Brian Gaynor: Shareholders weakest link in corporate chain

A number of recent developments clearly indicate that one of the main reasons for our corporate governance problems is that major shareholders, particularly cornerstone and institutions, are far too passive.

As a result the old boys' network still controls a number of major companies, the cult of personality is beginning to surface again and shareholders have been far too quick to give up some of their more important rights.

Consequently, most listed New Zealand companies are now subject to rules and regulations that are unacceptable under international best practice corporate governance standards.

The governance structure of a listed company is simple: shareholders choose the directors, the directors appoint the chief executive and the chief executive chooses his senior executives.

Companies fail to perform when shareholders, directors and the chief executives make poor appointments.

Good progress has been made regarding the appointment of chief executives and senior management but New Zealand shareholders are the weak link in the chain because they continue to elect directors who have a poor record as far as shareholder wealth creation is concerned.

The recent round of annual meetings is a good example of this.

A number of individuals were nominated to stand against incumbent directors of poorly performing companies, including NZ Farming Systems Uruguay (NZFSU) and PGG Wrightson.

The two outside nominations at NZFSU and PGG Wrightson received just 1.8 per cent and 4.3 per cent support while the six incumbent directors received between 95.1 per cent and 99.6 per cent approval.

Paul Grogan, who has an investment and farming background, stood for the NZFSU board.

The company reduced his notice of meeting biography to just 40 words whereas it gave the two incumbent directors nearly twice as much space.

The board opposed Grogan's election on the basis that it needed to identify potential candidates in a professional and structured manner.

The notice of meeting noted that "prospective director candidates should be fully researched for their professional experience, expertise, independence, culture fit and references".

In other words the directors of NZFSU made it very clear that they, rather than shareholders, would select any new directors and these directors would have to have "culture fit".

Grogan, who has visited the company's operations in Uruguay and knows far more about farming than many of the directors, would have been a badly needed independent director with farming expertise.

NZFSU needs more independent directors because PGG Wrightson has billed the company for US$62 million ($86 million), yet the Uruguayan company has generated total revenue of only US$24.3 million since formation.

In addition, NZFSU bought two Uruguayan farms from a director for US$8.5 million and almost no information has been disclosed on these properties.

John Calvin, the managing director of Avenue Homes Design Build and a former livestock agent, stood for the PGG Wrightson board. His notice of meeting biographical details were also brief and the directors used almost exactly the same words to oppose his election, as did the directors of NZFSU in opposing Grogan. This included the statement about "culture fit", etc.

Calvin, who spoke very well at the meeting, received just 1.8 per cent in favour whereas chairman Keith Smith, who is unlikely to win an award for creating shareholder value, received 99.5 per cent support.

The treatment of Grogan, Calvin and other outside nominations is a terrible reflection of our corporate governance, particularly the blunt assertion that existing directors, rather than shareholders, should choose new directors and they should have "culture fit".

It is important that board members work together but "culture fit" could easily be just another term for "old boys' network".

How will we ever develop a younger breed of more dynamic directors if existing boards have the exclusive right to identify new candidates and "culture fit" is a critical criterion for any new appointment?

Another disturbing development is the re-emergence of the cult of personality, particularly among the PGG Wrightson, Pyne Gould Corporation and NZFSU group of companies.

This combination of an extremely aggressive businessman and a weak board was particularly prevalent during the 1980s boom. Bruce Judge and his group of companies was one of the many examples of this phenomenon some 25 years ago.

PGG Wrightson and NZFSU, under Craig Norgate and weak boards of directors, have had many cult of personality characteristics. Shareholders of these companies have realised that this combination can destroy massive shareholder wealth.

Pyne Gould Corporation is beginning to demonstrate a number of similar traits with George Kerr, as is PGG Wrightson with Agria and an individual always referred to as XT.

XT is Xio Tao, the new chief executive of Agria, the Chinese company that has agreed to buy a 13 per cent stake in PGG Wrightson. XT, a former PricewaterhouseCoopers partner, is talked about in glowing terms, but little mention is made of any other Agria director or executive.

Given its experience over recent years one would have expected PGG Wrightson to put more emphasis on the depth of its new partner rather than the talents of just one individual.

Finally there is the SkyCity annual meeting and the disenfranchisement of New Zealand shareholders five years ago.

The NZX introduced new listing rules on May 1, 2004. As part of this it gave companies the option to obtain approval from shareholders that all future changes to the listing rules would be automatically deemed to be included in constitutions under what is called the "reference method".

Prior to this any listing rule change that was inconsistent with a company's constitution had to receive shareholder approval before inclusion in a constitution.

The Shareholders' Association opposed the "reference method" but most companies gained approval for this new approach even though it substantially disenfranchised shareholders. The "reference method" resolution was usually one of the last items on a meeting agenda and by that stage most shareholders were more interested in the post-meeting savouries and cakes.

SkyCity was one of the few companies to reject the "reference method" and last week it asked shareholders to approve a new constitution that included the latest listing rules changes, which were introduced on April 1 this year.

The motion was defeated because RiskMetrics, a New York-based proxy advisory group with an office in Australia, recommended institutional investors vote against the resolution. RiskMetrics believes the new listing rules, which are more liberal than the previous ones, are inconsistent with best practice international corporate governance standards.

SkyCity's share registry is dominated by offshore institutions with only four of the top 20 shareholders, all institutions having their head office in New Zealand. Overseas institutions rely heavily on RiskMetrics' advice regarding shareholder resolutions.

This means that the majority of New Zealand companies - all those that adopted the "reference method" - now operate under listing rules considered too permissive by RiskMetrics and major offshore institutions.

This brings us back to the role of shareholders and directors in New Zealand. One of the problems in this country is that shareholders are too passive, they give far too much authority to directors, whether it is in relation to the selection of new directors or the creation of new proposals that effectively disenfranchise shareholders.

Until shareholders take a more active and assertive interest in company issues we will continue to have too many "old boys' network" directors and there will be further Pyne Gould Corporation/PGG Wrightson/NZFSU debacles.

There will also be more "reference method" type decisions that subject shareholders to rules and regulations that are not consistent with best practice international corporate governance standards.

* Brian Gaynor is an executive director of Milford Asset Management.