New Zealand: One-Sized Corporate Governance Doesn’t Fit All

What’s right for the United States...

In the wake of the collapse of Enron and WorldCom and with the wounds of the tech-wreck still fresh, the quest to achieve better corporate governance and provide greater investor confidence has become a hot issue – and not just in the United States or the UK. New Zealand, as is Australia, is currently grappling with how to achieve higher standards of corporate governance in its listed companies without imposing unnecessarily high burdens of compliance. While we should pay attention to the policy response in the US – the passage of the Sarbanes-Oxley Act – we should regard that response as an example, not as a guide. Despite the global nature of financial markets, there are important differences in how different countries’ markets operate and their respective business environments. The US way is not the way forward for New Zealand. At the same time we need to take the issue of corporate governance seriously and be seen to achieve international best practice in how our markets operate.

The US response has been highly prescriptive and legislative. In contrast with New Zealand, the size and muscle of US corporations is such that they can cope much better with a "big stick" approach. There are also other significant differences. For example, in the US the chairman and chief executive are not infrequently the same person. In the New Zealand situation, the norm is to separate the two roles. Since Sarbanes-Oxley, there have been a raft of new requirements for US companies to address. These include steps to enhance the independence of external auditors such as the mandatory rotation of audit partners, to form audit committees with independent directors and generally prohibiting an external auditor from providing audit and non audit services to a client. The new rules also require CEO’s and CFO’s to vouch for financial statements, limit some forms of remuneration to senior executives, encourage more complete and timely disclosure, increase the potential liability of directors and executives and enhance the powers of the regulators.

In the New Zealand situation, prescribing that a certain number of independent directors should be on a company's board, or that audit partners should be rotated at certain intervals, is likely to cause practical difficulties. For a start, finding a consistently high calibre of independent directors in the New Zealand environment has always been a challenge. Secondly, due to their smaller size, many New Zealand companies require a board that is more involved in management, knowledgeable about the company and able to support the company as it grows. This is not always an ideal situation, but to prescribe specific levels of independence would be an over-reaction. The same goes for auditor rotation. One way in which to encourage higher standards of corporate governance is to keep the focus on transparency.

The focus on transparency is why the Australian and New Zealand Stock Exchanges have introduced continuous disclosure provisions. Among companies this has not been universally popular and the response from some has been uncertain. Overall, continuous disclosure is a good move towards raising the bar for corporate behaviour. It’s also clear that authorities on both sides of the Tasman are keen to enforce it. Meanwhile, the Australian Stock Exchange appears to be moving towards a regime where corporate governance guidelines are set, but not enforced through legislation. Companies that do not meet these guidelines have to explain to their shareholders why not, a provision that is not onerous but encourages transparency, and a recognition that one size does not fit all in terms of securities regulation.