New Zealand needs a boardroom "revolution" and a government active in the securities markets to help boost the country's productivity growth, incomes and living standards and restore investor confidence, says Kerry McDonald.
McDonald, chairman of accounting firm Grant Thornton, chairman of the Government's Savings Working Group, ex-BNZ chairman and chairman of the Wellington branch of the Institute of Directors, says he used to believe that markets function best without government interference.
"But the evidence seems to be strongly against that view now," McDonald says.
The Global Financial Crisis and meltdown in New Zealand’s non-bank finance sector (see our Deep Freeze list here for full details) was immensely damaging with a hangover risking spawning "yet another generation of New Zealanders – like that following the 1987 share market crash – who are unwilling to put their savings into equity or securities investments."
"Property, with its low rate of effective taxation compared with rates on income from simple savings products, is likely to remain as the default investment for most," says McDonald.
"Government must establish a framework within which high standards of governance are not only encouraged, but required – with serious consequences awaiting those who fail." Also see Gareth Vaughan's article 'Let the FMA take retrospective action.'
McDonald also says directors must be "more hard-nosed" about remuneration and performance, demanding the entire board is working, adding value and earning its pay, and that management is also up to the job.
"While 'remuneration at risk' is a contentious topic, losing a significant slice of reward for poor performance does tend to focus one’s attention," McDonald adds.
Read Kerry McDonald/Grant Thornton's statement below:
New Zealand company directors – in both the private and public sectors – need to have a much more rigorous and focused approach to performance if they are to add value, live up to their potential, restore investor confidence and lift New Zealand’s productivity.
In short, we need to spark a revolution in New Zealand’s corporate governance culture – maybe not among all organisations, but certainly in those that are not really cutting the mustard!
The Global Financial Crisis (GFC) and meltdown in New Zealand’s non-bank finance sector was immensely damaging and left investors with a jaundiced view of the markets, institutions, directors and regulators. Who can blame them? And, as recent economic figures indicate, we are not out of the woods yet.
The extent of corporate and board failures in the USA is particularly sobering considering that it is less than a decade after Enron and the imposition of Sarbanes Oxley – designed to prevent a repeat performance.
Yet, the GFC was a repetition, on a larger and more damaging scale, with little sign that the major regulators had any understanding of what was happening.
This hangover risks spawning yet another generation of New Zealanders – like that following the 1987 crash – who are unwilling to put their savings into equity or securities investments. Property, with its low rate of effective taxation compared with rates on income from simple savings products, is likely to remain as the default investment for most.
A further challenge is New Zealand’s rate of productivity growth, which halved in the last decade from an already low level. The impact on incomes and living standards is clear and serious, as is the impact on output and employment in the vital Tradable Goods Sector where output and employment in the export industries and import substitutes industries stopped growing in 2004, and have been declining since.
Company managers and directors must have a very focused and strategic approach to these issues and develop a clear plan of action.
· They must ensure that their organisation(s) continuously improves and increases its competitiveness.
· They must exert a clear and strong influence on the policy environment within which they operate, recognising the vital importance of tradable goods and services, so that barriers and burdens are minimised and opportunities maximised. Fewer officials and politicians these days have worked seriously in business and are therefore lacking a real understanding of it.
· They must also be more hard-nosed about remuneration and performance, demanding that the entire board is working, adding value and earning its pay, and that management is also up to the mark.
While “remuneration at risk” is a contentious topic, losing a significant slice of reward for poor performance does tend to focus one’s attention. These are often tough issues, but if they are not faced up to, the consequences can be serious.
Directors are typically best placed to judge board performance, but if they fudge the issue then they deserve the wrath of other stakeholders. The Government also has a role here. I used to think that markets function best without government interference – but the evidence seems to be strongly against that view now. Government must establish a framework within which high standards of governance are not only encouraged, but required – with serious consequences awaiting those who fail.
The performance of SOEs and their boards is also worthy of close attention, given that they are not subjected to market forces and that returns on capital are not what they should be. Unlike a profession, the boardroom is one sector where you do not need a formal qualification. There has been much discussion about this, especially at the Institute of Directors, but at the end of the day Grant Thornton does not see merit in framing a qualification.
We struggle to see how you can formally test an individual’s abilities to consistently make astute decisions on a wide range of issues, where experience is an invaluable resource. Requiring a formal qualification could exclude a great deal of serious talent.
SMEs also need to be part of the Governance Revolution. The vast majority of domestic businesses are either owner operated or family owned, and independent directors are a rarity, and often not even considered.
That’s a serious deficiency. In my experience, once family or aging owners understand the improved performance that good, independent directors can provide, they’re enormously relieved to be able to bring someone on board, reducing stress and providing more freedom to get back to thinking strategically about their business, or fishing.
Being a director is also more than just sitting around a board table. Directors must be out and about, walking around, seeing, questioning and talking, and, forming a view as to the culture, risks and performance of the business.
All that is part of the rich tapestry of being a company director. Done well, it’s hard work, but extremely satisfying – making a real difference!