Conflict of interest is a serious issue in the business sector. This is clearly demonstrated by Justice Raynor Asher’s decision to overturn an Auckland District Health Board contract with Labtests because of Tony Bierre’s conflict of interest.
The conflict of interest issue also arises with listed companies, particularly Guinness Peat Group (GPG).

GPG’s four executive directors, who dominate the company’s board and remuneration committee, have received combined salaries, bonuses and gains on options of $74 million over the past five years.

They also had unexercised options worth another $48.1 million as at December 31.
This is an average of $30.5 million for each executive director.

These generous remuneration and options schemes create a potential conflict of interest even though the company believes “Sir Ron Brierley has qualities which are sufficient to ensure the integrity and independence of the remuneration committee in fulfilling its duties”.

The huge increase in GPG’s executive remuneration has occurred during an era when a UK corporate governance code has been introduced to reduce potential conflicts of interest at the board table. This Combined Code on Corporate Governance, is relevant to GPG because it is a British-registered company.

UK listed companies are expected to comply with the code, although it is recognised that departure from the provisions of the code may be justified in particular circumstances.

Several code provisions are relevant to GPG’s executive remuneration. They include:

* The board should establish a remuneration committee of at least three members who should all be independent non-executive directors.
* No director should be involved in deciding his or her remuneration.
* Upper limits should be set on annual bonuses, and should be disclosed.
* The chairman should ensure that the company maintains contact as required with its principal shareholders about remuneration.
* Shareholders should be invited to approve all new long-term incentive schemes and significant changes to existing schemes.

The New York Stock Exchange also requires that all remuneration committee members should be non-executive directors.

But GPG’s board is dominated by executive directors. The current board consists of Sir Ron Brierley (chairman), Graeme Cureton, Tony Gibbs, Blake Nixon and Gary Weiss.
Brierley has been classified as a non-executive director since 2000 – even though the Australian media still credits him with most of the company’s successful deals.
The other four directors are executives.

Last year’s annual report says the remuneration committee is Brierley, Nixon and Weiss. Thus, two of three committee members are executives.
GPG’s board and committee structure creates a potential conflict of interest even though the company insists that no director is involved in deciding his own remuneration.

Most corporate governance codes recommend no executives be on the remuneration committee because they could put the interests of their fellow executives ahead of those of shareholders.

As well, Brierley has worked with Cureton, Gibbs, Nixon and Weiss for many years and has demonstrated in earlier situations, particularly at Brierley Investments, that he is not particularly forceful when dealing with strong personalities.

GPG’s executive directors receive a combination of a base salary, cash bonuses, accrued leave entitlements and share options.

Base salaries paid to Cureton, Gibbs, Nixon and Weiss have risen by between 42 per cent and 108 per cent since 2002.

In 2001, GPG introduced a staff bonus scheme, with the proviso that “no bonus will be payable in respect of any year where net profits attributable to GPG shareholders do not achieve a 12.5 per cent return on opening shareholders’ funds”.

No limits have been put on these bonuses, contrary to the recommendations of the combined code, and these payments have accounted for the huge increase in executive directors’ remuneration in recent years.

GPG’s generous option scheme, which expires in 2012, was approved by Brunel shareholders before the 2002 Brunel/GPG merger.

Details of the scheme were included in a highly technical 226-page merger document.
This says that “when granting options, the board should specify objective conditions by way of performance targets, to be satisfied before options may be exercised”.

The exercise price is determined by the board but may not be less than the higher of the nominal value of the shares (5 pence) and the middle market price per share on the last dealing date before the options are granted.

There is no evidence of any public statements regarding the targets executives have to achieve to be granted these options. The directors appear to have issued all options at the lowest exercise price allowed under the scheme.

How can GPG shareholders be sure the performance targets are realistic and the exercise price of the options is fair and reasonable when all of the directors, including Brierley, participate in the scheme?

The 2005 financial year was a bonanza period for GPG’s executive directors because the company achieved a return of 22.3 per cent, well above the benchmark target of 12.5 per cent. The combined payment for the four executive directors was $22 million made up of: salaries, $4.5 million; cash bonuses, $12.7 million; accrued leave, $1 million; gains on the exercise of options, $3.8 million.

The 12.5 per cent measurement is highly questionable as far as an investment company is concerned, because gains can be unusually high in a bull market, particularly when opening shareholders’ funds include subsidiaries and associate companies valued at cost.

Last year, GPG’s return was only 4.1 per cent and no bonuses were paid. Total executive director payments of of $11.6 million comprised: salaries, $4.9 million; accrued leave, $100,000; gains on options exercised, $6.6 million.

As well as these generous remuneration schemes the four executive directors had 27.5 million ordinary shares as at December 31, now worth $63.3 million, and can receive 18 months pay if dismissed and two years’ pay if GPG is taken over.

This issue is not about the total payments received by executive directors; it is about the way decisions are made on payments and options issued to them.
The decision-making process raises the possibility of a conflict of interest as far as GPG’s executive directors are concerned.

Shareholders should be concerned because GPG’s share price performance, relative to the ASX, NZX and London Stock Exchange benchmark indices, has declined in recent years as the payments to executive directors have increased.

The remuneration committee will probably be in a position to approve further huge bonuses this year, because the sale of the 19.4 per cent Australian Wealth Management stake on Thursday should enable the group to exceed the 12.5 per cent target for extra executive compensation.

Shareholders should also be concerned because the demise of Brierley Investments, the effective predecessor to GPG, was mainly due to an employee-dominated board that wasn’t scrutinised by strong independent directors or shareholders.

Sir Ron Brierley is the darling of many New Zealand retail investors but no one, including Brierley and his highly successful GPG executive team, should be immune from shareholder scrutiny.

GPG’s remuneration & gains on options – Extremely generous

(NZ$ million)

Sir Ron Brierley

Graeme Cureton

Tony Gibbs 

Blake      Nixon

Gary         Weiss 





































Unexercised options*














*The value of unexercised options as at December 31, 2006