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- Herausgeber: GRIN Verlag
- Sprache: Englisch
Master's Thesis from the year 2006 in the subject Law - Comparative Legal Systems, Comparative Law, grade: B+, University of Canterbury (Law School), language: English, abstract: The stock market has gained extraordinary significance over recent years. Large proportions of society invest in equity markets in order to save for their retirement. Various bodies exist to fight abuses by executives of publicly owned companies. Parliament has created the New Zealand Securities Commission (SEC), an independent Crown entity in terms of the Crown Entities Act 2004, to fight ‘white collar fraud’ and the abuse of business ethics and the law. Numerous scandals worldwide but especially the Enron case in the United States of America (USA) at the beginning of this decade shocked investors and led to a decrease in shareholder confidence. Investors lost their trust in corporate governance techniques and the credibility of managements. In the 1930s, in the aftermath of the 1929 stock exchange crash in the USA, Berle and Means ascertained the underlying problem of corporate governance as the separation of ownership and power. In accordance with Adam Smith, they explained that, as a basic human trait, executives never apply the same diligence when running a company as the owner of the same company might apply. This fundamental understanding is the reason for the necessity of corporate governance rules. As a pro-tection of shareholder interests, the interests of the owners of the company, the regulator tries to set standards which create investor confidence and security. By now the large majority of nations have implemented some form of corporate gov-ernance regime. The US government has tried to counter fraud and investor scepticism by adopting a statutory corporate governance code called the Sarbanes-Oxley Act 2002 (SOX). New Zealand, on the other hand, opted for a more voluntary ap-proach to governance regulation based on principles rather than legal norms, which impose no legal obligation on affected parties. Farrar disapproves of his approach and calls New Zealand’s principles “bland provisions”. He fears a decrease of investments in the New Zealand market if it does not follow the US lead quickly. This paper tries to evaluate Farrar’s proposal of imitating the US example. Section II portrays corporate governance regulations currently in place in New Zealand. It focuses predominantly on listed public companies and shows shortfalls in this area. Section III illuminates SOX and its provisions. The paper provides explanations ma-jor fraud scandals in the USA and discusses in the light of these findings the effectuality of SOX. It concludes that the US legislation has numerous pitfalls and fails to achieve necessary fraud prevention. Based on this understanding, Section IV discusses the advantages and disadvantages of a principle-based approach to corporate governance regulation. It is shown how selfregulation paired with a strong legal framework provides sufficient protection for investors and how such an approach values the theory of free markets. This author believes strongly in the efficiency of free, unregulated markets and eventually concludes with a few humble suggestions on how New Zealand might change their corporate governance regime.
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Veröffentlichungsjahr: 2007
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APPENDIX A: GRAPH OF THE 1929 CRASH OF THE US STOCK MARKET .. IV
APPENDIX B: 9thGLOBAL FRAUD SURVEY AMONG 500 TOP
CORPORATIONS CONDUCTED BY ERNST&YOUNG........................................ V
APENDIX C: EMPLOYEE TRAINING ON ANTI-FRAUD POLICIES ................. VI APPENDIX E: GRAPH OF PARETO DISTRIBUTION ....................................... VIII
Page 1
Corporate Governance: Codification or Self-Regulation? -Is SOX a Viable Solution for New Zealand?
I.INTRODUCTION
The stock market has gained extraordinary significance over recent years. Large pro-portions of society invest in equity markets in order to save for their retirement. Various bodies exist to fight abuses by executives of publicly owned companies. Parliament has created the New Zealand Securities Commission (SEC), an independent Crown entity in terms of the Crown Entities Act 2004, to fight ‘white collar fraud’ and the abuse of business ethics and the law.1Numerous scandals worldwide but especially the Enron case in the United States of America (USA) at the beginning of this decade shocked investors and led to a decrease in shareholder confidence. Investors lost their trust in corporate governance techniques and the credibility of managements.
In the 1930s, in the aftermath of the 1929 stock exchange crash in the USA, Berle and Means ascertained the underlying problem of corporate governance as the separation of ownership and power.2In accordance with Adam Smith,3they explained that, as a basic human trait, executives never apply the same diligence when running a company as the owner of the same company might apply.4This fundamental un-derstanding is the reason for the necessity of corporate governance rules. As a protection of shareholder interests, the interests of the owners of the company, the regu-lator tries to set standards which create investor confidence and security.
By now the large majority of nations have implemented some form of corporate governance regime. The US government has tried to counter fraud and investor scepticism by adopting a statutory corporate governance code called the Sarbanes-Oxley Act 2002 (SOX).5New Zealand, on the other hand, opted for a more voluntary approach to governance regulation based on principles rather than legal norms, which
1Securities Commission,About: Who We Are,<http://www.sec-com.govt.nz/about/>at05 July 2006.
2Berle A & Means G,The Modern Corporation and Private Property(1932).
3Smith A,An Inquiry Into The Nature And Causes Of The Wealth Of Nations(Glasgow ed, 1976).
4Ribstein L,SARBOX: The Road to Nirvana,2004 Mich. St. L. Rev. 279, 280.
5Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745.
Page 2
impose no legal obligation on affected parties.6Farrar disapproves of his approach and calls New Zealand’s principles “bland provisions”.7He fears a decrease of investments in the New Zealand market if it does not follow the US lead quickly.8
This paper tries to evaluate Farrar’s proposal of imitating the US example. Section II portrays corporate governance regulations currently in place in New Zealand. It focuses predominantly on listed public companies and shows shortfalls in this area. Section III illuminates SOX and its provisions. The paper provides explanations ma-jor fraud scandals in the USA and discusses in the light of these findings the effectuality of SOX. It concludes that the US legislation has numerous pitfalls and fails to achieve necessary fraud prevention. Based on this understanding, Section IV discusses the advantages and disadvantages of a principle-based approach to corporate governance regulation. It is shown how self-regulation paired with a strong legal framework provides sufficient protection for investors and how such an approach values the theory of free markets. This author believes strongly in the efficiency of free, unregulated markets and eventually concludes with a few humble suggestions on how New Zealand might change their corporate governance regime.
II.NEW ZEALAND’S APPROACH TO THE CODIFICATION OF
CORPORATE GOVERNANCE
A. The New Zealand Corporate Market
New Zealand’s corporate regime is a mixture of statute and common law principles.9The underlying framework is given by the Companies Act 1993 which defines direc-tor duties, board responsibilities and shareholder control.10The New Zealand economy is dominated by small to medium-sized companies with 96.3 per cent of com-
6SecuritiesCommission,Corporate Governance in New Zealand: Principles and Guidelines - A
Handbook for Directors, Executives, and Advisers,<http://www.sec-com-gov.nz>,at18 June 2006, p
28.
7Farrar J,Enforcement: A Trans-Tasman Comparison,Corporate Governance at the Cross Roads (14
February 2005), p 10.
8Farrar, above n 7, 10 & 11.
9Gilberton B & Brown A,Corporate governance in New Zealand,<http://www.iflr.com>,at18 June
2006, p 51.
10Ibid.
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panies falling within this category.11Consequently, corporate governance regulations must match New Zealand’s unique economic circumstances.
There are currently two types of companies12in place in New Zealand: companies and listed companies.13The term “listed companies” describes those entities that are listed with the New Zealand Stock Exchange (NZX).14Each form of company needs to have at least one or more shareholders as well as one or more director.15In the year 2001, there were 270,000 registered companies in New Zealand but only 216 of these were listed with the New Zealand Stock exchange and only 139 of these were original New Zealand companies.16Notwithstanding the minor share of listed public companies in the overall number of domestic companies, it has been estimated that “the total market capitalisation of the domestic equities market was approximately NZ$44 billion in 2001”.17Between 1985 and 2001 market capitalisation almost tripled and in June 2000, 44 per cent of all New Zealanders owned shares.18
Nonetheless, there is evidence that specifically large New Zealand companies have underperformed in recent years.19Large companies, however, significantly shape the reputation of country’s economy.20American but also European investors heavily rely on corporate governance practices nowadays. It casts a bad light on a country’s entire economy if large companies, which are internationally noticeable, show weak performance. In times of global equity markets, New Zealand cannot afford to have a bad international reputation.21A survey conducted by McKinsey in 2000 showed that three quarters of the questioned investors found that good corporate governance was
11Ministry of Economic Development,Small & Medium Enterprises,
<http://www.med.govt.nz/templates/MultipageDocumentPage_202149spx#P47_5065>at05 July
2006.
12Companies being defined as artificial legal entities with separate legal personality (Walker G, Reid
T, Hanrahan P, Ramsay I & Stapledon G,commercial applications of company law in new zealand,p
5 [§103]).
13Ibid, p 18 (§113).
14Ibid.
15Ibid, p 16 (§113).
16Ibid.
17Ibid, P 7 (§105).
18Ibid, p 8 (§105); NZSE,Share Ownership Survey 2000,(2000).
19Krackhardt O,New Rules for Corporate Governance in the United States and Germany - A Model
for New Zealand?,36 VUWLR 319, 327.
20Fox M & Walker G,Evidence on the Corporate Governance of New Zealand Listed Companies,8
Otago L. R. 317, 327-328.
21Krackhardt, above n 19, 329.
Page 4
as important as the financial performance when evaluating an investment.22Focusing on good corporate governance is important in order to “inspire confidence in … international investors”, to retain a strong equity market and to support underperforming large corporations.23In Australia, New Zealand’s biggest rival, medium to largesize companies have been 2.5 times more successful in developing growth than their New Zealand counterparts.24Considering that the NZX market capitalisation has, notwithstanding its overall success during the last two decades, only grown by $0.7 billion between 1994 and 2001,25whereas the Australian market grew from $282 billion to $733 billion during the same period of time,26New Zealand not only needs to be aware of its comparably less attractive market for international investors but also of the possibility that local investors might find it more profitable to invest overseas.
The slow growth between 1994 and 2001, after such severe progress in the preceding decade, might arguably be seen as an indicator that less and less local investors obtain equity of New Zealand companies and invest somewhere else instead. In the light of the fact that almost half of the population owns equity; such assumption does not appear to be absolutely far-fetched, in the author’s opinion. The words of Jane Diplock, Chairman of the SEC, that “corporate governance [in New Zealand needs to
be] world-class” are, therefore, more than just a slogan.27Good corporate governance can improve a company’s financial performance and its attractiveness to investors. Only through superior corporate governance can New Zealand, in the author’s view, overcome its recent capital underperformance and raise itself to one of the leading investment markets worldwide.28
22McKinsey and Company, <http://www.mckinsey.com>,at15 June 2006.
23Securities Commission,Corporate Governance in New Zealand - Consultation on Issues and Prin-
ciples(September 2003), < http://www.ecgi.org/codes/documents/cg_nz_consult2003.pdf>,at18
June 2006, p 3.
24Krackhardt, above n 19, 329.
25New Zealand Stock Exchange,Annual Report 2001.
26Krackhardt, above n 19, 329.
27Securities Commission, above n 23, 3.
28Krackhardt states also that “the small size of an economy does not prevent its producing interna-
tionally successful large companies” (Krackhardt, above n 19, 327).
