Corporate governance plans must strike balance

By MARK VERBIEST*

As New Zealand's leading listed company, Telecom believes it has a responsibility to its shareholders and the New Zealand stock market to practise high standards of corporate governance and external financial reporting. We take that responsibility extremely seriously.

The board of Telecom - as a matter of policy - regularly reviews international best practice to ensure the company is responsive to changing requirements.

Highly publicised cases of corporate fraud in North America in recent months have focused worldwide attention on standards of governance and accounting practice.

Ahead of predicted changes to legal requirements as a result of these cases, Telecom last month moved to ensure audit independence was maintained, both in practice and structurally, by revising its audit policy to ensure it reflected international best practice through the clear separation of audit and non-audit functions.

Telecom supports the direction of the corporate governance changes the New Zealand Stock Exchange is proposing. Telecom already complies with most of the exchange's draft proposals. It also complies with most of the changes the New York Stock Exchange is proposing.

For example, the Telecom board comprises seven directors - a non-executive chairman, an executive director (the chief executive), and five non-executive directors. Under the exchange's new rules, at least two directors or one-third of the board must be independent directors. Telecom betters this.

Similarly, Telecom has an audit committee to review external reporting, assess the adequacy of internal controls, and ensure policies and processes exist to identify and manage principal business risk. The committee also recommends the appointment of the external auditor to the board. The composition of this committee exceeds the exchange's proposed requirements in terms of the number of directors on it, and their independence from management.

Where Telecom and the exchange do differ, however, is on the prescriptive nature of some of the rules it is proposing. Telecom believes having prescriptive rules does not allow for differences in listed companies' circumstances, nor does it leave the possibility for a company to have different rules and to explain why to shareholders.

As always, it is important to strike the right balance. Imposing mandatory rules on all listed companies could be an unnecessary expense - particularly for small companies - and be a disincentive to listing. In the worst case, it may discourage potential new listed companies and the New Zealand stock market's development.

While Telecom applauds the exchange's desire to be proactive, it is also important to ensure that New Zealand does not get out of step of international stock markets. Doing so could create inconsistencies and complicate investors' thinking.

Telecom believes the exchange should not rush changes to its listing rules until overseas developments regarding corporate governance, particularly in the United States, become clearer.

Equally, what some commentators have said is true - you can have excellent policies and processes in place, but if board and management disciplines are not present requiring them to be followed then company failures can still result.

Telecom has always reported in excess of minimum disclosure requirements. We welcome any move towards tighter standards in governance, disclosure and transparency, as well as in harmonisation of international accounting standards.

The reality is that many companies and the New Zealand stock market would benefit from increased credibility.

* Mark Verbiest is Telecom's general counsel.