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    Does NZX have a serious conflict of interest?

    Ethics Governance Performance
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    Reports have emerged that the company that operates the New Zealand stock exchange, NZX Limited, has initiated a review of its own operating policies and processes—with a particular focus on conflicts of interest (and perceived conflicts). The review is timely, because NZX seems to have begun operating beyond what might be considered reasonable for a market operator. 
    So, what's the problem? Let's start by looking at NZX itself. Here's how NZX describes its business activity:
    NZX builds and operates capital, risk and commodity markets and the infrastructure required to support them. We provide high quality information, data and tools to support business decision making. We aim to make a meaningful difference to wealth creation for our shareholders and the individuals, businesses and economies in which we operate.
    This seems reasonable. NZX owns infrastructure, operates markets (including regulation) and provides information. However, what is not stated is that NZX also runs a funds management business line. Therein lies the problem (or the perceived problem), because the funds management business invests in companies that are themselves listed on the exchange.
    If you'll allow a sporting analogy: NZX sets the rules, provides the playing field, referees the game and is a player as well. Player coaches are common in sport, but player/referees? 
    Some might respond by saying this is a great example of the capitalist system in operation. It might be. But I can't help but wonder whether NZX is operating right at the very edge of what might be considered to be ethically and morally reasonable. Consequently, I look forward to reading the results of the review.
  • Published on

    What's actually more important: Longer-term value creation or shorter-term gains?

    Accountability Governance Leadership Performance
    Big box retailer, The Warehouse Group, is experiencing a bit of turbulence just now. The company has had a dream run over the past couple of decades. From its genesis as a single-store, The Warehouse Group has grown to become New Zealand's largest retailer. However, some tensions are starting to emerge. Some investors (actually, funds managers) are not happy.
    The company is currently rebuilding its business model to meet emerging customer and market demands. In 2011, the company embarked on a five-year 'turnaround' strategy under Group CEO Mark Powell. The strategy, which involves both acquisitions and a major refit programme in existing stores in order to provide enduring longer-term returns and capital growth, was approved by the board and it was well signalled to shareholders and the market. Yet some shareholders are making their expectations of ongoing share price growth and dividend returns quite clear.
    The emergent tension has the potential to be a major distraction for the board and management. Clearly there are two views on the table. The pressing priority for the company is that the shareholders, board and management are united in their pursuit of one agreed strategy. So, which view should prevail?
    I'd like to suggest that the longer-term view needs to prevail, because that's the agreed strategy and it's probably the option that better suits the best interests of the company. However, I am not a funds manager trying to eek the most out of my 'product', the investment in the business. Ultimately though, if they are not satisfied with the performance of the business, the funds managers have several choices available including these three (amongst others, no doubt):
    • Make representations to the board and ask the board to review the strategy
    • Seek to appoint new directors to represent their interests in the boardroom
    • Offer their holdings for sale and pursue their interests elsewhere
    What do you think is an appropriate course of action, and why?
  • Published on

    When publicly-listed companies miss revenue forecasts

    Accountability Governance Performance Research
    When publicly-listed companies miss their revenue forecasts, as Wynyard Group and Orion Health both did recently, the stock market generally responds by discounting the share price. That's because the 'value' attached to the business is a mathematical calculation involving both current inherent value (generally represented by customers, intellectual property and other assets) and future value (expected revenue). 
    Knowing this, some companies announce somewhat optimistic forecasts, both to challenge sales and delivery teams, and to send signals to the market. When forecasts are achieved, everyone is happy. However, if forecasts are not met, the natural reaction of the market is to back out the value. Sometimes the market reacts quite strongly, especially if the share price has climbed significantly on the back of optimistic forecasts, press release statements and marketplace hyperbole. This raises some interesting ethical questions:
    • Are share price movements simply the natural forces of the market at work in response to stimuli including forecast information?
    • Is any further action required to protect various parties from the vagaries of optimist forecasts?
    • What sort of guidance should publicly-listed companies provide to the market, or should companies remain silent on future revenue and profit expectations? 
    • What constitutes 'realistic guidance'?
    I don't have any strong views on these questions at present, other than to suggest they seem to be important to the smooth functioning of the market. Therefore, they probably deserve some air time. Depending on the responses to these questions, I may initiate some further research and develop some recommendations. 
  • Published on

    On corporate boards and retirement homes...

    Accountability Governance Performance Research
    What's the difference between the average corporate board and a retirement home? If age is the measuring stick, then not a lot apparently. Both tend to be populated by people of advancing years. While it's easy to jump on any number of bandwagons (employment, ageism, relevance, promotion of younger people), there is probably more value to be gained by digging a little deeper to try to understand what impact 'advanced average age' might have on business performance.
    Older directors can be beneficial in a boardroom environment, because age brings experience and wisdom, both of which are thought to be necessary for the making of good decisions. However, this view assumes that directors are actively engaged in the work of the board—an assumption that is far from universal in practice. In contrast, boards comprised primarily of older directors can be a hinderance to decision-making and business performance if the directors lack energy and focus; if their cognitive skills are weak; or, if they are not appropriately engaged in the work of the board.
    The relationship between diversity and financial performance has not been convincingly established. However, I suspect that if shareholders actively seek to appoint a mix of younger and older directors to their boards they will experience better returns in the long run—but only if directors are competent and engaged. A diverse set of competent directors who are actively engaged in the work of the board is more likely to identify a broader range of strategic options and debate issues more vigorously than a passive, homogenous board. While decisions may occur more slowly (while options are considered and the debate occurs), they should be of a higher quality. And if high quality decisions are implemented well, then improved business performance is a likely and realistic outcome.
    Age is probably just an indicator, another one of those blunt sticks that I mentioned recently. A better question for shareholders to consider is whether their directors are engaged, competent and committed to the cause.
  • Published on

    Board quotas: a failed experiment?

    Governance Performance Research
    I posted a comment last week that challenged the "blunt stick" thesis that increased business performance is one consequence of appointing more women to corporate board positions. After pressing the "post" button, I steeled myself to receive a barrage of hate mail, from people that fervently believe that the appointment of women onto boards is causative to increased business performance. However, none arrived, although several people provided positive feedback (thank you).
    The response made me wonder whether people are starting to move on. If this article, entitled Norway, France and Finland tried to help women by using quotas on corporate boards. It hasn’t worked is indicative, then maybe they are. The title says it all really. Given this, are we now prepared to admit that quotas are probably not the answer? Perhaps we really should bite the bullet, and start looking elsewhere for possible causes and explanations of how boards can or should influence business performance.
    As always, I welcome your feedback—because I'm in learning mode as much as anyone else!
  • Published on

    Is the term 'executive director' an unhelpful misnomer?

    Accountability Governance Performance Research
    I've been pondering a seemingly straightforward term of late, in an attempt to resolve what appears to be an anomaly in our understanding of directors and how they work. The term is 'executive director'. It refers to a company director who is also a company executive. While seemingly helpful as a qualifier, I wonder whether  the widespread usage of the term has led many, unknowingly, to a point of confusion and of unrealistic expectation.
    The very act of qualifying the term director introduces—subconsciously at least—the possibility that certain directors should, could or do act differently from other directors. Independent director; executive director; non-executive director; inside director; outside director; and, lead director, amongst others are all part of the lexicon. Yet in most countries the statute is quite clear: there is only one category of director. Consequently, all directors are expected to act in the same manner as they fulfil certain duties, in the eyes of the law at least. But do they, and importantly, can they?
    The role of 'executive director' seems to be quite troublesome. 'Executive' and 'director' are two distinct roles, yet the term conflates the distinct contributions into a new, third, role: someone who is a director and an executive concurrently. Is it possible to perform both roles concurrently and fulfil them dutifully?
    Directorial appointments are full-time commitments: one can't be a director some of the time. Responsibility is not absolved just because a director is on holiday or working in another context. An executive who is also a director is required to fulfil their directorial duties at all times. They don't 'stop' being a director when they leave the boardroom and return to their executive role. Similarly, in the boardroom, how might a director who is also an executive make a critical and objective assessment of management performance? I've seen this problem many times in the boardroom. Executive directors are blatantly conflicted, yet many expect to make decisions on their own proposals!
    I've concluded that the term executive director is an unhelpful misnomer.
    If boards are genuinely committed to acting in the best interests of the company, a resolution is required. One option might be to exclude executive directors from every formal decision made by the board. Another perhaps more tenable option might be to ensure that non-executive directors make up the majority of directors, so that self-interested executive directors cannot capture the decision-making processes. A third option might be to adopt a policy at the shareholder level that executives will not be appointed as directors.
    Do you have a view on this? I'd love to hear from experienced directors, chairmen and researchers, to learn about the ramifications of which of these options, and to hear whether any of them (or any other options not mentioned) might lead to higher quality decisions in the boardroom and better business performance.