Let’s not throw the baby out with the bath water

In recent weeks, the Michael Wood saga has been well-covered by local media. Scratch below the surface, however, and there is a clear impact on the interests of investors from unconscious bias in the rhetoric that has since emerged. As investors and New Zealanders, we need MP’s to understand capital markets. Their active participation in markets should be a ‘plus’ in ensuring representation – provided that conflict of interest protections are in place and enforced.

A quick recap

Michael Wood was suspended as the Transport Minister on June 6th after it was revealed that he had not disclosed shares in Auckland Airport in the public MP’s register of assets and other interests, despite being asked around a dozen times to clarify his position. Less than two weeks later, on June 21st, Mr. Wood resigned from Cabinet after it turned out that he also owned undeclared shares in Chorus, Spark and the National Australia Bank.

Some investors may question why this is relevant to them; after all, these are the clearly inexcusable actions (and inactions) of a single individual in our Parliament.

The potential for unintended consequence

It’s the wider reaction to this own goal by the former Minister that should concern us.

Clearly, Prime Minister Hipkins was more than a little frustrated at the hastily-called press conference held in the Beehive on Wednesday. “I don’t understand” was a repeated refrain throughout his answers to journalist questions – a (frankly) fair reaction to Michael Wood’s inaction on a relatively minor matter that should have been at the top of his to-do list.

But it’s now Prime Minster Hipkin’s reaction to Michael Wood’s inaction that holds more cause for concern, and potentially adds more fuel to the unconscious bias against direct investment in capital markets by retail investors that’s been a feature of government policies (regardless of political stripe) over recent decades.

The development of the PIE regime, encouraging investment via these funds at a reduced tax rate (maximum 28%).

A proposed tax regime that has potential to further ‘widen the gap’ in the tax paid by individuals and trusts compared with funds.

A murky set of rules surrounding realised (capital) gains for individual investors when buying or selling shares – while fund managers can trade with impunity.

And now – a proposal by the Prime Minister, as a result of Michael Wood, that no MP’s should be able to own individual shares.

There are bound to be other examples that experienced investors can point to.

No-one decries the increase in investing options for Kiwis – including NZSA. PIE funds and DIMS (discretionary investment managed services) have meant that New Zealanders who lack the passion for direct investment have a plethora of options available to them that can support productive investment in our economy and create a diversified wealth base, a stark contrast to the typical property-based retirement plan that existed for most only a half a generation ago.

But it’s also clear that government policies have been impacted by the lobbying efforts of key institutions and, probably more importantly, a lack of understanding of the unintended consequence of policy decisions on the long-term health of investment markets – and individual investors.

Let’s not forget that ultimately, it is individuals who choose where to invest their hard-earned cash – whether that’s via an institutional relationship or directly into public markets. For most, however, those investment decisions are being made in an increasingly distant manner, as more and more individuals outsource their investment decisions to funds.

Representation for Investors

The importance of parliamentary representation for all demographics and interests of our society – including investors – cannot be overstated. It’s a fundamental principle underpinning any democracy. Yet the PM’s knee-jerk response is another step to removing understanding of investment markets from Parliament.

Is it fair or appropriate that the interests of mum-and-dad investors are not represented in Parliament?

Would the Prime Minister be interested in forbidding MP’s to own investment properties? Because that is no different to what he is proposing for shares.

Recent NZSA surveys show that as investors, we’re attributing a declining level of importance to our political leaders. In other words, investors already feel that their interests are under-represented in Parliament. The cause is less clear – do MP’s not represent the interests of investors because there is no political mileage in it? Or do investors already feel disenfranchised by our Parliamentarians?

The Prime Minister’s comparison with existing Australian rules, which forbid direct share ownership for MP’s, is a cop-out. Our bigger neighbour is not always on the side of best practice when it comes to appropriate commercial standards. Surely, wouldn’t a rule that only allowed MP’s to invest via managed funds create an inherent bias towards supporting the funds management industry?

Yet another unintended consequence, one that adds to the “death by a thousand cuts” mentality that seems to dominate parliamentary attitudes when it comes to individual investors.

New Zealand’s existing rules relating to declaration of interests and consideration of potential conflicts for MP’s seem close to best practice when properly applied and enforced. And in that latter point lies the rub. The PM might be genuinely frustrated with the multiple breaches of interests declarations over the last few weeks. NZSA would argue that the sanction he has applied – removing the individuals – is an effective and appropriate enforcement.

Unfortunately, the Prime Minister inhabits a political world. The decision to apply an effective sanction – removing the individuals concerned from their positions – becomes fodder for political opponents and electorate sentiment, no matter the merits of the actual decision. The statement to forbid MP’s from direct share investment acts as a counterbalance – a knee-jerk soundbite that on cursory scrutiny appears to prevent a re-occurrence of the problem.

And the more systemic issues associated with the PM’s reaction? To some extent, the PM’s response indicates just how far down the vicious cycle we already are. The needs of individual investors have not been ‘top of mind’ in terms of awareness in our elected representatives for a long time.

In defining any problem – and formulating solutions – it’s critical to define the problem accurately, consider stakeholders and link potential solution outcomes to clear strategic principles. If Parliament’s underlying purpose is about representation and fairness, it should be thinking about solutions in a very different way.

Let’s hope it does so.

Oliver Mander

Oliver is the Chief Executive of NZSA. Over the past year, he has worked to improve political connections between MP’s and the interests of individual investors. There is still a long way to go. NZSA is politically neutral in its advocacy for investors.

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5 Responses

  1. Grant Diggle says:

    When John Key entered Parliament he placed his investments in a blind trust. I suggest this should be required by the Cabinet Manual. It is a simple solution that allows Ministers to continue holding investments in shares but not knowing the companies their shares are invested in whilst they are a Minister.

    • Max Smith says:

      This is not just an informative piece of advise in that I for one was unaware of this option but also very sound logic and is worthy of a wider audience. Perhaps a rewrite of this article, inclusive of this advise, would provide an acceptable remedy for issues such as this and would find acceptance in the higher echelon’s of both business and government?

      Max Smith

  2. Patricia Briant says:

    I think this article deserves wider publication than simply a letter to the shareholders association. Perhaps an opportunity piece to the herald, for instances

  3. Ken Morison says:

    Good to read your thoughts, but you remind me of what a previous boss once said to me: “Don’t come to me with your problems; come with your solutions”. You are in an excellent position to be more direct with solutions. Given the politicians’ poor understanding of investments, you wouldn’t want to leave it to them to come up with solutions.

    • I think I am simply saying that the current disclosure of interests rules are appropriate. They can be – and should – be enforced as the Prime Minister has done; it doesn’t need to be politicised any more than it needs to be, nor should our parliamentary leaders see owning shares as inherently “bad”.

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