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NZSE's rules hardly OK

By Peter V O'Brien

Friday 16th May 2003

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It was only a matter of time before the Stock Exchange's zeal for regulation and tight corporate governance flipped the organisation over the boundary between reality and unreality.

Last week it said it had developed its final recommendations for corporate governance and released a detailed proposal for a modified legal and regulatory framework. Both proposals were sent to the Securities Commission for review. They will go to Commerce Minister Lianne Dalziel after that.

Investors would be done a favour if the commission and/or the minister exercised common sense rather than rubberstamping the exchange's recommendations or relying on the views of officials who could be in favour of supposedly neat arrangements.

The exchange proposed a new framework for the compliance, enforcement and discipline of all market participants. It would comprise a "simplified" three-group structure, one being an in-house body of exchange people dealing with broker and issuer compliance and another regulating a listed Stock Exchange. The third group would cover "NZSE discipline."

It could be described only as breathtaking, because it would be a 20-person board, 75% (15) external and 25% (5) internal, to investigate suspected cases of non-compliance, hear charges brought before it, make findings and impose sanctions or penalties where appropriate.

The body might meet in smaller divisions if sanity wins the day. A 20-person board is mindboggling in the context of a quasi-judicial tribunal.

Juries comprise 12 people and the Court of Appeal has a full panel of seven judges, usually fewer for most hearings.

There seems little justification for 20 people to run the discipline function of the exchange and even less for five of them to be "internal."

Strange as that proposal might seem, it became minor when set against the proposal for certification of directors. The exchange's statement said directors should complete an "appropriate director certification course."

Such a course would apply to new directors, with existing board members having an exemption. Just as well, because certification, assuming existing appropriate academic qualifications were considered suitable, would catch some directors and others from bygone days, while allowing others to possibly escape certification.

The latter could be sweet if they were accountants or lawyers, accountants being one of the exchange's favoured occupations for inclusion on audit committees.

People without formal qualifications who would need certification if the proposal was retrospective, or applied in the past, include the first Sir James Fletcher (what would an immigrant Scots carpenter know about running a company), Sir James Wattie and Sir William Goodfellow (of dairy industry fame).

Others ruled out for lack of academic qualifications would include Sir Ron Brierley, Michael Hill of Michael Hill International and billionaire Graeme Hart.

Given the exchange's apparent infatuation with accountants and others with a financial background, former listed company directors Allan Hawkins and Bruce Judge would seem to have little trouble gaining certification in their glamour days.

Someone has to approve certification, assuming it goes ahead. We are back with the old saying of who will guard the guardians?

The thought they could be some semi-academic tribunal is depressing. Only one New Zealand-based academic has achieved a reputation as a director of a significant listed company in the person of former University of Auckland vice-chancellor Sir Colin Maiden. He had a corporate background in engineering.

The Institute of Directors seems in favour of the latest proposals, so it perhaps could have a role in the certification process. Educational courses are included in the institute's activities, which seems weird if one excludes people who are directors of corner dairies and similar small private companies.

Directors of public companies should have appropriate education about the corporate world before they take office, thereby removing the need for courses and certification.

The corporate governance and certification debate is getting out of hand, with some idea that regulatory nannies must protect the investor nursery from the harsh corporate reality.

Some of those issues were discussed in The National Business Review editorial last week and this column previously emphasised the need for caveat emptor on the part of investors (NBR, April 17).

The Stock Exchange, Securities Commission and the commerce minister can invoke all the tidy rules they think fit in the interests of neatness and control. They can never eliminate investor risk, nor directional foul-ups. Many directors walked, or were pushed, here, in Australia and elsewhere in recent times.

Perhaps someone could advise how many were members of the Institute of Directors, or its overseas equivalents, and whether they would have received the proposed certification before exposure of the foulups.

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