Regulation Overdose

Boards are only as good as the directors who serve on them. And our boards are under increasing regulatory and shareholder pressures to perform. But New Zealand’s pool of good director talent isn’t deep enough. So are our boards in shape to cope with the future and to handle more prescriptive regulatory environment? Mark Story talked to five of our highest profile directors.

New Zealand should not follow the United States’ lead and heap more governance and prescriptive reporting regulations on our largest corporations according to five of our highest profile directors.

New Zealand directors, like their British and Australian counterparts, favour less rules-bound codes of practice ahead of the US model enshrined in the Sarbanes-Oxley Act of 2002. The “form” of corporate governance won’t of itself improve company performance, make directors any more honest or prevent another collapse like Enron, or closer to home, like HIH Insurance, they argue.

An even more regulatory approach, including the proposals advanced last month by the New Zealand Stock Exchange, won’t remove the core drivers of excess. More regulation might well force corporate legal advisers to get more clever at working within the letter as opposed to the spirit of prescriptive frameworks.

Integrity overlooked
Sir Dryden Spring, currently chairman of Fletcher Challenge Forests, is convinced that New Zealand’s corporate landscape requires completely different set of checks and balances (to the US). The legislators have, he says, overlooked the reality that good corporate governance is all about integrity, ethics and leadership. “If you hire directors with these qualities, you’ll be three quarters of the way towards good compliance.”

Sir Dryden argues that while New Zealand has had its “fair share” of corporate failures, unlike recent US examples, it wasn’t necessarily greed that destroyed them. Also unlike the US, and more recently across the Tasman, New Zealand doesn’t have tradition of boards receiving disproportionate financial reward. He argues that excess, greed, egomania, recklessness and apparent stupidity, symptomatic of corporate collapses elsewhere, just isn’t part of the Kiwi business culture.

And when it comes to conflicts of interest within US companies, most roads lead to the practice of chief executives playing the dual role of CEO/chairman. This is “no no” in listed Kiwi companies. Instead of exterminating the executive director/chairman beast, the Sarbanes-Oxley Act attempts to address conflicts of interest by buttressing-up on the compliance front.

It has also been well-established practice in most New Zealand companies to transfer responsibility for audit issues from the board to the audit committee and to have majority of mostly independent directors on board to protect the interests of minorities. In the US the chair usually picks his or her own directors.

Kiwi boards better
New Zealand companies – particularly listed ones – are, according to the directors The Director spoke to, perceived to already exceed new corporate governance provisions being implemented globally. Assuming that’s true, where has the fallout from the global corporate scandals left us?

With Sarbanes-Oxley only impacting directly on companies with dual listings in the US, few directors we spoke to had an intimate knowledge of the new US corporate governance framework. But with listings in the US, Australia and New Zealand, Telecom must not only comply with Sarbanes-Oxley but with the NZSE’s proposed new listing requirements, Australian (ASX) and New York (NYSE) stock exchanges. But from chairman Dr Roderick Deane’s perspective, with mandated provisions such as independent directors and audit committees already in place, Telecom hasn’t had to make major changes to comply.

However, Telecom does not comply with the recommendations of the UK Higgs Report that forbids individuals from chairing more than one major company. Deane’s direct move from CEO to chairman flies in the face of Higgs and other corporate governance reports that criticise chief executives moving up to the chairman’s job.

Key signals
The important local fall-out from Sarbanes-Oxley is the impact it has had on local stock exchanges and their reaction to tighten up on reporting requirements. NZSE handed down its first discussion draft last month (see panel on page 11 and comment from Simpson Grierson’s senior partner, Shelley Cave page 13).

The dilemma, says Deane, is that we’re left with more prescriptive framework, even though in reality, the fundamental principles haven’t changed. An increasingly costly compliance environment looks inevitable. Directors will need to regularly check detail to ensure they haven’t missed the wood for the trees.

According to Deane the risks are twofold; boards will spend more time on compliance than ensuring the company performs better and, engaging both accountants and lawyers to complete audits will significantly compound compliance costs.

Grappling with disclosure
Directors are already bureaucracy-bound, overworked and underpaid, says Air New Zealand managing director Ralph Norris. He thinks added compliances will scare good people off from seeking board appointments. And New Zealand’s pool of high quality director talent is desperately tiny.

Of all the NZSE changes up for review, which ones are boards spending most time thinking about?

Correct or not, many boards claim to follow, albeit informally, best-practice corporate governance. Therefore, provision for making third of the board independent of management and including financial experts on audit committees, looks far from onerous.

Norris thinks continuous disclosure is the big issue, especially in relation to profit forecasts and (contingent) liabilities. “Everyone is currently grappling with that.”

Companies currently provide little or no disclosure between quarterly or half-yearly announcements. They will be required to notify the exchange on significant good and bad news as it arises. “Too much disclosure can be as bad as too little. What we’re trying to do is put out as much information on operating statistics and our hedging profile. That way the market can draw trend-line on market performance on monthly basis,” says Norris.

Detail overload
The new listing rules will provide good practice checklist for some companies but others will have to front up to the changes, according to Restaurant Brands’ chairman Bill Falconer. There are, he says, major doubts over whether the market has always been sufficiently briefed or briefed early enough, especially with stocks like Tranz Rail and Air New Zealand.

“Proposed disclosure rules are wake-up call that listed companies must take more pro-active stance. I agree in principle that management should represent that there’s nothing misleading. But I question whether the level of detail soon to be required is necessary,” he adds.

Sir Dryden predicts the incremental swelling of board sizes as another by-product of more prescriptive, rules-based framework. Board numbers have moved from 12 to six or seven, but he expects them to increase by two and to meet more regularly.

According to Norris, in the past it was relatively easy for individuals to hide within larger boards. “With smaller boards there’s less opportunity for one or two people to drive all the decisions and for the others to simply go along for the ride.”

Limited director pool
More prescriptive frameworks undoubtedly make boards and directors more accountable. Good directors, therefore, are increasingly more sought after. But they are scarce commodity.

The New Zealand Institute of Directors (IoD) is well regarded for providing basic training and helping boards keep up with compliance. But with only half the directors of listed companies currently members of the IoD, how does the other half keep informed?

Sir Dryden thinks the

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