Brian Gaynor: Caesar renders unto himself at GPG

Guinness Peat Group creates a huge dilemma for investors. The Britain-based investment company, which has 27,000 New Zealand shareholders, has been one of the better sharemarket performers, yet its poor corporate governance standards could adversely affect returns over the longer term.

GPG has a management-dominated board and many of the big corporate failures have had this characteristic. Equiticorp, Chase and most of the high-flying investment and property companies in the 1980s had this governance structure, as had Brierley Investments, Trans Tasman Properties and, to a lesser extent, Fletcher Challenge in the 1990s.

Many of the corporate failures in Australia, the United States and elsewhere also had management-dominated boards.

It is not surprising that a large number of previously successful companies fail due to poor governance as they are generally immune to criticism because of their success. These companies are given greater freedom by shareholders because they are believed to have discovered new and winning formulas.

Chase and Equiticorp had a cavalier approach to governance standards in the 1980s but criticism was dismissed because of their strong sharemarket performances. Criticism of Brierley Investments' board structure in the early 1990s was also rebutted because the company was still performing reasonably well.

Yet there have been a huge number of studies showing that board structures are important. These studies have been undertaken by business-friendly organisations that recognise the value of good corporate governance, particularly from a shareholder perspective. Corporate governance is not a vehicle to attack the business sector, it is a self-regulatory discipline that helps improve the performance of the corporate sector and protects shareholders from company failures.

Corporate governance has become increasingly important in recent years because of the expansion in trans-border investing. As shareholders are often domiciled in another country, and have little contact with management and cannot attend the annual meeting, it is important to have a robust structure in place to protect the interests of shareholders against the excesses of management.

This is particularly true of GPG because it is based in London and has a huge number of New Zealand shareholders.

Virtually all the major studies on corporate governance and codes of practice recommend that at least half the directors be non-executive. They also recommend that the non-executive directors be independent. The Bosch Report on Corporate Practices and Conduct in Australia defines independence as someone who is not a substantial shareholder, has not been previously employed by the company, is not retained as a professional adviser or has no significant contractual relationship with the group.

The UK Combined Code, which has been endorsed by the London Stock Exchange, believes that a majority of non-executive directors should be independent of management and free from any business or other relationship that could interfere with their independent judgment.

There is also widespread consensus that the board's remuneration committee should have a majority of independent, non-executive directors.

According to GPG's annual reports, the company has two non-executive directors, Sir Ron Brierley and Trevor Beyer, and four executive directors, Graeme Cureton, Tony Gibbs, Blake Nixon and Gary Weiss. Cureton was appointed on April 2.

Beyer is chairman of the remuneration committee and the other two members are Nixon and Weiss.

But the non-executive status of Sir Ron and Beyer is purely theoretical. At an extraordinary general meeting in London last year, shareholders approved an employee-only option scheme. As Sir Ron received 500,000 options and Beyer 150,000 options under this scheme they must be considered as employees, at least on a part-time basis.

Thus, contrary to best corporate governance practices, all the directors and members of the remuneration committee are GPG employees. In the December 2001 year, the three members of the remuneration committee received the following bonus payments in addition to their fixed salaries and fees: Beyer $290,000, Nixon $1,710,000 and Weiss $2,080,000.

These payments may be justified but it is totally inappropriate that an executive-only board and remuneration committee determines them.

The directors also have an extremely generous options scheme. Based on yesterday's closing price, the five long-term directors are sitting on a combined profit of $29.2 million on 32.5 million unexercised options.

Sir Ron was extremely critical of the generous payments made to Brierley Investments executives but these pale into insignificance when compared with GPG.

In 1997, BIL's last good year, the company's nine directors received total remuneration of $4.5 million after achieving a net profit of $311 million. In the December 2001 year, GPG's five directors received $9.6 million after net earnings of $145 million.

What will GPG's directors pay themselves if they get anywhere near BIL's peak earnings?

But the biggest problem with an executive-dominated board is not the excessive remuneration but the appointment and monitoring of the chief executive. One of the main roles of a board is to appoint the chief executive and monitor his performance. This can be done effectively only if there is a majority of independent directors.

Who is monitoring the performance of GPG's management? Who will dismiss non-performing executives?

The six directors are close long-term associates and will want to hang on to their huge remunerations as long as possible even if they are no longer performing to full capacity.

A group of executive directors can also band together and take effective control of a company. This happened at BIL in the late 1980s when several executive directors, not the independent board members, dumped Sir Ron. The new management team dominated the board and could not be removed until it was too late.

The most surprising aspect of this debate is that Sir Ron seems to be impervious to corporate governance issues even though he was closely involved with two of the country's biggest corporate disasters, Bank of New Zealand and Brierley Investments.

Bruce Sheppard wrote to Sir Ron asking him to help New Zealand shareholders to hook into the annual meeting in London on July 18, and mentioned the absence of independent directors (the correspondence is on the Shareholders' Association website www.nzshareholders.co.nz).

A communication link with the annual meeting is worth serious consideration because 27,000 New Zealand shareholders have almost no contact with the company.

Sir Ron was fairly dismissive of the meeting suggestion and made the following comments on GPG's board: "You mentioned independent directors. Independent of what? All of GPG's directors are totally committed and involved in the welfare of the company. Are you suggesting the board would be strengthened by the addition of one or more uncommitted individuals?"

Strong organisations need committed management but they should also have committed independent non-executive directors that monitor management's performance.

Although the corporate governance issues are important, they should not affect performance over the next year or so.

GPG has a large investment portfolio with approximately 33 per cent in the UK, 31 per cent in cash, 22 per cent in Australia, 7 per cent in New Zealand and the remaining 7 per cent is either undisclosed or in other countries.

GPG is best assessed on a net asset value (NAV) basis and analysts had a NAV on the company between $1.90 and $2.10. The discrepancy is caused by undisclosed changes to the group's portfolio and the difficulty in valuing several investments.

At yesterday's closing price of $1.78 GPG is trading at an 11 per cent discount to the mid-point NAV assessment. This is slightly lower than the traditional discount, which tends to be closer to 20 per cent.

GPG's short-term performance will be dictated by its investment portfolio. The long-term outlook would be more secure if it had some independent non-executive directors who could monitor management's performance.

* Disclosure of interest: Brian Gaynor is a GPG shareholder.

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