The guidelines issued this week by the newly-created New Zealand Corporate Governance Forum on the role and responsibilities of the listed company director contain a number of very good ideas but strain the bounds of practicality in a few important areas.
Key among these is the requirement to get shareholder approval for any share issues over 5%. The NZX Listing Rules are drafted to strike a balance between allowing companies to raise capital as efficiently as possible and ensuring shareholders are not unfairly diluted.
The 5% proposal would dramatically – and, in our view, adversely – alter that balance. It will be interesting to see whether the Forum members put this principle into practice and decline to participate in any share offers which have not gone to a shareholder resolution.
Other issues include:
- the proposal that shareholders should have the right to vote on executive director remuneration. This is likely to serve only to discourage CEOs (whose remuneration is a matter for the board alone) from wishing to be directors. It is not clear in what way that is a positive outcome
- the proposal that share-based remuneration schemes must be approved by shareholders. This will add significantly to the implementation costs for the company of such schemes, making companies less inclined to use what has traditionally been an important element of properly-aligned performance pay at senior levels, and
- the stringent definition of independence, which will have the effect of taking out of play many of our most experienced directors. The New Zealand talent pool is simply too small to accommodate the Forum’s ambitions in this regard.
The Forum, which represents the interests of institutional investors with a substantial exposure to the New Zealand share market, has based its guidance on international guidelines.
It has drawn on, among other sources, the International Corporate Governance Network, the UK Combined Code and the Australian Council for Superannuation Investors. These are directed to economies which are much larger than ours. Direct translation to the smaller New Zealand market is not always practical.
It does not appear that many listed companies were asked for input on the guidelines prior to their release. While it is important that the investors represented by the Forum have confidence in the transparency of issuer reporting and governance, a more extensive consultation with listed companies (and the Listed Companies Association) might have resulted in a better outcome.
As things stand, New Zealand now has yet another set of guidelines for company secretaries and boards to engage with. Ideally, there would be just one set of rules, reflecting a considered consensus view from all market participants
Perhaps that day will one day arrive. If the Forum’s guidelines prove to have been a spur to that, they are to be welcomed. So we encourage the Forum to engage with the Listed Companies Association with the aim of developing an agreed approach which is ambitious in relation to good governance and is also workable and fit-for-market.