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  • Robert MacCulloch

Yesterday I wrote an opinion piece about the RBNZ overstepping the mark for the National Business Review. You can read it here: or below.

A Law unto Itself: The Reserve Bank of NZ

One of the biggest strategic mistakes committed by our Reserve Bank has been its proclivity in recent times to make dogmatic assertions on topics having little, or nothing, to do with its core remits. Those remits are to ensure a sound financial system and stable prices. As a result of addressing unrelated issues, the quality of its communications, measured in terms of their transparency and credibility, has become eroded.

Take, for example, the following statements from a recent speech given by the Bank’s Assistant Governor: “Firms which can effectively generate a virtuous circle of economic prosperity, environmental sustainability, financial inclusion, and cultural diversity are being rewarded for their efforts …. As directors, these are the values of your future employees, customers, shareholders, stakeholders, and business partners”.

Clearly we all whole heartedly support the above list of worthy aims. The technical question, however, of whether implementing a “Corporate Social Responsibility” policy to achieve them will result in firms being “rewarded” is highly controversial. The evidence is far from clear. There may be win-win scenarios. But there are also plenty of situations where lower financial returns will occur. The extent to which businesses persevere with social objectives even when they yield monetary losses is presently unknown.

A nicely worded summary of the state-of-the-art view on this issue was produced by folks at Harvard Business School and the Kennedy School of Government who state, “Although proponents of sustainable business practices may argue that being environmentally responsible will inevitably lead to higher profits in the long-term, the relationship between socially responsible activities and profitability may be best characterized as some firms will generate long-term profits from some socially responsible activities some of the time”. Economic survival of the fittest suggests firms that participate in costly CSR activities can find themselves out of business, especially in a globalized world.

So why is the Reserve Bank making gross generalizations about how socially responsible behaviour leads to private rewards when that claim is not a fair characterization of the evidence? More pertinently, how come the Bank is speaking on a topic completely unrelated to its mandate? A topic on which it has close to zero expertise?

In the spirit of transparency, maybe the Reserve Bank could clarify where it wishes to take us with the loose talk? Under present corporate law in NZ, Great Britain, as well as many industrialized countries, including the United States, the main objective of business is to increase shareholder value - unless shareholders are happy for directors to depart from such an aim to undertake broader social goals. Legislation of this kind has features which result in CSR being discouraged, though it is permitted. Most evidence suggests that firms view “socially responsible actions” the same way as other business activities. That is, they conduct them, but only as far as they align with their private financial goals.

In contrast to ours, the legal systems in many European nations place a far greater emphasis on stakeholder consideration, for which the Reserve Bank has now revealed its preference. This approach has been codified in these places by legalizing various forms of profit-sacrificing behaviour. Consequently, more types of CSR are allowed in Europe compared to here. For example, the French legal code permits directors to make decisions based on the interests of all constituencies. Meanwhile in Germany management doesn’t even have an explicit obligation to maximize shareholder value. Instead, large German corporations have a board structure that includes employee representatives and encourages the consideration of the interests of parties other than shareholders.

Is the Reserve Bank actually advocating for a radical shift in our legal system in the direction of a European stakeholder approach? It may well be - but since when is it the job of the Bank to push for a rewriting of NZ company law? Does it wish to work on matters that we’re not paying it to work on? Has it got bored with banking and finance and so now wishes to branch out into other “hot topics”?

In terms of macroeconomics, the Reserve Bank seems confused about what it is even advocating. The stakeholder approach of much of the European Union is under review. Its’ future is being questioned as the model grapples with low productivity and the need to compete with countries where companies are focussed on narrower profit-oriented goals, particularly in the developing world. At least within the economics profession, it’s mostly believed that optimizing shareholder value, for all its problems, creates sharper incentives and wealthier societies. Ones that are based more around rewarding hard work and effort. The European way is looking like it has sacrificed efficiency for other goals.

On this note, the contemporary view is that neither the shareholder nor stakeholder model is ‘best’, contrary to the stance of our Reserve Bank. Instead what’s driving the adoption of these different approaches is the different beliefs and preferences held by people across the world. Surveys show most people in the US believe that the rich deserve their wealth and have worked hard for it, sometimes referred to as the “American Dream”, whereas the French believe the rich just got lucky. The shareholder model is consistent with the former belief and the stakeholder model the latter.

This way of looking at things implies that designing our institutions should be left to our elected representatives who are sensitive to the diversity of opinion in their respective countries, not unelected Central Bank officials whose job is to dictate interest rates.

  • Robert MacCulloch

The Head of the Productivity Commission has given an interview today with the National Business Review. Here's a quote from the article, "Even as NZ's productivity rates lag behind those of other small, advanced economies, Commission Chair Ganesh Nana hopes the push to cut the country’s greenhouse gas emissions might help narrow the gap. Nana told NBR NZ had to adopt a different approach if the country was to lift its productivity & produce more value, for less effort. It would require government, businesses, workers, communities, and Māori to work together with a common purpose. He said the best example of that “mission-led” perspective was the American decision last century to put a man on the moon within a decade". See

What is Nana on about? The space race between the Soviets and the Americans is a dubious example of how to boost productivity. The Soviets were first to put a person in space (though not land on the moon) and the cost practically bankrupted them. It was more about national pride than productivity and was a State-led, centrally planned project. It was not an example of (decentralized) private sector innovation, which is the engine of growth. And Nasa subsequently fell apart with loads of administrators and over sized budgets. It has only been private entrepreneurs like Elon Musk who revitalized innovation in this sector. His launch costs are a tiny fraction of Nasa's.

Furthermore, the US was already the world's leading industrial superpower prior to the moon mission and its status as a leader in innovation and entrepreneurship had practically nothing to do with a centrally planned "purpose", other than that coming from documents like the Declaration of Independence, which stated "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness".

The "working together for a common purpose" line from the Commission Chair suggests he supports everyone getting into line. But history has taught us there can be danger lurking in such an approach - what happens if the "common purpose" that is pushed upon us turns out to be wrong, even sinister? Aren't we meant to be living in a society promoting individual liberty whereby we each have freedom to pursue our own purpose?



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Robert MacCulloch