Out and about on the board walk

Dean Paatsch

Dean Paatsch promises to negotiate with rogue public company boards. But it is a pledge he can afford - he wields a big stick.

The Australian is the regional head of operations for the global corporate governance adviser Institutional Shareholder Services.

It plays a key role in helping more than 1600 institutional funds, collectively owning more than a quarter of the world's publicly traded companies, to decide how they should cast their votes in key shareholder resolutions - ranging from the appointment of directors to their remuneration and, in some cases, the desirability of mergers or large acquisitions.

More to the point, it has just started to scrutinise the governance of 67 of New Zealand's largest companies and is a key adviser to New Zealand's largest investment fund, the New Zealand Superannuation Fund.

"We are not pushed around by issuers but we do not want to be in the position where we are seen as clipping them around their ears. It doesn't work," Paatsch says.

It is still early days. ISS's first suite of reports on New Zealand corporate governance standards should start appearing ahead of the main round of the shareholder meeting season in the spring and the summer.

Still Paatsch is beginning to get a picture of where New Zealand companies need to lift their game - the pool of professional directors needs to be more frequently refreshed and companies need to give large shareholders more time to make up their minds on key annual meeting votes.

The first point is not a problem unique to New Zealand. All around the world, the pool of non-executive directors is ageing because it is failing to bring new talent up through the ranks.

Without constant renewal, boards miss out on fresh thinking and new ideas. Moreover, the informal networks of alliances that inevitably form in the professional director set are not challenged.

Paatsch said the problem could be helped if New Zealand followed counterparts in the US where top ranking company executives - not just the chief executive - are encouraged to take non-executive positions.

The phasing out of retirement benefits also helped. In the most egregious cases, these benefits resulted in payments bigger than annual fee entitlements simply because directors had lasted another year on the board.

"That is not something that really encourages a board to refresh itself on merit," Paatsch said.

Directors also needed to be paid more, given the extent of their responsibilities and the calls on their times in the cases of crisis - such as that suffered by troubled carpet-maker Feltex - or takeover.

"New Zealand directors compared with their Australian counterparts are quite poorly paid. I think that is related to the size of the director pool."

On the second problem, requirements that boards dispatch meeting material only 14 days before a meeting simply prevented international shareholders from taking part in the governance of a company and created an disincentive to investing. However, lobbying from ISS and other institutional shareholders was not the only force to correct these deficits.

"The pool of institutional capital is small but growing. You are moving from being a founders market or a private capital market to a more wholesale and disaggregated market.

"As that works its way out, inevitably companies will have to respond to the fact that if they are going to raise institutional money, they are going to have to satisfy institutions about the use of the cash, which means a board of responsive directors."

Paatsch said, however, the deficits in New Zealand corporate governance had to be kept in perspective.

"A lot of the things you and I are talking about are nuances compared with the practices in other markets," he said.

He said the New Zealand institutional activism was strong. Local fund managements were well versed about the extent and nature of the corporate governance issues they tackled. They also recognised that their interests were aligned with their counterparts overseas.

Moreover, they were willing to stand up and be counted.

"I find it really refreshing not to see people speaking boiler plate," he said.

ISS's foray in this part of the world follows its acquisition of Paatsch's private company Proxy Australia.

He founded this firm with his business partner, Geof Stapledon, in 2001 and aimed it at becoming a constructive critic of corporate governance rather than simply a trenchant and predictable critic of executive remuneration.

"We decided that it could be done so much better instead of attacking executive salaries with headlines that sound shrill and ineffective. The first few years were really hard."

But last year, after an approach from ISS - which is owned by the UK pension fund Hermes as well as a private equity group Warburg Pincus - they decided to sell.

If they had stayed independent, they would have remained a domestic-focused, limited-growth business. At the same time, since ISS was entering the market, they faced a tough competitor which would be able to spread its costs across a much larger customer base, potentially pricing their company out of the market. ISS also had superior technology.

"ISS occupied a really important place in the delivery of proxy information and we were making no impact in getting our research into offshore institutions," Paatsch said.

"They said where you are there's 350 offshore institutions that want to take Australian research. You will be serving them as well as growing the local market pie and go out and run the business and take it to new markets."

It took the pair just two hours to make up their minds.

This method of expansion by acquisition is a method ISS has followed around the world. It was a strategy developed in the UK, where in a joint venture with the powerful National Association of Pension Funds it had its first successes outside its home market of the US.

"ISS realised that local market knowledge was critical to getting the buy-in of the board and the investors."

ISS has a team of seven analysts in Australia, with one lead analyst covering New Zealand. Just as brokers do not cover every stock on the market, they will cover only those stocks which are investable and have demand.

The advice will be clearly tailored to the company and more than tips its hat to local standards of corporate governance.

Companies will not be surprised by the ISS view as they will be well informed about the recommendations ISS is making well before annual meetings are held.

Recommendations against any resolutions will, therefore, be representative of a failure of ISS to agree with the company and they will be an end point rather that the starting point of dialogue.


Institutional Shareholder Services

HQ: Rockville, Maryland.

Regional HQ: Melbourne.

Regional director: Dean Paatsch, 38.

Owners: UK pension fund Hermes and private equity group Warburg Pincus.

Sales: US$100 million.

Customers: 1600 large institutions controlling a quarter of the world's publicly traded companies.

Services: Corporate governance research, proxy services, class action recovery services.