Bruce Sheppard - life beyond the fringe

It's the sort of quote that Bruce Sheppard would relish throwing back at someone he considered a corporate villain.

In 2001, when he was considering setting up an organisation to represent the interests of small shareholders, the world's most unlikely accountant told the Herald it was vital that people of the right calibre were prepared to put themselves forward.

"You don't want to have a group which is padded with nutters. If you're perceived to be a group of fringe lunatics, you'll never be taken seriously," he stressed.

Nearly a decade on, the New Zealand Shareholders Association is not only alive, but with Sheppard in charge is still kicking companies' shins as hard as it can. But is it taken seriously?

It is probably fair to say that some people consider Sheppard himself as nutty as a Christmas fruitcake. It's a perception he seems to encourage, with his array of helmets, rubber gloves and other theatrical props which he frequently uses to illustrate what he maintains are outrageous breaches of good governance and sound financial practice.

Then there is his language. For someone so media-friendly, Sheppard is tricky to interview. He is almost impossible to quote at any length, because although the media is much less prissy about blue language these days, the c-word has not yet become so colloquial that it can be dropped into your average line of type.

In Sheppard's world, finance company bosses are "dog turds", Hanover's owners are "pricks", and seat-warming directors are words that simply can't be printed. And believe it or not, this is the toned-down Bruce. After much muttering from the rest of the association's executive, he no longer uses the word "euthanasia". And he has finally learned, he claims, to stop describing the victims of the finance company meltdown as "stupid".

"I was alienating them," he concedes.

You can't blame him, though, for being ever-so-slightly frustrated. After spending a lot of his own time analysing the latest deal being offered to Hanover investors, for example, Sheppard made it clear he wasn't going to waste another minute on their dilemma unless some of them bothered to join the NZSA.

In the event, only a single investor was prepared to pay the $90 subscription fee.

To add injury to the insult, Sheppard was forced to admit last week, in the wake of a bolshie letter from Hanover's lawyers

Chapman Tripp, that he was wrong to have stated on TV last month that Hanover's original owners, Eric Watson and Mark Hotchin, had "not paid a single dime" to help rescue the company.

"I've had it with Hanover," he sighs, in one of the many rooms his accountancy firm leases on the fourth floor of the Smith & Caughey building in central Auckland. "From now on, we're just sticking to the listed companies."

But later in the conversation he just can't help himself. "Watson and Hotchin are very thick-skinned, and I want to keep going to humiliate everyone who's ever been associated with them," he enthuses. "I'll get through their skin eventually."

It's an open question, however, how much longer Sheppard might be in a position to do that. It's not that he's being pushed out of the chairman's chair at the NZSA, or that he's tired of the job, he insists, but that the organisation simply wants to practise what it preaches - by bringing in some new blood.

"There's only two of us, Chris (Curlett) and I, who have been here from the beginning," he muses. "The rest are all new at various points and it will be my turn to peel off shortly."

Not that his foes should break out the bubbly just yet. It's possible, he hints, that his replacement could also be "quite interesting".

He tells me a potential name off the record, but the person concerned flatly denies being interested. Sheppard and his flock, it seems, will be a hard act to follow.

Before 2000, about the only real stirrer at annual general meetings, apart from Brian Gaynor and Oliver Saint, was the redoubtable Max Gunn, an accountant who - unlike Sheppard - didn't relish the limelight.

Gunn died a few months ago and his passing is an opportunity to reflect on just how much has changed over the past few decades for small shareholders.

For a start, there is now a Takeovers Code, and regulations that require a potential buyer to offer all shareholders the same price in a takeover situation. Younger investors may be surprised to learn that wasn't always the case.

In fact, the World Economic Forum's Global Competitiveness report this year lifted New Zealand's rank from fourth to first when it comes to protecting small shareholders' interests. We also topped the rankings for the ethical behaviour of firms.

It was the NZSA itself which publicised this welcome development. But the way Sheppard and the rest of the association see it, there is still much to do.

Contrary to popular belief, the NZSA is not a one-man band. Other board members include an ex-optometrist, a retired company secretary, an ex-motor industry executive, a governance consultant, an ex-partner at PricewaterhouseCoopers who teaches governance, and several others who among them have several centuries of business experience, and who, like Sheppard, are committed to "building a participatory property-owning democracy as the path to freedom and independence for all".

Deputy chair Des Hunt is a German who until five years ago was a major shareholder in agri-tech company Tru-Test.

Hunt does much of the corporate liaison work, meeting with board chairs and chief executives to discuss issues of concern.

He also meets regularly with industry figures he admires, such as Brian Gaynor, Stephen Tindall and Peter Masfen, to recharge his own batteries.

"They all agree there has to be change, but changing the current system is not easy. We do need education and good media coverage to debate some of these things."

If working behind the scenes doesn't produce results, then the association won't hesitate to go public.

"Telecom when Gattung was there - nobody was doing anything and we did take that fight up," says Hunt. "Contact was another one we took up last year, and got good TV and media coverage. But it's only when they got hurt and when profits were down that they wanted to meet with us.

"What we try to do is present fair proposals to boards. Some of them take it too personally - it's still not done professionally in our opinion."

Sheppard admits he is often accused of doing the same thing. But he is not about to apologise for it. "I have yet to see anything that ever exists on this planet that hasn't arisen from the act of a man or a woman, so forgive me for playing the woman or the man," he mocks.

Another board member, John Hawkins, admits that members do not always see eye to eye with Sheppard about his approach.

"I see it as really important that we get alongside the movers and shakers," Hawkins stresses. "You can be a big noise out there in the wilderness, and you can get plenty of press, but you don't necessarily make a difference with the people that count, so we've been working really hard on that over the past 12 months."

Kevin McCaffrey, the ex-PWC partner with a masters in governance, describes the dilemma as "Bruce's brand".

"There are things that Sheppard will say in his own right, and there are things we say, and we have to manage that interface. From time to time that causes some issues," he admits. "We occasionally take him into a room and beat him up - but only lightly."

So far the NZSA has managed to sign up more than 1000 members, which it claims is pretty good for its age. Its sister organisation in Australia has been going for more than half a century and has a lower membership per capita.

The organisation's five branches hold regular meetings, sometimes with prominent speakers such as Finance Minister Bill English, which can attract crowds much bigger than the actual membership.

It puts out a regular newsletter and also organises company visits. Companies love them, says Sheppard, because instead of just talking about their accounts, they get to talk about other issues that are important to the business.

It's all part of the organisation's overall aim to enable, protect and reward good ownership, and to gradually educate investors to become good owners, rather than punters.

While it admits branch meetings can look like Grey Power gatherings, the association is not giving up on the younger generation. Both McCaffrey and Sheppard do guest lectures for universities, and the association offers a relatively generous scholarship for up to three students studying commerce courses, in the hope of encouraging younger people to think beyond the bottom line when going into business.

Other organisations it liaises with include SpringBoard, a group recently formed to support emerging directors or trustees under the age of 45.

It has worked with the Waikato Management School, which has set up an online service to matchmake potential directors with boards, www.finddirectors.com. And it also regularly meets with the Listed Companies Association. "It is actually quite constructive," Sheppard grins.

Another board member, Patrick Flynn, claims the NZSA has made significant progress over the past year.

"When the NZSA speaks, it's a considered opinion. It might not seem like it sometimes - it might seem like an outburst - but it's a considered opinion," he insists.

Its submission to the Capital Market Development Taskforce, for example, was welcomed by Commerce Minister Simon Power. Sheppard is convinced Power was not just being polite and notes that the Minister has agreed to meet with the association quarterly.

Sheppard insists he takes advice from a wide range of sources, from politicians to CEOs to directors to regulators.

"Everyone who interacts with us knows our core principles. They know what we stand for because we're a broken record. As a result, they can openly share their views. I've probably got 200 or 300 people in the economy who will happily have a debate with me on anything. They'll tell me what they think, and they'll tell me when I'm being a dipstick or an idiot. They'll tell me when I'm missing something. We actually have a remarkably open dialogue.

At the end of it all you end up with a collaborative process, and we can actually find common ground for the majority to agree on."

One of the organisation's most notable achievements, says Sheppard, is getting companies to change their proxy forms.

Previously, if a proxy form was sent in blank, the chair could do what they liked with that vote. After years of lobbying, the forms for almost all public companies now include four options: yes, no, abstain, or proxy holder discretion.

"That has significantly changed the scrum, and it's probably the most tangible thing that we've achieved that re-empowers shareholders," he says. "What previously happened is the chairman held sway. The number of abstensions are higher but it's a better outcome and progressively investors will make conscious choices."

But it still annoys the association that some shareholders, including institutional investors, prefer to get guidance from consultants on how to vote. The main firm used here is the RiskMetrics Group, which was spun out of JP Morgan in the late 90s.

"It's a complete aberration that a significant block of 'mum and dad' capital is locked up in institutions who are charged with managing their money who can't even get their head around casting their vote unless some American company tells them how to do it," says Sheppard. "If we can get it into their head that we actually know the New Zealand marketplace and the directors that they're voting on better than they ever could know them, and get them

to liaise with us on board appointments, we could actually exert some considerable voting power."

McCaffrey would ultimately like to see the NZSA develop its own analytical framework, as some big pension funds have already done. He would also like to see a single code of practice established for directors, as an improvement on the various principles recognised by various organisations at present.

Another major issue is New Zealanders' reluctance to put their money in the sharemarket, when history shows that shares have traditionally outperformed most other investments over the long term.

Before KiwiSaver, it was estimated that only 80,000 New Zealanders - just 2 per cent of the population - were regular share investors, a very low rate by international standards. The comparable figure in Australia is close to 30 per cent.

The market capitalisation of the NZX as a percentage of GDP is also low compared to many other countries, and the level of foreign investment is high.

This is partly because New Zealanders don't save much to start with, and partly because what little we do save we tend to put in property instead. The Capital Market Development Taskforce has this week come out with its own recommendations, most of which the NZSA endorses.

Until confidence in the market improves, we don't have a hope of significantly increasing our wealth, says Sheppard.

"No matter what bullshit financial planners and other gurus sell, getting rich is really simple: work hard, spend less, invest wisely. There are no other lessons and it's as boring as shit, but it's true."

To help ram home this message, the NZSA has helped set up a financial literacy programme called Flow (Financial Literacy in Our Workplace) as a separate charitable trust. The programme does not teach anyone how to invest in shares, but simply provides basic lessons in how to organise your finances - like making sure you are spending less than you earn.

Companies such as Fisher & Paykel and Foodstuffs have needed little persuading that workers are more likely to be more productive if they are not fretting about how they are going to pay their next credit card bill, says Sheppard.

"The sad problem is that New Zealand is basically dog poor and the reason why New Zealand is dog poor is because most people don't understand their pay packet. So the idea behind Flow was to help those who earn a dollar and spend more to understand the consequences of their actions."

The programme was developed by Enterprise New Zealand, which has already developed a similar programme for schools, and is carried out by Skills4Work, a private training establishment.

It costs $75 per person to run, and so far the NZSA has provided $20,000 of its own money to set it up. The Tindall Foundation has provided another $15,000 and agreed to hand over $15,000 more if a matching sponsor can be found.

Sheppard believes the investment can be justified.

"If we don't fix what's happening at the bottom end of society, those of us who sit in the middle don't have much of a future either because there won't be a sovereign nation. And on top of that, if we don't increase the savings pool in New Zealand there will not be equity available for us to develop our people and our resources and sustain our businesses, and if those people when they enter the equity markets have at least some element of common sense then the moral hazard of the herd is reduced."

McCaffrey has his own theories on why Kiwis are so scared of the sharemarket, and one of them is a lack of faith in the decisions being made at board level. While it is well known that the '87 crash scared off some investors for life, McCaffrey notes that there have continued to be some spectacular failures, such as Air New Zealand, Fletcher Challenge and Carter Holt.

More recently, Telecom has been a "slow-burning disaster", he argues. "Feltex was wrong from the start, and you don't have to go much further than Farming Systems Uruguay where they have destroyed [much] of the equity this month alone."

In all cases, he blames a failure of governance - and often a blatant disregard of the nine principles promoted by the Securities Commission.

"It's fundamental stuff, like how can you have the parent robbing the child, as PGGW has with Silver Fern Farms. All of that is so transparently wrong."

The association would like to see better regulation, and a more active Securities Commission. It has campaigned for the NZX to be stripped of its role as a regulator as well as an owner of the Stock Exchange, and doesn't have many nice things to say about the Institute of Directors, either.

But McCaffrey agrees that in many cases shareholders have only themselves to blame, especially when they happily re-elect an entire board, as was recently the case with PGG Wrightson.

"Hanover is the same. It's the herd mentality, and that's why we exist."

Sheppard is convinced, however, that the quality of boards is indeed improving.

"I think the top end is getting better. As a proportion of the whole population of listed companies, which is about 1170, I'd be surprised if there's 50 directors that are any good. But that is way more than it was."

As for diversity, the NZSA argues that bringing more women onto boards is more likely to improve their quality, rather than dilute it.

Sheppard is keen on the idea of advertising board positions, in the hope of attracting a wider pool of talent.

"Even the chairmen who get it, in terms of new blood, still find intense resistance from their fellow board members," he claims.

McCaffrey, who has worked in recruitment, is cynical about the role of consultants, who he believes often have a vested interest in promoting certain people.

"It's not so much the old boys club. That's actually misnaming it - that's a cop out. It's too easy a description. It's more than that, it's actually a continuous group of directors who appoint people they know, and there is sense in that because you know what you're getting. But there are some absolutely outstanding women out there whose talents are definitely being overlooked."

The irony is that the NZSA's own board is almost entirely male - and mostly grey-haired males at that. But that's not by choice, they all insist.

"We would love more ladies," Hunt enthuses.

IT'S not just about gender, of course. Hunt is convinced that one of Telecom's problems is that, like many boards, it has had too many lawyers and accountants and not enough technical people.

Relations between Telecom and the NZSA haven't always been cordial. In 2003 the NZSA and some institutional investors opposed Telecom's appointment of former BNZ chief Lyndsay Pyne to the board. In what was seen as a watershed for investor activism, Pyne eventually resigned.

These days Telecom helps sponsor the NZSA, providing $10,000 a year in funding. In 2007 Telecom chairman Wayne Boyd wrote to shareholders encouraging them to join the association - and even enclosed an application form.

Boyd is also a former director of Tru-Test and Hunt is on the record as being a fan. He once described Boyd as a clear, strategic thinker and a good communicator who would bring change to Telecom at management and board level.

Boyd, in return, will only say that the NZSA appears to be "in transition". He credits Sheppard with having done the "heavy lifting" to get the organisation going, but it hasn't escaped his notice that there are quite a few new faces these days.

He describes Sheppard as "very challenging". "I think he understands a lot of the issues. He's very opinionated. You just have to look at his blogs and so on - that's him as an individual. He has a lot of knowledge of company accounts and he takes a lot of time to read them. His questions can be searching."

He also believes the NZSA has had a positive effect on issues like NZX rules and proxy forms. But Boyd is diplomatic about the organisation's methods, saying only that he learned early on as a public company director that "all shareholders are equal".

"There will always be questions they ask where people will be exasperated."

Boyd would personally like to see the NZSA play more of a role in educating the public about investing in equities, and instilling more confidence in the sharemarket. But another highly experienced director, Bill Falconer, says Sheppard is probably right to argue that that is the role of the NZX itself.

According to Falconer, Sheppard is respected by most company directors, if not always welcomed. "The reality is that most of us have got respect for his abilities, if not for his style. He's not dumb, and anyone would be foolish to assume otherwise."

It is true that some directors believe his methods do not encourage rational debate, he says. "That's not entirely constructive. Equally if he decides to pursue the person, rather than issue, then that doesn't make friends."

However, he is quick to note that's not his personal view.

"That's the way Bruce sees the role. There is no question of whether he is right or wrong - he has certainly been successful in generating publicity."

Falconer agrees that boards have changed a lot over the past couple of decades. And he is confident more women will be appointed as more reach the executive levels of organisations.

"It's not hard to find good directors but you have to know what you want. I think the people Bruce regards as seat-warmers are progressively being replaced."

The Institute of Chartered Secretaries would like to see more boards evaluate their own input.

The institute recently noted that less than half of New Zealand's listed companies refer in their annual reports to any kind of board evaluation process. Of those, only a fraction mention what that process might be.

Says NZSA board member Alan Best: "A few of them talk about the process of how they're doing, but most of them don't actually do it, and the thing that amuses me is you can bet your bottom dollar their HR department will have a 10-page performance evaluation for the cleaner."

McCaffrey is also puzzled why more boards don't use processes such as peer evaluation.

"There's systemic issues sitting in there that could be and should be addressed. You would not have a management team continuing for years. The board would be looking at the management team and refreshing, but the board seems exempt."

As far as pay is concerned, the NZSA has made it clear it supports pay based on performance - for every single person in an organisation. But it would also like to see the pay for the CEO linked to the average pay within the company.

While it is true that international research shows there's no correlation between shareholder value and performance-based pay, that is simply because most CEOs do not fully understand how they are delivering value to customers and the role of every person in the organisation who helps achieve that, says Hunt.

These days, the association will generally inform a company beforehand of any issues it wants addressed. However, there will still be the odd ambush, such as the question Sheppard asked about the CFO's bonus at Telecom's AGM recently.

In future, the association will push hard for the removal of directors it does not support, warns Sheppard.

"At Telecom's AGM, all but two questioners were members, so what you're finding is investors who are members are feeling empowered."

It's certainly a far cry from Telecom's AGM in 2002, he recalls, when one shareholder spent five minutes complaining that the Wellington telephone directory wasn't in alphabetical order.

"Straight after him, another person wanted them to give all the men tie-pins, and nice little brooches for the women. You don't get that sort of thing any more."

It must be tempting, but he hasn't once mentioned "euthanasia". It might be wishful thinking, but maybe one day it will no longer be necessary.

Day of reckoning nears for heroes and villains

At the end of each year, the Shareholders Association gives out two awards - the Beacon and the Glob.

There are no prizes for guessing which one is more likely to end up on a recipient's CV.

The Beacon award is given for outstanding performance, based on the following criteria:

* Leadership and guidance on corporate practice.

* Bravery in standing out from the crowd on controversial issues and taking stands against the trend on issues of governance, transparency and individual conduct.

* Conducting himself/herself in a manner that is a guide to others, ignoring self-interest and putting the concerns of others to the fore.

* Behaving in a manner that is respectful of the rights of others and treating the smallest shareholder with the respect of a business owner.

* Working within the rules and best practice while ensuring fair and equitable outcomes for all.

* And/or any such other act as may, from time to time, be identified by the executive board.

To win a Glob, you simply need to flout any or all of the above.

To its credit, the NZSA has never had much difficulty identifying heroes. Interestingly, in 2006 it struggled to come up with a single villain.

Association members get to vote on who they think deserves each award.

The winner of the Beacon is invited to a special lunch.

This year's winner was Michael Hill - jeweller, golfer and violinist - who was praised for, among other things, his "ethical conduct towards customers, associates and shareholders", and his various sponsorships.

After the lunch, Sheppard noted that Hill was a "very interesting guy".

Handing over the Glob has proved somewhat trickier over the years.

In 2007 Sheppard was head-butted by a passerby when he tried to enter the main branch of the ANZ Bank in Auckland, wearing his trademark Viking helmet, to hand over that year's Glob. Naturally, the TV cameras were there to record the bloody blow.

And needless to say, last year's Glob winner, Hanover chairman Greg Muir, didn't take too kindly to being given a can of baked beans, and being told: "You are not a brand."

This year's Glob winner was Provenco chairman Rick Christie. The NZSA sent Christie a bottle of "kerosene" (actually wine) and a box of matches, and suggested he set fire to himself.

It is stunts such as these that exasperate some members of the NZSA board.

"No, Bruce, you will not be doing that," one board member lectured him in a recent board meeting, when he revealed his plans for this year's Glob.

He did it anyway.