Management - Peter Crow | Helping boards govern with impact

Published on: 5 June 2014

Former directors cut a deal, without admitting liability

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?

Published on: 5 June 2014

Deloitte partner does boards and governance a disservice

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.

Published on: 3 June 2014

Feltex case: yet more revelations

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.

Published on: 3 June 2014

Postie Plus: now in administration

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.

Published on: 30 May 2014

What's up at Postie??

Things are not going well for struggling clothing retailer Postie Plus. They have just called a halt to share trading, pending an announcement. In April, the listed retailer was under threat of suspension for not filing it's half-year results within the required deadline. Back in December, the board got a grilling at the company's annual meeting.

Clearly, something is not right. Is the board active and acting in the best interests of the company, or is it simply asleep at the wheel? The former is hard to swallow given the evidence of late.

Published on: 24 May 2014

The small question of control: A new "shareholder spring"?

The question of who calls the shots in companies has been vexed for many years. On paper, the shareholders should have the final say, after all they own the company. However, the reality of what really happens is not so straightforward. Company ownership is widely held in many cases—particularly amongst publicly-listed companies—so forming a common view amongst shareholders is difficult at best. Consequently, boards and CEOs have considerable scope to seize control, in order to pursue their own aims.

My observation is that shareholders are relatively happy to accept this situation when the going is good. However, when times are tough, or when the board or management pursues strategies that are not popular with shareholders, shareholders need to become more active. Shareholders need to ensure that boards represent their interests and that they deliver the results that shareholders want. It seems that some shareholders are starting to do just that, for a new "shareholder spring" appears to be occurring. Will it make a difference? Who knows. One thing seems clear though: passive shareholders will get their comeuppance.

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