This was in draft as a brief law book review. I got distracted when criminal prosecutions were announced today of Vance Arkinstall and Rick Bettle among others, alleging misleading statements in the prospectuses and advertisements of Dominion Finance Ltd.

Vance was a longserving Chief Executive of ISI, the insurance and savings industry peak body.

Rick Bettle was a revered chief executive of Wrightson (before my time on the board of that company) and has since been one of the country's most highly regarded company directors. He has been a trusted government entity chair (TAB, Civil Aviation and Capital and Coast Health) and presided over the Institute of Directors In New Zealand.

What happens to the law, to the confidence of New Zealanders in the probity of our commercial leaders, and to the enforcement bodies when such people spend years in criminal proceedings?

They may be guilty as charged. They may be able to refute the prosecution claims conclusively, as all based on hindsight. They may escape on technicalities. Some may show that even due diligence did not reveal that the statements were incorrect. Others may fail  though they were equally unaware of the mistatements, because they have not kept a backcovering paper trail of diligence, even if they were in fact sensibly diligent. The cases may reveal a pattern of wishful thinking. They may instead show calculated risk-taking with the highest of motives, accepting personal exposure in the not foolish hope that continued confidence  would let the company trade through and avoid crystallizing the losses that are now certain.

I know nothing either way in this case. But  I do know one thing – these prosecutions and others like them could be seen in years to come as a watershed for our company  and securities law, and for respect for the law.  Which way that goes could in turn have more influence than all Bill English's tax changes, or Rodney Hide's red tape scissors, on whether we regain an enterprise culture, investing our own money productively in risky businesses,  or instead continuing to rely  on banks borrowing foreigners' money to fund our idleness..

The deterrent of the prosecutions could see the birth of  impeccable candour among company directors, ushering in a new age in which fear of prosecution makes it  possible to take at face value nearly all public commercial discourse, assuming statements have been checked to exhaustion for possibly misleading inferences. The resulting public confidence will see a flood or renewed saving and direct  investment by the newly trusting "mums and dads".

Or we could be watching a dramatic acceleration of the great decline in  opportunities for direct public investment, as promoters directors and major shareholders decide that the compliance costs (and risks) of public offering far outweigh any lowered costs of capital. On that scenario there will be little that the NZX can do to reverse its decline in significance. The power and revenue of private equity and other "wholesale" market intermediaries will surge, and whatever their 'financial literacy' or newly refreshed trust, for "kiwi mums and dads" there will be declining choice for direct investment.

This is not an attack on the Commission for these prosecutions. They may have been left with no choice but to pursue many of these cases, by rank culpability, or by the way the law is framed. I've long urged more enforcement and less fiddling with the rules. But the rules that need enforcement are the rules against fraudsters, against dishonesty. I hope the Commission is not deciding that the need to look tough justifies chasing people they do not suspect of genuine fraud, just because the regulations have redefined 'fraud' with strict liability for mistakes that had no dishonest intention.

I should have posted on this earlier when David Jackson, an eminent accountant, had to resign from the Securities Commission when the Commission launched  'civil proceedings' (essentially criminal prosecution-lite) against him and other directors of Nuplex. Or even earlier when John Hagen, with whom I sat on the Securities Commission began his ordeal under criminal law as a director of Feltex.

I do not know Jackson. But from what I know of the others they could never have imagined the liabilities they now face. Nor could many others who've worked with them and believe them to be honest and honourable. John Hagen put thousands of essentially volunteer hours into upholding standards of probity in the securities industry as an auditor, as a leader in his firm, and as a Securities Commissioner.

My fear is that as these cases wind on we will create a self fuelled spiral of decline in trust and the expectation of being law abiding, that are among our cultural treasures and competitive advantages.

What can protect ordinary investors from confusion and cynicism as they see commercial leaders in the dock (who can you trust?).

At the same time, even if the prosecutions are justified in law I foresee a tacit consensus emerging among business people that the law is deeply unfair if it targets people they believe to be decent and honest while politicians (and their own employees) are sheltered by other laws, for deceit, and theft and gross derelictions of duty. They will decide that securities law is written by cynical hypocrites who care only about appearances, not substance, and that it is enforced by morons. If that view takes root there will be a consensus like that already abroad about tax avoidance (and the tradesman cash economy). When enough people find justifications for  ignoring or evading the law you eventually get Italian style corruption. The "consensus of merchants" lies at the heart of our commercial morality. We generally trust that people will do their duty and what they say they will do. How long can that  expectation last when people see the law colliding with morality in yet another sphere (it is already mocked in employment law, and in welfare entitlements).

For two decades we have been writing aspirational slogans into securities law (and employment law ) instead of trying to confine it to what honest people do in practice. We are now reaping the consequences – regulators bound to enforce these aspirational statements against people who are not crooks. If they do not enforce, however unreasonable the law, the authorities will feed mistrust themselves for failing in their duties.

Even if those charged are convicted most of the market insiders will continue to regard the convicts as decent people, and some of them will remain leaders. People will not bother with niceties of reasoning. They'll simply decide "if even he/she is now a target, I could be too – best stay out of the territory, or do whatever it takes to make sure the authorities get no traction with me".

I have worried for years about the  potential costs of  law made by people who think it is enough to recite noble objectives, It is no consolation that at least one of the current targets regarded me as over-anxious.

And so, eventually I get back to the book review. Directors Duties and Powers is by Professor Peter Watts. He is one of the very few commercial law academics (here and overseas) with enough appreciation of the elements of the rule of law, and its fragility, to publish his  concerns about the trend to feelgood law (including self indulgent judgemade law). He has warned that eventually it could be an own goal.

For a flavour of his iconoclasm, here's his explanation for ignoring the fashionable topic of "governance".

"This is NOT a book on what has come to be called "corporate governance". ….If most companies, or most companies of a certain type, come to adopt a governance practice, it is usually not long before someone argues that directors are legally negligent if they have not conformed to the practice. Courts and legislatures need however to be vigilant on this score. It is not always necessary to integrate the ideal into the floor of duties, which is what the law should concern itself with. Many corporate governance ideas are the brainwaves of strong advocates, who like nothing better than to see their latest strictures turned into binding laws. All such notions and practices should be viewed with considerable scepticism by judges and legislators before being made compulsory…."

I'm not sure whether non-lawyers will appreciate the strength in that  delicate warning.

Peter was one of the best junior lawyers I've had the privilege to work with. He richly deserves the Legal Research Foundation's JF Northey Memorial Book Award for this book. I invited myself to the launch when I was unexpectedly free in Auckland at the right time last year. I should have thanked Peter before now by promoting his excellent work.

But for practical purposes, much of this scholarship will count as nothing if the dominant driver for  directors becomes fear of strict, crude and politically defined criminal liability, not the carefully balanced duties evolved over thousands of cases by the judges who oversaw the heyday of Anglo-Saxon capitalism.