Good Governance benefits all organisations

The Higher Education Funding Council for England (HEFCE) has just told Oxford University, the recipient of millions of pounds of government funding, that it needs to review its governance. HEFCE has advised Oxford to seek independent advice as it does not meet the requirements of a publicly funded higher education institution.

This statement comes after New Zealander John Hood, Oxford’s vice-chancellor since 2004, has waged a largely unsuccessful three year campaign to reform Oxford’s governance. The 900 year old university is governed ultimately by its “congregation”, a 3,000 strong body of Oxford academics. Among other measures, Dr Hood had proposed introducing outside business experts into the running of the university, especially its financial decision making, by giving them a majority on its ruling council. The HEFCE has endorsed Dr Hood’s efforts to modernise Oxford’s governance, noting that such initiatives are beneficial for the independent scrutiny of outside investors’ interests.

Providers of funding to any entity, (share holders, lenders, securities investors or public sector funding agencies) draw comfort from transparent and effective governance processes in the recipient entity. Good governance promotes funds being used efficiently for the entity’s proper purposes and discourages inefficient or incorrect use of funds. This is a basic property of good governance. Non-executive and independent directors can be a particularly effective means of controlling company executives and insiders to ensure that the interests of other company stakeholders such as shareholders, employees and creditors are not marginalised or prejudiced.

The New Zealand parallel can be drawn from the recently released 2007 ANZ Privately Owned Business Barometer Survey. The survey covered a sample of over 1,000 of New Zealand’s estimated 3,500 privately owned businesses with turnover in excess of $10 million. These are not small businesses and these businesses constitute a highly significant segment of New Zealand’s wealth producing capacity.

While availability of capital was not considered a growth constraint by two thirds of the respondents, almost half of them noted that they would expand if capital was more readily available. The survey observed that this raised the question of whether New Zealand businesses are consciously or unconsciously stifling their growth potential. Overall the survey hinted at a reluctance on the part of businesses to look at themselves not as an owner or manager but as an investor actively weighing growth and exit strategies.

The governance results of the survey would certainly appear to support this. Close to one third of the companies surveyed had no board of directors. Of the companies that did have a board of directors, 80% conducted formal board meetings but only 57% of these boards met regularly and 43% met quarterly or less often. Of those companies with a board just over a half had independent directors, and in three quarters of the companies the main shareholder held a controlling stake. 53% of respondent companies did not have their statements audited.

These results support the argument that many characteristics of good governance (such as independent directors, audited accounts, regular board oversight) are lacking in the medium to large privately owned business sector.

This is e significant for the reasons highlighted in the HEFCE example. Providers of capital will be more likely to invest in entities where the investment of that capital is conducted in a transparent, accountable and efficient way towards purposes subscribed to by the capital provider. While this may be of interest now to publicly funded New Zealand educational institutions it will be especially important in New Zealand generally in the years ahead for two key reasons.

First, the growth of KiwiSaver may well see increased capital available for investment. The privately owned and medium sized business segment in New Zealand will be a logical destination for some of that capital. Improved governance standards in that segment will provide one means by which these companies can attract and retain capital for growth and increased wealth creation.

Secondly, the ANZ Survey highlighted that almost half of the shareholder respondents expected to retire within 5 years and 45% by the age of 60. 28% of main shareholders are already over 60 years. Established governance practices and structures will assist in future business ownership transfers not only by increasing expected returns on capital but also by providing continuity in institutional and commercial knowledge. An established board of directors, composed of executive and independent directors, with relevant competencies and full understanding a company’s operations can operate just as efficiently after a change in shareholders.

For both medium sized New Zealand companies and 900 year old universities the governance moral is the same. Govern yourself well and prosper.