Will Abano trigger an NZX rule reform?
Whatever the outcome, the affair should trigger an overdue correction of a mistake in the NZX listing rules. I’ve heard suggestions the mistake happened “on my watch” so I’ve meant to write about it before now.
I disclose first that I have known the Chairman since my earliest days as a commercial lawyer. He was a demanding client. Most clients give instructions then go home while the wordsmithing continues into the night. Trevor would stay for as long as it took, so mistakes couldn’t get headway. He always paid more than lip service to getting things right.
So I see the attack on his performance as just a strategy to cloak a predatory attack on Abano. The predators may see no prospect of cowing the Board while he is there.
But the extended tussle brings back into focus what should be a running embarrassment for NZX.
In March this year NZX issued a class waiver that related to Mr Janes. It benefits only ACC Directors. Essentially the waiver says that ACC Directors do not lose their listing rule categorisation as Independent Directors when sitting on the boards of other companies even if ACC is a substantial shareholder in those companies.
The specific waiver should never have been necessary. NZX should have reformed the Rule long ago, or extended the new waiver to all non conflicted investment fund substantial shareholders. The rule acquired its current form in 2003. It was well intentioned but foolish. The provision should have focussed on directors with real, standing, conflicts of interest, like trade investors, not substantial shareholders indiscriminately.
Restricting the powers of executive directors and directors appointed by trade investors is a simple way to reduce pressure for related party transactions. Trade investors often want the company to:
- Sell to them (or associates) at an undervalue; or
- Buy at an overvalue; or
- Otherwise deliver collateral benefits at cost or risk to the company. ,
Substantial investors (such as ACC in the Abano case) which can only benefit from a company by way of dividend, or their exit price, are in the same position as the ordinary shareholders. Instead of putting them in the suspect category, the Rules should welcome them and their expert directors. When the badly framed rule was introduced there was good research suggesting that companies with directors appointed by substantial shareholders performed better than companies without such ‘non-independents’. Various explanations were offered:
- Greater independence from management and of the chair – who generally otherwise control director succession in widely held companies;
- The analytical background and resources they can call on;
- Their backers demand performance for tenure; whereas incumbency suffices for most directors in widely held companies.
In other words, by including nominees of major investment shareholders in the ‘suspect’ category of ‘non-independent’, the rule-makers inflicted own-goals on shareholders generally.
How did this misdirected rule get into the Listing Rules?
NZX was captured by its own shorthand. NZSX personnel referred internally to non-conflicted directors as “independent”. NZX wanted more directors able to withstand pressure from executives and trade investors. So they simply declared that intention as a rule, requiring at least two independent directors.
Initially it was primitive. They did not bother with definitions – “every one knows what we mean” was the answer to my aghast enquiry. Then when definition became unavoidable, it was again left to amateurs. They did not like the question “Independent of whom?” So sensibly they focussed the definition on conflicts of interest (albeit with a bad formulation that talks of “influence” without distinguishing between adverse and positive influence.)
The rule has never been fixed. When an associated rule was changed (increasing a trigger point to a 10% shareholding) to reduce interference with innocent conduct, the change was made to the wrong provision. It made dodgy behaviour less risky, and left untouched the poor drafting of the Independent Director rule.
The objective of the rule is sensible. It could be fixed quite simply. But rule administration has become ossified. Changes must be negotiated with the authorities, now that the rules are deemed subordinate legislation and not just private rules of contract. Many suspect that it is because lawyers have a financial interest in pointless complexity. I think it is more that few lawyers ask about the underlying purpose of rules. And non lawyers are bemused by slogans. Who wants to question a slogan advocating ‘independence’?
I’ve long meant to say publically of this rule – ‘It wasn’t me!’
I’m sorry Trevor that it has taken misuse of a dud rule by contemptible people to spur me into recording this. Good luck when the vote is held. A healthy market needs to show that unsubstantiated personal attacks will not work. Let’s hope the shareholder vote is decisive.
Stephen Franks is principal of Wellington commercial and public law firm Franks and Ogilvie.