Don't sell! (Yet)

Thursday 1st March 2001

Martin Taylor argues that selling the NZSE to the Aussies to fix our market's poor performance may be putting the cart before the horse.

Unlimited stirred up a hornet's nest a year ago when it spoke the unspeakable and pointed a finger at the Stock Exchange for much of New Zealand's lousy share market performance. On the issue of leadership, it had failed dismally. The exchange cried, "don't shoot the messenger" and started a PR blitz as it parcelled out blame.

Less than a year later, it's swung from denial to desertion by proposing to sell out to the Australian Stock Exchange (ASX). After strong anti-merger sentiment from members, the NZSE extended its deadline for producing a merger proposal until the first quarter this year, saying that not enough work had been done.

Just which problems a merger will fix isn't yet clear. But the fact that this issue of national importance could be dealt with in near secrecy points to one of the NZSE's biggest failings: it is a closed group that doesn't represent the many interests that make a modern market work.

Actually, I think our share market should eventually join one or (more likely) several other exchanges. But right now, we're not ready. To see why, we need to look at some causes of our market malaise. Probably the most important factor is the poor state of our retail market - the small investors who own shares directly. A thin retail market is a big problem for an economy like ours. While big investors and institutions pony up the bulk of funds, they don't like the cost of buying and managing small parcels of shares. Enter the small punter, who happily buys into small and mid-size firms, the lifeblood of New Zealand's economy. Their interest also has a flow-on effect to the managed funds sector. Because it's small, the information services that cater for the retail sector are also inadequate. Often, it's easier to research foreign stocks than companies listed in New Zealand. The internet makes it even more likely that Kiwi investors will look offshore.

Look to our listed companies for another part of the blame. An embarrassing number contribute to the bad impression the market gives small investors. Investor relations don't figure highly among their priorities, so useful information can be hard for potential -investors to find. Right now, the way our listed companies communicate with investors is equivalent to the dark age of New Zealand's tourism industry: we're selling cold pies, stale sandwiches and bad service and wondering why people don't stay long and don't come back.

Corporate governance mirrors this. Few boards formally review their own performance and often don't recognise the interests of small shareholders. If you want proof, look at their attitude to take-overs. Given three takeover codes to choose from, 95% of listed companies have opted for the code that is most likely to see the small punter screwed.

All of this serves to make our market inaccessible and even hostile to mum and dad investors. And it's plain dull, losing potential investment to Lotto, property and even bank deposits. The fizz is missing. Understandably, mum and dad store their collective wealth elsewhere.

We urgently need to build a culture of share investment. That doesn't just mean cajoling Kiwis into tossing their savings to fund managers. We need to make directly owning shares easy, exciting, fair and rewarding.

But what about the argument that the real problem is the performance of the companies themselves? No amount of information and sizzle will fix that. A widely cited ASB Bank study that claims to back this argument is based on the EVA (economic value-added) model. However, as a way of assessing a whole market's performance it is flawed. Poor economic and market performance can drive up the cost of capital. This makes it harder for companies to exceed their cost of capital and the argument -becomes circular: Does the high cost of capital reflect poor company performance or cause it?

Whether our listed companies are worse performers than their overseas counterparts is an important question that demands serious analysis and debate. But if it is the reason for our market's poor performance, how will selling out to the ASX improve things? With problems like these at the core of our market's woes, it's hard to see an ASX sell-out as the solution - it's more like feeding ourselves to the lions.

The Stock Exchange, guardian of our share market, should have led debate on these issues years ago. But Nero's been fiddling while Rome has burned and now it's time for a new emperor, one that reflects the diversity of interests that drive modern capital markets.

The NZSE has passed its use-by date. The role has shifted from transaction processer to information facilitator and market leader, but the NZSE is too narrow and too technocratic to take it on. The answer is to separate ownership and operation of the market from its governance, and to broaden the governing body - adding representatives from listed companies, institutional investors, small -direct investors, maybe even venture capitalists. This will pave the way toward selling our market, without losing the essential national voice for our companies.

The bill to demutualise the NZSE - expected mid-year - is a first step to prising these roles apart. Such a move appears to have the necessary support from 75% of member brokers, unlike the proposed merger. The new governing body should see improving access to, and confidence in, the market for small investors as a priority. It should take an active part in raising standards and promoting the New Zealand equity market to local and foreign investors. And like today's Stock Exchange, it should have statutory recognition.

Right now, a little leadership could go a long way.

Martin Taylor is the managing director of IDG Communications, publisher of Unlimited

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