Enron model not ours, say directors

Enron may have cast a shadow over corporate governance internationally, but New Zealand's top chief executives are on song about their own companies' standards.

Virtually all survey participants said they either "got the model right", exercised "robust" or "conservative oversight" or were adopting best practices.

"It is important that we recognise that New Zealand/Australian companies are generally not following the shonky US practices, as our regulatory regime does not permit this," said an experienced company chairman.

Think again, said Warwick Hunt, of PricewaterhouseCooper.

He was adamant that New Zealand should keep pace with best international practice and not seek to "lead the world".

But there were mandatory requirements: Listed companies should have properly constituted and effective audit committees composed entirely of independent directors.

Audit committee members should be appropriately qualified; at least one must be financially expert.

Importantly, directors must be willing and up to the job to assist and constructively challenge management.

Some survey respondents said they had moved - pre-Enron - to ensure proper governance by increasing the number of independent directors and separating out auditing and consulting advice.

In general, those who inhabit New Zealand's boardrooms believe they have the mix right.

But, Hunt said, the board chairman must not also chair the audit committee. Nor should the chief executive hold the dual chairman's role.

It was also important for New Zealand to adopt International Financial Reporting Standards (IFRS) so that financial statements met standards adopted elsewhere.

"To do otherwise is to handicap New Zealand corporates in international capital markets, with higher cost of capital being the inevitable result," said Hunt.

The Accounting Standards Review Board (ASRB) recommended that New Zealand listed issuers be required to adopt IFRS by 2007 - two years after its proposed adoption in the European Union and Australia.

"It is essential that our corporates at least be permitted to adopt the same timetable as the EU and Australia, but my preference would be for mandatory adoption to be moved forward, at least to 2006," Hunt said.

"All New Zealand reporting entities should be required to report to the same IFRS standards, whether listed or not.

"While that may require legislative changes, this should not be used as an excuse for dragging our feet."

Chief executives pointed to a credibility issue over Tranz Rail's controversial sale and leaseback arrangements. The Stock Exchange's market surveillance panel, chaired by Bill Falconer, had still not reported on its investigation into Tranz Rail's disclosure practices when this article went to press.

Deloitte Touche Tohmatsu chairman John Hagen said the accounting profession as a whole had been seriously damaged by Enron.

"In the international meetings that I have been to in the last couple of months, the stress that we as a firm are placing on the need for professional services firms to win back trust has been pretty prominent."

Hagen headed a team from the "big four" - Deloitte, PricewaterhouseCoopers, Ernst & Young and KPMG - who examined the local auditing environment post-Enron.

They quickly tightened governance rules.

But shareholders' advocate Bruce Sheppard claims he was the tail that wagged this dog.

Hunt said a commitment to transparent, open and timely communication with shareholders was needed.

"We have seen both here and overseas how the market punishes unpleasant surprises.

"The other issue that is becoming more important is the scope of reporting. Increasingly, corporates are reporting additional, voluntary information in terms of strategy and triple-bottom-line reporting.

"The message is that the more the market understand a particular company, the more confidence in it the market has, and this is rewarded by a lower cost of capital and higher share price."

Expert Joseph Healy, in his book Corporate Governance and Wealth Creation in New Zealand, argues that directors should be focused on what really matters: creating wealth for their shareholders and the economy.

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