This article originally appeared in the NZ Herald.
The annual reporting season, which is mostly concentrated in the August to November period, should be particularly interesting this year. This is because many directors don’t get it; they don’t understand their responsibilities in a changing investment environment and that they will be held more accountable than they have been in the past.
The biggest change is the shift in company ownership from individuals to KiwiSaver funds, unit trusts and overseas institutions.
This is reflected in the funds under management of the 10 largest New Zealand managers, which have surged from just $44 billion in December 2009 to $75b at the end of 2013 and $114b at present. These managers, which include KiwiSaver schemes, have an obligation to investors, who may include Dunedin nurses, Wellington bus drivers, Auckland window cleaners and a wide range of other hard working New Zealanders.
If our companies don’t perform, then these KiwiSaver members will have a lower level of retirement savings. Investment managers have a responsibility to their investors and, consequently, boards and senior managers of poorly performing companies must be held fully accountable for inadequate performances.
One of these companies is Metro Performance Glass.
Metropolitan Glass & Glazier was established in Auckland in 1987 by John Bedogni, Cameron Gregory and Andrew Smith. In 2006 they sold the company to Catalyst Investment Managers, a private equity investor, for just over $350 million. The acquisition was mainly debt funded.
The global financial crisis had a devastating impact on Metropolitan Glass, and by March 2011 it had assets of $191.0m, liabilities of $317.8m and $126.4m of negative equity.
Crescent Capital, another private equity firm, acquired ownership – without assuming the debt – and by March 2012 the Auckland based glass company had assets of $194.0m, liabilities of $94.5m and $99.5m of positive equity.
In mid-2014 Metro Performance Glass raised $244.2m through an IPO at $1.70 a share. The proceeds were divided as follows: $230.5m went to existing private equity shareholders while only $13.7m went to the company.
Following the IPO, new shareholders owned 77.6 per cent of Metro, pre-IPO private equity investors just 18.5 per cent and senior management 3.8 per cent.
New shareholders effectively met the cost of the share sale by original shareholders, as $10.9m of the $13.7m received by the company was used to meet costs associated with the offer.
Brokers, all involved in the share sale process, wrote optimistic reports on Metro before the IPO closed. These reports claimed Metro has “strong leverage to New Zealand building activity”, it is a company where “material operating leverage exists” and a “major plant investment will preserve competitiveness”.
Metro listed on the NZX on July 30, 2014 and achieved a net profit of $9.6m for the eight months ended March 2015 compared with the prospectus forecast of $9.4m.
Metro reported a net profit of $20.5m for the March 2016 year and $19.4m for 2016-17. These figures were disappointing, mainly because domestic building is experiencing a once in a generation boom.
Metro’s total share price return, including dividends, has been negative 5.4 per cent since listing three years ago, while the NZX50 Gross Index has appreciated 51 per cent over the same period.
The nurses, bus drivers, window cleaners and other wage earners who are relying on KiwiSaver or unit trusts to deliver them superior returns should be demanding – through their fund managers – major leadership changes at Metro Performance Glass.
Unfortunately, that is more easily said than done, as a high percentage of the country’s directors are reluctant to make crucial decisions even though they attend corporate governance seminars that outline their responsibilities to their companies and stakeholders.
Several shareholders wanted a highly regarded and experienced businessperson to stand for the Metro board at the annual meeting on Thursday, August 24. He agreed to accept the nomination if he received existing board support.
The potential director withdrew when informed that the company would not support his candidacy, as it is difficult, and often reputationally damaging, to obtain a board seat when the existing board is unsupportive. This was Tony Falkenstein’s experience when he stood for the NZX board this year.
Shareholders should have a major input into the director selection process, but most existing boards want to choose their own candidate. Existing boards usually find a reason to reject a nomination from shareholders. For example, if a shareholder nominee has operational expertise, the existing board claims it is looking for someone with strategic skills, but if he or she has strategic expertise, they will argue that they want a new director with operational experience.
Many New Zealand boards have been captured by a concept called Skills Matrix, which is a grid or table that illustrates the skills and competency of individual board members. This concept is promoted by executive search firms, giving them, rather than shareholders, the major influence over director selection.
Another issue with Metro is that Chairman Sir John Goulter, who received $170,000 in the latest year, is paid far more than most chairs. This includes the chairmen of Mainfreight and Port of Tauranga, two of the best performing NZX companies over the past two decades.
The chairs of these two companies received no fee and $123,828 respectively in the latest year, compared with their sharemarket values of $2,487m and $3,029m respectively. The chairman of Ryman Healthcare received $201,333, while the company has a market value of $4,650m. Meanwhile, Sir John this year received $170,000 but Metro’s sharemarket value is just $261m.
Metro has the temerity to ask shareholders to approve an increase in the directors’ fee pool, from $614,000 to $650,000, at this month’s meeting. This is to “provide headroom for additional fees for the chairs or members of committees, should any additional committees of the board be established in the future or any additional members be added and to allow for additional fees for specific project work from time to time. No changes are proposed to the current annual directors’ fees which have been in place since July 2014 …”
Sir John stands for re-election at this month’s meeting. His extraordinarily upbeat review in Metro’s latest annual report is completely at odds with investors’ view of the company and clearly indicates that we can expect more of the same under his continued stewardship.
Board composition is important, as it has had a huge impact on the performance of the domestic sharemarket over the past five decades.
In the 1960s and 1970s, listed company boards were dominated by directors with their feet on the brakes, directors who were risk averse and didn’t want change, even if their companies were performing poorly.
In the late 1970s and early 1980s they were replaced by directors with their feet firmly on the accelerator; these were risk oriented directors who had a focus on growth and were willing to make changes when required.
In recent years we have returned to conservative boards, boards dominated by directors with their feet on the brakes. This is one of the main reasons why our sharemarket is characterised by low-growth infrastructure companies, particularly electricity generators, and we have few growth oriented companies.
The ideal board is probably one with four directors with their foot on the accelerator while the other two directors are focused on the brakes.
Sir John Goulter calls Metro a “growth business”, but does the company have directors with major growth company experience and a willingness to make changes when growth targets are not achieved?
Major shareholders have a chance to have their say at Metro’s August 24 meeting. The retirement savings of nurses, bus drivers, window cleaners and other wage earners will be indirectly influenced by the outcome of the meeting.
Asked about the directors’ fees, a Metro spokesman said: “Metro Glass benchmarks its directors’ fees against a variety of fee surveys annually, and with the exception of fees relating to the remuneration committee and nominations committee formed in 2016, directors’ fees have not changed since the company listed.”