The first signs of a looming share price meltdown appeared at 8.30am on Tuesday when Fletcher Building released four documents to the NZX.
These were the company's annual meeting presentation, chairman Bruce Hassall's address, chief executive Ross Taylor's address and a media release announcing a profit downgrade.
The latter revealed that the company expected normalised earnings before interest and tax (Ebit) to be in the range of $630m to $680m for the June 2019 year compared with $710m for the June 2018 year and $817m for the previous year.
This profit downgrade was unexpected and was due to newly revealed issues, rather than the massive construction losses experienced in recent years.
Fletcher Building shares were subject to a wave of selling when the NZX opened at 10.00am. The company's share price was down 7.0 per cent, from $5.55 at Monday's close to $5.16, when the annual meeting commenced at 10.30.
There were signs of more trouble ahead as a large group of noisy protesters were encamped outside the Eden Park venue. They were objecting to Fletcher Building's residential development near the Otuataua Stonefields Historic Reserve, close to Auckland International Airport.
Inside the venue, Macquarie analyst Steve Hudson, who has a stellar record of predicting Fletcher Building's ups and downs, was in mild shock. He uttered depressingly: "I didn't expect this profit downgrade".
The meeting began with chairman Hassall's address to shareholders. The new chairman is a strange choice because he comes from a totally different background to Fletcher's line of business, as a former senior partner and chief executive of accounting giant PwC New Zealand.
He doesn't appear to have any prior listed company experience, although he is chairman of The Farmers' Trading Company and a director of Bank of New Zealand and Fonterra Co-operative Group.
Hassall showed his lack of listed company experience at Tuesday's meeting and his appointment is akin to Black Caps cricket captain Kane Williamson being appointed the All Blacks' half-back. This happens regularly in the NZ business world but would be ridiculed in sporting circles.
Chief executive Taylor tried to adopt a positive spin, but it was disappointing to hear him say that the June 2019 guidance downgrade was partly due to a slowdown in apartment construction across the Tasman.
This was a big surprise because shareholders have previously been told that Fletcher Building didn't benefit from the Australian apartment construction boom because it had a low exposure to this area.
The re-election of six directors, which dominated the meeting, was the next item on the agenda.
This process accounted for 42 per cent of the meeting, which lasted one hour and 45 minutes, with the formal addresses and shareholder questions each taking up 29 per cent of meeting time.
The first director standing for re-election, retiring Adelaide Brighton CEO Martin Brydon, opened his address with the comment: "I am delighted to be nominated by my fellow directors". Brydon made it clear that he had been appointed by his fellow directors, rather than by shareholders.
Shareholder Des Hunt was quick to his feet, asking Hassall about Fletcher Building's director approval process. Hassall replied that they used outside advisers and skills matrix analysis. A skills matrix is a grid or table that visibly illustrates the skills and competence of team members and the team's skill gaps.
Hunt then asked whether individuals nominated by shareholders were interviewed. Hassall said that all nominations "went into the process".
Brydon's address and the Hunt/Hassall exchange tells us everything we need to know about the director selection process in New Zealand. The reply that all nominations "went into the process" doesn't mean they were interviewed or seriously considered.
The fact of the matter is that new directors are appointed by existing directors and shareholders are rarely, if ever, consulted.
Large listed companies, particularly those that have performed poorly, should temporarily appoint one or two major shareholders, and a Shareholders' Association representative, to a nomination committee. These committees could also use outside advisers.
Only then will we have board appointments that represent a wider range of interests, rather than just the existing directors.
Barbara Chapman, the former ASB Bank chief executive, also opened her address with the statement: "I am delighted to be nominated by my fellow non-executive directors".
Chapman and the remaining directors focused on their personal ambitions, which were to transition from their successful management careers to governance careers.
My meeting notes had the following comments on the directors' presentations: "no energy", "no vision", "no passion" and "no strategic insights". Fletcher Building's share price performance after the meeting indicated that other observers came to the same conclusions.
However, there was one notable exception. Cathy Quinn, the former chair of law firm MinterEllisonRuddWatts, demonstrated considerable energy and passion while giving the clear impression that she could make a big contribution to Fletcher Building.
Unfortunately, too many successful executives believe they have an automatic rite of passage to transition from their CEO or CFO office to the board table.
Quinn at least gave the impression that she believed this passage had to be earned, rather than just automatically bestowed by existing directors.
The other area deserving comment is the way the Fletcher Building board handled the Ōtuataua Stonefields issue. This issue had been extensively covered by Simon Wilson in last week's Weekend Herald and attracted a noisy group of demonstrators outside the Fletcher Building meeting.
The best way for companies to deal with these high-profile issues is to go on the front foot and answer questions before they are asked. However, neither Hassall nor Taylor mentioned the issue in their addresses to shareholders.
Coralie van Camp asked all six directors standing for re-election whether they supported the controversial housing project. Most of the directors made the bland statement that they "supported the project" or "they supported the company's strategy".
Quinn went a little further with the comment that it would "add additional housing in Auckland".
Steve Vamos, the Australian-born Xero CEO, was the only one of the six directors who understood how to deal with these sensitive issues. He said the Stonefields issue was very important. He had given it lengthy consideration but decided to support it.
Vamos demonstrated some empathy towards the protesters, while most of the other directors showed little concern. This was a bad look for one of the country's more high-profile companies.
There were numerous questions on the controversial housing development, with Hassall diverting many of these to Fletcher Building's residential and development CEO Steve Evans.
Hassall gave the impression that he didn't fully understand the Stonefields issue or he wasn't particularly interested in it. When asked whether he had visited the site, he wouldn't confirm that he had.
How can we expect Fletcher Building directors to anticipate and deal with major commercial problems in Australia and New Zealand when they can't anticipate and effectively deal with a relatively small housing development issue at their own back door?
The company's directors seem to believe that if you ignore a problem it will go away, although this hasn't been their experience with the group's construction problems.
Fletcher Building has had serious ongoing governance problems and this week's annual meeting unmistakably demonstrated that these problems haven't been resolved.
- Brian Gaynor is an executive director of Milford Asset Management which holds Fletcher Building shares on behalf of clients.
