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Blackmore, Joshua --- "Evaluating New Zealand's evolving corporate governance regulatory regime in a comparative context" [2006] CanterLawRw 2; (2006) 12 Canterbury Law Review 34

EVALUATING NEW ZEALAND'S EVOLVING CORPORATE GOVERNANCE REGULATORY REGIME IN A COMPARATIVE CONTEXT

Joshua Blackmore^[*]

I. Introduction

Corporate governance is a term not far from the thoughts of lawyers, accountants, directors, managers and regulators in the contemporary business era. A number of high-profile international corporate scandals and collapses have focused the attention on improving corporate governance to protect investors and shareholders and maintain the integrity of capital markets both here and abroad. Maintaining effective levels of corporate governance is a 'key element in improving economic efficiency and growth as well as enhancing investor confidence.'[1] New Zealand's approach to corporate governance, led principally by the Securities Commission, has been to evaluate reforms overseas and gradually reform New Zealand's corporate governance framework in line with international concerns. This article will set-out and analyse the state of those reforms with reference to the experience of two other jurisdictions, the United States and Australia. Both of these countries are major trading partners and a source of much of our foreign investment. Moreover, their systems of company law and capital markets are in many ways analogous to our own. The major focus for corporate governance has so far been on large publicly listed companies. The Securities Commission, for example, aims its corporate governance principles at 'entities that have economic impact in New Zealand or are accountable, in various ways, to the public.'[2] Moreover, most of the available evidence is based on the experience of these companies. In line with this, the author proposes to limit the ambit of this article primarily to publicly listed companies. Notwithstanding this focus, what is good corporate governance at this level will, for the most part, be able to be extrapolated to fit other entities, such as smaller private companies, government entities or other organisations with similar structures. This article will first define and discuss the concept of corporate governance. The recent trend has been to focus on the narrow, accountability aspect of corporate governance, perhaps to the exclusion of its broader commercial aspects. The recent reforms in the United States and Australia will then be examined and critiqued. These two jurisdictions have taken a decidedly prescriptive approach to corporate governance reform, in part because of the recent incidence of a number of major corporate collapses. In the context of New Zealand they are of particular interest as regulators here have drawn on their experience in formulating reforms. The article will then examine the major issues relevant to corporate governance in New Zealand. A major focus is the question of whether the situation here is analogous to the United States and Australia and thus whether the solutions identified in those jurisdictions are appropriate in New Zealand. To an extent the New Zealand principles-based approach can be contrasted with that of the United States and Australia. However, there is a certain amount of convergence occurring in international corporate governance reform. This article argues that New Zealand's regulators may be applying principles gleaned from other jurisdictions that are not necessarily appropriate here. Moreover, there is evidence of an increasingly burdensome regulatory environment for New Zealand companies. Given the natural disadvantages many New Zealand companies face, especially with respect to the raising of capital, this may in effect drive companies to embrace alternative sources of funding, such as private equity, which will act to further retard New Zealand's major securities market. A better approach would be to more closely examine the unique aspects of the New Zealand market, and focus on improving the remedies and rules already available, rather than entrenching a more complex and burdensome regulatory regime based in large part on the experience of other countries.

II. The Difficult Concept of Corporate Governance

Providing a definition of corporate governance can be problematic as the concept is ambiguous. Farrar identifies corporate governance as both a narrow idea of legal control (encompassing companies' legislation) and a broader concept of 'de facto control' which encapsulates self-regulation and business ethics.[3] The Cadbury Committee defined corporate governance as 'the system by which companies are directed and controlled.'[4] This point is crucial as it identifies the relationship that lies at the heart of corporate governance; between the owners and managers of a company. A recent OECD report stated that '[c]orporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders.'[5] Moreover, it 'also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance' .[6] It may be that many of the definitions focus too much on the accountability of relationships in a company. Grantham writes that corporate governance has three core meanings. The first two, the 'allocation of control rights within the company between the board and shareholders'[7] and the 'accountability of those responsible for the operation of the company and how that accountability can be made more effective'[8] are the meanings which tend to be the focus of Academic writers. Grantham argues that this is done to the exclusion of a third, broader and more important meaning; 'the mechanisms and strategies designed to make the company a more efficient and profitable business.'[9]

The managerialist theory of corporate governance 'emphasises the importance of the power of corporate management and focuses on whether management holds and exercises this power legitimately.'[10] Maintaining the balance requires the imposition of mandatory duties and disclosure requirements on management.[11] This can be contrasted with classical contractual theory which emphasises the importance of the manager-owner contract. Market theory is more effective than mandatory regulation in ensuring effective protection of owners. Voluntary contracting and enforcement of those contracts by the parties is more useful in guaranteeing accountability; legal regulation is only effective to the extent that it deters self-dealing that cannot be regulated by the contract and in reducing costs by imposing consistency in standard-form contracts.[12] It is clear from recent developments in jurisdictions such as New Zealand, the United States and Australia that regulators are increasingly rejecting the contractual theory of corporate governance in favour of a greater level of mandatory regulation. In this sense, corporate governance regulation in these markets is in a state of transition.

Two of the issues that have arisen, particularly in the United States, are 'agency costs' and the problem of 'gatekeeper' failure. Agency costs are a consequence of a common characteristic of large, publicly held companies where there is often a separation of ownership and control.[13] Agency costs assume that because of this the interests of the owners (the shareholders) and the controllers (management) will diverge. This imposes a cost on the enterprise in the form of 'the reduced return to the owners due to the managers pursuing their own objectives and the costs incurred by owners in monitoring management.'[14] This cost is increased by the 'free-rider' problem. As shareholdings are often dispersed among smaller shareholders there is no incentive to monitor managers because the advantages of this would necessarily be shared with other non-contributing shareholders and investors.[15] Agency costs lead to the delegation of monitoring management by shareholders to so-called 'gatekeepers'. Ribstein includes senior executives, independent directors, large auditing firms, outside lawyers, securities analysts, the financial media and debt rating agencies in this group.[16] Because monitoring is in many cases completely delegated to these gatekeepers, failure by them to fulfill this task is inevitably costly to shareholders as the company effectively operates without any independent supervision. Gatekeepers are especially prone to failing to detect corporate fraud where they have conflicting interests (for example, auditors also having a role as accountants) or where their distance from the company makes detecting misconduct difficult.[17]

III. The 'Regulatory Overload' Response in the United States

The United States is home to a disproportionately large proportion of the world's biggest companies. As a corollary of this, the United States has suffered a large number of corporate collapses due to failures of corporate governance. Following the scandals involving Enron and other major companies, the United States corporate governance regime has been significantly reformed, most notably by the introduction of the Sarbanes-Oxley Act of 2002 (SOX).[18] SOX was designed primarily to restore investor confidence in the United States after the exposure of corporate fraud, accounting and auditing irregularities and corruption in companies like Enron.[19] Enron was a Texas company that initially specialised in the creation of energy markets which allowed utility companies to avoid the use of vertical integration strategies and which later expanded into other energy and telecommunications markets.[20] Despite the appearance of stable revenues and increasing profitability, Enron's accounting and auditing practices were such that speculative predictions were recorded as future sales, and loans were camouflaged as commodities contracts that had already been paid. By the end of 2001 Enron's financial situation had become parlous and the energy giant was forced to apply for Chapter 11 Bankruptcy Code protection on 2 December 2001 which cost investors, employees and creditors billions of dollars.[21]

Enron's practices seem to have been symptomatic of a 'bubble' mentality prevalent within large United States companies during a period which began during the late 1990s.[22] Three factors contributed to this. First, the common behaviour of executives at Enron and other companies was overly-competitive, optimistic to the point of delusion, and fundamentally unethical. Second, a number of new forms of accounting and transaction structures, including derivatives, structured financing and special purpose entities, made fraud difficult to identify for investors, regulators, auditors and boards of directors. Third, investors had been lulled into a false sense of security by the new opportunities offered by internet start-ups and innovative business structures, and showed less scepticism and prudence when investing in companies such as Enron.[23] Ribstein also attributes the collapse of Enron and other major companies to agency costs and gatekeeper failure. At Enron, the gatekeepers found themselves with conflicts of interest which caused them to overlook wrongdoing. Moreover the opaque accounting practices and distance between the gatekeepers and the wrongdoing caused many simply to miss it.[24] The response to the financial scandals of companies such as Enron was the introduction of SOX. SOX applies to all issuers, which are defined by the Act.[25] This definition effectively encompasses companies that are registered by the markets in the United States and Securities Commission (SEC), which regulates security markets in the United States. The Act makes no distinction between companies that are domiciled in the United States or domiciled in a foreign jurisdiction; if they are SEC registered, they are subject to SOX. As a result, SOX rules have become the de facto standard for a number of major non-US companies. For example, in the United Kingdom 40% of FTSE 100 listed companies are also SEC registered.[26] As a result these companies are forced to comply with the requirements of SOX as well as the corporate governance requirements in the United Kingdom. In practical terms, this has led to a significant decrease in the amount of foreign company listings in the United States. The New York Stock Exchange has recorded that the growth in new listings of foreign companies has slowed from an average of 50 per year in the period 1995-2001 to 25 per year in 2002-2004 and only one new listing in 2004.[27] SOX has clearly made the cost of going public in the United States much higher for foreign companies and as such is acting as a considerable disincentive to listing publicly in the United States.

SOX aims to cure the perceived problems in the corporate culture by instituting a new regulatory framework. This framework can be divided into five areas. First, the requirements of internal monitoring were overhauled and tightened. SOX requires relevant companies to have independent board audit committees whose purview includes the engaging and oversight of auditors. Reports and internal controls must be certified by executives who may be held criminally responsible for reckless or fraudulent certification. Other new rules are aimed at preventing managers from influencing or misleading auditors. New disclosure rules require that internal control structures and codes of ethics are made public. Moreover, companies are now required to provide protection for whistleblowers who expose irregularities.[28] The second area of enhanced regulation is aimed at those with gatekeeper functions. This involves relaxing the rules related to the disclosure of fraud by attorneys and the minimisation of ties between auditors and the companies they audit.[29] SOX also creates a new independent Public Company Accounting Oversight Board (PCAOB). The PCAOB is responsible for establishing and maintaining audit quality control standards and administers a register of all public accounting firms that prepare audit reports for SEC listed companies, both foreign and domestic. The PCAOB monitors professional and ethical standards and is responsible for conducting inspections of registered firms.[30] The third aspect of SOX aims to further regulate insider misfeasance by barring insider loans and requiring the repayment or return of any incentive based compensation where the company's accounting statements are later revised. The fourth element essentially requires faster and fuller disclosure of company information, including any off-balance sheet transactions, extraordinary transactions and material changes in the financial situation of the company. Finally, SOX also provides for the enforced independence of securities analysts from their firms' related investment banking operations.[31]

Clearly the introduction of SOX represents a major shift in United States corporate governance regulation. It is a highly prescriptive corporate governance code with heavy compliance costs for listed companies. Ribstein characterises SOX as typical of the 'Sudden Acute Regulatory Syndrome' that occurs after a major market failure, when the legal and political environment is fertile for increased levels of regulation that in the normal course of events would not be introduced.[32] The heavy compliance costs imposed on companies is one of the major criticisms of SOX. The major compliance costs arising out of SOX are those associated with s 404, which requires certification of internal controls by management. British Petroleum has indicated that its first year[33] compliance costs attributable to SOX would amount to US$125 million.[34] British Petroleum is a relatively large company, with a market capitalisation of approximately US$180 billion. British Petroleum's compliance costs are in the region of 0.7% of its market capitalisation, which is nonetheless a significant cost.[35] General Electric has estimated its compliance costs to be US$30 million.[36] On average, the cost of first year compliance with section 404 increased from US$2 million in January 2004 to US$3 million in July 2004. For companies with revenues over US$5 billion the cost of compliance increased from US$4.6 million to over US$8 million.[37] However, it should be pointed out that the cost of compliance can be expected to decrease as companies become more familiar with the SOX requirements and the need for outside assistance diminishes. Of further relevance is the cost to the share value of disclosed material weaknesses that could have been caught previously by the SOX requirements. Proponents of SOX argue that there are clear benefits to maintaining adequate internal controls over financial reporting that can prevent unforeseen market events and disclosures.[38] Perhaps a better way of evaluating the value of SOX is to evaluate each aspect of the regulation it imposes. SOX emphasises the value of independent directors, particularly in relation to the board audit committee. The relevant standard here is the requirement that 100% of the board audit committee should be independent.[39] However, the value of independent directors is hotly debated in the United States. Romano's review of a number of studies related to the independence of key governance organs concludes that there is no empirical basis to conclude that the SOX standard of audit committee independence improves performance.[40] Rather, the most important factor may be the financial sophistication of the audit committees, which is not necessarily a corollary of independence.[41] The monitoring of internal controls by executives, required by the section 404 certification process, may be of some value. Clearly, executives are in a good position to detect fraudulent behaviour or financial irregularities. However, at this stage it is unclear whether United States capital markets have reacted positively to this requirement.[42] The s 404 requirements, the cost of which is discussed above, are significant in other ways. It may well be that the disclosure of information required by SOX can reduce the competitive advantage of companies that are forced to disclose confidential trade secrets. The weighty disclosures required may also prove highly distracting for executives and employees, removing the focus from genuine business decisions.[43]

The protection of whistleblowers has some intrinsic appeal. Without the collusion of employees, executives would find it more difficult to carry out and disguise suspect practices. Thus the protection against reciprocal action against whistleblowers afforded by s 806 of SOX appears at first glance to be an effective measure. However, it is suggested that the section may be open to abuse by employees seeking to protect themselves from poor performance reviews. Moreover, when combined with s 307 of SOX, which requires attorneys to disclose any evidence of wrongdoing, a trend emerges that discourages the sharing of information; both with colleagues and legal advisors.[44]

SOX prohibits insider loans. While this is a natural reaction, especially after the scandal at Enron in which insider loans and the making of large profits by executives using these loans was exposed, this problem is somewhat more complicated. Insider loans are tied to the vexed question of executive remuneration. Insider loans allow executives to acquire shares in the company. In this sense, insider loans are hugely advantageous as they promote the alignment of executive interests with shareholder interests.[45] This strict regulation of insider loans may in fact be detrimental to shareholder interests, especially where companies may previously have had a rigorous evaluation and approval process for insider loans that neutralises many of the abuses seen at companies like Enron. The question of gatekeeper regulation is also problematic. Rules designed to minimise the extent to which gatekeepers are placed in conflict situations are commendable. However, safeguarding gatekeeper independence can come at a high cost. Ribstein identifies three potential problems. First, gatekeepers are inevitably outsiders. Therefore, identifying irregularities is more difficult and costly for them. The only way an auditor may protect itself is by conducting full forensic audits to ensure problems are spotted. This is costly and time consuming.[46] Second, the level of independence required changes depending on the company. The solution of an internal audit committee and regular audits by an outside firm may be sufficient for one company, whereas another may require further supervision by solicitors or a regulatory agency. Identifying the level of independence that is required can be awkward.[47] Third, restricting the incentives available to gatekeepers can be detrimental to performance. For example, prohibiting auditors from engaging in additional work for the client can be detrimental in that it prevents the auditor from establishing additional information flows with the company.[48]

SOX also addresses the issue of analyst conflicts. To a large extent market efficiency is dependent on the ability of market analysts to provide good information and to identify fraud and irregularities. One identifiable problem area is the links between the advisory and the investment banking departments of various firms. Section 501 of SOX attempts to reduce conflicts between those providing advice and their clients. However, this may act to decrease informal channels of information flows that enable valuable advice to be passed between departments and encourages more accurate evaluations of the price of securities made by analysts. Ribstein notes that perhaps this area requires less rigid regulation, not more.[49] As yet the value of SOX is difficult to evaluate. Studies so far have shown that the effects of SOX on market returns and share prices have been mixed. The data is essentially inconclusive. SOX assumes that securities markets are unable to self-regulate against corporate misdemeanors and that a new level or federal regulation is required to reassert investor confidence and prevent the failures of large corporations due to the wrongdoing of executives and directors.[50] In many cases SOX merely tends to exaggerate the traditional United States trend of solving corporate and securities markets failings by requiring fuller disclosure. However, SOX also seeks to impose what are in effect substantive corporate governance rules which have traditionally been imposed at state rather than federal level, and as such, represent a new approach for the United States legal system.[51] SOX has been enacted based on the belief that the encouragement of self-regulating market participants working on the basis of full disclosure can no longer cope with sophisticated financial frauds such as that at Enron. Whether or not SOX proves to be effective, it undoubtedly represents a significant shift away from the traditional Anglo-Saxon philosophical approach to corporate governance and the role of the regulator in the market. One of the most recent and most comprehensive post-SOX statements on corporate governance in the United States was that of the Court of Chancery of Delaware in the decision of Re Walt Disney Company Derivative Litigation.[53] The Re Walt Disney decision centered on a series of long-running disputes between shareholders in the Walt Disney Company and the directors of the company in relation to the alleged breach of fiduciary duty in connection with the recruitment and subsequent termination of the employment of Michael Ovitz as President of Disney.[54] Ovitz's hiring had essentially been driven by Michael Eisner, the Chairman and CEO of Disney, and a long-time friend of Ovitz.[55] Ovitz was hired in September 1995 after protracted negotiations and assumed the post of President with a substantial remuneration package approved by Disney's compensation committee.[56] Although Ovitz's initial performance was greeted warmly, it soon became apparent to the Disney board that Ovitz was unsuited to the role and was having difficulty coming to terms with Disney's culture and style. By late 1996 directors were openly discussing the pending termination of Ovitz's position.[57] Despite this, Disney's board and Eisner continued to support Ovitz and in December Ovitz was awarded a bonus of US$7.5 million by the Executive Performance Plan Committee.[58] Based on his salary, options and bonus, it was then revealed in the media that Ovitz's severance package would run to some US$90 million due to his position being terminated without cause. Despite the negative publicity, the Disney board pressed ahead with the termination and soon thereafter plaintiff shareholders filed an action alleging breach of fiduciary duty.[59] The major issue in the case was whether the defendant directors had breached their fiduciary duty to shareholders with respect to the hiring and termination of Ovitz. Although the case was framed in these terms, Chandler Ch. also dealt with major issues of corporate governance, while stressing that the two areas, while inter-related, are distinct, inasmuch as:[60]

... the best practices of corporate governance include compliance with fiduciary duties. Compliance with fiduciary duties, however, it not always enough to meet or satisfy what is expected by the best practices of corporate governance.

Chandler Ch. first canvassed the standard formulation of fiduciary duties owed by directors to shareholders, and their role within the corporate entity. The primary duties that were alleged to have been breached were that of due care and good faith.[61] Chandler Ch. also addressed the business judgment rule, recognising that the courts are often not well placed to evaluate business decisions with knowledge not available to the decision maker at the time. Chandler Ch. cited Mills Acquisition Co. v Macmillan, Inc.[62] in saying that the business judgment rule 'operates to preclude a court from imposing itself unreasonably on the business and affairs of a corporation.' His Honour recognised that the rule was a presumptive rather than substantive rule of law, that:[63]

... in making a business decision the directors of a company acted on an informed basis, ... and in the honest belief that the action taken was in the best interests of the company [and its shareholders].

Realistically, the presumption of the business judgment rule can only be rebutted by showing a breach of a fiduciary duty or at the very least an 'unintelligent or unadvised judgment.'[64] Having regard to this, Chandler Ch. could find no instance in which the defendant directors had acted in bad faith with respect to either the hiring or termination of Ovitz. The defendants were, in the ordinary course of events, negligent, but this could not suffice due to the presumptions of the business judgment rule.[65] Although Chandler Ch. could find no evidence that the defendants had breached their fiduciary duties, his Honour was adamant that that the board of Disney, and its Chairman, Michael Eisner, had most certainly failed to live up to accepted standards of corporate governance. Chandler Ch. was particularly damning when evaluating Eisner's performance:[66]

By virtue of his Machiavellian (and imperial) nature as CEO, and his control over Ovitz's hiring in particular, Eisner to a large extent is responsible for the failings in process that infected and handicapped the board's decisionmaking abilities. Eisner stacked his (and I intentionally write "his" as opposed to "the Company's") board of directors with friends and acquaintances who, though not necessarily beholden to him in a legal sense, were certainly more willing to accede to his wishes and support him unconditionally than truly independent directors.

Furthermore, Chandler Ch. made it quite clear that 'Eisner's actions in connection with Ovitz's hiring should not serve as a model for fellow executives and fiduciaries to follow.'[67] Despite subjectively believing that his actions were for the good of the company, Eisner failed the shareholders of Disney by failing to properly inform and involve the board in Ovitz's hiring, using media strategies to pressure the board into making the appointment and approve his compensation package and usurping roles traditionally held by the board as a whole.[68] The Re Walt Disney decision is a good example of how companies need to be aware of more than just basic legal fiduciary duties. Corporate governance extends beyond these into the realms of business ethics and incorporating sound procedures into decision-making. In the wake of SOX, Re Walt Disney reinforces the message that a rule-based, 'tick the box' mentality is not a fully effective solution to corporate governance problems unless it is allied with an effort to improve the culture in which decisions are made. The hiring and firing of Ovitz, as Chandler Ch. pointed out, were rational decisions. However, when placed in the context of the decision-making procedures and processes involved, they represent a poor level of corporate governance that ultimately failed investors.

Compliance with SOX will not prevent corporate fraud and irregularities where a company's ethics and internal controls are substandard. Thus, the value of a comprehensive, costly and burdensome regime such as SOX is highly questionable. The United States experience of recent reform highlights the tendency to try to solve corporate governance problems with more sophisticated regulation. New Zealand needs to carefully evaluate whether this approach is appropriate for our particular circumstances. It is unlikely that our companies could bear the high marginal costs imposed on companies listed in the United States and remain competitive. Given the recent trend towards delistings from the NZX and private equity encroachment, the establishment of a SOX-like program in New Zealand would be disastrous. So far, New Zealand regulators have shown little appetite for this.

IV. Australia's Reform Following a String of Corporate Collapses

Australia's experience of corporate governance reform is of obvious interest for New Zealand, given the consistent desire for ever closer harmonisation of business law. Australia adopted uniform companies legislation which was modelled on the Victorian Companies Act 1958, itself based on the United Kingdom Companies Act 1948. In 1981, a more complex Companies Code was enacted (and adopted by each state under the Companies Act 1981 (Cth)) and in 1989 the Corporations Act 1989, known as the Corporations Law, was introduced despite the difficulty of meshing a standard company law regime with the narrow interpretation of the Australian Constitution as recognised by the High Court.[69] Following the decision in NSW v Commonwealth[70] which upheld the state's argument that the Corporations Law was in excess of the federal Government's legislative powers, the Commonwealth and the states reached an agreement at Alice Springs which allowed Australian company and securities law to be federalised with the acquiescence of the states.[71] The complexity of the Corporations Law has led to an extended period of legislative activity, which resulted in the revision of the Law into the Corporations Act 2001.[72] Australia also has an ongoing review program mandated by the Corporate Law Economic Reform Program Act 2000. The Corporate Law Economic Reform Program (CLERP) is the most significant vehicle in Australia for responding to new issues; such as corporate governance reform. The major Corporations Law provisions relating to corporate governance set minimum duties owed by directors to shareholders and the company. Section 180(1) provides that a director or other officer[73] must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise. Section 180(1) clearly embodies an objective test. After a series of cases, including the AWA Limited v Daniel[74] in which the New South Wales Court of Appeal appeared to formulate a standard for directors of care and diligence which was seen by some commentators to be too harsh, a statutory business judgment rule in relation to the s 180(1) duty was including in the CLERP amendments. The business judgment rule excuses directors from a breach of s 180(1) where the director acted in good faith; without a personal interest; with as much information as the director deemed to be appropriate; and with a rational belief that the judgment was in the best interests of the corporation.[75] In comparison to the United States version, detailed above, which creates a presumption (although not a rule of law) that a director made a business judgment, the Australian version requires that the director establish a safe harbour by proving the four elements above. This may prove problematic as the onus lies on the director or officer to prove their innocence. Moreover, the definition of a 'business judgment' in s 180(3) does not specifically provide for the failure to take a decision. Under the Corporations Act 2001 directors and officers are also required to act in good faith,[76] which will be contravened if the director or officer's conduct is not, objectively, in the best interests of the company, even where the director or officer believed that it was. Section 182(1) prohibits the use of his or her position as director or officer for the purpose of gaining improper advantage, which can result in criminal liability. Disclosure of material interests is required by s 191(1). Delegation of director's duties is permitted by s 198D but the director will be held liable for the actions of the delegate[78] unless the director can satisfy the criteria in s 190(2). Moreover, s 189 exempts directors from liability incurred on the basis of professional advice where the advice was relied upon in good faith and was independently assessed.

Also of note is the duty on directors to prevent insolvent trading by their company.[79] Here directors are prevented from incurring obligations for the company at the time the company is insolvent, or there are reasonable grounds to believe that the company is insolvent, or that the incurring of the obligation would cause the company to become insolvent. Section 588G breaches can give rise to civil penalties in addition to personal liability. Where dishonesty can be established criminal sanctions may be employed as well.[80] The rule also extends to entering into an uncommercial transaction which is a debt for the purposes of s 588G.[81] The Corporations Act 2001 also contains a procedure of voluntary administration, which aims to maximise the chances of the company or its business to continue or to provide a better return for creditors than would result from an immediate winding up.[82] Apart from the other traditional methods of receivership and winding-up,[83] there is also provision for a formal scheme of arrangement between the company and its creditors as an alternative means of liquidation.[84] These insolvency rules provide many more options than the equivalent New Zealand provisions, although a voluntary administration procedure has been proposed as part of the Insolvency Law Reform Bill which is presently before Parliament.[85]

Notwithstanding the established core legal duties contained in the Corporations Act 2001, corporate governance reform has been given added impetus in Australia by a series of high-profile cases involving corporate governance failures at major companies. The most significant of these was the collapse of the insurer, HIH. HIH collapsed in mid-2001 because it lacked reserves to cover future claims. It was wound-up by liquidators in August 2001, leaving a shortfall of funds estimated to be anywhere between A$3.6 billion and A$5.3 billion.[86] The collapse of HIH caused considerable harm to employees, policyholders, the Australian business community and the Australian public at large. A Royal Commission investigation identified gross mismanagement and failures of corporate governance that were endemic at HIH and which led to poor decision-making, such as the decision to enter the United Kingdom market with an under funded subsidiary, and the disastrous purchase of the rotten FAI Insurances Ltd in 1998.[87] The head of the Royal Commission, Justice Owen, evaluated the level of corporate governance at HIH in the following terms:[88]

The problematic aspects of the corporate culture of HIH - which led directly to the poor decision making - can be summarised succinctly. There was blind faith in a leadership that was ill-equipped for the task. There was insufficient ability and independence of mind in and associated with the organisation to see what had to be done and what had to be stopped or avoided. Risks were not properly identified and managed. Unpleasant information was hidden, filtered or sanitised. And there was a lack of sceptical questioning and analysis when and where it mattered.

The Australian Securities and Investment Commission (ASIC) sought a number of declarations after the collapse of HIH against defendants intimately involved in the collapse. In the court of first instance Santow J found a number of contraventions of the Corporations Act 2001, including breaches of the duties of care, diligence and good faith and the use of the defendants' positions to gain improper advantage.[89] In the NSW Court of Appeal the vast majority of these findings against the defendants were upheld and the penalties, both pecuniary and compensatory, and the disqualifications were affirmed.[90] However, despite these successful prosecutions using the core legal duties under the Corporations Act 2001, the HIH collapse exposed major lapses in corporate governance at one of Australia's largest companies that went undetected for a significant length of time. HIH has not been the only major recent example of poor corporate governance. The ongoing debacle at NRM A provides another lesson about the dangers of faulty corporate governance. Since its demutualisation NRM A has been subject to almost a decade of board upheaval and infighting. During this period the company had 60 different directors.[91] Significant court actions have followed, including professional negligence actions against four directors that was ultimately dismissed by the NSW Court of Appeal[92] and an action for breach of duties against the chairman, Nick Whitlam, who was initially held liable at first instance[93] but has since had the decision overturned in the Court of Appeal.[94] Despite these continued difficulties, the board has continued to factionalise and is rapidly becoming irrelevant to senior management and shareholders. There are suggestions that the federal Government may soon step in to provide an administrator.[95] The recent decision in ASIC v Rich[96] also provides another example of contemporary Australian corporate governance failures. The ASIC v Rich case arose out of the collapse of One-Tel, where large amounts of information were kept from the board and company business was conducted in a highly irregular fashion.[97] Here the court recognised that corporate governance was a flexible and evolving concept that had to change to fit community expectations. As such, there clearly was a case to answer arising out of the collapse of One-Tel on the question of whether senior directors and the chairman had failed in their duty of care and diligence.[98] In light of the global debate on corporate governance and the wave of Australian corporate collapses, the federal Government moved to address many of the concerns raised in the round of corporate reforms introduced by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 (CLERP9). The CLERP9 amendments fall under nine separate heads. These are: an expanded Financial Reporting Council to set audit standards;[99] amendments to ensure the quality of audits, auditor independence and the provision of non-audit services;[100] auditor liability reform;[101] the adoption of International Accounting Standards Board accounting standards;[102] putting an onus on financial services providers to ensure analyst independence;[103] enhancing the framework of continuous disclosure;[104] more effective securities disclosure requirements;[105] wider powers for ASIC;[106] and a Shareholders and Investors Advisory Committee to improve and facilitate shareholder participation and enforcement of statutory rights and remedies.[107]

CLERP 9 also adopts some of the SOX provisions mentioned above, including protection for whistleblowers who report wrongdoing or impropriety to ASIC in good faith and on reasonable grounds.[108] CLERP 9 represents a response to corporate governance difficulties that is similar to that of the United States with SOX. The era of Government faith in self-regulation appears to be over, and not without some cause. However, it is questionable whether many of the CLERP 9 amendments would assist in preventing another HIH or One-Tel collapse. As was seen with the post-HIH litigation, ASIC has sufficient powers to prosecute wrongdoers; but this does not prevent the misconduct. Many of the criticisms that have been levelled at SOX are similarly applicable here. Problems of auditor independence and financial reporting standards were not as much of an issue in the Australian collapses as they were, for example, at Enron. In reality, the HIH and One-Tel collapses represent poor business ethics, substandard board participation and bad judgment. The CLERP 9 amendments do little to address these areas.

The other important aspect of corporate governance regulation in Australia is the role of the Australian Stock Exchange (ASX). The ASX is run subject to the regulatory governance of ASIC (a similar arrangement to that in New Zealand).[109] Much of the front-line regulatory requirements for public listed companies are set by the ASX via its Market Rules. The Market Rules contain a number of guidelines relevant to corporate governance. These includes detailed rules on continuous disclosure (which was also subject to CLERP 9 amendments),[110] transfers to persons in a position of influence,[111] significant transactions[112] and documentary requirements.[113]

The Market Rules are a condition of entry onto the ASX and a continuing requirement. The ASX is in a position to impose sanctions or remove issuers from the exchange if the rules are breached. As such, these rules are a major practical consideration for large listed issuers when evaluating and setting their corporate governance controls.

The ASX has also taken the lead in establishing the ASX Corporate Governance Council (the Council) which was formed in 2002 to formulate a corporate governance framework of practical application to ASX listed companies, investors, the wider market and the Australian community at large.[114] The Council's Principles of Corporate Governance and Best Practice Recommendations (the Code) is not a set of rules; rather the Council formulated 10 guidelines as 'a reference point for enhanced structures to minimize problems and optimise performance and accountability.'[115] The Council encourages companies to use the recommendations to evaluate and streamline internal controls and systems. While the Council requires that all companies to which the Code applies should conform to the recommendations, alternate practices may be instituted if the recommendations are inappropriate to their particular circumstances. The caveat on this is that where the best practice recommendations are not adopted, companies should comply with the 'if not, why not?' approach advocated by the Council and required by ASX Market Rule 4.10.[116] Companies must therefore identify in their annual reports to what extent they have followed the best practice recommendations during the period covered by the reporting. Where recommendations have not been followed, the company must identify these instances and explain the reasons for not adopting them.[117] The Code takes the form often principles and guidelines on how to achieve these. The Code's principles are similar to the New Zealand Securities Commission's Principles and Guidelines[118] document which is discussed below. Both have a similar purpose. Broadly, six of the recommendations in the Code are the same as the Securities Commission's recommendations. These are the requirement of a proportion of independent directors;[119] a board composition of individuals with mixed skills and knowledge;[120] mandatory subcommittees for audit and remuneration matters;[121] the board to set robust financial and governance reporting procedures and rules to ensure the integrity of that process and the accuracy of the information;[122] fair, reasonable and transparent board remuneration, linked to performance;[123] and board observance of high ethical standards which should be measured against a code of ethics.[124] Of particular importance to the ASX Council (and the Securities Commission) is clearly delineating the respective roles of the board and management. One of the contributing factors in collapses such as HIH and One-Tel was the confusion of roles and responsibilities between the board and management. Of particular import is establishing the clear responsibility of the board for oversight of management decisions and processes. In the case of HIH this role was not diligently performed, especially with respect to the hurried and faulty acquisition of FAI, a major contributing factor to HIH's eventual collapse. There are some significant differences between the ASX's Code and the Securities Commission's Principles and Guidelines. First, the Code is strictly limited to listed companies.[125] This stands in contrast to the Securities Commission Principles and Guidelines, which although clearly designed for listed entities, are not limited to this. Second, the Code takes a far more prescriptive approach than the Securities Commission Principles.[126] Third, the Code's Principle 8 is without counterpart in the Securities Commission Principles and Guidelines. Principle 8 aims to facilitate enhanced performance by an objective evaluation of board and management performance and effectiveness. Procedures for performance reviews for top echelon management and the board should be disclosed. One of management's key responsibilities is the provision of information to the board and board members should be encouraged to take professional advice and make independent evaluations and judgments on the performance of management and the company. The company secretary is particularly important in facilitating the effectiveness of the board by ensuring the board policy is implemented by management.[127] This is a clear directive aimed at 'improving the managerial and business performance and decision-making of a company's senior management.'[128] In fact, it represents the only direct recommendation in this regard in either the Code or the Principles and Guidelines.[129]

Principle 10 is interesting as it represents the evolving nature of Anglo-Saxon companies' jurisprudence. The Council advises that companies should '[r]ecognise legal and other obligations to all legitimate shareholders.'[130] While the Securities Commission's Principles and Guidelines also recognises the interest of stakeholders in its Principle 9, this is with the caveat that this should be done 'within the context of the entity's ownership type and its fundamental purpose.'[131] This seems to be a different and more tentative approach.[132] Clearly, legal obligations to all parties are required to be recognised by statute and/or the common law. However, the phrase 'and other obligations' represents a major shift in the conceptualisation of what a company is and who it owes duties to. Principle 10 goes on to say that:[133]

There is a growing acceptance of the view that organizations can create value by better managing human, social and other forms of capital. Increasingly, the performance of companies is being scrutinized from a perspective that recognizes these other forms of capital. That being the case, it is important for companies to demonstrate their commitment to appropriate corporate practices.

Just what does this actually mean? The Council states that codes of conduct should address the legal obligations that companies owe to stakeholders, including obligations to the financial community; obligations to clients, customers and consumers; the upholding of employment practices; obligations to maintain fair trading and dealing; responsibilities to the community; responsibilities to the individual; and how the company complies with relevant legislation. Disclosure and monitoring of the Code is also required.[134] Traditionally, the company has been a product and a creature of its shareholders. However, this enshrining of stakeholder theory into the best practice recommendations requires that companies make a much wider assessment of its obligations. Moreover, the ASX Market Rules require compliance with all the principles listed above, or an 'if not, why not?' explanation. This surely makes it difficult for listed Australian companies to ignore the growing implications of stakeholder theory and its impact on their business model.

V. What are the Issues in Corporate Governance Regulation for New Zealand?

Although New Zealand has not witnessed any of the major corporate collapses that have plagued other jurisdictions in recent times, its companies are not immune from problems.[135] Moreover, reform in other jurisdictions, especially those with which New Zealand shares common characteristics such as the United States and Australia, have been noted and in some cases applied here. New Zealand's corporate governance regulatory regime is three-tiered. The central core is the established legal duties embodied in the Companies Act 1993. Other statutes have some import here as well. However, this legal core has not been the focus for corporate governance reform in New Zealand. The most important developments have occurred in the next two tiers; the mandatory rules for companies that are listed on the NZX and the various best practice codes and guidelines that have been produced, principally by New Zealand's de facto regulator of corporate governance, the Securities Commission. The choice for New Zealand lies between a rule-based approach and a standards or principles-based approach. The rules-based approach, of which the best example is SOX in the United States, is a prescriptive set of rules on what boards and executives must do. It is backed by the full force of regulatory law. On the other hand, a principles-based approach focuses on the general requirements for good corporate governance, whilst allowing for some flexibility in how boards choose to implement these principles. There is a clear continuum between the two upon which the different regulatory responses can be placed. For example, Australia, as we have seen above, has opted for a balance between a rules- and principles-based regime. The comply or explain approach, coupled with the elements of SOX that have been adopted in CLERP 9, push it further along the continuum towards the United States' response. New Zealand's approach thus far stands in contrast to other jurisdictions, such as the United States, where the approach has been far more of a rules-based, stricter regulatory regime. Rather, the preferred approach of the Securities Commission is a 'robust principles-based framework'.[136] In part this stems from the difficulty in regulating corporate governance. Corporate governance issues are both 'structural', ie. the composition of boards, the division of duties between board and management or conflicts rules for auditors and 'behavioural', ie. that directors should be prepared to engage in constructive debate with management, that directors should bring an independent point of view to company issues or that a culture of risk management and identification should be fostered.[137] Of course, behavioural issues cannot be regulated for in the sense of strict procedural rules. Rather, the preferred approach is to establish guidelines and best practice recommendations. Instead of a 'tick-the-box' mindset, where rules are prescribed and backed by the force of law, a principles-based approach seeks to facilitate responsible corporate governance by fostering self-discipline and enabling investors and other stakeholders to ensure their own protection through robust disclosure and enforcement regimes.[138]

As a result, there are a number of major areas of focus for corporate reform in New Zealand, and generally worldwide. These can be grouped into three broad areas. The first of these relates to the structure, principal responsibilities and procedures of the board of directors. The board fulfills an important role in setting company goals, monitoring management and company performance and ensuring accountability to shareholders.[139] In response to concerns over board performance and independence, regulators in New Zealand and abroad have made an effort to promulgate rules to ensure the board is a strongly functioning body that assumes responsibility for the transparency and efficiency of the company. These focus on setting structural rules requiring a certain number of independent directors, the chairperson's role, the requirements for remuneration and nomination committees and the supervisory role of the board. The second area relates to ensuring the integrity of financial reporting. This focuses on rules for both external and internal auditors, including the audit committee. The third broad set of rules relates to the disclosure of information. Disclosure of information is often viewed as a cure for corporate governance abuses. These areas are often overlapping, for example, disclosure of a company's board structures and financial reporting processes are often required. It is in these areas that attention has principally been focused by regulators.

VI. New Zealand's Cautious Approach to Reform

In many ways New Zealand has occupied a privileged position in relation to the reform of corporate governance regulation in the last five years. Not having experienced corporate collapses of the size or frequency that have occurred in comparative markets, such as the United States and Australia, New Zealand has been able to take a cautious approach towards reform. Clearly, however, New Zealand has watched the reforms in other markets, especially Australia, closely and regulatory authorities in this country have taken steps to review the corporate governance framework. One of the most significant corporate collapses in New Zealand in modern times was that of the Fortex Group. Prior to its wholly unanticipated collapse, the Fortex Group, which specialised in meat processing and exporting, was seen to be an innovative industry leader.[140] It had listed on the New Zealand Stock Exchange in 1990.[141] However in March 1994, after having posted significant losses in the year to 31 August 1993 and the six months to 28 February 1994,[142] the various companies that it comprised were placed into receivership by their respective secured creditors.[143]

A number of parties were left with significant monies owing, not least the Group's employees that had subscribed to the Management Superannuation Fund, administered by the company. After the collapse, it emerged that for over a year the superannuation contributions had been banked into the Group's current accounts instead of being paid to the trustee as required.[144] Despite court action to recover these sums on the basis of equitable unjust enrichment and the alternative argument that Fortex was a constructive trustee for the employees, the Court of Appeal ultimately dismissed the actions and the money was never recovered.[145] A subsequent investigation into the trading of Fortex Group shares concluded that the provision of information to the market by Fortex management, although in some sense reasonable at the time, was deficient and resulted in wild fluctuations in the company's share price and resulting market uncertainty which materially contributed to the collapse.[146] Despite some evidence of irregularities in the provision of information to insiders and the suspicion of opportunities for insider trading, the Securities Commission could find no hard evidence with which to prosecute on this basis.[147] Fortex's collapse, although not totally due to corporate governance failures, illustrates that New Zealand cannot isolate itself from evolving corporate governance standards. Other subsequent scandals, such as the Government bailout of Air New Zealand following the collapse of its Australian subsidiary, Ansett, in 2001, also make it clear that New Zealand companies are not immune from the problems that have struck overseas.

More recently, the decision of the Court of Appeal in Richmond Ltd v PPCS[148] shows how 'good practice can be lost in the rough and tumble of corporate enterprise.'[149] Richmond Ltd v PPCS is the most recent instalment of the long-running battle between PPCS and Richmond Ltd, in which PPCS's takeover bids were consistently rejected by Richmond Ltd. PPCS then attempted a backdoor acquisition which breached substantial security holder rules, at the time governed by the Securities Amendment Act 1988. The Court of Appeal decision related to the penalties that should be imposed. In the heat of the takeover bid, the Court of Appeal identified that:[150]

The need for continuing pretence appears to have also led to unexplained departures from normal standards of governance by PPCS. ... We acknowledge that the active resistance by Richmond's board and shareholders at times was provocative and that on two occasions it involved dubious conduct, but that does not excuse what PPCS did.

PPCS's actions included the false recording of transactions[151] and filing a substantial security holder statement that was patently false.[152] Richmond's actions were by no means beyond reproach, as their legal counsel has attempted to place the chief executive of Richmond into a conflict position by sending a letter which contained confidential information.[153] Despite the obvious governance problems arising from the case, it is difficult to see what structural rules could be introduced to prevent such abuses. The temptation is to introduce new regulations in light of this. However, such a reaction ignores the fact that the behavioural aspects of corporate governance, which are often immune to regulation, are just as, if not more, important as the structural rules.[154]

New Zealand's corporate governance framework is an amalgam of statute, in the shape of the Companies Act 1993 and other relevant legislation,[155] code and common law principles. There are essentially three tiers to corporate governance regulation in New Zealand. The core legal duties under the Companies Act 1993 are the first aspect of this. The principal regulator for corporate governance is the Securities Commission, established by the Securities Act 1978, which delegates the Commission responsibility for New Zealand's capital markets. Although corporate governance is a topic with implications beyond merely those capital markets, the Securities Commission has been the principal organ in relation to formulating and enforcing corporate governance rules and guidelines. New Zealand currently has only one securities market, the NZX, a company that is the result of the consolidation of New Zealand's regional exchanges in 1974. Pursuant to the Securities Act 1978,[156] the Securities Commission has established a two-tiered system of regulation for the NZX under its Memorandum of Understanding (MOU) signed with the NZX on 27 February 2003. Under the MOU the NZX assumes responsibility for the frontline regulation of participants listed on its markets while the Securities Commission is the statutory regulator with oversight of the NZX's rules and guidelines and final authority.[157]

The NZX's regulatory function is carried out by requiring companies listed on its markets to comply with its Listing Rules. These Listing Rules are the NZX's minimum guidelines for market participants and cover matters such as exchange documentary requirements, continuous disclosure and related transactions. For large publicly listed New Zealand companies, the NZX Listing Rules are the second tier of regulation after the legal core of the Companies Act 1993. The third aspect of corporate governance in New Zealand are the various best practice codes and guidelines, the most important of which are issued by the Securities Commission. These include Corporate Governance in New Zealand: Principles and Guidelines, published by the Commission in February 2004 after a long consultation period. This is the Securities Commission's definitive statement on best practice for corporate governance.

The core legal duties for corporate governance are contained principally within the Companies Act 1993 and common law principles. Section 128 of the Act provides that the board of directors must manage or supervise the business and affairs of the company and that the board is therefore vested with all the powers necessary for this.[158] Under the Act, directors assume a number of duties. A director is clearly placed in a fiduciary position in relation to the company. The Act contains a number of so-called 'prophylactic' rules designed to prevent misbehaviour.[159] The general duties include the fiduciary duty to act in good faith and in what the director believes to be in the best interests of the company;[160] the duty to act for a proper purpose;[161] and the general duty of care to exercise the care, diligence and skill of a reasonable director.[162] Two further complementary duties are aimed at preventing directors from misusing company money. Directors are prohibited from carrying on the business of the company in a manner that is likely to create a substantial risk of serious loss for the company's creditors[163] and from incurring an obligation where the director does not believe the obligation will be able to be performed.[164] Directors are also bound to comply with the Companies Act 1993 and the company's constitution.[165] These duties are all owed to the company itself and not the shareholders.[166] Taken together, the laws 'represent the most extreme form of piercing the corporate veil, and inhibit enterpreneurism.'[167] This is puzzling, given that the Long Title to the Companies Act 1993 specifically provides that one of its purposes is:

To reaffirm the value of the company as a means of achieving economic and social benefits through the aggregation of capital for productive purposes, the spreading of economic risk, and the taking of business risks.

In comparison to the Australian provisions the New Zealand law seems disjointed. This is highlighted by the fact that New Zealand still lacks a voluntary administration procedure,[168] and the protection for directors of abusiness judgment rule.[169] The relationship betweens 135 ands 136 leaves much to be desired (the provisions effectively distinguish between debts on revenue accounts (s 135) and obligations on capital account such as major investments (s 136)).[170] In Fatupaito v Bates[171] O'Regan J pointed out that these sections clearly undermine the principle of limited liability (and that of separate legal personality).[172] Farrar makes the point that while these provisions clearly act to inhibit the taking of risk, they do not prevent true fraud or recklessness because enforcement is largely inconsistent. However, in the wider corporate governance debate, directors' duties as enshrined in the Companies Act 1993 have been largely ignored.

The NZX Listing Rules are the front line regulatory requirement for market participants on the NZX's various exchanges. The Listing Rules contain a number of provisions that relate to matters integral to corporate governance. The NZX has also produced a Corporate Governance Best Practice Code. The Listing Rules require that all market participants adhere to what the NZX considers to be the two core aspects of good corporate governance; the requirement for a certain number of independent directors and a standing audit committee. These are mandatory requirements. A board is required to have at least two independent directors or one third of board composition as independent directors.[173] Directors are independent when they do not have a disqualifying relationship with the company.[174] The second substantive requirement is a standing audit committee.[175] The audit committee must assume responsibility for monitoring internal and external audits and must ensure that the external auditor (or at least the lead partner responsible for the file) rotates every five years.[176] Although this has been identified here and overseas as 'an essential touchstone for good corporate governance practice'[177] it is somewhat contentious. Most auditors and many companies maintain that a continuing relationship between auditor and company allows a body of knowledge and expertise to be developed that facilitates a full discharge of the duties of the auditor. On the other hand, critics point to the phenomenon of 'client capture', where auditor and client develop so close a relationship that any notion of independence is eroded.[178] This was especially apparent during the investigations of the large United States collapses, including Enron. However, the rotation requirement can prove to be problematic, especially in a small market such as New Zealand. This problem is magnified when the nature of the audit industry is considered. The collapse of Arthur Andersen, post-Enron, meant that the industry had coalesced into four big companies that handle a vast proportion of auditing and accounting work. Despite this, the period of five years seems to be a pragmatic way of balancing both concerns; allowing the build-up of expertise between auditor and client whilst still maintaining the required independence.

The NZX's Corporate Governance Best Practice Code (the Best Practice Code), released in August 2003 is also relevant here. The Best Practice Code is designed to be a set of 'flexible principles which recognise differences in corporate size and culture.'[179] Pursuant to Listing Rule 10.5.3(i), companies listed on the NZX must disclose in their annual reports the 'extent to which [their] corporate governance processes materially differ from the principles set out in the NZX Corporate Governance Best Practice Code.' [180] The Best Practice Code addresses requirements for codes of ethics, directors, committees and the relationship with the independent auditor.[181] It is more focused on addressing both structural and behavioural issues. It seems to be designed to be more of a supplement to the Listing Rules, although the NZX does have the ability to take enforcement action if the requirement to disclose the extent of compliance is not adhered to.[182] The other important aspect of the NZX's assumption of responsibility for corporate governance is the continuous disclosure regime. This is instituted under s 10 of the Listing Rules, pursuant to the requirements of Securities Markets Amendment Act 2002,[183] and requires issuers on the NZX to disclose all relevant information immediately to the market, so that investors and other interested parties can have timely access to information likely to affect their decision-making. Continuous disclosure is a major departure from the previous disclosure regime, where companies had more freedom to decide what information should be released and the timing of that release, and addresses the concerns raised during the investigations following the Fortex Group collapse, among others. The continuous disclosure rules are part of the modern regulatory drive for a fully or fairly informed market. However, mandated disclosure in the form required by the NZX Listing Rules can be problematic. In practice, a market is never fully or fairly informed. Disparities of information will never be eliminated, even by rules such as continuous disclosure that create a heavy burden for companies. Many companies, especially those whose business is driven by competitive technologies or innovative strategies, are susceptible to a loss of value for shareholders if they are forced to disclose information that may be price-sensitive on the basis of the material information rule in Listing Rule 10.[184] Listing Rule 10 does contain exceptions which allow companies to withhold sensitive information from the market. However, such a requirement creates uncertainty within companies about what information should or should not be disclosed. Ultimately, companies that do not wish to release information, price sensitive or otherwise, create mechanisms for retaining such information. When this occurs, the disclosure rules have merely become another compliance cost to be minimised and another set of rules to be evaded. They are not meaningful, in the sense that they were created to attempt to reach an artificial standard of 'full' or 'fair' market information.[185] Moreover, the requirement that information be provided as soon as it comes to the attention of the company removes the ability of the company to manage information release in the best interests of shareholders. Admittedly, this can be abused, as the Fortex case shows. On the other hand, continuous disclosure, rather than ensuring a fully-informed market, could cause share prices to fluctuate wildly as the market digests constant streams of positive or negative news. Previously, the release of such information could be staggered so as to balance bad news with good news, and vice versa. A truly principles-based approach to corporate governance would allow directors to depart from the ideal of continuous disclosure where it was in the best interests of the company. Under the NZX Listing Rules this ability is removed. The success of the NZX's Listing Rules will clearly depend on how they are treated by issuers. Consistent with New Zealand's signalled principles-based approach, the Rules (and the Best Practice Code) contain a limited number of prescriptive elements, notably rules on director independence and board composition, disclosure requirements, audit rotation and responsibilities of board committees. There is, of course, the danger that the Listing Rules and the Best Practice Code will be adopted by companies in a prescriptive fashion, which defeats the stated purpose of creating rigorous self-discipline. However, it is hard to see what can be done about this by the NZX or the Securities Commission. The effectiveness of the Listing Rules in protecting against corporate misfeasance may depend on the application of the 'if not, why not?' standard for disclosing as against the Rules and Best Practice Code. If investors objectively evaluate non-compliance and the reasons for it then this approach may be appropriate. However, if the market comes to view the Rules and the Best Practice Code as the minimum compliance standard, then this may penalise smaller issuers and non-listed companies who are unable to fully comply with the Rules and the Best Practice Code but have legitimate and justifiable reasons for not doing so. Another area of concern is the requirement for a stated proportion of the board to be independent directors. Given the small size of New Zealand's market and the consequent number of qualified directors, this standard may be unreachable and promote a dilution of the quality of directors on the boards of large companies. This is contrary to the aim of NZX and the Securities Commission of ensuring rigorous scrutiny of management by well-informed and capable directors. The Securities Commission's most important statement on Corporate Governance is the Principles and Guidelines document, published in February 2004. This document consists of nine principles and related guidelines that the Commission identified as important for developing standards of corporate governance in New Zealand.[186] Given the Commission's statutory functions,[187] the principles are focused towards publicly owned entities such as listed companies and collective investment schemes. The principles do not impose any legal obligations, however, they are the standards that the Commission expects relevant companies to abide by and report on to their investors and relevant stakeholders.[188] The Commission has so far decided against a rules-based approach towards corporate governance, insofar as the Principles and Guidelines are concerned. The concern is that a 'tick-in-the-box' approach would arise out of any attempt to lay down overly prescriptive rules on how good corporate governance should be achieved. Instead of focusing on a list of rules that must be followed, the Commission favours an approach that encourages management and boards to develop good corporate governance processes using the principles as established by the Commission. Clearly, transparency and openness are an important part of this and so the Commission prefers companies to attempt compliance with the principles and to then explain how they have done so. If compliance is not achieved, the 'if not, why not?' approach is preferred so that investors can easily ascertain what the corporate governance structure is and why it is different from the Commission's recommendations.[189]

The nine Principles formulated by the Commission are that: directors should observe and foster high ethical standards;[190] there should be a balance of independence, skills, knowledge, experience and perspectives among directors;[191] board committees should be used where effectiveness can be balanced against board responsibility;[192] the integrity of financial reporting and disclosures should be maintained;[193] directors' remuneration should be transparent, fair and reasonable;[194] the board should set and review risk management procedures;[195] the board should foster and open and constructive relationship with shareholders;[196] and that the interests of stakeholders should be fostered insofar as is possible given the 'entity's ownership type and its fundamental purpose.'[197] The key structural measures to ensure compliance with the principles are an independent audit committee; a majority of non-executive directors; annual disclosure of board and senior management remuneration; disclosure by directors of other directorships so that independence can be maintained; and the annual disclosure of compliance with the principles.[198]

The Securities Commission's Principles and Guidelines have identified the major factor in corporate fraud and misdemeanor as the ease with which the board can become detached from their supervisory role over management. This is an aspect of the agency cost problem. The way in which the Securities Commission looks to minimise agency costs is by 'the establishment of the board as a quasi-external body that is able and willing to monitor management.'[199] The key is making the board as independent of management as possible. Once independence has been established, the board should associate its interests with shareholders, insofar as is possible, principally by applying transparent incentivised remuneration. Strong information flows from management and auditors facilitate the board supervising and reviewing management in the interests of the shareholders to ensure that management cannot pursue interests divergent from the owners of the company.[200]

This ideal is derived principally from the United States experience of large, widely-held companies with a number of highly liquid share market exchanges. Agency costs are very much a major concern in this type of market. However, the New Zealand situation is in many ways very different. The New Zealand economy is much smaller, characterised by relatively small companies listed (if at all) on an illiquid market with a large proportion of shares held by substantial shareholders.[201] This suggests that, in contrast to the United States, agency costs are far less of a problem in New Zealand. Of a higher likelihood are disputes between shareholders, particularly the abuse of a minority by the majority shareholder. The dual approach of independence and disclosure may in fact be unsuited to this reality. Of course, the temptation is to consolidate New Zealand's regulatory framework in line with the world's most successful economy. However, this may not produce optimal results for New Zealand. Independence can encourage detachment from the affairs of the company. Independent directors may spend far too little time addressing the affairs of the company and this 'independence' can come to mean 'indifference'. Moreover, where management and non-independent directors have an integral role in nominating and appointing independent directors, these directors are in effect beholden to them and therefore not independent at all.[202]

The case for independent directors is not as clear-cut as it often seems. There is an argument that the problem of agency costs will not be solved by further divorcing ownership and control. In fact, McConvill and Bagaric argue that independence is more often the problem rather than the solution.[203] Where directors are divorced from investors they are effectively always dealing with someone else's money. This is the essence of agency costs. As Jensen and Meckling put it: 'because managers cannot capture all of the gains if they are successful, and will not suffer all of the losses should the venture flop, they have less incentive to maximize wealth than if they themselves were the principals.'[204] Thus the solution to the problem of agency costs is not to further separate ownership and control; it is to, in fact, seek to integrate the two. Maintaining independence should be limited to preventing cross-directorships which give rise to conflicts of interests and undisclosed family ties. But where the term is used to suggest that independence is compromised by a stake in the company, it is false to suggest that independence promotes improved performance and propriety.[205] In the Re Walt Disney Company Derivative Litigation[206] it was made clear that although the board members may have been independent by the measure of not having an undue relationship with the company, they were clearly not independent in the true sense of the word as they were disproportionately reliant for their position on the Chairman. As yet, there has been no evidence to suggest that a strict requirement of independence improves board performance in either the commercial or supervisory sense.[207] Franks argues that (for reasons of legal liability and board performance) directors must be 'prepared to cross the governance/management boundary.'[208] To the Securities Commission's credit, it has recognised the particular problems that New Zealand's small pool of and market for directors creates. In response, the Commission emphasises that independence of thought and perspective is as important as independence per se.[209]

The other major criticism of the Commission's approach is that corporate governance is increasingly being equated with accountability rather than 'the mechanisms and strategies designed to make a company a more efficient and effective means of wealth creation.'[210] While ensuring adequate protection against corporate fraud and misbehaviour is admirable, it should not be promoted at the expense of the promotion of the company structure as a vehicle for profit and wealth creation. The Long Title to the Companies Act provides for the importance of the company as a vehicle for economic risk-taking. As Grantham states: '[t]he absence of impropriety in the management of companies is no guarantee of economic success.'[211] Working to divorce boards from management may in fact more adequately guard against corporate fraud. However, this may be to the detriment of the board as an integrated and engaged part of the company making informed strategic decisions designed to maximise profitability. The board is not merely an institution for supervising management. Of course this is one of its important functions but it should not be promoted at the expense of the wider role of the board to provide direction and the benefit of the full range of business skills and knowledge that its members possess.[212] New Zealand also lacks a comprehensive business judgment defence for directors of the type found in the United States and Australia. This contributes to the possibility of boards completely divorcing themselves from management to minimise potential liability and to maximise their supervisory role. Moreover, without the protection of a business judgment rule (which would be consistent with the Long Title to the Companies Act 1993) directors have a further incentive to devote themselves to the task of preventing wrongdoing, at the expense of fulfilling their wider commercial role.

VII. Evaluating New Zealand's Corporate Governance Regulation in a Comparative Context

New Zealand's corporate governance regulatory environment is in a state of flux. This article tends towards the view that a principles-based approach is far superior to a stricter, rules-based regulatory regime. Despite the high regulatory burden, there is little evidence to suggest that a SOX-type program will work to prevent corporate fraud. An undue focus on the 'rules' required to make governance good distracts attention from the real issue; fostering high standards of business ethics and organisational behaviour. As was identified in Richmond Ltd v PPCS[213] it is very easy to lose sight of the rules in the high-tempo environment of modern business. By encouraging companies to assess the guidelines set by the Securities Commission, individual entities are allowed to assess their own requirements and what, in fact, constitutes good governance in their organisation. Much importance has been placed by the primary regulatory organs, the Securities Commission and the NZX, on putting in place a comprehensive principles-based framework that encourages self-discipline via the dual strategy of an independent board and a robust disclosure regime. However, it is questionable whether even this relatively light-handed regulatory approach is appropriate to New Zealand conditions. Much of the corporate governance debate both here and overseas has been dominated by high-profile corporate collapses in the United States and Australia. New Zealand's economy and capital markets are not necessarily analogous to the markets in other countries, although there are similarities. As Grantham points out, the problem with the idea of convergence in this area is that the argument is necessarily contingent on an assumption of 'the supremacy of the US model ... in evolutionary terms.'[214] Although there are overall similarities, New Zealand's capital markets are have a number of features that are different from other countries. Most of New Zealand's listed companies are controlled by either a single shareholder or small group of shareholders (in a majority, minority or joint control fashion).[215] Therefore, agency costs are less of an issue in New Zealand. Formulating a strategy that focuses on agency costs as the primary problem in New Zealand corporate governance may ignore the real concern which is ensuring an environment that encourages risk-taking and wealth creation for shareholders. On the other hand, the increasing proportion of New Zealand companies under foreign control militates for an approach consistent with our major trading partners.[216] As New Zealand's securities markets and business increasingly come to rely on foreign capital, it is arguable that New Zealand's regulatory environment should be made as consistent as possible with the jurisdictions that those foreign investors are comfortable with. This is clearly the Securities Commission's view. In contrast to other jurisdictions such as the United States, and to an increasing extent, Australia, New Zealand's stated aim is to minimise the regulatory burden in New Zealand insofar as is possible. The Securities Commission recognises that '[t]he New Zealand model of economic management is based squarely on the disciplines of the market, and the ability of interests parties to hold accountable directors and managers.'[217] Certainly there is no parallel in New Zealand to the reactionary approach of United States regulatory authorities and the heavy regulatory load evident from SOX with its related heavy compliance costs for businesses. In Australia, the CLERP 9 program represents a scheme of stricter regulation than was previously in place. Both jurisdictions have essentially rejected the traditional approach of self-regulation in favour a closer alignment with managerialist theory. Regulation in this sense can be placed along a continuum. This article suggests that New Zealand still lies closer to a classical contractual conception of corporate governance, based on a dual approach of board independence and greater disclosure of information. Nonetheless, the regulatory load is increasing in New Zealand.

The most important regulatory development in New Zealand has been the advent of the Securities Commission's Principles and Guidelines document. As identified above, there is some force to the argument that the Securities Commission has focused on the wrong issues in the New Zealand context. Another criticism of the Principles and Guidelines approach is that it appears to be something of a halfway house; accepting neither the need for a managerialist United States style approach to corporate governance regulation, nor really staying true to the New Zealand principle of contractual, market based self-regulation. By issuing the Principles, the Securities Commission expects large issuers to comply, therefore accepting higher associated costs of compliance. However, if the Commission was serious about maintaining New Zealand's traditional approach to governance issues it would provide mechanisms which empower shareholders to enforce compliance with these governance requirements. It is all very well to expect investors to 'monitor' compliance, but by not allowing for some sort of remedy where management ignores investors' wishes, it risks the principles becoming some sort of 'lofty aspirational standard'[218] which is not grounded in practice. Although there is a risk that allowing for enforcement would create 'a common law of corporate governance'[219] not providing for it makes somewhat of a mockery of the Commission's statement that:[220]

Disclosure is important because it makes entities more accountable to their shareholders and other stakeholders. However, there are two sides to this and the users of this disclosure have a significant role to play. For disclosure to be effective, shareholders, investors and other stakeholders need to evaluate the information they are given and, on this basis, to responsibly call directors and executives to account when that is called for.

Moreover, the danger is that by not providing for enforcement, the Commission risks this gap being filled by the courts. Increased levels of regulation can have results that are detrimental to New Zealand's capital markets. Private equity investment is fast becoming a popular alternative to the traditional methods of raising capital on securities markets. Much of this is because of the increasing cost of this method of funding, in large part due to the 'stifling and costly impact of excessive governance regulation and compliance.'[221] Cameron suggests that 'poor regulatory responses will stimulate ownership of economic activities through "closed" corporate forms of organization at the expense of "open" publicly listed corporations with dispersed shareholders.'[222] The increasing cost of compliance for companies listed in the United States because of SOX[223] has led to a greater reliance on private equity as a source of capital. Cameron states that in 2004 private equity investment in the United States was US$302 billion, compared approximately US$100 billion in 2000. Similar developments are evident in Australia and Australian private equity firms are increasingly making their presence felt in New Zealand. The NZX is struggling to maintain the number of new listings and has also experienced a drop in the liquidity of the stockmarket overall.[224] The continuous disclosure rules are a good example of a heavy new regulatory burden that companies, especially those of a small to medium size, have been forced to bear in New Zealand in response to corporate governance concerns. Although individually, new rules and laws designed to safeguard investors may seem like a small step and a good idea, over time these regulations can act to stifle businesses and erode shareholder value.

New Zealand's corporate governance regulatory regime is still somewhat ad hoc. The Securities Commission has assumed responsibility for monitoring and improving corporate governance in New Zealand and has designed a two-tier regulatory scheme, with the NZX providing front-line regulation by way of its Listing Rules. This is itself problematic. The NZX is placed in a conflict situation by being required to regulate issuers from whom its revenue as an enterprise is derived. Moreover, the NZX is itself listed as an issuer on its own exchange. The potential for confusion is immense and was shown recently in the dispute between the NZX and the Securities Commission over the collapse of Access Brokerage.[225] The Securities Commission's position (like ASIC in Australia) requires it to provide a number of services, from enforcement of its rules at one end of the spectrum to education at the other, with a number of other roles in between.[226] Its response to corporate governance concerns has been to work with the NZX in amending the Listing Rules and to work in a guidance role by producing a set of Principles and Guidelines that sets out the Commission's view on corporate governance best practice. However, there is some concern that the Commission's response to corporate governance reform is being shaped by overseas requirements, rather than the concerns of the New Zealand market. More attention should perhaps be paid to the core legal duties that underpin corporate governance and ensuring that the basic principles of fiduciary duty and the creation of shareholder value be emphasised. In this way the demands of accountability and value creation could be balanced and a competitive advantage for New Zealand's companies be retained.

VIII. Conclusion

It should always be remembered that '[c]orporate governance is one aspect which forms only part of the larger economic context in which firms operate.'[227] It is not really a new concept, although the modern fixation with it is certainly unique. In many ways the sharp regulatory responses to recent scandals in jurisdictions such as the United States and Australia is understandable, affecting as they have thousands of investors. However, the modern tendency is to focus on the idea of corporate governance to the extent to which it describes 'the system by which companies are directed and controlled.'[228] In this context, the implementation of SOX and CLERP 9 in the United States and Australia is understandable. However, in the wider sense of corporate governance as the 'mechanisms and strategies designed to make the company a more efficient and profitable business'[229] these reforms will arguably fail. New Zealand's regulatory response has been in no way as extreme as other jurisdictions. Despite this, there remains a suspicion that New Zealand's regulators have been caught up in some of the international hysteria, and that the reforms so far instituted in New Zealand are more a reaction to overseas concerns than New Zealand's particular circumstances. A concerted effort should be made henceforth to focus on the particular demands of New Zealand's business and investment community. Regulators should bear in mind the natural disadvantages that face New Zealand's capital markets and companies in an increasingly global economy and seek to minimise the regulatory burden. As with all aspects of the economy, corporate governance reform presents an opportunity for New Zealand's economy to retain a competitive advantage by facilitating a balanced and fair regulatory environment.

[*] BA/LLB(Hons). The author is currently employed by Chapman Tripp in Wellington in a corporate/commercial team.

[1] Organisation for Economic Co-Operation and Development, OECD Principles of Corporate Governance (2004), 11.

[2] Securities Commission, Corporate Governance in New Zealand Principles and Guidelines: A Handbook for Directors, Executives and Advisers (March 2004), 4.

[3] John Farrar, Corporate Governance in Australia and New Zealand (2001) 3.

[4] Sir Adrian Cadbury, Report, Committee on the Financial Aspects of Corporate Governance, (1992) [2.5].

[5] Organisation for Economic Co-Operation and Development, above n 1, 11.

[6] Ibid.

[7] R Grantham, 'Corporate Governance: A New Names for an Old Problem' (2002) 8 New Zealand Business Law Quarterly 257, 257.

[8] Ibid.

[9] Ibid.

[10] R P Austin, 'Corporate Governance at the Crossroads' (Paper presented at the Legal Research Foundation Conference, Auckland, 18 February 2005) 3.

[11] Ibid.

[12] Ibid.

[13] L E Ribstein, 'Sizing Up Sox', (Paper presented at the Legal Research Foundation Conference, Auckland, 18 February 2005) 4.

[14] R Grantham, 'Corporate Governance Codes in Australia and New Zealand: Propriety and Prosperity' [2004] UQLawJl 10; 23 (2004) University of Queensland Law Journal 218, 220.

[15] Ribstein, above n 13, 4.

[16] Ibid.

[17] Ibid.

[18] Ibid 2. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.

[19] J Edwards, M Gajic and C Lynch, 'Public Company Accounting and Investor Protection in the United States: Implications for Australian Corporate Governance from the Sarbanes-Oxley Act', (2002) 20 Company & Securities Law Journal 413, 413.

[20] Ribstein, above n 13, 3.

[21] Edwards, Gajic and Lynch, above n 19, 413.

[22] Ribstein, above n 13, 3.

[23] Ibid.

[24] Ibid.

[25] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745, s 2.

[26] W Hunt, 'What has Sarbanes-Oxley Meant for New Zealand Companies?' (Paper presented at the Legal Research Foundation Conference, Auckland, 18 February 2005) 2.

[27] Ibid.

[28] Ribstein, above n 13, 4.

[29] Ibid 4-5.

[30] Hunt, above n 26, 2.

[31] Ribstein, above n 13, 5.

[32] Ibid.

[33] The cost of complying with s 404 of SOX in the first year of implementation.

[34] Hunt, above n 26, 13.

[35] Ibid.

[36] Ibid 1.

[37] Ibid 13.

[38] Ibid.

[39] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.

[40] R Romano, 'The Sarbanes-Oxley Act and the Making of Quack Corporate Governance', Yale Law and Econ Research Paper 297, 17.

[41] Ribstein, above n 13, 6.

[42] Ibid 7.

[43] Ibid 8.

[44] Ibid.

[45] Ibid.

[46] Ibid 9.

[47] Ibid.

[48] Ibid.

[49] Ibid 10.

[50] M Lamo De Espinosa Abarca, 'The Need for Substantive Regulation on Investor Protection and Corporate Governance in Europe: Does Europe Need a Sarbanes-Oxley?' (2004) 19(11) Journal of International Banking Law and Regulation 419, 424.

[51] Ibid.

[52] Ibid.

[53] 825 A 2d 275 (Del. Ch. 2003).

[54] Ibid 284.

[55] Ibid 285-286.

[56] Ibid 294-295.

[57] Ibid 295-298.

[58] Ibid 315.

[59] Ibid 320.

[60] Ibid 324, per Chandler Ch.

[61] Ibid 325.

[62] 559 A 2d 1261,1280 (Del. 1988).

[63] Aronson v Lewis 473 A 2d 805, 812 (Del. 1984) cited in Re Walt Disney Company Derivative Litigation, above 825 A 2d 275 (Del. Ch. 2003), 326.

[64] Mitchell v Highland-Western Glass 167 A 2d 832, 833 (Del. Ch. 1933); Van Gorkom 488 A 2d 858 (Del. 1985), 872.

[65] Re Walt Disney Company Derivative Litigation, 825 A 2d 275 (Del. Ch. 2003), 337.

[66] Ibid.

[67] Ibid 339.

[68] Ibid.

[69] J H Farrar, 'A Brief Thematic History of Corporate Governance' (1999) 11 Bond Law Review 259, 268-269.

[70] (1990) 8 ACLC 120.

[71] G Proctor & L Miles, Corporate Governance (2002) 125.

[72] Ibid 125-126.

[73] The definition of director extends to de facto and shadow directors by virtue of s 9 of the Corporations Act 2001. Section 9 also contains a wide definition of the position of an officer.

[74] (1992) 10 ACLC 933.

[75] Corporations Act 2001, s 180(2).

[76] Corporations Act 2001, s 181(1).

[77] Corporations Act 2001, s 184(2) & (3).

[78] Corporations Act 2001, s 190.

[79] Corporations Act 2001, s 588G.

[80] Corporations Act 2001, s 588G(3).

[81] Corporations Act 2001, s 588FB.

[82] Corporations Act 2001, s 435A. The lack of this in New Zealand is highlighted above.

[83] Either by Court order (Corporations Act 2001, ss 461 and 459) or by voluntary arrangement (Corporations Act 2001, s 499(4)).

[84] Corporations Act 2001, pt 5.1.

[85] The Insolvency Law Reform Bill was introduced onto Parliament early this year and is presently at Select Committee stage.

[86] Commonwealth, The HIH Royal Commission, The Failure of HIH Insurance (2003) v.

[87] Ibid.

[88] Ibid vi.

[89] ASIC v Adler [2002] NSWSC 483; (2002) 42 ACSR 80.

[90] Adler v ASIC [2003] NSWCA 131.

[91] Farrar, above, n 69, 61.

[92] HeydonvNRMA Ltd [2000] NSWCA 374; (2001) 36 ACSR 462.

[93] ASIC v Whitlam [2002] NSWSC 591; (2002) 42 ACSR 407.

[94] Whitlam v ASIC [2003] NSWCA 183; (2003) 46 ACSR 1.

[95] Farrar, above n 69, 61-62.

[96] [2003] NSWSC 85; (2003) 21 ACLC 450.

[97] Farrar, above, n 69, 62.

[98] Ibid 63.

[99] Corporate Law Economic Reform Program 'CLERP' (Audit Reform and Corporate Disclosure) Act 2004, sch 1 pt 1 & sch 2 pt 3.

[100] CLERP (Audit Reform and Corporate Disclosure) Act 2004, sch 1 pt 3.

[101] CLERP (Audit Reform and Corporate Disclosure) Act 2004, sch 1 pt 6 & 7.

[102] CLERP (Audit Reform and Corporate Disclosure) Act 2004, sch 2.

[103] CLERP (Audit Reform and Corporate Disclosure) Act 2004, sch 10.

[104] CLERP (Audit Reform and Corporate Disclosure) Act 2004, sch 6 & 7.

[105] CLERP (Audit Reform and Corporate Disclosure) Act 2004, sch 7.

[106] CLERP (Audit Reform and Corporate Disclosure) Act 2004, sch 4.

[107] CLERP (Audit Reform and Corporate Disclosure) Act 2004, sch 8.

[108] CLERP (Audit Reform and Corporate Disclosure) Act 2004, sch 9.

[109] B R Cheffins, 'Corporate Governance Convergence: Lessons from Australia' (2002-2003) 16 Transnational Law 13, 34.

[110] Australian Stock Exchange Market Rules, Ch 3.

[111] Ibid Ch 10.

[112] Ibid Ch 11.

[113] Ibid Ch 15.

[114] Australian Stock Exchange Corporate Governance Council, Principles of Good Corporate Governance and Best Practice Recommendations, (2003) 1.

[115] Ibid.

[116] Ibid.

[117] Ibid.

[118] Securities Commission, Corporate Governance in New Zealand: Principles and Guidelines, (2004).

[119] Australian Stock Exchange Corporate Governance Council, above n 114, 19.

[120] Ibid.

[121] Ibid 29 & 51.

[122] Ibid 29-38.

[123] Ibid 51.

[124] Ibid 25.

[125] Australian Stock Exchange Corporate Governance Council, above n 114, Foreword.

[126] Grantham, above n 14, 220.

[127] Australian Stock Exchange Corporate Governance Council, above n 114, 47-48.

[128] Grantham, above n 14, 220.

[129] Ibid.

[130] Australian Stock Exchange Corporate Governance Council, above n 114, 59.

[131] Securities Commission, above n 118, 33.

[132] Australia has signalled a different view of stakeholder theory than New Zealand. Australian private companies of a certain size are required to publicly report, whereas in New Zealand private companies are not required under the Financial Reporting Act 1993 to publicly notify their financial reports. In Australia the relevant rules are contained in the Corporations Act 2001, ss 286-292.

[133] Australian Stock Exchange Corporate Governance Council, above n 114, 59.

[134] Ibid 60.

[135] The Institute of Chartered Accountants, Improving Corporate Reporting: A Shared Responsibility (2002) (published initially in August 2002 and subsequently revised and republished in May 2003) found that there was no evidence of endemic poor corporate governance in New Zealand.

[136] CathyQuinn, 'Corporate Governance Post-Enron', (Speech delivered at the Legal Teachers Forum, Hamilton, New Zealand, 8 July 2005). Cathy Quinn is a member of the New Zealand Securities Commission. The speech is available as at 14/09/2005 at <http://www.sec-com.govt.nz/speeches/cqs080705.shtml> .

[137] Minter Ellison Rudd Watts, Corporate Governance White Paper, 28 May 2003, 3. The report is available at <http://www.minterellison.com/publications.html> .

[138] Quinn, above n 136.

[139] L Miles, 'Recent Developments in Corporate Governance in New Zealand' (2004) 25 The Company Lawyer 246, 247.

[140] McIntosh v Fortex Group [1996] NZHC 1575; [1997] 1 NZLR 711 per Gallen J (HC), 713.

[141] Securities Commission, Report on an Inquiry into Aspects of the Affairs of Fortex Group Limited (in Receivership and in Liquidation) Including Trading in its Listed Securities, (1995) 15.

[142] Ibid 16.

[143] Fortex Group v McIntosh [1998] 3 NZLR 171 per Tipping J (CA), 173.

[144] Ibid 173.

[145] Ibid 171-172.

[146] Securities Commission, above n 141, 39-40.

[147] Ibid 121-122.

[148] [2004] 1 NZLR 256.

[149] G Shapira, 'Developing Corporate Governance Principles in New Zealand' (2004) 22 Company & Securities Law Journal 286, 286.

[150] Richmond Ltd v PPCS [2004] 1 NZLR 256, 286-287 per McGrath J.

[151] Ibid 266.

[152] Ibid 265.

[153] Ibid 266.

[154] Shapira, above n 149, 287.

[155] Including the Securities Act 1978, the Securities Markets Act 1988, the Takeovers Act 1993 and the Takeovers Code and the Financial Reporting Act 1993.

[156] Securities Act 1978, s 10.

[157] Memorandum of Understanding between the Securities Commission and NZSE Limited on regulatory co-operation (27 February 2003) Principal 4.1, 4.

[158] Companies Act 1993, s 128.

[159] Andrew Beck & Andrew Borrowdale, Guidebook to New Zealand Company and Securities Law, (7th ed, 2002) 59.

[160] Companies Act 1993, s 131(1). The duty requires directors to act in the best interests of the company, not in their own interests or those of any particular shareholder. The courts usually look to see whether the director's actions were based on reasonable grounds. Boardman v Phipps [1966] UKHL 2; [1967] 2 AC 46 (HL).

[161] Companies Act 1993, s 133. This involves an examination of the nature of the power, the limits of that power, and the substantial purpose for which it was actually exercised. A power that is exercised in the best interests of the company may still be one used for an improper purpose. Hogg v Cramphorn Ltd [1967 Ch 254.

[162] Companies Act 1993, s 137. Taking into account the nature of the company; the nature of the decision; and the position of the director and the nature of the responsibilities undertaken. The criteria are substantially objective. Directors are essentially required to be diligent, make inquiry and to understand their business.

[163] Companies Act 1993, s 135. This duty recognises that in certain situations the interests of the company and its shareholders may become divorced from the interests of its creditors. Although the duty is not owed to creditors, enforcement provisions where it is breached allow creditors to recover. Therefore, it does not matter that the risk to creditors was outweighed in the director's mind by the possible gain to shareholders. Fatupaito v Bates [2001] NZHC 401; (2001) 9 NZCLC 262,583. The test is an objective one; what should have been expected of an ordinary, prudent director in the same circumstances. Re Hilltop Group Ltd (in liq); Lawrence v Jacobsen (2001) 9 NZCLC 262,612.

[164] Companies Act 1993, s 136. The belief must be based on reasonable grounds at the time the obligation is incurred.

[165] Companies Act 1993, s 134.

[166] Companies Act 1993, ss131, 133-137.

[167] J H Farrar, 'Directors' Duties and Corporate Governance in Troubled Companies'[2001] CanterLawRw 6; , (2001) 8 Canterbury Law Review 99, 112.

[168] Although note that a voluntary administration regime is proposed in the Insolvency Law Reform Bill, see above n 86. For the Australian procedure see Corporations Act 2001, ss 435A-447A.

[169] In Australia see Corporations Act 2001, s 180(2). In the United States see Re Walt Disney Company Derivative Litigation 2005 WL 1875804 (Del.Ch.) above for a discussion of the business judgment rule.

[170] Farrar, above n 167, 110.

[171] [2001] NZHC 401; (2001) 9 NZCLC 262,583.

[172] Ibid 262,583.

[173] NZX Listing Rules, Rule 3.1.1.

[174] Ibid Rule 1.1.2. A disqualifying relationship is a direct or indirect interest that could have a material affect on the director's decisions in relation to the company. Where 10 per cent of the director's revenue is derived from the entity this will usually equate to a substantial portion of the director's income and disqualify them from independence. Independent directors must be identified as such.

[175] Ibid Rule 3.6.2. Audit committees members are required to directors of the company; the audit committee must have at least three members; a majority of those must be independent; and at least one director must have significant accounting or financial experience.

[176] Ibid Rule 3.6.3(f).

[177] Shapira, above n 149, 288.

[178] Ibid.

[179] NZX, Corporate Governance Best Practice Code ( 2003) 3.

[180] Ibid.

[181] Ibid 4-6.

[182] Pursuant to NZX Listing Rules, Rule 10.5.3(i).

[183] Securities Markets Amendment Act 2002, pt 2.

[184] S Franks, 'Corporate Governance Codes: Rules or Guidelines?', (2002) 4 Company and Securities Law Bulletin 29, 29.

[185] Ibid 30.

[186] Securities Commission, above n 118, 8.

[187] Securities Act 1978, s 10.

[188] Ibid 6.

[189] Ibid 9.

[190] Ibid 12. This includes a written code of ethics.

[191] Ibid 15.

[192] Ibid 19.

[193] Ibid 21.

[194] Ibid 24.

[195] Ibid 26.

[196] Ibid 31.

[197] Ibid 33.

[198] Shapira, above n 149, 289.

[199] Grantham, above n 14, 220.

[200] Ibid 221.

[201] In New Zealand in 2003 32.1 percent of New Zealand's listed companies were under majority (over 50 percent of capital held by one holder or tightly-group) control, 39.4 percent were under minority (an individual or small group of shareholders hold enough votes to dominate company affairs, by minority representation on the board) control, and 8.8 percent were under joint (aminority interest couple with a close association with management, essentially resulting in de facto control) control. In only 19.7 percent of New Zealand's listed companies was ownership so widely spread that no one shareholder or shareholder group could exercise effective control. Only in these cases is management in de facto control of the company. M A Fox & G R Walker' Corporate Control of NZX Companies' (2003) 21 Company & Securities Law Journal 538, 538-539.

[202] Grantham, above n 14, 223.

[203] J McConvill and M Bagaric, 'Why All Directors should be Shareholders in the Company: The Case Against Independence' (2004) 16 Bond Law Review 40, 43.

[204] M Jensen and W Meckling, ‘The Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure' (1976) 3 Journal of Financial Economics 305, 305.

[205] McConvill and Bagaric, above, n 203, 46.

[206] 825 A 2d 275 (Del. Ch. 2003).

[207] Ibid 51.

[208] Jensen and Meckling, above n 204, 30.

[209] Securities Commission, above n 118, 17.

[210] Grantham, above n 14, 224.

[211] Grantham, above n 14, 224.

[212] Ibid 224-225.

[213] [2004] 1 NZLR 256.

[214] Grantham, above n 14 , 222.

[215] Fox and Walker, above n 201.

[216] In 2003 the proportion of New Zealand listed companies under foreign control was 42.3 percent. Ibid 540.

[217] Quinn, above n 136.

[218] Shapira, above n 149, 291.

[219] Ibid.

[220] Securities Commission, 'The Bulletin', April 2004 27, 1. The Bulletin can be accessed at <http://www.sec-com.govt.nz/publications/bulletin/html> .

[221] R Birchfield, 'Corporate Governance; Private Thoughts - Is the Tide Turning?' (2005) New Zealand Management 70, 70.

[222] R Cameron, 'Evaluating Regulation of Corporate Governance: AShareholder Value Perspective', (Paper presented at the Legal Research Foundation Conference, Auckland, 18 February 2005) 3.

[223] Hunt, above, n 26, 1,13.

[224] Birchfield, above n 221, 70.

[225] Securities Commission, An Inquiry into the Performance by NZX of its Regulatory Functions as a Registered Exchange During 2003 and 2004 Prior to the Collapse of Access Brokerage (2005).

[226] J Segal, 'Corporate Governance: Substance Over Form' [2002] UNSWLawJl 24; (2002) 25 University of New South Wales Law Journal 320, 325.

[227] Organisation for Economic Co-Operation and Development, above n 1, 12.

[228] Sir Adrian Cadbury, above n 4.

[229] Grantham, above n 7, 257.