Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Fletcher result poor but boss wants more

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Adamson and his senior executive team may be having a ball but they continue to deliver below average investment returns

Mark Adamson appears out of touch with how Kiwis regard their business leaders. Photo / Dean Purcell
Mark Adamson appears out of touch with how Kiwis regard their business leaders. Photo / Dean Purcell

This column is about two companies at opposite ends of the NZX.

The first is Fletcher Building, which is our largest listed company with a market value of $6.2 billion and which faces a number of corporate governance challenges.

The other is Renaissance Corporation, which has a market value of just $5 million and is hoping to sell its major asset as it struggles to survive.

Fletcher Building's governance issues came to the fore during the holiday period when the Australian published a major interview with chief executive Mark Adamson.

The article featured on the front page of the Australian's business section.

The central themes of the interview were that Adamson, rather than the board, was determining the group's overall strategy and the chief executive and his management team were seriously underpaid.

Adamson, who joined the group in October 2012, was quoted as saying that he had a "pretty bloody good" relationship with chairman Ralph Waters and after the first few board meetings Waters would say: "I don't necessarily agree with what you are doing but I didn't give you the job to interfere."

The new chief executive went on to tell the Australian that after recent board meetings, Waters had told him: "I don't really understand what you are doing but I really like the outcomes".

Many Fletcher Building shareholders have been disturbed to read that the group's highly regarded chairman neither "agreed with" nor "understood" the new management team's strategy.

Adamson also told the Australian that he talked to Waters "at least twice a month".

This is a very low level of communication between a chairman and a chief executive, particularly for a company undergoing a radical strategy rethink.

Shareholders can realistically expect a chairman and a chief executive to have at least one scheduled conversation per week, usually by phone, to ensure that there is a full flow of information between the executive team and board of directors.

Adamson was also quoted as saying: "I come to New Zealand, the land of the tall poppy. I come to the biggest public company that is under daily scrutiny and the board are well connected with society and value their role on that board. It is a real clash of cultures. It is the one issue that I have outstanding to resolve."

These comments seem to imply that Adamson believes that board members are more interested in status than making hard decisions.

He seems to be saying that this creates a clash of cultures between a hard nosed management team and a soft board.

The Fletcher Building chief executive uses the term "tall poppy", as do many senior executives, because it implies any criticism they receive is not justified, it is purely due to New Zealanders' vindictiveness.

Nothing could be further from the truth. New Zealanders are not vindictive and overly critical. Anyone who attends annual meetings or reads the media will know that we are extremely uncritical of our business leaders, even those who don't perform. We have had a large number of company failures, including most of the finance company sector, partly because New Zealanders are reluctant to criticise flawed governance structures and poor performances.

Adamson also challenged the Fletcher board to review the company's remuneration policies to better compensate its senior executives. He talked about the international executives he had attracted to New Zealand and emphasised that they don't want to work for charity.

He was quoted as saying: "They are having a ball at the moment and my issue is not keeping them for the next two years - it is sustaining that story for the coming years. A lot of them have moved from the Northern Hemisphere. As brilliant a place as New Zealand is, it is a bloody long way from where they are used to. For us to kick on to the next stage, we are going to have to put ourselves out there and offer these people an appropriate recompense."

Adamson and his senior executive team may be having a ball but they continue to deliver below average investment returns. In 2013 - the new chief executive's first full calendar year - Fletcher Building had total shareholder returns of just 6.3 per cent compared with 16.5 per cent for the benchmark NZX50 Gross Index.

Most Fletcher Building shareholders have two main requests for 2014 - a far better performance by the company in terms of total shareholder returns and the appointment of a strong chairman to replace Waters when he retires later this year.

Renaissance Corporation first listed as Consolidated Silver Mining, a Thames area silver mine operator, in 1968.

It changed its name to Consolidated Minerals in 1981, Consolidated Enterprises in 1983, Triumph Industries in 1987 and Renaissance in 1997.

Consolidated Enterprises had the Apple computer franchise for New Zealand but the US company decided that this operation had to be sold because it did not want its New Zealand Apple activities operating under a stock exchange listed vehicle.

Ironically the company changed its name to Renaissance after it bought back the Apple distribution business in the mid-1990s.

The company's outlook was positive until Apple started direct distribution in New Zealand and reduced Renaissance's distribution margin.

Since then Renaissance has struggled and the company is holding a special meeting on January 29 to obtain approval for the sale of its Yoobee School of Design, its major remaining operation, to Academic Colleges Group for $14 million.

Renaissance chairman Colin Giffney released a highly informative letter with the notice of meeting.

He wrote: "A company is an association of shareholders. Renaissance has effectively become a dysfunctional such association. At various times several of the larger shareholders have openly expressed their preference not to inject new funds. They were rightly reluctant to sell or to be diluted if, for instance, a third party was introduced.

"Renaissance was run on the basis of returning all profits to shareholders. The belief was that, if Apple did do something that affected the distribution business, there would be little or nothing left. In the end just that scenario played out. The reluctance to invest in the business carried over."

Giffney, who is a highly regarded former sharebroker, went on to explain that the vast majority of small NZX companies struggled because shareholders are reluctant to invest new money, they have no broker research coverage, they find it difficult to attract good management and new directors and "it can be impossible to find buyers (for shares) when you want to sell and impossible to find sellers when you want to buy".

He wrote that "the Renaissance share price went up 60 per cent on the announcement of the proposed sale of the Education Division says it all. Share price and value were poles apart."

Giffney's comments are perceptive but they are mainly applicable to back door listings. These back door listings have not been successful in New Zealand because shares are issued to acquire additional assets and the new controlling shareholders do not have funds to reinvest in the business.

These controlling shareholders often put their own interests ahead of the company, particularly as far as their willingness to let the company raise capital from new shareholders which dilutes their shareholding.

There is plenty of money to invest in smaller NZX companies, particularly since the introduction of KiwiSaver and the PIE (portfolio investment regime). The money is there but the problem is that most controlling shareholders do not want their interest diluted.

Nevertheless Giffney makes a number of perceptive observations, far more accurate that Mark Adamson's comments on our low executive remuneration and so-called "tall poppy syndrome".


Brian Gaynor is an executive director of Milford Asset Management which holds Fletcher Building shares on behalf of clients.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular 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 Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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