Recent issues in some New Zealand listed companies have created concerns that organisations, both big and small, are not reacting well to mistakes and have highlighted the need for all aspects of a company's performance to be aligned and working effectively.
Management must be able to communicate clearly with the board and the board must understand the company and be able to provide appropriate oversight. The company must be open in interacting with its external advisers, most notably its auditors.
Auditors are not supposed to be making a silk purse out of a sow's ear and should be provided with a competently prepared set of financial statements. They can then stress-test those results and provide assurance that those statements give an accurate financial picture of the company.
Disclosure to investors should be clear, concise and effective, not opaque and voluminous.
Organisations need to constantly challenge themselves and respond to feedback they receive. One excellent source of feedback is regulatory interactions. Regulation is not a barrier to business success. Regulation is necessary for sustainable and transparent markets.
Companies should take regulatory inquiry as a valuable check on their own internal biases. In most cases the questions the regulator is asking are questions that should have been asked internally already.
We have always emphasised that the FMA is a regulator that understands regulation is not an end in itself and that regulators must work with industry to ensure there are good outcomes for investors. We have no desire to transform into a "shoot first and ask questions later" regulator. Constructive engagement will always be our stock in trade.
However, our patience with some aspects of corporate attitude is running thin.
For example, while it is true that entities ultimately own their own disclosure, it is also true that those disclosures take place in a regulated environment. Whether that's the regulated offer regime, which emphasises clear, concise and effective disclosure, or in the listed environment, which requires material information to be released to the market in a timely way.
Responses to regulatory queries that start from the proposition that the entity knows its business and that questioning it is somehow impertinent are not helpful. Nor are responses that are like quicksilver, shimmering into exotic new shapes at every opportunity. Responses that don't address customer outcomes at all are sub-optimal.
Lawyers can be value-additive or a block to a good outcome, depending on their quality and ability to see the wood for the trees.
There is too much emphasis placed on policies and procedures and broad assertions of good governance or culture, and not enough on how these policies or concepts actually work. Responses should gravitate toward the demonstrable, not the abstract.
These are not salad days in the capital markets and a complacent attitude of business-as-usual will not suffice to retain and build the investor confidence required to sustain these markets. For example, we have actively encouraged NZX to promote a new continuous disclosure listing rule that will impose a constructive knowledge standard on boards so they are caught where there are situations where they ought to have reasonably known that disclosure was required. This will do no more than codify good business practice.
We understand there is some opposition to this in the listed sector. Suffice to say, given some recent issues we find this surprising to say the least.
The tension between constructive engagement and direct intervention with the market is a permanent debate within the FMA to ensure we get that balance right. A worrying aspect of recent events is that the lessons of the finance company cases appear not to have been well-learnt.
The last thing anyone wants is for the regulator to take a knee-jerk lurch into regulation for regulation's sake, but it is also crucial that investors' trust in the market and its regulation be maintained.
Our expectation is that standards of conduct will rise over time and companies will get more efficient at providing for better customer outcomes. As the conduct regulator, our desire to assist entities achieve better customer outcomes remains as strong as ever, but we are prepared to act should the outcomes we consider appropriate not be occurring.
● Garth Stanish is director of capital markets for the FMA
