Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Chance for fresh approach at the top

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Rob Fyfe has been an inspirational leader at Air New Zealand and will be missed. File photo / Wayne Drought
Rob Fyfe has been an inspirational leader at Air New Zealand and will be missed. File photo / Wayne Drought

The changing of the guard was announced at three big organisations during the week.

Rob Fyfe revealed he would finish as Air New Zealand's chief executive at the end of the year after more than seven years in the demanding role.

Reserve Bank Governor Alan Bollard disclosed that he would not seek a third five-year term and would leave in September.

NZX chairman Andrew Harmos announced the appointment of Tim Bennett as the exchange's new chief executive. He replaces Mark Weldon who had nearly 10 years at the helm.

Fyfe has been an inspirational leader at Air New Zealand and will be missed.

His first annual report, for the year ended June 2006, was an important change from the conservative documents of previous years. It was modern, upbeat and attractive to read reflecting the new chief executive's innovative style.

The company has performed remarkably well during Fyfe's tenure, particularly as fuel costs, which are the company's biggest expenditure item, have risen sharply since he started in October 2005.

Benchmark Brent Oil has surged from US$59.50 to US$111.00 a barrel but Air New Zealand has had a positive sharemarket performance of 38 per cent, including dividends, while the NZX-50 Gross Index has been down 1.3 per cent.

By contrast Qantas has had a negative sharemarket return of 37.6 per cent since October 2005 while the Australian sharemarket has risen by 25.9 per cent, in gross terms, over the same period.

Air New Zealand has won many awards under Fyfe's stewardship and the company has outperformed most of its competitors in a difficult industry.

Fyfe told the media this week that he is undecided where to go next but he is the ideal candidate to replace Paul Reynolds at Telecom.

Telecom is essentially a marketing company since it split from Chorus and Fyfe's marketing skills would be a huge benefit to the company. Telecom chairman Mark Verbiest should be banging on Fyfe's door and refusing to go away until he gets a positive response from one of the country's best business leaders.

Bollard's decision not to seek a third term has ignited a debate about his likely successor and the role of the Reserve Bank.

The bank was originally established with private shareholders under the Reserve Bank Act 1934.

A prospectus was issued in 1934 and sharebrokers reported huge demand for the securities. The Treasury took considerable care to restrict the shareholdings to New Zealand residents, the offer was quickly oversubscribed and 8783 investors were allocated Reserve Bank shares.

The bank began operations on August 1, 1934, essentially to issue currency that replaced the coins and notes issued by individual banks.

However in a pattern that is all too familiar in New Zealand the number of shareholders quickly fell to 6359 as investors realised profits. There was also considerable concern about the ability of one party to obtain control of the bank and there was a huge debate over whether it should be in private or government ownership.

The Reserve Bank was nationalised shortly after the first Labour Government was elected in November 1935. Public shareholdings ended on April 1, 1936, after investors were given the option of accepting either cash or government stock for their bank shares.

The Reserve Bank has played a key role in implementing monetary policy since then, although up to 1989 the Ministry of Finance directed the bank as to what monetary policy should be and how it should be achieved. These directives were not made public.

Under the Reserve Bank Act 1989 the primary objective of the bank is to control inflation through monetary policy. The Government sets the inflation target, the target is made public and the bank has operational independence as to how that inflation target is achieved.

The bank has a number of secondary functions, including the oversight of the country's financial system. However this is essentially a monitoring role and is subservient to the bank's price stability objectives.

New Zealand has led the way in terms of the "independent central bank with a primary focus on price stability" model but there is now considerable debate about whether central banks should have other objectives as well.

A recent research paper by the Brookings Institution - Rethinking Central Banking - recommends changes to central bank mandates.

The paper argues that the recent property and financial bubbles, followed by the Global Financial Crisis, have shown that central banks need wider objectives. The institution believes that central banks should be able to implement policies to counteract rapid credit growth, asset price bubbles and other financial excess even if it means that inflation targets are missed.

In other words central banks should have a mandate for financial stability as well as price stability.

New Zealand's finance company debacle is a good example of this.

The finance company sector was unregulated and unsupervised because no government agency had a specific mandate to oversee it. This sector is now under the regulation of the Reserve Bank but it is far too late, investors have suffered huge losses.

If the Reserve Bank had a financial stability objective then it could have taken action to control the finance company sector excesses but it had no mandate to do so.

This issue is particularly important because the main candidates to replace Bollard are "economic dries". These are individuals who generally believe that the Government and its agencies should play a minimal role in the economy.

The "dries" believe that markets automatically self-correct before excesses develop, although recent worldwide developments contradict this widely held belief. A good example of a "dry" is former US Federal Reserve chairman Alan Greenspan who continues to believe in the power of the market and advocates minimal government and central bank intervention.

Bollard has performed exceptionally well as Reserve Bank Governor but his performance has been within a narrow mandate. The next Reserve Bank governor needs to have a wider mandate, as recommended by the Brookings Institution, because it is unlikely that any of Bollard's obvious replacements will be willing to embrace a wider role unless specifically required to do so.

At the NZX, Tim Bennett will replace Mark Weldon on May 7. Bennett, who is a Singapore-based New Zealander, is relatively unknown in this country.

Bennett comes from a consulting background, the same as Weldon. Consultants are usually highly intelligent, have strong strategic strengths but they don't have much experience managing people.

Weldon has demonstrated these strong strategic abilities at the NZX but the exchange has had a large staff turnover and communications between the NZX and the country's stockbrokers has not been as strong as it should be.

The big challenge for Bennett is to rebuild the NZX's relationship with the stockbroking community, other investment industry participations and the general public. The partial privatisations of Might River Power, and the other state-owned enterprises, are an excellent platform to achieve this aim but Bennett cannot rely on these alone.

The NZX has never fully recovered from the 1987 sharemarket crash, particularly as far as public confidence is concerned, and Bennett's main objective must be to ensure that confidence in our sharemarket is fully restored by the time his term of employment is completed.

Disclosure of interests: Brian Gaynor is an executive director of Milford Asset Management.

- 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.

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