The board of Fletcher Building ignored warnings that all was not well at the company, according to the New Zealand Shareholders Association.
In a letter sent to its members the association (NZSA) said the current issues started when Mark Adamson was appointed chief executive.
"The restructuring under his watch with consequent losses of competent, qualified and experienced personnel was a blatant example of throwing out the baby with the bath water and as early as March 2015 NZSA was warning the company that this would have consequences," the association said.
"The result by mid-2015/2016 was a gutting of skills in B+I [Buildings + Interiors division] where along with some justified changes, many high performers left rather than face job insecurity and what appeared to have become a culture of fear."
Fletcher Building yesterday said difficult construction contracts had caused losses in its Buildings + Interiors division of $292 million in the year to June 30, 2017, with a further $660m of losses projected in the current financial year.
The company said the troubled unit would not be bidding on big new projects and would focus on finishing those on its books.
Earnings guidance for the group excluding the B+I division was $680m to $720m.
Corporate heavyweight Sir Ralph Norris, who joined the company as a director in 2014 and became chairman in October of that year, announced his resignation on Wednesday and said investors expected the board to be accountable.
"It's not a situation where's there a single point or thing," Norris said.
"There are a number of issues that conspired. One of the issues is the information flows through to the board were not as fulsome as they possibly could have been."
Changes in the contracting environment and risks to the division were a significant factor, he said.
"We have also had a situation where we have had a significant building boom," he said, adding that this was often the most dangerous time for a building business, "worse than a bust because it puts stress on subcontractors, services and the like".
"In calculating the contracts, there was a significant difference between the professional quantity surveyor firms' calculations on what it cost to complete the projects and some of those numbers moved by more than 100 per cent," Norris said.
"There are significant parts of this business that have under-performed and were acquired prior to my arrival that have been questionable.
"The market, in general, is going to say, okay who carried the can for this - whether it's right or wrong," he said.
"A lot of this was well in train before I joined the board," Norris said, adding that he is confident his own performance has been acceptable while chairman.
"There has been management failing - that's the situation. The board became aware just over a year ago and the market has been moving in such a way when you've got this boom in construction. Supply and demand rules start to apply. Costs have gone up. That's what's happened here."
Adamson left the company last July and had been chief executive since October 2012, having previously worked for Formica, a Fletcher-owned business.
His replacement on deck since last November, Ross Taylor, helped precipitate the increased provisions announced on Wednesday, making a review of B+I the first of his tasks in what he called a two-phase review of the company.
By June he expects to have unveiled a revamped business strategy. Taylor's last job was at UGL, an engineering firm owned by Cimic Group and formerly known as Leighton Holdings.
"The Fletchers board had plenty of warnings that all was not well in the real world, including from credible organisations such as NZSA," the association said.
"They were ignored. Attempts by the chairman to deflect criticism by saying the major issues arose before his tenure do not carry much weight in our view. It may be true for the Christchurch Justice Precinct, but not for later projects," the association said.
"Information coming from outside the organisation should have set the alarm bells ringing. Once it has appointed a CEO, the role of a board and particularly the chairman is to be a professional sceptic, particularly when it comes to assessing management's proposals and the quality of information the board receives."
It appeared there might have been a "funnelling" effect with most information going through the chief executive to the chairman.
"This is very high risk and Sir Ralph Norris has now acknowledged that the board did not receive all information in a timely fashion. The new CEO is on record as saying the latest disclosures are the result of a 'sanity check' and a more pragmatic approach. What he means is that projections now align with reality."
Good governance required all the board to be able to interact with senior management and where credible concerns were raised to dig into the organisation.
"They clearly failed to do so despite our repeated efforts to bring issues to their attention."
Most institutional investors had sat on their hands, the association said.
"It is extraordinary that we now see calls for major board changes, yet they were silent when NZSA suggested that the whole board needed to seek a fresh mandate at the last AGM."
The association believed the company had done its utmost to assess the full extent of the damage, "and we are reasonably confident that most of the bad news is now out".
Shareholders would want to see a big change from the consistent financial underperformance over a long period.
The appointment of the new chief executive with the appropriate background, the departure of Norris and promised board refreshment was a necessary first step "but it will be a slow process given the magnitude of the current damage".
Some questions remained and the association said it would have more to say after the company's half-year result.
"We will also be looking closely at the role of the audit committee and external auditors. We will not be alone in this and it is highly likely that both regulators and litigation funders will be taking a close interest," it said.
Fletcher Building expects to have negotiated new covenant terms on all of its funding lines by the end of March, having gained a waiver from its banking syndicate for breaches of conditions related to earnings ratios. It is also in talks with holders of its debt issued in the private placement market.
The company's share price dropped 9.3 per cent on Wednesday to close at $7.05.
- additional reporting BusinessDesk