Brian Gaynor: Trust's role cause of Vector's problems

By Brian Gaynor

The dramatic resignation of three independent Vector directors raises important corporate governance issues. The resignations came a few days after three Pike River independent directors walked out and follow the dreadful governance of several companies, including Feltex and Plus SMS, over the past year.

Telecom, the country's largest listed company, has also had its fair share of issues, with chairman Roderick Deane resigning in mid-year.

The departure of Tony Gibbs, John Goulter and Greg Muir from the Vector board also has major implications for Auckland because it demonstrates once again that public/private partnerships are not working in this region.

The Vector Arena is behind schedule, the Rugby World Cup stadium debacle reflected poorly on the area's decision-making process and Vector's problems are heavily influenced by the conflicting interests of the group's public and private shareholders.

Auckland will never be a world-class city until its governance problems are solved.

The root causes of Vector's problems are the political conflicts and inconsistent policies of the Auckland Energy Consumer Trust (AECT), the listed company's 75.1 per cent shareholder.

The trust, which has five elected trustees, represents 290,000 Vector electricity customers.

The 1998 "Report of the Ministerial Inquiry into the Auckland Power Supply Failure" concluded that it was not best practice for elected AECT trustees to be directors of the energy company as their conflicting duties would diminish the board's effectiveness.

Nevertheless in April 2002 John Collinge, an AECT trustee, was appointed to the Vector board to help in its transition to a new regulatory environment.

This caused problems two years later when a new board of AECT trustees, elected in October 2003 and chaired by Warren Kyd, decided it was no longer appropriate to have a trustee on the Vector board.

Collinge, who was deputy chairman of the AECT, refused to resign and left only after the AECT proposed a special resolution of shareholders to remove him.

The Collinge debacle was a clear sign of the disfunctionality of the trust and its constantly changing attitude towards the energy company.

Just over four months later, the AECT said Gibbs, Goulter and Muir had been appointed to the Vector board after a comprehensive review by the trust.

Trust chairman Kyd said "the AECT has taken considerable care and some time to select replacement directors to complement the existing board" and "the new directors' proven ability and wide variety of experience will add strength to the existing board in meeting the challenges ahead".

At last year's float, Vector had seven directors - chairman Michael Stiassny, Gibbs, Goulter, Muir, Donald McLaren, Brian Plimmer and Robert Thompson.

The prospectus emphasised the importance of good governance and the independence of all directors.

The share float was successful, but soon after came rumours of a dysfunctional board and directors shouting at one another in meetings.

McLaren resigned in April and three months later, two AECT trustees, Karen Sherry and Shale Chambers, were appointed to the Vector board. Sherry is a former chairwoman of the trust and Chambers a former deputy chairman.

Why were two AECT trustees appointed directors when the 1998 ministerial report concluded that this diminished the board's effectiveness and Kyd, who is still chairman of the trust, said during the 2002 Collinge dispute that "having a trustee in a position of potential conflict [on the board] is not a desirable position"?

Kyd justified this year's appointments by saying that since Vector listed, it could no longer consult the trust on strategic matters because of the continuous disclosure requirements of the Securities Markets Act and listing rules.

That may be true, but he and the ministerial inquiry have said it is inappropriate for AECT trustees to be on the Vector board.

Vector's corporate governance problems burst into the open this week with the dramatic announcement by Gibbs, Goulter and Muir that they had resigned because of concerns with the governance of the company and the leadership of chairman Stiassny.

The three Pike River directors resigned for "personal reasons" and went underground. But the departing Vector directors made an unprecedented public attack on their former chairman.

Vector now has only four directors - Stiassny, Chambers, Sherry and Thompson; Plimmer retired at the October annual meeting. Not surprisingly they and trust chairman Kyd said they had confidence in Stiassny and Vector's governance.

The departed directors immediately went on the front foot and accused Stiassny of being autocratic, uncommunicative and making policy decisions behind their back.

One of the claims is that he and an AECT representative met the Commerce Commission without telling fellow directors or Vector's management.

Where there is smoke there is fire and Stiassny has admitted he is a black and white individual. He is a difficult person to get a straight answer from and his uncommunicative and autocratic style, which is a characteristic of his receivership background, is probably inappropriate for a large listed infrastructure company.

The resignations demonstrate that the AECT is now totally in control of the Vector board, as three of the five independent directors were opposed to Stiassny before this week's dramatic developments. The resignation of two other independent directors since last year's float, and their replacement by two AECT representatives, has dramatically changed the board's composition.

This is ironic when it is considered that the AECT originally nominated Gibbs, Goulter and Muir as directors.

The basic problem is that Vector is controlled by a trust that represents 290,000 customers in Auckland City, Manukau City and parts of Papakura, yet the listed company has 373,000 other electricity customers in North Shore, Waitakere and the Wellington region. It also has more than 140,000 gas customers in 30 North Island towns and cities.

How can the AECT trustees on the Vector board represent the best interests of the company and all 803,000 customers when they have a specific mandate to advocate for only the 290,000 electricity users in their electoral area?

The issue is further complicated by a deed from last June that requires Vector to consult the AECT before increasing electricity charges to residential and small commercial customers in the AECT area.

This relationship was a major contributor to Vector's recent problems with the Commerce Commission, as the commission found that the company favoured its Auckland electricity customers over its North Shore and Wellington users.

Commission figures showed Vector had a pre-tax return of 4.6 per cent from its Auckland residential customers compared to 5.4 per cent and 9.4 per cent from North Shore and Wellington residential customers respectively.

This dispute has been resolved, but the 1998 ministerial inquiry, the problems with the Commerce Commission and this week's resignations clearly demonstrate that Vector's governance structure is hopelessly flawed.

The situation is exacerbated by a chairman who is uncommunicative and autocratic. This suits the AECT because it has effectively neutralised Vector's independent directors, particularly now that the AECT has two trustees on the Vector board.

Vector's corporate problems will be resolved only when the two AECT trustees resign from the board.

It should have been Stiassny, Chambers and Sherry who left this week instead of Gibbs, Goulter and Muir.

* Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.

THE COMBATANTS

Auckland Energy Consumer Trust (AECT)

Warren Kyd, chairman.

Michael Buczkowski, deputy chairman.

James Carmichael.

Shale Chambers.

Karen Sherry.

Vector directors

Michael Stiassny, independent chairman.

Shale Chambers, AECT trustee.

Karen Sherry, AECT trustee.

Robert Thomson, independent.

Tony Gibbs, independent (resigned) (right).

John Goulter, independent (resigned).

Greg Muir, independent (resigned).

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