KEY POINTS:
Families or founders can wield powerful influence over listed companies. This was demonstrated recently in the saga of Rupert Murdoch's takeover of the Wall Street Journal's parent, Dow Jones, where success depended on winning over the Bancroft family, who controlled Dow Jones.
Well-run family-owned companies can help
shareholders create wealth, but those run by compliant boards under a family's influence run the risk of underperforming or even destruction.
In New Zealand, "dynastic" families have been selling down their public companies and cashing out during the past decade and a half.
In 1993, family-owned concerns accounted for 11 of the local stockmarket's 20 most profitable companies. They included the Myer family, the Goodmans, Sanfords and the Whitcombs and Tombs, according to Bruce Sheppard of the New Zealand Shareholders Association.
Sheppard said these families owned 13 per cent of the top 20 companies but by 2006 this had dropped to only 8 per cent. His research was published in the April, May and June issues of the New Zealand Investor.
Sheppard said family companies and dynastic interests had taken out about two-thirds of their wealth that was in the listed market, and almost halved the number of companies they controlled in 13 years. By 2006, Australians and fund managers had control of 57 per cent of the stockmarket's 20 most profitable companies.
One reason for the decline in family-owned concerns on the stockmarket is the emergence of a more sophisticated private equity market, which wasn't there until five years ago, says Brian Gaynor, an investment analyst and strategist at Milford Asset Management.
In the past, entrepreneurs looking for capital took the path of a trade sale or a share float. These days, private equity provides another source of capital.
Hugh Fletcher, former chief executive of the now defunct Fletcher Challenge, and now a member of the boards of Rubicon and Fletcher Building, says the lack of a savings philosophy could be one reason why New Zealand hasn't seen more companies thrive on the public market. New Zealand has lost some of its most prized assets because of a naive attitude towards overseas investors, and the investment community is still risk-averse when it comes to valuing a deal, Fletcher says.
Why have families been cashing out? It is part of the evolution of business for families and entrepreneurs to cash out at some point, says Arthur Lim, investment director at Macquarie Securities. "Some entrepreneurs have been very progressive. By virtue of tapping into public funds, they have been able to grow the company's wealth and multiply it, phenomenally" says Lim. Others, however, have not created value, he says.
An example of an early sale of a business which has led to major expansion is Pumpkin Patch, where Sally Synnott sold her shareholding early in the company's development cycle to Maurice Prendergast. He subsequently took the company public.
Synnott, who started Pumpkin Patch as a mail-order company, realised early in its development that her young family meant she could not devote the time needed to grow the company. Greg Muir, chief executive of the company, says: "Both Sally and Maurice were fully conscious that if they wanted to grow their business into a major export business, holding on to the majority share would not be realistic."
For the late Sir Angus Tait of Tait Electronics, on the other hand, being in business was about hanging on for as long as possible. He was one of those entrepreneurs who wouldn't seek money from a public float or sell to big owners, and believed that many companies take a "giant leap backwards" when owners choose to sell and the new owner takes the firm in a different direction.
"People ask me all the time why do you do this?" he said not long before he died. "Yes, I could have sold, and have $50 million to $100 million easily in my back pocket. There are half a dozen suitors around the world all the time. But what's the point of that?"
Fisher and Paykel is probably one of the most successful companies still headed by a person bearing the family name. Gary Paykel started at 19 working in the factory shop, sweeping the floors and doing odd jobs.
He was not handed the family business to run and neither will he do so with his own son, who had to go through the HR process to get a job in the company.
Paykel is no longer actively involved in the day-to-day business but retains chairmanship of the company started by his uncle, Sir Woolf Fisher, and his father, Maurice Paykel.
Gary Paykel shows some of the grit of the company's founders; he fought hard to keep F&P from falling into the hands of competitors, particularly Australia's Email Group. When the formidable receiver for the failed Equiticorp, Fred Watson, was seeking the highest bidder for its 30 per cent stake in F&P, it took guts to fight him off. "We managed to settle that amicably," Paykel recounts.
There was also a time when Paykel stuck to his guns against criticism from institutional investors. "They thought we spent too much on development capital. But I strongly felt that one had to take a long-term view with development and they just couldn't understand that then." The DishDrawer took eight years and $34 million to bring to market, he said. Today, it is a global product.
At one time, Paykel would also have fought to keep all manufacturing in New Zealand. But globalisation has forced the company to make some difficult decisions. F&P Appliances recently announced plans to move its laundry production to Thailand.
"It is a very sad day for us, but we have become a global business and are under pressure to do the best for the company and the shareholders."
The only thing he said he would have liked to have done better during his time as chief executive was to have taken more costs out of the business before it was restructured. "I said I would stay on for a year as executive chairman when we took on the task; I should have stayed a bit longer," says Paykel, who relinquished his executive chairmanship of the company in 2004.
Paykel says protecting stakeholders' interests is a strong feature of the Fisher and Paykel family values. The two founding members of the company were also great philanthropists who believed in giving back to the community.
Unequal shares shunned
Overseas, everyone from the Ford family to Google's founders have used shares with different voting power to keep control of "their" companies. However, dual-class shares are not a feature of this country's sharemarket, due to the New Zealand Stock Exchange's hawkish stance on giving shareholders equal rights.
Hugh Fletcher, a director of Fletcher Building and Rubicon and former chief executive of Fletcher Challenge, says New Zealand has been intolerant of different classes of shares. "In the UK and US, families have been able to control the voting structure while maintaining very little equity."
A stock exchange spokesperson says shares are issued based on the principle of one share, one vote, but there is flexibility to structure the voting power of shares. Non-voting preference shares are common.
Section 37 of the Companies Act says firms can have different classes of shares with different voting rights, subject to shareholders' approval. Sections 116 and 117 provide protections for shareholders in the event that such shares are issued.
Investment analyst Brian Gaynor says the New Zealand Stock Exchange has been strict in ensuring shareholders enjoy equal rights.
Bruce Sheppard, of the New Zealand Shareholders' Association, says he is not aware of shares carrying different voting rights being allowed in recent stock exchange history.
