By Nick Stride
Thursday 17th April 2003
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Bill Lytton's recent poke at regulators, borrowed from the psychologist Abraham Maslow, undoubtedly wasn't intended as a personal affront.
It just seemed that way when one of the next speakers up was Securities Commission chairman Jane Diplock.
"Many examples of very poor performance by directors come to the attention of the commission," Ms Diplock told a corporate governance forum in Auckland on April 7.
"This is not a matter where we can delay any further."
As other countries settle new regimes, the corporate governance debate in New Zealand meanders on with little sign of coming to a head.
On the same day as the Auckland forum Commerce Minister Lianne Dalziel spoke to a Wellington conference on corporate governance in the public sector. In Christchurch Reserve Bank governor Alan Bollard gave the Institute of Directors annual meeting an interminable address on financial sector governance.
Among directors the question isn't just about which new rules or guidelines to adopt but whether New Zealand needs any at all.
"The causes of Enron were dishonesty, greed, ego, and recklessness. The answer to all these is integrity," Sir Dryden Spring told the Auckland forum.
Ms Diplock took up the theme too.
"There is a school of thought ... that since it is impossible to legislate for ethics, the cause is lost and no attempt should or need be made to impose any disciplines on companies, directors or officers," she said.
"This is clearly nonsense and has been rejected by all sophisticated thinkers on these issues around the world."
The deeper questions concern the quality of New Zealand's boards, and whether more rules will improve them or weaken them by further deterring highly qualified candidates.
An oft-quoted statistic is ANZ Bank's assessment that the companies of the NZSE40 index destroyed $21 billion of shareholder wealth in the 10 years to 2001.
But Joel Stern, the creator of the EVA (economic value added) technique used to measure such things, points out the poor performance was by only a few very large companies and masked very good results from a broad range of others.
In Auckland last week to address an ANZ forum, he told The National Business Review it should be left to individual companies to decide what corporate governance models they operated under.
Investors, he said, applied a discount to the shares of companies with poor governance and poor disclosure.
It was the board's job, not regulators', to weigh that against costs in time and money and other drawbacks.
Nor did he agree New Zealand had to hurry to catch up with the rest of the world.
"The focus now is on 'management governance'; director's governance won't be an issue after this year."
The government indicated immediately post-Enron that it would watch what other countries did before deciding what if anything needed to be done.
Its current stance is unclear. Ms Dalziel's press secretary, Julie Clausen, did not respond to an enquiry about the minister's position.
Ms Diplock said it was likely New Zealand would settle on a disclosure rather than a prescriptive approach; the British and Australian "if not why not" regime, not the US "just comply."
In the US the Sarbanes-Oxley Act, passed in a rush to "restore public confidence" after the string of corporate scandals, has attracted widespread criticism.
Under "Sarbox," we're lost but we're making good time," Mr Lytton said,.
The new rules mean companies must assess and report on the effectiveness of internal controls over financial reporting.
In the UK the Higgs report has recommended best practice guidelines with which companies must comply, or explain why not.
These include a requirement for at least half of a company's board to be made up of independent (non-executive) directors; a ban on the same individual serving as both chairman and chief executive; a ban on a former chief executive taking up the chairman's role; regular meetings of the independent directors in the absence of management; and the appointment of "senior independent directors" with a particular responsibility to hear shareholder concerns.
Australia has come up with the Clerp 9 proposals on financial reporting, disclosure, and audit processes.
These include mandatory audit committees for the top 500 listed companies, with committees to be made up of independent, financially literate members.
A beefed up disclosure regime increases penalties for contravention from $A100,000 to $A1 million, and gives the Australian Securities and Investment Commission powers to fine companies without having to take them to court.
Other changes are mandatory audit partner rotation; restrictions on former auditors working for clients as senior managers or directors; and protection for "whistleblowers" who report infringements to ASIC.
More recently the Australian Stock Exchange Corporate Governance Council has come up with its "principles of good corporate governance and best practice recommendations."
Like Clerp 9, the ASX proposals have attracted criticism from companies and directors as overly intrusive and restrictive, a charge chief executive Richard Humphry defended by saying they were better than Sarbox-style law.
Shareholder advocates have attacked both codes as not strict enough.
In New Zealand the debate has been more muted, mostly because some of the hotter items chairman/CEO separation, for example, or requirements for companies to have audit committees aren't seen as a problem.
A recent survey by PricewaterhouseCoopers of 120 directors and senior executives found 98% agreed all listed companies should have an audit committee, 77% agreed its members should be independent, and the same percentage felt the chairman of the company should not also chair the committee.
Some 87% felt the roles of chairman and chief executive should be kept separate, 72% agreed with mandatory audit partner rotation, and 86% disagreed with compulsory audit firm rotation.
But opinions were more divided on other ground covered by the Australian and British reports.
While 60% thought accounting firms shouldn't be barred from providing non-audit services to an audit client, 35% thought they should.
And while a third agreed there should be stronger regulation of financial reporting, half of the respondents disagreed.
Initiatives so far have been uncontroversial.
The Institute of Directors has released a raft of guidelines. The institute is supporting the introduction of director registration as a way of setting minimum standards directors must attain.
The Stock Exchange has issued guidelines on independence, the role and composition of audit committees, director registration, and the adoption by boards of a code of ethics.
The Securities Commission wants a corporate governance "regime" adopted to settle all those issues and a range of others such as conflicts of interest, signing off on accounts, continuous disclosure, shareholder relations, risk assessment, performance appraisal, and "stakeholder issues."
It also wants powers to take civil or criminal action against directors who don't act in the best interest of the company.
Directors are supportive of codes that will help improve governance.But they worry about the man with the hammer and a "knee-jerk regulatory response" to events that never happened here.
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