Speech To New Zealand Institute of Directors Annual General Meeting
Hon Dr Michael Cullen, Minister of Finance
1230, 18 March 2002
Wellington
I am very pleased to have this opportunity to address your Annual General Meeting. So often, when we discuss the
essential qualities that our business sector and our community at large need in order to grow and thrive, we think first
of such qualities as fostering innovation, adoption of leading edge technology, entrepreneurialism and creativity. As
vital as these qualities are, we cannot forget the pervasive influence of good corporate governance practices in turning
business visions into enduring realities.
The one thing that all New Zealand companies have in common is the need to maintain good governance. And the Institute
of Directors has a crucial role in ensuring that our innovators, risk-takers and technical wizards are well served by
directors with the ability to ensure that our businesses learn how to simultaneously catch the wave and play the long
game.
Of course, the task of company directors is made easier when there is stable economic policy and good growth prospects.
And I feel I cannot pass up an opportunity to remind you that this is what we now have.
Our economic indicators are stronger, and more balanced, than they have been since the mid 1960s. The balance of
payments deficit has fallen to about 3.5 percent of GDP. Inflation is at 1.8 percent. Unemployment, at 5.4 percent, is
close to thirteen year lows. Employment growth is strong, but it has been accompanied by an increase in immigration and
a sharp rise in the participation rate which, at 66.4 percent, is the highest it has been in fifteen years.
The government for its part is operating with a fiscal surplus averaging around one percent of GDP, and forecast to rise
to nearer 2.5 percent over the next three years. We have held government spending as a percentage of GDP, and it is
fractionally lower than it was two years ago. Net crown debt has fallen from just under 22 percent of GDP in 1999 to
around 18 percent now.
The economy grew by 2.6 percent in the 2001 March year, and is forecast to grow by 3.1 percent in the current year. It
is likely to taper in the next year to around 2 percent before lifting again to something like a three percent rate in
the out years.
In short, the economy is growing steadily, with low inflation, rising employment, moderate unemployment, and a current
account deficit that is very low by recent standards. Real wages and share prices have both risen. Government spending
is at prudent levels, with healthy fiscal surpluses, and manageable public debt.
All of this at a time when the world economy has been through one of its more synchronised recessions, with confidence
badly knocked by the events of September 11 last year.
There is an element of good luck in these results. We have had good growing weather at a time when commodity prices,
especially for the sorts of commodities New Zealand produces have been at cyclically high levels. What is more, good
weather and good prices coincided with a rather large drop in the value of our currency, meaning that we had a
competitive exchange rate that allowed other exporters, and the tourism industry in particular, to join in the good
times.
However, good economic management is also an important part of the picture. Several points are worthy of mention here:
ľ One of the first things that the new government did was to re-negotiate the Policy Targets Agreement with the
Governor of the Reserve Bank. It confirmed the independence of the Governor and that the primary objective of the Bank
was to control inflation, which was good for confidence. But it also required the Bank to be more sensitive to the
impacts of its monetary management on output in the real economy in the immediate term.
ľ We also commissioned a review of monetary policy and practice, and that has fine-tuned structures and informed
practices. We are tending to adopt a medium term focus for the inflation target rather than the point to point target
that might have contributed to some of the volatility of the mid 1990s.
ľ Our fiscal settings have supported monetary policy. This government has raised the extra money required to cover its
extra spending on social and economic development programmes. And it has introduced a scheme to partially pre-fund
tax-funded pensions, so that when our demographic structure acquires the inevitable older age profile, there is a
cushion to assist in the transition.
The government has also moved away from a passive role in the economy, and is developing a new stance based, not on a
return to the crude activism of the past, but a smarter kind of activism. I could cite from a growing list of examples:
ľ our recent initiative on Growing an Innovative New Zealand, as set out in the GAINZ report;
ľ initiatives in dealing with skill shortages;
ľ upgrading the regulatory environment that applies to the electricity and telecommunications sectors;
ľ supporting the development of e-commerce;
ľ improving the funding of research and development; and
ľ simplifying the tax treatment of private sector R
Our method is pragmatic and case-by-case, as evidenced by the consolidation of the dairy industry on the one hand, and
the deregulation of the apple industry on the other. Each was a considered response based on a careful analysis of the
global marketplace.
I would argue that this mix of policies has created a much better environment for business than did the policies pursued
in the 1990s.
The last year has also given me personally a great deal of insight into the challenges of corporate governance through
my role in the New Zealand public¡¦s acquisition of an 82% share in Air New Zealand. As you will be aware, this was not
part of my plan for my first term as Minister of Finance. I did not go looking for it. It came looking for me.
In particular, the events of last year provide a cautionary tale about the pitfalls of large composite boards. Much as
they try to avoid it, such board structures often make the board-room table the battleground for the competing interests
of shareholder factions. It is difficult in these situations for the board as a whole to maintain the sense of
perspective and focus on the best interest of all shareholders that is necessary for strong, positive leadership.
This is not the occasion for a post-mortem on the Air New Zealand affair; especially since the patient is very much
alive, and is taking steps to rebuild a strong position in what is now ¡V post September 11 ¡V a very edgy global
airline industry. So, in a forward-looking mode, I would like to take this opportunity to explain the role that the
Government is taking as principal shareholder in the company, since Air New Zealand is an important part of the
value-chain for many other New Zealand businesses, and hence is under constant scrutiny by the business media.
The key principle behind the Crown¡¦s approach going forward will be that we exercise our shareholder rights over board
selection in the normal way, at the company¡¦s annual general meeting.
But decisions on operational issues will lie entirely with the Board. This makes it clear that the Board is accountable
for the outcomes of the airline. The Crown can exercise its controlling stake in the airline to remove Board members if
it considers they have not performed adequately. And, of course, the directors are bound by the normal provisions of the
Companies Act and the liabilities that potentially go with that.
Hence the major roles I will exercise as principal shareholder in Air New Zealand are:
ľ Voting at shareholder meetings (for directors and proposed material transactions);
ƒæ Receiving information from the company for monitoring the Crown¡¦s investment, including general information
presented by Air New Zealand to all its investors and specific information reflecting the Crown¡¦s substantial quantum
of at-risk capital invested (this specific information will be provided under a Confidentiality Agreement between the
Crown and Air New Zealand);
ƒæ Receiving financial forecast and actual performance data from Air New Zealand for consolidation into the Crown¡¦s
accounts and forecasts; and
ľ Ensuring the Crown does not breach its obligations with regard to insider trading legislation.
There is to be clear separation of regulatory and ownership issues. I have sole responsibility for the Government¡¦s
ownership interest in Air New Zealand. The Minister of Transport will have sole responsibility for the Government¡¦s
role as regulator of the New Zealand aviation market. In particular, the Minister of Transport is the Kiwi Shareholder,
which allows the Government to exercise rights in order to protect New Zealand¡¦s bilateral air traffic rights agreed
between our Government and other Governments.
In light of this separation, the Treasury and the Ministry of Transport will not share commercially sensitive
information. Each Minister will only consider the policy proposals of the other as part of their wider collective
Cabinet responsibilities.
The Crown will be unable to trade in Air New Zealand securities, or otherwise act on the Air New Zealand information it
is in possession of, until after that information becomes available to the market. The Treasury has put in place
security measures in order to protect the Air New Zealand information it receives.
Given the high profile of Air New Zealand, it is very important that the Crown¡¦s stance and its implications are well
understood. Three recent incidents help to illustrate the point. One involves an undoubtedly adequate Australian wine,
another involves a clearly inadequate Australian journalist, and the third concerns flights between Christchurch and
Singapore, whose only relation to Australia is that they fly over it.
The wine incident concerned a colleague of mine who found it strange that the Koru lounge in Auckland was serving
Australian wine, thereby passing up an opportunity to promote New Zealand vintages. I saw his point, as did many New
Zealanders; but clearly the Air New Zealand winelist is not within my purview as principal shareholder. It may be of
interest to Jim Sutton in his role in raising the profile of New Zealand agricultural product, although it is for him to
take the matter up directly with Air New Zealand management, if he so desires.
The issue of scaling back direct flights from Christchurch to Singapore is of more consequence. However, it is the kind
of tough business decision that the board and management are charged with taking on the basis of careful analysis of the
pros and cons. Having entrusted these operational decisions to the Board, I have no comment to make although Jim
Anderton may choose to raise it with Air New Zealand in his capacity as Minister of Economic Development. Like the other
shareholders, I will be interested to see at the next AGM whether this decision ¡V alongside all the others that have
been taken ¡V has strengthened the company¡¦s position and enhanced the value of the investment the New Zealand public
has made.
The incident with the Australian journalist relates to my recent visit there and a report in The Age to the effect that
I was ¡§leaving the door open for Qantas to take a stake in Air New Zealand¡¨. What I actually said was that as a
shareholder it is important for me to stay away from direct discussions about possible business propositions, and that
accordingly I had referred a recent call from Qantas chief executive Geoff Dixon about unspecified commercial matters to
the Air New Zealand Board. This is not ¡§leaving the door open¡¨. This is politely closing my door, and pointing Qantas
in the direction of the Board¡¦s door, which is the one they should be knocking on.
Of course, the Board would then be expected to come back to the majority shareholder to discuss any proposal that
affects that shareholder¡¦s interests.
To move on from the specifics of Air New Zealand, the broader issue that is highlighted by the current state of the
airline is the growing interdependence of our two economies. This came through quite strongly in my recent discussions
with political and business leaders in Australia. There is untapped value in our combined economy.
The increased awareness of this in Australia is partly a response to September 11; but also to the acquisition of some
major Australian companies by foreign interests. The prospect of becoming a branch economy of the United States, with
¡§hollowed out¡¨ companies exercising a major influence on the country¡¦s economic well-being, is something both
Australia and New Zealand now share. Part of the answer is to build a web of Trans-Tasman companies with a firm base in
our common market.
Hence it is an important challenge for directors to be capable of leading New Zealand companies into stronger
trans-Tasman business ventures and alliances. The Government is playing its part with ongoing coordination of business
law and alignment of tax regimes. In many areas New Zealand is taking unilateral action to make sure its own business
law is compatible with Australia¡¦s. Our recent Takeovers Code has many features in common with the Australian code, and
Australian law is informing our approach to the control of insider trading. And while the proposal to merge stock
exchanges has fallen by the wayside, the Australian government has recently invited our government to develop proposals
for the mutual recognition of securities offerings. I am hopeful that the work now starting will result in reduced
compliance costs for cross border securities offerings and give investors in both countries increased investment
options.
While I was in Australia, Peter Costello and I released a discussion document on options for resolving the trans-Tasman
triangular tax problem. Previous New Zealand and Australian governments have attempted without success to resolve the
longstanding issue of how to make imputation credits available to investors in companies that pay tax in both countries.
This discussion document is the first real progress that has been made. It sets out a proposed mechanism for relieving
the double taxation that can occur in certain trans-Tasman investments.
Referred to as "pro rata allocation", it is a method for allocating Australian franking credits and New Zealand
imputation credits to dividends of Australian and New Zealand companies who pay tax in both countries. The advantage of
this method over other methods described in the discussion document is that it is consistent with both countries'
policies on imputation, which is to apportion tax credits on the basis of shareholders' ownership in the company.
The pro rata allocation method is still formally a proposal at this point. The purpose of the discussion document is to
hear from investors and business in both countries whether it could work and to assess the costs and benefits of
proceeding with the proposal.
We are approaching the 20th anniversary of CER, and it is the right time to breathe new life into the agreement. I admit
that CER is not glamorous. It had a promising childhood, but in its teenage years became a somewhat shy and retiring
wallflower. However, it makes a enormous contribution to our economy, and can make a greater contribution in the years
ahead. In its next decade I believe we will see it mature and come into its own.
This will not happen by default. It will require effort and application, on both sides of the Tasman, and by leaders in
both business and government. I, for one, am confident that a partnership of business and government in New Zealand can
provide the leadership we need to secure the economic future we want for ourselves.
Thank you.