Brian Gaynor: Shareholders deserve answers from boards

5:30 AM Saturday Aug 25, 2012

Recent AGMs, takeover bids show governance affects investor results

There were a number of interesting developments during the week, particularly at the two Fisher & Paykel annual meetings and in relation to the partial takeover offer for Wakefield Health, now called Acurity Health Group.

The upbeat meeting at Fisher & Paykel Appliance (FPA) was dominated by long addresses from chairman Keith Turner and managing director Stuart Broadhurst. Retiring director Gary Paykel joked that the 90-minute meeting was too long but most shareholders were happy to be given the clear message that the company's outlook had improved.

Turner expects the company to pay its first dividend since the end of 2008, although he warned this was subject to no deterioration in trading conditions.

One of the issues was the re-election of two Haier directors, Liang Haishan and Tan Lixia. FPA is 20 per cent owned by the Chinese company.

The problem here is that neither Liang nor Tan attended any of the 18 board meetings in the March 2012 year and they were not at the annual meeting.

Turner explained that Chinese companies appointed senior executives to outside boards but these were then represented by alternates. The two Chinese alternatives to Liang and Tan had attended most of FPA's board meetings and were at the annual meeting.

That may be acceptable in China but this is New Zealand where shareholders have the right to appoint directors under the assumption those directors will go to board meetings.

FPA's annual report has detailed biographies of Liang and Tan but nothing about the two alternative directors who were at most of the board meetings.

When Haier acquired its 20 per cent shareholding there were concerns the Chinese company would call the shots, particularly as far as the transfer of technology was concerned. There is no indication the latter is happening but FPA is certainly playing under "Chinese rules" as far as its board composition is concerned.

Another FPA shareholder expressed surprise that directors, including Turner, had no shares even though they were expressing considerable optimism about the future.

Turner replied - as do many other directors - that he would like to purchase shares but was concerned he would breach insider trading rules because he had information that was not available to the market.

This is a strange argument given the company's continuous disclosure obligations and its annual report, interim and final profit announcements should give full and accurate updates on the company.

There is a clear window, after the interim and final result announcements, when directors are allowed to buy and sell shares. Most shareholders would be delighted if directors took advantage of this opportunity, particularly if they purchased shares.

Fisher & Paykel Healthcare (FPH) tried to be upbeat but its AGM didn't have the same conviction as its sister company. One shareholder argued that "management is deluding itself" after chairman Tony Carter's address started with an impressive graph, which rose sharply from left to right, showing cumulative dividends.

A graph showing cumulative dividends always looks good even if a company doesn't increase its dividend, as is the situation with FPH.

FPH made a number of references to constant dollars, which give an overly positive view of the company's performance, whereas New Zealand dollar figures are much more relevant as far as shareholders are concerned.

Carter proposed the re-election of managing director Michael Daniell to the board with the comment that his reappointment was important.

This was an interesting remark as Carter is also on the Air New Zealand and Vector boards, where the CEOs do not have board seats. However, he also sits on the Fletcher Building board where the CEO has a board position.

A number of other major New Zealand companies do not have their CEO on the board.

Carter told the meeting that Daniell was on the board because he had always been there and the company might review this strategy when the next CEO was appointed.

If a CEO is on the board, then the board may not exercise its supervisory role to the extent that it should. If a CEO is on the board for a long time, particularly longer than the non-executive directors, that CEO may have a strong influence over the board instead of being answerable to the board.

Many New Zealand companies appoint their CEO to the board for traditional reasons instead of taking into account best practice corporate governance standards.

The world is changing and shareholders should consider whether it's more appropriate to have a CEO accountable to the board rather than him or her having peer status as a board member.

Another reflection of the different approach taken by companies is the way Acurity Health has responded to a takeover offer compared with Comvita late last year.

On October 14, Cerebos announced it would make a full takeover offer for Comvita at $2.50 a share. Comvita chairman Neil Craig and CEO Brett Hewlett, who is not a director, immediately went on the offensive, arguing the offer was too low. They contacted shareholders directly or through an aggressive media campaign.

Their stance was justified when Grant Samuel valued the company between $3.40 and $4.00 a share. The bid was unsuccessful and Comvita's shares are now trading at $3.60.

On July 25, Austron announced its intention to make an offer for 50.01 per cent of Acurity at $6.00 a share. Austron is jointly owned by Mark Stewart's Medusa and Royston Hospital Trust Board.

Medusa and Royston already own 39.98 per cent of Acurity between them and they have been given priority as far as acceptance of the offer is concerned.

AMP has agreed to accept in respect of its 15.71 per cent, so the joint-venture bidder has already achieved its 50.01 per cent target even though KordaMentha assessed a value range between $6.92 and $7.88 a share.

Although the Acurity board has recommended shareholders not accept the offer, it hasn't gone any further than this.

Chairman Alan Isaac and CEO Andrew Blair, who is not a director, appear to have made no contact with shareholders nor have they attempted to influence their decision through the media.

Why did Comvita aggressively encourage shareholders to reject the Cerebos offer whereas Acurity has taken a much more passive approach to the Austron bid? Surely it's not because Cerebos had no representation on the Comvita board whereas Medusa and Royston are both represented on the Acurity board?

The other issue in relation to the Acurity bid is whether it's within the spirit and letter of the Takeovers Code.

One of the fundamental rules of the code is that a shareholder with 20 per cent or more of the voting rights of a code company cannot increase its voting rights except by making a partial offer, where it must reach 50.01 per cent, or a full offer to all shareholders.

The reason for this is that all shareholders have the chance to participate in the premium for control.

The offer for Acurity seems to breach this because the newly formed Austron, which has made the offer, is giving priority to Medusa and Royston, which own 19.99 per cent each. The remaining shareholders are offered crumbs.

This is yet another example of the dreadful related party transactions that have bedevilled the New Zealand sharemarket.

The Takeovers Panel needs to have a serious look at the Acurity offer as it sets very dangerous precedents.

If this type of deal is not banned then a number of shareholders could get together, collectively owning around 50 per cent or more, and make an offer that excludes all other shareholders.

This would take us back to the dark days before the Takeovers Code was introduced.

Disclosure of interests: Brian Gaynor is an executive director of Milford Asset Management which has invested in all the companies mentioned above on behalf of clients.

bgaynor@milfordasset.com