Brierley swings, Weldon weaves, but the horse has bolted

Shoeshine

Friday 30th January 2004

Sir Ron Brierley has long had a beef with "outsiders" interfering in the way companies are run so it wasn't entirely surprising he last week took a swipe at the NZX over the corporate governance requirements written into its listing rules.

What has been surprising is the lack of passion the whole debate over corporate governance has provoked.

Sir Ron's comments, although undoubtedly heartfelt, aren't likely to make much difference to the New Zealand regime. The exchange's new rules, which went through an exhaustive submissions process, came into force on October 29 and all listed companies will have to take steps to comply by the end of this year.

The response from exchange chief executive Mark Weldon was predictable: our major trading and investment partners all have codes of one type or another; if we aren't seen to have a set of rules that are recognised as robust by overseas investors, they won't invest here.

That pragmatic viewpoint seems hard to argue with. As Weldon pointed out, many large international funds regard strong corporate governance as one of the most important criteria when choosing which companies to invest in.

Some, in fact, have rules that preclude them from investing in companies that don't meet defined governance standards.

But his argument begs two important questions.

First, were New Zealand standards of corporate governance so low before the exchange introduced its regime that such funds gave New Zealand a wide berth?

And second, was it really necessary for the exchange to impose a one-size-fits-all regime on all companies rather than allowing them, and their shareholders, to set the standard?

Sir Ron's company, Guinness Peat Group, is a particularly interesting case in point.

Its board is dominated by executive directors. The only "independent" director, Trevor Beyer, is a long-time friend and investment associate of Sir Ron's.

Although it was the NZX that got picked on this time, Sir Ron might just as well have vented his spleen at the Australian or London exchanges � GPG is listed on both and both have rules setting a minimum number of independent directors.

But his point is not without supporters.

His comments to the New Zealand Herald elicited a response from Business Roundtable executive director Roger Kerr, who asked why GPG, a company that has done very well by its shareholders throughout its life, should be forced to change the governance arrangements those shareholders have been perfectly happy with.

The exchange's definition of independence, although only a variant of other countries' definitions, is also open to question.

The value of independence, Fletcher Building director Kerrin Vautier told The National Business Review last year, lies in a director's ability to critically assess what is put before him or her.

Nor had proponents of new rules proved a connection between poor boardroom decision-making and a lack of independence.

On one point Sir Ron appears to have got his wires a bit crossed.

Excluding as an independent any director who drew more than 10% of their income was absurd, he thundered, and would oblige boards to indulge in the invidious exercise of examining each other's levels of personal income to ensure the rules were being met.

That would indeed be absurd. In the case, say, of Telecom chairman Rod Deane, whose fees last year came to $384,000, it would mean his total personal income would have to have topped $3.8 million if he was to be considered independent.

But that isn't quite what the relevant rule � 1.1.2 � says. It reads: "a director shall be deemed to have a disqualifying relationship ... where the director has a relationship (other than in his or her capacity as a director of the issuer) with the issuer ..." and "by virtue of that relationship ... has derived ... 10% or more of his or her annual revenue."

In other words, if Telecom was paying Dr Deane more than 10% of his income to act as a consultant he wouldn't be "independent."

That's arguable but it can't be called "absurd."

A better line of attack � again, supported by at least some other New Zealand directors � is that directors' fees have to be substantial if they are to attract people of sufficient calibre to do the job.

But the idea that anyone who relies for a large part of their income on a company directorship can be "independent" is an oxymoron, Sir Ron reckons. You can't be reliant and independent at the same time.

Maybe not. But in the context of corporate governance, that's a bit like arguing that if you can't stop people littering there's no point outlawing murder.

Sir Ron has another favourite whipping boy, international accounting standards. As in the case of corporate governance, his arguments are always well thought out and refreshing and his manner of putting them entertaining.

Long may he continue to tilt at windmills and skewer sacred cows. But his outbursts aren't likely to change much, coming as they do after the horse has not only bolted but disappeared over the horizon.

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