Brian Gaynor: Best practice saves firms from decline

Sir Ron Brierley has been an excellent investor but he has no time for modern corporate governance. Photo / Brett Phibbs

The huge disappointment over Guinness Peat Group's long-awaited "return of value" clearly demonstrates the importance of good corporate governance.

GPG's inadequate proposal is an inevitable consequence of its governance structure, whereby the board has been captured by individual self-interest and has lost almost all contact with its shareholder base.

Best practice corporate governance is based on a number of principles. These include a board having a majority of independent non-executive directors and an independent chairman. The board should be continually refreshed with new director appointments, there must be a succession plan for the chairman and chief executive and the remuneration committee should comprise non-executive directors only.

Companies that adopt these standards have a better chance of maintaining a superior performance over the medium to longer term. Companies that reject these principles often crash and burn because they have conflicting interests and eventually make poor decisions.

Brierley Investments was a good example of this, as is GPG. Sir Ron Brierley has been an excellent investor but he has no time for modern corporate governance standards and shareholders are again paying a huge price for his unwillingness to adopt best practice in this area.

GPG had a successful strategy until the mid-2000s with Tony Gibbs managing New Zealand, Gary Weiss and Graeme Cureton in Australia and Trevor Beyer and Blake Nixon in the United Kingdom. Sir Ron divided his time between Sydney and London.

The New Zealand, Australian and UK operations, which were largely autonomous, invested successfully in undervalued and poorly run companies.

That changed in 2003 when GPG acquired Coats, a global threads and crafts company that was established in the UK in 1730. The acquisition was bizarre because it required substantial operational skills, which GPG did not have, and the purchase of Thistle Hotel, another aged British company, was a major contributor to the demise of Brierley Investments.

Coats has been a disaster for a number of reasons; the banks wanted their money back as soon as GPG gained control, its profits had been overstated, it had been poorly governed and was hit with massive European Union fines.

But, worst of all, GPG has no exit strategy for Coats. It is stuck with a huge millstone around its neck, which is destroying shareholder value.

No one has been held responsible for the Coats debacle, even though Nixon is essentially responsible for UK acquisitions and was a Coats' director before it was acquired by GPG.

Shareholder discontent has grown as GPG's share price has substantially underperformed, yet the directors continue to pay themselves huge salaries with additional remuneration. In addition, no one has been appointed to the board with the skills to help deal with Coats' problems.

It could be argued that the perpetuation of an executive-controlled board, with its overly generous remuneration policies, was more important than the appointment of independent directors with the skills to resolve Coats' issues.

Three years ago, chairman Sir Ron Brierley promised to return value to shareholders but Coats, which represents approximately 40 per cent of group assets, has been a major deterrent to this because there is no obvious way to realise value from it.

It appears that two directors, Gibbs and Weiss, have each had proposals to extract assets from GPG and away from the pernicious influence of Coats. Gibbs' scheme to demerge and manage the New Zealand assets was rejected by his fellow directors but Weiss's plan was accepted, albeit not unanimously.

The latter proposal was due to be announced at the annual meeting on May 7 but for some unknown reason this did not occur. The annual meeting has been a turning point as far as shareholders are concerned, as it has become increasingly obvious that there are major board conflicts, particularly between Gibbs and Weiss.

The announcement on Wednesday clearly demonstrates that Weiss has won the first major battle but he is a long way away from winning the war.

Under Weiss's proposal, GPG's Australian assets, which represent approximately one-third of total group assets, will be demerged into GPG Australia. This new company will be managed by Weiss and listed on the Australian and New Zealand stock exchanges.

All the remaining assets, which include Coats and the New Zealand and UK businesses, will remain with GPG, which will be listed on the New Zealand and London stock exchanges. Gibbs and Nixon will be responsible for the NZ and UK activities respectively.

The immediate reaction to the announcement was positive, with GPG's share price quickly surging almost 10 per cent, from 66 cents to 72 cents. However disillusionment quickly set in after investors had the opportunity to study the proposal.

Investors are disillusioned for a number of reasons, including:

* There will be no immediate return of value in the form of cash.

* There seems to be limited benefit in the separation of the Australian assets from the rest of the company, particularly as there will be two overhead structures instead of one.

* Investors have lost confidence in the GPG board and any proposal from it will be treated with scepticism unless it has a significant cash-repayment component.

* GPG will no longer be attractive to Australian shareholders and this could lead to substantial selling by them.

* Corporate governance will continue to be a major problem as Weiss, who will manage GPG Australia, has said the company's independent directors have already been chosen. Weiss seems to be selecting the GPG Australia board whereas it should be the other way around, with the board appointing the chief executive.

* Governance will continue to be a problem at GPG unless there is an independent chairman and a majority of independent non-executive directors.

* The flotation of Coats may not occur for another two years and no specific details have been disclosed on the long-term management of the NZ and Australian businesses.

We all have egg on our faces over GPG. Shareholders should not have re-elected an executive-dominated board year after year, particularly when none of the directors had the experience or skills to deal with the problems at Coats.

Broker analysts have fallen into the classic value trap by continually recommending GPG as a buy because its share price has been at a substantial discount to net asset value. They also recommended Brierley Investments on a similar basis throughout most of the 1990s even though they made no attempt, with either Brierley Investments or GPG, to assess whether either company had the board or management skills to narrow this value gap.

Most shareholders and broker analysts finally discovered this week that the emperor has no clothes as far as the GPG board is concerned. This emperor-has-no-clothes development is a direct consequence of woeful corporate governance and an acquiescent shareholder base.

The only clear solution for the company is a complete reconstruction of the board of directors with the new board containing a majority of independent directors and an independent chairman.

Disillusionment with GPG is now so intense that shareholders are unlikely to endorse any restructuring proposal unless it has been initiated by a board which is not dominated by executive directors.

Disclosure of interests: Brian Gaynor is an executive director of Milford Asset Management and a GPG shareholder.

bgaynor@milfordasset.com