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Financial Markets Authority CEO Rob Everett says regulators and the law should reflect the expectations and needs of society and the goalposts are shifting

Financial Markets Authority CEO Rob Everett says regulators and the law should reflect the expectations and needs of society and the goalposts are shifting
Rob Everett by Jacky Carpenter.

Financial Markets Authority (FMA) CEO Rob Everett has given a withering critique of the Milton Friedman principle of shareholder primacy, saying company boards and executives should "anchor themselves" in what's good for New Zealand and the communities in which they operate.

Everett made these comments in a presentation to the NZ Capital Markets Forum, entitled Thinking beyond shareholders. It was released by the FMA on Friday. He also said companies ought to ask what their purpose is. And if it's solely to make money at the expense of everyone else they shouldn't be allowed to operate, Everett said.

The model favoured by American economist Milton Friedman was never valid or sustainable, Everett said. He described the Friedman model as one where the responsibilities of a listed company board are primarily aimed at returns for shareholders, with the competitive dynamics of the “market” itself able to weed out those who do harm.

Everett, who worked for investment bank Merrill Lynch prior to joining the FMA, said he hadn't "gone communist." Rather what working at Merrill Lynch had taught him was when a firm shifts from a client-focused model to a shareholder and employee-focused model, "bad stuff happens."

"Across the globe, people are asking themselves – what purposes do companies serve, what are the duties of their boards, and who are those owed to......Well, there’s a lot in there but I am going to focus first on the question of the duties of boards and then on whom board directors are there to serve."

Although directors do "of course" owe their duties to those who entrust the company with their hard earned capital, they also have employees to consider, plus the local community, the environment and their regulators. Last but not least is the customers, who pay for products or services.

"They have a right to be treated with respect, not to be lied to, misled or avoided when they aren’t happy with how they have been treated," said Everett.

Meanwhile a focus on what is expected from boards opens up the broader question of who they serve, he added.

"This is particularly challenging in somewhere like NZ where the financial services firm boards are often 'subsidiary boards' - ie they have to balance serving and directing the NZ entity, while under the direction and resource constraints of a parent company in another country. A country and parent’s entities which, despite the similarities, quite naturally put their own agenda first."

'We have plenty of reason to challenge Friedman’s model'

Everett said the accepted model of capitalism post-Friedman, and encouraged by ex-US Federal Reserve Chairman Alan Greenspan, has been "an unfettered pursuit of corporate profits with the assumption that rational and judgemental markets will weed out the crooks and the incompetents, and the 'best' will rise to the top."

"All of us in financial markets know that markets are often not rational and nor, it seems, are parliaments or electorates."

"In 1970, Friedman said that those who claim 'that business is not concerned merely with profit but also with promoting desirable social ends . . . They are — or would be, if they, or anyone else took them seriously — preaching pure and unadulterated socialism.' Unfortunately, we have plenty of reason to challenge Friedman’s model," Everett said.

"One flaw in the principle of shareholder primacy is that the shareholder is often no longer the person or entity at the biggest risk from the conduct of the company. Reductions in profit or even bankruptcy at any particular company are not existential threats to global fund managers or other institutional investors running huge, diversified portfolios. Employees have much more at risk."

"As we have seen here with a situation like Mainzeal, suppliers likewise often have more at risk than shareholders especially when they become, whether they like it or not, creditors of the company. BP risked death and injury to its employees, irreversible damage to the environment and risk to the livelihoods of the local fishing fleet, in cutting corners and shaving off costs on its Deepwater Horizon rig," Everett added.

"Social licence is a phrase that is becoming over-used but I believe that most market participants now accept that all corporate structures have responsibilities to a broader set of stakeholders than their shareholders."

 Companies need to ask themselves what their purpose is and what their values are, Everett said.

"And if it is purely to make money at the expense of everyone else they should not be allowed to operate."

Citing examples aired in Australia's recent financial services royal commission, Everett said taking outrageous levels of fees on old investment products “because it’s in the contract” might be legal but it’s not right. Additionally charging fees for no service “because no one has noticed and we managed to pull the wool over the regulators’ eyes” is not right. And nor, he said, is charging dead people or failing to fix known issues because there are technical complications.

"These behaviours apply equally across a whole range of corporate sectors. Some of the Commerce Commission action against Viagogo, Vodafone and Youi insurance reflect that," said Everett.

"Some might argue that competition will ultimately deal with those who treat any of those constituents with contempt and so it will - but experience tells us - not quick enough. Not before customers have been mistreated, rivers polluted or employees harmed. This is mostly why we have conduct regulators or consumer protection agencies. Frankly, without wanting to do myself out of a job, that’s a shame but it is the reality."

Push back

Everett also said that, if all that matters to boards and CEOs is the share price and how to keep demanding shareholders happy, the problems revealed in financial services in Australia and elsewhere will happen in NZ.

"So boards and executives need to anchor themselves in what is good for NZ and the communities in which they operate and they need to push back on parent companies and shareholders who push them in the other direction."

"Boards have to balance serving the shareholders by doing the right thing. And as [Kenneth] Hayne pointed out in the Australian Royal Commission that is a far higher standard than complying with the law, or doing stuff that may not be in the spirit of the law, or does not 'affirmatively' and provably breach it," Everett said.

"I think the tide has turned in terms of what the public and the community at large expects from its corporate leaders. Issues of trust and fair treatment of those that companies come in contact with show up clearly in the global research as the top indicators for employees and customers.To some extent, the law hasn’t caught up yet although recent consultations on corporate governance standards in both Australia and the UK reflect the general direction."

"Regulators and the law should reflect the expectations and needs of society. And those goalposts are moving," said Everett.

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Golly, a revival of nationalism in an unexpected place. Personally I've always had more respect for businesses where the owner actually works there and aims to look after his customers, so they in turn look after him.

Not sure he is right about BP, wasn't that due to the US bods they hired being incompetent or perhaps intentionally sabotageing equipment? Wasn't the key piece of safety equipment, the cut off valve, supplied in non functional condition?

Not sure he is right about the Aussie banks outrageous behaviour either, weren't they just responding to the incentives society set before them?

"weren't they just responding to the incentives society set before them?"
I don't intend to be disrespectful here Mr Kerr. I realise there are diametrically opposed camps in this subject area. So I am not being personal.
When you wrote that last line were you being tongue in cheek or serious?
If serious, then I think such a sentiment as society leading such change is bordering on delusional. In the same delusional ballpark as supermarkets claiming customers define the quality of fresh produce and how it is presented to the consumer.
Isn't the psychology of marketing a specific academic field? Irrespective of end application sector - finance, food, etc?
Isn't new product marketing about convincing consumers that they need to buy my widget? I've heard tell that it is frustrating to marketers of deodorants that in many Asian countries, they have failed to convince the people that BO is bad or offensive and are therefore denied access to a huge new market.
Thank you FMA.

There seems to be some miscommunication, or we need a real life example to really understand what this guy is talking about.
How can you serve your shareholders if you are not serving your customers? Of course you are ultimately serving your shareholders, but this doesn't mean you are necessarily excluding your customers, or the employees of the company. That is misunderstanding what it takes to run a successful business.

In the example of shareholders not being the ones at the most risk, is it not a bit of a stretch to talk about global fund managers as the ones in control here? The people in charge are the board of directors and the CEO, and having a mandate of maximising shareholder wealth means they have to take care of employees and customers.

The only point I can get to grips on, which is kind of buried in this article, is that of externalities. I would agree that there are externalities that companies are not being adequately charged for, and I disagree that the market will make those companies lose out.
In this case I would say the answer lies in regulation.
But this is a very different argument to the one being presented here.

"How can you serve your shareholders if you are not serving your customers?" Tobacco companies??

You are confusing two issues here though.
1. They are serving their customers by providing them with a product that they want (whether or not you agree with it). That means the customer keeps buying the product, which ultimately serves the shareholders.
2. There may be externalities here which the company is not being charged, i.e. health costs to the taxpayer for smoking-related illnesses. Or there may be a more general social impact as people become addicted and spend money on cigarettes instead of food for example, and become unhealthy at the same time.

In this case, govt regulates the product through tax and prohibiting advertising, and even labelling.

You might argue that the regulations don't go far enough - great, but it's a separate argument altogether. The customers are still being served.

The two points are completely separate.

Nonsense, while these things are true, the companies responsibility will always be firstly to the shareholder. The law needs stop these bad things. You will be waiting a long time for companies to do it themselves and companies that don't will have market advantage.


Wrong,wrong,wrong. I don't know what experience you have,but I have been involved with stockmarkets for over 40 years,both as advisor and investor. In retirement,dividends represent the largest single element of my income,so i have a very direct interest in this. I am in doubt that my best LONG-TERM interests are best served by those companies which put the interests of staff and customers first. This produces more engaged employees,lower staff turnover and happier customers. In time,this flows through to the company's bottom line and to higher dividends.

BP blamed for US incompetence. Not mentioned is the $10 billion liability cap that Obama broke. Classic case of US breaking contracts to weaken their competitors. A $47 billion transfer from UK pensioners to the US incompetents.

By the same logic, employees shouldn't do what their employer wants if it's not congruent with what's good for society. Wouldn't quite work would it.

Anyway, it's not "shareholders first" that's the problem. It's the shareholders themselves. There are companies that act in what they perceive as a possitive to society currently within the supposed "shareholder first" structure.

I agree it is the shareholders themselves that are the problem, namely that they aren't human.

Company A is for sale.

Company Z sets up a holding Company (C) who then start a new company (B) that purchases A. Company C is then transferred to Company Y (Also owned by Z), which is then merged into Company X (Bought by C), they are then split out again a year later into Companies T and V. One of which is bought by Company H (owned by Company J, owned by Company O, owned by Company C), while the other is purchased by Companies F and G (both completely unrelated to Z, but owned by Company E). Company E is owned by investment firm (Company P), Company P is one on many companies owned by Company D. Company D is owned by ...

Yes, eventually it is possible there is a human owner(s). But the reality is that any "decisions" are probably made by that person's accountant who has been issued the sole instruction to increase profit as the client needs a new boat/car/holiday/....

Also, there is something deeply concerning with the words "they should not be allowed to operate".

I agree. Too much pompous moralising.

We live in neo liberal times, the behaviour derided in this article is a result of that...we need to change paradigms for any less exploitive behaviour to take effect. Unfortunately, the minute anyone tries to do that they risk everyones endless river of dividends that grow year on year. Who's going to vote for that?

Mr Everett should be given a medal. I have been arguing this point for years. Regulation is required to keep them in check.

Directors should think about stakeholders other than shareholders, directors should have something higher than compliance in mind etc. As if directors are individuals who belong to a monastery in Tibet trained to say no to a materialistic life and not "business men and women". As if they are not paid and selected by owners of the business they suppose to direct.
Ownership and control mean that owners can (and will) steer the ship in the direction that best suits them. It is all a lot of nonsense to assume that a directors (who is assigned by the owner) will behave in a way that puts the owners' interest at risk. But off course the regulator will say that, They want the directors as their escape goats. To somehow justify their own embarrassing failures to regulate them (think VW, Ernon, Boeing, failed banks etc).
If we could have expected businesses to act in a way other than their own best interest, there would have been no need for regulators such as the FMA.

Fundamentally what Mr Everett is say is that while business's and corporations might like to think that somehow they are above and apart from society, they are not. I have long argued that their behaviour demonstrates this as they reap exhorbitant profits, work to create monopolies and then run roughshod over communities, go to great lengths to avoid paying taxes while seeking to profit from those things the taxes pay for like infrastructure, education, health and so on.

Business's are a construct of society, and any business that is not concerned with the health of it's society will essentially be the author of it's own demise. Thus they have a responsibility to pay fair wages, pay taxes, charge fair prices and so on.

But we all know that human nature is not like this if allowed to run unregulated, and business's are created and run by people. Thus it is the Governments role to ensure that business's are well regulated and their owners, directors and managers (the decision makers) are fully accountable for the consequences of their decisions and actions. After all the Government is elected to represent the interests of their communities, not the business's?

I have been a long time reader (and contributor) to but will be ceasing. The new format makes many articles un-readable with text hidden behind banners and full articles unable to be read. All the best.

Shame this wasn't tested before being rolled out.

Days to the General Election: 25
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