Investors must demand better governance: regulator

Rob Everett said institutions such as fund managers holding shares on behalf of clients had a lot of clout and could do more to demand governance improvements.

Institutional shareholders need to place more focus on demanding quality corporate governance from firms they have investments in, says Financial Markets Authority chief executive Rob Everett.

In its strategic risk outlook report, released last week, the regulator said governance would be one of its seven strategic priorities over the next two to three years.

The FMA flagged concerns about director influence in New Zealand being "relatively concentrated in a small group of interconnected directors" who sit on many company boards.

"While some degree of interconnectedness is vital to the efficient functioning of our financial system, it can also serve to amplify existing market frictions, conflicts of interest, information asymmetries and other structural and behavioural factors," the report said.

Everett said there was much room for improvement in corporate governance in New Zealand.

"I've seen a few scenarios where I think there's been a degree of complacency around things like conflicts of interest, trading in the shares of the organisation, and some of the stuff around continuous disclosure could be a lot better."

Everett said institutions such as fund managers holding shares on behalf of clients had a lot of clout and could do more to demand governance improvements.

"Boards need to understand they are there to serve the shareholders and not there just for themselves or the CEO."

Devon Funds Management principal Paul Glass said institutions had been taking a lot more interest in governance in recent years.

"I think there's probably been a realisation that it's an important component of the long-term returns that we get from companies we invest in."

He said recent updated governance guidelines did not go far enough.

"What we'd like to see is the FMA issuing - rather than just principles - some stronger guidelines."