One of the biggest issues facing New Zealand investors is the inability of the country’s business leaders to create long-term growth companies.
This has been highlighted by the recent announcement that GuocoLeisure, formerly known as Brierley Investments, will leave the NZX on June 27.
Brierley Investments was the country’s largest listed company in the 1980s but has experienced a substantial decrease in its sharemarket value since then.
Sir Ron Brierley’s other main NZX listed company, Guinness Peat Group, has had a similar experience.
Sir Ron isn’t the only New Zealand businessperson to disappoint investors, many of our listed companies have achieved strong short-term growth but have failed to grow over the longer term.
A survey of the largest NZX listed companies between 1984 and 2004 shows how poorly our largest companies have performed, particularly when compared with Australia.
In this 20-year period 10 companies were ranked in the top three in terms of market value.
These were Fletcher Challenge, Brierley Investments, NZ Forest Products, Chase Corporation, New Zealand Insurance, Carter Holt Harvey, Telecom, Lion Nathan, Fletcher Energy and Contact Energy.
Only Contact Energy and Telecom remain listed on the NZX.
Fletcher Challenge was split into separate listed energy, forestry, paper and building divisions. Brierley Investments is now called GuocoLeisure and NZ Forest Products was taken over by Carter Holt Harvey which was acquired by Graeme Hart.
New Zealand Insurance is now owned by Australia’s IAG, Chorus was split from Telecom, Lion Nathan was acquired by Japanese interests and Fletcher Energy was sold to Shell.
Ironically Fletcher Building, which was originally the smallest of the four Fletcher Challenge divisions, is the only one to remain in New Zealand ownership.
By contrast Australian companies have had a far greater survival rate.
Seven of the eight companies ranked in the top three by market value between 1984 and 2004 – BHP, News Corp, National Australia Bank, Westpac, Commonwealth Bank of Australia, Telstra, Conzinc Riotinto (now called Rio Tinto) – remain listed and have created considerable shareholder wealth.
Only BTR Nylex, which was acquired by UK-based BTR, has disappeared. The latter changed its name to Invensys and is now listed on the London Stock Exchange.
There has also been substantial attrition – and minimum wealth creation – among the fourth and fifth ranked NZX companies by market capitalisation between 1984 and 2004.
The latter group comprised ANZ Banking Group (NZ), Wattie Industries, Bank of New Zealand, DB Breweries, Goodman Fielder, Air New Zealand, Fletcher Paper, Fletcher Forests, The Warehouse, Fisher & Paykel Healthcare and SkyCity.
The first four were acquired by overseas interests as were the two Fletcher companies.
Goodman Fielder migrated to Australia, Air New Zealand was in the top five before it was bailed out by the Crown in the early 2000s and The Warehouse was highly rated before its failed expansion into Australia.
The accompanying table, which lists the top 10 ASX and NZX companies by market value at the mid-point of our survey, illustrates the poor performance of NZX companies as far as wealth creation is concerned.
Seven of the top 10 ASX companies at the end of 1994 remain listed and their total market value has surged by A$437.7 billion ($472 billion), from just A$107.5 billion at the end of 1994 to A$545.2 billion.
The three departed companies are Western Mining, which was acquired by BHP, BTR Nylex and Coles Myer which is now part of Wesfarmers.
By contrast only four of the top 10 NZX companies at the end of 1994 remain listed and their total value has fallen by $6.8 billion, from $30.7 billion to just $23.9 billion even though Chorus is included in the latest Telecom figure.
The major concern about these depressing figures is that we don’t seem to care.
We are extremely upset when Australia beats us at union, league, cricket, netball or yachting but there is little anguish about our under-performing businesses.
New Zealanders are far too soft on our poorly performing companies yet, ironically, are continually accused of having a tall poppy syndrome by business leaders.
There are a number of reasons New Zealand companies have failed to achieve long-term growth. These include:
• The New Zealand economy is small and a large number of our companies have stalled badly when they move offshore. These include Air New Zealand in the early 2000s, Pumpkin Patch, Rakon, The Warehouse and Tourism Holdings.
• Many of our companies don’t have overseas expertise, particularly at board level. As a result they are poorly prepared and under resourced when they go offshore.
• A number of our companies have expanded offshore through acquisitions rather than organically, even though the acquisition approach has not been particularly successful.
• Our corporate governance has often been extremely poor. For example Sir Ron Brierley told a meeting of fund managers that GPG didn’t believe in corporate governance, including having a formal agenda for board meetings and post-meeting minutes. Sir Ron’s views on board governance are extreme but it wouldn’t be a surprise if this approach extended to many of the companies he controlled over the past 30 to 40 years.
• Sir Ron was extremely successful with his asset stripping, downsizing and cost cutting strategies in the 1970s and 1980s and a large number of businesspeople have copied this approach rather than going for growth.
• We have been far too quick to sell companies with good growth prospects. Included in this group are Bank of New Zealand, Fletcher Energy and Trust Bank.
In light of these factors it is not surprising that domestic investors are extremely enthusiastic about Xero and a number of other technology businesses with high-growth aspirations.
Investors have been attracted to these companies because they are starved of high-growth opportunities on the NZX as it is heavily populated with regulated utilities and companies with limited growth opportunities.
But the solution to this problem lies with us, New Zealand shareholders must adopt an ownership approach, rather than an investor approach towards all investments.
In other words we should treat our company shareholdings as we would our house, car and other personal assets.
A good place to start would be at the Tower annual meeting which will be held in Auckland next Wednesday.
The company, which has nearly 50,000 shareholders, is downsizing and returning cash to shareholders even though it demutualised and listed in 1999 “to remove growth constraints resulting from difficulties in accessing new capital under the mutual association structure”.
Why did Tower, which was established in 1869, go from a growth to a non-growth company in such a short period of time?
What are its plans for the future?
Why was a non-executive director appointed to replace Rob Flannagan as chief executive?
What performance indicators does new chief executive David Hancock have to achieve before he receives his $500,000 bonus?
Shareholders who want to take an ownership approach to Tower should be asking these questions, and many others, at next week’s meeting.
Change is increase or decrease in sharemarket value since the end of 1994.
Disclosure of interest: Milford Funds Ltd. currently holds or may have previously held shares in the companies mentioned in this article.