Investors pay heavily

By Peter V O'Brien

Friday 20th December 2002

Investors everywhere will want 2003 to be free of this year's level of corporate fraud and mismanagement, professional incompetence, excessive remuneration and widespread loss of shareholder value.

New Zealand and Australia saw some of the phenomena, with some top executives paying the price for misjudgments despite having board approval for major decisions. Shareholders and markets accepted the resignations (sackings) as a fact of corporate life.

They were less accepting when substantial payouts to departing executives were disclosed and were often upset about remuneration packages organised for people who kept their jobs but presided over companies' losses.

Small shareholders can do little about the excesses that surfaced this year unless they find allies in the major corporates, fund managers and other financial institutions that dominate share registers in New Zealand and Australia. That could be difficult in cases when those controlling the investments travel on the same financial gravy train.

The carefully woven argument that people in Australasian companies need massive remuneration and employment contracts providing for substantial golden handshakes to attract international quality became a see-through fabric this year.

Proposed new rules for corporate governance in this country could improve accountability and make companies less susceptible to the excesses revealed overseas, particularly in the US. It seems extraordinary that executives who organised disastrous acquisitions can resign and get paid, for example, accumulated bonuses going back many years.

It is equally extraordinary that lavish executive option schemes are still being approved in various countries.

Those matters and other need better control and supervision if investor confidence worldwide is to recover from the battering is suffered in 2002.

They are important in the context of increasing the range and number of companies available for investment on the stock exchanges.

The New Zealand Stock Exchange wants to increase the size of the sharemarket and is revamping its structure to that end. The market has decreased in recent years through takeovers and delistings for other reasons.

This year saw a better balance between new floats and delistings. There had been six delistings and five new companies at the time of writing.

More new floats are expected in 2003 but it seems inevitable some listed groups will be absorbed through takeovers or removed when their financial situation makes operations unsustainable.

It is an open question whether there will be another round of executive and director resignations next year in New Zealand and Australia to follow the unusual number who departed in 2002. The answer will depend partly on the general performance of investment markets.

It was no coincidence that several top resignations came this year from people in financial service companies that need buoyant markets to provide them with satisfactory profits.

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