Why investors should support corporate governance Forum

Thirty years ago New Zealand’s markets were quite rightly regarded as the Wild West of the financial world. Insider trading was rife, boards and management teams often focused more on how they could make money for themselves than for their shareholders and investing money into the equity market was like swimming through a shark-infested pool.

Through a series of much needed reforms the NZ financial markets have been brought into line with global best practice and, for the most part, now function well. With the devastating collapse of the unregulated finance company sector, where 45 companies went into liquidation between 2006 and 2011, the last real opponents of regulated markets have come to understand that a sensible regulatory regime is needed to protect investors.

We are not a wealthy country and we need to ensure that what wealth we do have is not squandered or stolen.

The major reforms that have been enacted, including the Takeovers Act 1993 and the Financial Markets Conduct Act 2013, should give investors confidence that they will be treated fairly when investing in financial assets.  The objective is not to eliminate risk, but to ensure that risks are identified and understood so that they can be correctly priced. However, regulatory reforms only go part of the way. Sitting over these regulatory structures we need a code of conduct that ensures that we optimise the outcome for all stakeholders in a business, an area we broadly refer to as corporate governance.

From our point of view, as shareholders in listed companies, we have noted over a long period of time that investment outcomes tend to be better in businesses that take good corporate governance seriously, a view that is backed up by international research. This view is based on a common sense approach: businesses that look after interests of stakeholders rather than just management tend to be stronger and more sustainable companies and are usually more highly valued by the stock market, ultimately resulting in better returns to shareholders.

In my view good governance should be less about box ticking and more about cultural attitude. Governance rules cover important areas such as the independence of directors, Board diversification, the relationship between the Board, the company, shareholders and other stakeholders, communication with investors, sustainable business practices, risk management and remuneration.

In many ways shareholder democracy has struggled in recent years, as evidenced by, for example a continued lack of independence on boards and amongst advisory firms, and  executive remuneration running massively ahead of overall wage inflation. Good governance practices are now aimed at correcting the balance, enabling better  stakeholder relations  and protecting shareholder rights.

There is a large body of international research on best practice corporate governance standards. It is this research that the recently-launched NZ Corporate Governance Forum has drawn on to issue best practice guidelines for listed companies in NZ. In representing the views of large asset owners, the Forum has a unique perspective to add to the guidance already available from the NZ Stock Exchange, the Financial Markets Authority, the Institute of Directors, and the NZ Shareholders Association.

The emergence of this Forum is a good sign that NZ’s financial markets are maturing and will, I believe, be beneficial to all listed company investors over time. Devon is proud to be a founding member of this Forum.