The Financial Markets Authority’s consultation paper on corporate governance is timely. It is timely because it coincides with a large number of annual meetings where governance issues are a major topic of discussion.

Board composition is an important subject for shareholders because election of directors is one of the few areas where they have a yearly vote. These directors, particularly the chairman, play a huge role in determining a company’s strategy and overseeing its execution.

The main point about board composition is that it’s more an art than a science and there are far more guidelines than specific legal requirements. So there is considerable freedom as far as the selection of directors is concerned.

The NZX has a number of specific rules regarding board composition, including:

• Companies must have a minimum of three directors.

• At least two directors must be ordinary residents of New Zealand.

• There is a minimum of two independent directors or, if there are eight or more directors, three or one-third of the total directors, whichever is the greater.

• At least one-third of directors must retire from office at the annual meeting each year but are eligible for re-election at that meeting. Those to retire are those who have been longest in office since they were last elected or deemed elected.

• Only one executive director is exempt from having to be approved by shareholders.

One of the more contentious issues is the definition of an independent director. According to NZX listing rules an independent director is a person who is not an executive of the company and has no disqualifying relationship – primarily any person who owns more than 5 per cent of a company or any person associated with a 5 per cent-plus shareholder.

The Securities Commission, the FMA’s predecessor, wrote in 2004 that “directors with an independent perspective are more likely to constructively challenge each other and executives – and thereby increase the board’s effectiveness”.

This is true, but how can directors be fully independent when their position is totally dependent on the votes of a controlling shareholder?

Two weeks ago this column looked at Goodman Property Trust which has an external management structure. The trust has no directors; it’s managed by a company that is 100 per cent owned by Australia’s Goodman Group.

According to NZX definitions, the Australian controlled management company has four independent directors. Why is a director appointed by a 100 per cent shareholder more likely to “constructively challenge” other directors and executives than an individual who represents a 6 per cent shareholder?

Paul Glass of Devon Funds Management recommends at least one or two independent directors be elected by a majority of minority shareholders. So the Crown could not vote on the election of a specific number of Genesis Energy, Meridian Energy or Mighty River Power independent directors.

Glass’ recommendation is long overdue as it would result in the election of one or two truly independent directors.

The FMA has outlined a number of board composition guidelines in its consultation paper, including:

• The chairperson of a publicly owned entity should be independent.

• No director should simultaneously hold the chairperson and CEO roles.

• Only in exceptional circumstances should the CEO go on to become chairperson.

• Boards should report on an annual basis, and in a clear and measurable way, the assessment of its composition and the impact it expects that composition to have on its success and sustainability.

• The board should have rigorous, formal processes for evaluating its performance. The FMA encourages boards to have an independent external review of its performance. For example, if an annual review is done this could be an external review every third year.

The FMA also encourages “boards to consider the length of service of each of their directors and the impact this has on the ability of directors to remain independent. Regular review of the length of board appointments will also improve the board’s ability to strike the right balance between institutional knowledge and fresh thinking from newly appointed directors”.

NZX-listed companies generally adhere to the first three FMA guidelines. Individuals are not chairperson and CEO at the same time and most chairs are independent with a few exceptions. The latter includes Sir Michael Hill at Michael Hill International and Bruce Plested at Mainfreight.

Only a few CEOs go on to be chairperson with Ralph Waters at Fletcher Building and Alan James at Cavalier being two rare examples.

However, NZX firms don’t publish assessments of board composition, only a few seem to have formal annual board evaluations and there don’t seem to be many external reviews.

Shareholders should be demanding more board reviews and the publication of these assessments.

One of the big areas of contention in New Zealand is length of tenure, with many directors staying far too long. These directors argue that experience is extremely important and don’t seem to value the benefits of fresh thinking from newly appointed directors.

This is one of the reasons why our company boards are often called old boys’ clubs and less experienced individuals find it extremely difficult to obtain board seats.

Guinness Peat Group was a clear example of this. In 2008, before its major problems, it had four directors, all effectively executive directors. Three directors had 18 years’ tenure at the time and the other, 12 years.

Any director who is on a board for more than 10 years should not be classified as independent.

There are a huge number of rules and guidelines regarding board composition but in reality it comes down to judgment, making sure the board has a wide skill base and a mix of experience and fresh thinking.

The accompanying table shows the board composition of Abano Healthcare, Cavalier Corporation and Pumpkin Patch. These three companies have been chosen purely because they all held their annual meetings at the Ellerslie Events Centre on Wednesday.

Board composition; Conflict between experience and fresh thinking


Abano Healthcare

Cavalier Corporation

Pumpkin Patch


Trevor Janes*

Alan James*

Peter Schuyt*

Managing director

Alan Clarke

Colin McKenzie


Danny Chan*

Graeme Hawkins*

Luke Bunt*


Pip Dunphy*

Grant Biel

Bruce Cotterill*


Susan Paterson*

Graeme Edmond*

Rod Duke


Ted van Arkel*

Sarah Haydon*

Brent Impey*




Josette Prince*

Average length of tenure

7 years

11 years

1 year

Directors with over 10 years tenure




Number of directors over last 10 years




*Classified as independent directors

The big difference between the three companies is the mix of experience and fresh thinking on their boards.

Pumpkin Patch directors have little experience of the company as the average tenure is just over one year. Three of the directors were appointed this year, Rod Duke and chairman Peter Schuyt in 2012, and Brent Impey in 2010.

At the other end of the scale is Cavalier with an average tenure of 11 years. Three of the six directors have more than 10 years of residency.

Chairman Alan James, who is a former managing director of the company, stood for re-election at this week’s meeting having already been a director for more than 21 years. James placed a great deal of emphasis on experience in his address to shareholders. His re-election appeared to be defeated by a show of hands but the decision was reversed in a subsequent poll vote.

Abano Healthcare has average board tenure of seven years and regularly appoints new directors with fresh thinking.

Board composition is very important as far as shareholder returns are concerned and the FMA consultation paper is a timely contribution to the debate. But there is no substitute for shareholders being active on board selection and voting at every annual meeting.


Brian Gaynor

Portfolio Manager

Disclosure of interests: Milford Asset Management holds Abano Healthcare and Cavalier Corporation shares on behalf of clients.