Annual Corporate Managers and Company Secretaries ConferenceAssociate Minister of International Trade
Good morning ladies and gentlemen. It is my pleasure to have been asked to address this annual meeting of the Corporate Managers and Company Secretaries Conference. I have been asked to speak today on the topic 'New Zealand - Leaders in systems of corporate governance or overburdened with compliance''
I suggest that both these descriptions can be applied to New Zealand. We have in New Zealand, through legislation and private sector initiatives, some of the leading corporate governance regimes in the world. Today I would like to describe the Government's aims for the development of business law and how these aims fit with the leading corporate governance statute, the Companies Act 1993.
I will address the issue of compliance costs imposed on businesses through regulation in other areas later in my speech. Corporate Governance is concerned with aligning management and shareholder objectives, essentially an attempt to bridge the gap between the separation of ownership and control within the company. There is a careful balance between allowing management to manage the business, and protecting shareholders from possible abuse.
Issues of corporate governance are addressed by both government regulation and private initiatives. In terms of government regulation the Ministry of Commerce has primary responsibility for the strategic development of business law in New Zealand. This responsibility was formerly with the Ministry of Justice but was transferred to the Ministry of Commerce in 1995 to reflect that Ministry's responsibilities for improving the business environment. The Government's principal focus is to ensure that the legal framework that it provides to businesses facilitates business activity, and does not impact adversely on either the ability of business to function, or on the effective and efficient operation of the markets of which those businesses are a part.
I am conscious that regulation of business activity may have adverse effects if it is either inappropriate, badly designed, or poorly drafted. In particular such regulation may be costly for businesses to comply with, it may prevent desirable transactions from occurring within the market place, or it may create incentives for firms to allocate resources in an inefficient manner.
Therefore the legal framework must be carefully designed to ensure that it creates a favourable climate for economic growth for New Zealand businesses, by promoting an open and competitive market for goods and services. Company law policy, as a part of business law, is no different. The Government believes that the focus of company law should be on innovation, optimal firm performance, sustainable economic growth, and wealth creation. In essence company law is intended to allow companies within New Zealand to operate within a legal framework which maximises the prospects for economic success. Management should be allowed to focus on the opportunities for the business, albeit within parameters which protect the ownership interests of shareholders.
These aims are largely consistent with the long title to the Companies Act 1993, in particular subparagraphs (a) and (d) which state it is an Act to reform the law relating to companies, and in particular;
(a) 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; and
(d) To encourage efficient and responsible management of companies by allowing directors a wide discretion in matters of business judgment while at the same time providing for shareholders and creditors against the abuse of management power;
The goal that I have set for the Ministry of Commerce in company law policy formulation over the next several years is to lead the world in delivering a company law regime that enables companies to focus primarily on wealth creation and not on regulatory compliance. When this goal has been attained, New Zealand companies will have an enhanced prospect of creating greater value for shareholders and as a result companies will be generating economic growth which benefits the wider community.
Companies will be able to organise their business according to their particular needs, and will be able to respond quickly and effectively to opportunities of value to them. New Zealand companies will become efficient and competitive both within the New Zealand market and internationally.
The Companies Act 1993 is already a substantial step towards achieving these goals. The Act represents not only an ambitious departure from its predecessors, but also from traditional models for companies law in New Zealand, notably that of British companies law. It draws its models from the United States and Canadian company law.
It seeks to focus on 'core' company law, the basic law under which companies are established, operated, and terminated, attempting to provide a regulatory framework which simplifies company law, and makes it more accessible.
The Act is first and foremost a set of enabling rules. It provides a standard set of rules under which a company may be incorporated and governed. It does not seek to distinguish between large and small companies, or listed and non listed. Establishing a set of rules which may be used wholesale, or varied accordingly, reduces transaction costs to companies, and reflects the complexities of corporate forms in today's markets.
I believe that it is appropriate to have a standard set of rules in law to reduce transaction costs to companies, but they should in many cases be capable of alteration by those who commit their capital to establish a company. The specific mechanisms for this are through alterations to a company's constitution by a resolution approved by a majority of 75% of shareholders. or through unanimous shareholder assent. Those who risk their money are usually the best judge of what is appropriate for them. Rules which mandate particular conduct should be carefully limited to ensure that unnecessary costs are not imposed upon companies, and that the benefits of such rules outweigh any costs to the company.
The Act should only impose mandatory corporate governance rules in situations where the transaction costs to management and owners in negotiating specific governance rules for an individual company are prohibitive. The Act regulates only those transactions where shareholders', or creditors', interests are particularly at risk from abuse by management.
As a result certification and documentation requirements have been imposed on some transactions. Such paper trails are intended to increase transparency and accountability. I would welcome feedback from corporate managers and others in the business community on whether these aims are being met, or whether unnecessary compliance costs are being generated. Increased accountability is also the aim of the directors' duties in the Act.
These duties are largely codifications of the pre-existing law. Such statements increase the awareness of directors of the duties that they owe, and the awareness of shareholders of the risks and liabilities that arise as a result of the separation of ownership and control.
As succinctly put by Alan Galbraith QC in his paper presented to the Company Law Conference in 1994; The core concept underlying the general duty seems to me to be that of diligence. Diligence requires a director to be alert and active. Being alert includes an obligation to enquire and understand. Being active includes an obligation to make a judgment and to act on that judgment.
While there is potential for improvement, in terms of the direction of corporate governance legislation, New Zealand can be seen as a world leader. Indeed our legislation has become a base model for Hong Kong in its attempt to produce a companies law that better provides a more competitive environment for the companies within its jurisdiction. The Consultancy Report on the Review of the Hong Kong Companies Ordinance looked for direction from New Zealand in establishing a coherent model for company law in Hong Kong, reflecting our mutual heritage of common law.
If Hong Kong is to become the benchmark for companies law in the Asian region, the New Zealand Companies Act may have a profound effect on regulatory regimes internationally. In turn New Zealand must keep itself informed of overseas developments in this area.
The government is watching with interest the results of the Australian Corporations Law Economic Reform Programme and the recently released Hampel Report in the United Kingdom to assess how more interventionist jurisdictions are dealing with corporate governance issues. Legislation alone however is not the only method of dealing with issues of corporate governance. Private initiatives, such as that of the Institute of Directors' Code of Proper Practice for Directors deal with the moral and ethical responsibilities of Directors in New Zealand. The Code provides guidance to Directors to assist them in carrying out their duties and responsibilities professionally and effectively, focusing on principles of integrity and accountability.
There are numerous examples of companies themselves developing models of best practice for corporate governance. Contractual arrangements dealing with the relationships between owners and managers can also be found in the New Zealand Stock Exchange Listing Rules. The Companies Act is still in its infancy but concerns that it might have a detrimental impact do not appear to have been borne out, with little in the way of litigation of the Act's provisions. This year the Ministry of Commerce is seeking legislative priority for a Business Law Amendment Bill to address largely technical issues which have arisen from the Act's operation. More substantial amendment may be appropriate at a later stage.
I am aware of concerns that the enactment process affected the simplicity and effectiveness of the Law Commission's original proposals. It may be possible to simplify some of the more complex procedural parts of the Act such as the share re-purchase provisions. I also wish to ensure that the Companies Act's operation is consistent with the government's goals for business law.
Against this background the Ministry of Commerce will continue to monitor the operation of the Act. If the results of the monitoring suggest a need for amendment the Ministry may review a number of aspects of the Act, including; ' The appropriate set of standards for corporate governance rules to address transaction costs.
' Whether there is an appropriate alignment of incentives between owners and managers. ' Whether compliance costs adversely affect the ability of managers to focus on innovation and the exploitation of business opportunity. ' The usefulness of distinguishing between closely held and widely held companies. ' The nature and scope of the duties imposed on directors and whether the standard of care imposed is discouraging persons from taking on the office. While I believe that New Zealand is set on the right direction in its specialist corporate governance legislation, New Zealand businesses frequently complain of the costs resulting from regulatory interventions.
The reduction of compliance costs imposed by statutes and regulation is an immediate priority for the Government and I would like to share with you some of the measures that we are taking to achieve such a reduction. We should be concerned about the regulatory obligations we impose on business and society in general. Regulation is intended to achieve important policy objectives but if the regulatory requirements are not understood, and the task of gaining that understanding is too difficult or expensive, we cannot be assured that the policy intent is being achieved.
A complex regulatory system, such as we have in New Zealand today, compounds the problem of understanding at least amongst some sections of the business community, and reduces the incentives to gain that understanding. In essence, the challenge faced by regulators is to construct laws which achieve their policy objectives, and to do so in the least cost manner.
Some of these costs are obvious - they are costs of obtaining information about a regulatory requirement, understanding that requirement, assessing the extent to which it applies to one's business, preparing the necessary paperwork and maintaining records. They can include the costs of implementing programmes and procedures, installing equipment and training staff. However other costs are less obvious and measurable. Poorly constructed regulations can impede innovation or create unnecessary barriers to trade, investment and economic efficiency. What then are we doing at the national level to improve the overall quality of regulatory interventions and ensure that compliance costs are minimised'
It is important to recognise that good regulation is a product of good advice and good decision-making. Every week in Cabinet and various Cabinet committees as a Minister I am required to make decisions on complex and often technical matters on the basis of a large number of weighty papers which I have had, at best, a few days to read. The confidence I have in those decisions depends, to a large extent, on the quality of the advice which is contained in those papers, which in turn is dependent upon my confidence in the processes which have been gone through in developing that advice.
With respect to this process a number of things can go wrong: ' the objectives of Ministers in requiring the work to be undertaken may not have been fully understood; ' the analysis has failed to clearly identify the problem which the regulatory proposal is intended to address; ' all the regulatory and non-regulatory options for addressing the problem have not been identified and considered; ' all of the costs and benefits of alternative options have not been considered; ' issues of implementation, including the legal practicality of the proposed new law, have not been fully considered; ' the information has not been presented to Ministers in a form which facilitated decision-making.
The first attempt to address some of these problems, specifically from compliance costs perspective, was in 1994, when the Government issued a discussion paper outlining its proposals for a Business Compliance Cost Reduction Framework. A key element of the Framework was a proposed requirement for a Compliance Cost Assessment Statement, which would be made in all Cabinet papers which contained proposals with compliance cost implications. This would be supported by a more detailed Compliance Cost Assessment Report in cases where compliance costs were substantial.
This Report would be available to Ministers on demand. The Compliance Cost Assessment Framework has been in place since November 1995. However, since this initiative was taken my thinking has moved on in terms of the scope of the compliance cost problem. In effect, the Compliance Cost Assessment Framework, while an important staging post, did not complete the journey towards good quality regulation. This is because compliance costs for the purpose of this exercise were defined narrowly as the incidental costs incurred by businesses in fulfilling government requirements. They were distinct from the direct costs of the requirement, such as the amount of tax payable, the information provided or the costs of installing new safety equipment.
The current package of proposals, which has been approved in principle by the Government, is much broader in its scope. It aims to improve the overall quality of regulation and it aims to address existing regulation as well as new regulatory proposals. There are five main elements to this package: ' a Code of Good Regulatory Practice ' a Generic Policy Development Process ' a requirement for Regulatory Impact Statements ' a legislative instrument, such as a Regulatory Responsibility Act ' a Regulatory Task Force The first four elements of the package are aimed to increase the discipline on the regulation making process and make it more transparent. The final element, a Regulatory Task Force, is intended to identify priority areas for Government action aimed at reducing the burden of existing regulation.
I would like to briefly discuss each of these elements in turn. Code of Good Regulatory Practice This Code sets out the key policy and process principles which should underpin regulation making. They are in a sense a codification of principles which already guide regulation making, but are not applied consistently. The key principles, which in the Code are supported by guidelines, are efficiency, effectiveness, transparency, clarity and equity. Both the Code of Regulatory Practice and the Generic Policy Development Process are intended to be embodied in the current contracting relationships between Ministers and the Public Sector.
They will be used as a reference point for departments developing and reviewing regulation, and for stakeholders when commenting on policy proposals. Generic Policy Development Process The Generic Policy Development Process is intended to define the desirable features of a regulation-making process. It is modelled on the Generic Tax Policy Process, which is generally regarded as improving the process for developing and implementing new tax proposals.
There are two main features of the Generic Policy Development Process. The first is a set of process features which experience suggests contribute significantly to good policy outcomes. The second is a strategic and tactical process for aligning regulatory policy development to the government's goals and ensuring there is effective co-ordination between departments and, where appropriate, between departments and key stakeholders. Regulatory Impact Statement I noted earlier that one of the problems faced by decision-makers is having the issues laid out in front of them in a clear and coherent way.
Equally, those who may be affected by such decisions have a right to know what the basis of that decision is, and that means the information should be accessible to them. The proposal for Regulatory Impact Statements is intended to address these issues through providing, in summary form, information which allows Cabinet and others to efficiently evaluate the consistency of regulatory proposals with the principles embodied in the Code of Good Regulatory Practice.
It is envisaged that the Regulatory Impact Statements, which would be attached to Cabinet papers, would contain: ' a statement of the nature and magnitude of the problem to be addressed; ' a statement of the public policy objective; ' a statement of possible options, both regulatory and non regulatory; ' a statement of the net benefit of the proposal, including the total regulatory costs and benefits of the proposal and other possible options; ' a statement of the consultative programme which has been undertaken. Regulatory Responsibility Act The purpose of a Regulatory Responsibility Act is to improve the quality of regulation by imposing a legislative discipline on the regulation making process just as the Fiscal Responsibility Act imposes a legislative discipline on fiscal matters. A Regulatory Responsibility Act will establish a set of principles to guide regulation making which is authoritive, accessible, and durable.
This discipline is not intended to curtail the rights of governments to take decisions. Rather it is intended to make the basis of those decisions transparent. Regulatory Task Force The final element of the package is the concept of a Regulatory Task Force. The government has agreed that further work be done on this concept. Essentially what I want is an efficient mechanism to identify those areas of regulation which should be subject to review, with a view to reducing the overall regulatory burden on business.
Approaches such as the task force for addressing the costs of existing regulation should be seen in the context of other initiatives which are already underway. One such initiative is the Compliance Cost Inquiry which is being conducted by the Commerce Select Committee. Another is the set of reviews which the Ministry of Commerce has initiated into the compliance costs associated with specific areas of regulation. These include the Resource Management Act, Building Act and Occupational Health and Safety Act. As I noted earlier Cabinet has agreed in principle to these initiatives. Officials from the Ministry of Commerce will be reporting progressively over the next few months on implementation details. Regulatory Creep I would like to raise briefly an idea that has been recently put to me regarding compliance costs and "regulatory creep".
I have recently received a paper that suggests, in order to get the optimal rather than maximum level of Government intervention, and to reclaim the relevance of Government, that a mechanism should be set up that simply requires that for every new regulation that is created, a number of existing regulations must be repealed. This, my staff say, will change the incentives for both the public service and politicians from an "if in doubt, regulate" culture to one more focused on getting optimal solutions to perceived problems.
I have asked my officials to look into this idea, as it strikes me that some sort of exchange mechanism may work in the legislative area. Conclusion I suggested at the beginning of this presentation that New Zealand is both a leader in systems of corporate governance, while remaining overburdened with compliance in other areas of government regulation. I have described the Government's aims for business law and some of the measures that we are taking to achieve a reduction of compliance costs imposed by statutes and regulation.
However it is important to note that Government in isolation cannot ensure that New Zealand continues to improve its corporate governance practice and reduce compliance costs. It is up to businesses to take full advantage of the added flexibility the Companies Act 1993 aims to provide. Business also needs to continue to provide well reasoned, constructive input into the policy process in improving the corporate governance regime and reducing compliance costs.
In your positions as corporate managers and company secretaries you can play a vital role in maximising the benefits legislation and private initiatives offer in the area of corporate governance, and in providing input into the Government's policy process.