Brian Gaynor: A zeal for governance can go too far

The recent Genesis Research & Development and Waste Management annual meetings indicate that companies and shareholders are becoming too inflexible on corporate governance issues.

If this is so then the recent emphasis on this topic may do more harm than good.

At the Genesis meeting chairman David Irving and director Herman Rockefeller were up for reappointment and Doug Wilson, John Palmer and Allan Freeth were standing for the first time. Palmer and Freeth are chairman and chief executive of Wrightson, the recent buyer of a 15.3 per cent holding in the biotech company.

Genesis has no limit on number of board members, but Irving quoted Australian Stock Exchange guidelines on independent directors to argue that Rockefeller should be re-elected and one of the Wrightson nominations should be rejected.

Irving said that only two of the existing seven directors were independent - himself and Rockefeller - and if Palmer, Freeth and Wilson were elected only three of the 10 would be independent (Doug Wilson would be the new independent director).

The problem with this approach is that directors are being assessed on their independence rather than their ability.

Fortunately, shareholders did not heed Irving's advice. Rockefeller didn't turn up to the meeting, he had another engagement, and Palmer and Freeth gave excellent presentations. Irving, Wilson and the two Wrightson representatives were elected but Rockefeller missed out.

Genesis board meetings will be extremely interesting following the appointment of Palmer and Freeth. They don't support the break-up of Genesis into two separate companies, Health and Plant, and indicated that the company should take a more commercial approach.

Palmer and Freeth will bring a more finely tuned commercial attitude to Genesis than the existing board do.

The main issue of contention at the Waste Management meeting was the proposal to give performance rights to managing director Kim Ellis.

At last year's annual meeting an option issue to Ellis was criticised because the exercise price was the market price of the ordinary shares on the date the options were issued. Although this issue was particularly generous as far as Ellis was concerned, 21 million proxy votes were received in favour of the motion, only 2.2 million against and the motion was carried.

Under this year's proposed scheme Ellis would receive 251,088 ordinary shares for nothing but only if the company achieves a 25 per cent increase in earnings per share in the three years ended December 2005.

Although the proposed issue had a reasonably tough performance hurdle 8.47 million proxy votes were in favour, 8.53 million against and the motion was withdrawn (these figures do not include an institution that mistakenly voted for the proposal when it intended to vote against).

A year ago only 2.2 million shares were voted against a scheme that was overly generous to Ellis, yet this year 8.53 million proxy votes were lodged against a much more demanding scheme.

Companies are now anticipating that institutions will vote against options schemes. GDC Communications has revealed that if shareholders reject the proposed issue of 1 million options to chief executive Geoff Lawrie, with an exercise price of $1.15 per ordinary compared with the current market price of $0.81, then he will be given a lump sum payment of $250,000 instead.

If institutions reject performance-based schemes then companies will make cash payments to executives that are not subject to performance. Is this the outcome institutional shareholders are seeking?

Air New Zealand/Qantas

The two regulatory reports on the proposed Air New Zealand/Qantas alliance have highlighted the huge opposition to the deal on both sides of the Tasman.

The Australian Competitor and Consumer Commission (ACCC) revealed that 30 of 51 submissions covered in its report were against the joint venture, 16 were in favour and five were undecided.

In New Zealand only one of the substantive submissions was clearly in favour of the alliance and a large number of the 78 letters and documents received by the Commerce Commission (NZCC) were strongly opposed to the deal.

The ACCC received a large number of submissions from Government departments, both federal and state, whereas the NZCC received nothing from Government sources.

The New South Wales, Queensland, South Australian, Tasmanian and Western Australian Governments are all in favour of the proposal but the Victorian Government is against. South Australia, Tasmania and Western Australia are attracted by the prospects of more direct flights between Auckland & Adelaide, Auckland & Hobart and Auckland & Perth.

The Victorian Government believed that the present proposal would lead to increased airfares and lower capacity and it should not be approved unless the Federal Government adopts an open skies aviation policy.

A large number of Australian tourism industry participants, airports and trade union movements are against the proposal. The Australian Federation of International Forwarders Ltd argued that the airline industry was relatively stable in Australasia, it was mainly European and North American carriers that were in trouble.

On this side of the Tasman the Tourism Industry Association New Zealand was the only organisation to come out strongly in favour of the Air NZ/Qantas deal.

It wrote: "Recent airline history has shown that competition in itself does not necessarily support the public good-interests of New Zealand and most of the benefits of competition are short-lived and come at the expense of shareholders, long-term service levels and the New Zealand taxpayer".

Three substantive submissions from New Zealand, all opposed to the deal, were given wide coverage in the ACCC and NZCC reports. Professor Tim Hazledine of the University of Auckland made a detailed attack on many of the assumptions put forward by the two airlines.

Gulliver Pacific claimed that the alliance would lead to the closure of some travel agencies, tour operators and associated services.

Origin Pacific, the Nelson-based airline, argued that Air New Zealand and Qantas would dominate domestic, transtasman and other routes and it would use this to cross-subsidise and engage in anti-competitive practices.

The submissions and draft reports indicate that Air New Zealand and Qantas have a long way to go before they win the hearts and minds of the regulators, the business sector and the general public.

Goldmining

The rumoured sale of the exciting Favona goldmining prospect near Waihi to a South Africa goldmining company will bring a wry smile to former Macraes Mining shareholders.

The rumours come just after Normandy NFM completed the takeover of Favona's owner, Otter Gold Mines.

The proposed sale is not unexpected as Normandy NFM stated in its February offer document that it was reviewing its Waihi interests and among its alternatives were a trade sale or an initial public offering and Stock Exchange listing.

Based on the Macraes experience, it is more than likely that Normandy NFM will realise a considerable profit from the sale.

Since Macraes was acquired by GRD in 1998 its pretax earnings have risen from A$5.6 million to A$31.5 million ($34.7 million), and annual gold production from 94,000 to 162,000 ounces while its cash operating costs have fallen from A$476 ($525) to A$310 ($342) an ounce.

The company plans to raise its annual production at the Otago mine to 350,000 ounces and at Reefton, where the development has been delayed because of weak financial markets, annual production of 70,000 to 100,000 ounces is expected.

It would be far better if New Zealanders and the NZSE were harvesting the fruits of Macraes' success - instead of Australian investors and the ASX.

* Email Brian Gaynor