Brian Gaynor: Muir's departure takes pressure off AGM

Pumpkin Patch row puts focus on poorly performing boards Greg Muir resigned yesterday as Pumpkin Patch chairman. Photo / Martin Sykes

Pumpkin Patch's annual meeting, to be held on Tuesday, was going to be an interesting test of shareholders' attitudes towards directors of failed companies and board composition until chairman Greg Muir's dramatic resignation late yesterday.

The meeting had attracted a great deal of interest because Muir - a former chairman of finance company Hanover - was due to stand for re-election to the board.

There is little dispute that New Zealand punches above its weight in most sports because we demand very high standards from our athletes.

However, it can also be argued that the country punches well below its weight in business because we are far too soft on our business leaders, particularly those who underperform.

The Pumpkin Patch meeting would have been a good test of the latter argument.

Muir first appeared on the listed company scene in March 1999 when he was appointed chief operating officer of The Warehouse. The discount retailer had a strong management team with Stephen Tindall at the helm.

It acquired two Australian retailers, Clint's Crazy Bargains and Silly Solly's, in August 2000 and Muir replaced Tindall as chief executive in February 2001.

The Australian operations reported a $1.5 million loss for the July 2001 year, a small surplus for the following year and a deficit of $13.6 million for the July 2003 year.

Muir resigned from The Warehouse just before the end of the group's 2003 year. He was not responsible for the company's disastrous foray into Australia. That decision was driven by Tindall and a number of other influential board members.

Muir reappeared on the listed scene in May 2004 when Pumpkin Patch released its IPO prospectus. He had been appointed executive chairman three months earlier.

The shares were issued to the public at $1.25 and soared to a high of $4.95 in January 2007.

Meanwhile, Muir joined the Vector board in October 2004 and, according to Company Office records, he became a director of his first Hanover company, Hanover Financial Services, in December 2005.

The following year he joined the board of a further eight Hanover-related companies including two public issuers, Hanover Finance and United Finance.

According to the Company Office records Muir was a director of five of the six companies included in a November 2008 KordaMentha report. These were Hanover Financial Services (Australia), Hanover Financial Services, Hanover Capital, Hanover Finance and United Finance. These directorships were not disclosed in the Disclosure of Interests by Directors sections of Pumpkin Patch's annual reports.

But Muir's biography in the listed company's 2006, 2007 and 2008 annual reports revealed that he was chairman of Hanover Group Ltd, the company that sits on top of the Hanover structure. Meanwhile there is no Company Office record of Muir as a director of Hanover Group Ltd.

There is a strong argument in support of senior executives having one outside directorship, and it could be argued that in 2006 Muir took on too much - he was executive chairman of Pumpkin Patch, a Vector director and a director of nine Hanover companies including Hanover Finance and United Finance.

Muir had huge responsibilities as Hanover Finance had total assets at the time of $1025 million, of which $199.5 million were related-party loans and advances.

He received $637,000 from Pumpkin Patch in the July 2006 year and $633,000 the following year and he disclosed this week that his remuneration at Hanover was higher. In addition he received director fees from Vector until he resigned in December 2006 after a high-profile boardroom spat.

One of the major issues with Hanover Finance was the payment of large dividends, particularly $45.5 million in the 12 months before the company stopped paying principal and interest to investors in mid-2008.

Muir argues there was nothing wrong with this even though Hanover Finance paid total dividends of $146.5 million in the four years ended June 2008 when it had after-tax earnings of only $110.4 million.

He claims that the $45.5 million final-year dividend came directly back to Hanover Finance and, as a result, the payment was not cash negative. That may be true but the dividends reduced shareholder funds by $45.5 million and loans due from related parties by the same amount. This represents a loss to retail depositors.

Hanover Finance's former chairman is not in a great position to argue the issue as he was also director of Hanover Capital and Hanover Financial Services, the two recipient shareholders of these dividends, and therefore had a different view from depositors.

Finally Muir recommended that Hanover Finance investors accept the restructuring proposal put to them in December 2008, partly because Mark Hotchin and Eric Watson were going to contribute $96 million and investors would get 100 per cent of their money back within five years.

Accepting the deal has proved to be a bad move because Hanover Finance investors now face losses of more than $400 million or nearly 90 per cent of their investment. This is significantly higher than Pumpkin Patch's total sharemarket value of just over $300 million.

Pumpkin Patch investors have to vote in the best interest of the company.

They have to ask themselves if Muir, who is now managing director of Tru-Test and a non-executive director of Pumpkin Patch, should be re-elected and whether the company's board composition is appropriate.

Two annual meetings this week give excellent examples of the impact quality of board leadership and composition can have on shareholder value.

Fletcher Building, which is now chaired by Ralph Waters, has become our biggest listed company largely because of excellent board leadership and composition. The clear impression from the annual meeting was that the board is hard-headed and makes decisions that are in the best interest of the company.

By contrast, Tourism Holdings, which held its annual meeting on Thursday, should be far more hard-headed about board composition, particularly its leadership.

Chairman Keith Smith, who was standing for re-election, gave completely the wrong message when he told shareholders the company's executives and his fellow directors supported his re-election.

Smith did not mention any consultation with shareholders although a director said after the meeting he believed Smith had talked to one major shareholder.

Unfortunately too many directors take the same view as Smith and if Pumpkin Patch isn't careful it could become more like a Tourism Holdings than a Fletcher Building.

Pumpkin Patch has huge potential but it is unlikely to achieve this until the board is strengthened.

Before Muir's resignation, it consisted of four present or former employees, who are not considered to be independent, and three independent directors.

The board still needs to be refreshed and contain a majority of independent non-executive directors.

That is why the Muir re-election issue was important and why a number of institutional shareholders had either lodged proxies against his re-election or were going to vote against him on the day.

These fund managers took the view that shareholders could either endorse Pumpkin Patch's inward-looking culture and head down the same route as Tourism Holdings or vote for a new era of excellence that would start the company on the same path as Fletcher Building.

It can be argued that Pumpkin Patch is already looking more like Tourism Holdings than Fletcher Building as the retailer and the tourism companies have both substantially underperformed on the benchmark NZX50 Gross Index in the periods that coincide with Muir's first involvement with Hanover, whereas Fletcher Building has outperformed the sharemarket average.

* Brian Gaynor is an executive director of Milford Asset Management. Funds managed by Brian Gaynor hold shares in Fletcher Building, Pumpkin Patch & Tourism Holdings