Company annual reports discover corporate virtue

Peter V O'Brien

Friday 7th November 2003

Nothing concentrates corporate minds more than regulation or the threat of it. The minds, through the words of company chairmen, other directors and chief executives, have become concentrated on corporate governance. The issue is referred to in company reports and the addresses given at annual meetings.

What a change. Anyone who talked about corporate governance rules in the 1990s would have received indignant rebukes from the directors and executives entrusted with a company's welfare. It seems the indignant rebukes these days would be levelled at anyone who failed to talk about corporate governance rules.

Blame the Americans for this situation. They are handy scapegoats for any of society's ills. The US' population size and its economic and technological superiority over others may produce a high number of creative minds, some of which are susceptible to diversion into real or perceived nefarious activities and perversions.

It was no surprise that calls for tighter corporate governance controls were first heard in the US after exposure of the fraudulent administration of Enron, WorldCom and Tyco, and later scandals associated with broking and investment houses and some mutual funds.

The Americans threw the full legislative power of Congress at actual and potential evildoers.

It is an open question whether passing laws stops evildoing. Some people may be deterred but if anti-fraud laws were fully effective there would be no fraud prosecutions or convictions.

New Zealand usually tries a consensus approach to financial and corporate governance issues, falling back on controversial rule imposition only where there is no consensus. There seemed to be consensus on the NZX corporate governance listing rules, which took effect on October 29. A statement from NZX quoted general counsel Elaine Campbell as saying the development of the new rules included "thorough and extensive consultation with all key industry participants."

The exchange felt confident the rules reflected the needs of New Zealand's capital markets and the listed issuers.

Awareness of the need for appropriate corporate governance, the constant publicity given to it and the continuing exposure of scandals, including insider trading and kickbacks of various kinds, have spawned a new industry.

Consultancies have arisen to train directors and executives in the ways of "good" corporate governance and suggesting people should be examined on their awareness and competence.

The phenomenon raises the obvious question about who will examine the examiners and trainers on their awareness and competence to train and examine.

There is a danger of overkill in the plethora of calls for better corporate governance, a point New Zealand's consensus approach to regulation may recognise.

The NZX governance rules apply only to listed companies but the Securities Commission and other agencies are looking at new or tougher rules for other entities.

That raises issues of need and compliance cost.

The former is summed up in the "if it ain't broke, don't fix it" adage and the latter in a comment from NZX's Campbell last week.

She was quoted as saying good corporate governance was an important tool in promoting investor confidence in listed companies by providing "a framework for increased transparency and accountability."

She added, "Having said that we're conscious of the need for balance between regulation and the cost of compliance, which is why we have chosen a mix of both rules and disclosure based regulation."

Companies have scrambled to prove their corporate governance virtue. They either revealed longstanding policies, older than the current debate and regulatory innovations, or said they had improved their procedures.

It was intriguing to discover the extent of virtue in the New Zealand corporate world when pursuing recent statements, particularly those from companies that denied they ever had problems.

There was no denial in NGC Holdings chairman Greg Martin's comments about corporate governance at his company's annual meeting on October 30. He noted the activities of the stock exchange and the Securities Commission in the governance area and said the formal governance regime in which companies operated was taking definite shape, although it might not yet be complete.

"This has not stopped the board from actively adopting governance practices that reinforce the continuous improvement culture and represent real improvements in the sound administration of the company." Martin said the practices were apparent in the corporate governance section of the annual report. "They include, for example, the addition of risk management to the responsibilities of the board audit committee now the audit and risk committee to strengthen the proactive identification and management of risk and the establishment of two new standing committees, HSE [health, safety and environment] and nominations."

The board introduced an audit-related services protocol related to external auditor services, had an independent risk adviser and a performance self-review regime for the audit and risk committee. Such developments could be, as they say, the wave of the future for companies.

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