Market operator has been an underperformer, and splitting into two companies is an obvious solution.

NZX doesn't want entrepreneur Tony Falkenstein to join its board.

Its reaction to his bid for a board seat has been totally predictable and in my opinion illustrates a culture that rejects outside influence and advice.

In response to Falkenstein's candidacy, chairman James Miller sent this message to shareholders in bold type: "The Board DOES NOT SUPPORT resolution 5 which relates to Mr Falkenstein's election".

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This columnist, who was a member of the New Zealand Stock Exchange three decades ago, observed the old boys' network culture from the inside and, unfortunately, nothing much has changed.

Back then, some brokers had no interest in banning cowboy companies from listing because they were making too much money from these shonky IPOs. Today, brokers want to protect their ability to make their own rules, regardless of the interests of the wider business community.

As a result, share trading liquidity is low, there are few IPOs and there are only a handful of brokers to service a younger generation that is becoming increasingly interested in the sharemarket.

These young investors are looking to the Australian sharemarket because there are more brokers and the ASX has far greater market liquidity, more companies and more IPOs.

As a company, the NZX has also delivered very poor investment returns. Over the past five years it has had a total gross return of only 17.6 per cent compared with 112.7 per cent for the benchmark NZX50 Gross Index. Over those five years the NZX was the worst performing company of the 38 that have been included in the NZX50 Index for the full period.

Falkenstein's Just Water International achieved a 185.0 per cent return over the same five years, although his company is much smaller than the NZX and has been the subject of an unsuccessful takeover offer.

The NZX's investment performance has been so poor that in my opinion there is a reasonable chance it will be dropped from its own benchmark NZX50 Index.

By contrast, the ASX has had a gross return of 107.9 per cent for the same five-year period compared with a 75.6 per cent return by the ASX200 Accumulation Index.

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Looking at it another way, the sharemarket value of the NZX operator has fallen from $320 million to $290m since May 2012, while the market value of the ASX operator has surged from A$5140m to A$9900m over the same period.

Why has the NZX been such a poor performer in recent years?

The widespread view among NZX members in the 1980s was that the stock exchange was there to serve their interests rather than to achieve any lofty national objectives. The large broking companies usually nominated their weakest partner, the one generating the least income, to the board of the exchange. This reflected the view that the exchange was primarily an administration vehicle; it wasn't an organisation with great growth potential.

The NZX board has been beefed up since its June 2003 listing but it still doesn't have a strong entrepreneurial bias, nor does it have a clear and well-articulated growth strategy.

For example, the three brokers with the greatest vision and entrepreneurial drive - Neil Craig, Eion Edgar and Bryan Johnson - have never been on the listed NZX board.

Thirty years ago, Craig operated a small one-man office in Whakatane which he has turned into Craigs Investment Partners; Edgar was running the regional five-partner Forsyth Barr in Dunedin, which is now a major national company; and Johnson was the driving force behind Jarden & Co, now called FNZC (formerly known as First NZ Capital).

Why haven't these three visionaries been on the listed NZX board, particularly as they have been directors of a number of growth oriented listed companies?

The answer to this may be found in the recent NZX letter to shareholders. Chairman Miller wrote that the NZX board had "developed a skills matrix and gap analysis in conjunction with [a] governance services firm". He went on to write that "the skills matrix outlines the experience needed to ensure the board is equipped to provide the high standard of corporate governance required to lead our business into the future".

"The board considers the attributes of all potential director appointments against this matrix and several other important elements of board composition, including committee succession, relevant executive and governance experience, regulatory requirements, geographic location and diversity as part of this process".

What about directors with vision, leadership qualities and strategic, judgment and entrepreneurial skills?

What weighting does the NZX give to these in its "skills matrix and gap analysis"?

Miller wrote: "while it was recognised that Mr Falkenstein would bring to the board entrepreneurial skills and experience in the small listed company sector, his skills overlap with those of existing directors and are focused on an important but small part of NZX's wider business".

NZX directors have decided to oppose the election of Falkenstein because he "would bring limited additional skills to the board".

The opposition to Falkenstein is revealing because it shows that the NZX doesn't place a great deal of importance on the small company sector even though most of its listed companies are small.

The NZX board is supporting the election of Frank Aldridge, managing director of Craigs Investment Partners, and Richard Bodman, a former senior executive of FNZC. This is consistent with the NZX's policy of appointing individuals associated with the major broking firms.

These broking firms have a strong influence over the NZX, even though they have minimal shareholdings.

The problem is that this director election policy, which includes the appointment of broker directors, has delivered poor outcomes.

This is because in my opinion the NZX board previously did not appoint successful CEOs nor has it developed a clear growth strategy.

The last two CEOs have left with substantial financial rewards even though their performances were arguably hugely disappointing.

Mark Weldon invested in a number of offshore activities, one of which, in Australia, went horribly wrong.

Tim Bennett invested heavily in the funds management business, which reported an operating loss of .3m for the December 2016 year compared with a surplus of $1.7m for the previous year.

This strong emphasis on funds management is bizarre, particularly as only seven of Smartshares' 23 ETF (Exchange Traded Funds) invest in New Zealand companies.

The other 16 ETFs invest in companies listed on the ASX and other global sharemarkets.

How can investors have confidence in the NZX when most of the company's ETFs invest in offshore sharemarkets?

Why is the NZX focusing on funds management, particularly the development of ETFs that invest offshore, when its core activity is the development and growth of the domestic sharemarket?

This funds management emphasis is clearly evident in Miller's letter to shareholders when he rejects Falkenstein's nomination because of his limited experience in "funds management and clearing". Meanwhile, Aldridge and Bodman have been endorsed, partially because of their funds management experience.

The NZX's emphasis on funds management is consistent with the major broking firms, which are expanding their private wealth and funds management operations. Therefore, it is not surprising that the NZX, with its strong broker director representation, is going down the same funds management route.

A clear solution to the NZX's poor performance is that it should be broken up into two separate companies, one operating the stock exchange and the other holding its funds management business.

The broker directors should stay with the funds management company while the stock exchange company should appoint new directors with vision, leadership qualities and strategic, judgment and entrepreneurial skills. Neil Craig should be the only broker representative on the new stock exchange company board.

Two separate companies is an obvious solution to the NZX's poor performance but it is highly unlikely that the current board has the "skills matrix and gap analysis" to make this bold and visionary decision.

NZX's annual meeting will be held in Wellington on Friday June 30.

Brian Gaynor is an executive director of Milford Asset Management which holds NZX shares on behalf of clients.