Wednesday 15th May 2019
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Disclosure lies at the heart of New Zealand’s corporate regulatory systems but the regulators themselves have greatly undermined that principle more than once.
The beauty of enforced disclosure is that it’s nice and cheap, and a strong streak of Scottish frugality runs through our body politic.
Journalists like me, of course are all for it. Sunlight is the best disinfectant and all that.
It’s enshrined in share market operator NZX’s continuous disclosure rule imposed on all companies that list debt or equity on its main board.
“Once an issuer becomes aware of any material information relating to it, the issuer must promptly and without delay release that material information,” says listing rule 3.1.1.
But our regulators aren’t doing the nation any favours by making a mockery of such requirements.
Financial adviser Chris Lee’s new book, The Billion Dollar Bonfire, includes a reminder of a particularly egregious failure by NZX to enforce its own rules.
In late 2009, when Sandy Maier was appointed chief executive, South Canterbury Finance had both bonds and perpetual preference shares listed on NZX.
But from then until SCF went into receivership on Aug. 31, 2010, it’s clear that Maier failed to abide by the disclosure rule, made statements that hindsight showed could not possibly have been true and failed to disclose matters that should have been disclosed.
“No one has ever been accountable for this cynical non-disclosure,” Lee says in his book.
I spoke to Maier by phone in September 2010 and he said everything “was disclosed perfectly appropriately” and that he stood by comments he had made on SCF’s financial position earlier that year. “I’m quite happy with the accounts.”
Preparation of the June 30, 2010 accounts should have been well underway by the time of the receivership but when I asked Maier why he hadn’t issued any warning about what those accounts would contain, he hung up on me.
Examples of Maier’s statements include one on April 12, 2010 when he told NZX that SCF’s total equity was $206.6 million.
On May 21, 2010, Maier told NZX that SCF had produced “a break-even trading result.”
On Aug. 5, 2010, NZX queried SCF on whether it was complying with its continuous disclosure obligations after the price of its listed preference shares dropped from $16.50 to $10 on Aug. 3.
Maier replied that SCF “confirms that, in its view, it continues to comply.” He blamed the price fall on an unnamed “financial adviser,” probably Lee, who had written to his clients saying that Maier’s attempt at recapitalising SCF wouldn’t succeed.
The government, which had guaranteed SCF’s debentures, ended up having to pay out about $800 million and that didn’t include $120 million of preference shares.
The more recent CBL Insurance debacle is an even more egregious example because a regulator in that case, the Reserve Bank, ordered listed company CBL to keep secret crucial information it should have been disclosing under the NZX rules.
So CBL didn’t tell the market that in July 2017, the central bank had started investigating it or that the RBNZ had ordered CBL to increase its solvency level.
In fact, the Reserve Bank had concerns about whether CBL’s reserves were adequate going back at least as far as mid-2016. An actuary appointed by the central bank said it had been insolvent since 2013 – CBL didn’t list on NZX until October 2015.
CBL’s investors knew none of this and, oblivious, continued to trade in CBL shares until the RBNZ’s confidentiality order was finally lifted in February 2018. But by then NZX had suspended trading in CBL shares.
Worse, the market conduct regulator, the Financial Markets Authority, had known about the Reserve Bank’s concerns since August 2017 but it didn’t utter a public peep either.
Most recently, New Zealand First politician and Regional Development Minister Shane Jones berated Spark chief executive’s Simon Moutter for obeying both the letter and spirit of the NZX rule.
Back in November, Moutter informed NZX that the Government Communications Security Bureau had informed him that Spark using equipment made by China’s Huawei in building a 5G network would “raise significant national security risks.”
There was nothing optional about this; as Moutter explained, NZX’s continuous disclosure rule mandated the announcement.
In March, Jones pontificated in the House of Representatives that he had a message for corporate New Zealand.
“Do not arrogantly take upon yourselves the ability to influence foreign policy and make these unwise statements, as Mr Simon Moutter did to the share market, thus providing an opportunity for anxiety and stress for all of our exporters. Show judiciousness,” Jones exhorted. “Do not go beyond your corporate writ.”
So there, listed companies. Do you listen to a cabinet minister and various regulators and flout the disclosure rules? Or do you do what your investors expect?
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