STATE & THE BANK.

Dominion, Volume 6, Issue 1827, 13 August 1913, Page 5

STATE & THE BANK.

CHAIRMAN'S REPLY. TO SHAREHOLDERS' POINTS. .■ TEXT OF LETTER. SENT TO HON. JAMES ALLEN. Some weeks ago a letter was sent to 'the Hon. James Allen (Minister for Finance) by Messrs. Martin Kennedy and William Watson, shareholders' representatives on the directorate of tho Bank of New Zealand. Rejoinder to this letter lias no\v l:eou addressed to the Minister by Mr. Harold Btaucliainp. In the course of his.ldtter, .Mr. Ueaucliqmp says: "A.s this letter not only' makes several adverse rclerences to myself as chairman of directors, but attempts to traverse my liitinC'Kiiukim to you ou .May 15, 1 desire, partly in self-dcience, and partly by way of answer to 'tho contentions "of these gentlemen, to submit the following observations for your consideration:— Shareholders' Objections, "The substance of tho letter in question may be stated as follows:—"FirstMessrs. Kennedy and Wa'tson object to tho State having in future a controlling representation on the bank's directorate Second —These critics of mine object to a renewal of the million pounds of State guaranteed stock maturing in July next, anil insist that it be paid off by the bank. Third— I They object to legislative authority being given to the bank to issue fresh capital to tho amount of three millions, consisting of one million of preference shares to be offered to the Government, 'and two millions of ordinary shares to be offered to the shareholders—the issue in each ca.su to be at a premium, and to be made at such time and on such terms as the board, with the approval of the Minister of Finance, may prescribe. Thus, shortly put, they object to the essential proposals set out in my memorandum ; to you above referred to." State Control of Bank. "Now, I will'first deal with tho proposal that the bank should be permitted lo pay, and should pay oil this million pounds of guaranteed stock. My iirst poinlt is thac this repayment would not 00 in the best interests of tho institution; and my second point that the proposal is insisted upon merely for the purpose of strengthening the ground upon winch the shareholders seek to take control of the bank from the State and vest it in themselves. These conclusions become obvious if rt'o contrast" the consequences of renewal with -those of repayment. In effect, tho renewal of the stock means a fixed deposit iu the bank of a million pounds ror twenty years ,at 4 per cent. It cannot bo seriously suggested that any bank in Australia or New Zealand would refuse such a benefit. It would bo readily and gladly taken at tile present moment by any banking institution in Now Zealand. The interests of the Bank of New Zealand would undoubtedly- be proriioted by this renewal, while repayment would be as distinctly disadvantageous. This seems beyond question. The bank, so far from having; a plethora of capital out of which this million could next year be paid, is", ill common with ali other similar' financial institutions, in need of further capital to meet, "the legitimate requirements of its customers. It is indeed mainly for this very reason that the representatives on.the board, both of the shareholders ami the Government, desire to see the sharo capital of the bank increased. But this is not my opinion alone. It was, until Messrs. Kennedy and Watson sought to take the control of the bank away from tho State, tho opinion of these gentlemen themselves. For instance, Mr. HVatsftn'Sis recently as December 4, 1012, in addressing the shareholders of the bank, said: 'With regard to the one million guaranteed stock, the bank ist now able to redeem it from its own resources, but seeing that we do not take any fixed deposits in Great Britain, and that business might have to bo curtailed in consequence of redeeming it, 1 am of opinion that, as much in the interests of the Dominion as of the bank, it should be continued.' It seems clear, therefore, that the demand for repayment of the million guaranteed stock springs, not from' a desire to promote tho bank's interest, but to strengthen the , grounds upon which tliosc gentlemen' seek to exclude tho State from its present control of tho institution. Control by Shareholders. "Next I deal with the demand that the constitution of the board should be altered with a new to giving shareholders.tho control of the bank by a majority representation _on the directorate. "As my critics point out, the State control of the institution'was increased by the Act of 1898. This was alter the bank had passed through its period of greatest stress, and had _ reached a position of comparative stability and safety. It is impossible to I read the Act of 1898, in tho light of the State's previous assistance to, and connection with, the institution from the year of tho great crisis iu 1891 and onwards, without clearly recognising that the Legislature in 1898 came to the definite conclusion that it was in the interests of both j the Dominion and the bank, and certainly due to tho people of New Zealand, that the control of the institution should be taken from the Shareholders and vested in the Government. _ "Whatever may have been the view of the Legislature when tho Act of 1891' was passed, it certainly in 1898 clearly recognised that in no circum'stances could tho Bank of Now Zealand, which has become (i great national institution, intimately bound up with the interests of the people of this Dominion, be allowed to fall into liquidation. Then, as now, the. State found itself committed to a permanent sponsorship for. the financial stability of the institution. It is that permanent sponsorship which is to-day the bank's strongest foundation. It was by and through the State's action, its guarantees and its assistance, that a derelict institution, which undoubtedly would have foundered, was repaired into a line seaworthiness and efficiency ; and the Legislature in 1898 determined that, so' far as State control could prevent it, the bank should never again ill its history reach a foundering condition. This is the central ; fact that my critics entirely : overlook, . but yet this is tho central fact which explains why the Legislature (after the bank had been, taken from tho rocks. and shoals which imperilled it in 1894 and placed safely on I tho high seas) deliberately took tho control jof the institution from the shareholders (and provided that there should be four ; Government nominees on the board and j only two ' shareholders' representatives. 'This was Ijlainly done to vest the conj trol of the institution permanently in the Government. Intention of Legislature, "It is suggested by my critics that Section 47 of the Act of 1895 contemplated a ! termination of this State control when the 'bank's liability to the State ceased. Seci tion 47, as far as it is relevant, runs as follows:— " 'Tho powers conferred by tho Share Guarantee Act, or this Act, on the Governor, tho Agent-General, and the Colonial Treasurer respectively for tho appointment of, and with respect to, tho president of the bank and the auditors respectively, and the power of veto conferred on the president of tho bank by the last-mentioned Act and this Act, shall respectively subsist so long as any liability on the part of the colony shall subsist under the Share Guarantee Act, or this Act.' "It will be observed first that this was three years before the Act of 1898 was ; passed,' when the present constitution of 'the benrd was established; and so far ifrom the. State's control being reduced in | tin's interval of three years, it was'materi--1 allv increased. Secondly, it is clc-ar from i Sections 111 and 18 of the Act.'of 1903 that , the Legislature expressly reserved the ri"ht to keep this control until it should think fit to alter or give it up. "Section Hi runs as follows:— " '.Sub-section 1 of Section 49 of tho Bank of New Zealand and Hanking Act, 1895, shall continue in operation so long as any liability on the part of the' ■ celonv subsists under this Act or his Majesty is tho holder of the preference shares, and the limitation .of tinio imposed bv that ssctioa is hereby - extended accordingly/

"And Scction 18 is in these words:—"Xotivithstanding anything to the contrary in tho Hank or Xeiv Zealand and Hankiiip Act;, IS!!,"), or any other Act, tho . provision* of the Bank of Xcv.' Zealand and Hiinkiiijr Act Amendment Act, ISIIB, with reject to flio constitution »i I lie lioanl iif DireiStors of tho bank, and the mode of appointing and electing tlie director?, ■snail continue until other provision is mad'ff by Act.' "Xoiv, if it was intended that the control of the Ixtnl: by the State .-hollllL cease when (ho hank's liability to the Maie came to an end, we certainly should not expcct to find the clear words in .Section 18 providing that the'constitution of the beard and the mode of appointing Ilia directors should continue, and should not ha altered without definite legislation. l!y the year liliKl the bank paid oft' a million pounds of the guaranteed debentures, and although there wa.s .still a liability on the pert of tho bank to tire State, tho institution had l/ccome prosperous, its stability undoubted, and the time had arrived for tho temporary control by the State—if temporary control hail been intended —being terminated or reduced. But instead of this, we find a definite statutory c.eclaration that tho control fixed five years bstfere by the Act of 1898 shou'.d remain permanent, unless altered by I'a.riiaiiient. It ffi'em?, therefore, impossible to contend, n.s my critics do, that the Legislature intended, or that tho shareholders inferred, that tho State's control was to ba of a merely temporary nature, and contemporaneous only with the duration of the bank's liability to the State. Calling Up of Capital. "I next pass to my critics' contention that the uncalled capital on the existing ordinary shares should be called up. In answer "to this contention, I would first point out that there never was at any time any understanding either between the shareholders and the heard, or between tho bank and the Government, that this capital should be called up. It is a wellrecogniscil rule of sound banking that it is desirable in the interests of tho safety and stability of a banking institution that it should have a large uncalled capital. Many illustrations of this could bo readily given. One, of the most recent is that in connection with the issue of now shares by the Union Bank of Australia, The nominal amount of these shares is -£m> but tho amount to bo called up is only ,i! 25. Tho reason why in common banking practice a large amount of share capital is left uncalled is' to afford a further guarantee or security to depositors and others lor the stability of tho institution in case of financial stringency or crisis: and the shareholders of the Bank of New Zealand' have no right in law or reason to demand that the uncalled capital should bj called up. • Position of London Shareholders. "Next, with regard to the contention of my critics that no legislation should'' be passed until tile Loudon shareholders can 1:2 consulted regarding my proposals, I would first point out that Mr. Martin Kennedy, when recently in England, consulted the shareholders or their representatives, and is, or claims to be, fully familiar with their views, and authorised to act lor them in tho consideration of my proposals. It is clear, therefore, that shareholders are sufficiently represented by the two local directors in any necessary negotiations regarding the proposed legislation ; but if any definite instructions are required from t'ho London shareholders, these could be easily obtained by cable. "Divided Against Itself." "I am next bound to say that in my opinion this demand for reference to the London shareholders is merely a pretext for delav, and delay in the present circumstances "would bo distinctly prejudicial to the interests of the bank, i apprehend that mv critics recognise that they have little chanoe of obtaining Parliamentary approval of their demands; and, feeling this; th«y elesire delav as offering some possible chance of preventing my proposals becoming law. It cannot be denied that the pi?=ent acrimonious conflict between tho shareholders'.representatives on the board and t.ho Government representatives is noc in the tics-t interests of the institution. The controversy and recrimination which Vive already taken place, so far from tending to assist the shareholders interests', are much more likely to induce members of Parliament to terminate tho spectacle of a house apparently so divided against itself as the present board has recently, by my critics been made to appear to be, bv taking complete control of .the institution, than to surrender to the shareholders the dominant power over its policy and management. Auditor's Veto, "Then it is suggested that the auditor's power to vote with a minority Government representation on the board is sufficient for the State's purpose, 'lho answer is that, with a Uoverniueiit minority and a shareholders' majority on the board, the policy and management of the bank would for ill practical purposes be in the hands of the shareholders. It is clear that tho power of veto with minority representation could, not give any cffcctive control over that management policy. This was found to be tile case before the Act of 1898 was passed. With a shareholders majority on the board, the policy of the bank would be conducted solely in the interests of the shareholders, and the State's proprietary interests, end the wider national interests, made subsidiary. Some of ihe shareholders, indeed, say that they want the full value of their interests now, and do not want these interests locked ,\ip in any way in the interests of. the bank itself. I assume that the present Government proposes to continue tlie policy of'its predecessor, and retain control over the general management and policy, of the institution: and if that assumption is right, it seems quite clear that the Government cannot accede to this request of my critics without reversing that policy of State control which has proved so eminently successful, and so bepeficial both to tho bank, its shareholders, and the people of the Dominion. "Political Influence," "Then my critics, with moro courage than discretion, fall back upon; the evils of political influence. You aro told in my critics' letter that 'it is utterly impossible to have sound, strong, and prudent management of so great c, ooininercinl institution as tho Bank of New Zealand if political influence is (o predominate on tho .board, -as-'-jt certainly will if each successive Government is to have power to nominate the majority of the board of directors.' A complete answer to this argument can bo found in f iio history of the bank fur tlio last nineteen years. The shareholders' control prior to 1894 brought the institution to a condition so disastrous that only tlio prompt intervention of the State's assistance saved it from liquidation. Since lS9f, the bank has been under what my critics would call the evils of political influence and control, and the institution, in spite of what we are to infer is pernicious Government interference,- lias- risen and expanded along unbroken lines of prosperity and success until to-day'its stability, its growth, and its operations may be fairly termed amazing. I am not aware of one instance of the evil of what my critics call political influence having arisen during the last nineteen years of tho bank's history. On tho contrary, Governmental control has been eminently successful and entirely fair, both to the shareholders, the permanent interests of the institution, and to the Government as representinc tho people of this Dominion. Indeed, one of the highest authorities has given the present State control of tho bank his entire approval. In a speecli which lie made at a meeting of the shareholders of tho bank on tho ltitli day of June. 1911, Mr. Martin Kennedy himself said: I take tho opportunity of expressing mv own gratification, and I believe of the shareholders generally, on tho splendid prosperity of the bank, and the success attending the. dual proprietorship and Government control.' This was thirteen years after tho Act of IS9S had established tho present constitution of the board. In mil, however, Mr. Martin Kennedy was not endeavouring, as ho is now, to wrest the control of tho institution from the Mate in the interests of the present shareholders alone. State as Shareholder. ' "The next contention of my critics is that the Government is entitled to no further interest in the bank than it at pieswit holds. It is difficult io understand how such a contention can be seriously advanced. At the present moment the Stale is 0' shareholder in the bank to the extent ol' .WOO,001) of paid-up capitr. 1 . The shareholders' have paid up the same amount. It is now proposed to increase the capital of the institution, but my eritics sav tint, while the shareholders are entitled to subscribe the increased capital required, and obtain additional shares at par, the State's claim to an increased interest is to bo ignored, and ,tha State denied tha rkht of subscribing

for any of the proposed new shares. Upon what principle of equity or of company law or practice. can such a contention be jrstified? My proposal is that for every share issued to the State two should be issued to the shareholders. In my judgment this propc-al is in the highest degree equitable to the ordinary shareholders, and 1 am confident (hat Parliament: would never tolerate such a sacrifice of this country's plain rights as to' denv it the privilege of increasing its interest in ...tin institution which owes its magnificent position to-day mainly to the State's assistance. Chairman's ''Inconsistency." "In the twelfth paragraph of my critics' letter, an attempt is niado to convict me «t inconsistency: and it is minted out that at a meeting cf shareholders in December, 19(17 (live and a half years as;o) 1 said, as chairman of the board: 'If the board continued the existing policy of steadily piling up the reserve, they wcra hopeful they would be able to pay tho million pounds maturing in 191-1 without increasing the present share capital ol' tho bank. It was a consummation devoutly to be wished.' "C-:iaiinenting on this statement, by critics say: 'We are unaware of any reason to justify this volte face of the chairman. 1 If my. critics are unaware of any reason justifying this change of opinion, they must be astoundingly ignorant of the financial changes which have taken place during til# last six years. When I spoke these words in December, 1907, it was at a time when there was a plethora of money in file market, and every prospcct of an abundance of capital continuing. Indeed, the bank's difficulty at that time, in common with other banks in Australasia, was to find a suitable investment for its funds. If that condition of things continued, and the bank was embarrassed with large amounts of capital it could not safely or suitably invest, it is obvious that it would have been prudent to use x its superabundance of funds in redcemim* the debentures; and that was what I contemplatetl when I used the words in question Since 1907, however, the demand lor money has gone on increasing so rapidly that tho bank has (as I have already said) at presen't insufficient capital to meet the legitimate demands of its customers, and this is one of the main reasons why 1 pioposod a largo increase in the capital of tho bank. Tins experience—this change in the money marketlias not been limited to New Zealand. •It has been equally well marked in Australia and Canada, and many of the principal bank's of these two countries have of recent years deemed it advisable to increase their capital in much 'the same way, and for the '.same (Surpose, as I have proposed an increase in the capital of the Bank of New Zealand. "I think that this disposes effectively eif my critics' charge of inconsistency. Their criticism reveals not so much a volte face on my part as a curious obliviousness on the part of two masters of finance of the great changes in the money market which necessarily alter the bank's policy with regard to repayment of the stock in question. "A Touch of Comicality." "Thc-n, I am arraigned as cne of the Government representatives on the board with having disregarded my sacred obligations as a director. There is a touch of comicality in luy critics ascribing sanctity to their conception of 'tJieso ouligatious. 'lliesa sippsar m the last analysis to be obligations', not so much to the permanent interests ot tho institution as to the pockets of tho present shareholders. When one looses through the motive which lies below my critics' attack on my proposals, and tne purpose of -their own, and recognises how entirely these aim at tho aggrandisement, at the expense of the institution and the State, of the present ordinary shareholders, one can scarcely fall to perceive how much sell-interest has distorted my critics' ser.so of fairiiGss and soundness of judgment. In point oi fact, the board has steadily looted to the permanent paramount interests of tho institution; and whits doing this, has always shown a eluo regard te> the important, if nevertheless suuonliuate, interests of the shareholders and the State. The directors havo been guilty of no partisanship, nor has the majority representing the Government on the board used that majority oppressively. This is best proved by the fact that throughout the last nineteen years, on (ho countless occasions oil which tho board has passed resolutions on matters of great importance, neither of my critics, so far as 1 can recollect, has found it necessary, as representatives of 'the shareholders," to enter any dissent or protest. The only caso in which, such protest was entered was recently at two board meetings, .when the proposals contained in my memorandum -to you were discussed, "and by a 'majority of the directors approved. Tho following extract from n letter dated March .'lO, 1912, and signed by lit. Martin Kennedy (then the actingchairman of the boardi, conveying to mo a complimentary resolution, speaks for itself " 'It was resolved to place on record ... . their high appreciation of the very valuable services which he— (that is, the present writer)—has rendered to the institution during the 'thirteen years Jie has been associated with it as a director, anel particularly ' during the last live years that ho has by the unanimous choice of*his codirectors occupied tho position of chairman of tho board.' "I would place this certificate, signed by Mr. Martin Kennedy himself, against my critics' present charge that 'the board, nominated, it is true, by the Government, but bourn! in honour to discharge tho duties of trustees for the shareholders, havo disregarded their sacred obligations.' State's Interest Ignored. "In conclusion, I suggest that the whole of my critics' long letter persistently ignores tho interest which the State now has in tho Bank of New Zealand. It also ignores the claims which these interests and the State's co-partnership with tho shareholders give to tho Government to retain its present control, and acquire a reasonably increased share in the institution. Particularly in tho thirteenth paragraph of their letter, my critics .seem to proceed upon the assumption that the ordinary shareholders alone are to bo considered, anel tlia't their interests should bo made paramount both to the permanent welfare of the institution and to tho rights of tho Government. "I do not own singlo share in , the bank. I am actuated by no sense of partisanship; and in tho memorandum I havo already submitted to you. I conscientiously tried to do justice in full measure to tlit> triple interests of the institution, -tho shareholders, and the Slate."