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Exchange directors' rules find favour

By Nick Stride

Friday 9th May 2003

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The Stock Exchange this week unveiled a "no-surprises" corporate governance regime, allaying concerns the government and officials would step in with more red tape.

The exchange has taken a two-tiered approach, with a set of uncontroversial "just comply" rules underpinned by an "if not, why not" best-practice code.

"It's a pragmatic response to what's been happening overseas and I wouldn't argue with a lot of it," Institute of Directors chief executive David Newman said.

"There are some details they need to take another look at."

Chief executive Mark Weldon said neither the "lengthy and prescriptive" mandatory rules of the US' Sarbanes-Oxley Act nor the "excruciatingly detailed" non-mandatory "show or tell" regime adopted by the Australian Stock Exchange code suited New Zealand.

The mandatory regime introduces a set of rules even smaller listed companies should be able to live with.

Audit committees, for example, must have a majority of independent directors of whom at least one must have "an accounting or financial background."

Mr Weldon said the mandatory approach was taken after feedback from listed companies on the continuous disclosure regime adopted late last year. Issuers had said the "show or tell" approach was fine "but at the end of the day we just want to know what's wanted."

Powerco chairman Barry Upson said the regime simply made mandatory elements of the Institute of Directors' best practice code, which Powerco had followed for several years.

The second tier is a corporate governance best practice code. The listing rules will be amended to require issuers to disclose which parts of the code they don't comply with and why.

To comply with the code audit committees will have to be comprised solely of independent directors. Remuneration committees will have to have a majority of independents.

That won't be a problem for companies such as Telecom but smaller companies have worried they would have to take on additional independents just to comply.

Best practice also introduces a requirement for quarterly reporting but many issuers are likely to flag this, arguing the compliance costs outweigh the benefit to shareholders.

"I don't think most [issuers] will do quarterly reporting. It gives the wrong message anyway in terms of putting the focus on short-term performance," Mr Newman said.

"It puts the focus on meeting analysts' expectations, which is not something to be encouraged."

Directors joining the board of a listed company for the first time will have to complete a certification course from a provider approved by the exchange within 12 months. A grandfather clause exempts current directors if they have served for five years.

Mr Newman said that was too long.

"Shareholders should be able to know in three years if a director has performed."

He also thought the definition of an accounting or financial background ­ either a listed company chief financial officer or a member of the Institute of Chartered Accountants ­ was unduly restrictive.

Equivalent overseas qualifications should also be recognised, he said.

The exchange also announced a revamped market-policing regime.

An exchange executive group will undertake compliance and monitoring; a disciplinary committee will decide whether the rules have been breached and will impose penalties; and an external three-person special division will oversee compliance by the exchange itself when it is listed.

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