Phil O'Reilly: Ethical business necessary to win back trust

Opinion

Events of the past decade have dented confidence in business and markets.

The global economic meltdown destroyed confidence as well as wealth and the actions of some New Zealand finance companies have left a feeling of mistrust.

It's unfortunate that the actions of a few are overshadowing the benefits of business done well.

Business is our only source of sustainable wealth and we all need trust in it to be maintained.

Firms cannot operate without the goodwill of the community. The "licence to operate" is earned through ethical business.

Goodwill for the institution of business is a precious thing absent from corrupt or communist countries and we need to maintain it.

This year we should remember it wasn't the majority of businesses that caused the grief but a tiny minority.

Second, we should view the events of the past as a learning opportunity so we become better informed and more sensibly cautious.

The Government's contribution is to improve relevant laws and regulations. This is valuable but shouldn't be dominated by the political need to be seen to get tough.

It's counterproductive to write laws that sound as if they will get tough on bad behaviour, but may not be able to deliver.

For example, the consumer law review seeks to prohibit "oppression" or "unconscionable" conduct.

These are strong words and could give a feeling of protection. But they are emotive terms that are open to interpretation and are more likely to bring expensive litigation than protection.

Any action that could be called oppressive or unconscionable would already be illegal and deserve stiff penalties under the act anyway.

Emotive language in law can raise unrealistic expectations. Critics call it feel-good law or slogan law.

Another example is in the draft powers of the Financial Markets Authority, the new body set up to regulate and enforce markets to help restore investor confidence.

Included is a proposal for the authority to have the power to take court action against directors on behalf of - and instead of - investors, when in the public interest.

This could raise the unrealistic expectation that the authority might take action whenever an investor loses money.

It is a fact of life that investors can lose as well as make money and promoting false comfort will simply cause problems.

It would be better to improve regulations to make it easier for investors themselves to take class actions against miscreant company directors.

As well as improving relevant legislation, another useful thing would be more financial education in schools and beyond, to help people make better investment decisions.

Financial literacy education to help New Zealanders better understand and manage their dealings with business and markets is sorely needed.

We need to sharpen our act with regard to investment. Part of the problem of investors putting money into shonky finance companies was a lack of other avenues for investment.

With a large part of the economy dominated by state-owned enterprises and co-operatives, scant listings on the NZX (stock exchange) and the trend for successful new Kiwi firms to be sold overseas, there have not been a lot of good investment opportunities.

Hopefully the Government's review will help to rebalance the investment landscape.

Work connected with the Financial Markets Authority, Capital Markets Development Taskforce, Savings Working Group, consumer law review, Productivity Commission, Resource Management Act streamlining, the new bank governance requirements and tightened company rules is heading in the right direction.

The review of the Securities Act - which ideally should have happened before all this took place - is also expected to bring positive change.

Given this amount of regulatory reform, the need for a Regulatory Responsibility Act is greater than ever.

This still-pending legislation, requiring lawmakers to adhere to a set of principles of good practice, has been a long time in coming.

Like the Securities Act review, it should have been completed before the other taskforces and reviews.

In all, this activity shows the Government is serious about helping to prevent a recurrence of past events.

But business itself needs to act to help restore its good name.

It's not enough for New Zealand to be recognised as the "world's least corrupt" - we should also have a good name for profitable investment in growing, ethically managed companies.

The big story on the news shouldn't be about investment disasters but investment success.

The Government's reform work should help rebalance the incentives around investment, including away from housing and towards more productive enterprise.

Hopefully this will be followed by SOE reform, increasing opportunities for people to invest in parts of the economy currently dominated by these enterprises.

These kinds of undertakings would greatly improve prospects for a better investment environment. They should be accompanied by business conduct of the highest standard.

It's a paradox that while we have a shortage of investment avenues, we also hear many firms complain they are unable to get investment capital to grow.

I believe we need business conduct that gives investors compelling reasons to invest.

There is no shortage of areas where improvement could be made - more ambitious growth goals, more investment in research and development, clearer objectives, more use of independent directors and proper board processes.

Also, better education for managers, more customer responsiveness, scrupulous environmental and waste management and wider investment in the local community.

We need more export ambitions, transparency in reporting and accounting, inclusive hiring practices, win-win thinking when bargaining, more results-oriented pay, respect for staff, customers and community, and more action on productivity growth.

Getting to a place where laws, policies and business conduct are together conducive to investment would be a good goal for this year.