RBNZ board appointment process far from smooth sailing. Photo / Mark Mitchell
It has been revealed a Reserve Bank (RBNZ) board member was asked to give up his insurance company directorship 27 days into the job at the bank “to avoid the potential perception of a conflict”.
RBNZ board chair Neil Quigley on July 27 wrote to Byron Pepper to request he give up his seat on the Ando Insurance board, a document released under the Official Information Act shows.
Pepper had disclosed his connection to Ando through the extensive recruitment process that led to him being appointed to the RBNZ board.
It wasn’t deemed problematic because Ando isn’t regulated by the RBNZ. Rather, The Hollard Group, which has a 39.65 per cent stake in Ando, is licensed by the bank under the Insurance (Prudential Supervision) Act.
Ando provides insurance on behalf of Hollard. It works with insurance brokers, assesses insurance claims and takes care of the other operational aspects associated with administering insurance. But Hollard ultimately provides the cover.
So, Pepper’s appointment to the RBNZ’s new governance board, established on July 1, was legal.
However, Quigley – who was part of a panel of Treasury and RBNZ representatives that recommended Finance Minister Grant Robertson ask the governor general to appoint Pepper – took issue with the “potential perception of a conflict” after it was publicised.
When Pepper’s appointment was announced on June 30, the Herald ran a story that included comments from an industry expert worried about the potential creation of a conflict, and a statement from Robertson, who said this wasn’t a problem because Ando isn’t regulated by the RBNZ.
The issue was topical. Just over a week earlier, alarm bells had been rung over Rodger Finlay – the then chair of NZ Post (which had a 53 per cent shareholding in Kiwi Group, which owned Kiwibank) – contracting to the RBNZ as a “transition board” member.
Again, the arrangement was legal, as the RBNZ regulates Kiwibank not NZ Post. The point of contention was whether it was appropriate or good practice.
Then on July 27, Quigley wrote to Pepper saying, “[T]he RBNZ needs to set the highest standards, and take appropriately conservative approaches to the management of interests and the avoidance of both actual and perceived conflicts of interest.
“This also means that the RBNZ needs to avoid complexity and opaqueness in managing the interests of the Board members, because these are challenging to explain to journalists and to the public.”
Quigley noted he’d sought advice on the matter both internally and from a partner at law firm, Chapman Tripp, who concluded Pepper’s involvement with Ando didn’t pose a conflict.
“However, as is clear from the letter from the Insurance Council, this legal position will not stop interested members of the public from asking us to explain how we manage the situation,” Quigley said.
A spokeswoman for the Insurance Council of New Zealand confirmed to the Herald its chief executive Tim Grafton wrote to the RBNZ in July asking for assurance that potential conflicts involving Pepper would be managed.
She said Grafton noted the fact the RBNZ collects commercially sensitive information from insurers, but more generally speaking, supported having people with insurance expertise on the RBNZ board.
Coming back to Quigley’s letter, he flagged concerns around the costs involved with managing perceived conflicts of interest.
He agreed with the legal advice he’d received internally that RBNZ directors shouldn’t be in situations where continuous assessments of interests need to be made and “cumbersome committee structures” need to be created to “channel workflows in ways designed to avoid interests”.
This would likely also “reduce the overall effectiveness of the Board”.
So, Quigley told Pepper his “effective participation” as a board member required that he resign from the Ando board.
“Whilst this might not be required from a strict legal perspective, it assists to avoid the potential perception of a conflict,” he said.
Quigley addressed another issue Pepper had already declared – the fact he agreed to buy non-voting equity shares in Ando, worth less than a per cent of the company.
He said Pepper had to consult with him before doing anything with these shares in the future.
“Your full participation in the RBNZ Board can resume immediately upon your resignation from the Ando Board taking effect, and you confirming the other provisions set out above,” Quigley told Pepper, before thanking him for the “integrity” and “patience” he’d demonstrated.
The Herald asked Pepper whether he was satisfied with the process and outcome. He said he didn’t have anything to add.
Pepper isn’t the only RBNZ board member to end up in the news due to the way his recruitment was managed.
As previously reported, Secretary to the Treasury Caralee McLiesh in June wrote to Robertson to apologise for the fact the Treasury neglected to flag potential conflicts of interest regarding Finlay in two different documents that went to Cabinet.
One document was about appointments to the RBNZ board, the other was about appointments to the NZ Post board.
“[T]he papers should have outlined that NZ Post is a majority shareholder of Kiwi Group Holdings Ltd, who in turn owns Kiwibank Ltd and that as Chair of NZ Post, there was the potential that Mr Finlay could have a perceived or real conflict of interest in also serving as a member of the Board of the Reserve Bank,” McLiesh said.
“This matter was considered by the Reserve Bank and NZ Post legal teams and Mr Finlay’s interests were deemed manageable and noted on the respective Conflicts of Interest Registers of each organisation.”
Both Finlay and government officials knew, before it was public knowledge, that Kiwibank would eventually be sold to the Crown. Thus the potential conflict would be removed.
Nonetheless, Finlay ended up declining an offer to be reappointed NZ Post board chair, as he took up his seat on the RBNZ’s new governance board on July 1.
Finlay is also a director of Ngāi Tahu Holdings Corporation, which owns Ngāi Tahu Investments, which has a 24.9 per cent shareholding in Fidelity Life Assurance Company. Fidelity is an insurance company regulated by the RBNZ.
He told the Herald he was confident the process he went through to be recruited was robust.
Finlay also noted the difficulty finding people with the appropriate skills in a small country like New Zealand.
Neither National nor Act took issue with the proposed appointments of Finlay and Pepper when consulted with by Robertson.
Because RBNZ board positions are so powerful, the finance minister is required by law to consult the opposition before appointments are made.
Nonetheless, both parties raised concerns (which were ignored by Robertson) around the mix of skills on the board.
“The candidates appear to have limited experience in central banking and prudential regulation and supervision. We believe these competencies are essential and could be under-represented on the proposed board,” National’s finance spokesperson Nicola Willis said.
ACT leader David Seymour endorsed the appointments of Finlay and Pepper, but said he was concerned two other appointees “appear to have no background whatsoever in economics, finance or banking”.
The Treasury, in another document obtained under the Official Information Act, noted Pepper and Quigley were the only board members with prudential regulation experience.
Finlay likewise ticked a number of boxes in terms of his experience in commerce, financial services, governance, organisational change and accountancy.
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