Confidence Trick: How the NZSE is driving best-practice corporate governance

Compare New Zealand boards of directors with overseas counterparts and we are said to be in reasonable shape. But to improve our reputation, give investors more confidence in our market, and to make it the destination of choice for discretionary capital, former Olympian swimmer Mark Weldon, the NZSE’s new chief executive, believes we must be on the leading, not lagging, edge of corporate governance.

The rationale behind the soon-to-be-demutualised exchange and its proposed new listing rules recognises that it’s no longer sufficient for the NZSE to operate as technologically proficient and low-cost exchange.

Weldon accepted the NZSE job after spending eight years as high-flyer within the New York investment industry. He believes that if he can convince listed companies to adopt corporate governance reforms, then their decision making and returns from the New Zealand sharemarket, one of the world’s worst-performing markets over the past two decades – last two years excluded – will also improve.

Best practice disclosure

Much of Weldon’s new and forward-looking strategy is fashioned around the view that the NZSE can play much bigger role in national growth. He plans to grow local markets by implementing regime of corporate governance best-practice that local issuers (listed companies) must abide by.

In light of corporate ownership changes, the NZSE board and management finally conceded that simply relying on member firms (offshore-owned brokers) to promote the exchange is unrealistic. Brokers argue that while they are responsible for advising companies on their post-listing obligations, there’s little financial incentive to advise on corporate governance and communications issues. “Investors don’t like uncertainty – they like transparency. Uncertainty means higher risk, which means lower valuations, and lower stock prices, which means higher cost of capital to companies,” says Weldon.

With investors calculating risk premiums at both the individual company and the market level, an appropriately regulated market can help keep the cost of capital down for the whole economy, and help companies be more competitive.

Investor assurance

The old rules weren’t exactly broke, but they had major shortcomings, especially in relation to issues of local trading controls and board composition and disclosure. On these points our companies have been accused of being arrogant and uncommunicative.

So how exactly will new listing rules make New Zealand more desirable place to invest? From corporate governance perspective the new rules attempt to ensure greater (retail and institutional) investor assurance with the processes that govern corporate behaviour. “What we’ve proposed is well thought-out and sensible plan to promote confidence. It’s not draconian, nor will it increase costs. Over time the new rules will generate more information to the market – and companies should welcome that. We’re doing this in the name of getting things in place so the markets can grow,” says Weldon.

The proposed listing rule changes are now undergoing final review after calling for public submissions last September. Elaine Campbell, NZSE general counsel, suspects the new rulings (expected to take effect in February 2003) to comprise around 90 percent of the original proposal.

Renewing investor confidence

But is it so critical that we become “best-in-class” in corporate governance to attract investment? “Yes,” says Weldon. Many of the largest and most powerful asset managers in the world use good corporate governance as key screening criterion for investment. Others blacklist companies, or countries, that do not meet certain regulatory and governance standards.

Weldon thinks the practice of using good corporate governance as positive screening criterion will increase. The fact that an Enron has not yet happened here does not mean that our market can’t be improved. Large overseas investors and institutions were burned in very real way in high-profile New Zealand deals in the 1990s. Many overseas investors still associate New Zealand with those deals.

“We also need to give local investors, who have stayed away since 1987, the confidence to reinvest. We need to change the ‘why bother investing in New Zealand?’ attitude that is prevalent to ‘why should I invest outside New Zealand’?” says Weldon.

Careful not to impose any unnecessary additional costs on companies, the NZSE is trying to balance the need for maximum transparency and minimal uncertainty (positive for investors) with minimal compliance costs (positive for companies). As result, Weldon’s proposed new listing rules on corporate governance focus on the acts of governing and monitoring, the groups of people involved, and disclosure of the decision-making process.

What’s being proposed?

The general tenure of proposed new listing rules is that certain unequivocal principles should apply when the public invests in securities. Decision-making power, for instance, should not reside entirely in one group or individual. There also needs to be clear process of disclosure around accounting issues.

While the new rules don’t go as far as the New York exchange, Weldon is comfortable that they hit the important stuff, and this includes:
• minimum number of independent directors on the board. What this ruling aims to do, says NZSE non-executive chairman Simon Allen, is renew in investors’ minds the notion that there is an independent group capable of making decisions, especially when there’s major shareholder with interests that may conflict with those of minor shareholders.
• Separation of the chairperson of the board from the CEO. While one person can do both, Allen says the chair’s job is to appoint and monitor the performance of the CEO. “Lack of separation mean loss of checks and balances when something goes wrong.”
• Minimum qualification standards for directors, and requiring that non-compliance with best-practice corporate governance code be reported to the exchange.
• mandatory audit committee.
• The majority of audit committee as independent director.
• Disclosure regarding process and rationale behind choice of auditors.

Other key proposals would see unruly stockbroking firms liable for fines of up to $250,000. Changes to the continuous disclosure regime (included within the SMI Bill) will reduce the timeframe for submitting annual reports from four to three months and half-yearly ones from four to two months. Greater transparency of decisions made by the market surveillance panel will see greater publication of key decisions.

If Weldon wants more New Zealand companies to list, and he does – especially argi-stocks, exporters and property companies – then he says the exchange must actively promote the benefits of the market and ensure people are aware of their options.

Walking the talk

A publicly listed NZSE will be in better position to pursue business opportunities. The exchange will, for example, be involved in seminars, distributing literature, providing advisory columns for newspapers and magazines, operating more user-friendly website and working through tertiary institutions to increase awareness of the markets. And Weldon wants brokers to take higher profile and do more to attract customers.

What the NZSE’s new model should signal to the market, says Allen, is that simply keeping lid on the cost of doing business is not enough to drive vibrant capital markets. “Three fundamentals that good corporate governance drives towards – transparency, continuous disclosure, and good capital markets – are all needed to foster economic growth. Demutualisation will give the exchange corporate model to meet the wider needs of the broader capital market community.”

Mark Story is regular writer in Management magazine
Email: [email protected].

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