Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Directors need a message to cough up

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Shareholders must use voting power to bring poorly performing boards to task

Shareholders must vote against Tony Gibbs as GPG director to deliver a strong message to the company. Photo / Glenn Jeffrey
Shareholders must vote against Tony Gibbs as GPG director to deliver a strong message to the company. Photo / Glenn Jeffrey

Two poorly performing companies, Guinness Peat Group (GPG) and Richina Pacific, were in the news this week with the former releasing its December 2009 annual report and the latter holding its December 2008 annual meeting in Auckland, a full 15 months after its balance date.

Unfortunately, New Zealand shareholders in both companies are relatively powerless because GPG is domiciled in the United Kingdom, and holds its annual meeting in London, whereas Richina Pacific is now controlled by overseas shareholders.

However GPG's New Zealand shareholders still have some influence and the May 7 annual meeting is an important one for the company.

It is 20 years since GPG was reconstituted by Sir Ron Brierley and this is the year he has vowed to return value to shareholders.

This promise seems to be waning and shareholders need to give a strong message to the directors that procrastination is unacceptable.

The best way to do this is to vote against Resolution 2 (the directors' remuneration report), Resolution 3 (the re-appointment of Tony Gibbs as a director) and Resolution 4 (the re-appointment of Ron Langley to the board).

Unless GPG shareholders give a firm message to their directors then they could end up in the same unenviable position as Brierley Investments and Richina Pacific shareholders.

GPG's annual report shows the company had a loss of £36 million for December 2009 compared with a loss of £50 million for the previous year.

These figures are not overly important as the key issue as far as investment companies are concerned is their sharemarket performance and that has been fairly dreadful in the case of GPG.

The company has underperformed the benchmark NZX50 Gross Index in four of the past five years and had a negative 2009 return of 4.9 per cent, including dividends and 1 for 10 bonus issue, compared with an 18.9 per cent appreciation in the benchmark NZX50 Gross Index.

GPG has had a negative return of 28.6 per cent since the end of 2004 compared with a positive 6.6 per cent return by the NZX benchmark index.

The directors have been extremely well paid even though the company has underperformed the NZX by a wide margin. Since the end of 2004, Tony Gibbs has had total remuneration of $23.1 million.

Blake Nixon, who is based in London, has earned $17.7 million and Gary Weiss $21.7 million.

The company's performance does not justify these huge remuneration packages.

There are a number of reasons, besides the company's poor sharemarket performance, why shareholders need to give directors a strong message at this year's annual meeting. These include:

* The board badly needs refreshing. Sir Ron and Nixon were appointed in March 1990, Weiss in November 1990 and Gibbs in May 1996. The board has lost its vitality and cohesion and this is impacting on the group's performance, particularly as Nixon, Gibbs and Weiss are all executive directors.

* The annual 1 for 10 bonus reflects a board that has run out of ideas, particularly as these bonuses lead to a huge increase in the number of shares and are a contributing factor to the group's poor sharemarket performance.

* Ron Langley, who is 65 and was appointed to the board as a non-executive director in May 2009, is a long time associate of Sir Ron. Langley was in charge of the United States investments of Industrial Equity (Pacific) Limited (IEP), one of Sir Ron's favourite brainchilds in the 1980s. Neither Langley, nor any of the other directors, are truly independent.

* The overly generous compensation packages have been established by a remuneration committee consisting of Sir Ron, Langley, Nixon and Weiss and, prior to the appointment of Langley, the other three. It is totally unacceptable that these directors, who are long-term associates and non-independent, should determine the remuneration of their fellow directors.

These entitlements, with the exception of the share options scheme, are not subject to shareholder approval.

* GPG portfolio construction has been poor, particularly its big bet on Coats, which represents nearly 40 per cent of the group's portfolio.

Big bets have to be successful and GPG has repeated the same mistake Brierley Investments did with its investment in Thistle Hotels.

Back in 2007, Sir Ron started signalling that 2010, the 20th anniversary of the group under his stewardship, would be a landmark in terms of the return of value to shareholders.

Since then he has wavered with the latest annual report indicating "it is planned to have a process in place prior to the AGM" that would realise value. This is quite different to the earlier indication a clear strategy would be revealed to shareholders at the meeting.

This is not inconsistent with Sir Ron's past behaviour as reports in the early and mid-1980s said he was about to retire, but these predictions were never realised.

Sir Ron made his mark in New Zealand in the 1960s to 1980s by targeting poorly performing companies controlled by overpaid non-independent directors who were friends. GPG has now adopted many of these characteristics and a vote against Gibbs and Langley's would deliver a strong message to the company.

Ironically, GPG would have been an ideal target for Sir Ron 30 or 40 years ago. He would have organised a strong campaign against the re-election of directors with his crusade based on wealth creation rather than any personal vendetta.

Richina Pacific, which was delisted from the NZX in January 2009, barred the media from this week's annual meeting. The company is determined to stay out of the public eye and CEO Richard Yan said he didn't want competitors to see the accounts of the 100 per cent-owned Mainzeal.

The website can be accessed by password only when it is upgraded.

When shareholders approved delisting in December 2008 they were promised that all shares owned by dissenting shareholders would be bought back at 45.47 cents a share.

This offer, which was also available to all other shareholders, fell through because a potential purchaser did not have sufficient funds.

Nevertheless, a number of substantial New Zealand shareholders sold their shares through Yan at 45.47 cents a share.

Some of them thought they were selling to the company while others believed they were selling to another investor through Yan.

Yan told this week's meeting that he had personally bought these shares at 45.47 cents. This raises the question as to why the CEO was buying shares from some shareholders when the company couldn't meet its buy-back promise to all shareholders.

This week, Richina Pacific approved a number of resolutions including:

* The company will no longer be required to have independent directors.

* As a result, related party transaction will not have to be approved by independent directors.

* Richina Pacific does not have to hold its annual meeting in New Zealand.

* Under a proposal adopted at this week's meeting, shareholders will not be able to "divulge or communicate to any person any confidential information concerning the business, accounts, or contractual arrangements or other dealings, transactions or affairs of the Company which may come to their knowledge without the prior written consent of the Company".

These motions were carried by 99.1 to 0.9 per cent, mainly because of the support of large offshore investors.

Richina Pacific's New Zealand shareholders have been almost completely disenfranchised and deprived of regulatory protection.

Their main hope is that Yan will finally deliver on one of his many promises and buy back their shares at 45.47 cents by the December 2011 target date.

* Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management and a GPG and Richina Pacific shareholder.

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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