Ethical Ambition and the NZX
15 Feb 2022
If the stock exchange can foster more ethical leadership, investors and New Zealand as a whole can benefit. Ethically leading companies are more appealing than laggards, as they are doing more good and are often less risky. Better-governed companies contribute to a more sustainable and productive economy for New Zealand. With these objectives in mind, I was honored to be invited to contribute to a submission to the ‘NZX Corporate Governance Code Review’.
The joint submission was made by myself, along with Jane Arnott from The Ethics Conversation, Barry Coates from Mindful Money and Professor Karin Lasthuizen, Victoria University of Wellington. Professor Chellie Spiller was also a key contributor, and we framed the opportunity for the NZX to be a Wayfinding Leader.
This Corporate Governance Guidance was revisiting familiar territory for me. Back in 2004, as a Member of the Securities Commission report, I helped draft the original ‘Corporate Governance in New Zealand Principles and Guidelines’. These principles included some key features that I and my fellow submitters recommended the NZX now revisit and adopt. Here are some extracts of what I wrote for the submission:
1.1 Recommendation: Include Principle 1 ‘Code of Ethical Behaviour’ in the Review
The NZX recognises that the most fundamental aspect of good corporate governance is ethical behaviour. This is highlighted by the NZX in its commentary to Principle 1 which states: ‘Ethical behaviour is at the heart of good corporate governance and underpins an issuer’s reputation’. Given the integral nature of business ethics it seems important for this aspect to be more effectively included in the review. Without such a focus it seems unlikely that the objectives of the review will be achieved.
1.2 Recommendation: Redefine Principle 1 from ‘Code of Ethical Behaviour’ to ‘Ethical Standards’
The original Securities Commission report on Corporate Governance in New Zealand Principles and Guidelines (2004) stated Principle 1 as ‘Ethical Standards’ as does the Financial Markets Authority Corporate Governance Handbook (2008). In contrast the NZX Corporate Governance Code states Principle 1 as ‘Code of Ethical Behaviour’. In highlighting the ‘Code’ aspect the NZX title for Principle 1 may lead issuers to consider that a Code fulfils their need for ethical standards. The current wording can lead to a ‘tick the box’ approach – ‘a Code is a Code and any Code will do’ – as highlighted by Jane in ‘Codes vs Commitment – An Assessment of the Codes of Ethics of the NZX50’ (The Ethics Conversation, 2021).
1.3 Recommendation: Include a new Principle 9 ‘Stakeholder Interests’
The original Securities Commission report on Corporate Governance in New Zealand Principles and Guidelines (2004) included Principle 9 ‘Stakeholder Interests’, as did the 2014 FMA version. This Principle is not included in the NZX list of principles. This omission means that the Code is extremely unlikely to achieve its objectives, including objective 3 that explicitly references stakeholders in seeking to “support the generation of long-term benefits for issuers’ shareholders and other stakeholders, and contribute to a sustainable and productive economy for New Zealand”.
The rationale for Principle 9 was highlighted in the 2004 Handbook that included:
‘…Company law requires directors to act in the best interests of the company (subject to certain exceptions). However, advancing the interests of other stakeholders, such as employees and customers, will often further the interests of an entity and its shareholders. There is a trend for listed companies to report on how they have affected their stakeholders.
Good corporate governance practices will generally benefit stakeholders. Relationships with significant stakeholders can be improved if they are addressed in specific policies which are disclosed and reported on to stakeholders. In general, we agree with the response to our consultation that managing stakeholder interests should be viewed as simply good business.’
Since 2004 the global business and investment focus on stakeholder interests has grown substantially. This focus is highlighted in ‘ESG Priorities for UK Companies’ published in January 2022 by the UK Institute of Directors (IoD) and authored by Dr Roger Barker – a former investment banker with a doctorate from Oxford. Introducing its first recommendation, the paper states:
“The IoD believes that companies should adopt a balanced stakeholder orientation to guide their business activities – rather than a narrow focus on short-term shareholder returns. The doctrine of shareholder value maximisation, which dominated corporate decision-making in the 1980s and 1990s, is increasingly incompatible with current societal challenges, given its tendency to promote short-term decision-making and negative environmental and social externalities.”
If you would like a copy of the full submission, contact Money Matters. Or to learn about our recommendation 1.4, see my blog ‘A Question of Purpose’.
