Gaynor: Time to put NZSE under scrutiny

By BRIAN GAYNOR

What is wrong with the New Zealand sharemarket? Why has it performed so badly over the past decade and a half? Why hasn't there been a comprehensive independent analysis of its dismal performance?

Since the end of October 1986 the NZSE40 Capital Index (formerly known as the Barclays Index) has fallen 46 per cent, the market's total value has remained virtually static and only 133 New Zealand companies are listed, compared with 273 15 years ago.

By comparison, the Australian All Ordinaries Index has more than doubled over the same period, its total value has increased fivefold and the ASX has 209 additional listed companies.

In New Zealand dollar terms, the ASX is now more than 20 times the size of the NZSE, whereas in October 1986 it was only four times larger.

The most telling statistic is the total market capitalisation to gross domestic product (GDP) ratio. The value of the NZSE has fallen from 90 to 37 per cent of GDP since October 1986, whereas the ASX has risen from 53 to 103 per cent of Australia's GDP.

The NZSE market capitalisation to GDP ratio is one of the lowest in the world.

The poor performance of our sharemarket has enabled foreign interests to take control of a large number of top-40 companies relatively cheaply. These include Bank of New Zealand, Countrywide Banking, Fletcher Energy, Fletcher Paper, LWR, Macraes Mining, Montana, NZI Corporation, PDL, Progressive Enterprises, St Lukes, Trust Bank, Whitcoulls and Wilson & Horton.

This list does not include Contact Energy and Frucor, both of which will be foreign-owned if the current bids are successful, or the large number of listed companies that are controlled by overseas interests.

As the sharemarket should be the driving force behind a strong free-enterprise economy, a full-scale independent analysis of the poor performance of the New Zealand market is long overdue.

Contact Energy

One of the factors contributing to the poor performance of the New Zealand sharemarket is the inadequate disclosure of most listed companies. Contact Energy is an excellent example of this.

On May 3 the Wellington-based electricity generator announced a 6.7 per cent decline in net profit for the six months ended March 31. The results commentary contained a mixture of positive and negative news, but gave no indication of the expected result for the year to September 30. The company made no further comments to the Stock Exchange on its September-year result until the full details were released on Friday.

The only other official indication of the company's earnings for the 2000/01 year was included in the Grant Samuel appraisal report dated May 11. The report indicated that Contact Energy's management was anticipating operating earnings (earnings before interest, tax, depreciation and amortisation) of $273 million for the September 2001 year, whereas the actual outcome was 30 per cent higher at $356 million.

Why did Contact Energy not keep the market fully informed of its earnings outlook for the 2000/01 year? Why do many New Zealand companies specifically refuse to update profit forecasts that are included in prospectuses and other official documents?

There is little doubt that Contact's share price would have been much higher when Edison Mission made its takeover offer if the company reported to shareholders on a quarterly basis. It also would have been much higher if Phil Pryke and his fellow directors had kept the market fully informed of its improved profit performance.

While Contact Energy and many other New Zealand companies live in the dark ages as far as disclosure is concerned, the United States is taking a big leap into the electronic age. Harvey L. Pitt, the new chairman of the Securities & Exchange Commission, believes quarterly reporting is outdated and companies should be posting monthly, or even weekly, financial information on the internet.

US regulatory authorities want to reduce reporting periods from three months to one month, whereas Contact Energy went 5 1/2 months without giving any indication of its improved earnings performance to the Stock Exchange.

Inadequate disclosure gives a controlling shareholder a huge advantage over other investors, particularly if this shareholder is contemplating a full takeover offer. It also makes it easier for overseas interests to buy New Zealand companies relatively cheaply.

Directors' Payments

Stock Exchange managing director Bill Foster has gone on the offensive over suggestions that the listing rules almost encourage companies to give golden handshakes to retiring directors. But in his attempt to rush into print, Mr Foster may have neglected to scrutinise his own rules.

The rules are quite simple. Rule 3.5.1 states "no remuneration shall be paid to a director in his or her capacity as a director unless that remuneration has been authorised by an ordinary resolution of the issuer". This rule, which is consistent with section 10.17 of the ASX's listing rules, means that shareholders must approve all payments to directors.

But in the next paragraph, under Rule 3.5.2, the NZSE creates an exception. It states that retiring directors may be paid a golden handshake without shareholder approval as long as it "does not exceed the total remuneration of the director in his or her capacity as a director in any three years chosen by the issuer".

This exception does not appear in the ASX's rules.

Air New Zealand is a good example of how the NZSE rules work in practice. In the June 1999 year the national carrier paid total director fees of $400,000, the maximum amount allowed under a resolution approved by shareholders at the 1994 annual general meeting.

At the 1999 annual meeting, shareholders approved an increase in director fees from $400,000 to $900,000, and $860,000 was paid under this provision in the June 2000 year.

But during the 2000 year, Paul Collins and Patsy Reddy retired and they were given golden handshakes of $120,000 each, bringing total director remuneration to $1.1 million. This was $200,000 more than the sum approved at the 2000 AGM.

Bill Foster claims that Rule 3.5.2 "is designed to set a limit on the ability of company directors to make payments to themselves". In practice, it does just the opposite.

* bgaynor@xtra.co.nz