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Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Foreign ownership shortchanging locals

40 comments
Investors lose imputation credits and boards lack former chiefs.

Restaurant Brands, which operates KFC, Starbucks and Pizza Hut, is one of the few companies that offers local ownership of international brands. Photo / Supplied
Restaurant Brands, which operates KFC, Starbucks and Pizza Hut, is one of the few companies that offers local ownership of international brands. Photo / Supplied

The release of the Deloitte/Management Top 200 list tells us a great deal about corporate ownership in New Zealand.

The list shows that, unlike most other countries, a majority of our largest companies are overseas- owned and relatively few are listed on the domestic sharemarket.

The breakdown of the largest 200 companies - measured in revenue terms - is as follows:

*102 of the Top 200 companies are at least 50 per cent overseas owned and are not listed on the NZX.

*48 are listed on the NZX but 14 of these are at least 50 per cent offshore-controlled.

*19 are co-operatives.

*12 are State-owned Enterprises (SOEs).

*The remaining 19 are non-listed domestic controlled entities. In this group are a number of government or city controlled organisations including Housing New Zealand, Watercare Services, Ports of Auckland, Northpower, Unison Networks and AgResearch.

Thus the vast majority of our largest 200 companies are either overseas controlled, co-operatives or effectively under the control of politicians through the public sector.

A number of important financial institutions are not included in the Deloitte/Management Top 200 because they don't meet the revenue criteria.

This includes ANZ National Bank, Westpac New Zealand, Bank of New Zealand and ASB Bank, even though the combined net earnings of these Australian-owned banks are more than the total net earnings of the 15 largest companies in the Top 200.

There is nothing wrong with overseas ownership, SOEs or co-operatives, but the balance is lopsided in New Zealand; we have too many large corporations overseas-owned or under the direction of politicians and not enough NZ private sector controlled companies.

Companies are major wealth creators and the substantial overseas ownership of our larger corporates results in a significant transfer of wealth out of the country.

New Zealand companies have offshore assets but these are far smaller and less profitable than the overseas-owned companies here.

There is a widely held belief that New Zealanders can obtain the benefits of this wealth creation by buying into Australian banks, Vodafone and BP in the UK and Wall Street-listed companies with activities in this country.

This is true but the New Zealand activities of these organisations are relatively small, overseas share transaction costs are usually high and these corporates don't distribute imputation credits to our investors.

A number of commentators, including Ernst & Young partner Brad Wheeler, have argued that the Australian-owned banks should be listing their New Zealand operations on the NZX. Wheeler recently began an opinion piece with the following comment: "New Zealanders should be demanding the opportunity to buy shares in the Kiwi operations of Australian banks without having to invest also in the parent companies."

He went on to write: "Because New Zealanders can't use Australian franking credits, it is not tax-efficient for them to invest in Australian-owned banks, even those which are dual-listed in Australia and New Zealand."

The problem is that a number of these banks were NZX-listed but shareholders decided to accept takeover offers from Australia.

ANZ Banking Group (NZ) was listed on the NZX until it was acquired by the Melbourne-based bank in 1986.

Bank of New Zealand was listed on the NZX until a successful takeover offer from National Australia Bank in 1992.

Countrywide Banking Corporation and Trust Bank New Zealand were NZX-listed until they were fully acquired by overseas interests in 1992 and 1996 respectively. Westpac (NZ) Investments listed on the NZX in 1999 to give New Zealand investors a dividend, equivalent to the amount paid on Westpac ordinary shares, with NZ imputation credits.

In 2005, Westpac exercised its right to exchange shares in Westpac (NZ) Investments for ASX-listed Westpac ordinary shares on a one-for-one basis. This right was exercised because of a "change in tax rules [which meant] Westpac would be subject to Australian franking debits in relation to the NZ class share structure from July 1, 2005".

In other words, the distribution of New Zealand imputation credits to shareholders of Westpac (NZ) Investments would reduce the number of Australian franking credits available to Westpac shareholders.

That development reflects the harsh reality of the corporate world.

A large number of our Top 200 companies were also previously listed on the NZX. The new offshore owners will always put their own interests first and are not concerned about the loss of imputation credits to New Zealand investors.

Restaurant Brands, which operates the KFC, Pizza Hut, Starbucks and Carl's Jr. franchises, provides one of the few situations where the domestic ownership of overseas brands allows imputation credits to be passed on to New Zealand investors.

Extensive overseas ownership also has a negative impact on the country's balance of payments because the earnings of these companies are an outflow as far as these statistics are concerned.

Twenty-three New Zealand-based companies reported a net profit after tax of more than $100 million in the latest year, according to the Deloitte/Management survey. Ten of these, with net earnings after tax of $3.9 billion, are 100 per cent overseas owned. Thus these 10 companies contribute 39 per cent of the country's balance of payments deficit of $10.1 billion.

Every country has overseas-owned companies, but if New Zealand investors rejected takeover offers there would be more imputation credits available for domestic investors and the country would have a smaller balance of payments deficit.

The foreign dominance of our corporate sector also has a big influence on the pool of company directors and our corporate governance.

Former chief executives play a major role on the boards of listed companies in most countries.

Their experience in running companies is highly sought after.

The pool of former chief executives is extremely small in New Zealand because most of the individuals who have filled these situations in overseas-owned companies have returned to their offshore parent or retired to their home country. Thus, they are not generally available to join the boards of New Zealand companies.

Former chief executives of the four major Australian owned banks are good examples of this.

In addition, a large number of our NZX-listed chief executives have come from overseas.

These include Andrew Ferrier and Theo Spierings at Fonterra, Ralph Waters, Jonathan Ling and Mark Adamson at Fletcher Building, Paul Reynolds at Telecom, David Baldwin and Dennis Barnes at Contact Energy, Nigel Morrison at SkyCity and John Fellet at Sky Network Television.

Some may stay in New Zealand but the majority return to their home country and their experience is lost to our boards.

New Zealand boards have a large number of accountants, lawyers and other service professionals, partly because of this reason. This reduces the effectiveness of our boards because former chief executives can make a huge contribution. This positive contribution has been as demonstrated recently by Keith Turner and Tony Carter, two former chief executives, who chair Fisher & Paykel Appliances and Fisher & Paykel Healthcare respectively.

It is vitally important that Mighty River Power, Meridian Energy and Genesis Energy remain under domestic control because the wealth created by these companies will remain in New Zealand, they will pay imputed dividends, they won't have a negative impact on our balance of payments deficit and they will help deepen our retired chief executive pool.

A deeper New Zealand-based chief executive pool would strengthen both our boards of directors and our corporate governance.


Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management. bgaynor@milfordasset.com

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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