“The consequences of (banks) mismanaging their risks can be severe indeed – not only for the individual bank, but for the (financial) system as whole…” Bollard told the Institute of Directors in Christchurch on April 7, 2003. His address was sadly prophetic. But have we made any governance advances or learnt any lessons since then? Dr Bollard answered some questions from NZ Management’s writer-at-large Reg Birchfield.
How well do you think institutional governance has performed in the eight years since you gave your speech?
My focus is inevitably on the financial sector and we have seen quite few regulatory developments in the banking, finance company and insurance industries that are very important. The GFC was the important issue for me. We had to deal with Australian (owned) banks through this period. They sometimes wanted to retrench resources or draw control back into Sydney or Melbourne. So couple of years ago we put in place some local incorporation and outsourcing requirements to better deal with stress events such as this and to tighten inter-group arrangements. The changes we have implemented are good basic governance principles that sheet home responsibility for both management and board operations. We wanted an authoritative New Zealand board that would have contract with the chief executive in New Zealand. The CEOs did not need to be New Zealanders, but needed to know their responsibilities to New Zealand law.
The law has also been changed to give us responsibility for the regulation of non-bank deposit takers, finance companies, building societies and credit unions, which requires RBNZ to put in place governance requirements for directors. We are also doing this for insurance companies to apply fit and proper tests for their directors.
Is financial sector governance now more robust?
I look at it in two ways. The story around finance companies has not been happy one. Some of the problems, though not all, have been governance issues. Now, for the first time, finance companies must have two independent directors, the chair cannot be an employee or related party of the company and they must meet some proper tests. We think this will get rid of some of the egregious behaviour we saw in the past.
The banking story is quite different. We always had properly constituted boards. What we have been trying to do is get the right balance between the parent bank and the local New Zealand subsidiary. Reinforcing the roles of the New Zealand boards and their chairs is crucial to that.
Is there is better general understanding of how important good governance is to ensuring better risk management practices generally?
Many New Zealand directors have had to confront this issue over the last few years. Local businesses have, I think, done better over the last few years than in the past. We probably had about four times as many business failures during the economic downturn in the late 1980s and early ’90s than we are seeing this time. That reflects the problems businesses then had with managing risk. This time we are seeing much better hedging of financial risks, particularly exchange rate risk, and better understanding of other sorts of risk. There is, for example, more formal use of board audit and risk committees. I think there has been significant improvement in board performance here.
You said in 2003 that “how well or poorly an economy performs” depends on where companies invest and use their resources and that was determined by management and governance strategies, not political policy-makers. How well do you rate New Zealand’s management and governance performance in that regard?
I generally rate that pretty well. But we suffer from New Zealand’s smallness and remoteness. You see lot of volatility in decision-making and business confiden
