Richard Inder: Just how long can key directors hang on?

One of the chief benefits of free and open capital markets is supposed to be their ability to inoculate institutions against cronyism.

Capital should follow talent, depriving fiefdoms based on anything less than meritocracy of the key ingredient they need to perpetuate themselves.

But life is not so black and white.

Free markets will protect against the most egregious repeats of management failures - like the collapse at US energy trader Enron - over the long term. But by themselves they will not deal adequately with the shades of grey that occur in the period between a management team losing its way and losing the plot.

It is in such instances that a free, open and unbiased media, shareholder activists, professional management bodies, regulators and laws governing companies and markets come into their own.

This week, however, the management teams leading three of New Zealand's largest companies - Telecom, Contact Energy and Feltex - have cast doubts on the effectiveness of these controls in this country.

The fact that key directors remain in place despite a catalogue of failures suggests the ties that bind the New Zealand director fraternity are tighter than most would care to admit.

Tim Saunders - chairman of carpetmaker Feltex and one of the independent directors that led electricity generator Contact Energy into the now-aborted plan to merge with its largest shareholder, Australia's Origin Energy - should volunteer his roles at both companies.

At Feltex he has presided over its float at $1.70 and its subsequent plunge to yesterday's close of 22c. This $230 million destruction of value has followed five profit revisions, four of which have been warnings.

The first came on April Fool's Day last year. The latest came this month when Feltex said reorganisation costs were higher than it expected and - more worrying - that it was in breach of its banking covenants and it needed new equity.

At the same time Saunders and his management team have been criticised by NZX's disciplinary body for allegedly not adequately disclosing information to the market before Feltex's April 1 warning.

It has spurned what now looks like an attractive merger proposal from Australian rival Godfrey Hirst and only managed to dispatch its chief executive, Sam Magill, after an unseemly spat.

And despite the parlous state of affairs, Saunders and chief executive Peter Thomas are refusing to respond to the media's questions.

After the first warning Saunders may have been justified in staying to clean up the mess, but Feltex's performance since suggests preparations for an orderly departure are now in order.

Saunders has also played a key role in major management failures at Contact. He and Contact deputy chairman Phil Pryke made up two- thirds of the committee supposedly representing minority shareholders.

They recommended a $4.25 bid from Edison Mission Energy in 2001. But minority shareholders did not share that view - a call vindicated by the rise in Contact's shares, which last night closed down 4c at $7.12

Saunders and Pryke also supported Origin's controversial merger bid, ditched this week because it could not get minority shareholders' support.

The duo also preside over governance arrangements at the electricity generator that cast serious questions over the degree of influence exerted by Origin.

The point of greatest concern, highlighted this week by activist investor Brook Asset Management, is Origin's appointment of Contact's chief executive, David Baldwin. This creates possible conflicts now that Origin is a potential competitor in electricity generation, and a contractual partner in the supply of gas from the new Kupe field.

Saunders and Pryke should at the very least offer themselves for re-election at Contact's annual meeting later this year.

Pryke is showing few signs of moving. This week he told the Herald: "Since we listed, Contact has had remarkable total shareholder returns ... I think independent directors who have been with management through this whole period can take some credit with management."

When it was suggested minority shareholders would not have enjoyed such value gains if they had accepted his 2001 recommendation to sell, he said he had only reluctantly given "modest" support because "it was at the bottom end of the value range advised by the independent expert".

Pryke's responses to these questions beggar belief.

Theresa Gattung's retention of her role as chief executive of Telecom is still not assured. Telecom's new chairman, Wayne Boyd, was careful not to remove the threat of an axing this week as he unveiled plans to split Telecom in two.

He said: "The chief executive and the management team have the full support of the board in implementing this new strategy."

But there are grounds to believe that Gattung will remain in place. Telecom has - so far at least - not initiated a search for a chief executive, suggesting she will not even have to reapply for her job.

And if she had given Boyd an undertaking to leave quietly in the medium term this should have been disclosed to the market.

But the very fact she remains, even if it is for a short time, raises questions over the politics at Telecom.

Gattung has presided over enormous value destruction - at least $1.7 billion in Telecom's failed expedition into Australia and just lately well over $2 billion after the company lost the regulatory battle.

At an investor conference in March she trashed trust in the company when she declared Telecom used confusion as a marketing tool and damaged relations with the Government when she said it would not be dumb enough to regulate the monopoly.

The comments also showed she was utterly disconnected from the lawmakers' thinking, even though they had influence over Telecom's prospects that vastly outweighed any commercial risks the company faced.

Yet she is now in charge of the most dramatic reorganisation the company has seen since it was split from the Post Office and floated on the stock exchange.

And this change - more than ever - requires the attention of someone the Government and regulators can trust. It is certainly not clear that Gattung can fulfil this requirement.

However, all three directors exert enormous influence over the economic life of New Zealand. Saunders holds or has held influential roles on the boards of NZX, Capital Properties, Pyne Gould Corporation and Solid Energy.

Pryke, similarly, has held or holds roles at EDS, Macquarie Goodman, Macquarie Goodman Property, Lucent Technologies, the New Zealand Health Funding Authority, the Treaty of Waitangi Fisheries Commission, the New Zealand Apple & Pear Marketing Board, the Maori Development Corp among others.

Gattung is the protege of perhaps New Zealand's most powerful businessman, outgoing Telecom chairman Roderick Deane.

Certainly, it would be wrong to imply a conspiracy, but the unspoken ties that bind play an influential role in New Zealand - and these are perhaps to the country's detriment.