Further to my commentary yesterday, reports have emerged from New Zealand this morning that another ambitious technology business, PowerbyProxi, is seeking capital for growth. PowerbyProxi is developing a wireless charging technology which, if it comes off, will mean fewer wires in the office and when travelling. Samsung is an early adopter. PowerbyProxi wants to hire an additional 90 engineers, based in New Zealand, Korea and the USA, to accelerate product development and commercialise the technology.
Whereas others are heading down the IPO path to fund growth, PowerbyProxi may seek a listing or it may use other instruments. Overall, the plan sounds audacious. However, the CEO Greg Cross, has a track record of making things happen.
The New Zealand Stock Exchange has admitted several new listings in the past six months, with more pending including Gentrack, PushPay, Hirepool and iksGPS. Rumours abound that several other companies are hatching plans. The Initial Public Offering (IPO) is a popular option if new capital is required for growth or if the owners want to sell down. However, it is also an expensive instrument.
Investor and commentator Brian Gaynor has suggested that the current surge in listings in New Zealand is a good thing. It may be, but I'm not so sure—because the grown-up world of public share trading is ruthless. If value is to be realised, the IPO needs to be heavily subscribed and performance needs to be at or above the expectations created in the IM. Otherwise, a key driver to list—liquidity at a fair price—will be lost, as Moa found out recently.
While IPOs are popular at present, the current surge in activity may lead to a supply-and-demand problem. The supply of offers is bound to exceed demand from investors at some point. Inevitably, advisors will struggle to attract sufficient interest to fill the initial subscriptions, and that will put the share price under pressure. Boards need to think carefully about this before they decide to take an IPO proposition to shareholders. It may be smarter to use debt (or some other instrument) to fund growth.
I am on record as being a critic of the way local councils often go about their business. Councils were established to provide common/shared infrastructure to support the growth of towns and cities, and to set some rules (bylaws) around the operation of infrastructure. However, many councils have claimed a greater remit over the years, with attempts to drive economic development (what do councils know about business?), sister city programmes and so forth. Yet few of these schemes have delivered much to ratepayers except cost. I have a sense that local councils have lost sight of their "core business", and that the mayor and the council (ie. the chairman and the board) have lost sight of their role in many cases.
However, things may be starting to change. The problems with the issuing of building permits and the maintenance of appropriate standards of construction provide a case in point. The Christchurch City Council lost the right to issue building permits because it was doing such a poor job. Now, the judicial system has ruled that affected parties can bring a case against Auckland City Council in respect of poor construction standards (the so-called leaky building problem). I applaud these decisions. Hopefully, they will cause Mayors and Councils to take their core roles more seriously, and hold their CEOs to account for performance more directly. That will be a good thing, for ratepayers and citizens alike.
Members of the Institute of Directors in New Zealand (IoDNZ) endorsed a proposal to establish a Chartered Directors programme at their AGM this week. I have been a member of the organisation for over a decade now. In that time, I have often wondered why directors are not categorised like doctors, lawyers and other professionals. There have been nominal membership levels in the past, but they have lacked credibility in the minds of many.
The Chartered Director programme has several categories of membership. Members will be asked to sign a commitment statement each year, and commit to continuing professional development (CPD). More information is available on the IoDNZ website. The programme sends a very strong signal, to members and the general public alike, that the cushy club atmosphere that some have enjoyed is now history.
I am a keen supporter of the programme, but have no doubt that some will react because they have the demonstrate competency to retain their post-nominal. For too long now, the only instrument available to hold directors in New Zealand accountable for performance has been legislation—the Companies Act, the Securities Act, et al.
If the programme is embraced as intended, directors will return to the classroom and seminar room regularly, to refresh their skills and learn new practices. Knowledge gained on courses like the "essentials" workshops, the Company Director's Course (*) and other more advanced courses should lift the competency and performance of directors and boards over time. The new programme should be good for the economy, as a new generation of more engaged and more competent directors make better decisions which, ultimately, should lead to improved company performance outcomes.
(*) Disclosure: I am a contracted facilitator on the Company Director's Course.
I have mused on the downfall of Postie Plus twice recently: when trading was halted on the stock market, and then when an administrator was appointed. Today, a third instalment: an initial impression of what went wrong, and what boards can learn from the case.
The Postie Plus board and management appear to have lost sight of the company's purpose. The company's genesis was as a provider of good quality, affordable clothing that was good value for money. However, in recent years, the company has found itself competing in a higher fashion segment of the market, something that the chairman—remarkably—is on record as saying that the company did not aim to do. On this information, the company was operating at variance to its strategy. Gosh. The questions that emerge from this revelation flow thick and fast. Why did the board allow this to happen? Was the board watching? Did the board know? What was the board thinking?
The board is responsible and accountable for the achievement of business performance outcomes in accordance with the wishes of shareholders. Yet in this case, decisions were made (or, not made?) that resulted in the company performing less well over an extended period. Sadly, the board took little, if any, action. The Postie Plus board knew something was amiss two years ago. An interview with the chairman in December 2012 corroborates this. At that point, the board should have gone back to basics—to purpose, values and strategy—to find out what was going wrong and to make some serious adjustments. However, it appears that the company simply tinkered around the margins (while the patient was dying).
Other boards should take note. Boards need to set strategy, and they need to review business performance against strategy on an on-going basis, to determine the appropriateness of the strategy. To do this effectively, boards need to understand the business of the business they are responsible for. They need to understand the market, the competition and the emerging trends, lest they get blind-sided by competitors, completely disruptive technologies, or, more simply, a change in buyer preferences and behaviours. On the evidence to date, the Postie Plus board does not appear to have done these things—or if it has, then it has not done them well. It is little wonder that the Postie Plus business has unravelled as it has.
The former directors of failed finance company Strategic Finance have successfully negotiated a deal that sees them avoid civil or crown action against them, so long as they uphold some binding commitments made as part of the deal. The $22m settlement sees the directors avoid further court action in return for making a significant payment and promising not to act as a director, CEO, CFO or promoter of a public issuer for several years.
The deal was made with the Financial Markets Authority and the Strategic Finance receiver, PwC. Interestingly, the fine print includes a line "without the regulator's approval", which suggests that any of the directors could, if they wish, mount a case to obtain permission to act in one of the roles for which they are now disqualified.
This is an interesting outcome. It enables the directors to avoid any form of conviction or detention. In effect, they are free to carry on their lives, albeit within the constraints of not performing certain roles. I doubt that would be too much of an inconvenience for the gentlemen concerned. However the investors lose 85–95 cents of every dollar they invested. The sounds like a deal in which there are a few winners (the directors) and many losers (the investors). I understand the deal has been done, but how fair is this type of outcome?
From time to time, I read newspaper articles and get annoyed. When I read this article, published today in the Dominion Post, the hairs on the back of my neck stood up. Do you notice anything odd or misleading? The article is easy to read and very accessible. The title is compelling, and the information is seemingly helpful. However, aspects of the article are poorly researched and, quite frankly, the suggestions do boards, owners and governance a disservice. Bill Hale, a partner at Deloitte, should know better. Allow me to explain, using one of the ten traits for business growth mentioned by Hale:
Governance - A well-governed company is one that is under ‘adult supervision' - the founders are surrounded by people who have ‘been there and done that' before.
Actually, this is not governance at all. This description perpetrates a serious misconception. Boards are not minders or coaches and governance is not a mentoring service, although many boards behave this way. Individuals directors or external advisors may perform these roles, but not boards should not. The concept of a board was established as a result of the separate of ownership and control—when absentee owners (investors, if you will) needed something to represent their interests and achieve their purposes. A seminal article, written by Berle and Means in 1932, makes the case very well. The board is an organisational-level structure: the purpose of which is to influence the achievement of performance outcomes, in accordance with the wishes of shareholders. Boards are responsible and accountable to the owners. Further, they are required (by law, in New Zealand, at least) to act in the best interests of the company.
Can I suggest that corporate governance is actually a mechanism, through which business performance outcomes are achieved. Governance is not some structure or process as many (including Mr Hale it would seem) suggest, and the terms 'governance' and 'board' are not interchangeable. The activities and actions of boards (what they do), including setting strategy; making decisions; monitoring performance; and, hiring the CEO (for example), are processes—events that occur over time. Further, companies are made up of people, and people make choices. Consequently, the desired results—revenue growth in the case of the companies mentioned in this article—may or may not occur as a result of governance interventions, despite the best intentions of boards and managers—or anyone else that wishes to contribute.
There was another round of revelations in the Feltex Carpets case today, and they do not make good reading for the defendants. When I wrote about the case in March, the suggestion was that Feltex was a lemon and that most of the juice had been squeezed out already. It now appears as though the defendants knew of the sales shortfall before the IPO was launched. Oh dear. If this is correct, the directors knowingly oversold the business and misled prospective investors—which puts them is a very awkward position.
The representative action case on behalf of 3639 former shareholders is being heard by Justice Robert Dobson. It has quite a complex case—both sides have been rolling in expert witnesses—so the judgement could be weeks away. Notwithstanding this, the decision has the potential to set an important precedent for future IPO activity, not to mention the duty of care responsibilities of directors and disclosure benchmark requirements. For this reason, it is being watched closely by investors; directors; advisors; and, the Institute of Directors in New Zealand (IoDNZ)—and rightly so.
Despite tough trading and assurances of an improved future, Postie Plus on the ropes. It appears the die has been cast for the once strong retail business, with the announcement today that an administrator has been appointed.
I suspect this sad tale will make a very interesting case study for an MBA class or a governance researcher in the months and years to come. It will be very interesting to learn whether the board had full visibility of the situation; what it was doing about it; and, why assurances of an improved future were provided as recently as two months ago. However, answers to these questions can (and should) wait until the dust settles. Jobs and livelihoods are on the line. The administrator needs space to work out what has gone wrong, and to tidy up what looks like a rather messy situation.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.