Shake-up in the country's boardrooms

Fletcher Building's appointment of Ralph Waters has some worried about governance issues given his former role as chief executive. Photo / Greg Bowker

On Monday, Fisher & Paykel Appliances will take its first steps towards a major boardroom shake-up.

Two representatives from Chinese Appliance manufacturer Haier are expected to be voted on to the board as part of the financial bail-out deal by Haier to buy 20 per cent of the New Zealand company.

At the same time former Air New Zealand chief executive Norm Geary will step down from the board and former Fletcher Building chief Ralph Waters has said he wants to leave by the end of this year because of extra responsibilities elsewhere.

Those responsibilities include Waters taking on the role of chairman at Fletcher Building in a move that has raised eyebrows in the investment industry.

Fletcher is also in the process of a rejig with two new Australian directors coming on board next month and long-serving chairman Rod Deane retiring in March.

At Telecom changes have been afoot for some time. Marketing man Kevin Roberts and Japanese telecommunications entrepreneur Sachio Semmoto came on board this year after the company rebuffed moves by US hedge fund manager Elliott International to put forward candidates Mark Tume and Mark Cross.

Change and turnover are a good thing, according to Institute of Directors research and policy manager William Whittaker. The level of turnover comes as no surprise to others, who say directors are facing the highest pressure seen in more than a decade.

"Boards are working with a stress level not seen in some time and some directors who have never been in this kind of economic cycle will be finding it really tough," says Cherry Maier, a remuneration and recruitment consultant specialising in independent directors.

Maier says the economic environment of the past 18 months has made it hard to make decisions because there hasn't been a lot of information and guidance in the market. "Unless companies have to make a decision they won't. Everybody is like deer frozen in the headlights."

Maier says at the same time boards are looking very closely around the table at who is contributing to the business and who isn't.

"If they don't have the skills or the competencies needed - in good times you can put up with that, in these times you can't afford to have non-contributing board members."

She also believes some will be weighing up the personal risks of being a director at this time.

"Around the edges will be some directors that say - given the personal liability and low fees - and the reputational risks this is simply not worth it to me.

"They will see now as a good time to head for the door."

It's an assessment Ernst & Young partner Simon O'Connor wholeheartedly agrees with. "Clearly in New Zealand we have had an ageing board population which has probably had a period of pretty good times. The risk reward has been reasonable and a number have accumulated nine or 10 board memberships, which is now proving too much.

"They will now be looking at five or six to zero-in on."

O'Connor, who works closely with boards on their accounts, says directors with financial experience have faced high workloads in the past year.

Needing more financial experience on the board was the main criticism of Fisher & Paykel Appliances this year when it revealed a mountain of debt amid falling sales.

Institutional shareholder Brook Asset Management called for a new director to be added to the board with financial expertise and other market commentators were agitating for board and management change.

The Haier appointments, Zhou Yunjie and Tan Lixia, are expected to bring experience and knowledge of the Chinese market to the table and Fisher & Paykel is still on the look-out for more directors.

One market commentator says a lot of the board changes aren't linked directly to the economic times but the environment is forcing companies to focus on efficiency.

"That is meaning boards have to work double time to make cuts and ensure that balance sheets are robust and sustainable. Where that has been felt the most there has been pressure to change."

Nuplex, another company which faced debt problems this year and criticism over its management, has recently added experience to its board with the appointment of Peter Springford.

Springford had previously held senior executive roles at Carter Holt Harvey, Fletcher Challenge and Winstone Group. It's an addition that has been welcomed by investors but not all recent board changes have been so smooth.

Fletcher Building's appointment of Waters has some worried about governance issues given his former role as chief executive of the company.

"It's not ideal," says one fund manager, "but it's one of those things that are worth living with to get a really good chairman."

Institute of Directors' Whittaker says there is nothing wrong with it. "Many successful directors and chairmen have held executive management positions in their careers. It is a recognised career path."

But others say it can add a dynamic at the board level where it is hard for other directors to stand up against the chairman.

Whittaker says in general New Zealand has much greater separation between management and its board compared with countries like the United States where the role of chairman and chief executive can often be filled by the same person.

But it can depend on the ownership of the company itself.

Whittaker says some companies like Contact Energy, which is 51 per cent owned by Australia's Origin Energy, are very tightly controlled.

"Not only are Origin able to ensure that the chairman is Grant King, CEO of Origin, but also that they are strongly represented on the board. They also have influence over the appointment of independent directors, an issue that has caused concern among minority shareholders about the impartiality and true independence of the independent directors."

It appears that, regardless of what small shareholders want, unless the existing board and the chairman is on side it can be an uphill battle to get fresh faces on to a board.

Last year when US hedge fund Elliott International put forward New Zealanders Tume and Cross for the board of Telecom few believed it would succeed.

Tume, an experienced and well-connected Wellington director on a number of boards including Infratil and Ngai Tahu Holdings, did better than Cross, an ex-pat Kiwi who was looking to break into the directorship circuit. But neither got even close to the support they needed.

One market watcher says the Telecom situation shows it can still be a "bit of a closed club" when it comes to getting on a board in New Zealand.

Mint Asset Management chief Rebecca Thomas believes it has been a "jobs for boys market" in New Zealand.

"The pool has been quite small." Thomas believes a number of independent directors have had way too many directorships and says in more regulated markets like the United Kingdom there is a limit of five directorships.

"What they say is it is a job where you have the same responsibilities as an executive and in order to do it properly you shouldn't have a portfolio of more than five directorships. A small handful here have had umpteen which I do think is too many." There is also the issue of female to male ratios. Whittaker says given directorships have historically been a male preserve it is not surprising that it is male-dominated. "Also, people tend to seek out those with whom they are comfortable and with whom they feel some kind of affinity."

Whittaker says when vacancies arise on the boards of listed companies most boards will engage in a comprehensive search, usually employing external agencies. "But if you are presented with two candidates with equal qualifications and you know and trust one, which are you likely to choose? The one you know, or the stranger? It is a delicate balance."

He says part of the problem is a lack of independent directors coming up through the ranks from small- and medium-sized businesses - many of which do not have independent directors. "Breaking into the boardroom can be difficult because there is something of a Catch 22 situation over experience and appointability."

Ernst & Young's O'Connor believes it is a situation which could cause problems with new regulation coming in to ensure directors are "fit and proper" to be on the board in the wake of the finance company collapses.

"I think we are then going to be patently thin going forward with the regulations and the 'fit and proper' requirements being introduced."

Maier says there are plenty of people willing to be directors, but finding the right people is the challenge. She believes part of the problem is pay - an issue which is unpopular with the public and shareholders.

"Raising fees is pretty much a non-starter at the moment. It's a public relations nightmare," she says.

"But if you really need to raise the calibre of the directors how are you going to do that without the cash?"

Maier says it's a cultural thing in New Zealand that professionals towards the end of their careers step off the law partner or accountancy track. "They are not really in it for the money."

But it is hard work and valuable work. "If they are not paid properly it is devalued. If we want businesses to perform well we need to have good people running them."

O'Connor also believes pay is an issue in New Zealand, particularly when it comes to the level of risk directors take on. "If you look at a lot of remuneration for board roles some are very well paid and others aren't - it's not particularly rewarding in terms of the reward versus risk."

But James Miller, a chartered accountant, who recently joined the Vector board, says the money was never an issue for him.

"If you were really being honest you are not going to be a director for the money - there are a lot of other entrepreneurial things you can do to earn more.

"I think it is a fair comment that directors do take on significant personal risk and if it does go bad [based on] the amount of work they end up doing to protect their own reputation they would be getting 2c an hour."

Miller says the economic downturn has been a wake-up call to directors who thought the job would be a piece of cake. "The recession is just a wake-up call to the pressure that was always there. Things can always go down and capital structures need to be able to withstand these scenarios. My view is that was always a live scenario."

Being on a board involves serious responsibility and liabilities and anyone not prepared to take on that risk, which has been brought home in the past few years, should think twice.

DIRECTORS' RESPONSIBILITIES
* Managing the company's day-to-day business.
* Must act honestly and in the best interests of the company.
* Must not carry on the business in a manner likely to create a substantial risk of serious loss to the company's creditors.
* Must abide by the Companies Act 1993 solvency test which requires the company to own more assets than liabilities and be able to pay all its accounts as they fall due.
Source: Companies Office website

HOW MUCH THEY EARN

Pay as of May 2009:
* Median salary for listed company chairman: $65,000
* Median increase in last year: 7.1 per cent
* Median salary for listed company non-executive director: $40,000
* Median increase in last year: 3.6 per cent
Source: Joint survey by Strategic Pay and the Institute of Directors.

ON BOARD

JAMES MILLER

Becoming a director was never something 47-year-old chartered accountant James Miller thought about in his early career, but when he was offered a position on the Vector board this year he snapped it up.

"When I used to work for an electricity corporation I wanted to be CEO but things went down a different road," says Miller, who heads up the institutional investment division at brokerage house ABN Amro Craigs.

The Vector offer came at the same time as pending changes at ABN and Miller saw it as a logical part of his career to seize on something new.

"I believe you should put back into an industry that has given you so much.

"I have got a lot of experience in that sector which goes back 20 to 25 years, particularly the issues they are having to deal with on regulation. I thought I would be able to add some value."

Considered to be fairly young for a director, Miller doesn't believe the lack of young directors is because boards are unwelcoming.

"It may be that many don't have the time - most younger people are doing other things - they have family or are working."

But he believes there needs to be more people coming through.

"It would be nice to think each board would mentor someone."

PHILIPPA DUNPHY

Philippa Dunphy says being a woman did not made it any harder for her to get on to a board but getting backing from the chairperson is vital.

Dunphy, who comes from a finance background, got her first board job with the Earthquake Commission through knowing the Associate Energy Minister at the time.

Her next directorship offer on the board of the ACC came through a call out of the blue around three years after she retired from working full-time.

But Dunphy admits being a director was not something she had specifically planned to get into.

"Not especially, but I'm not the sort of person that wants to retire. It's a way of keeping your hand in."

She believes selection for a board should be skill-related. "If they have the relevant skills they should be able to do it."

Dunphy says typically it can be quite hard to find females with finance skills. "Do those people exist? I think that is a fair question."

But she believes there are plenty of potential women in the business world that boards could tap into.

"I think there is a growing list of people that could do the job - the challenge is to diversify - to get new blood." Tamsyn Parker