Mervyn King was in New Zealand last month as guest of the Sheffield Academy of Corporate Governance. Directors in Auckland, Wellington and Christchurch turned out for his series of Institute of Directors/Sheffield organised seminars entitled ‘Good Governance Simplified’. He also offered private consulting advice to some of our largest enterprises. The New Zealand Stock Exchange released its proposed rule changes while he was here. He wasn’t entirely impressed. He talked to The Director’s editor Reg Birchfield.
What do you think of the NZSE’s proposed governance rule changes?
I haven’t seen the detail of what is proposed but I have my doubts about directors having to be certified. In the UK they tried to charter directors. They very quickly found that they had to rethink this. Some of the best directors do not have degrees, are not lawyers or accountants. They soon started making exceptions to the rules. Why make rule if you end up having to make exceptions?
New Zealand has very small skill pool from which to draw competent and experienced directors. Too many restrictions will reduce that pool even more. And then, on the question of accreditation, who accredits the accreditors? How well suited is the IOD to accredit than say, an outside organisation like Sheffield or even group of financial journalists?
I am also sceptical about the suggestion that the external or lead auditor should change every five years. New Zealand, like South Africa, faces real skills shortage in this area. For the first two years your external auditor is learning about the business. It is only about the third or fourth year that they actually understand your business, so you only get quality audit in the third and fourth years. The problem is, if they only have year to go after getting on top of the job, they will become demotivated to do good job. That’s insane. In South Africa you have two auditors; one watches the other as well as the company. With only four global accounting firms, how do you move them around every five years?
The problem, it seems to me, is that the NZSE is trying to cookie-cut from the Sarbanes-Oxley Act and that (Act) isn’t going to work even in the United States.
Sometimes the chief executive gets too close to the senior audit partner so I suggest that every three years you change the senior audit partner, but keep the same audit firm and retain the continuity.
What about the provision for independent non-executive directors?
There are effectively now four kinds of directors. To my mind, if you are director you are director. But, if you are employed by the company you are now labelled an executive director. Someone who is not employed by the company but who might have some contractual link, or supply something, is non-executive director but is not independent. Someone not employed by the company, without contractual links and not representing major shareholder, is an independent non-executive director and someone people can rely on. Sarbanes-Oxley has gone another step and created senior independent non-executive director who must focus on the interests of the major shareholder. It is getting silly. And what about the role of the chairman in all this. It is confusing. I have real doubts about (the practicality) of all this in small country like New Zealand.
Why did you move from the law to commerce?
I resigned from the judiciary with another judge because we objected to the (white) government’s financing of South African newspapers and using them as the (president’s) mouthpiece to prop up an horrific social scene. Despite attempts to oppose our readmission to the bar, my brother judge and I were readmitted to practice. I had large law firm advising on mergers, acquisitions and restructuring companies and was retained as legal counsel to the major banks. I then decided to ‘do’ and not just advise.
I was offered number of board appointments. I even became the chief executive and chairman of company – the executive chairman. I soon found that didn’t work. I also learned that it pays to have more than one executive on the board – needing conspiracy of two makes it harder for one individual to massage information.
What did your trip to New Zealand last year tell you about governance standards here?
I would say the governance orchard in New Zealand is generally healthy. As in South Africa and Australia, there are couple of rotten trees, not just apples, in the orchard but the orchard is generally good. In most of Europe the whole orchard is rotten – particularly in eastern Europe. Compared with the rest of the world I think the more developed Commonwealth countries’ standard of corporate governance is among the best.
How different is your message here this time?
My message is that too much governance ties up company. You have got to have the correct balance of conformance and performance otherwise you become, what I call ‘corporates in slot’– ticking boxes of compliance. Too much governance and you don’t have enterprise and your ultimate social responsibility is to have successful business.
How do we simplify good governance?
You can have all these trappings and pass all these additional rules you like but in the end, if the directors do not honestly apply their minds to the best interests of the company then all the trappings will do is have outsiders say; Aren’t they good at complying with the rules – pity about the business’. You have to go back to basics and say; ‘What are the duties of director? What are our responsibilities?’
I now think corporate governance is about processes that give outsiders the confidence to conclude that the organisation is being governed correctly. It is not, unfortunately, valid conclusion to draw however. It can still have holes in it.
Would you say moves like the Sarbanes-Oxley Act in the US and the Higgs Report in the UK help to simplify governance?
No they don’t. They simply complicate it. And my concern is that if you make things too complicated here, and that includes the proposed stock exchange rules, you will have companies delisting in New Zealand and you will be swallowed up by Australia. I agree you can’t legislate for integrity. Moses tried and failed.
How can we ensure that boards adopt the spirit of intent that attaches to word like ‘integrity’?
Well, that’s what I try to teach. I have developed series of questions which I think board should be subconsciously asking itself. If you keep asking these questions you start to learn process of quality governance. And quality governance is essential. If you destroy governance and if boards continue to act in bad faith they will destroy the capitalism. Do you recall the marches in Washington and other cities where young people were saying that corporations are destroying the environment? The World Bank has already warned large corporations that they must get their act together on sustainability and adopt accounting practices like triple bottom line.
Are you optimistic about the future of boards and the shareholder model of capitalism?
I am, provided there is quality output.
