317 "Evidence On The Corporate Governanace Of New Zealand Listed Companies Mark A Fox and Gordon R Walker* Contents I. Introduction Corporate control Foreign control A. Introduction B. Foreign equity investment into New Zealand companies C. Foreign control of New Zealand listed companies D. Evidence from the New Zealand Stock Exchange Top 40 companies E. Reasons for increased foreign investment in New Zealand F. Advantages and disadvantages of foreign investment G. Conclusions II. III. IV. Institutional investment A. Introduction B. Types of institutional investors and their shareholdings MarkA. Fox M.Com. (Hans.) (Cant.) recently completed a Ph.D. in the Department of Management at the University of Canterbury. - Gordon R. Walker BA (Hans.), LLB (Hans.) (Otago); Dip. Ed., LLM (Adel.); MBA (Syd.) is a Senior Lecturer at Canterbury University School of Law. We acknowledge the assistance of Matthew Roy (Business Policy Division, Ministry of Commerce, Wellington) and Sam Mellor in obtaining some of the data contained in this article. Thanks to Dr. James Allan of Otago University School of Law, Professor James D. Cox of Duke University School of Law and Dr Geof Stapledon of Melbourne University School of Law for reactions to earlier drafts of this article. All errors remain the responsibility of the authors. This article draws on, and adds to, previous research by the writers and others including: G. Walker and M. Fox, "Securities Regulation and New Zealand Sharemarket Patterns, 1989-1993" (1994) 5 Journal of Banking Finance Law and Practice 244; M. Fox, M. Roy and G. Walker, "Interlocking Directorships in New Zealand Publicly Listed Companies" (1994) 12 Company and Securities Law Journal 331; M. Fox and G. Walker, "Institutional Investment in New Zealand Publicly Listed Companies" (1994) 12 Company and Securities Law Journal 467; M. Fox and G. Walker, "Ownership Structure of New Zealand Stock Exchange Top 40 Companies" (1994) 12 Company and Securities Law Journal 529; M. Fox, M. Roy and G. Walker, "Corporate Control of New Zealand Publicly Listed Companies, 1962 to 1993" (1995) Company and Securities Law Journal 73; M. Fox and G. Walker, "Board Structure of New Zealand Public Listed Companies" (1995); 13 Company and Securities Law Journal 400; Fox, M.A., Studies of Corporate Governance in New Zealand (Unpublished Ph.D. thesis, Department of Mq.nagement, University of Canterbury, 1995) and G. Walker and M. Fox, "Globalization: An Analytical Framework" (1996) 3 Indiana Journal of Global Legal Studies (forthcoming). 318 Otago Law Review (1995) Vol 8 No 3 1. Insurance companies 2. Banks 3. Bank nominee companies 4. Superannuation, retirement fund and trustee company shareholders C. Implications for corporate governance D. Conclusions V. Board structure A. Introduction B. Changes in board structure in New Zealand 1. Outside directors 2. CEO duality and executive board chairs 3. Board size C. Conclusions VI. Interlocking directorships A. Introduction B. Distribution of multiple directorships C. Distribution of company and director interlocks D. Comparison with recent Australian findings E. Conclusions VII. Conclusions I. Introduction This article considers and adds to research on corporate governance in New Zealand listed companies. We present quantitative evidence on corporate control, foreign control, institutional investment, board structure and interlocking directorships. The evidence has implications for a range of contemporary legal issues in New Zealand such as corporate governance, foreign investment, takeovers and securities regulation. In this regard, the article is intended to provide an intellectual foundation for subsequent analyses. It is not the primary purpose of this article to tease out implications although some observations are made. Some of our findings are consistent with international experience, namely a rise in institutional investment and increasing institutional activism. Other findings appear specific to New Zealand. For example, we find an increase in the proportion of majority controlled companies! in New Zealand and a decrease in company and director interlocks. 2 The main reasons for these phenomena Majority controlled companies are those in which the major shareholder owns over 50 per cent of issued voting capital. Company interlocks are the number of companies with which a company has common directors. Director interlocks are, for any given compan~ the number of board positions its directors hold on other boards. Corporate Governance 319 are likely to be associated with deregulation in New Zealand and the sharemarket "crash" of 1987. Observable increases in foreign equity investment and foreign control of New Zealand listed companies require more complex explanation. In brief, however, these phenomena can be regarded as a product of international processes such as deregulation of capital flows, increasing institutional investment and domestic economic reform. 3 II. Corporate Control It is often argued that, in the modern corporation, the ownership of shares is so widely spread that management can pursue their own interests unchecked by shareholders. Symptoms of management's alleged pursuit of self-interest are believed to include conglomerate building and excessive salaries and perks. 4 An early expression of the notion that managers may not act in the best interests of shareholders was proposed by Adam Smith in the Wealth of Nations: The directors of [joint stock] companies, however, being the managers of other people's money than their own, it cannot be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.s In contrast to this cynical view of managerial behaviour, a more charitable view of managerial behaviour is given by stewardship theory, which proposes that, " ... the executive manager, far from being an opportunistic shirker, essentially wants to do a good job, to be a good steward of the corporate assets".6 This view has recently gained some empirical support in the New Zealand context? In this section we address the issue of management versus owner control of New Zealand listed companies. Specifically, we focus on the extent to which shareholders in New Zealand's listed companies are likely to have the ability to influence the actions of management. On this point see the sources cited in G. Walker, "The Policy Basis of Securities Regulation in New Zealand" in G. Walker and B. Fisse, eds., Securities Regulation in Australia and New Zealand (1994), 171, 186, fn 8. A recent account isM. Clifford, "New Zealand's Racy Economy" Far Eastern Economic Review, July 13, 1995, 70. B. Dumaine, "A Knockout Year for CEO Pay" (1994) 130(2) Fortune 136; Y. Amihud and B. Le\', "Risk Reduction as a Managerial Motive for Conglomerate Mergers" (1981) 12(2) Bell Journal of Economics 605. A. Smith, The Wealth ofNations (1776), cited in H. Hunt, "The Separation of Ownership and Control: Theory, Evidence and Implications" (1986) 5 Journal of Accounting Literature 85. L. Donaldson and J. Davis, "Stewardship Theory or Agency Theory: CEO Governance and Shareholder Returns" (1991) 16(1) Australian Journal of Management 49. M. Fox and R. Hamilton, "Ownership and Diversification: Agency Theory or Stewardship Theory" (1994) 31(1) Journal of Management Studies 69. 320 Otago LaIL? Review (1995) Vol 8 No 3 Previous studies of corporate control in New Zealand have, with the exception of Firth,S used the classification scheme devised by Fogelberg. 9 That scheme classifies companies listed on the New Zealand Stock Exchange (NZSE) according to the degree of control of those owning voting shares. Under the scheme, companies are given one of four control classifications: nzajority, n1illority, joint, or nzanagemen t. Each of these four types of control is seen to represent different stages in the detachment of ownership from management control (refer to Table 1). At one extreme, majority control represents a situation where there is a major shareholder (or group of shareholders) that holds an unassailable position in terms of control of a company. At the other extreme, management control represents a situation where shareholdings in a company are so widely dispersed as to ensure that no individual shareholder can exercise control in the direction of the company. The most recent study is by Fox and Roy and looks at corporate control in 1985, 1990 and 1993. 10 Table 2 summarises the results of this and previous studies. TABLE 1 Classification of control types ll Classification Majority Minority Deemed to exist when: Majority of capital (over 50%) held by one holder or a tightly-knit group. An individual or small cohesive group of shareholders hold sufficient votes to be able to dominate the company through their interest. Exists where there is an important minority interest or family group accounting for between 15 to 50% of the votes, where this minority interest is represented on the board. Joint Minority interest strengthened by a close association with management, or management control enhanced by a sizeable minority interest. One of two situations may apply. Either: · owning a minority interest of 10-15% coupled with board representation, or · owning or controlling a minority interest of more than 5% with board representation and active management involvement. Management Ownership is so widely distributed that no one individual or group has a minority interest which is large enough to allow them to exert dominance over the company's affairs. Corporate Governance 321 TABLE 2 Control types of New Zealand listed companies, 1962 to 199312 1962 13 1974 14 1981 15 1985 1990 1993 Control classification Majority Minority Joint Management No. 7 14 5 17 43 % 16.3 32.6 11.6 39.5 No. 3 13 6 21 43 I % 7.0 30.2 14.0 48.8 No. 45 78 19 62 204 % 22.1 38.2 9.3 30.4 No. % 54 37.8 69 48.3 No. 73 52 4 I % 54.5 38.8 3.0 3.7 No. 58 48 7 3 % 50.0 41.4 6.0 2.6 10 7.0 10 143 7.0 5 No. of companies 1 134 - ~~ Two previous studies have interpreted changes in ownership leading up to 1985. 16 The first, conducted by Fogelberg, examined the 43 largest surviving NZSE companies listed between 1962 and 1974. Of these companies, Fogelberg commented, " ... by the early 1960s there had been a substantial movement towards management control. During the next 12 years this movement continued, 13 firms moved either directly or more closely towards management control." 17 If we conduct a chi-square test on all the available data (as given in Table 2) we do find some significant differences in control classifications by year (refer Table 3). Interestingly - and in contrast to our expectations from Fogelberg's comments - no statistically significant change in the proportion of companies having various control classifications took place between 1962 and 1974. 10 11 12 13 14 15 16 17 M. Firth, "Control-Type and the Financial Structure and Performance of New Zealand Firms" (1992) 26(2) New Zealand Economic Papers 1. G. Fogelberg, "Ownership and Control in 43 of New Zealand's Largest Companies" (1980) 2 New Zealand Journal of Business 54. M. Fox and M. Roy, "Corporate Control and Foreign Ownership of New Zealand Listed Equities" (1994) 1(2) New Zealand Strategic Management 24. Derived from Fogelberg, op cit, at 61-64. Our 1985, 1990 and 1993 samples comprise 66, 94 and 89 per cent respectively of all listed companies in each of these years. Fogelberg, op. cit. Ibid. R. Chandler and B. Henshall, "Corporate Directorship Practices in New Zealand Public Listed Companies" Research Paper No.1 (Department of Business Administration, Victoria University of Wellington, 1974). Fogelberg, op. cit.; Fox and Hamilton, op. cit. Fogelberg, op. cit., 55. 322 Otago Law Review (1995) '1018 No 3 TABLE 3 Chi-square statistics for differences in distribution of control categories between adjacent years 1962-74 1974-81 1981-85 1985-90 1990-93 Majority Minority Joint Management 2.29 0.07 0.20 0.94 3.50 66.51 4.32 3.15 14.21 88.19* 15.99 3.75 0.83 25.76 46.33* 9.92 2.48 3.08 2.04 17.51* 0.43 0.20 3.61 0.41 4.65 j Chi-square statistic (3 dof) I *significant at .001 level We find that the first major changes in corporate control occurred between 1974 and 1981. Between these two years we observe a significant difference in the proportion of majority and management controlled companies. We also find a higher proportion of majority controlled companies in 1981 and a lower proportion of management controlled companies in the same year. The 1981-85 period saw further significant changes in the distribution of companies among different control categories. Compared to 1981, in 1985 there was a greater proportion of listed companies in the majority and minority categories. Furthermore there were significantly fewer companies in the management controlled category in 1985 as compared to 1981. The changes highlighted above are consistent with Fox and Hamilton's comment that, " ... by 1981 there had been a big rise in the proportion of majority controlled companies and a roughly equivalent fall in the proportion of management controlled companies (as well as consistent if less marked shifts in the minority and joint categories). These changes continued on through to 1985."18 The 1985-90 period also saw a difference in the proportion of companies having majority control, with a greater proportion observable for 1990. There was no significant change in the distribution of firms by control classifications between 1990 and 1993. In summary, we conclude that, over the period from 1962 to 1993, there has been a significant shift to majority control among New Zealand listed companies. By 1993, 50 per cent of our listed companies were majority controlled. This increase in majority controlled companies has taken place along with a decline in the proportion of our companies that are management controlled. Fogelberg's 1980 study found that 39.5 per cent of the 43 largest companies in the year 1962 were management controlled. In contrast, by 1993 only 2.6 per cent of all listed 18 Fox and Hamilton, op. cit., 74. Corporate Governance 323 companies were management controlled. A significant increase in the proportion of minority controlled companies is also evident over the 1962 to 1993 period, as is a significant decrease in the proportion of listed companies having joint control. From the preceding analysis, we conclude that there is little evidence of a "managerial revolution" in terms of the control of New Zealand listed companies. In fact, the reverse is the case, with companies coming increasingly under the control of major shareholders. Hence, it is unlikely that there will be scope for managers to pursue actions which are not in the best interests of shareholders. In the event that managers do pursue actions which are not in the interests of major shareholders then, given the high degree of control exhibited by these shareholders, it is likely that moves will be taken to align management's actions with those desired by shareholders. III. Foreign Control A. Introduction This section investigates the extent of foreign control of New Zealand listed companies. The evidence has relevance for an assessment of the benefits and potential negative consequences that foreign control can have for investors on the New Zealand sharemarket and for corporate governance. The structure of this section is as follows: first, foreign equity investment into New Zealand between 1989 and 1994 is examined; second, foreign control of New Zealand listed companies is analysed. Evidence that foreign control has increased is supported by a study of the NZSE Top 40 companies. The final part of this section considers why this increase has occurred and the consequences of foreign investment in New Zealand listed companies. B. Foreign Equity Investment into New Zealand Companies There has been a significant increase in foreign equity investment in New Zealand in recent years. Statistics New Zealand reports that foreign equity investment was $9.8 billion in the year to March 1989 but increased to $28.0 billion for the year to March 1994. This is an increase of some 186 per cent (refer Table 4). The data for foreign direct investment (FDI) in New Zealand companies is particularly interesting. 19 FDI increased from $8.4 billion in 1989 to $26.5 billion in 1994, an increase of some 215 percent (refer Table 4). In contrast, portfolio investment - which is non-direct investment in, for example, stocks and bondsdeclined from $1.4 billion in 1989 to $0.9 billion in 1992; a decline of some 38 per cent. However, portfolio investment has significantly increased between 1992 19 Direct investment is any investment made to acquire 25 per cent or more of the voting shares in a company, the purpose of the investment being to gain a voice in the management of the company. Also see, K. McConnell and G. Walker, "Foreign Direct Investment in New Zealand" in G. Walker and B. Fisse, eds., Securities Regulation in Australia and New Zealand (1994), 191. 324 Otago Law Review (1995) Vol 8 No 3 and 1993, but dropped again for the year ending March 1994. From this analysis it is apparent that changes in equity investment have increasingly resulted in foreign investors gaining some form of control of New Zealand companies. TABLE 4 Foreign equity investment in New Zealand companies ($NZ millions) 1989 Direct Investment Portfolio Investment 8412 1378 9790 I 1990 12293 1 561 13854 1991 13294 1 766 15060 1992 17750 850 18600 1993 21035 2483 23518 I 1994 26494 1532 28026 I Total Source: Statistics New Zealand, Hot off the Press (1995). C. Foreign Control of New Zealand Listed Companies Having noted - in section II of this article - an increase in ownership concentration among listed companies and, above, a general increase in foreign equity investment in recent times, we decided to investigate the extent to which increase in ownership concentration is a result of increasing foreign investment. With this in mind data were collected on foreign ownership for those companies that were in our original control classification samples for the years 1985, 1990 and 1993. This simply involved identifying whether or not the controlling shareholder(s) in terms of Fogelberg's classification scheme (as given in Table 1) were of local or foreign origin. Information on the country of origin for controlling shareholders was obtained from annual reports and the relevant editions of the Directory of Shareholders New Zealand Public Listed Companies. Table 5 shows data collected on foreign control of New Zealand listed companies for the years 1985, 1990 and 1993. From this table, we observe that there has been a significant increase in foreign control of New Zealand listed companies between 1985 (when 16.8 per cent of all listed companies were foreigncontrolled) and 1993 (when 39.7 per cent of listed companies were foreigncontrolled). Two chi-square tests confirm that major changes in foreign versus domestic control of listed companies occurred within our control categories. For the first chi-square test, we find that there is a significant difference in the distribution of companies among control categories for 1990, compared to what we expect from the 1985 data. 20 We also find a comparable change for companies listed in 1993, compared to what we expect from the 1990 data. 21 20 21 Chi-square statistic=52.65; 5 degrees of freedom; significant at alpha=0.005. Chi-square statistic=30.28; 5 degrees of freedom; significant at alpha=0.005. Corporate Governance 325 TABLE 5 Foreign control and ownership types of New Zealand listed companies: 1985, 1990 and 1993 1985 Total 1990 Total 1993 Total Foreign controlled Foreign controlied/ total C;;,) Foreign controlled Foreign controlled/ total (r;~) Foreign controlled Foreign controlled/ total (%) Majority Minority Joint Management 18 6 0 0 24 I 54 69 10 10 143 I 33.3 8.7 0 0 16.8 21 12 0 0 33 73 52 4 5 134 28.8 23.1 0 0 24.6 I 31 14 1 0 46 I 58 48 7 53.4 29.2 14.3 0 39.7 3 116 Totals From Table 5 we observe several major changes in foreign control. First, between 1985 and 1990 foreign controlled companies having the minority control classification rose from 8.7 per cent to 23.1 per cent of all companies examined. Also, between 1990 and 1993 the percentage of all companies having the majority control classification rose from 28.8 per cent to 53.4 per cent. During this later period foreign minority controlled companies increased from 23.1 to 29.2 per cent and foreign joint controlled companies increased from zero to 14.3 per cent. D. Evidence from the New Zealand Stock Exchange Top 40 Companies The evidence presented above is supported by an examination of foreign ownership of equity in NZSE Top 40 companies. The sample comprises the largest 40 companies on the NZSE, in terms of market capitalisation at seven points in time, starting in December 1989 and ending in September 1993. Shareholder data for the top 40 shareholders of each Top 40 company was examined to classify investors as either local institutions, overseas institutions, local companies, overseas companies, or Employee Share Ownership Plans (ESOPs). A further classification of other was given to private investors who were in the Top 40 list of shareholders and all investors that did not make the Top 40 list of shareholders. When interpreting the data this means that the other category is likely to be overestimated and all other categories underestimated. 326 Otago Law Review (1995) Vol 8 No 3 TABLE 6 Ownership structure of the New Zealand sharemarket, 1989 to 199322 Type of Investor Local institutions Overseas institutions Local Corporates ESOPs Overseas Corporates Other Dec 14 24 10 4 20 28 March 15 25 9 4 19 28 Sept 17 27 7 3 16 30 Dec 16 10 21 4 9 40 March 14 17 15 8 6 40 Aug 12 22 11 4 20 31 March 12 23 11 4 20 30 Totals Institutions Corporates Overseas 26 30 19 31 21 23 34 31 42 35 31 43 38 40 44 40 28 44 44 23 43 The Top 40 list of shareholders was provided by Datex Services Ltd and was drawn directly from information held by the share registrars of each company. Table 6 shows the ownership structure of the sample between December 1989 and September 1993. With regards to foreign ownership, note that between December 1989 and September 1993 there was an increase in average overseas investment from 19 per cent per company to 43 per cent. Furthermore: · · total institutional investment rose significantly over the period, from 26 to 44 per cent between December 1989 and March 1992, local institutions reduced their holdings from 16 to 12 per cent, but this group increased their holdings after March 1992 (to 17 per cent in September 1993) overseas institutions significantly increased their holdings (from 10 to 27 per cent) total corporate investment declined significantly between December 1989 (30 per cent) and March 1991 (21 per cent), increased significantly to December 1992 (40 per cent) and has since dropped (to 23 per cent in September 1993) local corporates significantly reduced their holdings, from 21 to 7 per cent · · · We observe from the above that, while overseas investment in Top 40 companies rose significantly over the period of interest, much of this change is attributable to institutional as opposed to corporate investors. 22 Taken from Ownership Structure ofthe New Zealand Stockmarket (March 1991; September 1993), Doyle Paterson Brown Ltd. Note that the Totals categories overlap and therefore do not add to 100%. Corporate Governance 327 A further study by Gaynor in 1993 confirms the observed trend towards increased foreign control of New Zealand listed companies. 23 Gaynor found that overseas investors owned 4.2 per cent of the New Zealand stock market (in terms of market capitalisation) in December 1986, compared to 30 per cent in December 1992. 24 E. Reasons for Increased Foreign Investment in New Zealand It is instructive to ask why the observed increase in foreign investment in New Zealand listed companies has taken place. The main reason relates to the process of economic deregulation which has taken place in New Zealand, a process which started in 1984, under Sir Roger Douglas, the then Minister of Finance. Economic deregulation has resulted in New Zealand moving from one of the, " ... most regulated societies in the free world, to the world's freest market economy".25 Deregulation, and in particular the Employment Contracts Act 1991, has made New Zealand companies more competitive and has drawn the attention of foreign investors. 26 New Zealand's manufacturing sector is now seen to be " ... on average, 15 per cent more competitive than those of its major trading partners and 30 per cent more cost advantageous over its leading trade partner, Australia".27 New Zealand's current Foreign Direct Investment (FDI) regime has been described as, " ... very liberal [with there being a] lack of restrictions on capital inflows" .28 From a policy viewpoint, high levels of overseas debt have led various governments to encourage FDI. As Colgate and Featherstone write: ... the combination of low economic growth and relatively small domestic capital markets makes FDI an attractive option to help fund investment growth. Second, FDI provides an alternative to the use of debt to finance ~~ew Zealand's persistent current account deficits, and could therefore be seen as part of a strategy to reduce overseas debt ratios to more acceptable levels. 29 Another major factor that has led to increased foreign investment in New Zealand is the increasingly global nature of investnaent by funds managers, especially, by fund managers in the U.S. This diversification of global investment 23 24 25 26 27 28 29 B. Gaynor, "How to Ensure Better Protection for Shareholders" (1993) Proceedings: New Zealand Law Conference 49. Id., 50. S. Passow, "New Zealand: An Economic Turnaround Lays the Foundation for Investment" (1992) 26(8) Institutional Investor 5. See also Far Eastern Economic Review, Asia 1995 Yearbook (1995), 180. Anon, "Southward, look, the pi e ratios are low" The Economist, September 18, 1993, 76. Passow, op. cit., 5. F. Colgate and K. Featherstone, Changing Patterns of Foreign Direct Investment in the Pacific Region: New Zealand Country Paper (NZIER, 1992),2. The Overseas Investment Amendment Act, 1995 extends this trend. Ibid. 328 Otago Law Review (1995) Vol 8 No 3 has occurred for several reasons, namely: the increasing attractiveness of countries in Asia for investment; the increasing size of pension funds in the United States30 and a stagnant North American economy. The increasing international exposure of some large New Zealand companies has led to an improved international awareness of New Zealand as an investment destination. Some of New Zealand's largest companies are listed on overseas exchanges. For example, the shares of Brierley Investments Limited are also traded on the Australian and London stock exchanges and Fletcher Challenge Ordinary Division shares are traded on the Australian, London, Toronto, Montreal, Vancouver and Frankfurt stock exchanges. In particular the listing of Telecom Corporation of New Zealand locally and internationally (Telecom is also listed on the Australian and New York stock exchanges), and the high profile acquisition of a major stake in this company by two large U.S. telecommunications companies - Ameritech and Bell Atlantic - increased awareness among international investors of New Zealand as an investment destination. New Zealand has also become increasingly appealing to foreign investors because of our General Agreement on Tariffs and Trade (GATT) exposure. Our agricultural industry is seen to be the most competitive in the world and therefore New Zealand is seen to be in a position to benefit greatly from increased international trade liberalisation under GATT. Finally, the increase in the number and size of unit trusts internationally has led to more funds being invested globally. F. Advantages and Disadvantages of Foreign Investment31 The major benefit of increased foreign investment relates to the ease with which New Zealand listed companies can raise equity. Raising initial finance is seen to be particularly difficult in New Zealand, because the country suffers from endogenous capital constraints. 32 Take, for example, the following observations: New Zealand lacks much of the financial expertise and advanced specialised capital markets that have helped industry in other nations. 33 and 30 It is estimated that funds invested in pension funds today equal funds invested in 31 32 33 savings, whereas ten years ago savings were approximately 10 times higher than pension fund investments. There is a general review of the advantages and disadvantages of foreign investment in K. McConnell and G. Walker, op. cit., 194-197. See, generally, G. Walker, 1994, op. cit.; M. Fox and G. Walker, "Sources of Funding for Small and Medium Sized Companies in New Zealand" [1994] New Zealand Law Journal 421. G. Crocombe, M. Enright and M. Porter, Upgrading New Zealand's Competitive Advantage (1992), 111. Corporate Governance 329 Large and sophisticated capital markets by definition offer a broad range of sources of debt and equity funding. The New Zealand market, however, is limited in size. Consequently, a small company seeking capital can soon eliminate possible sources which a large market might be willing, due to competitive pressures, to accept [at] higher levels of risk. 34 The problem of raising initial finance is particularly noticeable for large raisings. This problem was mentioned by Crocombe, Enright and Porter who commented, " ... limited capital availability in New Zealand constrains business development and economic growth. Lenders and investors have limited amounts of capital to invest" .35 It is beneficial for New Zealand listed companies, and in particular large listed companies, to be able to raise equity through share placements to foreign investors. A further benefit of foreign ownership relates to the liquidity of shares - the ease with which shares can be purchased and sold. Liquidity obviously increases as more investors are involved in trading on the New Zealand Stock Exchange. Foreign investors may bring management expertise to bear on the New Zealand companies in which they invest, leading to improved performance. Carter Holt Harvey Limited is an example where the management expertise of a new foreign shareholder (the North American company, International Paper), was instrumental in restructuring and improving corporate performance. International Paper appointed one of their senior executives, David askin, as Carter Holt's new Chief Executive Officer. In addition to Mr. askin, two International Paper directors were appointed to Carter Holt's board of directors. Access to technology is another area where New Zealand companies can benefit from foreign ownership. For example, Milburn New Zealand is changing from coal to waste oil fuelled furnaces. This change was brought about through an association with Milburn's major shareholder, a Swiss company. This move is expected to improve Milburn's profitability. The most disconcerting aspect of increased foreign investment is the possibility that capital flight may occur. Foreign investors may liquidate their holdings in New Zealand companies because of local events, such as perceived political uncertainty under an Mixed Member Proportional Representation (MMP) electoral system. 36 The first MMP election will be held in or before November 1996. In discussing MMP, ANZ McCaughan, Stockbrokers, note that "[t]he general consensus is that New Zealand's country risk premium has risen as a consequence of electoral uncertainty" .37 34 35 36 37 Coopers & Lybrand, Factors Affecting the Supply of Capital for Small Company Growth (1993),38. G. Crocombe, M. Enright and M. Porter, op. cit., 114.. The system is described in A. McRobie, "The Electoral System" in P. Joseph, ed., Essays on the Constitution (1995),312. See also M. Chen, "The Introduction of Mixed Member Proportional Representation in New Zealand - Implications for Lawyers" (1994) 4 Public Law Review 104. ANZ McCaughan, MMP: The Changing Face of lVew Zealand Politics (Research Department, ANZ McCaughan Securities Limited, November 1994), 2. See also, G. Walker, "Capital Shortage - Implications for New Zealand" (1995) 13 Company and Securities Law Journal 342. 330 Otago Law Review (1995) Vol 8 No 3 There is some evidence that foreign investors will react differently to political instability depending on the industry or industries in which they invest. 38 Hence, the extent to which perceived political instability has negative consequences for New Zealand companies is likely to reflect the perceived impact on the industries in which these companies operate. International events may also prompt capital flight. For example, relative returns in other investment destinations may become more appealing than returns available in New Zealand. Capital flight would have a major detrimental effect on New Zealand companies and New Zealand investors. It is estimated that approximately half the equity in New Zealand listed companies is foreign owned. If a significant proportion of this were liquidated, share prices could drop until local investors entered the market. These concerns are highlighted by Brian Gaynor's comment: "If the trend towards increasing overseas investment continues ... the New Zealand sharemarket will then become increasingly vulnerable to any changes in perception of New Zealand by overseas investors."39 By far the most controversial aspect of foreign investment is the possible effects on the sovereignty of New Zealand as a nation caused by overseas investors. 4o Concerns over sovereignty invariably relate to listed companies in which New Zealanders, through an ownership stake held by the government, have an interest. In recent times, two such companies were the Bank of New Zealand, which was taken over by National Australia Bank, and Telecom, in which two American companies acquired a substantial interest. Objections to foreign ownership in such cases can be made on grounds that foreign ownership leaves the government "with less options in dealing with the control of the economy", 41 that it leaves New Zealand open to exploitation by foreign companies or countries, and that it may result in the loss of employment for New Zealanders. The prospect of the abuse of New Zealand's resources is another possible negative consequence of foreign ownership. For example, if an international company with a controlling interest in a New Zealand forest were pushed for cash then it might cut down forests before optimal logging time and sell logs rather than process the logs further in New Zealand. Finally, foreign investors may use their ownership in New Zealand companies to provide them with leverage to exploit New Zealand as a market, leading to increased imports and a decline in the trade balance. A concomitant potential harm of foreign ownership involves research and development. Foreign investors may not to do their research and development in New Zealand. 38 39 40 K. Fatehi and M. Safizadeh, "The Effect of Sociopolitical Instability on the Flow of Different Types of Foreign Direct Investment" (1994) 3(1) Journal of Business Research 65. B. Gaynor, op. cit., 50. This is a matter of increasing political concern in New Zealand. See, for example, B. Ansley, "Rolling out the Red Carpet" New Zealand Listener, May 13, 1995, 18. Corporate Governance 331 G. Conclusions The evidence presented demonstrates a significant increase in foreign control of New Zealand listed companies over recent years. In particular, the ownership of equity in listed companies by overseas institutions has increased markedly. These changes in the ownership of New Zealand listed companies have occurred primarily as a by-product of economic deregulation and have resulted in several obvious benefits to New Zealand investors and companies alike. The benefits of foreign investment to New Zealand listed companies appear substantial. There are, however, several potential negative consequences, foremost among which is capital flight. This should not be a concern as long as New Zealand companies continue to perfOrlTI well in comparison with investment targets in other countries. IV. Institutional Investment A. Introduction In the previous section we discovered that institutional investors have increased their influence in New Zealand listed companies over recent years. However, institutional investors are not an homogenous group. In fact, there are different types of institutional investors. In this section we explore the influence of these different types of institutional investors in New Zealand listed companies. In so doing, we provide a New Zealand comparison with Ramsay and Blair's 1993 study of institutional investment and ownership concentration in a random sample of 100 Australian companies listed on the All Ordinaries Index. 42 The New Zealand data was assembled by Fox and Walker in 1994. 43 As regards methodology, we followed the same procedure as Ramsay and Blair. 44 Data was obtained from the Directory of Shareholders New Zealand Public Listed Companies 1994. This publication lists the major shareholders of New Zealand listed companies as of January 1994. The samlple comprised a total of 127 companies who had ordinary shares listed on the New Zealand Stock Exchange. For each company we recorded the percentage of ordinary shares held by each of the top 20 shareholders. Following identification of the top 20 shareholders, we noted which of these shareholders could be classed as institutions. Institutional investors were classed 41 42 43 G. Kelly, New Zealand Parliamentary Debates (1992),527, 10165. I. Ramsay and M. Blair, "Ownership Concentration, Institutional Investment and Corporate Governance: An Empirical Investigation of 100 Australian Companies" (1993) 19 Melbourne University Law Review 153. For some implications of these findings, see, J. Hill and I. Ramsay, "Institutional Investment in Australia: Theory and Evidence" in G. Walker and B. Fisse, eds., Securities Regulation in Australia and New Zealand (1994), 289. M. Fox and G. Walker, "Institutional Investment in New Zealand Publicly Listed Companies" (1994) 12 Company and Securities Law Journal 470. Ramsay and Blair, op. cit. 332 Otago Law Review (1995) Vol 8 No 3 as either: banks, bank nominee shareholders,45 insurance companies, or superannuation, retirement fund and trustee company shareholders. As with Ramsay and Blair, we also noted occurrences of institutions holding between 5 and 10 per cent of shares, or holding more than 10 per cent of shares. 46 In the following section we discuss our findings with regards each type of institutional investor. B. Types of Institutional Investors and their Shareholdings 1. Insurance Companies Table 7 shows our results fOf insurance company shareholders. This type of institutional investor was observed to be listed a total of 52 times amongst the five major shareholders of all 127 companies (i.e., among 635 shareholding positions). This equates to 8.2 per cent of the observed shareholding positions. This contrasts with Ramsay and Blair, who found that insurance companies were listed 74 times amongst ,the largest 5 shareholders in their Australian sample i.e., 14.8 per cent of the observed shareholding positions. It appears that insurance companies are more prevalent among the largest shareholders of Australian as compared to New Zealand positions. Furthermore, the ownership stakes of insurance companies in Australian listed companies are larger than those of New Zealand listed companies. In our sample of 127 companies, we only found 7 occurrences where insurance companies held between 5 and 10 per cent of shares. In contrast, Ramsay and Blair found 38 such occurrences in their sample of 100 companies. In looking at insurance companies with over 10 per cent of shares we only found two such cases, whereas Ramsay and Blair found 12 in their sample. From Table 7, we note that four insurance companies, namely Colonial Mutual, National Mutual, Norwich Union and NZI Corporation, hold noticeably more dominant positions in listed companies than do any other insurance companies. 45 46 Bank nominee companies hold shares on behalf of clients in the same manner as do, for example, nominee companies of stockbroking firms. As an aside, we also noted the ownership concentration for the top 5, top 10 and top 20 shareholders. We found that the largest 5 shareholders held on average 61 per cent of issued shares. The 10 largest shareholders held 68 per cent and the 20 largest shareholders held 73 per cent. These figures for the largest 5 and largest 10 shareholders are higher than those found in Ramsay and Blair's sample of 100 Australian companies. They found that the 5 largest shareholders held 54 per cent; the 10 largest held 64 per cent and the 20 largest held 72 per cent. Corporate Governance 333 TABLE 7 Insurance company shareholders I~---I~ Number of times company is listed in the five largest shareholders Number of times company holds between 5 and 10% of shares 2 Number of times company holds more than 10% of shares Colonial Mutual Life Assn National Mutual Life Assn Norwich Union Life Inc Tower AMP Society NZI Corp Sun Alliance Life Guardian Royal Exchange Assn Oceanic Life Ltd Prudential Assn All others (8 companies) 9 0 0 0 0 0 2 10 10 5 4 1 1 1 2 7 4 0 0 0 0 0 0 0 0 0 2 0 1 1 1 52 Total 1= 0 0 7 2. Banks Ownership of equity in New Zealand listed companies by banks is limited (refer Table 8). This is primarily because the Reser~e Bank Act 1989 discourages banks from having substantial shareholdings (under the Act equities owned by New Zealand registered banks are deducted from the bank's equity in determining the bank's capital ratio). TABLE 8 Banks as shareholders Number of times company is listed in the five largest shareholders Number of times company holds between 5 and 10% of than 10% of Number of times company holds more shares shares Bank of New Zealand National Bank of NZ National Bank of Aust Westpac Banking Corp 1 4 0 2 1 1 0 1 3 1 1 7 0 0 2 Total 334 Otago Law Review (1995) Vol 8 No 3· 3. Bank Nominee Companies Table 9 shows our New Zealand results for bank nominee companies. An important point with regard to the interpretation of data such as that presented in Table 9 is made by Ramsay and Blair who caution that, " ... there is an issue as to whether bank nominee companies can be classified as institutional investors. This is because bank nominee companies are an aggregation of a diverse range of individual and institutional investors."47 For our sample of 127 New Zealand companies we found bank nominee shareholders were represented a total of 175 times among the largest 5 shareholders i.e., they represented 27.6 per cent of the top 5 shareholder positions examined. In contrast, Ramsay and Blair found 169 occurrences of bank nominee shareholders among 500 shareholding positions, or 33.8 per cent of positions examined. Bank nominee companies were also seen to be more likely to have shareholdings of between 5 and 10 per cent (57 occurrences for New Zealand sample vs. 70 occurrences for Australian sample). However, New Zealand bank nominee companies were more likely to hold over 10 per cent of shares (42 occurrences) compared to Australian bank nominee companies (29 occurrences). TABLE 9 Bank nominee shareholders Number of times company is listed in the five largest shareholders Number of times company holds between 5 and 10% of shares Number of times company holds more than 10% of shares ANZ Bank Ltd Nominees Austraclear Bank of NZ Nominees CBA Nominees Chase Manhattan Nominees Citibank NZ Nominees Hong Kong and Shanghai Bank Nominees National Aust Bank Nominees Westpac Bank Nominees 63 56 7 0 1 2 4 26 18 2 0 0 0 2 8 16 0 0 0 0 1 35 7 175 9 0 57 16 1 42 Total 47 Ramsay and Blair, op. cit., 185. On this point see also G. Stapledon, "The Structure of Share Ownership and Control: The Potential for Institutional Investor Activism" (1995) 18 University of NSW Law Journal 250 at fns. 31-37. Corporate Governance 335 4. Superannuation, Retirement Fund and Trustee Company Shareholders Table 10 shows the New Zealand results for superannuation, retirement fund and trustee company shareholders. Such institutional shareholders were represented a total of 11 times among the 5 largest shareholders of all 127 companies, i.e., they comprised only 1.7 per cent of the positions analysed. This contrasts notably with Ramsay and Blair's study where such c9mpanies were listed a total of 20 times, i.e., represented 4 per cent of positions analysed. For our New Zealand sample, no institutional investor of this category held 5 per cent or more of shares. By contrast, Ramsay and Blair found 6 cases in Australian companies where institutional investors held between 5 and 10 per cent of shares. TABLE 10 Superannuation, retirement fund and trustee company shareholders Number of times company is listed in the five largest shareholders Number of times company holds between 5 and 10% of shares Number of times company holds more than 10% of shares Westpac Superannuation Nominees Superannuation Investments Ltd Colonial Mutual Superannuation 8 a a a a 2 1 2 a a 2 Total 11 C. Implications for Corporate Governance Bank nominee companies appear to be the largest institutional shareholders in New Zealand listed c mpanies. Because bank nominee companies may hold shares on behalf of ind'viduals or non-institutional companies, the influence of this group is indeterm nable. However, we can confidently say that insurance companies are among he most influential major shareholders in New Zealand listed companies. Th potential influence of banks, superannuation funds! retirement fund and tr stee company shareholders appears minimal. The rise of institutio al investors, as identified in the section III(D) and outlined in more detail above, has important implications for corporate governance. Benefits may be appar nt for both capital markets and the monitoring of listed companies. Hill and arnsay in a 1994 review of the research on institutional investment, capital markets efficiency and liquidity, noted that companies with higher levels of institutional ownership more frequently released information, had less variability in ~heir share returns and that, shares traded heavily by institutions experienc1 rising turnover, declining volatility, and narrowing bidII ··· I 336 Otago Law Review (1995) Vol 8 No 3 ask spreads" .48 The obvious concern one should have with the studies reviewed by Ramsay and Blair49 relates to causality. Institutional investors may not be the cause of the positive outcomes just mentioned, rather institutional investors may simply be more likely to invest in companies with these characteristics. Given this possibility, we should treat the findings mentioned with caution. In addition to possible capital market efficiencies institutional investors may, by monitoring the companies they invest in, effect significant changes in corporate governance and strategy that will benefit all shareholders. Black mentions several areas where monitoring by institutional investors may add significant value. 50 The first involves the appointment of independent directors. Such directors are seen to benefit corporate performance for several reasons, one of which relates to their independence from management which, in theory, allows them to appraise the performance of management more effectively.51 Monitoring managerial performance is a governance function which is compromised when executive directors dominate a board of directors. Awareness of the desire of investors for independent representation on boards is a factor which has led some New Zealand boards to increase independent director representation. For example, Brierley Investments Limited stated in its 1992 Chairman's Report: This board is aware of the investment community's view that boards should comprise significant numbers of non-executives. Accordingly as we review our own situation it is appropriate to have the means of accommodating any future additions. 52 A second area where institutions can positively influence corporate performance is by discouraging excessive diversification. This can add value to investment targets as some forms of diversification (e.g., those into related areas), are more beneficial to performance than are others (e.g., diversification intounrelated product areas).53 Executive compensation is also an area where institutions can playa role in increasing firm value. Concern over what may be seen as excessive executive compensation has been expressed in the popular business press. 54 A recent New Zealand example of institutional intervention in this area relates to the executive share option scheme which Brierley's attempted 48 49 50 51 52 53 54 Hill and Ramsay, op. cit., 298. Ramsay and Blair, op. cit., 153. B. Black, "The Value of Institutional, Investor Monitoring: The Empirical Evidence" (1992) 39 UCLA Law Review 895. See also G. Stapledon, Institutional Shareholders and Corporate Governance (forthcoming). On the gap between theory and practice, see, B. Gaynor, "How shareholders lost out in Noel Leeming takeover bid" The National Business Review, March 31995,53. Brierley Investments Limited, Annual Report 1992, 7. R. Hamilton and G. Shergill, "Extent of Diversification and Company Performance: The New Zealand Evidence" (1993) 14(1) Managerial and Decision Economics 47. Anon, "The Flap Over Executive Pay" Business Week, May 6, 90; Anon, "Recession Puts a Harsh Spotlight on Hefty Pay of Top Executives" New York Times, Jan 20, 1992, AI, Column 4. Corporate Governance I I I 337 to introduce in late 1~93.55 The scheme was abandoned following concern expressed by institutiohal investors. Another area where linstitutional shareholders can wield influence is voting rights. 56 For example, ~n Australia, Rupert Murdoch informed shareholders in News Corporation that he wanted to change the voting rights in the company's shares, a change WhiCh[WOUld have seen the Murdoch family have greate.r voting rights attached to thei shares, compared to those of other shareholders. The Australian Investme t Managers Group (AIMG) subsequently defeated Murdoch's proposal. ~ore recently, Australian institutions, reputedly led by AM~ lobbied for the~removal of Goodman Fielder chief executive Michael Nugent. One press re ort stated: "Mr Nugent leaves in November. The putsch is, perhaps, the most b atant example of institutional heavying."57 I D. Conclusions I Institutional investorst and in particular insurance companies, are among the most influential grouws of investors in New Zealand listed companies. On a global basis instituti0lal investors are playing a more active role in the direction and monitoring of th companies in which they invest. 58 There is also some evidence that in New ealand institutional investors are becoming more active. I I V. Board structure A. Introduction Remarkably little is nown about the boards of directors of New Zealand companies. The mostlrecent research in this area was conducted by Turner who examined Chief Execetive Officer (CEO) duality among listed companies for 1984,59 Chandler and~enshallwho examined board size, incidence of executive board chairs and the roportion of outsiders (non-executives) on the boards of listed companies,60 a d Firth who examined board size and interlocks of New I 55 l I 56 57 58 59 M. Fox and G. Watlkfr, "Institutional Investors and the Brierley Investments Limited Executive Share OP~ions Scheme" (1995) 13 Company and Securities Law Journal 344. See 5. Fridman, "5u er-Voting shares: What's All the Fuss About?" (1995) 13 Company and Securities La,\! Journal 31; A. Mandelbaum, "Departure from the One-Share OneVote Rule: An Over iew and Some Lessons for New Zealand" (1995) 10(2) Journal of International Bankifg Law 56. D. McEwen, "Managers or Meddlers: The Changing Face of Kiwi Institutional Investment" The -N tional Business Review, March 4 1994, 64. B. Black and J. cOffe1' "Hail Brittania?: Institutional Investor Behaviour under Limited Regulation" (1994) 2 Michigan Law Review 1997. R. Turner, "Board 0 Directors Leadership" (1985) 7 New Zealand Journal of Business 59' 60 Chandler and HenS all, op. cit. lh I I 338 Otago Law Review (1995) Vol 8 No 3 Zealand Stock Exchange companies for the years 1972 and 1984. 61 We seek to expand on these earlier studies and, in particular, identify what changes in board structure have since occurred. This analysis should give us a sense of the responsiveness of New Zealand companies to pressures for corporate governance reform,62 and the current state of corporate governance with respect to board structure variables. In particular, the research gives us a prima facie sense for the extent to which New Zealand boards engage in desirable governance practices, something which is of increasing concern to directors as a consequence of the Companies Act 1993. 63 B. Changes in board structure in New Zealand We add to the data on board structure in New Zealand in several ways. First, we look at more board structure variables than do previous local studies (refer to Table 11 for a summary of the board structure variables of interest). Second, we update our knowledge of board structure variables, and changes in board structure, by including data for all listed companies in the year 1993. TABLE 11 Board structure variables Variable CEO duality Executive board chair Board size Number of Outsiders Proportion of Outsiders Majority of Outsiders Definition Occurs when an individual is both chief executive officer and board chair Occurs if the board chair is also chief executive officer or another executive; "0" otherwise Total number of directors (excluding alternative or deputy directors) The number of directors who are current executives of the company Number of outsiders divided by board size Binary variable. Coded as "1" if greater than 50 per cent of directors are outsiders; "0" otherwise 61 62 63 M. Firth, "Multiple Directorships and Corporate Interlocks in New Zealand" (1987) 23(2) Australian and New Zealand Journal of Sociology 274. See generally, L. Sealy, "Corporate Governance and Directors' Duties" (1995) 1(2) New Zealand Business Law Quarterly 92. See generally, A. Borrowdale, Duties and Responsibilities of Directors and Company Secretaries in New Zealand (1995). I Corprrate Governance 339 I Table 12 summarises the findingf of past studies in New Zealand along with those findings for 1993. We now pr ceed to identify and examine changes which have occurred in the board struct re of New Zealand listed companies since 1962. I I Table 12 Summary of New Z~aland board structure studies I Year Board size CEO duality (%) Exec. chairpersons (%) Number of outsiders on board Proportion of outsiders on board 1962 64 7.21 197065t266 6.96 I ,t-! I 1981 67 198468 6.95 11.14 20.30 198469 7.12 1987 6.14 1990 1993 6.07 14.29 16.54 4.57 6.66 5.70 I I 71.50 I 74.18 Percentage of companies with a majority of outsiders No. of companies 58 160 247 208 184 221 i 82.71 292 143 133 I 1. Outside directors I The major argument proposed in favour of representation by outside directors on boards relates to their perceiV1.e impartiality. One of the governance roles of a board is to monitor the perfor ance of management. Executive or insider directors are viewed as being inc pable of impartiality in this regard, whereas outside directors who are not inv~lved in the management of the companies on whose boards they sit are more a~le to impartially appraise the performance of management. : I 64 65 66 67 68 69 Laurent, Interlocking Oirecto1ates in New Zealand (Unpublished MeA Thesis, Department of Accountancy, Victpria University of Wellington, 1971). G. Fogelberg and C. Laurent, Bo~rds of Directors in New Zealand Companies (Research Paper No.1, Department of Busin1ss Administration, Victoria University of Wellington, 1974). Ibid. I Firth, 1987, op. cit. I Chandler and Henshall, op. cit. I Turner, op. cit. Firth, 1987, op. cit. I I c. I I I 340 Otago Law Review (1995) Vol 8 No 31 The mean number of outside, or non-executive, directors in 1993 was 4.57. The number of outside directors was greater than the number of insider directors on 82.7 per cent of boards in 1993. There has been a slight increase in the proportion of outsiders represented on the boards of listed companies since the work of Chandler and Henshall in 1982, the only other previous study to examine this variable for New Zealand. Those authors found that the mean proportion of outsiders was 71.5 per cent during 1981/° for 1993 we find this statistic to be 74.1 per cent. From the above we can infer that New Zealand boards are, prima facie, likely to be able to impartially appraise the performance of the management of the companies on whose boards they sit. 2. CEO Duality and Executive board chairs Those who argue that it is inappropriate for the CEO, or any other executive, to also be board chair typically propose that if one person holds both roles then the monitoring role of the board is inevitably compromised. Where CEO duality occurs, the question arises as to who monitors the performance of the CEO. After all, if the CEO is also board chair then he or she is likely to be in a position to dominate board meetings and filter information to the board as a whole. As Mallette and Fowler comment: When a single individual serves as both a firm's CEO and the chairperson of its board, managerial dominance is greatly enhanced because that individual is more aligned with management than with shareholders and is likely to act to protect his or her job and enhance personal well-being. 71 Furthermore, where CEO duality occurs the dual CEO may surround himself or herself with cronies who are typically other executives. These individuals are not in a position to perform effectively their role as directors as they lack independence, being responsible to the CEO on a daily basis and beholden to the CEO for their job and board position. The incidence of CEO duality has increased between 1984 (when 11.1 per cent of listed companies had CEOs who were also chairpersons), and 1993 (at which point 14.3 per cent of listed companies had CEO duality). In contrast to the increased incidence of CEO duality there has been a decline in the incidence of executive chairpersons (from 20.3 per cent of listed companies in 1981 to 16.5 per cent in 1993). The incidence of both CEO duality and executive chairpersons is quite low by international standards. For example, the incidence of CEO duality in American companies has been estimated as being as high as 76 per cent. 72 70 71 72 Chandler and Henshall, op. cit. P. Mallette and K. Fowler, "Effects of Board Composition and Stock Ownership on the Adoption of 'Poison Pills'" (1992) 35(5) Academy of Management Journal 1010. Donaldson and Davis, op. cit., 49. Corporate Governance 341 3. Board size There has been a Significa~'t change in board size between 1962 and 1993. Full information was available for board data for all years except 1962 and 1981 (in these years only the mean board size was available). Conducting an analysis of variance on the available ata we found an F ratio of 14.62 (p(1993), 104. Id.,107. This section draws on M. Fox, M. Roy and G. Walker, "Interlocking Directorships in New Zealand Publicly Listed Companies" (1994) 12 Company and Securities Law Journal 331. Firth, 1987, Ope cit. I I Corporate Governance 343 As to definitions: compa. ny in JerI 0 cks refers to the number of other listed companies with which any given listed Jonlpany has directors in common. Director interlocks, for any given cOlnpany, refers to the total number of board positions held on other boards by its own di~ectors. Finally, multiple directorships, for any given director, refers to his or her ~otal number of directorships less one. Our data was collected fOJeaCh of the 133 companies listed on the New Zealand Stock Exchange in 1993. nformation about listed companies was readily available frorn Annual Rep rts, The New Zealand Company Register and The Nezo Zealand Business Who's Who. From these sources, a list of directors was compiled for each company. I As is common in studieS! this type, potential (as opposed to actual) interlocks were calculated. This is bec use of the inherent difficulty in establishing whether or not interlocks are used f r a particular purpose. Of course, the existence and proliferation of interlocks ~s not necessarily a cause for concern. The mere existence of interlocks does rot provide evidence of a power relationship,?8 One cannot assume that directprs use networks of board memberships for any particular purpose (e.g., in~ider trading), merely because the potential for such abuse exists. Interlocks ar¢ rather indicators of potential power relationships between corporations and directors. An actual interlocking directorate can only be said to occur where thf link is of actual benefit to the firms involved.79 Therefore, potential and acrual interlocks must be distinguished. Based on our data set, f·rect potential interlocks per company (company interlocks), and the potentia interlocks for all directors of each company (director interlocks), were caJlculate . In addition, the number of board memberships (directorships), were calcul ted for each director. . This data is important be9ause it may suggest legal and legislative implications in areas such as cOlnpetit~pn law,80 the common law fiduciary principle that directors must avoid confl~ct of duties,81 and the codification of those duties pursuant to the COITtpaniesl Act 1993. Ultimately, there is also a political context which may have legislative repercussions. In New Zealand, for example, concern has been expressed in the popular press regarding the power of the Business Roundtable and directors¥£ listed companies. 82 Also, in the United States, similar concerns prompted the Sec rities and Exchange Commission, in 1992, to require disclosure of interlocks whe e matters of executive compensation are concerned. 83 78 79 80 81 82 83 A. Pettigrew, "On StudYin1 Managerial Elites" (1992) 13 Strategic Management Journal 163. Fogelberg and Laurent, o~. cit. See R. Carroll, "Trade Prac .ces Implications of Director Interlocks" (1990) 18 Australian Business Law Review 3 5; R. Carroll, B. Stening and K. Stening, "Interlocking directorships and the Law in.Australia" (1990) 8 Company and Securities Law Journal 290. R. Christie, "The ]Jirector$ Fiduciary Duty not to Compete" (1992) 55 Modern Law Review 506. D. McLoughlin, "Nightslof the Roundtable: The Gang of 45" North and South, September 1992, 66. M. Schwartz, "Executive ompensation: A Brief on the SEC's New Rules" (1993) 17 Directors and Boards 59. I I 344 Otago Law Review (1995) Vol 8 No 3 The Australian literature contains several studies of multiple directorships. Rolfe examined potential interlocks between the top 50 Australian corporations for 1963.1'4 Hall scrutinised the existence of potential interlocks between firms listed on the Australian Stock Exchange during the period 1971-74. 85 Stening and Wan studied potential directorship interlocks among the top 250 Australian firms from 1959 to 1979 and reported a trend of increasing board memberships and potential interlocks. 86 A subsequent study compared this data to potential interlocks in the top 250 Australian companies in 1986 and concluded that potential interlocks were increasing significantly.87 These findings were later disproved by Alexander and ~i1urray who also revealed an error in the tallying of data in the Stening and Wan paper. 88 The Alexander and Murray study showed no significant change in company interlocks from 1959 to 1986 and a fall in interlocks to 1991. Research on boards of directors and interlocking directorates in New Zealand commenced with the work of Laurent in 1971. 89 There has been subsequent significant research. 90 Firth's data ended in 1984. Since that time there have been significant changes in New Zealand's regulatory climate 91 and - as we saw in earlier sections of this article - in corporate control. B. Distribution of Multiple Directorships Table 15 shows the distribution of directorships held for 1984 and 1993. There has been a significant fall in the number of directorships held per director (from a mean of 1.38 in 1984 to 1.22 in 1993) and the number of multiple directorships held (falling from a mean of 3.00 in 1984 to 2.51 in 1993). These findings are probably due to the falling number of listed companies over this period. C. Distribution of Company and Director Interlocks Tables 16 and 17 below present the distribution of potential company and director interlocks respectively over the period 1984 to 1993. The results are significant. From the 1984 data, potential company interlocks have fallen from a mean level of 7.00 interlocks per company to 2.60 in 1993. In 1984, only 10.86 per cent of firms had no interlocks with other companies. This figure rose to 30.08 per cent in 1993. The greatest number of potential company interlocks for a firm was 26 in 1984 and 12 in 1993. 84 85 86 87 88 H. Rolfe, The Controllers: Interlocking Directorates in Large Australian Companies (1967). C. Hall, "Interlocking Directorships in Australia: The Significance for Competition Policy" (1983) 55 Australian Quarterly 42. B. Stening and W. Wan, "Interlocking Directorates among Australia's largest 250 Corporations 1959-1979" (1984) 20 Australian and New Zealand Journal of Sociology 47. Carroll, Stening and Stening, op. cit. M. Alexander and G. Murray, "Interlocking Directorships in the Top 250 Australian Companies: Comment on Carroll, Stening and Stening" (1992) 10 Company and Securities Law Journal 385. I I I Corporate Governance 345 I I The fall in potential compan interlocks is mirrored by a reduction in potential director interlocks - see Tabl 17. Potential director interlocks measure the potential ties a company has t rough the number of directorships the directors on its board hold on other boards. Thus, potential director interlocks give an indication of the potential intensity of the company interlocks of any given company. These interlocks fe 1from a Inean of 7.97 directorships per company in 1984 to 3.32 in 1993. In 1984 the largest nUlnber of potential director interlocks for anyone company was 34:. By 1993 the largest number of director interlocks was only fourteen. The decline in the number corporate and director interlocks between 1984 and 1993 is primarily due to ta eovers, mergers and bankruptcies between those years (only 133 companies w re listed on the New Zealand Stock Exchange in 1993 compared to 221 in 1984)1 The move toward minority and majority control of listed companies, which vve documented in section II, is likely to provide part of the explanation for the obs¢rved decline in company and director interlocks. As Roy, Fox and Hamilton reientlY noted: We contend that the obset,1 ved decline in networks in New Zealand is a direct result of the rapid agglo eration of corporate assets in New Zealand since 1984 ... Networks of interl cks, the precursors to this process of agglomeration, have been usurped by it fnd hence are in decline. Corporate power in New Zealand is now much rn4re narrowly concentrated. 92 t I D. Comparison with Recentt,ustralian Findings The most recent Australian f ndings are contained in the literature discussed above. These studies are no comparable with our recent New Zealand data because of their bias towardstrger companies and the lag in years. Alexander and Murray observed that co pany interlocks declined between 1986 and 1991 (with mean interlocks of 6.5 and 4.52 respectively). A substantial decline in company interlocks was also,vident in the New Zealand data froln 1984 (mean company interlocks of 7.00) t 1993 (mean of 2.60). Accordingly, the comments of Alexander and Murray to the effect that potential interlocks for Australia, New Zealand and North Anterica are higher than those of Great Britain but lower than the rest of Europ~ may still hold true. Hence, any grave concerns over potential interlocks in ~ew Zealand compared to other countries would appear to be unfounded. I 89 90 Laurent, op. cit. in New Zealand" (1973) 3 Io rnal of Business Policy 16; Fogelberg and Laurent, 1974, op. cit.; Chandler and Hens alt op. cit.; Firth, 1987, op. cit. C. Campbell-Hunt, D. Har er and R. Hamilton, Islands of Excellence? A Study of Management in New Zealand (1993). Roy, Fox and Hamilton, op. c' t., 210. 91 92 I 346 Otago Law Review (1995) Vol 8 No 3 TABLE 15 Distribution of directorships per director 1984 1993 No of board memberships 1 2 3 4 5 6 7 8 9 No. of directors 927 122 34 30 14 9 1 % of directors 81.1 10.7 3.0 2.6 1.2 0.8 0.2 0.4 0.2 100.0 1.38 Cumul. % 81.1 91.8 94.8 97.4 98.6 99.4 99.5 99.8 100.0 No. of directors 567 65 23 7 3 1 % of directors 85.1 9.8 3.5 1.1 0.5 0.2 Cumul. % 85.1 94.9 98.4 99.4 99.9 100.0 4 2 1143 Total Mean directorships held Mean directorships held 666 100.0 1.22 3.00 2.51 Corporate Governance 347 I TABLE 16 Distribu,ion of potential company interlocks I 1984 1993 Potential company interlocks 0 1 2 3 4 5 6 7 8 No. of firms 24 10 7,; of I firm~ 10.9 4.5 Cumul. % 10.9 15.4 22.2 33.5 41.2 48.0 53.9 60.2 64.7 70.1 74.7 78.7 83.7 87.3 90.5 91.4 93.2 94.1 96.4 97.7 No. of firms 40 17 22 17 9 7 6 4 6 2 1 1 1 % of firms 30.1 12.8 16.5 12.8 6.8 5.3 4.5 3.0 4.5 1.5 0.8 0.8 0.8 Cumul. % 30.1 42.9 59.4 72.2 79.0 84.2 88.7 91.7 96.2 97.7 98.5 99.3 100.0 I 15 25 17 15 13 14 10 12 10 9 11 8 7 2 4 2 5 3 i I i I I I I I I 6.8 11.3 7.7 6.8 5.9 6.3 4.5 5.4 4.5 4.1 5.0 3.6 3.2 0.9 1.8 0.9 2.3 1.4 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 I ! i I 1 1 1 1 i 0.5 0.5 0.5 0.5 98.2 98.6 99.1 99.6 1 221 0.5 100.0 7.00 I 100.0 133 100.0 2.60 Total Mean potential company interlocks I 348 Otago Law Review (1995) Vol 8 No 3 TABLE 17 Distribution of potential director interlocks ~- 1984 1993 I Potential director interlocks 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Total Mean potential company interlocks No. of firms 24 10 11 19 17 15 14 15 10 11 7 10 9 8 6 7 2 6 4 5 1 2 % of firms 10.9 4.5 5.0 8.6 7.7 6.8 6.3 6.8 4.5 5.0 3.2 4.5 4.1 3.6 2.7 3.2 0.9 2.7 1.8 2.3 0.5 0.9 Cumul. % 10.9 15.4 20.4 29.0 36.7 43.4 49.8 56.6 61.1 66.1 69.2 73.8 77.8 81.5 84.2 87.3 88.2 91.0 92.8 95.0 95.5 96.4 No. of firms 40 12 15 16 8 9 7 11 2 4 3 1 3 1 1 % of firms 30.1 9.0 11.3 12.0 6.0 6.8 5.3 8.3 1.5 3.0 2.3 0.8 2.3 0.8 0.8 Cumul. % 30.1 39.1 50.4 62.4 68.4 75.2 80.5 88.7 90.2 93.2 95.5 96.2 98.5 99.3 100.0 2 1 1 3 0.9 0.5 0.5 1.4 97.3 97.7 98.2 99.6 1 221 0.5 100.0 7.97 100.0 133 100.0 3.32 I forporate Governance ! I 349 E. Conclusions I There has been a significant d~cline in company and director interlocks in New Zealand in recent years. The fnost likely explanations for this decline are the sharemarket crash of 1987 whic~ greatly reduced the number of listed companies in New Zealand and the on-g9ing process of economic reform. ! ! VII. Conclusions This article presents ownership and control of the New Zealand sharemarket. This is import nt for several reasons. First, any analysis of corporate governance, takeov rs, foreign investment, securities regulation and associated issues in N ew Zeal~nd needs to proceed from an understanding of the evidence. For example, ~ne can analyse the implications for securities regulation in New Zealand fldwing from increased institutional ownership of the market. 93 In the absence of t~e requisite evidence, analysis occurs in a vacuum. Second, the evidence present d here increases our understanding of the New Zealand sharemarket which ha a present market capitalisation of approximately $43 billion. The sharemarke is a prime mechanism for the formation and subsequent raising of capital for New Zealand businesses. New Zealand's national economic goals such as those articulated in the New Zealand Trade Development Board's "stretchlscenario"94 and the Budget Policy Statement 199595 are closely tied with the operation of the sharemarket. Indeed, the relationship is fundamental. In the U.S. cqntext, Jane D'Arista has commented: "Economic growth is crucial to our nation1s future. And our financial markets must be able to raise the necessary capital t1 fuel this economic growth".96 New Zealand is a capital importing nation whic~ needs domestic and foreign capital for growth and the sharemarket is a key m,chanism for the attraction of that foreign capita1. 97 Hence, our findings are als relevant to an assessment of New Zealand's economic goals. eVidence~on I 93 94 95 96 97 G. Walker and M. Fox, "Securi ies Regulation and New Zealand Sharemarket Patterns, 1989-1993" (1994) 5 Journal 0 Banking Finance Law and Practice 244. TRAOENZ, Stretching for Gro th: Building an Export Strategy for Ne'w Zealand (1993). The New Zealand governm nt Budget Policy Statement 1995 and the companion document, Investing in Our F ture: Toward 2010 both list enhancing and maintaining New Zealand's economic gro th as key objectives. For a review of the 1995 budget, see The National Business R view, June 2, 1995. There is a good review of New Zealand's economic goals in ar Eastern Economic Review, Asia 1995 Yearbook (1995) J 180, 183. J. 0' Arista, The Evolution ofU.~. Finance, Volume II: Restructuring Institutions and Markets (1994), xvii. G. Walker, supra, n.3.