Brian Gaynor: Mission: transform the sharemarket

Open letter to Mark Weldon, chief executive, New Zealand Stock Exchange, Wellington.

Dear Mr Weldon,

Welcome back to New Zealand and congratulations on your appointment as chief executive of the New Zealand Stock Exchange. Your arrival has been greeted with great enthusiasm and there are high hopes that you will develop a new and forward-looking strategy for the exchange.

Nobody is expecting you to deliver an instant cure, but the exchange needs to establish a realistic long-term growth strategy that is inclusive of all stakeholders. You will have the full support of the NZSE board, as the new directors have a more progressive outlook than their predecessors.

As you are aware, the NZSE's performance, in terms of new listings, capital raisings, investor participation and market capitalisation growth, has been fairly dismal in recent years. Some of this has been due to the poor performance of the domestic corporate sector, but the exchange must also take its fair share of the blame.

The main objective of the organisation has been to supply a modern and low-cost trading facility for brokers. The job of promoting the exchange, in terms of new listings and investor participation, has been left to members.

This strategy has proven to be hopelessly ineffective since the early to mid-1990s, when most of the major stockbroking firms were taken over by overseas interests.

The main focus of foreign owners is to promote institutional transborder trading in large companies. They have had little interest in encouraging small and medium-sized companies to list, or in promoting the sharemarket to individual investors. The NZSE board and management failed to recognise the impact of these ownership changes and continued to rely on member firms to promote the exchange when their overseas owners had no commitment to this strategy.

The NZSE has to undergo a dramatic shift in focus. It needs to become a marketing-oriented organisation. To this end you will have to establish a strong marketing department that promotes the exchange to potential listings and individual investors.

The exchange needs to identify companies that have the potential to list, and actively promote listing to them. Seminars should be held for potential listings and the exchange needs to identify a pool of directors, with experience on listed company boards, who are willing to become directors.

You also need to undertake an extensive review of the New Capital Market and the unlisted market. Both of these should play an important role in bringing new companies to the market but they are not fulfilling this role because of inadequate or inappropriate rules.

Many companies fail to take advantage of their stock exchange listing because they have no directors or senior management with listing experience and the exchange doesn't offer advice on non-regulatory issues.

Contact Energy listed three years ago with 225,000 shareholders, but none of the directors had listed company experience. The board adopted an arrogant and uncommunicative approach to shareholders and a large number sold out.

The company's communications have improved, but it now has only 116,200 shareholders. Brokers argue that they have the responsibility to advise companies on their post-listing obligations but they have no financial incentive to advise on corporate governance and communications issues.

Companies need to be able to go to the exchange for non-regulatory advice because their post-listing performance, both in terms of communications and share price, has a big impact on investor sentiment.

The NZSE also has to make a major effort to promote the sharemarket to individual investors. It needs to convince them that a far higher percentage of their savings be invested in equities instead of housing.

Investors left the sharemarket in droves after the 1987 crash and most of them have not returned, mainly because the NZSE has made almost no effort to attract them back. The four major life insurance companies, AMP, AXA (formerly National Mutual), Colonial and Tower distributed shares to policyholders and 24 per cent of Australians and 47.3 per cent of New Zealanders have sold out.

A higher percentage of New Zealanders have sold out of these four companies because we have far less confidence in the sharemarket than investors across the Tasman.

Managed-fund statistics tell a similar story. There are $46.7 billion of managed funds in this country (14 per cent is invested in the New Zealand sharemarket) compared with residential mortgage borrowings of $67.2 billion. By comparison, Australians have invested A$655 billion ($767 billion) in managed funds (36 per cent in Australian equities) and have residential mortgage debt of just A$333 billion.

The NZSE has to take several initiatives to attract investors back to the market. It has to stop promoting securities legislation that favours institutions over individual investors and it must convince retail brokers to come down from the 24th floor and meet their clients in a more friendly environment, at ground level.

Maybe you could convince Charles Schwab, the huge United States retail broker, to set up an operation in New Zealand.

You should also promote the positive features of the sharemarket through the media and hold seminars, with presentations by chief executives and investment experts, which are open to the public.

As Telecom chief executive Theresa Gattung has never been seen in public in Auckland, there would be a huge turn out for a lunchtime presentation by her. The exchange and its principal participants need to come face-to-face with the investing public instead of hiding behind their public relations advisers.

Your website is poor and must be substantially upgraded. New Zealand doesn't have many websites containing company information and most of the information supplied by retail brokers is hopelessly inaccurate.

Direct Broking has Fletcher Challenge Forests NTA (net tangible asset backing) at 152c a share and Access Brokerage puts it at 119c when the correct figure is 39c. The two brokers have BIL's NTA at 111c and 100c respectively when the correct figure is just over 50c.

Investors need accurate information to make sound investment decisions. It is essential that the NZSE website contains free information on companies, share prices and market depth and is the primary source of information on the New Zealand sharemarket.

There are two other areas that need your attention. New Zealand is one of the few countries in the Western world that does not have tax incentives for superannuation savings. As a result, we have a very low level of savings and the Stock Exchange is in a key position to play an active role in encouraging savings and convincing the Government to take a more pragmatic approach in this area.

The exchange should move its head office to Auckland, as the city has New Zealand's largest population and is the home base of the majority of listed companies and potential listings. Sixty-six per cent of listed companies are based in Auckland and 71 per cent of new listings in 2000 and last year, including the New Capital Market, also have their head office in the City of Sails.

As an effective marketing organisation must be close to its existing and potential clients, this leaves you with no choice but to move to Auckland.

Finally, there are many individuals who are ready and waiting to invest in the sharemarket but find it extremely inaccessible.

If you can de-mystify the sharemarket and increase its accessibility to individual investors and potential listings, then the NZSE will be well on the road to recovery. It will then be able to make a more meaningful contribution to the New Zealand economy.

Yours,

Brian Gaynor

* bgaynor@xtra.co.nz