'Blunderbuss' approach galls CEOs

Tighter rules on corporate governance are a worry to business - especially accountants, who are divided over the prospect of increased audit regulation, writes GRAEME HUNT.

Big Business is becoming increasingly wary of the drive for greater corporate governance compliance.

Just one in two of the 120 chief executives and company chairmen surveyed by the Herald believe shareholders should subject boards and chief executives to greater scrutiny.

An Auckland-based chief executive of a major New Zealand company cautions the Government should also not go overboard.

"A blunderbuss apparatus is being used to zap and fix a very small incidence or problem. Boards and management are forced to spend huge amounts of time on things other than generating profits."

Kim Ellis, managing director of Auckland-based Waste Management NZ Ltd, is typical of the listed company chief executives opposed to giving shareholders greater powers to put directors and chief executives through the hoops. He said the role of the chief executive was to enhance shareholder wealth and said this could be assisted by cuts in the corporate tax rate and compliance costs. But he held out little hope for progress under the present Government.

"The real issue is that the quality of financial analysis in New Zealand is far too weak," said another business person. "There is not enough good advice ... The best solution [for good corporate governance] is to have good analysis and good advice and people will vote with their feet. Shareholders should not only hold boards and chief executives accountable but advisers as well."

Mighty River Power chief executive Doug Heffernan added that there was nothing stopping shareholders subjecting boards and chief executives to greater scrutiny. "They already have freedom of choice.'

But others from business' top table are sceptical. New Zealand boards have burned through a huge amount of cash and destroyed value in companies such as Brierley Investments and Bank of New Zealand, they were "too incestuous" and needed "to be more transparent", were some of the countering viewpoints.

At the SME level it is a different story. Seven in 10 SME respondents wanted shareholders to subject directors and chief executives to greater scrutiny, including external audits. But most shy away from demanding more regulation to enforce corporate governance.

"Shareholders have a right as part-owners to demand accountability from their boards and chief executives," one business person said." But they also elect the boards. Therefore that process is one that should be carefully monitored."

The Government has introduced a vast wodge of commerical regulations and laws since the US Enron disaster.

However, the Securities Commission, led by Australian-born chairman Jane Diplock, concedes that corporate governance practices in New Zealand are by and large good. "Good corporate governance should increase confidence in boards and management, and attract support from investors and other stakeholders," Diplock said in a report to the Government last month. "Ultimately it should make business more productive, competitive and financially sustainable."

The commission's 10 principles for good corporate governance are largely common sense. They provide guidelines for ethical standards, independence, disclosure and respect for shareholders and stakeholders.

What they do not cover, or even allude to, is profitability or wealth-creation - key principles in the 1993 Companies Act.

It is possible, therefore, for companies to meet the principles of good corporate governance in full and to also fail.

No New Zealand research provides evidence of a relationship between the commission's 10 principles and corporate success, though Diplock claims that transparency through high standards of reporting and disclosure is of paramount importance. "The quality of corporate governance can play a key role in corporate performance. Improving governance should be a priority for all corporate entities," she told the Government.

"Shareholders and other stakeholders can properly evaluate an entity and its governance only if they are fully informed."

Diplock's regulatory mindset is largely shared by the Government. Only last month, the then-Minister of Commerce, Lianne Dalziel, warned that rubber-stamping practices are not in a company's best interests. She praised the Shareholders Association for focusing public attention on issues that, she said, were fundamental to the proper functioning of the securities market. This includes highlighting the responsibilities that are too often ignored by institutional investors, who hand their proxy votes to the very people whose actions are supposed to be subject to independent scrutiny.

Dalziel made corporate governance the most important item on her corporate reform programme. The first part of the programme, the Takeovers Code, in force from July 1, 2001, had improved perceptions of the New Zealand market because minority shareholders now felt they had greater rights during takeovers.

The Securities Markets and Institutions Bill, enacted on December 1, 2002, also gave the NZX the powers of a front-line regulator under the supervision of the Securities Commission.

New securities market regulations, in force from March 1, would improve transparency by ensuring information on directors' and officers' shareholdings was up to date, and a review of securities trading law would concentrate on insider trading and market manipulation.

However a new NZX requirement that listed companies have a minimum of two independent directors (or at least one-third of their boards) has raised hackles. GPG head Sir Ron Brierley fired a written broadside at the stock exchange in January saying it had no mandate to restrict shareholders rights to elect or not elect the directors they wished to represent them on a company.

Riposted Dalziel: "I know the no-rules brigade regard every aspect of regulation as an unnecessary compliance cost but there is a cost in being different that New Zealand cannot ignore. Independent directors ... can provide an impartial arms-length perspective to a board and can help ensure the protection of minority shareholders' interests. I consider it essential that there are checks and balances in place."


The Herald survey reveals that two of the country's top accountants are sharply divided over whether a new level of audit regulation, an audit oversight committee, should be introduced.

The new chairman of the Accounting Standards Review Board, Warwick Hunt, favours it, but the former chairman, John Hagen, describes the proposed committee as "absolute madness".

The oversight committee is a key recommendation in the Diplock report, although it was strongly opposed during the commission's extensive consultation.

Diplock says New Zealand is unusual in not having a body independent of the audit profession responsible for the oversight of auditors.

The commission considers independent oversight of auditors would contribute to confidence in audit quality and, in particular, auditor independence.

John Hagen, chairman of accounting firm Deloitte, said the only area of disagreement was an oversight board for the auditing profession. "This is a small country in comparison with the UK, the US and even Australia and to put on another layer of regulation when the problem is not apparent is absolute madness."

Hagen said corporate governance had improved in New Zealand over the past three years. He welcomed the country's commitment to adopt international accounting standards by January 1, 2007.

But Warwick Hunt, who is also chief executive of accounting firm PricewaterhouseCoopers, said an auditor oversight board operated in Australia and would be an issue when transtasman accounting standards were harmonised.

He said considerable progress was being made on harmonisation. New Zealand was now represented at meetings of the Australian Financial Reporting Council and the Australian Accounting Standards Board.

Hunt said it was in the long-term interest of public companies to operate on both sides of the Tasman under the same accounting rules. He said there was an opportunity for New Zealand to persuade Australia of the merits of its light-handed approach to regulation.

Hunt said the standard of corporate governance in New Zealand was good but there were reporting deficiencies.


THE DEBATE

The accountants

John Hagen, Executive chairman, Deloitte: Regulator Jane Diplock has won support for many of her recommendations, says Hagen. But adding in an "audit oversight committee" to supervise auditors would be "absolute madness".

Warwick Hunt, Chief executive, PricewaterhouseCoopers: Hunt believes it is in the long-term interests of public companies to operate under the same set of rules on both sides of the Tasman. "There is an opportunity to persuade Australia of the merits of New Zealand's more light-handed approach."

The regulators

Margaret Wilson, Minister of Commerce: The Prime Minister gave Wilson the commerce portfolio after Lianne Dalziel resigned under pressure. Business hopes Wilson will make a better fist of Commerce than her previous Labour portfolio. "Even listen to us," said one respondent.

Jane Diplock, Chairman, NZ Securities Commission: The "Aussie" regulator has set out to move NZ governance standards to an internationally recognised platform. But many NZ business players still prefer the market's free-wheeling past. "Why legislate against an Enron we haven't had?" asked one.

The sceptics

Kim Ellis, Managing director, Waste Management: Ellis opposes giving shareholders more control. "It's the role of CEOs to focus on creating greater shareholder wealth. Shareholders should direct their efforts to persuading Government to reduce compliance costs and cut taxes."

Doug Heffernan, Chief executive, Mighty River Power: Free-marketeer Heffernan says there is nothing to stop shareholders subjecting boards and chief executives to greater scrutiny. "They already have freedom of choice."

* Additional reporting Fran O'Sullivan