Chris Lee & Partners Ltd

TAKING STOCK 26 JANUARY

THE astonishing sense of entitlement of so many business executives could not have been better illustrated than the charming salesperson Mike Pero displayed, in his recent court case, regarding money he had awarded himself.

Pero has been instructed by the court to repay approximately $1.5 million to the business he 50% owns, known as Mike Pero Real Estate.

Pero has an absent business partner who did not appoint a director to Mike Pero Real Estate, preferring to let a shareholders’ agreement control Pero’s behaviour, and set Pero’s remuneration.

Pero, of course, is best known for his previous mortgage broking business, his attempt to get into flying instruction, and for the undoubted charm that made him a successful salesperson.

He succeeded where the likes of Doug Edgar (Money Managers) and Adam Parore perhaps failed, each of them trying to franchise selling operations based on the ‘’brand’’ of the figurehead.

None of these fellows were experienced business executives with widespread market knowledge, but all were seeking to buy a client following by heavily advertising their ‘’brand’’, putting their names in neon lights.

Parore was a good cricketer, not loved by his team-mates, but respected for his cricketing skills, which were substantial.  He dabbled in financial markets, art, sharebroking and mortgage lending, growing his brand recognition by featuring in women’s magazines, often with his various wives.

It was modern, American marketing, but ultimately business success relates to knowledge, meaningful experience, values and consistency, so unsurprisingly Parore moved on from his ideas that he could franchise his brand.  He was never Richie McCaw.

Edgar was a Southland boy who dabbled in Invercargill property where he learned some expensive lessons, dabbled in Auckland City student housing, discovered that borrowing in Swiss Francs was not a great idea, went overseas, returned, and tried to build a sustainable business on fresh air, lacking capital, financial market knowledge, lacking a suitable mentor, but gifted at selling to a blue collar audience.

For a while, based on his energy and what one might call the gift of the gab, he assembled a group of very poor fellow salesmen, attracted a client base best described as the Radio Pacific audience, and for a short while was a successful salesman of poorly-priced, high-risk products.

The collapse of his selling group came only after he had extracted for himself tens of millions, perhaps hundreds of millions, so the ultimate mayhem left behind did not exclude him from a life now fuelled by extraordinary piles of money, if not admirers.

Pero is different from Edgar.

He has been frank in explaining that he is not a business leader, not really even a businessman, and most obviously is not well versed in things like governance, compliance or accounting.  He does not pretend to be what he is not.

After all the tribulations of his mortgage business, and his other ventures, he returned to real estate where he has built a brand based on cheaper fees and exploitation of his particular image (charm and devotion to his clients), a combination that often works, if combined with relevant knowledge.

Sadly his inadequate knowledge of sensible business practices has now left him embarrassed, in court and in debt to his partner for a whole lot of money that he thought he was entitled to extract, but was never approved by his 50 per cent partner.

One bizarre example of this entitlement was that having established the brand, put his name on the company and sold half of an assessed value of this brand, he felt he was entitled to additional income of $180,000 per year to be the company’s ‘’brand ambassador’’.  Baloney!

Someone with business experience would have known that his ‘’brand ambassadorship’’ was purchased by his partner when he sold 50% of the company.  He needed some fellow directors to help him avoid unwise decisions.

You can hardly call yourself Richie McCaw Ltd, sell shares, be paid a huge salary (Pero was paid $200k p.a.), and then claim that to represent the brand you want an ambassador’s fee.

To me that sounds like triple-dipping and reflects the same sense of entitlement that you might find in poor business models with poor leadership.

Pero explained in his court case that he did not make various self-focussed remuneration decisions with his partner or others because he was the sole director and did not keep a copy of the shareholders’ agreement on his desk.

It was ironic that his case came up at a time when I have been working on a claim for those ripped off by a company whose one-time chief executive was so self-focussed that he believed he was entitled to borrow, at discounted rates, $15 million from the company to speculate in a share purchase, without any obligation to repay if his childish speculation failed.

The corporate world is blighted by people who seek reward without risk, without corresponding contributions, and without regard to other stake-holders.

Pero, a fellow who seems mellow and who has a perhaps deserved image of being altruistic as well as charming, needs to work for a mentor who teaches him the merit of sustainable and credible business governance.

Mike Pero Real Estate might continue to carve itself a spot in real estate as being cheap and client friendly, but if it is to have a long future it needs its namesake to link his rewards to shareholder-agreed definitions of success.

There will be thousands of salesmen and small-time businesses that might learn from reading the Judge’s finding in Pero’s case.

 _ _ _ _ _ _ _ _ _ _ _ _

WHILE Mike Pero clearly understands brand importance, I am not so sure about the US hotel group Hilton Hotel.

In Christchurch it has bought the respected, elderly Chateau on the Park Hotel, and renamed it Double Tree Hilton, presumably one of the brands the Hilton group uses.

The COTP was built around 45 years ago by some characters whose ventures did not always go the distance, but the hotel itself has been wonderful and withstood the 2010 and 2011 earthquakes.

With its turrets and quirky shapes, it is distinctive.  Its location next to Hagley Park is clear of inner-city frenzy, its courtyard gardens are beautiful, its car parking is generous and most of all its staff comprises wonderful people, many of them far from youthful, but thoughtful, kind and devoted.

The hotel itself is old, decoratively refreshed, but still in the 1970s style, showers over the bath, noisy air conditioning, somewhat dated style of bar, and not too many of the sort of facilities (sauna etc) that you might be offered in Hilton Hotels overseas.

But the hotel and the staff are homely; just great.  I have stayed there pretty much monthly for nearly two decades, hiring a boardroom to meet with clients and a room to sleep.

I paid a sensible tariff for a pleasant but ageing facility.

Along comes the Hilton brand, the new owner doubles the tariff, and when I demur, makes me a member of some club and offers to reduce the price to 175% of the previous tariff.

The staff, politely, cannot discuss price, the phones are now answered in the Philippines or somewhere, and with heavy heart I must contemplate an equally convenient place at a more sensible tariff.

The Hilton brand is important to Americans.

When I have used Hilton’s hotels in different countries I have observed a concentration of American guests, perhaps those guests knowing there will be maple syrup pancakes on the breakfast menu.

But if Hilton targets and sets its prices for Americans in Christchurch, it is about to learn a branding lesson.

The dear ageing COTP is brilliant at coping with tour parties of tourists, and with New Zealanders who accept 1970s standards in return for a fair tariff.

I am not sure that there will be enough tolerant Americans to replace those who will seek fair value and move elsewhere, now room prices have become silly.

Great staff still; silly owners.  Christchurch is not New York.

 _ _ _ _ _ _ _ _ _ _ _ _

DONALD Trump may well be from the Idi Amin school of leadership, but he displays a deft touch in choosing the New Zealander Chris Liddell to provide his team with guidance.

We just have to hope that Liddell has sufficient sway to moderate Trump, and to achieve job satisfaction.

Liddell, like many others, has grown into a respected business leader, having worked his way through sharebroking/investment banking, where wide areas of knowledge and contacts become accessible to those with intelligence, skills and integrity.

He was a young man when he was made joint chief executive of what is now First New Zealand Capital, and would have been an early preacher of the value of a clean culture, differentiating his company from the bucket shops, whose self-focus cost them respect, loyalty and perhaps multi-million dollar compensation settlements.

(Think of Deutsche Bank, already fined tens of billions for its treatment of investors, perhaps, as another New Zealand company famously wrote, describing investor clients as ‘’flies’’.)

Liddell, still a young man, has moved on to chief financial officer positions in Microsoft and General Motors, and is having to resign as chairman of Xero to take up the challenge of keeping Trump off a couch, and the world clear of his wackiest ideas.

Liddell is one of an impressive band of skilled investment bankers to have gained career impetus through First NZ Capital, other notables including Brian Gaynor, who later was an adviser to David Lange, and Rob Cameron, whose consulting firm has done important work for government.  Of course the All Black Ron Jarden, whose name was used by the company in the 1960s and 70s, was also widely used by government, notably in broadcasting governance.

Perhaps the company has a special additive for its water.

Liddell, who has holistic values, has already been honoured for his contribution to New Zealand.

 _ _ _ _ _ _ _ _ _ _ _ _

THE faux indignation from the well-meaning but politicised charity Oxfam, over the wealth of two New Zealand-born people, underscored the low value of commercial radio talkback last week, and the naivety of many charitable foundations.

While I was driving in a rental car to Dunedin, the car’s radio was tuned to a station where a talkback jockey was discussing what he wrongly said was the news, that two New Zealanders ‘’owned’’ a third of all New Zealand’s assets.

He then interviewed people to discuss this stupid misinterpretation.

One competent, but politicised, academic blamed an unfair tax system which allowed such a distortion to occur. Really?

Why did no one correct the nonsensical interpretation of the announcer and put the subject into a correct context?

The ‘’news’’ was that two international investors born in New Zealand have had their combined wealth estimated by amateurish journalists at around 15 billion NZ dollars.

Oxfam then noted with ‘’shock’’ that this sum exceeded the combined wealth of 30% of all New Zealanders.  Oxfam would have been ‘’shocked’’ only of its people can neither read, nor understand economics or mathematics.

Of course the two men, Hart and Chandler, have not made their wealth in NZ, do not often live here or even visit here very often.  They hold their wealth overseas, and may not be tax residents of NZ.

Their wealth is not anywhere near 30% of New Zealand’s wealth, as the radio announcer suggested.

Do the maths!

New Zealand’s housing market alone is worth $1trillion.  The NZX is worth perhaps 150 billion, our own bank deposits are worth maybe 100 billion, our farm land is worth billions, and we probably own many billions of our own sovereign debt.

So without calculating the value of Crown assets, let us assume the assets of New Zealand are at least two trillion, of which 30% is $600 billion, not $15 billion.

The two wealthy NZ born investors have assets that someone, who might not understand the difference between gross and nett, has tallied up to $15 billion, a figure somewhat south of $600 billion.

Let us charitably assume the announcer meant to say that $15 billion is more than the value of all the assets of 1 million New Zealanders (30% of our adults).

This is hardly surprising, or news, or a ‘’shock’’, because 35 per cent of New Zealand’s adults do not own houses, and therefore might have assets of cars, household stuff, bank accounts, KiwiSaver accounts, or maybe some modest paper assets.

If those assets averaged $15,000 each it would be surprising, but if they did, those adults might own assets of $15 billion, said to be the value of Hart and Chandler’s wealth.

Of course, this assessment of the assets of those without a house is meaningless as when they reach the age of 65 those people will have access to the equivalent of a $300,000 annuity, otherwise known as the NZ pension.

In many constituencies people do not get state pensions but draw on annuities, which are individually labelled in the person’s name.

If you want to have a stupid and pointless debate you could say that every 65-year-old in effect has $300,000 in a special annuity, awaiting gradual collection.

New Zealand’s richest men, living overseas, and paying taxes in the countries where they are resident, are very rich, and New Zealanders who have yet to own a house, are very much less endowed with monetary wealth.

Can we please find social policies that help people to move towards some financial independence without resorting to absurd, politically-inspired debates that insult anyone who can perform arithmetic?

Footnote: The Oxfam horror might be appropriate in Russia, where 110 people own £260 billion of assets, whereas the other 142,999,890 people collectively own £490 billion of assets.

Be shocked by that obscenity.

 _ _ _ _ _ _ _ _ _ _ _ _

New Issues

 

 

THE Wellington International Airport 8-year 5% senior bond issue will remain open until February 10.

We have access to a further number of Quantum Dixon Street property units, available at par ($25,000), paying 9.25%.

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

I will be in Nelson next Wednesday Feb 1 for two meetings on quite separate subjects, being held at the Beachcomber Motor Inn’s conference room:

Investing in 2017 - 1.45pm

SCF Preference Shareholders Potential Claim - 3.15pm

All clients and the public are welcome to attend.

Kevin will be in Christchurch on February 2 to meet with investors by appointment.

Edward will be in Auckland (Remuera) on February 17 to meet with investors by appointment.

Chris Lee

 

Managing Director

Chris Lee & Partners Ltd

---

TAKING STOCK 19 January

GIVEN the extreme variations in corporate performance, and the speed with which technology-based change is disrupting the status quo, it is entirely logical that there is a new focus on directors and executives, especially with companies developing new technologies.

If corporates are to merit public investment support, we must have faith that those in charge are competent, insightful and driven to produce products and services that meet the new challenges.  The old order might not be up to these challenges.

We expect profits and in this new world we expect companies to behave in a socially aware manner.

The days of a battery manufacturer pouring waste products into the Hutt River, or a council pouring untreated sewerage into Cook Strait have long gone.

Over the Christmas period I met with one of New Zealand’s most successful chairmen, a man in his 50’s who has helped build a great, modern company, with high standards.

He defined for me what he sought in a chief executive.

The modern CEO, he said, had to have candour, valour, vigour, have a mind that operated clearly even at 78rpm, he must have integrity and he must know how to recognise and understand risk, and how to make a profit.

Identify his potential, provide him with experience, give him support and celebrate the achievements, was his formula, as a chairman.

Perhaps, in this respect, nothing has changed.

I recall Lloyds Bank, in the 1960’s, recognising these qualities in John Anderson, (later Sir John), who was quickly promoted to CEO of South Pacific Merchant Finance, at a young age, and later had to sort out the National Bank of New Zealand, which had fallen into the hands of corporate politicians, rather than skilled bankers.

Selecting a CEO is itself an art.  Ensuring he/she is allowed some sort of lifestyle balance, and is motivated to perform the job for many, many years, is also the task of a skilled chairman and board of directors.

The concept of musical chairs at CEO level is about as banal as the concept of contracting out public relations to a third party, and I much prefer the process of creating a CEO internally.

The stupid American concept that a CEO should move on every few years has been a major cause of short termism.

The choice of directors is as important, perhaps more important.

In the 1970s and 80s we endured an era when a small number of lawyers and accountants dominated the governance of New Zealand public companies.  The result was ugly – 1987.

The call today is for diversity, presumably implying a wish for ethnic and gender variety, more representative of our community.

My own emphasis would be on relevant expertise.

If one accepts the judgement of those who work with boards, one would accept that we still have a heavy weighting of what younger people call ‘’muppets’’, that is smiling, unthinking people who enjoy the rewards and status, but do little original thinking and often hide behind the strongest, smartest people on the board.

I am unconvinced that the funds management industry, now a powerful voting bloc, is doing its job to change this.

Yet the dominance on share registers of fund managers is a relatively recent theme that in theory should ensure better governance.

In theory fund managers should be skilled and have a deep understanding of the strengths and weaknesses of every company in which they invest other people’s money.

In theory this should help them identify the key requirements of the governors of each company.

In practice, an increasing amount of other people’s money is invested unthinkingly by index funds, promoted by their salesmen and by academics, often with zero experience in capital markets, sometimes with personal agendas that sometimes are so nasty that they might reflect hangovers from failed marriages or poor personal financial management.  Index funds need no knowledge.

Conceptually we should take confidence from the potential influence of an active funds management presence on a share register.

When I look at a board of directors I want to see evidence of knowledge and experience of the industry.  I want to see independence, at least with some directors, and I want to see a commitment to a transparent pursuit of logical objectives.

I hope to see evidence of accountability, pride, integrity, commitment to shareholders, staff and clients, and I hope to see evidence of street wisdom.

In contrast many Asian countries want to see status.

They choose as chairmen people with political power, apparent prestige, and public recognition.

Perhaps that is why the Asian owned company Mainzeal chose a retired career politician, Jenny Shipley, as its chairman.

Unsurprisingly she failed to identify the huge weakness of Mainzeal’s behaviour and the company failed, a victim of extremely poor management and governance, based on a fragile and unwholesome shareholder commitment.

I could list many other companies that failed, having pursued the frivolous strategy of putting a retired politician in as chairman.

Lombard, Pacer Pacific, Brierley, Viking, Intellectual Mezzanine Partners, were all chaired or governed by politicians with utterly inadequate corporate knowledge.

I really do not care whether the board comprises eight competent women or men, or a mix, and I do not care whether the directors are of any particular ethnic range.

Companies prosper when they have competent, relevant, committed, knowledgeable, insightful, experienced and energetic directors who pursue credible and achievable objectives, without being afraid of change.

In 2017, when the concept of free trade, unrestricted access to markets and global access to labour markets might be overturned by Europe, China or the USA, a small country like New Zealand will need excellent governance.

This will be especially true while we continue to be dependent on foreign savings, which can boycott those who lack integrity or good governance.

 _ _ _ _ _ _ _ _ _ _ _ _

THE relationship between politicians and capital markets has always been dubious.

Politicians need an organisation to keep them in power, and those organisations need large sums of money to be effective.

A cynic would say that it is much easier to persuade a corporate leader to donate shareholder (other people’s) money, than it is to get the leader to donate his own money.

Political parties exist because those in charge of other people’s money support them, whether it be a union’s money, a Greenpeace trust, or a chunk of corporate profit.

Historically politicians could reward corporate largesse with kind tariffs, lower taxes, import licences (think the Todd family) or loose regulations.

It is almost beyond belief that our laws, till the last five years, placed so little liability on highly-paid providers, like auditors, trustees, company directors, credit rating agencies, money lenders, corporate advisers or financial planners/advisers.

Our laws relating to the use of other people’s money were also pitifully diluted.

A contracting company like Mainzeal, could win a contract, sub-contract out most of the work, yet collect the revenue and retain most of it as internal cashflow, leaving the sub-contractors at increasing risk.

Of course, Mainzeal gambled too often, and went broke, costing dozens and dozens of sub-contractors hundreds of millions, in total.  Many sub-contractors had long before declined to work with such a precarious company as Mainzeal.

The link between political dependence on corporate donations and poor or non-existent law is not entirely imaginary.

Pragmatic politicians, of all political colours, see life as a series of trade-offs.

Happily we have had sufficient public clamour since the 2008 global crisis, to demand and get better consumer protection.

Best of all, our courts have retained their independence and have mostly displayed competence, on those occasions (too rare) when matters reach the court’s attention.

Ironically, it is a sign of respect of the court’s independence, and of our country’s lack of corruption in the judiciary, that leads to many out-of-court settlements.

The downside of a settled dispute is that by definition it does not allow the opportunity for relevant, modern case law.

In commerce, there are many examples of a need for better guidance from case law.

Auditors, trustees and company directors will be blushing as they are reminded of this truism.

As well as more case law, we need better powers of investigation, and much higher budgets to be granted to our regulators.

Consider this case of chicanery.

A finance company, privately owned, is about to go spectacularly broke, costing investors several hundred million.

The devious owner knows he will be under a spotlight so he ‘’sells’’ a personal asset to a friend at a highly discounted price.  Let’s say the asset is some land or a commercial building, sold at a quarter of its value.

There is no law dictating that a personal vendor has to sell at a proper price.

There is no law against a personal agreement being made at false prices.

Indeed I have myself made such an uncommercial decision.  I recall in Spain, after a meal of grey mussels, paying someone the equivalent of 10 dollars to swap for a peseta that I urgently needed to spend.

A distressed spectator at the US Masters emerged from the bushes once, caught short, having failed to find even some old newspaper, and allegedly asked Jack Nicklaus if he would swap a $20 note for three $5 notes.

To return to the anecdote, years go by.  Investors have lost their money.  Investigations into the company failure have been completed.  Memories are getting dim.

The ‘’friend’’ who warehoused the asset then sells the asset for many many millions and ‘’chooses’’ to ‘’donate’’ 25% of the profit back to the discredited finance company owner, giving him/her a few million to add to the family trust.

What authority will act on this display of chicanery?

The receiver, the liquidator or the official assignee might be interested, if they had energy, a budget, an intellect and if they cared, a very rare combination.

Would the trustee?  (Pardon my mirth)

Would the Financial Markets Authority be interested, or the Serious Fraud Office?

What about the independent directors of the finance company?

Perhaps the transaction is no one else’s business, unless the various authorities have wrongly assumed the finance company owner was penniless and not worth pursuing, for all the inappropriate dividends or salary he had stripped from the company.

My point, of course, is that unless there is some authority, some whistle-blower, or some energetic person prepared to pursue every avenue, there will be very unfair outcomes.  The crooked manager wins.  The investor has been cheated.

The incompetent, sometimes cheating incompetents, will milk companies of dividends, use them to buy and hide assets, and get away with it because our budgets and laws do not lead to recoveries.

The example I quoted could apply to at least three finance company owners.

You may recall that in 2006 we had approximately 60 finance companies raising money from the public, of which a handful (UDC, Marac, South Canterbury Finance, St Laurence, Strategic, Medical Securities) had external investment grade credit ratings.  Most of the 60 companies were run dishonestly, with deliberate non-disclosure of highly important problems.

Today we have UDC and two Australian-owned organisations, Liberty and Fisher & Paykel Finance, and a handful of sprats, the latter without investment grade ratings.  Soon UDC will be Chinese owned and seems likely to lose its investment grade rating.

We need a non-bank finance sector, with many lenders in different sectors.  We do not need back street pay day lenders.

We still have yet to find a regulatory framework that will spawn public confidence, the missing element.

Until we have a credible framework, credible regulations, a fully-funded regulatory system, a much higher benchmark for directors, far far better standards of trustee behaviour, more clarity established by the courts, much better accounting laws, and  much more transparency, we will have no public confidence.

When Simon Power was in John Key’s cabinet, he ripped into the problem and in two years did what others had said could not be done.

Will Bill English find another clone of Power to get these issues addressed?

Might a flourishing non–bank sector be a source of political party funding?

 _ _ _ _ _ _ _ _ _ _ _ _

THE link between political party funding, and government largesse, admittedly in the United States of America, was displayed to me by an American, at an annual meeting I attended last year.

He owned a very large American company, revenues in the tens of billions.  He recalled details of his first billion-dollar contract.

It came during Bill Clinton’s term as President.

The contract had one unusual condition.

It was awarded subject to a specified donation ($50 million) to the Democrat Party by the tendering contractor.

In New Zealand there is no evidence of comparable corruption.

But readers might recall that following the Rodney Council’s court case involving a roading contractor, the media interviewed other contractors about council contracts, generally.

One such contractor noted that it was common for contractors to ‘’seal someone’s drive’’, or ‘’build a fence or garage’’ after the contract had been awarded.

Near where I live, an impecunious mayor, many years ago, became the owner of various sections after some land was rezoned.

Corruption appears to occur everywhere.

No wonder we do not see many glass houses these days.

 _ _ _ _ _ _ _ _ _ _ _ _

ONE effective way of reducing corrupt practices is to have a strong fourth estate, a media with the money to attract talented, brave, experienced journalists with the credibility to win the confidence of whistle-blowers, and deter the burglars.

Watergate, President Nixon’s shameful legacy, might never have been exposed but for a brave newspaper.

We do not need to waste energy re-stating the pitiful state of the media in New Zealand.

It is suffice to say that our two poorly-managed media groups, NZME and Fairfax, are in such a bleak state that they believe merger is their only salvation.

Their budget for investigative journalism is virtually nil, as is their appetite for material that does not produce advertising revenue.  Very, very few journalists are paid adequately.

Indeed over the holiday period it has seemed that our media’s only focus is on reporting random road accidents, an intrusion into private grief that is of interest to rubber-neckers but should seldom be front page material.

I am told by a senior Fairfax journalist that any debate about newspaper content or direction is now regarded as insubordination and is career-ending.

So it was with delight that I noted in its last two editions before Xmas that The National Business Review seemed to be on a new invigorated track, recruiting real journalists.

Joining its senior journalists Tim Hunter and Jenny Ruth, are Karyn Scherer and soon, Fiona Rotherham.

They will be easily the best team the NBR has had for years.  If they could also attract Rebecca Macfie, who wrote the brilliant if nauseating account of the disgraceful Pike River Coal disaster, then the NBR might find it could restore its weekly publication to a standard that attracted respect from a real audience.

Currently its sole, very limited, market is the corporate world which pays for its daily digital news, though quite why I am unsure, as almost all corporate managers will have access to Bloomberg, whose coverage is truly global and written by specialists with no advertising compromises.

The corporate world tells me that the NBR has been what my grandfather used to call ‘’a two minute silence’’.  (A quick flick from page to page.)

If the NBR maintains its improving standard, as exhibited before Xmas, it might return to being a paper bought by retail investors, which would increase its potential circulation by around 300,000.

If its offerings were interesting, included investigative work, and were focussed on what retail investors might find useful, the NBR, after banishing any hackneyed old goats from its columnists, might be rejuvenated.

I, for one, would subscribe, if the new energy grows, and if there is enough focus on ‘’business’’ rather than government departments, politics and hobbies.

An effective media would never have allowed the likes of Butler, Petricevic, Tallentire, Somers-Edgar, Moses, Reeves or Hotchin to achieve credibility with retail investors.

The NBR must first identify a better target than just a few thousand corporate readers.  Corporates might provide advertising revenue but it is weight of numbers that provides the grunt needed to produce better standards, and to be an effective policeman of good corporate behaviour.

Hunter and Ruth have produced some telling articles in their time.  With Scherer, Rotherham and maybe Macfie, they might have the grunt to provide effective fourth estate policing.

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

I have begun a series of investor meetings, and a separate series of meetings with South Canterbury Finance preference shareholders in various cities.

Details are below.

Investor meetings will discuss the changes that are occurring globally and here.  Whilst no-one knows the outcome of the changes, some consequences are relatively predictable.

I shall outline a strategy that accommodates change.

All clients and readers of our newsletters are welcome to attend the meetings which are also being advertised in local papers.

The SCF meetings are for SCF investors and particularly those who are funding the nearly-completed legal investigation, and for those who might join any group action that might occur.

I will not be able to discuss all details as clearly there would be matters that are best divulged in the right arena but I will provide an update on progress and a summary of what might happen next.

24/1 Wellington – Petone Workingmens Club – Investors – 10am – SCF – 11.45am

25/1 Kapiti – Southwards Museum – Investors – 9.45am – SCF – 11.30am

26/1 Auckland – Ellerslie Racecourse – Investors – 11am – SCF – 1pm

27/1 North Harbour – Milford Bowling Club – Investors – 11am – SCF – 1pm

1/2 Nelson – Beachcomber Motor Inn – Investors – 1.45pm – SCF – 3.15pm

Please RSVP if you will be attending.

Edward, David and Michael Connor will attend some meetings. 

Kevin will be in Christchurch for client meetings on February 2.

 

 

Chris Lee

 

Managing Director

Chris Lee & Partners Ltd

---

TAKING STOCK 12 JANUARY

THE NZX enters the year of 2017 yet to confirm its new chief executive, and facing the threat of its major listed companies contemplating the move of their ‘’main’’ listing being on the ASX.

Implicit in this threat is significant loss of income and status.

In preparation, the NZX has diversified its revenue base, promoting a range of index-based managed funds.

And the NZX retains hope of fast growing debt listings, given additional energy thanks to the need for the major banks to shrink their corporate lending books.

The banks need to do this to meet capital ratio requirements.

Their only alternative is massive capital-raising, an unattractive option.

Corporates will be borrowing from the public, with NZX-listed bond offers.

The NZX agenda, in terms of revenue protection, is therefore pre-determined, but that should not be its main task.

The prime task for the NZX must surely be a focus on incremental improvement, making New Zealand an increasingly attractive home for international investment.

It must surely be obvious that we need to prioritise our attractiveness to the foreign suppliers of capital.

Foreign investment accounts for at least a half of our government and local authority debt, global investors own at least a quarter of our listed public companies, and they provide at least a third of the funds that our banks lend.

Our reputation in international capital markets has much to do with our standard of living.  Without a good reputation, we would endure poorer standards.

So it is not surprising that intelligent capital market participants, like the Auckland fund manager Brian Gaynor, would present a plea to those who lead the NZX.

Gaynor wants to see more diversity in the composition of boards, he wants to see a focus on better accounting rules and practices, and he wants to see much better processes when it comes to the pricing of any new offers.

On these matters it is hard to disagree but they are not at the top of my list.

My observation is that there are two much more important areas demanding immediate repair.

We simply MUST move to identify and punish corrupt practices, and we must crank up our efforts to reach the gold standard for transparency.

The latter must begin with better definition of what is required of our continuous disclosure regime; for example, who has obligations, and who must blow the whistle, when obligations are ignored.

Our country’s leading investment bank believes that any investment bank, paid to advise a company, must alert a company to its disclosure failure, AND RESIGN if the disclosure is not corrected.

Is this the gold standard, or should the investment bank report the breach to the regulators?  I prefer the latter.

Corruption and transparency are probably chapters in the same book.

By international standards New Zealand is already well regarded, regularly in the least corrupt five countries in the world, according to global surveys.

But we have had our shameful episodes in the past and it is now no secret that corruption is evident here on a much greater scale than surveyors might know.

The recent example of a roading contractor’s crass behaviour with the Rodney Council north of Auckland reached the courts last year.

The High Court Judge was required to assess various practices and pronounce the court’s view of what was and what was not acceptable practice in pursuit of client/council ‘’good relationships’’.

The client had provided council staff with entertainment, spent hundreds of thousands on fancy meals, paid hotel bills, upgraded council staff to business class for international travel, sent council staff to overseas ‘’conferences’’, sent gifts, paid telephone bills and provided taxi chits.

The construction industry, behind closed doors, concedes that these practices are widespread and ‘’normal’’ in New Zealand.

We know the cost to New Zealand when global investors identify corrupt practices.

We counted the cost in the 1990s, after the debacle with the Development Finance Corporation (DFC), a Crown-owned entity (like NZ Post) which had raised hundreds of millions, much from Japanese institutions.

The DFC eventually became confused, behaving like an organ of government some days, and like a profit-obsessed private company on other days.

For example on some days it made political decisions perhaps promoting regional development, while in other areas it took untold risks, in foreign-exchange dealing, in property development projects, or even in allowing its chairman Buck McConnell to authorise his stable of companies to borrow from the DFC, or sell to it their assets.

When the DFC collapsed the Japanese naturally expected the Crown entity to be underwritten by the Crown.

The Crown, under pressure after the 1987 collapse of the property market and more pressure from the failure of the BNZ, allowed the DFC to be sold, for some $130 million, to the National Provident Fund, ostensibly a non-political fund manager.  The Crown believed this sale left it with no obligations.

The NPF had no reason to repay the Japanese.  Nor did it have any reason to buy the DFC, an ‘’investment’’ that cost the NPF policy-holders $130 million, as almost everyone in capital markets knew it would.

Quite predictably the Japanese reacted by declining to invest in New Zealand for many years, forcing our country to pay higher rates, to get what we wanted from a diminished market.

Corruption does have a real cost, and not just in money terms.

It demoralises honest people, and may influence those who waver to cross the line into dishonest or improper practices.

The construction industry is not the only example of a vulnerable sector.

The fishing industry itself has some history, and of course the finance sector has often been outed, for its greed and corrupt behaviour.

Does anyone recall the era when the BNZ began its downward track, resulting in its fire sale to the National Australia Bank?

How much of this loss of value could be linked to corruption, beginning at the political level?

Anyone remember which organisations used the Cook Islands to cheat the New Zealand tax laws?

Did not Crown-controlled entities fall into this category?

Corruption begins when secrecy becomes a standard practice.

For that reason poor transparency – continuous disclosure – is a precursor of corruption.

The result of poor disclosure – poor transparency – has been obvious in one of New Zealand’s finest cities, Dunedin.

For decades unelected people have had an undesirable influence on Dunedin, a relative small cadre of people having an undue say in controlling public assets and cash flows.  They have not donated their time.

Perhaps that era is behind us but the affairs of Aurora and Delta, which control Dunedin’s electricity network and its infrastructure, are definitely in need of closer public inspection, and greater transparency, as was the decision to proceed with building Dunedin’s sport stadium (the Forsyth Barr Stadium).

This stadium decision was based on many loose expectations, and some loose promises, which never came close to being delivered.

For example the stadium decision was based on a promise of corporate support that simply has never converted to dollars received.

Under pressure, Dunedin seemed to be prepared to allow investment decisions to become highly speculative, with the hope that fast returns would relieve problems caused by bad decisions.

The decision-making process was not transparent, not performed at council level, nor even performed intelligently.

Land was bought speculatively, various property developments, some already under pressure, were supported at full prices, and later sold at ugly losses, ultimately borne by the council (ratepayers).

Incompetence and stupidity might have been the cause but lack of transparency always feeds those who seek to discover sinister motives.  Transparency solves this.

One result in Dunedin today is that it has thousands of dangerous power poles, and seems unable or unwilling to spend tens of millions each year to replace them.  The underground network in central Dunedin, according to a former chief executive, needs hundreds of millions spent now to avoid an imminent disaster.

Meanwhile the city diverts revenue to servicing debt on its Forsyth Barr stadium, an asset that quite clearly would not have been built had the fund-raising been done transparently, and the go-button been activated only when the funds had been pledged contractually.

The problem in Dunedin is transparency, as far as I can see, not corruption but it is easy to see why so many websites are so suspicious.

For the NZX continuous disclosure is the regime that should eliminate secrecy.

Let me offer a simple example.

Imagine that Blue Star Print, when it had its cynical offer of bonds in 2009, had disclosed that it intended to offer prior security to the banks and borrow huge sums to buy out partly-owned subsidiaries and expand its market presence in Australia and New Zealand.

This disclosure would have provided transparency to some plans that were as stupid, cynical and rash as any adopted by the likes of Bridgecorp, St Laurence, Strategic or Hanover, in the years of 2007 and 2008.

None of these players, least of all Blue Star Print, ever signalled their stupid plans, many of them based either on greed or panic.

They must have decided that investors did not need to know of the new levels of risk they were taking.

If there is no transparency, no continuous disclosure enforcement, then how can any investor, let alone a foreign investor, make an informed decision to invest.

Of course the trite answer is that directors have sanctions that enforce good decision-making processes.

Another answer might be that where trustees are paid to act for investors, they might intervene.  Pardon my mirth.  Even if there was an element of competence in any trust company, there would be conflict of interest.

Perhaps the answer is that regulators and the law might combine to punish those who hide their intentions, or secrete problems that materially alter the prospects for a company, thus leaving investors to make uninformed decisions.

That is where the NZX comes in.

It simply must do more to define what must be disclosed – anything material, anything that significantly alters the risk of holding, buying or selling a security.

It must define who is responsible for ensuring disclosure is made.

If a bank, the Crown, a corporate adviser, an investment bank, an auditor, a trustee or any director knows that material information is being hidden, how should they act?

Should they be compelled by law to report the matter to the Financial Markets Authority, or the NZX?  (Financial advisers, subject to a code, are compelled to report bad behaviour).

Should a security be suspended from trading at the very moment material information is being hidden?

For example, if Fletchers tomorrow announced that one of its building materials had failed and would lead to claims from building owners, investors would naturally want to know the potential effect on profits, dividends or maybe even company survival.

In my view disclosure would be obligatory.

Perhaps Fletchers would argue that no disclosure should occur until a legal opinion had been prepared, and full assessment of potential cost had been commissioned.

Should the share trading be suspended immediately?

Whose opinion is right?  What do the regulations actually require?

The NZX, under its new leader, ought to prioritise the publishing of a definitive paper on the matter.

In a year when China’s debt problems, Europe’s banking problems, Trump’s protectionist policies, and the various secular, civil, currency and trade wars are escalating, it could be difficult to raise all the money that New Zealand likes to attract.

The biggest contribution the NZX can make would be to define AND ENFORCE a gold standard of transparency, of disclosure, significantly minimising the risk or corruption, or fear of corruption.

The year of 2017 should be the year of action on this front.

 _ _ _ _ _ _ _ _ _ _ _ _

FOR all of the above reasons, I applaud the New Year honouring of the flamboyant Auckland accountant Bruce Sheppard.

Any long-term reader of Taking Stock may regard my applause as representing a mind-set change.  They would be right.

When Sheppard set out to mobilise support for a NZ Shareholders Association, I was critical of his behaviour.

He clowned at meetings to get attention and he often appeared to be a conspiracy theorist.

I now see that he was effective and that the outcome has justified the method.

I also see that his analysis and information-gathering was often better than any other commentator or analyst.

For example he loudly contradicted the views of the then PricewaterhouseCoopers chief executive, the late John Waller, noting that Waller’s advice on various Hanover Finance proposals was conflicted and hopelessly inept.  I knew and trusted Waller.  Sheppard was right.

Waller had been a trustee of an Eric Watson trust, Sheppard divulged, and Waller was lacking street wisdom about the ridiculous level of loans Hanover made via conduits, or to parties linked to Hanover’s owners.

Where Waller saw collectable loans, Sheppard saw a pile of dung.

As we all now know, Sheppard was right, Waller was poorly informed and should not have endorsed Hanover’s plans.

Sheppard was right in arguing that Hanover investors needed to be represented by a statutory manager who might have clawed back the astonishing and ill-considered dividends that had been paid to Hanover’s owners, Watson and Hotchin.

Sheppard did get the NZSA to progress and resigned once it had momentum, handing over to a conventional leader John Hawkins, who might never have interested the media, largely motivated more by Sheppard’s colour than by the issues he identified.

I doubt that Sheppard’s New Year honour relates to his one year contribution to the FMA.

This body is a regulator and is much more likely to behave like a law firm, albeit with an eclectic bunch of directors, than to behave like a street-wise policeman.

Sheppard should have been allocated to the Serious Fraud Office, where his street wisdom would have been welcomed.

Still a practising accountant, a high-risk investor, and a policeman of corporate behaviour, Sheppard is now also a litigation funder.

He will continue to make a significant contribution to the clean-out of rot in our capital markets, and I suppose he will do this colourfully.

Indeed in 2017 there might be a wide range of court cases of high relevance to corporate New Zealand that Sheppard and his co-funders bring to a head, beginning with the disgraceful performance of Mainzeal’s directors.

We should all salute his vision, his energy and his information-gathering.

He would make a much better knight than many of the greedy, self-focussed hypocritical business ‘’leaders’’ selected from capital markets by weak politicians of the past, so many selected for channelling money to political parties, rather than contributing to the progress of a transparent financial system.

 _ _ _ _ _ _ _ _ _ _ _ _

NEXT week I begin a series of investor meetings, and a separate series of meetings with South Canterbury Finance preference shareholders in various cities.

The details are below.

Investor meetings will discuss the changes that are occurring globally and here.  Whilst no-one knows the outcome of the changes, some consequences are relatively predictable.

I shall outline a strategy that accommodates change.

All clients and readers of our newsletters are welcome to attend the meetings which are also being advertised in local papers.

The SCF meetings are for SCF investors and particularly those who are funding the nearly-completed legal investigation, and for those who might join any group action that might occur.

I will not be able to discuss all details as clearly there would be matters that are best divulged in the right arena but I will provide an update on progress and a summary of what might happen next.

The meeting dates and places are:

16/1 Invercargill – Ascot Park Hotel – Investors 9.45am – SCF – 11.30am

17/1 Dunedin - Edgar Centre – Investors 10am – SCF – 11.45am

18/1 Timaru - Sopheze on the Bay – Investors – 9.45am – SCF – 11.30am

19/1 Christchurch – Burnside Bowling Club – Investors – 10am – SCF – 11.45am

24/1 Wellington – Petone Workingmens Club – Investors – 10am – SCF – 11.45am

25/1 Kapiti – Southwards Museum – Investors – 9.45am – SCF – 11.30am

26/1 Auckland – Ellerslie Racecourse – Investors – 11am – SCF – 1pm

27/1 North Harbour – Milford Bowling Club – Investors – 11am – SCF – 1pm

1/2 Nelson – Beachcomber Motor Inn – Investors – 1.45pm – SCF – 3.15pm

Edward, David, Kevin and Michael Connor will attend some meetings. 

Please RSVP if you will be attending.

 _ _ _ _ _ _ _ _ _ _ _ _

New Bond Issue

 

THE Wellington International Airport senior bond, paying 5%, for eight years is still available.  It involves no transaction cost for investors.  The offer document is available on our website under current investments. Please contact us if you wish to secure an allocation. The offer closes in February.

May 2017 be a happy, healthy year.

Chris Lee

 

Managing Director

Chris Lee & Partners

---