Dialogue: Transtasman marriage no answer to stockmarket woes

By SIMON BOTHERWAY*

The proposed merger (read takeover) between the New Zealand and Australian Stock Exchanges has prompted much debate from a broad range of interested parties including politicians, brokers, companies and individuals.

In essence, proponents of the merger claim New Zealand companies have a higher cost of capital than their international counterparts and this negatively affects their stock prices, impairs their capacity to raise equity capital and severely hampers their ability to carry out mergers and acquisitions.

The New Zealand market is also considered to be too small and illiquid to attract international capital flows. A merger of the stock exchanges would purportedly expose NZ companies to the much larger pool of investment capital in Australia at a lower effective cost of capital.

The merger proposal is symptomatic of a number of factors unique to the NZ market which, if properly addressed, would put the stock market on the sort of footing that would develop a vibrant market that creates value for all stakeholders. All this could be achieved without a merger.

The major factors contributing to the relative failure of the New Zealand stock market are:

Shortcomings in the regulatory and surveillance regime

New Zealand could be considered the Wild West of global capital markets. Unlike Australia, the United States and the United Kingdom, we have no takeover code to prevent discrimination against smaller investors in stock transactions involving large portions of a company's stock.

International investors often avoid New Zealand because of the lack of legislation protecting minority shareholders. However, a takeover code becoming law on June 30 will greatly reassure investors.

Insider trading laws also require an extensive overhaul and the Securities Commission's powers of investigation should be substantially broadened. The present legislative review of insider trading laws is welcome. An insider's capacity to trade in a company's stock should be restricted to periods when the market is as fully informed as possible of the company's performance and insider transactions should be continuously disclosed.

In general, the model adopted in the US and enforced largely by the Securities and Exchange Commission is the most effective globally due to the success of the US capital markets and the high level of stock ownership by the public.

An additional compelling reason for modelling New Zealand regulations on the US is the growing dominance by many large US funds management and investment institutions of the global pool of investable capital. To attract foreign investment, a regime as similar as possible to that of the US is desirable.

. Poor performance by company management and directors

Corporate New Zealand has performed dismally over the past decade. New Zealand companies have been slow to adjust to the rapidly changing business environment of the information age. There has been an almost naive approach to investing internationally with many high-profile disasters. Staggeringly, the directors and managers (both present and former) of many such companies are still lauded as icons of the business community.

A fresh approach is required. We would welcome an influx of new talent into the severely limited pool of professional directors in New Zealand, many of whom warm multiple board seats but perform no useful function other than to ensure the boxes are ticked and directors' fees are periodically raised.

. Investor indifference

It is often claimed that New Zealand is a land of contrast. No more vividly is this portrayed than in the attitude of New Zealanders to their sportsmen and sportswomen compared with the attitude towards those stewarding the companies into which they have invested their hard-earned savings.

The vilification that was so liberally heaped on John Hart after the demise of the All Black campaign in the 1999 World Cup should have had perennially under-performing company directors shaking in their boots at annual meeting time. Yet how many directors have failed to be re-elected? When was the last time a board was rolled by a group of shareholders?

Individual shareholders cannot be blamed. Despite directing the odd spirited question at annual meetings, individuals by and large do not have the analytical resource or skills to address the critical issues on the basis of comprehensive company knowledge.

It is the media, brokers and institutional investors who must take responsibility for this. The media appear reluctant to criticise (with a few notable exceptions), brokers in many cases are in positions of conflict and would not risk jeopardising a corporate relationship for the sake of telling it like it is, and institutional shareholders have largely been sleepy and complacent.

Failure of successive Governments to establish a compulsory retirement savings regime

Unfortunately New Zealand has, to date, failed to adequately address the issue of unfunded pension liabilities as the baby-boomers age and swell the number of the retired.

Unlike in Australia there is, as yet, no compulsory retirement savings regime. The effect of the Australian regime has been to swell the pool of available capital, stimulating the creation of new companies and probably even industries.

It is this source of capital that is so attractive to many New Zealand companies. As never before, this Government has the opportunity to shape the medium-term future of the capital markets.

The national savings pool will no doubt have an allocation to NZ equity investments. The Government can ensure a vibrant domestic capital market by carefully choosing the indices against which the performance of the selected fund managers is measured.

Resolution of the problematic triangulation of tax credits for transtasman companies will also probably result in greater investor interest from Australia and may also make a New Zealand listing a more compelling proposition for Australian companies.

In any event, an Australian domicile and listing has not proved the automatic tonic that some companies expected.

In summary, the merger debate is essentially putting the cart before the horse. Many of the problems facing New Zealand companies and the New Zealand Stock Exchange could be rectified by sensible regulation and the introduction of a compulsory savings regime.

Indifferent management and investor complacency are more difficult issues to address but in time, more of a US-type active approach to companies from investors is inevitable as funds drift from underperforming fund managers to those better-performing managers requiring a realistic return on investment.

* Simon Botherway is head of equities for Arcus Investment Management.