This morning I am going to cover the following areas:
- Expectations of directors – that’s expectations held by the regulator - but also by shareholders and consumers.
- Some remarks specific to New Zealand, notably on conflicts of interest and the pool of director talent in New Zealand and how we can improve it.
- The Financial Markets Conduct Act, and the opportunities it brings not only for financial services firms, but firms that are issuing debt or equity, or raising funds in some way.
- And finally I want to remind you of something that I know you all recognise. That the role of a non-executive director is one worth undertaking. Despite its tribulations, directorships contribute to the welfare of this country in a substantial way, and at the Financial Markets Authority (FMA) we greatly value that contribution.
Let me start with expectations. Because – from what I hear anecdotally when I and FMA staff are talking to directors and boards – it’s an area that might trouble some of you.
A good place to start is to ask how much has changed - in expectations of directors - in the last 25 years or so? I’d suggest to you that the expectations of directors are still largely the same.
I agree that there’s more pressure and more focus on boards. The media get on your case more readily. And regulators and shareholders are more willing to assert themselves.
But the substantial underlying duties – at law – are not much different to what they were in the 1990s.
Indeed, if I look at the vast majority of the cases the FMA has pursued against directors - either on our own, or jointly with the Serious Fraud Office (SFO) – few, if any, of those cases have aimed at raising the bar in terms of the legal standard. Most of them sought to ensure that the law – as it stood at the time – was applied properly.
I have heard suggestions that recent case law in New Zealand - and specifically the approach taken by the FMA and the SFO - has shifted the goalposts a long way for directors. I don’t accept that.
New Zealand had a strict liability regime for misstatements in offer documents – which was among the more demanding regimes of its type in comparable jurisdictions. And that has had serious consequences for directors who breached the regime.
But - broadly speaking - most of the judicial commentary on the duties of directors - in the cases over offers - was textbook stuff for anyone who studied corporate law in the 1980s, as I did.
So, as the capital markets regulator - and with the benefit of case law fresh from the bench - what do we expect of directors today?
We do expect directors to pay close attention:
- in particular when the quality, honesty and prudence of public statements could cause harm to investors or consumers
- in particular when people are entrusting their savings or their financial security to financial services firms.
This is really very straightforward, and I think you would all accept the underlying point.
Investors – who are taking on debt or equity securities, or buying financial services products - are entitled to believe what they are told and to believe they are being told everything that is material to their decision.
Indeed, many of the key rules of the NZX - and the intentions of regulators like the FMA – zero-in on the quality of corporate disclosure - whether that’s in offer documents, exchange announcements, or other material that is provided to shareholders.
For directors, this is an area where relying solely on experts, or on management, raises unnecessary risks. Directors should reassure themselves - personally - that the materials tell the right story.
Of course, different skill sets on any board must be acknowledged and made the most of.
Boards need a blend of directors with a diversity of skill-set, and approach, to function best. Some directors will have a better grasp of debt and equity offers and the expectations of the market in terms of content and timing of disclosure than will others.
And management enjoys a detailed understanding of a company’s operations that non-executive directors can’t achieve, simply because they aren’t there all the time. But this is not a recipe for blind reliance.
Directors need to pay close attention. Read the materials. Ask questions. Keep asking until you are fully satisfied. Challenge the executive and the advisors.
Overall, take steps to reassure yourselves that the materials are accurate and that management and the experts are competent and honest. You are directing both business strategy and managing risk. And you need a strategy and process for both.
In financial services – where the FMA has specific regulatory responsibilities - I challenge the boards and management of firms, both big and small:
- To show us that they put the customers first.
- To show us that they pay attention to the outcomes delivered to their customers and that those outcomes match your aspirations and claims.
- That what you do as a board - what you look at, how you react, and how you probe beyond what management tells you - is designed to protect and serve shareholders and customers.
Thinking more widely, in my view, boards should – alongside management - drive corporate culture.
Putting up posters – complete with the right messages on them - in lifts and in meeting rooms isn’t enough.
Defining culture demands leadership by conduct and - more importantly - by demonstrating what it is that the board cares about.
I believe - very strongly - that “tone from the top” is crucial in any organisation, and that the board has a huge role in setting that tone.
Some questions I have asked of the boards of financial services firms, to determine whether a board is concerned with culture include (and by the way, any company should be looking at many of these same questions):
- Does the board look at customer complaints?
- Does it pay attention to data on customer outcomes?
- Does the board inquire into sales incentive structures and whether these contribute to good outcomes?
- Does the board understand thoroughly the company’s relationship with its suppliers, shareholders, employees, customers, and regulators?
- Does the board consider the criteria for promotion or rewards?
- Who do staff look up to and wish to emulate and why?
- Are the star performers allowed to behave differently to other staff?
In the United Kingdom, I saw – first-hand - instances of good, well-organised boards that were full of experienced and successful non-executive directors who were stunned at the bad outcomes their institutions were delivering to customers.
Often it took the regulators - or a dose of embarrassing media coverage - for them to recognise what was happening.
When challenged, these boards often said: “But we put customers first...it’s on the wall in the lobby.” Well, it didn’t feel like that when you looked at their complaints data or talked to their regulators. This is not a remote, far-off problem.
Some of you will have followed the inquiry into Commonwealth Bank’s financial planners in Australia. Last month the report of a Senate inquiry revealed a long-run problem with very poor quality and in some cases dishonest advice - by a group of financial advisors - to clients of two advisory firms that are owned by CBA, which is Australia’s largest bank. 
Many of the retail clients were significantly damaged as a result of the advice they were given, and CBA has been undertaking a very public settlement with those clients.
Senior management at CBA knew about the problem. Indeed, the Australian regulator agreed on a continuous improvement plan with CBA in 2008 as a result of the regulator’s prior concerns.
But the problem persisted, at least partly because CBA’s response was inadequate. That indicates, among other things, a culture that allowed the bank to perpetuate a risk – for customers and shareholders - without responding to it.
Underlying these duties - for directors - is the quality that is most often called trust.
It’s a nebulous term. Trust means different things to different people at different times.
One definition of trust is that I can be reassured that you will do what you said you would and that you will act in our agreed mutual interest – even though you would enjoy an advantage in not doing so. 
To put that plainly, it means all sides of the transaction are looking after everyone’s interests – as they were agreed - even when we aren’t all there to see what’s happening.
Trust is fragile.
If I knowingly breach your trust – with substantial consequences for you - what’s to say I won’t do it again? And it’s fair to say that in the public domain, trust has been slowly declining over the last few decades.
Generally, public trust – which is the degree of trust between a society and its agents, such as governments and police forces – is less than it was, say in the 1970s when I was growing up.
One result of that is that public sentiment is already acutely tuned to actual or perceived breaches of trust, whether they are in the public or in the private sectors.
Here – in New Zealand – the finance company saga eroded trust in directors and - indeed - in regulators. People saw directors running companies for their own benefit, engaging in related-party transactions and tolerating conflicts of interest on a large scale.
In some cases, boards and trustees did little while management behaved poorly or even dishonestly.
Of course, there are many instances where boards did their jobs to the fullest extent, making tough decisions in demanding times. For every company that failed, there were many others that steered through the storm and kept investors whole.
Indeed, it’s vital to remember that.
There will be some of you here today who sat on boards during that period and have good reason to be proud of the decisions you made in the interests of shareholders, employees, and customers. Nonetheless, the shadow of that period remains.
All of us – directors, senior management, and regulators as well – face a slow climb out of the shadow. I’m confident that we are up to the task.
I wanted to make two observations about the director community in New Zealand, based on my experience at the FMA since I started in February.
Firstly, competence and trust are related proportionately, at least up to a point.
So, I applaud the IoD’s decision to transform the Institute into a professional body that requires members to undertake formal professional development if they want to remain a member. It’s recognition that the director community in New Zealand must be at least up to the standard of other director communities in the Asia-Pacific region.
However, tough though that requirement might be, on its own mandatory professional development won’t raise the quality of a community of directors.
If you are a director in New Zealand today, I’d urge you to think about your skill set. Can you cover – comprehensively - all the competencies for a director? If, for example, financial statements vex you then I’d urge you to address that.
Boards need a blend of strengths, so not everyone will be as comfortable as everyone else on every topic and you should seek the benefit of that experience round the table. But that doesn’t mean unquestioning reliance on other directors or management to do your job for you.
Secondly, growing the pool of potential director talent in New Zealand would have advantages for businesses.
Generally, it’s better to have more people to choose from – provided they are ready to do the job - not fewer. Today I’d like to make a public call for people who think they are up to the job to consider taking it on. You need the right experience, you must be willing to do the hard work, and you must be willing to dedicate yourself to a firm or organisation over the medium-term.
But the benefits – for firms, investors, and the economy as a whole – from high-quality directors - are substantial. That includes the injection of deep and broad commercial and technical knowledge and experience into boards, blending diverse cultural and personal backgrounds and skill-sets, and asserting independence of mind. A deeper pool of director talent in New Zealand might also mean fewer conflicts of interests, and fewer conflicts of duty – both actual and perceived.
And that’s my second point about the director community in New Zealand.
New Zealand must do better in addressing conflicts. Conflicts of interest occur where directors put their own personal interests and relationships before the interests of the company.
Conflicts of duty occur where they put themselves in situations where they have conflicting duties to more than one organization or group of people.
As a recent arrival here, I am surprised at how tolerant New Zealanders are of senior company officers and professionals who have a role on two sides of a deal, on two sides of proceedings, or on two sides of a critical policy issue.
I hear this referred to as a conflict of interest. It’s not. As I have indicated, a conflict of interest is where you prefer your own welfare over someone else.
What I’m describing here is a conflict of duties. Generally-speaking, one professional can’t serve two or more causes – or two or more parties - that are opposed to each other.
The answer – which I often hear – is that “New Zealand is a small society and we have to tolerate it”. In my view, that response is lazy and inadequate.
The fact that New Zealand is a small society means that trust is hard-earned and easily lost and we have to be particularly diligent. We have to be willing to be clearer about separating our duties and willing to be seen to do so. We have to be willing to step down or step aside – temporarily, and sometimes permanently - where that would alter actual or perceived conflicts.
FMC ACT - OPPORTUNITIES
On a more positive note, I’d like to talk now about some of the opportunities for corporate New Zealand provided by the Financial Markets Conduct Act, which is progressively coming into effect this year and next.
Firstly, the improvements – which we are already seeing – in offer documents for debt and equity.
The new standards for offer documents focus on content and format, with the aim of providing investors with clear, concise and effective disclosure. Documents drafted by lawyers, for lawyers - and in anticipation of litigation – don’t help investors make informed decisions.
We made huge progress with the Genesis IPO when it came out earlier this year, with a cogent and succinct offer document. Full marks to the directors of Genesis, its management team and its advisors, because they worked incredibly hard to get to clear, concise and effective disclosure – to meet the new standards even though they don’t take effect – technically – until 1 December.
Others have followed, including among the IPOs like Serko.
I used to draft and review these documents for a living and it’s incredibly disheartening to think how little use they were for those who were supposed to read them – namely, investors.
The FMA is looking for a similar response – from boards, CFOs, and the auditing profession – in financial statements and financial reporting.
I know it is very hard to distil complex performance data, and to present it in a cogent way and real bravery is required not to take the easy route and just “kitchen sink” all the information on a “just- in-case” basis. But some New Zealand companies have recognised this and are publishing quality financial reporting that investors can follow very easily. Some of you here will be coming to the half-day seminar – which the FMA is hosting - on this in September.
We applaud the positive approach, being taken by many boards and their auditors, to recognise that financial disclosures and investment disclosures are designed to be read by people who buy securities or by people who advise buyers. That’s something that got lost in the anxiety about over-eager litigation or, dare I say it, enforcement.
Secondly, the Financial Markets Conduct Act provides new capital-raising mechanisms for New Zealand companies – with a particular focus on smaller companies.
Some companies may make use of the ability - provided in the Act - to issue securities of the same class, as those already issued, without extensive new disclosure documents.
Under other provisions, we have just licensed the first platforms that will provide crowd-sourced equity. This is getting plenty of profile, partly because it’s new to New Zealand as a regulated product and partly because it plays to the enthusiasm of New Zealanders for entrepreneurial and visionary businesses.
Crowd-sourced equity allows:
- Up to $2 million to be raised in any 12-month period.
- No need for an offer document or prospectus.
- Leading to significant time and cost savings for smaller firms that are raising funds.
The ability of small, but growing companies to bring in experienced and sizeable investors often changes the game, turning a burgeoning company into a potential world-beater.
Thus, the Conduct Act also provides for exchanges that provide a ‘stepping stone’ or growth market, for smaller firms that want to raise funds publicly, but aren’t ready to list on the main board.
Right now we are working hard - with the NZX, which has a proposal for such a stepping stone market, and with the Ministry for Business, Innovation and Employment - to find the right balance, of issuer simplicity and investor protection, in the stepping stone space.
I said earlier that directors’ duties are largely unchanged. But I also accept that – practically - a director’s job is tougher than it was.
Nonetheless, for you, for regulators, for the firms you serve, and for the economy – it’s still a job worth aspiring to. It’s still a job that provides the opportunity to serve a higher cause. Indeed, being a director is that rare thing in the 21st Century - a job with a genuinely noble purpose, and demanding the highest ethical standards.
As a Brit, standing in front of a room full of New Zealanders, I am reluctant to take my lead from an Australian. Nonetheless, allow me to quote an Australian judge on this.
In 2011, Justice Middleton in his decision in the Centro case –which was a directors’ duties decision over the firm’s annual financial statement - said:
“A director is an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of a company…the role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors.”
Justice Middleton is saying – effectively – that directors serve more than the shareholders, plus the three C’s - ‘capital, the customers, and the company’.
Holding a directorship requires you to serve the interests of people you don’t know and may never know. They may be customers or suppliers in distant countries. Employees who you haven’t met. They may be investors, local and offshore, big and small, institutional and retail.
For those of you who are starting high-potential firms or managing big funds, you may be serving the interests of people who aren’t born yet.
So, let me leave you with this thought. Don’t be put off by the scare-mongers.
Big and small companies - take up the challenge and embrace the opportunities under the new regime.
Tell us at the FMA what concerns you and how we can support you – because, you can be reassured, we do want to support you.
If you care enough about the company you lead - and pay careful attention to what it is delivering to customers, shareholders, and employees – I am confident you can - and will - do it well.
 Stephen Knack, ‘Trust, Associational Life and Economic Performance’, in The Contribution of Human and Social Capital to Sustained Economic Growth and Well-Being: International Symposium Report, J. Helliwell (ed.), Human Resources Development Canada, 2001