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A question of independence

By Nick Stride

Thursday 24th April 2003

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New rules on corporate governance could create more problems than they fix.

"Almost all the companies that have materially destroyed shareholder wealth in New Zealand," wrote ANZ Bank's Joseph Healy recently, "were controlled by executives who were unrestrained by independent representatives of shareholders."

As local regulators mull a mass of new rules on corporate governance ­ Sarbanes-Oxley in the US, the Higgs report in Britain, Clerp 9 and new ASX rules in Australia ­ the question of boardroom independence will be high on their lists.

But in those boardrooms at least there seems to be little feeling that the quality of New Zealand's governance lags anywhere else's, especially in the area of independence.

"Surely the value of independence is the ability to assess critically what's put before you," Fletcher Building director Kerrin Vautier says.

"It means you've got to detach yourself from the executive position. Each individual has to be very alert to any suggestion you shouldn't rock the boat. But you can't have rules for these things."

Mr Vautier argues some of the problems encountered overseas ­ having too many executive directors or three-term chairmen, for instance, might have been a contributing factor to cases of wealth-destruction here.

But proponents of new rule sets would have to prove strong connections in retrospect between bad decisions and a lack of independence.

In fact, some argue, the collapses of the 1980s and the big writeoffs of the 1990s galvanised boards into getting their houses in order. A new set of rules not only are unnecessary but could be counterproductive.

"You win some and you lose some," Telecom chairman Roderick Deane says.

"The best boards and management win more than they lose. Most companies encounter problems; that's true of every country I'm aware of. I don't think the New Zealand corporate world per se has a governance problem."

As in Australia, the governance debate post-Enron has largely discounted the possibility such things could happen here.

For example, some of the problems US corporates have experienced have been blamed on the prevalence of chief executives also acting as chairmen.

That simply isn't a problem here: of the 33 New Zealand-domiciled NZSE40 companies, none have an individual in both roles. Fisher & Paykel Appliances' Gary Paykel is the only executive chairman.

Nor does there seem to be much of a problem with independence, provided that is defined liberally.

Of the 231 board seats only 28% are filled by non-independents and the majority of those are the appointees of a major shareholder.

Legally they are bound to act in the company's interest ­ that is, in the interest of all shareholders and not just the holder who nominated them. But it would be naïve to imagine that's always the case.

"Post-1987 a number of significant shareholders acted in their own interests, not in the company's, particularly if they borrowed the money to buy their shareholding," says Rob Challinor, a director of Ports of Auckland and The Warehouse and chairman of Mighty River Power.

Securities Commission chairman Jane Diplock says the commission is aware of many instances in which directors have failed to act in the company's interest. But, she says, the commission is powerless to do anything about it.

For a number of directors, there has to be a pragmatic trade-off between what we demand of directors and the limited number of qualified candidates available to our small economy.

A recent survey of 120 directors and senior managers by PricewaterhouseCoopers found 77% agreed the audit committee should be comprised only of independent directors.

But some directors worry those good intentions might prove hard to realise in practice.

"I'd imagine some New Zealand companies would have great difficulty appointing an audit committee that complied with the Sarbanes and ASX definitions of independence," Fletcher Challenge Forests chairman Sir Dryden Spring says.

"Those sorts of regulations would probably push us back toward larger boards again ­ there's a very limited number of people who could be on all the committees and the appointments committee would be particularly problematic."

One focus of the governance debate overseas has been on directors spreading their attentions too broadly.

Both the UK and Australia have "guidelines" banning any individual from chairing more than one major company.

Fund manager Simon Botherway cites instances of directors "unzipping the courier pack as they walk into a board meeting" and thinks individuals should be restricted to four or five companies.

But, he argues, fees would have to rise to a level at which remuneration for board service at least equals what directors could make doing other things.

Somewhat tongue-in-cheek, perhaps, professional director Sir Ross Buckland calls professional directorship "a doddle ­ you get regular, scheduled meetings, with papers at least a week in advance." But he agrees non-executive directors shouldn't hold more than five seats.

Few if any directors feel the issues lend themselves to hard-and-fast rules; decisions on time commitment should be left to boards' and individuals' common sense.

"Statutory limits would be arbitrary," Telecom's Dr Deane says. "Government bureaucrats and politicians can't decide. They usually haven't worked in the commercial world."

Dr Deane says all the boards he serves on ­ a hefty list spanning New Zealand, Australia, and Canada ­ are already "Higgs-compliant." Directors are required to consult the rest of the board before they take on any new commitment. "Some boards are a lot more work than others," Dr Deane says.

One contentious aspect of independence is what, and how, directors are paid. Much of the debate has focused on aligning directors' and managers' interests with those of shareholders through equity or options stakes in their companies.

But hardliners such as Rob Challinor say alignment and independence are mutually exclusive. To achieve alignment the stake would have to be "significant" ­ that is, a significant portion of their personal wealth. And no director can be considered independent, Mr Challinor says, if they hold such a stake.

The Higgs report also recommends chief executives should be banned from becoming the chairman. That presumably wouldn't find favour with Dr Deane but some other directors are supportive.

"How hard would it be to win the confidence of the board when your predecessor sits at the table?" Sir Ross asks.

Another issue is the potential for long service on a board to dull directors' powers of critical analysis. Higgs recommends non-executive directors serve only two three-year terms "although a longer term will exceptionally be appropriate."

Sir Ross favours nine years. "The longer a director is in place, the closer they get to thinking like management."


Roderick Deane says all the boards he serves on ­ a hefty list spanning New Zealand, Australia, and Canada ­ are already 'Higgs-compliant.' Directors are required to consult the rest of the board before they take on any new commitment



* Not an executive

* Not an employee within past five years

* No material relationship with company within past three years

* No remuneration other than director's fee; no participation in share option, performance-related or pension scheme

* No close family ties with directors, advisers or senior employees

* No cross-directorships or significant links with other directors through involvement in other companies or bodies

* Doesn't represent a significant shareholder

* Hasn't served on the board for more than 10 years


* Not an executive

* Not a substantial security holder

* Hasn't derived more than 10% of revenue from a professional relationship with company in past six months

* No close family ties with non-independent director


* Not an executive

* Not a substantial security holder, or officer of or associated directly with a substantial security holder

* Hasn't been a company executive, or served as a director after being a company executive, within past three years

* Hasn't been a principal of a material adviser, a material consultant or an employee of a material adviser/consultant within past three years

* Not a material supplier or customer or associated with one

* No material contractual relationship with company other than directorship

* Has not served on board for a period that could reasonably be perceived to materially interfere with ability to act in company's best interests

* Free from any interest or business that could be reasonably be perceived to materially interfere with ability to act in company's best interests

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