Bulls, Bears and Elephants: A History of the New Zealand Stock Exchange
Victoria University Press, $69.95,
ISBN 0 86473 308 9
The stock exchange is an enigma to many. The organisation has a popular image as a wealthy and exclusive club which favours the large investors and pays only token regard to the interests of less prosperous individuals and David Grant’s excellent book does nothing to dispel this image. The history of the New Zealand Stock Exchange is characterised by brokers’ self interest, the successful efforts of members to avoid government regulation and, of course, the booms and busts.
New Zealand has a speculative culture and sharemarket booms have reflected this. The fanatical behaviour of the 1980s was not exclusive to New Zealand but was more exaggerated here. The local sharemarket is one of the few in the world which is still well below the pre-crash high.
The true test of a stock exchange is its ability to raise new capital for enterprising and growth-orientated companies. In this regard the New Zealand exchange has earned little more than a low pass mark.
The exchange can argue with justification that throughout the nineteenth century and early years of this century the economy was agriculturally based and there was a limited role for capital raisings through the sharemarket. Under the protectionist policies of the first Labour government the sharemarket also had a limited role, as the government was the preferred supplier of funds. In the 1930s and 1940s a number of listed companies, including the Reserve Bank and Bank of New Zealand, were nationalised.
So the exchange was hopelessly unprepared when the opportunity arrived to make an important contribution to the country’s economic development, particularly in the 1980s. As with many sectors of the economy, the exchange was frozen in time. In 1980 there were four regional exchanges and no effective computerisation. Advertising and branch offices were banned, the exchange had never had a women member, there had been no outside members of the governing body and its rules were badly outdated.
Not surprisingly, the 1980s produced all the excesses of previous booms: flaky companies, inside trading, suspect accounting, unethical directors and a massive loss in confidence after the crash. This time around the market was much more broadly based than in the gold mining eras of the late nineteenth and early twentieth centuries. As a result the 1987 bust had a far greater impact on the economy than previous crashes.
Over the past 10 years the exchange has made considerable progress. However in two important areas, the raising of capital and public confidence, the organisation has made only limited headway. Capital raisings are low and less than half the number of companies are listed compared with the 1970s and 1980s. The exchange seems to be more concerned with avoiding government regulation than encouraging new listings.
Market turnover has increased, two-thirds of the sharemarket is owned by foreign interests and most of the stockbroking companies are overseas-controlled. The exchange has progressed since the early 1980s but still has some way to travel before it takes a leadership role in economic development.
Stockbroking started from the requirements of gold mining companies to raise money and the desire of individuals to become part-owners of these mining operations and to benefit from their success. In the early days the industry was localised and fiercely parochial. The Dunedin Brokers Association, founded in 1866, raised money for Otago and West Coast mining companies. The Thames Stock Exchange, established on an informal basis one year later, concentrated on the Thames and Coromandel gold rushes.
Stock exchanges followed prosperity to the mining towns. The West Coast town of Reefton had an unofficial stock exchange, 16 hotels, three banks, two breweries and two daily newspapers. According to Grant, the town had “no checks and balances on the activities of sharebrokers or scam artists preying on the gullibility and avarice of investors. Share prices could rise and fall by massive amounts in minutes, fed by rumours and false promises”. The collapse of the gold mining boom left many investors with empty pockets and activity plummeted on the Reefton and Thames exchanges. Brokers moved on to greener pastures.
The second boom was the gold dredging euphoria in Otago and on the West Coast at the turn of the century. Dunedin, which had three stock exchanges at the top of the market in 1900, was the centre of the hysteria. In January 1899 Otago had 36 gold dredging companies and a year later 159 and more than 300 companies were listed by mid-1900. Three months later gold dredging stocks were unsaleable because of disappointing returns from dredging activities. The market collapsed and fortunes were lost.
Following allegations of commercial abuse and immorality, a parliamentary committee of inquiry was established to investigate the floating of gold dredging companies. The committee determined that there had been major excesses and recommended legislation against bogus company promotion. The government of Dick Seddon brushed the issue aside and no action was taken. This lack of action has characterised the securities industry for the past 95 years.
After the collapse of the gold dredging market in 1900 the exchange turned inward and the obsession with self-image began. Advertising was banned, branch offices were disallowed, brokers could not send recommendations to clients or talk to the media, Easter breaks lasted 10 days and the exchange was closed for 24 days over Christmas. A ban on brokers approaching clients of other brokers was one of the more strictly enforced rules.
Attempts by the government to regulate were successfully repelled. In the mid-1930s a recommendation by a government-appointed commission to establish a corporate investments bureau was withdrawn after intensive lobbying by the broking community. The proposed bureau would have established a constitution for the exchange and stockbroking industry.
Its conservative attitude was best reflected in the refusal to list Ron Brierley’s company in the late 1960s. Brierley applied six times for listing and was rejected six times without explanation. In 1970 R A Brierley Investments was at last admitted by a majority of just one vote.
In 1978 Ron Trotter, then managing director of Challenge Corporation, accused the exchange of being one of the most exclusive cartels in the country. It responded by claiming Trotter was a persistent critic and that the sharemarket remained one of the few areas of commercial activity where major transactions were made by word of mouth without the requirement of written contracts.
The exchange claimed to be the citadel of free enterprise yet the rules of the organisation were excessively restrictive. Brokers spent a large amount of time accusing each other of poaching clients or having their names quoted in the media. According to Grant, “it was hypocritical for brokers to claim to be a bastion of the free market when that same freedom of competition was denied within their own ranks”.
In the 1970s a new wave of young men entered the industry. They were less respectful of the internal rules of the exchange and its unwritten code of ethics. Their main objective was to make money and the free-market environment of the 1980s and the absence of effective external regulations was the perfect milieu for their ambitions.
The 1980s euphoria reached nearly every corner of the country. An estimated 41% of the adult population owned shares and Brierley Investments had nearly 200,000 shareholders. In less than three years the total value of the market rose from $13 billion to $50 billion. In January 1991 the market’s value was back down to $14.5 billion.
The rise and fall were more exaggerated in New Zealand than nearly any other country. The reasons were numerous but the outdated rules, the reliance on old-fashioned ethical standards and the absence of effective external regulations played important roles. Neither of the two major supervisory bodies, the Reserve Bank and Securities Commission, had the resources or the statutory powers to dampen the excesses.
Since the crash the exchange has introduced a number of important reforms but attempts to regulate it from outside have been successfully resisted. A recommendation by the Russell Committee to establish a statutory body to oversee it was repelled, as was the proposed takeovers panel and takeovers code. This continuing ability to ward off external controls is extraordinary in view of the appalling behaviour of participants under self-regulation during the 1980s.
So it remains one of the most unregulated sharemarkets in the world. In the United States the government is the overall market regulator under a structure established after the Wall Street crash of 1929. In Australia and throughout most of Asia governments play important roles in controlling or overseeing stock exchanges’ activities. A strong ethical code plays an important role in the London market where government controls are more limited than in the United States. This form of self-regulation is more successful in a business environment which is highly institutionalised and has a hierarchical structure which has existed for centuries.
The main argument against regulation is that it places additional and unnecessary costs on business. Advocates of regulation claim that rules are essential to encourage and protect the smaller investors. These individuals play an important role in supplying new capital for small enterprises. Many listed companies and those seeking listing are too small and risky to attract equity from the larger institutions.
The broking industry has become less and less concerned with the wellbeing of the individual investor. Most of the major broking organisations are overseas-owned and foreign investors dominate sharemarket activity and brokers’ income. As long as this situation prevails there is no incentive for the exchange to promote the requirements of individual investors.
Overseas investors are more attracted to companies — Telecom for example — which are cutting costs and buying back shares. Private individuals, who have been more willing to fund the expansion activities of listed companies, have left the market in droves and are now chasing the residential real estate boom.
The banks also played a significant role in the performance of the sharemarket during the 1980s. Since deregulation of the economy in the mid-1980s they have had difficulty finding a home for their funds because of the low levels of investment in productive assets. Ten years ago banks were aggressively lending to sharemarket investors and commercial property speculators. In recent years the banks have nourished the residential property market by increasing their lending to home buyers from $15.9 billion in December 1990 to $45.7 billion at the end of last year.
The combination of a speculative culture, low levels of capital investment, a surplus of funds in the banking sector and a lightly regulated sharemarket are the ideal ingredients for another boom. As long as these characteristics prevail another speculative period is inevitable.
Grant is right to say that the exchange has made progress since the 1987 crash. Although it is probably out of the historian’s domain, the book would have benefited from an analysis of the route the exchange has decided to travel. In terms of capital raisings, where the greatest contribution to economic development can be made, the exchange continues to perform poorly. Until progress is made in this area it will maintain its low rating for overall performance.
Brian Gaynor worked in the stockbroking industry between 1976 and 1987. He was a member of the New Zealand Stock Exchange from 1982 to 1987. He is now an independent investment analyst, writes a weekly business column for the New Zealand Herald and is a director of The New Zealand Investment Trust plc.