Colin Giffney: Making good rules do their job

COMMENT

New Zealand securities law is not the Wild West. Nothing is fundamentally wrong with our securities law, takeovers rules or stock exchange regulations. New Zealand corporate governance is not substandard. We need to stop saying that it is.

The way we enforce the law may have been or may be an issue. But New Zealand corporate performance has been lousy and that is the core issue.

Nevertheless, the stock exchange has promulgated standards. The Institute of Directors has distributed a questionnaire and would have directors sit tests.

The Securities Commission has distributed a questionnaire. Politicians worry that corporate governance is not robust.

The focus is wrong. Codes, regulations or tests will not stop mischievous or dishonest behaviour. They will not ensure growth and value-creation.

Brian Gaynor started to hit a sounder note in his column on the (boring) corporate governance debate. His central theme was that New Zealand's main problem in the securities area is enforcement, not regulation.

The stock exchange has lightened its regulated view of directorial responsibility. We need the Institute of Directors to realise that tests for admission to its club will not cover for inadequate understanding of value and inadequate corporate performance.

The drama now being played out in the PPCS/Richmond contest is salutary. It is not the rules. It is the enforcement.

It is worth trying to understand "enforcement" better. As I am a member of one of the enforcement agencies, my comments may be seen as throwing bricks, but enforcement is the issue, not the law.

The three core enforcement bodies are the Securities Commission, the takeovers panel and the surveillance panel.

My experience suggests that there are some key elements to success in these bodies: speed in decision-making; staying true to the principles; being open in decision-making; avoiding stepping into the shareholder or investor shoes.

In my view the prerequisites for getting these elements right include strong chairmanship, fierce avoidance of conflict issues, "street smarts" among the members and independently minded members who know about securities and markets.

Nothing in these prerequisites to success for an enforcement agency is about the law. They are human requirements.

So far, the market seems to think the takeovers panel has come through most tests in its short time.

Speed in financial markets - sometimes even if the decision is "wrong" - is better than delay because at least the advisers can adopt a new strategy, a new direction and move on.

The takeovers panel has been quick with its decision-making. Decisions of 32 meetings are written and publicised. By ensuring that other parties are allowed to put their points of view, the trap of making decisions for shareholders has so far been avoided. It may just be a long honeymoon.

All the enforcement bodies have the seductive power of exemption or waiver. Legal advocates are smart and persuasive and they continually test the enforcement bodies with exemption requests.

The public disclosure of these outcomes is the mere tip of the iceberg of requests. Sometimes the requests could be best categorised as commercial convenience but often they are extremely tactical moves.

Almost without exception, exemption or waiver applications are made "in confidence". The ability of any enforcement agency to test the advocacy with some or all of the people who may be affected by the decision is removed by the applicant. It is inevitable that from time to time enforcement agencies will, with the benefit of hindsight, get it wrong.

The concept of the surveillance panel was fine. It was an independent body to enforce the stock exchange regulations. Initially, membership was drawn from market participants. The body was welcomed at inception and well-regarded in the initial years. The stock exchange's perception that it failed may be unfair. Lost its way, perhaps.

The surveillance panel certainly became known as an exempting body, and practitioners would test it with a request, even when they knew it should not be given, because it just might be given. Effectively the panel could be sucked in as a player in the commercial process - often unwittingly.

It is possible that the balance of members on the panel, contrary to its origins, may have weighted to commerce rather than market and the eye for market gamesmanship became dulled.

The Lion/Montana affair was the nadir for the panel.

Exemptions were given that were hugely influential in the outcome, and hopeless timeframes prevailed after the exchange's appellate body became involved. The understanding of time imperatives seemed non-existent.

The NZX had the courage to change the system when it thought it wasn't working, and it should have the courage to change back to a more independent body if need be.

The Securities Commission is a different body altogether. Practitioners have always regarded it as quaintly patriarchal and perhaps a little academic.

Decisions have been deliberate and it has been prone to granting exemptions. It has never been regarded as an enforcer and may have lacked the personnel to do that.

Interestingly, it is operating under different personnel now, and may also be considered in a honeymoon period.

Its recent attitude to requirements for NZAX companies perhaps shows the historic reluctance to trade off risk for performance, and the very prospect of "unlisted" should demonstrate the level of flexibility the market sought.

The commission has failed in some of the areas in which markets would like to see it succeed, but it remains grossly underfunded as an enforcement body.

When the first Securities and Exchange Commission was formed in the US after the 1929 crash, Joseph Kennedy was its chairman. John F's father had been one of the most cunning traders on the exchange but the poacher was appointed gamekeeper. The world changed.

There is a conclusion. Securities law enforcement is about people before it is about the law.

The Government and the NZX need to make sure they have the right people on these bodies. To be successful enforcers, the best people need to be attracted. Having obtained them, the Government must give them the space, the resources and the independence to enforce the law. It must then listen to these bodies if law change is needed.

Finally, when matters get to court, appropriate penalties must be imposed. It will take time to work out what "appropriate" is.

The PPCS/Richmond imbroglio will help to set those standards. Rubicon/Fletcher Forests is still to come. No one is saying the law is wrong. The debate now is with the courts, the ultimate enforcement bodies.

Sit with a bunch of German corporate lawyers, as I did a couple of months back, and discuss their securities law regime and ours.

They would give their eyeteeth for our regime. I would give my eyeteeth for their economy, even in its current depressed state ... Perhaps that is the point.

* Colin Giffney is a corporate adviser at Giffney & Jones, a member of the takeovers panel, a founding member of the surveillance panel and a member of the NZX.