Having something at stake

Vector Chairman Michael Stiassny. Photo / Wayne Drought

Which Kiwi directors have got 'skin in the game' and does it really matter? Alexander Speirs and Brierley Penn report

Since the beginning of the Global Financial Crisis, corporate governance has been in the spotlight. Fuelled by a spate of high-profile finance company collapses, the degree to which New Zealand directors' interests align with the companies they govern has been questioned.

One of the key ways in which investors can feel more assured that directors are acting in their best interests is when those same directors also hold shares in the company they are serving. "Holding a meaningful personal shareholding can be a positive signal of confidence in a company," says Ralph Chivers, CEO of the Institute of Directors NZ.

"At an NZX 20 level, companies are generally very well managed in New Zealand," says Chivers. "A contributing factor to New Zealand surviving the GFC and difficult economic times is the effective governance of our top companies."

Vector chairman Michael Stiassny agrees that director shareholdings in public companies can ensure an effective alignment of interests. "There is a view held by more and more people that it would be good if all company directors owned shares in the companies they are involved in. There is no doubt that it is a nice thing to do to own shares in the company. It brings our relationship with shareholders closer together. You have a sympathy with them, and a connection."

An analysis of NZX 20 companies revealed that at last year's balance date, 75 per cent of directors held a stake in the company they served. But only five boards boasted their entire membership as shareholders.

Stiassny suggests this trend needs to be improved, as though many directors hold shares, a number do so with rather insignificant amounts. "By international standards we are very poor at owning shares. There are always some directors who own quite a lot because they are more executive than non-executive, but there are quite a few cases where you'll see non-executive directors owning no shares at all."

The increasingly popular view is that all directors should have a stake in the companies they are involved in. Balance, however, is important. A very large financial stake can tie up the livelihood of a director too much with the company that they serve and consequently, mean that they are overly hesitant to make tough decisions that may be in the longer-term interests of the company.

Says Stiassny, there must therefore be balance within the boardoom, with directors holding "not a lot, enough to have some skin in the game, but not enough to totally consume them." He suggests that the general feeling within the industry is that half a year to a year's worth of director's fees may be a reasonable holding size.

Clearly, holding shares will never be the sole determinant of a director's effectiveness. Diversity policies, further training requirements, and membership of bodies such as the Institute of Directors are also cited as important factors. But the general feeling amongst industry participants seems to be that a direct financial stake can go some way to incentivising improved governance of our leading companies.

Chorus chairman Sue Sheldon disagrees with the assertion that board members need to have a stakes in the companies they serve. At current market prices, the Chorus board holds about a cumulative $237,000 stake in the company. "Directors either come to the table with the right skillset and understanding, and exercise appropriate governance or they don't."

Sheldon emphasises diversity among directors, so boards are able to use balanced and complementary skill sets to achieve the best outcomes for shareholders. "I think that a lack of the right skills around the table played a major role in a number of financial companies collapsing. Around a number of boardroom tables the directors all looked the same. There wasn't the right skillsets in place to handle the situation if the market changed."

Perhaps the biggest danger of all comes in the way that directors' shareholding responsibilities within companies are designed.

Public criticism has been brutal, for example, toward US banks, who were inappropriately managed by directors' with short-term shareholdings in their companies.

Such shareholdings encourage directors to inflate profits and share prices for the period until those shares are cashed in, but ultimately harm the company in the long term.

The director can also boost their wealth and run, leaving the blame to be heaped on future directors, who are tasked with repairing the misallocated investments of the past. Chivers says, "If directors do have shareholdings they should be held with the objective of long-term investment rather than short-term profit.

"This is consistent with a director's responsibility to protect the long-term welfare of companies while at the same time ensuring their compliance with legal requirements."

Owning up

• Fletcher Building, Westpac Banking, Trade Me, Auckland Airport and Vector were the only companies on the NZX 20 Index where all directors owned shares;

•Sky Television, Kiwi Income Property and Port of Tauraga ranked the worst among the NZX 20, with only two of the seven directors on each board owning shares;

•The most significant ownership by a board in terms of percentage of a company was Mainfreight (21.5 per cent), followed by Ryman Healthcare (7.9 per cent) and Guinness Peat Group (3.6 per cent);

• (Among those owning shares) 75 per cent of companies had an average director shareholding in excess of $100k.

NB: Based on 2012 annual reports.