ABSTRACT
Corporate governance, especially by financial institutions, has increasingly come under the spotlight as economies and governments have struggled to come to grips with the recent financial crisis. While predating the financial crisis, it is argued that limitations in regulatory structure and corporate governance contributed to the recent collapse of the finance company industry in New Zealand. This is illustrated by the Bridgecorp Finance Ltd failure. Bridgecorp was, by some measures, a successful company as it maximized the wealth of its owners; however, this was at the expense of depositors, who may have believed they were protected by New Zealand prudential regulation. Instead regulations, which should have offered some protection to depositors, were used to obfuscate the true financial situation as the Securities Commission, trustees and auditors appeared to be more concerned with compliance rather than the substance of underlying transactions. This allowed substantial shareholders on the Bridgecorp board of directors the opportunity to entrench themselves and disregard the interests of depositors while paying lip service to best practice corporate governance. Tragically, warnings given as early as 2003 of possible non-bank deposit taker (NBDT) failures such as Bridgecorp went unheeded. The costs of failures were ultimately borne by depositors, taxpayers and the New Zealand economy as a whole. New Zealand has a venerable tradition of using trust and transparency to regulate its financial markets. The benefits of such an approach include the empowerment and individual accountability of institutions, who then can act on shared beliefs to obtain optimal benefits for the society at large. The social contract that underlies the principal of trust and ethical behaviour can and has added value beyond expectations. It can also reduce compliance costs. But, a regulatory system based on trust, ethical behaviour and transparency will have few oversight mechanisms in place to regulate behaviour. If trust and transparency principles are violated, sub-optimal outcomes can and will occur. This was the case in the New Zealand finance company industry.
