Brian Gaynor: Directors need entrepreneurial spirit

The collapse of Feltex raises serious questions about the quality of our directors.

How could an important company go from boom to bust in such a short time?

How could Feltex directors reject an offer of more than 50c a share from Godfrey Hirst just a few months before the carpet-maker was placed in receivership?

Feltex is not the only company to be heavily criticised for poor governance in recent months.

The resignation of Telecom chairman Roderick Deane was influenced by the group's failure to anticipate Government regulation.

Investors have also lost confidence in the Vector board since the Commerce Commission censured it.

Contact Energy's independent directors were criticised for recommending a merger with Origin Energy before the preparation of an independent appraisal report. The proposed amalgamation was dropped because of fierce opposition from shareholders.

The Waste Management board was condemned for allowing Transpacific to acquire the company through an amalgamation process and for recommending the deal before an independent appraisal report was prepared.

The directors of Carter Holt Harvey and Capital Properties were criticised for not adopting more aggressive defensive strategies during recent takeover offers.

The board of Pacific Retail approved the disastrous PowerHouse acquisition while The Warehouses' Australian operations, which were sold late last year, are now performing particularly well under new ownership.

Stephen Tindall, who is trying to privatise The Warehouse, is critical of the sale of the Australian operations.

The root cause of our board problems is the conflict between the legal and business obligations of directors.

Unfortunately most of the textbooks on directors' roles are primarily focused on their legal obligations. The widely used Australian manual Duties and Responsibilities of Company Secretaries and Directors has this to say about the role of directors: "In exercising the powers vested in them, the directors must act collectively, as a board, and their acts are the acts of the company. In a sense, the board of directors is the company; for this reason the board is often referred to as the organ of the company."

The manual goes on to list and detail a large number of directors' duties.

These include:

* A director's fiduciary duties are owed to the company alone.

* There is a statutory duty to act honestly.

* There is a duty to act in good faith and to exercise powers for a proper purpose.

* There is a duty to avoid conflicts of interest and not to misuse information or position.

* There are also duties of care and skill.

Would Stephen Tindall and Sam Morgan, the founders of The Warehouse and Trade Me respectively, have placed a strong emphasis on these features when they started their companies?

There are far fewer guidelines on the business requirements of directors.

Manuals that cover this issue believe that the board of directors should have a vision and a strong strategic strategy for the company. One of the boards' main roles is to appoint a chief executive who has the ability to implement the directors' objectives.

In the late 1990s a prominent company director, who is now retired, said he was concerned that boards were becoming increasingly dominated by legal and corporate governance-type directors and that fewer and fewer individuals with proven business skill and entrepreneurial vision were being appointed.

This is even more so today, mainly because of the huge increase in regulation and corporate governance requirements after the collapse of Enron in the United States.

As a result boards are increasingly dominated by procedural issues and by directors with corporate governance orientations. There seem to be fewer and fewer listed company directors with proven business records and a strong entrepreneurial vision.

Company directors and senior management complain in private about the lopsided nature of company boards. They are "too conservative", they "lack entrepreneurial skills and clear goals" and many directors are little more than "glorified company secretaries".

A good company secretary should be able to ensure that a board of directors adopts best-practice corporate governance standards while the main focus of directors should be to have a vision and to help develop a realistic business plan for the company.

Feltex chairman Tim Saunders talked about the company's robust corporate governance standards immediately after the carpet maker collapsed, but what about the debt-funded Shaw acquisition and the rejection of Godfrey Hirst's relatively attractive offer this year?

Feltex shareholders would have been happy to accept lower corporate governance standards if the board had made better business decisions.

The response of Contact Energy's independent directors to a number of takeover and merger proposals indicates that they have limited vision.

If a board of directors has an attractive long-term business plan then it will be reluctant to accept a takeover unless it offers higher returns than those available under the company's long-term strategic plan.

An impasse has developed between Contact Energy's independent directors and institutional shareholders because the latter group have a much more positive view of the group's long-term prospects than the directors.

The takeover of Waste Management by Transpacific Industries was another recent example where New Zealand directors showed a lack of vision.

I attended a presentation in Sydney where Terry Peabody, the driving force behind Transpacific, talked glowingly about Waste Management and the contribution it would make to his company. At the same time back in New Zealand Waste Management's directors showed little enterprise. They argued that the Transpacific proposition was a great deal and should be accepted by shareholders.

It was clear from listening to the two parties that Peabody had much higher aspirations for Waste Management than the company's directors.

42 Below has an entrepreneurial board yet the directors immediately accepted the Bacardi offer because their goal was to create a powerful brand and then sell the company to a multinational drinks group.

Some believe that the chief executive should provide the vision while the board supplies the corporate governance expertise. The problem with that argument is that a corporate governance orientated board could stifle and frustrate a visionary chief executive.

The Warehouse is a classic example of the conflict between corporate governance requirements and entrepreneurial vision at the board table.

Stephen Tindall's entrepreneurial orientation dominated the company until its Australian acquisitions began to report horrendous losses. Tindall believes that the board has become too cautious and conservative as a result.

He hopes to privatise the company and have a small and entrepreneurial board with all directors having considerable "skin in the game".

Woolworths' share purchases this week may frustrate Tindall's plans.

There is a growing opinion around the world that the strong emphasis on corporate governance is leading to a sub-optimum performance by listed companies and this is creating a virtual gold mine for private equity organisations.

In other words companies with a corporate governance bias at the board table will underperform their competitors and be subject to takeover offers. There is a mountain of private equity funds available to fund these deals, particularly in Australia.

This represents a serious threat to the NZX and other stock exchanges.

The answer to the problem is for New Zealand companies and their shareholders is to find individuals with business acumen and entrepreneurial vision and appoint them to their boards.

* Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.