Michael Reddell: Or Not

"Time has come for a four-year term of govt”, or so declared the editorial in yesterday’s Sunday Star-Times. I voted against the idea in the 1990 referendum, and would do so in any conceivable future referendum.

Click to view

Four-year electoral terms (which is at issue, not – at least directly – “four-year terms of govt”) appeal to politicians and bureaucrats (on the latter, see how voters in Karori/Wellington Central/Ohariu were among those least opposed to four year terms in the two referenda we’ve already had). The reasons aren’t particularly hard to fathom: more time and less accountability will almost always sound good to those being held to account (think students with assignments and lecturers with a reputation for granting extensions easily), and since most Wellington head office bureaucrats tend to be more attuned to the interests and perspectives of ministers – and “getting stuff done” – than to those of pesky voters (often actually assuming they know better the interests of those voters and their families than the voters do themselves).

But what caught my eye most in the SST editorial was a claim from a representative of a business lobby group (in this case Infrastructure New Zealand) that “three years is just not enough time to develop policy, implement legislation, and embed the necessary system changes and begin to measure results”.

It isn’t an approach most of us would settle for in other areas of life

Representative democracy can helpfully be seen as an agency problem. We (the voters) are the principals, who elect/employ agents to act on our behalf. But it is difficult to ensure that they do so, especially over such a wide range of issues, and the most powerful lever by far available to us is simply the ability to toss them out. They can at times simply pursue their own ends (in some cases, simply holding office might be enough), or pursue ends, or by means, which we come collectively to think are not the best way forward. Circumstances change too, in ways that neither voters nor MPs can envisage with any confidence. And while there are some other checks on what governments and Parliaments do, they are often pretty thin (the more so in New Zealand where governments form from a parliamentary majority, and Parliament is sovereign and can if it chose reverse or override the effect of any judicial rulings).

Agency problems aren’t unique to democratic politics. Another good example is widely-held public companies, listed on a stock exchange. There are many shareholders, who delegate power to a board of directors and, through them, to management. Those agents can do a good or bad job, and they can pursue shareholders’ interests or their own (managers, for example, tend to like bigger empires which tend to raise executive remuneration whether or not they add to shareholder value). Of course, in tightly-held companies these issues are much less severe – at the extreme a founder may be both CEO and the dominant shareholder. That person might do a good or a bad job, but the main wealth affected is his/her own. Representative democracies are much more like widely-held public companies, but our exposure to things going wrong or being done badly is much greater, because for most of us there is little or no scope for diversification, and even when there is (eg dual citizenship) exercising that option can be both costly and disruptive. This is our country. We have only one.

Listed companies are traded on the stock exchange. For companies of any size there will be transactions – and a fresh market-clearing price – each day. When management and the Board are seen to be doing a capable job – have a credible strategy to add shareholder value – the share price of the company concerned will match or outstrip the market. When doubts arise, the share price underperforms. It doesn’t tend to be too good for the chief executive’s career prospects if that underperformance becomes entrenched. Here’s one example of a New Zealand underperformer.

Click to view

A day to day fluctuation in the share price won’t usually affect the Board or management much. Noise happens, market trends will be at work. In the political sphere, a single opinion poll typically won’t matter too much either. But over time a weakening share price is going to raise doubts among existing shareholders as to whether capital should be left in the business (retained earnings), and make it more difficult and expensive to raise fresh capital (each dollar of fresh capital dilutes existing shareholders’ interests to a greater extent).

What can shareholders do? They can, of course, as individuals sell some or all of their shares and thus reduce or eliminate their exposure to the firm and the agents (Board/management) it had been employing. But they can also vote out some or all of the directors, or create a climate where some incumbents think it might be best if they stepped aside and did not seek re-election.

And how often do directors come up for re-election? Well, in New Zealand the stock exchange listing rules require each director to face re-election at least every three years.

Click to view

A person I mentioned this to wondered if the three years had been inspired by the three year electoral term for our government. I don’t know the history of the NZX listing rule, but I thought I’d check the situation in some other countries. The ASX also requires directors to face election at least every three years, but then Australia also has three-year federal parliamentary terms. But what about Canada and the UK, both of which have parliamentary terms of up to five years? Listing rules in Canada appear to require annual election of all directors (a practice that was apparently common there even before the rules changed in the 2010s). In the UK, the corporate governance code appears also to require annual elections for directors, at least for larger listed companies.

There is simply much less at stake as regards the governance of any individual listed company than in respect of our Parliament and government (and bear in mind that no government in 100 years or more has fallen inside the three year parliamentary term, although there have been a couple of discretionary early/snap elections). And there are far fewer checks and balances (let alone easy exit options). I cannot for the life of me see why we would delegate so much greater power to MPs and ministers (and their supporting bureaucrats) for terms longer than shareholders and the market generally choose to do for those who run public companies. Parliament is sovereign, individual companies are not. Individual companies also have much clearer benchmarks for performance (something around maximising shareholder value) than is ever conceivably possible for a Parliament or government.

Of course, there are plenty of democratic countries with longer electoral terms but (for all NZ’s faults) it is far from obvious that the general quality of government and policymaking has been any better in the UK or Canada (federally) than in Australia and New Zealand. And I don’t think either an upper house or a written constitution is any sort of solution that should make New Zealanders more comfortable with the idea of a four-year electoral term – you can’t create an alternative legitimacy simply thru a different voting (or worse, appointment) method for an upper house, and the written constitution simply hands over (lots) more power to the whims of unelected and unaccountable judges.

When we’ve had governments that really wanted to do bold stuff (a) they’ve managed to do a lot in three years, and b) in all case I can think of they managed to persuade voters to give them (at least) one more electoral term, to either carry on the work, consolidate results or whatever. It will be 50 years this year since we last decided not to give a government a second term (and that government had lost its biggest electoral asset to death halfway through). And in that sense, things aren’t so different from a company and CEO devising and putting in place transformational strategies for a company. These things take time, and especially take time to produce secure longer-term bottom line results. But shareholders are putting their money on the line each day, directors face re-election each year, and chief executives are probably more prone to being ousted early than Prime Ministers (the last PM to be forced out by his colleagues on anything other the health/age grounds was almost 30 year ago [perhaps Palmer too, but he’d not become PM at an election], and he was I think the only one in at least a century). Part of the skill of being an able PM/Cabinet or Board/CEO is to convince your publics (voters or shareholders) that you have the skills and the plans and that you warrant being allowed to stay.

And although, at a political level, it is easy to overstate the extent to which incoming governments typically reverse what their predecessors had done (not that much very quickly even after the 1984-90 or 1935-49 governments) it is also true that there are genuine contests of values and ideas – indeed, to a considerable extent it is what politics is about. In that sense, it is different than the listed company situation, where differences are much more about means rather than ends. On many things at any one time there are real differences across the public in values and priorities. And if public opinion shifts sharply or political leaders lose our confidence I can’t see strong reasons why they should simply have a claim to hold office for longer. They are, after all, our agents, not the principals. Good agents are really really valuable and can make a huge difference for the better. But good help can hard to find, and difficult to monitor that they are pursuing the preferences/priorities of those who voted them in.

And if the idea of a four-year term for Parliament has no appeal whatever with the present or any recent crop of politicians (I find it hard to think of any government in my adult life that I’ve felt with conviction really warranted even a second term), the suggestion that it would have to be accompanied by longer term for local government is positively alarming. Perhaps there are good local bodies – whose councillors should then readily win re-election – but I live in Wellington.

PS:  I’d also commend on this topic a column by Rob Campbell in Newsroom (paywalled today, but not I think from tomorrow). I suspect he and I would disagree on a huge proportion of policy issues, but that is his point (and mine)

Click to view

Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.