“If one takes a group of individually mainly sound assets, some good assets and a couple of big liabilities, and mixes them with poor structure and control the outcome is very difficult. This is known in corporate finance as the Pat Lam theorem. We can only play with the cards left behind.”
Sir Ron Brierley was re-elected to the Guinness Peat Group board at this week’s annual meeting after lively and acrimonious interaction with Shareholders’ Association chairman John Hawkins.
The re-election resolution opened with a long dissertation from Sir Ron on the history of GPG. He told shareholders it has been a successful UK merchant bank but got into trouble when it acquired fund managers in the United States.
Alan Hawkins’ Equiticorp acquired a shareholding, but GPG then came under the control of its banks.
Sir Ron and Blake Nixon, a current GPG director, spotted an opportunity regarding GPG, but they first had to get rid of the newspaper baron Robert Maxwell and Brierley Investments (BIL).
As Sir Ron chattered on, it became increasingly clear that the distinction between GPG and BIL was blurred, particularly in the 1990s.
They shared the same offices and BIL had first bought into Tyndall, which later became one of GPG’s best investments.
Sir Ron then claimed that it was a complete myth that GPG’s “corporate governance was bad”.
He said the company had operated successfully in three countries for 20 years and this would not have been possible without good governance.
This was in stark contrast to earlier comments by chairman Rob Campbell that “the structure in which they (the company’s assets) are entangled and the lack of decisive direction on many critical matters, along with a culture of non-accountability at board level, have left a difficult legacy”.
Sir Ron then spent a long time talking about GPG’s share price performance.
He said GPG had originally sold shares to New Zealand investors at 45c each and the company had since had 16 one-for-ten bonuses and paid a one pence dividend every year until recently.
He said that “not too many companies have done better than that” and “I believe we have delivered in full”.
Sir Ron admitted that the last few years hadn’t been great but investors had done very well over the longer term and he blamed the recent poor performance on the global financial crisis.
Shareholder Gordon Wallace told the meeting he didn’t agree with Sir Ron because many investors bought into GPG at $1.50 or $2 a share, not the 45c on which Sir Ron was basing his calculations.
Wallace told Sir Ron that “you say it is all right to lose money” to which the former chairman replied: “You are blaming me because you paid too much for [GPG] shares.”
But Wallace had an important point because it is the investment returns of the average investor that count, rather than the returns of the early investor.
Take, for example, a situation where 10 individuals invest $10,000 each at the beginning of year one, a further 40 individuals invest $10,000 each at the beginning of year two and the returns in year one are plus 25 per cent and the returns in year two are minus 5 per cent.
Under this scenario the average return of the original investors would be 9.4 per cent a year, but the average annual weighted return of all investors would be negative because the 40 investors in year two made a combined loss of $20,000, whereas the original investors made a profit of $18,750 over the two years.
Unfortunately the investment returns of GPG are far worse when measured on an average weighted return for all investors basis, because the majority bought in after the company had generated its high initial returns.
This is the reason GPG and BIL have been disasters for New Zealand investors even though Sir Ron claims GPG’s performance has been top- rate.
Another shareholder asked Sir Ron about Coats’ European Commission fine.
The former chairman shuffled nervously before Campbell said “Ron can be blamed for a few things but not for this one”, and answered the question.
John Hawkins then stood up to talk about Sir Ron’s re-election.
He said shareholders should look to the future, not the past, and Sir Ron didn’t have a solution when the global financial crisis struck.
Hawkins then raised several items, including GPG’s strategy, the problem with its UK pension funds and Sir Ron’s board meeting attendances.
He said Sir Ron had said that GPG wouldn’t hold one dominant investment and wouldn’t have an operational involvement, yet that was exactly what it had done as far as Coats was concerned.
The Shareholders’ Association chairman said GPG had sold two companies in the UK but kept their pension liabilities, an action he likened to someone selling a house but keeping the mortgage.
At this stage Sir Ron was getting increasingly restless and agitated. His discontent heightened when Hawkins said GPG’s latest annual report revealed that Sir Ron had missed several board meetings.
Hawkins said he was voting his proxies against Sir Ron because under his stewardship GPG had poor risk management, no independent directors, poor corporate governance and Sir Ron had no company wind-down experience.
This was the spark that ignited Sir Ron’s anger.
He stood up and accused Hawkins of being “outrageous” and talking “absolute nonsense”.
He said the pension funds were not a liability until the UK Government changed the law to make employers liable for pension shortfalls.
Sir Ron then spoke about his attendances at meetings.
He said he had missed only one GPG board meeting in more than 20 years and his 50 million shares gave him a great incentive to attend. He said the annual report’s statistics on board meetings, which showed he missed two of eight board meetings last year, were “very misleading”.
He then climbed into Hawkins on the issue of board meetings. He said Hawkins comments were a “baseless slur”, “you don’t have a clue” and “you wouldn’t have the faintest idea what goes on at a board meeting”.
The Shareholders’ Association chairman did well to stay seated and not engage in a shouting match with Sir Ron.
Sir Ron was re-elected to the GPG board with 456.5 million shares for him and 443 million against.
If Sir Ron voted his 51.9 million shares in support of the motion, then a majority of other shareholders voted against him.
The demise of GPG and Sir Ron is an integral part of our capitalist system, as described by Joseph Schumpeter in his Capitalism, Socialism and Democracy. The economic system and its organisations are continually revolutionised from within; the old are destroyed and the new are incessantly created.
Schumpeter called this “creative destruction”.
The problem in New Zealand is that we have had plenty of destruction but limited creation. Sir Ron played a huge role in the destructive side of the equation in the 1960s, 1970s and 1980s. This era is over now, because there is not much left to destroy.
We now need a burst of creativity but where are the creators?
There would be little problem sitting through a depressing GPG annual meeting if one could attend the shareholders’ meeting of an up and coming company the next day.
Unfortunately the up-and-coming opportunities are few and far between on the New Zealand stock exchange.