King's Rules on Good Governance: Former South African Supreme Court Judge, Mervyn King, Is an Internationally Acknowledged Expert on Corporate Governance. His Views and Experience Are Highly Prized in His Native South Africa, Europe, the United States and Now New Zealand and Australia. (Governance)

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Mervyn King was in New Zealand last month as a guest of the Sheffield Academy of Corporate Governance. Directors in Auckland, Wellington and Christchurch turned out for his series of Institute of Directors/Sheffield organised seminars entitled 'Good Governance Simplified'. He also offered private consulting advice to some of our largest enterprises. The New Zealand Stock Exchange released its proposed rule changes while he was here. He wasn't entirely impressed. He talked to The Director's editor Reg Birchfield.

What do you think of the NZSE's proposed governance rule changes?

I haven't seen the detail of what is proposed but I have my doubts about directors having to be certified. In the UK they tried to charter directors. They very quickly found that they had to rethink this. Some of the best directors do not have degrees, are not lawyers or accountants. They soon started making exceptions to the rules. Why make a rule if you end up having to make exceptions?

New Zealand has a very small skill pool from which to draw competent and experienced directors. Too many restrictions will reduce that pool even more. And then, on the question of accreditation, who accredits the accreditors? How well suited is the IOD to accredit than say, an outside organisation like Sheffield or even a group of financial journalists?

I am also sceptical about the suggestion that the external or lead auditor should change every five years. New Zealand, like South Africa, faces a real skills shortage in this area. For the first two years your external auditor is learning about the business. It is only about the third or fourth year that they actually understand your business, so you only get a quality audit in the third and fourth years. The problem is, if they only have a year to go after getting on top of the job, they will become demotivated to do a good job. That's insane. In South Africa you have two auditors; one watches the other as well as the company. With only four global accounting firms, how do you move them around every five years?

The problem, it seems to me, is that the NZSE is trying to cookie-cut from the Sarbanes-Oxley Act and that (Act) isn't going to work even in the United States.

Sometimes the chief executive gets too close to the senior audit partner so I suggest that every three years you change the senior audit partner, but keep the same audit firm and retain the continuity.

What about the provision for independent non-executive directors?

There are effectively now four kinds of directors. To my mind, if you are a director you are a director. But, if you are employed by the company you are now labelled an executive director. Someone who is not employed by the company but who might have some contractual link, or supply something, is a non-executive director but is not independent. Someone not employed by the company, without contractual links and not representing a major shareholder, is an independent non-executive director and someone people can rely on. Sarbanes-Oxley has gone another step and created a senior independent non-executive director who must focus on the interests of the major shareholder. It is getting silly. And what about the role of the chairman in all this. It is confusing. I have real doubts about (the practicality) of all this in a small country like New Zealand.

Why did you move from the law to commerce?

I resigned from the judiciary with another judge because we objected to the (white) government's financing of South African newspapers and using them as the (president's) mouthpiece to prop up an horrific social scene. …


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