Rob Everett: Disclosure a key focus for the FMA

Fianncial Markets Authority CEO Rob Everett. Photo / Supplied

This time last year we commented on the importance of market integrity — focusing on conduct in our traded markets. Over recent months, we have been concerned to see a catalogue of corporate problems in NZ-listed companies.

Each of these situations has its own relatively unique set of circumstances but across all of them, the performance of the board, management and the auditors has been questioned.

In places we perceive some weakness or potential failures in governance by the boards, rather than breaches of market conduct regulation. It's worth noting the FMA does not have a direct right of action against directors for breaches of the Companies Act duties.

Under section 34 of the FMA Act, the FMA could initiate or take over proceedings "to stand in the shoes" of shareholders — for instance to assume a derivative action under the Companies Act that those shareholders have or could have taken themselves.

Whilst this is a much-valued power, the circumstances where that is likely to happen will be rare — the public interest test in s34 will always be difficult to trigger.

Beyond fraud or other criminal wrong-doing (which may sit with enforcement agencies and regulators), shareholders have causes of action and other routes that they are able to pursue either against companies or directors. For example, voting to remove a director — these are rights shareholders have been empowered with in the first instance rather than regulators.

On financial statements and related disclosures, we have engaged with a number of NZX-listed companies in recent months. Companies and their boards own their disclosure, not regulators.

... for a dual-listed company we could see an action being taken successfully on disclosure in Australia that would fail here.

Rob Everett

They are better placed than we are to identify the significant features of their business models and performance. Where we have seen fit to raise issues, we have been able to influence them to enhance their disclosure but on occasion we have found issuers less than enthusiastic about our involvement.

Issuers need to understand that enhancing disclosure for investors is a key focus for the FMA and if that requires us to intervene on occasion where the information available to us suggests we should, then we will.

It is often the case that corporate failures or results disappointments raise questions about whether the company has promptly complied with its continuous disclosure obligations under the NZX listing rules.

While the primary responsibility for investigating such concerns sits with the NZX, the FMA and NZX work together in reviewing such situations and do so frequently. Boards own their continuous disclosure obligations, not regulators or exchanges, but we will get involved if we have reason to believe there is, or has been, an issue.

Nowhere is good disclosure to investors more important than where it is likely to disappoint or alarm. The finance company failures should have taught everyone this fact — especially the host of criminal and civil actions and even a few jail terms — however, it's not clear these have been well-learned.

In the context of some continuous disclosure inquiries, we have assessed whether boards have been fully on top of the business strategy, performance and the risks and challenges of that strategy.

The fact that a board was unaware of significant deviations from expectations or difficulties with material contracts, projects or business strategies cannot be acceptable.

If there are situations where management is evading the responsibility of reporting up to the board, or misrepresenting material information, then the board needs to immediately review their governance mechanisms and processes to ensure they understand what's going on and to look beyond what they are told.

We have been discussing with the NZX whether the current listing rule can respond to this discomfort that senior management and boards are not always as connected as they should be.

Both the Australian and UK formulations would catch a board that ought reasonably to have known that the situation of the company had changed to the extent that disclosure to the markets was required.

We now face an uncomfortable situation where for a dual-listed company we could see an action being taken successfully on disclosure in Australia that would fail here.

Without wishing to make the risk profile for corporate directors any higher than it needs to be, we have encouraged the NZX to consult on a revision to the listing rule that would fill this gap.

We absolutely want quality directors to be willing to take on directorships in companies that pose a higher risk of failure. It is vital however that those directors have understood the risk and are comfortable that it is properly disclosed to investors.

Critically, their job is to rigorously and sceptically review the information they get from management when things are getting difficult, to take independent advice and soundings and to specifically consider whether new or different disclosure is required.

Directors are there to make sure the company is being run properly for shareholders, risks are being managed, and that appropriate information is available to all. By no means will all corporate difficulties require or justify breach of duty actions or breach of disclosure/financial reporting actions. But right now, questions are being asked of NZ's director cohort and not all of the answers we've seen to date have been acceptable.

We'll take action where we need to and strongly support the suggestion that the rules that apply to the knowledge of boards in times of trouble need updating.

More generally, the FMA will act in a variety of ways to ensure that boards take proper ownership in these areas — whether that's behind the scenes in influencing better disclosure, working to make the regulatory or legal system better or if necessary taking regulatory action, be that public reports or court action.

• Rob Everett is chief executive of the Financial Markets Authority.