Brian Gaynor: Small investors treated as second class

Fletcher Building chief executive Mark Adamson (right). Photo / Dean Purcell

The Shareholders' Association is on the warpath. The association believes that individual investors are increasingly being treated as second class citizens. It has appointed Michael Midgley as its first chief executive and the new appointee will have plenty of important issues to deal with in the months ahead.

One of these is company communications, a problem illustrated by recent developments at Fletcher Building.

On Friday, March 17, a Fletcher Building trading halt was released to the market at 10:06:08am, just after the market opened at 10.00am. Already that day, volume of 1,738,818 shares had been reported to the NZX, with 1,728,868 of these shares being international crossings from the previous day. The remaining 9950 shares went through the market in six separate trades before the trading halt announcement.

These were clearly retail investor transactions.

Why didn't Fletcher Building make the trading halt announcement before the market opened? If it had, then the 9950 shares traded on market at $9.22 would not have been completed. This would have saved purchasers $1.04 a share, as the stock opened at $8.18 on Monday following the announcement of the company's latest profit downgrade.

Another feature of the profit downgrade was the NZX announcement that "Fletcher Building management will host a teleconference call for institutional investors, fund managers and analysts at 11.00am NZ time today to provide some more detail on this announcement".

Why weren't individual shareholders invited to the teleconference?

One of the issues with Fletcher Building is that its investor relations department has become increasingly oriented towards institutional investor and has been seemingly neglectful of individual shareholders.

Unlike other companies, Fletcher Building didn't publicly invite shareholders to listen in to its recent post-result teleconference briefing and a recording of this teleconference can no longer be found on its website.

By contrast, Auckland International Airport and Spark New Zealand released details of their post-results briefings through the stock exchange, with Spark stating that its briefing was for "investors and analysts". Copies of these webcasts are available on the Auckland Airport and Spark websites.

The largest ASX listed companies are also more welcoming to individual shareholders, with CBA inviting shareholders to watch a post-result webcast briefing, while Westpac emails the highlights of its results to all shareholders with a link to "a webcast of our institutional presentation'.

Shareholders at the SkyCity Entertainment annual meeting. Photo / Jason Oxeham

As most New Zealand companies have the email addresses of their shareholders, why don't they email invitations to the post-result briefings and include direct links to archived teleconferences and webcasts?

The Shareholders' Association has been so frustrated with Fletcher Building's poor communications with individual shareholders that it has posted a recording of this week's post-profit downgrade teleconference on its website.

But Fletcher Building's problems are much more serious than its communications with individual investors.

The group's construction division recorded an operating profit of $24 million for the six months to December 2016, on revenue of $1,150m (see table). This $24m profit figure includes a $19m contribution from the Higgins contracting business acquired in July 2016 and an estimated $30m loss on a major construction project.

Chief executive Mark Adamson told investors, mainly institutional investors and analysts, last month that he believed the $30m loss would be full and final.

This week, Fletcher Building announced it would experience a further $110m loss on major construction projects, a total of $140m for the year. This is a woeful outcome for a company that should be achieving record profitability during one of New Zealand's biggest construction booms.

The directors and senior executives of Fletcher Building, Z Energy and Heartland Bank don't seem to be concerned about treating individual shareholders as second class citizens.

Who is to blame for the debacle? Why didn't Adamson have far better oversight of the group's second largest division in terms of revenue?

Adamson's generous remuneration, STI (short-term variable incentives), ELSS (Executive Long-Term Share Scheme) and share options clearly indicate that he shoulders a large responsibility for Fletcher Building's overall performance.

But also, the Fletcher Building board of directors has a clear responsibility to find a chief executive who will enable the group to take full advantage of the booming economic conditions while avoiding the large losses reported earlier this week.

The Shareholders' Association is also totally opposed to Z Energy's decision to abolish its physical annual meeting and replace it with a webcast meeting. Z Energy seems to have made this decision because of the low turnout at its 2016 meeting.

The company has had three annual meetings since listing on the NZX, the first in Wellington in 2014, followed by Auckland in 2015 and Wellington again last year.

Z Energy's corporate governance officer Debra Blackett wrote in the Business Herald last September: "On July 2 Z Energy held its annual general meeting at Te Papa. It was a beautiful sunny day" but only "a grand total of 19 shareholders attended in person".

First, the meeting was at 2.00pm on Friday July 1, not on Saturday July 2.

Second, the weather records show that July 1 was partly sunny but the mid-day temperature was only 10C and there was a 37 km/h southerly. This mid-winter weather does not inspire shareholders to attend annual meetings, particularly when the southerly averaged 45 km/h earlier in the day and the temperature was forecast to drop to 5C that evening.

Third, Friday afternoon is the worst time to hold a meeting because most people are winding down for the week or are preparing to go away for the weekend. Rakon is probably the only other NZX company to hold a Friday afternoon meeting.

In other words, if a company wants a small turnout it should hold its annual meeting on a mid-winter Friday afternoon.

But more importantly, annual meetings have become boring in recent years.

This is because investor relations people, who are much more suited to preparing complex presentations for analysts, are now organising these meetings and they don't have a genuine feel for individual investors.

In addition, many chairmen don't answer shareholder questions because they claim any answers have to be released to all investors through the stock exchange.

This no-reply policy is rarely used by company executives in their twice yearly post-result teleconferences with fund managers or in their follow up one-on-one meetings.

The clear messages for Z Energy are: don't hold your annual meeting on a mid-winter Friday afternoon in Wellington, make sure the meeting is interesting for individual investors and answer shareholder questions in a clear and informative manner.

Last but not least is Heartland Bank's recent capital raising. The company raised $20m through a share placement to institutions at $1.46 a share and a further $20m through a Share Purchase Plan (SPP).

The SPP offered shareholders up to $15,000 worth of shares at $1.46 a share but this offer was 3.1 times oversubscribed and shareholders who subscribed for the full $15,000 have been scaled back to $4829.56 worth of shares.

The Shareholders' Association believes the full $40m should have been raised through a rights issue to shareholders. This criticism is justified, particularly as Heartland has an extremely loyal and enthusiastic shareholder base that turns up to the company's annual meeting in large numbers.

For some unknown reason, the directors and senior executives of Fletcher Building, Z Energy and Heartland Bank don't seem to be concerned about treating individual shareholders as second class citizens. This is a sad indictment of the country's corporate sector and is one of the reasons why New Zealanders prefer residential property, our sharemarket is around 50 per cent overseas owned and NZX trading volume is low.

Disclosure of interests: Brian Gaynor is an executive director of Milford Asset Management which owns shares in Fletcher Building, Z Energy and Heartland Bank on behalf of clients.