NZX gets key measure right in NXT market

The slow take-up of the NXT market opportunity does not surprise me.

It may yet take off. But the listing rules turn too many aspirational principles into minimum conduct obligations enforceable with savage penalties. They make it rational for entrepreneurial companies to stay clear of listing.

The NXT market needed a clean break. It should have offered a persuasive promise that dishonesty would be pursued implacably, but not mis-judgment. Low quality decision-making in bad luck is hard to distinguish from current lawyer views of negligence. So entrepreneurial companies which must make decisions under high uncertainty and with information that could always be improved by spending more or waiting longer, are often best to stay private if they can. So the public are deprived of the opportunity to invest in them.

Even the modified continual disclosure obligations create too much risk of harsh and very expensive hindsight judgment as to what should have been appreciated and disclosed. They do not exclude the risk of being forced into premature disclosure that can damage the business, or damage reputations as events unfold unexpectedly. At the least the compliance burden of listing will distract board and management. It sits beside another risk of being listed – that some management become addicted to public attention, and invest too much in managing perceptions and not enough on managing the business.

Nevertheless the NXT market has pioneered some great new features. I’m impressed by the KOMs (Key Operating Measures) in the post float reporting, after identifying them in the offer docs. They may differ for each company. It seems to be a sensible mechanism to substitute for the clutter and irrelevance of much IFRS material.

I imagine that it is helpful in the preparation of offer documents, and in guiding management after listing, to focus the  company hard on the factors most relevant to its real prospects.

I hope the NXT market develops enough momentum to cement into market expectations generally that investors should be looking for KOMs particular to each company.

Stephen Franks is principal of Wellington commercial and public law firm Franks and Ogilvie.