Brian Gaynor: Fletcher's Sir Ralph Norris a victim of his own success?

Sir Ralph Norris doesn't deserve to wind down his business career on a negative note. Photo / Greg Bowker

The problem with Sir Ralph Norris, who announced his resignation as Fletcher Building chairman this week, could be that his senior management career was too successful.

Successful people have usually learned from their mistakes but Norris had so few mistakes that he didn't have this experience to draw on when Fletcher Building's construction division hit the proverbial wall.

The other issue with Norris is that he is incredibly loyal to his business organisations and always seemed to accept internal reports even when there was a strong argument that they were inaccurate.

For example, he refused to blame former Fletcher Building chief executive Mark Adamson for the company's construction problems even though Adamson should have had much clearer oversight of this high-risk division.

He continued to give the impression that the group's construction writedowns had been completed when industry participants believed that Fletcher Building hadn't addressed many of its problems.

This columnist had first-hand insight into Norris' corporate loyalty in May 2012, after writing about overseas ownership in New Zealand. The following comments covered ASB Bank and Commonwealth Bank of Australia (CBA), where Norris has spent most of his highly successful executive career:

"Take ASB for example. There was substantial public opposition to the 1989 sale of 75 per cent of the bank to CBA for $252 million. The remaining 25 per cent was sold to the CBA for $560m in 2000.

"The sale proceeds were used to fund the ASB Community Trust.

"ASB Bank was acquired for $812m, and has paid total dividends of $3.3 billion to its parent since the end of 2005 (now more than $6b).

"The ASB Community Trust, which had total net assets of $1.1b in March last year (currently also $1.1b), makes donations to arts and culture, community building projects, health, learning, recreation and sport and other areas.

"Its donations would be far, far greater if it had maintained ownership of the bank.

"The New Zealand sharemarket has also been a loser because the bank's directors rejected an IPO and NZX listing following the (1987) crash."

Norris called two days later saying that he was very disappointed with my comments. He had received several calls from former CBA colleagues over the weekend who were also upset and claimed that ASB Bank was only successful because it was Australian owned; it wouldn't have been as successful if it had remained in New Zealand ownership.

Sir Ralph Norris at a media briefing after standing down from the Fletcher Building board. Photo / Greg Bowker

Norris refused to meet to discuss the issue and cancelled several previously arranged meetings, and a prospective business arrangement he had agreed to.

One can get unexpected responses to columns, but these responses give useful insights into the thinking of some of the country's senior businesspeople.

This raises the important question of whether the boards of our large listed companies should be populated by individuals with no specific industry experience, albeit having had very successful business careers in other sectors.

Fletcher Building, which has had 17 directors over the past decade, is a good example of this phenomenon.

Four of these 17 directors had a finance background, two had been senior partners of accounting firms and one each has had legal, economic, IT/media, dairy farming and management consultancy backgrounds.

Of the remaining six directors, four were either current or former Fletcher chief executives, Tony Carter had been Foodstuffs managing director and Dr Rod Deane, who retired from the board in March 2010, was a former Spark chief executive.

None of the non-executive directors had extensive construction or building sector experience. This left a gaping hole in the Fletcher Building board as construction is a high-risk, low-margin business that can experience huge losses when costs rise and subcontractors demand big payments.

These cost issues were highlighted by the 2013 collapse of Mainzeal and the recent failure of Carillion, the UK construction giant.

The lack of construction sector experience is clearly evident on the Fletcher Building board, which has announced five profit downgrades over the past 12 months.

Back in 2016, chief executive Adamson was upbeat about the company's outlook. He told the October 2016 annual meeting that "every indicator points to another good year in the construction sector".

However, in February 2017 Fletcher Building announced losses on a major construction project, estimated at $30m.

Less than two weeks later the company announced additional construction losses of $110m on two major projects after a "detailed review".

On July 20, chief executive Adamson resigned after the company announced further writedowns of around $125m on the two major projects. Norris was quoted as saying: "It is very disappointing to see further losses being reported."

Just over four months later, at the October 2017 annual meeting, the company announced further construction losses of $125m and Norris was quoted as saying: "A considerable amount of remedial action has taken place in the past year by the board, the executive team and construction leadership team to address the issues we have experienced in our B+I [construction] business. I strongly believe these actions will address the issues we have experienced over long-term."

Finally, on Wednesday, Fletcher Building announced further construction losses of $486m after a review of 16 construction projects and "external input from independent construction experts and KPMG".

The company also announced that it won't pay an interim dividend and Norris will resign no later than the 2018 annual meeting, which is usually held in October.

Norris wrote that "shareholders expect accountability from the board for all aspects of the company's performance. In this context, I wish to announce that I will stand down as chairman".

The latest $486m writedown was clear and decisive while the previous four were vague and lacked transparency.

This week's announcement illustrated the construction expertise of Ross Taylor, the group's new CEO, as the $486m writedown should be full and final whereas Norris and Adamson had given the impression that they were keeping their fingers crossed that no further issues would arise.

Fletcher Building has had 17 directors over the past decade. Photo / File

Norris doesn't deserve to wind down his business career on a negative note but his views on governance have been inconsistent.

He has argued that ASB Bank would have been less successful under a NZ governance structure, even though it operated in a lightly competitive domestic environment, whereas Fletcher Building, which operates in a highly competitive global setting, would be successful with a governance structure that didn't include any independent director with specific construction experience.

The two new directors appointed under the Norris regime were from a big accounting firm, while the other "has more than 30 years' experience in the information technology and online media industry".

There have been a huge number of losers from the Fletcher Building debacle, including an estimated 1 million to 1.5 million KiwiSaver investors.

The only party to come out of the debacle with its reputation enhanced is The New Zealand Shareholders' Association (NZSA), which has been highly critical of the company's governance for several years.

The NZSA stated this week that it "almost alone, have been consistently calling for changes at Fletcher. Most of the institutional investors (who are primarily based offshore) have sat on their hands. 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 NZSA doesn't sit on its hands and individuals who want to take a serious approach to investing should join this organisation and take heed of its proxy voting recommendations.

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