New Zealand's corporate governance systems lag behind those of comparable countries. The result? Loss of investor confidence and a too-high tolerance of unfit directors. Corporate governance is an increasingly complex amalgam of legal and self-regulation. The courts work at one end of the system, acting as the washing machine of our corporate dirty laundry. So, although judges are clearly not the sole guardians of governance standards, they do have a constructive role to play when all other systems fail.
The legal component of corporate governance covers directors' duties, shareholder remedies and meetings. There is a debate whether it covers other law which imposes liability on directors. Systems of self-regulation range from what could be called hard/soft law like stock exchange listing rules and statements of accounting practice, to institutional codes such as the ASX Principles of Good Corporate Governance and Best Practice Recommendations to the codes of individual companies. Sometimes corporate governance is thought to cover business ethics. The form of self-regulation tends to be analysed in terms of rules versus principles, but to these we can add the norms of best practice.
The evolution of modern corporate governance has certain club-like features. The Cadbury Report and its sequel in the UK and the General Motors Guidelines had a cosy insider feel to them and yet the major corporate collapses of the past five years have arguably represented the significant failure of this system. Organisations such as Enron, WorldCom and HIH had all the trappings of modern corporate governance and yet failed to deal with significant misconduct and corporate failure.
The American response was a draconian rule-based system in the Sarbanes-Oxley Act of 2002 (SOX) which marked a significant federalisation of corporate governance and gave new powers to the Securities Exchange Commission. Australia, which under the Howard government relishes its deputy sheriff role, set up a plethora of committees to decide on the extent to which Australia adopted SOX. The results have been the ASX Principles of Good Corporate Governance and Best Practice Recommendations and the amending legislation of 2004.
New Zealand has been more dilatory and the governance environment is more permissive than directors would find in Canada, the United Kingdom, the United States or Australia. This is a paradise for directors; a principles-based regime with few rules to underpin it and regulators with little bite.
How we got to this point can be partly traced back to New Zealand's major free-market reforms in the 1980s, which were introduced very fast and with an emphasis on self-regulation. Subsequent company law changes adopted the broad shape of the Canadian model without much of the associated elaborate regulatory system that underpins it.
The reasonably benign set of principles now promulgated by the Securities Commission is based on some useful initial work by the Institute of Directors, and follows an attempt at takeover of the subject by the New Zealand Exchange. This system is a form of self-regulation and very much principles-based rather than rules-based.
On the surface, this may not sound like much of a problem. Light-handed regulation has an upside in lower business compliance costs and less 'friction' in doing business. But in the global investment environment, New Zealand has become a less attractive destination because it is a common view that our standards are suspect and we offer less assurance that directors' duties will be adequately monitored and enforced.
That has undoubtedly been an influence in some cases in the past two decades as major listed corporates have shifted offshore. From having a significant and varied list in the late 1970s New Zealand has succeeded through Rogernomics and its sequels to shift the control of major companies to Australia, leaving behind a dwindling and relatively insignificant list of companies. …