Kerry McDonald calls for a corporate governance revolution and strong govt involvement in the securities markets

Kerry McDonald calls for a corporate governance revolution and strong govt involvement in the securities markets

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!

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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 productivity growth """""""""

With these magic words spouted and touted you already know this guy Kerry Mcdonald hasn't got a clue about what under pins current economic activity - cheap plentiful energy!

 

Why is it that every time an opinion or news piece is published here no matter what it is about, the board’s resident Green and or other nutters jump straight on it with their completely off topic obsessional tripe, before the discussion has even got underway?! It is becoming an extremely tiresome feature of this board that it's resident nutters keep cluttering up each and every topic with their obsessions, vast conspiracy theories and other hysterical rants. This thread is about Corporate Governance in NZ from an individual who is well aquatinted with it, he raises some very interesting points and topics for discussion and yet the first post is an insulting one about cheap oil. This thread has absolutely nothing to do with cheap oil.

The exercise of some moderation to keep matters on topic, at least in the beginning by the site’s masters would be most welcome, otherwise this is going to become an increasingly irrelevant place to discuss/ debate issues.

It's because there is nothing - REPEAT NOTHING - which happens without energy.

And no economic activity which happens without incorporating energy at the current price.

Which means - given that we're half-way throuygh the pile (give or take, doesn't matter, exponential growth takes care of that) and have cherry-picked the easiest/best first, You can say with absolute assurance that everything will be 'more expensive' from here on (although 'more expensive compared to what, given that everything is based on it, gets you into serious Boolian Algebra territory). And 'more scarce'.

McDonald is right in that it needs Governance - the market wasn't set up in a time of permanent powerdown. And there's a legitimate debate about whether 'productivity gains' actually mean 'efficiencies', which are indeed a legitimate goal.

With respect, please get  informed, rather than denigrating folk who have.

You could start with listening to the Nine-to-noon podcast (11.07) of Nigel Horrocks.

Listen to it twice.

Follow his suggested links.

What McDonald et al were expert in, was a temporary phase. If you want to discuss the deckchairs, don't be surprised if others think the sinking is more important - indeed the overriding aspect of all others.

here, here DB...time and a place guys

Actually, having thought about it (an hour on the beach, it's a glorious day) McDonald raises an interesting issue:

If we take the current crop of 'corporate governors', they're there for one reason - to represent the 'shareholders'. There is one overriding goal, indeed I suspect they'd be in court if they substituted another - that of maximising a profit.

Some will have subsequent goals, which may or may not be socially-oriented.

My appraisal is that on average, the current crop will be more self-centred than the average citizen, more ruthless than the average, shorter of stature than the average (wait for the howls) and not long-game oriented. They will aslo be totally sold on 'growth'.

The vision window is almost certainly not 20 years ahead, probably not 10, I suspect 1-3.

So, the market doesn't deliver anymore, growth has to be ditched (on average) as a goal, and social outcomes - particularly sustainability - will feature increasingly. 20 year-visions have to be a minimum.

So - we do indeed need a different style in those governance roles, and it goes without saying, that not many of the incumbent will survive the morph. Old guards, particularly if already old dogs, don't often outsurvive change.

Who's trained?   Good question. What will be the needed skills? Another goodie.

Maybe you have to have a proportion who follow a set of rules (or guidelines, but unlikely) given that those who grasp what is ahead, will be thin on the ground. Those folk could write the rules, though, and a wider echelon do the implementation.

Wait for the screams of 'Nanny State' etc etc (we don't need rules, there are no limits...yeah right)

But it would be absolutely a better outcome, if the governance was appropriate to the real world. From here on, that means aiming for an environmental equillibrium (sustainability/maintainability, call it what you will) which will mean an incrediblt less extractive, less polluting, less empirically-growing world. (again, wait for the howls)

Maybe one psychological type might be better than another too - the attack types (the Rommels of strategy, strikers of soccer) may not be as good as the strategic withdrawal-ers ( the Auchinleks and the fullbacks), in a poweringdown world.

It's actually an interersting think.

 

Hooohoo – wow good on you - Kerrywalter  !

First we have to sack all underperforming parliamentarians in power Mr. Brownlee/ Joyce would be first on my list followed by...some others.

In today’s fast and ever changing world free market ideology and entrepreneurism only work in a structured economy – yes ! Planning for the future starts with the right mindset - a culture change.

Small countries have to think small – but with bigger ideas. We do not need necessarily big companies in this countries, but sustainable solutions for the future – a 100%NZpure Economy.

An economic model for the world.

PS- I would also sack the guy above - traditional thinker David B.

my goodness!give that man a knighthood.who says we're in trouble??business leaders the world over will be headhunting sir kerry ( mk2). 

"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."

Not in this country anyway. But seriously... how many controls were put in place over the years to prevent repeat performances? Does anyone actually believe that any new controls being put in place on our current system are ever going to be effective? In my mind its going to be about as effective as testing for drugs cheats at the tour de france.

Hamrod, this from a Brian Gaynor article on the post 1987 attempts to prevent a repeat:

"Numerous recommendations to introduce better regulation after the 1987 crash were rejected, mainly because of fierce lobbying by the Business Roundtable and cabinet opposition by Bill Birch and Ruth Richardson.

Most of the post-1987 crash recommendations were sensible and practical but were never implemented.

If they were, New Zealand's capital markets would be in a far stronger position, investors' confidence would be higher and it is unlikely that we would have had the complete meltdown of the finance company sector."

http://www.nzherald.co.nz/nz-business-roundtable/news/article.cfm?o_id=3...

Personally, having cut my teeth reporting in London on the British and European equity markets, I was flabbergasted when I returned in NZ in 2002 and saw how little regulation we had here.

For example, the telco act and commissioner were introduced in 2001 & 2002 over a decade after Telecom was sold by the Govt lock, stock and barrel. And our OECD internet/broadband rankings have been woeful.

And our Takeovers Code was only introduced in 2001.

I think the incoming Financial Markets Authority is a step in the right direction in our post global financial crisis world. Although no regulation/regulator is likely to be perfect, we're better to take it seriously than be a wild west with no realistic protections for retail investors.

Gareth Vaughan: Have courage .. now would be an opportune moment to do several interviews with both, (a) members of the Business Roundtable, and (b) an independant with an opposing view such as Brian Gaynor, and elicit more in depth views. It would most revealing to know if the Business Roundtable is today comfortable with its' stance of the 1990's and the consequences of its' actions.

I did do a double shot/video interview with Brian Gaynor last year - http://www.interest.co.nz/news/gaynor-pins-future-hope-sharemarket-generations-x-y

But no one from the Roundtable yet...

Deja Vu. The Business Round Table has today issued a press release exercising the same lobbying powers of the un-elected, wanting to veto the FMA, which the NBR has kindly re-produced. Now's your opportunity Gareth. Strike while it's hot.

Matt Taibbi's latest shows the best way to deal with this sort of carry on:

...one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."

http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?page=1

The most notable feature of Bryan Gaynor's NZH article was the comments which mostly  amounted to lobbyists (non-independents) arguing (sort of) against the regs, a few independents arguing for the regs and complete silence about the "Giant NZ Vampire Squid" .. has there ever been any contrition ?

Why invest in companies knowing full well any meaningful profit goes straight onto the pockets of directors via their massive annual salary increases while the actual shareholders watch for years as the stock price barely moves ahead of inflation. And any that do look great on paper end up being investigated by the SFO a few years later when times and ponzi schemes are so rosy

Yeah, and I just finished reading the Rolling Stone article about Wall Street and US government corruption.

Depressing to the nth degree.

Isn't there one of those principles that the people who benefit most from any organisation are the ones managing it?

Perhaps what is needed is some innovative solutions here.

On the one hand it is very difficult to tell a good con man from the real deal since good con men are good at what they do.

Being a company director is not all its cracked up to be, the salary does not compensate for your life being on hold for ten years if something blows up. You are the scapegoat, whether you deserve it or not.

Being a shareholder is not all it's cracked up to be either - you have no influence over the company, which is only fair given you have no responsibilty if it stuffs up, and you are very much second at the table after mangement (directors are part of management in my view) have eaten whatever they choose to regard as their share.

On the other hand, its hard to see the massive leap forward in living standards (try watching some 1930s movies) that has taken place on the basis of the invention of the limited liability company.

But what exactly is the problem? That's what I cannot figure out.

 

I agree with the comments above. Most shareholders do not understand that in corporate world mediocrity rises to the top. The people who dont rock the boat and get on with others get to manage the businesses but mostly have no clue about the businesses they are running and how to manage them. They then surround themselves with simmilar dimwits and build large bureacracies that attend meaningless meetings which have no outcomes.

Most directors are old school tie boys who are incompetent or wide boys who would make carreer criminals blush.

I have been there and seen it. A colleague of mine once said to run a big business you need a small business mentality. He then produced a poster which is corporate law. Dont be seen to be doing nothing call a meeting.

It is no surprise that globally the public have pulled out of equity markets. In the U.s and Europe they are run by suppercomputors working for large institutions who are skimming margins. In NZ the