Gaynor on Wednesday: Air NZ share options a reward for risk

By BRIAN GAYNOR

Air New Zealand

There are two ways to look at the recent issue of 12.85 million options to a selected number of Air New Zealand executives.

(The company has refused to disclose the names of these executives, but it is reasonable to assume that the vast majority went to chief executive Gary Toomey.)

The first is from a theoretical point of view, the other from a more realistic perspective.

The theoretical concept of options is that they act as an incentive for directors and management to outperform a clearly defined rate of return. In other words, a company has to achieve certain performance targets, particularly related to shareholder returns, before the options are in the money.

The newly issued Air New Zealand options are totally unacceptable from this point of view, because they have an undemanding performance target. They were in profit to the tune of $2.2 million on day one. (The 6.55 million A options have an exercise price of $1.00 a share, 5.81 million B options at $1.28 a share and 0.49 million B options at $1.00 a share.) But viewed realistically shareholders have little choice but to accept the dilution of their shareholding through this issue.

When Mr Toomey joined Air New Zealand in January he must have had no idea what he was letting himself in for. From the outset he has been up to his neck in inherited problems and has handled the situation with professionalism and skill.

His problems keep growing. This week the Australian media reported that Ansett would lose A$400 million ($500 million) this year and analysts continue to increase their forecast losses for Air New Zealand for the 2001 and 2002 years.

Mr Toomey could still leave the company with his reputation intact and have a wide choice of highly paid employment opportunities. By staying with Air New Zealand he is taking a huge personal risk and must be compensated for this.

Air New Zealand's directors had little choice. If Mr Toomey resigned the company would be completely rudderless and its share price would suffer.

The national carrier will benefit from Mr Toomey's long-term commitment but the directors responsible for the mess have a great deal to answer for.

Stock Exchange

The Stock Exchange's attempt to establish one common shareholder number (CSN) and FASTER identification number (FIN) for every investor by July 1 is turning into a bureaucratic nightmare.

At present there are three share registries in New Zealand - Computershare, BK Registries and National Registries - and they each have an individual shareholder and FIN number for every shareholder.

This system is relatively efficient, but the exchange has decided that every investor should have just one shareholder and FIN number for all New Zealand and overseas companies traded through the Exchange's FASTER system.

The broking community has to apply for the new CSN & FIN on behalf of investors and they are sending out letters asking for detailed information from clients. These include the number of shares held in each security, IRD numbers and other details.

Many brokers are abusing the process because they are using it as a means to obtain a detailed listing of all securities owned by clients. The process is particularly confusing for individuals who are clients of more than one stockbroking firm.

The exercise, which is supposed to be completed by July 1, is complicated and confusing and shows a lack of planning by the exchange. It would have been far easier to send a standardised letter to all investors requiring just the shareholder and FIN numbers allocated to them by each share registry, including the overseas registries.

Bill Foster, managing director of the Stock Exchange, admitted there were problems and said he was attempting to iron these out.

In the meantime investors are advised to reply to just one broker; ask the broker if they can supply the shareholder and FIN number of each share registry only; and, if not, supply the name of the securities owned but not the number of shares or units held.

Fisher & Paykel

Gary Paykel, chief executive of Fisher & Paykel, was in a buoyant mood last Wednesday. Early in the day he released the company's result for the year ended March and later presided over a high-spirited telephone conference before enjoying dinner with friends at an Auckland restaurant.

Mr Paykel's jovial mood was well justified. Fisher & Paykel has survived and prospered in an environment that has been extremely hostile to domestic manufacturing.

It is easy to forget that the economic reforms of the past 17 years have been primarily aimed at increasing consumer choice through greater competition.

If the choice was between a domestic producer selling washing machines for $820 and an imported one costing $800 then Government policy has favoured the latter on the basis that the domestic manufacturer is inefficient.

This policy has almost destroyed the domestic manufacturing sector and there are now only a handful of listed manufacturers, compared with over 60 in 1984.

Fisher & Paykel has not only survived but has developed a very successful healthcare division, which now accounts for approximately two-thirds of pre-tax earnings. The healthcare operation will be listed on Nasdaq following its separation from appliances later this year.

Mr Paykel's good news week continued with Monday's announcement that the Government is imposing anti-dumping duties on fridges and washing machines from South Korea. This decision is significant and could indicate that the Government is more willing to take steps to protect domestic manufacturers against unfair competition.

This is further good news for Fisher & Paykel shareholders.