Cover Story: Crisis at the Top

High profile scandals and director incompetence at home and abroad have rocked public confidence in corporate integrity. Good corporate governance is not just about staying within the limits of the law. Compliance is now given. Directors can’t act as if they are passive participants in corporate morality play – intent and underlying sentiment matter. So what has to change within corporate governance Kiwi-style to claw back credibility and lift the game?

Faith in corporate New Zealand has been waning for some time. The antics of the players in what became known as the “winebox affair” sowed the seeds of distrust. The fact most of the “winners” now live offshore to continue to avoid tax payments doesn’t help. And our penchant for rewarding non-performing executives while shareholders suffer breathtaking losses, coupled with poor or misleading disclosure tactics and improper accounting methods, have all compromised recent boardroom and Stock Exchange reforms.

The upshot of all this, plus the downturn in global markets, the rise of the New Zealand Shareholders Association, more complex trading environment, plus increased director responsibilities (and associated infringement penalties), is that corporate governance is now hot topic.

And, of course, interest in the issues has been accelerated by the failures of American, Australian and local corporates including Worldcom, Enron, Xerox, Tyco, Ansett, HIH, One.Tel, BIL, Fletcher Challenge and online retailer, Harris Scarfe. Corporate governance dialogue has turned from compliance to commitment to shareholders, leadership philosophy and values. In doing so, it has raised major doubts about the professionalism of board members and the role of social responsibility.

Analysts in the United States are now questioning the wisdom of the unique relationship that exists between chairman and chief executive, who are often one and the same.

The director/board model in the United States invariably delivers fewer independent directors, and correspondingly greater management influence over all facets of governance – including executives setting their own remuneration and share options, standards of financial reporting and involvement in the appointment of auditors.

Inadequate board controls
New Zealand’s director/board model is, on the other hand, less broken and not under such pressure to change. Separation of the role and function of board and management remains an essential pillar of corporate governance here. The local view is that United States scandals reflect the inherently different US corporate governance environment. But before we get too complacent, weak corporate governance standards are still rife here and we don’t need another wine box to prove it.

One parallel between large-scale US accounting scandals and local corporate performance is the degree to which boards get their hands dirty. While many US boards try to run the entire show, “hands off” approach by local boards produces similar shortcomings – companies operating without adequate director input.

A report by Enron board member, William C Powers Jr, revealed an almost total collapse in that company’s board oversight. Board controls were inadequate, its committees carried out “only cursory reviews”, and the board failed to appreciate the significance of “specific information that came before it”.

And before we snigger, the performance of many local boards suggests they are equally asleep at the wheel. Being generous about interpretation, this might have more to do with local naivety over the real implications of being director rather than any overt moral turpitude.

Implementation – biggest downfall
Ian Taylor, Sheffield CEO, thinks we need to fix the implementation, rather than the substance of our director/board model, particularly as we move from the era of professional manager to professional director.

If so, what are the key corporate governance issues that directors struggle to implement successfully? The order of importance varies, but based on his dealings with corporates big and small, Taylor believes prevailing concerns centre around:
• willingness to reward failure: examples include the A$15 million paid to two One.Tel senior executives in the year the business collapsed, and the A$15 million paid to the departing CEO of retailer Coles Myer following the collapse of the company’s profits and share price.

Closer to home, reported payment of $4 million to the departing CEO of BIL, $4.2 million paid to short-term CEO of Air New Zealand and the $6 million paid to the outgoing CEO of Contact Energy all begged public disbelief.

Bruce Shepherd, chairman of the recently formed New Zealand Shareholders Association (NZSA) and speaker at last month’s LexisNexis Management magazine Corporate Governance Masterclass presentation in Auckland, is critical of executive remuneration (especially stock options) packages that are wired to quick-fix dynamics that impact capital market perceptions.

An additional dilemma is the “shortism” with which many shareholders own company stock. Short-term shareholders are more interested in share price than profit or underlying fundamentals.

• Board brains trust: providing sufficient remuneration to attract talented directors and ensuring they have the right skill base isn’t easy. Given the responsibilities, accountabilities and liabilities of directors, directorship is not task for those without business and organisational experience, or an understanding of the role of the board. New Zealand’s pool of good directors is tiny. Research by Massey University (International Business) reveals little to encourage people to accept board positions.

Information technology is largely untapped corporate governance tool, according to Chris Comber, director of Burcom, new specialist corporate governance, IT, risk analysis consultancy based in Wellington.

IT will enhance the working relationship between board and management by delivering directors better real-time information about the organisation. “If the board’s role is to create wealth for shareholders, directors must be more proactive with the information that’s available to them. Faced with wall of information, directors need to be educated about using technology, and know how to assimilate information quickly,” says Comber.

• Reporting: given auditor independence reforms, companies should reconsider their reporting structures. The chief legal officers of some New Zealand companies still report to the chief financial officer or line management rather than directly to the CEO.

• Managing external advice: how to review the advice of outside consultants is undergoing intense scrutiny. Taylor suspects companies will increasingly value ‘in-house’ professionals, rather than use external accounting and legal firms.

• Balancing act: striking the right relationship between boards and management, and the right balance of independent and executive directors.

• Corporate codes: New Zealand doesn’t have generally recognised corporate governance code that prescribes ethical and behaviour settings. The Government’s Crown Company Monitoring Advisory Unit (CCMAU) has implemented Code of Corporate Governance setting basic good corporate governance values for Crown company boards.

• Performance: board obligations to ensure that companies continue to generate shareholder value.

In-house counsel
More companies are appointing in-house corporate counsel to act as strategic advisers. Corporate governance consultant John Shaw, says boards think that in-house counsel can save them from onerous penalties (in the case of the Harris Scarfe CFO – six-year jail sentence) and so the number of lawyers employed by companies and government departments has mushroomed. Ron Pol, president of the New Zealand Corporate Lawyers Association (CLANZ), confirms this. Nearly 15 percent, or around 1200 of all New Zealand lawyers,

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