Richard Inder: Disclosure leaves much to be desired

NZX chief executive Mark Weldon's favourite attack on the media is what he calls its propensity to see a conspiracy. And to be fair to Weldon, it is an occupational hazard.

Each day, journalists are confronted with a mass of lies and half-truths, from which they attempt to winnow fair, accurate and balanced reports. Facing such a barrage, a good journalist has to fight hard against generalising this to the wider world.

However, if journalists are paranoid (and I reject this as a fair assessment of most I know) Weldon and the NZX have done little to ease the affliction.

To put it bluntly, NZX's disclosure to the market is poor. It is arguably even below the standards it imposes on companies that issue securities to trade on its exchange.

This should not be taken as a dismissal of Weldon or NZX management's achievements over the past few years. They have wrought dramatic and significant improvements.

But the NZX's backdown on proposed changes to the fees it charges its listed issuers this week is the latest and, it must be said, an egregious example of a significant failing.

On April 21, the NZX disclosed the results of a long-standing review of the fee structure. It said that from July this year it would link fees to companies' market value or their position in the NZSX-50 index.

The proposal outraged many listed issuers, some of whom faced increases of more than 100 per cent.

However, investors in the NZX were delighted. On the day the new fees were disclosed, NZX's shares surged from $8.60 to $9 and later rose to their recent peak of $9.75.

On the same day, ABN Amro published research suggesting fee increases added at least 77c to NZX's share price. But it added they could be worth as much as $3.81 a share because they could set a precedent for fee rises to approach those levied by the ASX.

However, the NZX got cold feet.

This week, Weldon, apologised to listed issuers. He said: "NZX acknowledges it did a substandard job at consulting the issuer client base as regards to the nature and timing of the fee changes, as well as communicating the value (real or perceived) of the upcoming changes in service levels and service provision."

The fee revamp would be phased in over two years.

Meanwhile, listing fees would not be reviewed again until 2009.

However, investors were kept in the dark.

NZX made no mention of the backdown on its website and did not even note the development at its annual meeting in Wellington on Thursday.

Weldon told the Herald on Thursday night that disclosure was not needed because the change was not material to NZX's bottom line and its long-run revenue.

The NZX backed that assertion yesterday morning, issuing a press release stating for "clarity" that the delay would cut revenue growth this year by $400,000.

But Weldon's claim is arguable.

Material information is defined by the NZX rules as information "a reasonable person would expect ... to have a material effect on the price of a security".

Yesterday, NZX's shares fell 20c to $9.40.

Sure, the Reserve Bank on Thursday delivered a more dour outlook for the economy than economists were expecting but it is still reasonable to deduce the fall was due, to a great extent, to news on the fees.

For one, NZX's investors and observers are of that view.

Second (and it is almost trite to say it) share prices are not only affected by dollars and cents. Assessments about management capability count.

Setting aside whether the fee increases are right or wrong, the NZX accompanied the modification with a frank admission of management failure. Moreover, it modified a proposal that it had made a great song and dance about in April.

Surely other NZX plans must now be taken with a grain of salt?

But even if the back-down is set aside, NZX does not stand up well to scrutiny.

Such a test has not mattered to NZX in the past. Just before Christmas, Weldon mistakenly sent an email - destined for the board - to the wider market. In it, he set out his plan to consolidate New Zealand's securities registries businesses.

In the email, Weldon said the ANZ National Bank was ready "to deal" its debt register to the NZX's registry joint venture Link Market Services and wanted to complete the transaction by March.

Again, Weldon refused - to the surprise of many - to disclose NZX's intentions to the wider market because the deal "would not represent a significant or material transaction". But five months later, in a general release to the exchange, the NZX disclosed it had indeed agreed to buy ANZ National's registry business.

One interpretation is that NZX made an error. The less favourable view is that NZX was reluctant to draw attention to its mistakes - a view entirely in keeping with its handling of the fee disclosure.

To a certain extent, journalists and investors expect this behaviour from listed companies. The best nuggets of information are often buried in the fourth to last paragraph on the last page of a turgid three-page press release.

However, NZX is an unusual beast. It is not only a company with commercial objectives and thus clear incentives to cast itself in the best possible light, but it is also a regulator of the market.

If NZX is unable to demonstrate anything but absolute compliance with its own rules, then it loses its legitimacy to impose compliance on other issuers. And, if all of this is rejected, investors should at least demand consistency from NZX, if only to improve the standard of financial journalism.