Des Hunt: Creating an informed investor community

It was interesting to read in the Herald that the global corporate governance adviser, Institutional Shareholder Services, has begun monitoring the governance of 67 of New Zealand's largest companies.

ISS helps more than 1600 institutional funds worldwide, including the New Zealand Superannuation Fund, to decide how they should cast their votes in key shareholder resolutions, for example the appointment of directors and chief executive remuneration.

That large funds require the services of organisations such as ISS to help in the active management of their holdings highlights the difficulties faced by typical private investors when it comes to:

1. Securing a reliable and timely flow of information about each of their investments.

2. Finding time and having the skills required to analyse this information effectively.

3. Feeling confident that independent directors are effectively representing their interests.

Helping smaller investors overcome these hurdles so they can confidently and proactively take part in the sharemarket is a key goal of the New Zealand Shareholders' Association.

There are thus significant parallels between the role ISS plays for institutions and that which the NZSA provides for its members.

NZSA representatives spend significant amounts of time meeting company boards to promote good corporate governance and discuss issues of concern to shareholders, particularly smaller investors.

The NZSA also regularly communicates with institutional investors and where possible works in conjunction with them on key issues to present a united argument - for example, over recent issues at Telecom, Waste Management, Contact and Feltex.

Like ISS, the NZSA's preference is always to reach agreement on issues before AGMs, though we, of course, are not afraid to openly debate issues and vote against resolutions on which we cannot reach agreement.

Similarly we will also make our opinions known in the media if we are unable to resolve matters through direct discussions with a company.

It is important to note that the NZSA does not limit its interactions with companies to those times where there is a matter of dispute.

We enjoy opportunities to communicate praise of good corporate performance and governance and also proactively seek opportunities for company visits for our members.

We have found many listed companies amenable to these visits, which typically involve a Q&A session for our members with one or more members of the board and/or senior executive team as well as a tour of some of the company's facilities.

This type of first-hand interaction with key company officers is invaluable when making investment decisions.

It also emphasises to directors and CEOs that our focus is on constructive engagement on an ongoing basis, not simply knocking on the door when we have a bone of contention.

As well as activity focused on individual companies, the NZSA also devotes time to the more general advocacy of good corporate governance habits.

For example, like Dean Paatsch, regional head of operations at ISS, we have for some time been arguing for a broadening of the pool of professional directors in New Zealand.

Drawing directors from a wider range of backgrounds and skill sets is critical to ensure boards have an appropriate range of skills to reflect their companies' areas of operation and broader environments.

Few boards in New Zealand could be accused of lacking in accounting and legal expertise, but just as few jump out as having a healthy mix of operational, technical and marketing experience.

The mix is essential for a board to be able to effectively evaluate and contribute to the strategies being pursued by the CEO and his or her senior management team.

For example, we continue to argue for Telecom to upweight the technical and marketing expertise on its board.

A larger talent pool would also help to avoid the pitfalls associated with the informal networks and alliances that undoubtedly exist among New Zealand's rather limited professional director community.

Such networks are not transparent to the everyday investor and, particularly when it comes to "independent" directors, can result in conflicts of interest that should, at the very least, be disclosed.

Independent directors have a significant role to play in representing and protecting the interests of shareholders and their performance is fundamental to investor confidence in individual companies and the market as a whole.

Unfortunately, in the world of professional directors, vocally expressing a dissenting view tends not to be the best career move, likewise resigning over a point of principle is rarely treated as a badge of honour.

Of course, independent directors are not alone in often finding it difficult to speak out on contentious issues.

Witness the reluctance to comment of most broking firms in the face of injudicious corporate behaviour and their consistent dearth of sell recommendations.

The cynical among us find it hard to believe that concerns about securing the next big float, capital raising and M&A deal play no role here.

These shortcomings in the willingness of some parties to play a more active and public role in the monitoring and management of corporate governance activity are what make the existence of organisations such as the NZSA and ISS so important.

Although New Zealand's institutions are becoming increasingly vocal, led by individuals such as Simon Botherway, many still feel more comfortable foregoing public comment, even in the forum of AGMs.

Similarly, the actions and policies of the NZX do not always send reassuring signals to small investors.

For example, in the often contentious area of CEO and board remuneration, there have been a number of cases where the stock exchange has given a waiver allowing the board to avoid getting shareholder (i.e., owner) approval.

The legal process also offers little for the smaller investor, with costs likely to be prohibitive in most cases.

* Des Hunt is director of corporate liaison for the New Zealand Shareholders Association.