Dalziel Address to the NZ Shareholders Association
Hon Lianne Dalziel
Address to the NZ Shareholders Association, Auckland
Thank you for the opportunity to speak to such an important stakeholder in New Zealand's securities markets. I want to begin with a compliment to the New Zealand Shareholders Association. You have managed to focus public attention on many issues that are of fundamental importance to the proper functioning of New Zealand's securities' markets. This includes highlighting the responsibilities that are too often ignored by the institutional investors, who hand their proxy votes to the very people, whose actions are supposed to be the subject of independent scrutiny.
Yes, you have often resorted to antics that have disturbed the comfort zone of the corporate image - but image is nothing if it leads to rubber stamping practices that are not in the best interests of the company.
I have also appreciated your Association's willingness to engage with me as I work through a programme of reform commenced by my predecessor, Paul Swain. Starting with the Takeovers Code, followed by the Securities Markets & Institutions Bill, we are now preparing the Securities Trading Law Reform package, to be followed by a review of the Securities Act.
I have another item on my work programme, which is called corporate governance, which is awaiting a report from the Securities Commission. In many respects it is probably the most important item on my work programme, however, until I receive the report from the Securities Commission it is hard to say definitively what the end point will be. But I'll come back to that after I have given a quick rundown on the programme I have outlined.
The first part of the reform programme, the Takeovers Code, came into force on 1 July 2001. This had two main objectives:
Firstly, to align our takeovers regime with international best practice giving international and domestic investors greater confidence in our market. And secondly, to give greater confidence to minority investors, by providing them with fair and equal treatment and participation in takeover situations.
I am very happy with the Takeovers Panel and believe they are doing an excellent job. I think that they've demonstrated that they're administering the code effectively and are able to react in a timely manner, which I'm sure you'll all appreciate is vital in a takeover situation. I believe that perceptions of the New Zealand market in relation to takeovers have been greatly improved since the introduction of the Code and that shareholders now feel that they have greater rights in takeover situations.
I have recently received from the Panel its recommendations for technical amendments and improvements to the Code. My officials are in the process of examining these before I make my decisions later on in the year, on how the Code might be improved.
Securities Markets and Institutions Bill
The second part of the reforms, the Securities Markets and Institutions Bill, was enacted by Parliament on 1 December 2002.
This introduced a co-regulatory framework for markets in New Zealand. The New Zealand Exchange functions as the "front-line" regulator, is responsible for monitoring and controlling behaviour that occurs within its markets. The NZX works subject to the oversight of the Securities Commission. In this respect, NZX is responsible for a variety of important functions, namely authorising intermediaries to trade on its markets, monitoring the activity of those intermediaries and taking appropriate enforcement actions where necessary.
It is also responsible for monitoring the conduct of its listed companies, including ensuring ongoing information disclosure. Despite the certainty that the sky would fall, the continuous disclosure regime seems to be working well. Having visited Australia soon after taking up the Commerce portfolio, and finding out just how normalised their continuous disclosure regime had become, frankly I would have been surprised if the initial market reaction to early disclosures had continued beyond the first few months.
In terms of its oversight function, the Securities Commission has been given new powers of investigation and sanction. For example, if NZX systems detect an unusual pattern of trading in a particular security, this triggers an NZX investigation and the Securities Commission is notified. The working relationship between NZX and the Securities Commission is now governed by a memorandum of understanding between the two organisations.
Following passage of the Bill, new Securities Markets Regulations, relating to the disclosure of interests by directors and officers, were approved in December, which will come into effect on 1 March 2004.
The purpose of these provisions is to improve transparency, ensuring that information about directors' and officers' holdings is up-to-date and relevant to the market, which should reduce opportunities for insider trading and market manipulation.
Securities Trading Law review
The third part of the reform programme, the securities trading law review, is well underway. This review is designed to increase the effectiveness and efficiency of the law relating to the trading of securities and futures on registered securities exchanges and authorised futures exchanges.
This will include key provisions on insider trading and market manipulation.
Officials are currently talking with industry experts who are providing us with some final comment on the bill. We hope to have this bill in the House by the middle of this year. The government is committed to enactment within the term of this parliament.
The Review of the Securities Act - and Other Securities Law Issues The final part of this law reform programme will be the review of the Securities Act 1978. My officials at the Ministry of Economic Development will begin the review later this year. They will look at the way in which offerings of securities are made amongst other issues. Issues include the possible licensing of financial intermediaries, transfer of securities, verification and monitoring of securities, the treatment of collective investment schemes including unit trusts, and contributory mortgages. We're doing this in order to modernise the law. We need it to reflect the current state of play more accurately - who's buying and who's selling, what is being offered for sale and how. We need to consider the best means of providing appropriate investor protection while also avoiding the imposition of unnecessary compliance costs on companies and others.
The review will also ensure that we have a consistent package of securities laws that are effective and able to be clearly understood.
Review of Corporate Governance
Returning now to corporate governance. As you know I was presented last year with a report prepared by the Institute of Chartered Accountants of New Zealand on corporate transparency.
After I received the Institute's report, I referred it to the NZ Securities Commission, so that they could engage with a wider range of stakeholders.
They have recently completed a public consultation exercise that was designed to establish consensus within the New Zealand business community about the principles that should guide corporate behaviour.
This process builds on the work undertaken by the Institute of Chartered Accountants and focused the debate on nine key issues namely:
· Ethical conduct - including the use of codes of ethics
· Board composition and performance - including the role and definition ofindependent directors and the issues of certification and accreditation;
· Board committees - including composition of committees;
· Reporting and disclosure - including quarterly reporting and certification of financial statements
· Remuneration - of executives and directors;
· Risk Management - including levels of disclosure
· Auditors - including rotation and oversight;
· Shareholder relations - including institutional shareholders; and
· Stakeholder interests
The Securities Commission is due to report to me on the outcome of this process by the end of this month. In the meantime, the New Zealand Stock Exchange has released its own Corporate Governance Best Practice Guide and made changes to its Listing Rules that are designed to improve the corporate governance of listed companies.
Some criticism has been levelled at recent changes to the new NZX requirements; in particular, the requirement for listed companies to have a minimum of two (or at least one third) of its board comprised of independent directors.
Any amendments to the rules of a registered exchange must be vetted by me, as Minister of Commerce, before coming into effect, and I assess them against a public interest test with the advice of the Securities Commission.
I chose not to disallow additions to NZX's rules as I was satisfied that they are likely to have a positive effect on New Zealand's securities market, both in terms of local and international perceptions and confidence. I know the 'no rules' brigade regard every aspect of regulation as an unnecessary compliance cost, but I believe that there is a cost in being different that New Zealand cannot ignore. We are too small to be too different.
I believe independent directors are important as they can provide an impartial "arms-length" perspective to a board and can help ensure the protection of minority shareholder interests. I consider it essential that there are checks and balances in place, so that shareholders can be sure that the Board is acting in the company's best interest.
It is interesting to note that in September last year, Sky Television's two independent directors, disagreed with the rest of the Board and advised shareholders that they believed INL's proposed offer was not in the best interests of the shareholders. The independent directors did not agree that Sky's share price contained a healthy premium. I consider this kind of objective advice beneficial both to the shareholders directly affected and ultimately for the improved public perception of New Zealand's capital markets.
Recent changes made to the NZX rules are broadly consistent with developments in other jurisdictions. The London and Australian stock exchanges recommend as best practice that there be a majority of independent directors on the board. If companies don't follow this principle, then they must explain why in their annual report.
The New York Stock Exchange actually goes one step further. It is a requirement that a majority of the board be independent.
One of the main benefits of the changes is that they will increase investor confidence both within New Zealand and internationally. In order to do this, we must ensure that public issuers maintain good standards of corporate governance and that New Zealand accords with international norms.
If we are to maintain investor confidence in the New Zealand securities markets and position ourselves as an attractive investment destination, we must be seen to be up to date with international standards. As Mark Weldon of the NZX has commented, our rules must be recognised, understood and accepted by the international investment community.
A Shared Responsibility Above all, I believe that corporate governance is a shared responsibility and that all sectors of the business community have an important role to play in ensuring corporate transparency and accountability.
I believe that it's vital to remember that most organisations are engaged in a complex web of relationships with regulators, shareholders, stakeholders, professional advisors, rating agencies and investment banks.
Thus, it would be unwise to presume that legislation is the only means for promoting high standards of corporate governance and it would be equally unwise to assume that rules produce more protection than a principles-based approach. Nor should we under-estimate the influence of the well-informed shareholder - as your Association stands testament.
The government has actively encouraged all sectors of the New Zealand business community to play a role in assessing the robustness of our corporate governance systems.
As I've already mentioned, I have specifically requested that the Securities Commission work collaboratively with representatives from the business community to develop a series of corporate governance principles to shape the behaviour of New Zealand businesses, and I look forward to their report.
Consultation is an integral part of the policy development process and I greatly value the insight that organisations such as the New Zealand Shareholders' Association can contribute to this process.
I am encouraged by the fact that your organisation is actively engaging with industry players and I understand that the NZSA has noted some positive changes in corporate attitudes to shareholders.
I would again like to commend the NZSA on the proactive stance it has taken in involving itself in these issues. This kind of response will stand New Zealand in good stead, and I look forward to the Association's continued contribution to these important issues.
In closing I thought I'd share my internet find, which I apologise for to those who have heard it before.
Feudalism: You have two cows. Your lord takes some of the milk. Fascism: You have two cows. The government takes both, hires you to take care of them and sells you the milk.
Communism: You have two cows. You must take care of them, but the government takes all the milk.
Capitalism: You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.
Enron Capitalism: You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt-equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred through an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The Enron annual report says the company owns eight cows, with an option on one more.