Directors' skill key at PLCs, elsewhere

SEHAAM CASELBERG
Last updated 08:27 05/11/2012
Director Speak
Fairfax NZ

Director Speak

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Next year, when you read through the annual reports of household names like Chorus, Air New Zealand, PGG Wrightson or Xero and scan the list of names or photos of directors, you may find yourself evaluating how well they are doing on the diversity ratings. Another exercise might be to reflect on how governance within a public listed company differs from one that is not.

The most visible difference is the NZX published share price of a listed company. It is a quick indicator of how well the organisation is doing, commercially as well as its overall governance health. As an investor, you will be tuned into the capital investments of your portfolio and the value returned to you as the shareholder.

"Financial analysts will quickly assess and value decisions that the board takes and let you know what they think of them," says Annabel Cotton, former NZX director. "The share price measures many things but, over time, can be seen as an indicator of how much value the board and management collectively are adding to the business through their decision-making.

"There is a high level of accountability and scrutiny associated with having to report publicly on the entity's performance. There's a line of thinking around at the moment that perhaps annual meetings are losing their relevance. However, having to front up to shareholders and answer whatever questions they put to you regarding how their capital has been managed and invested is a vital part of keeping the board accountable."

Public reporting, or rather the rigorous requirement to determine what board decisions need to be publicly announced to the market, is a less visible difference and one that perhaps is taken for granted. The regulators, FMA and NZX, monitor announcements and have the authority to hold directors accountable if they disagree with a decision.

Measuring performance is a little less straightforward when it comes to private companies, co-operatives or not-for-profits. Their indicators may be weighted differently depending on the relationship between the shareholders, investors and beneficiaries.

Sustainable performance, says Neil Richardson, an experienced director and IoD Fellow, can and often is, regularly challenged by the expectations, motivations and allegiances of stakeholders.

Public listed or not, organisations have legislative and legal frameworks to operate within, such as ownership structure, the constitution, skills on the board, strategy, risk and financial health.

While there is some overlap, those frameworks look substantially different for public listed companies.

"Public listed companies have a raft of legislation that specifically affects their governance, including the Securities Act, the new Financial Markets Bill as well as the standard legislation such as the Companies Act. At the other end of the spectrum, not-for-profits come within the ambit of the Charities Act, while co-ops like Fonterra have their own legislation. Each situation is different."

Good governance principles always apply, says Earl Rattray, director, dairy industry adviser and recently appointed IoD Fellow.

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For him, ensuring the entity is competently managed and monitored, ensuring that business risks are understood and managed, and ensuring that there is a clear strategy with the human and capital resources in place to deliver it are relevant whether public listed or not.

"In the end it is the culture, disciplines and oversight of the directors which will determine if the entity meets its shareholders' expectations, no matter whether it is not-for-profit, co-operative or PLC."

Sehaam Caselberg is chair of the communications subcommittee, Institute of Directors Waikato iod.org.nz

- Waikato

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