Sky Lark

Managers don’t always do what their shareholders want, which may explain the SkyCity deal oddities.


Listener: 30 March , 2013.


Keywords: Business & Finance;  Governance;


Richina Pacific has hardly reported to its shareholders since 2008, according to NZ Herald business columnist Brian Gaynor. By ignoring them, Richina Pacific gave no information to stakeholders in Mainzeal, its wholly owned construction company, which has gone into receivership. Nor did it give any information to those whose buildings it was constructing or to its subcontractors, some of whom will lose money; all will suffer hardship.


There is an argument in economics that companies behave independently of shareholder interests, generously remunerating the board and senior executives while pursuing company objectives that do not enhance shareholder value. Instructively, former Mainzeal chairwoman Dame Jenny Shipley said, “In all my governance roles, I focus on the best interests of the company.” Not, you observe, the best interests of its shareholders.


Others reply that if a company neglects its shareholders, it will be bought out and its management replaced with those more shareholder-aligned. The threat keeps the existing management sensitive to shareholder concerns and the company economically efficient. They go on to argue that this justifies privatisation, since a government-owned company is not under the same shareholder pressure. You don’t hear this argued as strongly nowadays; the privatisations of the 1980s and 1990s failed to deliver the promised benefits.


Both sides agree that, given half a chance, the management will neglect its shareholders. The dispute is whether the sharemarket effectively monitors the management. In practice, there is both regulation by the stock exchange (although Richina Pacific is not listed) and law to improve the power of shareholders. But shareholders often have little power.


Perhaps indicative of the difficulties they face is that the Government has been unable to rein in state-owned Solid Energy, despite knowing for some time that troubles were brewing.


Given such freedom, managers will behave differently from when they are following the requirements of shareholders and other stakeholders. Even when they are not pursuing their own interests, they can make decisions based on intuition rather than some rational assessment.


This may explain various oddities about the Auckland convention-centre deal. Think of Prime Minister John Key as a business executive who judged that the SkyCity deal best fitted his firm’s objectives. As is common in business, he probably does not know exactly why; compatibility is often critical.


But he is not a business leader who can neglect his shareholders, even though New Zealand has a very thin formal constitution and it is relatively easy for a prime minister to ignore Parliament in the short run. Many readers’ memories will go back to the Muldoon era when that was too obvious. Muldoon was doing little more than previous prime ministers had done, but they were more covert and had a more compliant media.


Over the following 30 years, we have introduced a series of procedures that reduce the prime minister’s discretion; they amount to informal or semiformal constitutional restraints. There are more transparent public accounts and the Treasury regularly reports to Parliament. The Official Information Act was also introduced to restrain the executive.


Another dimension has been strengthening the roles of the parliamentary officers whose task is to act on behalf of an independent Parliament if it had the time and the expertise. Among those officers is the Auditor-General. In the case of the SkyCity deal, she concluded that the procedures we – our representatives in Parliament – usually require were not applied. She did not find evidence of the corruption of someone improperly benefitting from the deal; her concern was a corruption of the constitutional process.


Yet Key said he was “comfortable” with the report’s findings. Perhaps the Prime Minister was thinking of himself as a businessman doing a deal the way that business does. Those who have publicly defended him have been mainly from the business sector. They just want to get on with building the convention centre even though it involves fiscal subsidies and social costs. They do not really care about the niceties of the constitution. Alas, the Prime Minister seems to agree with them. Does Parliament?