KEY POINTS:
The NZ Exchange has been touting chief executive Mark Weldon's latest bonus scheme to major shareholders over the past couple of days, trying to avoid another revolt like the one in March.
At that time, shareholders objected to the fact that under the bonus scheme, Weldon could have
increased his present 5.3 per cent shareholding to nearly 10 per cent of the company, worth about $27 million at today's prices.
Also, investors thought the target Weldon had to achieve to get the bonus - a 10.5 per cent annual total shareholder return for three years - was too low.
Shareholders kicked up a fuss and after NZX chairman Simon Allen and other board members failed to quell concerns the scheme was dropped.
This time Allen is consulting shareholders before making the scheme public.
The latest iteration of Weldon's bonus scheme is understood to be considerably more modest, and won't allow Weldon to end up with so much of the company. The hurdles for achieving the bonus have also been reset.
Allen won't reveal details of the new package, but is confident shareholders won't object. "We've had widespread support so far in our process," he says.
And it seems that shareholders agree, with one fund manager describing it as "much more palatable".
While there's no doubt the NZX board badly bungled the first attempt at setting Weldon's bonus, it might have got it right this time around.
MORTGAGE MEDICINE
Twenty years ago, the variable interest rate on home mortgages was 20.5 per cent.
That means that someone with a $300,000 mortgage would have been facing monthly repayments of $5157.
Switch to July 2007 and variable mortgage rates are averaging 10.29 per cent and monthly repayments on a $300,000 mortgage are $2726 - perhaps not a paltry sum, but about half the 1987 figure.
Those calling for a cut in interest rates seem to have forgotten this fact.
In saying that Reserve Bank Governor Alan Bollard should focus less on keeping inflation under 3 per cent and more on the currency and growth, proponents of lower rates have forgotten that the price of rising inflation is eventually rising interest rates.
The reason that interest rates were so high 20 years ago was because inflation was out of control, hitting 18.8 per cent in June 1987.
Inflation eats away at economic growth. Rising prices erode the value of investments and distort investment decisions. They discourage savings: why not spend your money now if it's going to buy you less in a few weeks' or months' time?
Also, those who do want to save tend to put their money into investments such as gold and real estate, which hold their value against inflation, rather than into productive assets that help the economy grow.
That's the economic theory, but it also holds true in practice.
In a 2001 study of the economies of more than 140 developing and industrialised countries, the International Monetary Fund found that inflation above 3 per cent in industrialised economies "exerts a negative effect on growth".
ANZ National bank argues New Zealand's monetary policy framework - controlling inflation with interest rates - is generally working well.
In its submission to the Finance and Expenditure Select Committee's inquiry into monetary policy it notes that while monetary policy cannot increase the rate of economic growth, "it can certainly undermine it by leaving inflation unchecked.
"After slipping down the OECD ladder throughout the 1970s and 1980s, the New Zealand economy has managed to keep up with the average OECD growth rates since the early 1990s," ANZ says.
"Structural reforms over the 1980s and the adoption of a sound macro-economic policy framework, of which monetary policy played an important part, have been key in the economy's performance."
Once inflation gets out of control, it feeds on itself and rises and rises.
The only way to get it back under control - and get the economy back on a sound footing - is to raise interest rates and keep them high for a long time.
Those who struggled under the weight of high interest rates could be said to have made the sacrifice to help beat inflation. It would be a great pity to squander that victory and have to fight the battle all over again.
TAKEOVER PARTY TO END
The meltdown in the US sub-prime mortgage overnight has already been felt in New Zealand, with both the NZ dollar and the NZX-50 falling sharply.
Both could easily recover over the next few weeks, but in the long run the local fallout from the US housing market woes could well be more than a momentary blip.
In the US, the fall in new home sales in June has convinced investors that they need to take notice of the collapse of the sub-prime mortgage market - that segment of the market that lends to high-risk borrowers.
More and more better quality home mortgages - the so-called prime market - are looking shaky as well.
This has already caused some investors to take their money out of risky, but high-yielding bonds and put them into safer investments.
That raises questions about how long the private equity takeover binge of the past few years that has been funded by high-risk bonds can continue. If investors pull their money out, liquidity will dry up and the party will come to an end.
And that's bad news for the local sharemarket, which is presently deriving much of its strength from expectations of corporate activity.
The two most obvious examples are The Warehouse and Auckland Airport, although the two main contenders for the airport are pretty well funded in their own right. Other stocks that could suffer if hopes of a takeover evaporate are SkyCity Entertainment, Tower and Freightways.
* Christopher Niesche is business editor of the Herald.
