Creating a level playing field for listed companies

NZSA Disclaimer

NZSA plays a key role in advocating for the rights of individual investors in New Zealand’s public markets. That much is well-known, recognised by individual shareholders, directors and others in the investment community. At a fundamental level, however, our work assumes that individuals have choice when it comes to investment. And indeed, most New Zealanders have indeed enjoyed an increasing choice of both investment options and mechanisms over the past two decades.

Our ability to invest in overseas shares is a great example of this.

The power of the internet and enhancement of custodial relationships with brokers means that this is easier than ever before. There’s wide competition for investor dollars between NZ-owned platforms (such as Sharesies or Jarden Direct) and offshore platforms (such as Interactive Brokers). Just be wary of those pesky tax rules…even a small investor needs to pay their tax on any dividends they receive! And for investors who have invested more than $50k offshore, the Foreign Investment Fund (FIF) regime will have you sweating over your favourite spreadsheet at tax time.

Of course, the development of exchange-traded funds (ETF’s) mean that an investor doesn’t even have to go outside New Zealand to invest offshore, nor worry about complicated FIF spreadsheets. There’s a range of NZX-listed funds operated by Smartshares, an NZX subsidiary, as well as three actively managed listed investment companies (LIC’s) operated by Fisher Funds. With a bit of luck and a following wind, kiwi investors will soon be able to reap the benefit of Australian-based BetaShares listing some of their ETF’s on the NZX. Their funds are already available through financial advisor and other wholesale investment platforms in New Zealand, as are plenty of other options for investors working with financial advisors.

Retail vs Wholesale. Listed vs Unlisted. Shares vs Funds. Active vs Passive. As our recent ‘explainer’ on property investment options for New Zealanders showed, there are many ways to create diverse exposures within an investment portfolio – each with their own risk profile.

From an investor perspective, one might hold some hope that the increased risk prevailing in ‘unlisted’ investments on offer in private or wholesale markets is compensated by increased returns compared with public (‘retail’) markets. In some cases, ‘increased returns’ should mean more than just a few basis points.

Given this risk-return relationship, maybe it’s too much to expect a ‘level playing field’ between public and private markets; perhaps we should consider the relationship between private and public markets as more of a ‘gentle incline’.

What it should not be is the flat road running into a cliff face of compliance that is the current situation for companies considering a listing.

Let’s be clear – this is not about reducing the standards of our public, regulated, stock exchanges (NZX, Catalist). We contend that a market that creates confidence amongst investors through high-quality protections is a good thing, especially at a time of global economic uncertainty. That’s especially relevant for our small, isolated country at the bottom of the world. New Zealand’s listed markets can’t compete on scale with most developed-market stock exchanges – but investing in a stock market with high-quality investor protections has good potential to improve overseas investor fund flows. Put crudely, a foreign investor in New Zealand’s stock markets might still lose money (welcome to capitalism), but they are far less likely to get ripped off in a high-protection environment.

On this basis, NZSA believes that for the most part, there is little wrong with the plateau of protections at the top of the cliff of compliance. It doesn’t mean our job is done; our championing of a minority interests voting regime reflects a unique attribute of the NZX, where a third of listed companies have a single shareholder owning more than 30% of the company.

Rather, our concern about the cliff of compliance is more about the relaxed road of regulation impacting unlisted companies. Well, more to the point, the relaxed road that doesn’t impact unlisted companies.

Inadvertently, it probably also impacts the investment choices made by most domestic investors.

At NZSA, we often hear from direct or broker-advised investors that “there is nothing worth investing in on the NZX”. Or that “the ASX is a better environment for my money“. Sometimes, we even hear that “we need more companies like Tesla on the NZX“. But more often than not, we hear “I invest mostly in private markets or unlisted funds these days“.

Ultimately, all these statements are about choice.

I hasten to add that this is not just a New Zealand occurrence. The rise of private equity and unlisted funds has been a global phenomenon. But there’s probably a couple of systemic reasons why the impact has been more felt here than in other countries;

  1. Our cultural (and taxation-incentivised) love affair with property – as we highlighted in our April 7th article. In the benign economic environment following the GFC and Christchurch earthquakes, that’s resulted in a steady flow of dollars into property and unlisted funds.
  2. New Zealand’s weighting towards small and medium-sized businesses, with a high ownership proportion vested in a single (or small group) of entrepreneurs and owners. That’s a structure more conducive to dealing with a small group of private-equity funders than the vagaries of sentiment associated with a public market.
  3. Our statutory requirements governing unlisted companies – or lack thereof.

This must be close to one of the more ironic statements regularly trotted out by de-listing companies.

QEX Logistics anyone…? Exactly how much ‘protection’ do investors enjoy in that situation? The former NZX-listed company still exists but offers little by way of disclosure or communication to its shareholders. I’m not exactly sure what the company or its CEO are up to these days, and frankly, I have no way of finding out. In the unlikely event that I would want to offer investment funds to QEX, I would have little information to assess fair value nor is there a liquid market to determine a fair price for said investment.

If you were an existing shareholder in any unlisted company, there is little to inspire confidence in seeking any redress for any potential wrongdoing by directors under our Companies Act. While directors of all companies must act in the best interests of the company, good luck with meeting the costs of ‘lawyering up’ to achieve an uncertain justice where you believe this is not the case. If it’s a smaller entity (<$20m), its unlikely to even be attractive for litigation funders, who specialise in taking risks on uncertain legal outcomes.

Ultimately, our Companies Act (like many business relationships) is founded on trust. NZSA does not want to remove trust from any business relationship, but we do believe that there is an equal role for information and assurance.

That’s why we’re calling for changes to the Companies Act to reflect a proportionate regulation regime with statutory compliance requirements determined by the number of shareholders. In some cases, such as the preparation of financial statements, requirements are further governed by regulations (in that example, by the IRD and External Reporting Board).

Particular areas of focus relate to financial statements, audit requirements, annual meeting requirements, director remuneration approvals and introducing the concept of ‘director independence’ to the Act (for companies with greater than 100 shareholders).

We believe these changes would offer meaning to the statement that “Investors still retain the protections afforded under the Companies Act“, while acting to improve the relationship between private and public capital markets.

Our proposals are not limited to the Companies Act. The recent introduction of climate-related disclosure obligations under the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act applies to listed issuers with a market capitalisation (or debt securities) greater than $60m and to large financial institutions. That excludes unlisted companies whose size may be greater than their listed competitors – hardly a level playing field. NZSA much prefers the ‘tiered’ approach being considered by the Australian government, based on a combination of total assets, revenues and number of employees – and that applies equally to organisations regardless of their listing status.

This year, there are already two smaller NZX-listed companies that have chosen to delist from the NZX, with citing the alternative of saving $400k in compliance costs by operating as an unlisted, widely-held company. In the case of Just Life Group (JLG), this company is already 80%-owned by interests associated with CEO Tony Falkenstein. NZSA also notes that the company plans to establish a ‘buyback’ facility ahead of its de-listing, allowing existing shareholders concerned about future liquidity to exit the company, and also intends to maintain a listing on the ‘Unlisted’ platform (USX).

Falkenstein makes the point in a letter to shareholders that the company was originally listed on the NZAX (NZ Alternative Exchange), a ‘low-compliance’ NZX environment that offered few more shareholder protections than those already inherent in the Companies Act.

From NZSA’s perspective, the low-compliance listing model (enshrined in the former NZAX) is unacceptable – it unwittingly exposes retail investors to the pitfalls of wholesale-style investing. Longer-term, it has arguably helped to create a ‘low-compliance’ culture in some of the NZX’s smaller constituents. I hasten to add that Just Life Group does not fall into this group – the company has consistently offered relatively strong disclosures and governance structures for its minority shareholders.

I have no doubt that JLG will save money through de-listing. And for many closely-held companies, a listing may not be the answer; Falkenstein’s 80% ownership of JLG is a key factor limiting existing trading liquidity on the NZX. We’re yet to determine our voting intentions in relation to JLG, but the actions planned by JLG as party of its de-listing proposal count in its favour.

However, the reason JLG is likely to save money is because of the low level of underlying protection offered in our existing Companies Act. A proportionate regulation regime that reflects statutory requirements based in the number of shareholders will likely send a better market signal to all companies – regardless of whether they are listed or not. In JLG’s case, that might just mean consideration of whether Falkenstein’s 80% interest morphs into eventual full ownership or raising additional capital from external shareholders to ‘turbo-charge’ existing strategies to accelerate growth.

Applied at scale, either option leads to a more productive New Zealand – either through generating scale or freeing up (minorities) capital for use elsewhere. The current disjointed meeting place between the relaxed road of regulation, the cliff of compliance and the plateau of protection is not serving the future capital productivity needs of New Zealand.

It’s time for a change.

Oliver Mander

Oliver is the CEO of NZ Shareholders’ Association. He still remembers his Year 12 English lessons focused on tautology, alliteration and the power of the triple construction. Thank you, Joe Bennett.

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