Taking Stock 30 July 2020

Chris Lee writes:

MANY who are vigilant about financial market changes and behaviour will still be quizzical about the Goldman Sachs/Malaysian Development Bond Fund that rocked the corrupt nation of Malaysia a few years ago. The fund was known as 1MDB.

To recap, a Malaysian spoilt boy – a goof – and a corrupt Malaysian Prime Minister were able to raise many billions from Wall Street and the Middle East by claiming they were raising the money to develop Malaysia's infrastructure.

By paying extreme brokerage to the unadmired bank Goldman Sachs, they were able to tempt the giant American ''squid'' to stretch its tentacles to its clients and the wholesale market.

Goldman Sachs was paid hundreds of millions in brokerage, the GS deal-making staff member received tens of millions in bonuses and was promoted, while the American giant recorded inflated profits. GS is now paying for that greedy behaviour.

Sadly, the investors were duped, as the money did not go to much-needed infrastructure projects.

Some of it went up in smoke, as the spoilt boyish goof held the sort of absurd parties – champagne and dancing girls jumping out of cakes on board luxury yachts – that attract unintelligent Wall Street people and glitterati.

Clearly these party-goers are of such modest social and intellectual intelligence that they view such childishness as being the pinnacle of reward for their being a part of ''the club'' that GS heads.

The Malaysian goof spent hundreds of millions on such plastic events while the Malaysian Prime Minister used his share of the funds personally and for his electioneering.

Ultimately the Prime Minister was booted out of office and charged. He still resists the charges, appealing a court finding of guilt, for which jail is the normal sanction.

The Malaysian government undertook to repay the duped investors. The goof is still at large, sheltered by those who must regard him as a party-organiser, worthy of protection. The Lord moves in mysterious ways.

Last week Goldman Sachs, acting with rather more decorum, agreed to settle with the Malaysian government by paying US$3.9 billion to Malaysia, a not insignificant penalty for their greed and stupidity.

One hopes that this expensive outcome for the New York-based bank/broker will drive rather more questions before it ever again offers to promote such nonsense.

I keep asking myself how it thought any infrastructure fund could ever justify paying brokerage of 6% to a distributor of a bond fund.

I have heard of how a greedy NZ broker was once paid 8% for arranging $10 million of finance for a university, and many with memories will recall the Money Managers, Reeves Moses and Waltus Syndicates, whose brokerage payments filled the coffers of uninquisitive buffoons in the 1990s.

However, a government bond fund paying 6% surely must have raised questions, even in the most rapacious broking houses.

Anyone wanting to read the whole story should read The Billion Dollar Whale (not to be confused with The Billion Dollar Bonfire, though one could be excused for wondering which was which!).

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THE Mainzeal directors, headed by its chairman Jenny Shipley, are now appealing the $36 million award made by a High Court judge to its liquidator.

That award apportioned $6m to each of the three directors including Shipley, magically equating to the exact level of their insurance cover, while $18m was allocated to Richard Yan, the founder of the company and undeniably the man who claimed to be the moneybox behind Mainzeal, and used the company as his treasury.

Shipley's insurer wants to reduce the award.

The liquidator, BDO, wants the award to be substantially higher. So the argument now rests with the Court of Appeal, the case a work in progress. The Supreme Court might yet be required.

One can imagine the three errant directors would be wishing that the insurer had not appealed. There is no upside for them, but significant downside.

The Appeal Court's decision can help only the insurer. If it increases the award, the three directors will be digging into their purses.

The importance of the case has already been demonstrated. The judge's finding that Mainzeal traded while insolvent is not disputed, nor is there any belief that directors should be left alone by liquidators when such infractions occur. The truth is that the Old Boys Network for too long has protected directors, most liquidators and receivers declining to tackle their privileged peers.

My summary is that this case should deter people with no relevant experience or knowledge from ever agreeing to directorship.

Politicians like Shipley, and many others including John Key, no doubt have abilities in some areas, but I cannot think of a single politician I would want to be chairing any company in which I invest.

 A recent letter-writer to The Dominion (Susan Smith) included an excellent message, defining what she expected from a Prime Minister.

From memory she listed about nine qualities, based on knowledge, experience and their personal standards.

I struggled to tick many of her nine sensible criteria when assessing any of our Prime Ministers in the years after Jim Bolger.

In my experience, chairmen need to have:

- Relevant knowledge of the sector

- Relevant commercial experience

- Strategic thinking skills

- Social intelligence

- Respect for regulations and regulators

- Street wisdom

- Demonstrable, good judgement

- Ability to support but also oversee the chief executive

- The primary motive of wanting to make the organisation better

I regret that I cannot think of any politician who ticks even half of those boxes.

The Mainzeal appeal will not adjudicate on these matters but it might re-price the cost for those who seek the status and the rewards without adding equivalent value.

I hope so.

Johnny Lee writes:

THE recent debacles involving two tiny NZX-listed companies, Blackwell Group and New Talisman, should serve to remind investors that markets are not always logical, and ultimately are controlled by the decisions of individual traders making individual decisions every day.

Blackwell Group, which was spawned from a reverse takeover of failed finance company NZF Group, is almost certainly facing heavy censure from the NZX following a blunder in its preliminary unaudited results, which listed its Net Tangible Assets (NTA) incorrectly. The NTA was published $0.15, instead of $0.0015. In the detailed report accompanied by the announcement, the figure was published correctly.

A small number of traders, persuaded by this high asset backing that the stock was massively undervalued, began buying a handful of shares at increasing prices. The stock then featured on various websites as the ''Top gainer'', fuelling unprecedented interest in what was previously a very small, rarely traded company. Literally thousands of trades followed, predominantly sourced from a particular discount broker.

The NZX surveillance team did its job, asking Blackwell Group to explain the sudden price movement. The company, apparently oblivious to its error, responded to that effect. At the same time, directors were hastily selling their shares, profiting from what was surely a genuine error by the company.

A month later, the error was spotted and corrected, and the price crumbled. Those who bought the shares at 9 cents have seen their investment tumble at breakneck speed. Investors were undoubtedly misled by the incorrect reporting, and traders buying shares based on ''Top gainer'' lists had learned a valuable lesson.

The next step will be determining the appropriate consequence for its mistake, and whether compensation is appropriate for those misled by the incorrect announcement. NZX Discipline will also need to determine whether all parties involved in the actual trading met Orderly Market and Good Broking Practice requirements. These concepts tend to have some flexibility in their interpretation, meaning the conclusion is not necessarily straightforward.

The time delay between the execution of the trades and the correction should be cause for embarrassment for all involved. This delay has meant that the trades cannot simply be cancelled, as settlement has long since occurred. The incorrect announcement in question is a single page document.

The second debacle I refer to was in relation to New Talisman Gold Mines, formerly known as Heritage Gold.

New Talisman is currently under investigation by the Financial Markets Authority following a complaint from a member of the public, regarding its Chief Executive Matt Hill.

Hill, under various pseudonyms, is believed to have used online chat forums to promote New Talisman shares among retail investors. Concerns are now being raised as to whether he had breached ongoing disclosure requirements while using the forum.

The FMA investigation will assess the veracity of the claims. If true, shareholders would be justifiably baffled that their CEO chose to spend his time in this way. There are, surely, better ways to engage with investors than using a cloak of anonymity to promote the company to other anonymous investors and traders.

Small capitalisation companies can be exciting for traders, with increased leverage and volatility bringing opportunities for quick profits (and quick losses). However, investment decisions should always be made with solid research and appropriate regard to risk. Unadvised traders using low-cost trading platforms can expect fair access to correct information, but ultimately must recall the principle of Caveat Emptor – Buyer Beware.

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Chris Lee writes:

My one-hour seminars will feature the modern, superior technology wonders known as flip charts, but these will comprise headlines only.

We will display thirty pages of various statistics which seminar attendants are welcome to photograph. These will also be displayed on our client website pages.

In addition, David will record a video of the presentation. The YouTube link for this will be on our website.

The seminar details are below. Please note that only the afternoon seminars in Wellington and Nelson are still open for registrations. All of the other venues are open, but please let us know if you would like to attend.

Kapiti – Southwards Car Museum

Tuesday, August 4at 11am

Wellington – Wilton Bowling Club

Wednesday, August 5 at 2pm

Christchurch – Burnside Bowling Club

Monday, August 10at 11.30am

Timaru – Sopheze on the Bay, Caroline Bay

Wednesday, August 12 at 1.30pm

Albany – Fairway Events Centre, 17a Silverfield, Wairau Valley (beside Takapuna Golf Course)

Tuesday, August 18at 11:30am

Auckland – Mt Richmond Hotel, Mt Wellington Highway

Wednesday, August 19 at 11.30am

Tauranga – Hotel Armitage

Monday, August 24 at 11.30am

Palmerston North – Distinction Coachman

Monday, August 31 at 11.30am

Napier – Napier Sailing Club, Ahuriri

Tuesday, September 1 at 1.30pm

Nelson - Beachcomber Motel, Tahunanui

Monday, September 7at 2pm



Edward will be in the Wairarapa on 6 August and Napier 13 August.

Kevin will be in Ashburton on 19 August.

Please let us know if you would like an appointment in your town.

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock, 23 July, 2020

Johnny Lee writes:

REPORTING season is almost upon us, and it is shaping up to be one of the most important seasons in many years.

August will bring with it a flurry of full-year reports, giving investors, analysts, brokers and advisers an opportunity to peek behind the curtain and determine the true state of affairs of most of our listed companies. The likes of Spark, Contact, Fletcher Building, Heartland, EBOS, Scales and Sky TV are all due to report to market. Others, including Ryman, Mainfreight and ANZ, report later in the year.

Continuous disclosure requirements should prevent any large-scale surprises.  Investors should have confidence that, if a company's situation had deteriorated over the past few months, the company would have updated the market to ensure its shareholders were fully informed, where possible.

Many have done this. The Warehouse, for example, has been particularly diligent in updating the market as conditions evolved, and deserves plaudits for treating its shareholders respectfully during what is no doubt a challenging time for the sector. Shareholders may not like bad news, but being kept in the dark is far worse.

Conversely, Heartland Bank's most recent update of substance was in March of this year. It stated that the company forecasts a result ''in line with the original NPAT forecast'' and concluded with the suggestion that ''Heartland will . . . provide further market updates if and when required''.  No update has occurred, leaving investors no choice but to assume that the situation has not materially changed.

Next month will give a definitive answer. If the forecasts are accurate, Heartland shareholders should and will be delighted.

There are exceptions to the requirement to disclose.  Companies do not (and should not) disclose information that is speculative or subject to confidentiality.  Equally, companies are not required to disclose information that would have no material impact on a share price.

Reporting season will also bring more clarity around whether companies are seeing enough stability to reintroduce long-term forecasting and dividends. They will be keenly aware of their shareholders' needs, many of whom rely on these distributions to supplement their income.

The investment industry is acutely aware that a large number of investors are ''sitting on the side-lines'', waiting for greater clarity before committing further to capital markets.  These are unprecedented times, and the behaviour of some of our larger trading partners does not inspire confidence.

Reporting season will give companies an opportunity to re-engage with its shareholders, giving them an insight into its current operating environment, and the path moving forward.

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ONE growing trend, both here and abroad, is the increasing relevance of retail shareholders to stock price movements.

The huge growth in young investors, utilising leverage supplied by brokers eager to disrupt and willing to endure long-term losses in exchange for market share and client information, is having an unusual impact on market volatility.

Typically, investors into share markets analyse share price performance, economic conditions and their impact on sectors, capital and people management and dozens of other factors before making the decision to invest in a company.

If a company has filed for bankruptcy and publicly warned traders that its company could be ''worthless'', most investors would at least hesitate before leaping over each other to buy a share of the company's fortunes.

When Hertz Corporation, the American-listed rental car company, filed for bankruptcy in the wake of a massive reduction in tourism and associated car rentals, most assumed the story was over, at least until such a time that its fortunes could be resurrected.  Its largest shareholder, billionaire Carl Icahn, dumped his stock at below a dollar for a huge loss, accepting that its future was less than rosy.

Retail investors did not agree. Tens of thousands of new shareholders purchased shares for a few dimes and then drove the price up to $5 a share.  At one point, more than a hundred thousand retail investors had bought in, either to sell them to the next mug, or genuinely believing that a car rental company, in bankruptcy, during a global pandemic, had a future.

Hertz, almost immediately, tried to raise additional capital to repay its bondholders and other creditors.  If shareholders were willing to pay $5 a share in a company that the company itself believes could ''ultimately be worthless'', they would surely pay half that to recapitalise the company.

The federal regulator quickly intervened, and the capital raising was postponed. The share price remains above a dollar, and punters are still holding the stock. The bonds are worth barely more than thirty cents in the dollar, suggesting the shares will soon be worthless.

Back in New Zealand, the willingness of young people to dive into more speculative investments has been visible for some time. The likes of crowdfunding have enjoyed this trend, and some of our smaller, yet very active, listed companies have no major institutional shareholdings whatsoever.

The success stories from these companies are few and far between.  Long-term investors in solid, dividend-paying blue-chip companies have seen ample rewards over the past decade.

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David Colman writes:

HAVING debt used to be a burden that incorporated paying back the principal with interest but it seems the interest component has been reduced to nothing.  It is as if the global banking system is adopting the Islamic banking approach of charging no interest without employing the religious scrutiny and profit sharing involved in the Islamic system.

The traditional approach of putting savings into savings accounts seems ancient but as recently as 2008 savings accounts were offering interest rates of about 4.0%. That rate of 4.0% is higher than bond yields today.

Also in 2008, 10-year New Zealand Government bonds yielded about 6% per annum and had been no lower than 5% for 30 years. In fact before this century they had been much higher (12% in 1990 for example).  Many New Zealanders planned to use savings accounts and term deposits to supplement their pensions, assuming interest rates would reflect the averages of above 5% that they had seen for much of their lives.

As we have seen since the Global Financial Crisis, quantitative easing is erasing any chance of interest rates returning to higher levels without a dramatic, and I imagine painful, about-turn.

Business failure has been allowed in the past as a natural part of the economic cycle but has become unpalatable to the politically minded.

How long can an economy be supported by governments and central banks that will do everything they can in their efforts to avoid failure?

The global economy continues to be haunted by the events that transpired during the GFC and perhaps more importantly the events unfolding this year.

Economic growth has become economic decline this year as a result of the various different ways the nations of the world have reacted to Covid-19. In the end the health crisis may be a small event in a much greater economic story, just as the GFC, the dotcom bubble and the 87 crash have become.

Those events affected large parts of the planet in a generally negative way but many other prolonged events in the past have had far more influence on our present standard of living and the distribution of wealth.

Economic miracles have happened before, with major examples being industrial revolutions which increased productivity by massive amounts and with it greater global prosperity. Before the 1700s there was very little global GDP growth and although population increased slowly GDP per capita was reasonably stable for hundreds of years. There was no expectation of, or assumed, long-term GDP growth.

In a way, what we see as severe poverty today was normal for most and did not change for a long time before a momentous change in the late 1700s.

Rapid change began in the 1780s when England led enormous growth, shared with a select few nations at first, with the rise of steam powered mechanisation which increased production in textiles, advanced transportation with railways, and fostered many other innovations.

In the mid to late 1800s the USA led the second industrial revolution including, but certainly not limited to, mass production, standardisation, fertiliser, gasoline engines, and electricity. 

The USA also led the way in a third industrial revolution which, with the development of semiconductors, introduced computers, changing a previously analog world into the digital one with which we are familiar today.

We live in a world where growth has been accepted as the norm but I argue much growth has been more a result of the spread of each of the unrepeatable advances made during the industrial revolutions.  Each advance has brought economic growth but as the benefits become ubiquitous growth must come from elsewhere as the influence of each step change for growth fades.

The step changes of the past have elevated human life to levels far beyond life before the 1700s, but there may be a limit to the number of such influential changes in human existence and the assumed economic growth that comes with it.  Each change rules out that change being able to occur again.

A fourth industrial revolution is said by many to have started.  Just as the second and third revolutions were extensions of the phases preceding them, a fourth industrial revolution is described as an extension of the third but evolving at greater speed. It includes nanotechnology, biotechnology, artificial intelligence, Internet of Things, quantum computers, self-driving vehicles, among other initiatives. To describe it, in a Darwinian way, it may be less of a revolution and more of an evolution of technology.

It is easy to be sceptical of further technological advancement. In some ways it feels like inventing humans out of existence, as it would have felt to Luddites in the early 1800s as machinery replaced human toil.

In reality we have been accepting ever greater digital convenience all our lives. Never have we been able to do so much, or so little, with just a device you hold in your hand.

Covid-19 continues to be a terrible disease and is causing major economic problems. A miraculous economic push from a new industrial revolution similar to the past industrial revolutions would be more than welcome.

I would encourage investors to consider if they have sufficient exposure to technology within their portfolios.

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Chris Lee writes:

IN last week's Taking Stock item on the grim, perhaps Soviet-like future facing Air New Zealand (government dictating strategy), I did not adequately record the transition from virtual bankruptcy to state ownership, nor give enough credit to Ralph Norris for his role in the transition.

Norris has not been in touch with me for years but, on review, I believe I should acknowledge that he played an important role in restoring Air New Zealand after Brierley had wrecked the prospects of the company.

When Brierley took control, installing Selwyn Cushing as chairman of Air NZ, the company sought to ramp up value by taking over Ansett, rather than upgrading Air NZ. Brierley knew nothing about running an airline and figured that takeovers and financial engineering were the means by which value could be added.

Ansett's purchase was poorly researched, its unions and xenophobic influences driving Ansett to ruin and destroying Air NZ in the process, leaving an ugly mess.

The academic and uncommercial Minister of Finance, Michael Cullen, resisted a rescue plan from Singapore Airlines, seemed happy with a plan to sell to Qantas, but eventually settled for a NZ government bail-out, the last credible solution to stave off collapse.

The new Air NZ chairman John Palmer then set about restoring Air NZ, with Norris as his chief executive, investing in better and new aircraft technology, like the new check-in terminals that replaced counter staff.

Norris is entitled to regard his role in salvaging the company as his finest corporate moment, before passing on to Rob Fyfe, who turned a better bus service into a decorated small international airline, with cheerful cabin crew, comfortable check-in procedures and commendable records of punctuality. Fyfe's contribution was presumably not limited to his excellent public relations, an area in which Air NZ had underperformed, its communication with travellers being appalling prior to Fyfe, its timeliness also poor during the pre-Fyfe days.

When Fyfe left, Christopher Luxon pushed on, ultimately introducing bonuses for all staff, as the airline celebrated its rising status and its international awards. His contribution had real substance and probably surpassed Fyfe's by some distance. He made the tough decisions with skill.

Covid-19 has stripped away the gloss of international travel and left Air NZ the task of downsizing to a diminishing domestic market.

To me, the future looks like the distant past – a largely domestic airline, its international ambition framed by the reality that this year international travel, according to the industry, will involve about 50% of the numbers of last year, the NZ numbers much lower as we focus on protecting our border from the virus.

Internationally, hundreds of aircraft - 35 Boeing 747s in Britain alone – are not wanted in a market that appears glum, perhaps numbed by the dual threat of the pandemic and the belligerence of those who oppose air travel. One wonders how much time will pass before the assessed environmental cost of air travel is added to every ticket price.

Air NZ will no doubt dominate domestic air transport, as NAC did sixty years ago. Profits and dividends might be at modest levels. The days of $400 million profits and hearty dividends seem, like the days of Concorde, unlikely to be repeated.

One must hope that the airline industry is not dragged down by international opportunists, like Richard Branson, whose focus would be exploitative rather than aid the survival process.

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OUR seminars are now all but finalised. 

Please check dates and times, as some have changed.

Any client or investor wishing to attend is asked to email us with their numbers attending. There is no charge. We need to know approximate numbers to ensure we have an appropriate-sized venue.

Kapiti – Southwards Car Museum

Tuesday, August 4at 11am

Wellington – Wilton Bowling Club

Wednesday, August 5 at 11.30am

Christchurch – Burnside Bowling Club

Monday, August 10at 11.30am

Timaru – Sopheze on the Bay, Caroline Bay

Wednesday, August 12 at 1.30pm

Albany – PLEASE NOTE CHANGE OF VENUE – Fairway Events Centre, 17a Silverfield, Wairau Valley (beside Takapuna Golf Course)

Tuesday, August 18at 11:30am

Auckland – Mt Richmond Hotel, Mt Wellington Highway

Wednesday, August 19 at 11.30am

Tauranga – Hotel Armitage

Monday, August 24 at 11.30am

Palmerston North – Distinction Coachman

Monday, August 31 at 11.30am

Napier – Napier Sailing Club, Ahuriri

Tuesday, September 1 at 1.30pm

Nelson - Beachcomber Motel, Tahunanui

Monday, September 7at 11.30am

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Edward will be in the Wairarapa on 6 August and Napier 13 August.

Kevin will be in Ashburton on 19 August.

Please let us know now if you would like an appointment in your town.

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 16 July 2020

THE details and timing of Air New Zealand's capital raising may not yet be known or digested but the outcome of the raising should be obvious, even before it proceeds.

The result would and should be that the Crown ends up owning most, perhaps in effect, all, of the company that has been a victim of several concurring events, and is now doomed to mediocrity.

It lost its experienced, zealous, and highly successful chief executive Christopher Luxon, after he and his predecessor Rob Fyfe had restored a company that had been in tatters after being governed by the likes of Brierley, and later Ralph Norris, leading to an inglorious collapse, rescued by the Labour government.

Any skill Brierley had was in asset trading and arbitrage, not in managing. Norris was the head of CBA in Australia during a period that led to the Australian banking industry enquiry, and had been chairman of both Fletcher Building and Air New Zealand.

Norris does not have his name on a chair in any business hall of fame that might reside in my imagination. (Nor would any Brierley executive or past director.)

Fyfe brought empathy and intuitiveness to Air New Zealand, lifting its ambitions to achieve high standards, displayed on the world stage. Luxon, Fyfe's chief financial officer, took over after Fyfe's own life had become cluttered.

Luxon would by some margin be the most successful and admired business leader ever to lead the National Party if that were to happen. His time in Air NZ was notable for the many international gongs Air NZ was awarded, as a small airline with a culture and standards matched by very few. He is a genuine business builder and leader, not a smiling sales manager.

When Luxon retired, the highly-likeable and intelligent New Zealander Greg Foran returned from the USA, having led a huge retailing company there, a position also far more distinguished than sales management.

His knowledge of the airline sector was intended to be acquired on the job in 2020 and 2021, rounding out his proven excellence as an executive. He may well have been a great Air NZ leader, had he been given some space to learn the air travel secrets.

He arrived days before the airline was devastated by Covid.

His first tasks included farewell parties for several of his best and most experienced air industry specialists. They saw the future. They left.

Effectively Foran was the new All Black captain asked to lead a team of novices all complaining that the South African waitress had fed them bad oysters.

I have no criticism of Foran, nor would I hold him accountable for what must now be seen as the destruction of a fine airline, paying the penalty for an ownership structure that leaves the doors open to political drongos taking over.

The government commercial interference in dictating business tactics, such as cancelling flights for returning Kiwis, was prompted by other government failures, such as forgetting to contract sufficient accommodation for quarantined travelers.

Air New Zealand, with a new CEO, stripped of experienced executives, forced to negotiate the swirling hurricanes delivered by border closures, and dictated by well-meaning but gauche politicians, will not be restored.

Foran himself might have a photo of NAC and TEAL on his desk.

The new Air NZ will resemble NAC with a TEAL tinge, without the flying boats.

It will also have to deal with a growing, angry crowd, demanding that Air NZ and all airlines cease to commoditise travel and prioritise the planet, making air travel and cruise ships anti-social options for the rich. In times of misery their voice becomes powerful.

Foran has acted logically, laying off pilots and cabin crew.

Pilots are invited to join a furloughed group, recallable in 2024, rewarded until then with free ''staff'' travel, but no pay.

Cabin crew are also furloughed, each one numbered to join a queue who would receive an invitation in 2024, should Air NZ be recruiting cabin crew by then.

Given all of this, why would anyone want to join the government by taking up Air NZ rights to prolong a ''bus'' service that has no show of achieving a scale that produces surpluses and dividends, yet has the obligation to maintain the highest standards of safety, and the further obligation to meet the quality expectations of its regular users?

Furthermore, airlines will have many surplus aircraft that might need to be moved on by a discounting process that enables someone like Evan Wilson, at Kiwi Air, to buy good aircraft for very low prices, enabling such an opportunist to set up a main-trunk airline service that even further forages in Air New Zealand's pantry.

Air New Zealand's shares are not likely to justify any meaningful price for years, perhaps for decades, maybe for ever, its international landing rights being handed back, its inbound tourist numbers unlikely to reach 2019 figures, its domestic usage challenged by the climate change clamour.

Jarden research suggests the shares are worth at most 80 cents, the figure falling by the day as the border reopening is further delayed by social insistence.

A capital raising at 50 cents would be supported by the Crown and perhaps by those romanticists who foresee a return to the 2019 tourism environment.

In February the shares sold at around $3, anticipating a thickness of cream that came with 300,000 inbound tourists arriving each month.

In July the share price is set by nouveau punters. It is set at a level today that in theory gives Air NZ a significant percentage of the various sharemarket indices, meaning index funds must buy or hold, to meet the promise of replicating the index.

A capital raising, properly priced at say, 30-50 cents, might lead to a share price fall to a similar range of prices, resulting in a major lowering of its index relevance, in turn leading to index managers selling, in turn leading to yet more price falls, unless the Crown behaves with even less concern for value.

We need an air-based service, notwithstanding the burning of kerosene.

It might just have to be subsidised every year, as are all other public transport services in a small country no longer boosted by millions of tourists.

Perhaps we might conclude that Air New Zealand has had its best years, the victim of what might now be a flawed plan for NZ to put economic prosperity into the fickle hands of peripatetic foreigners.

International tourism is unlikely to fuel a restoration of Air New Zealand's highly successful model, built in the Fyfe/Luxon era.

_ _ _ _ _ _ _ _ _ _

IT has been a refrain for years but I now hear more people humming a tune of joy in thanks to our judges who preside over commercial misdeeds.

Many, including me, believe that if the laws, even those so wilfully mis-drafted as the Insolvency Practitioners Act, were constantly applied to commercial chicanery and misdeeds, then NZ might justify its status as a country with low levels of corruption.

Sadly, confidential out of court settlements, pragmatic and sometimes financially-beneficial to the injured parties, allow the errant parties to escape any consequence other than a money hand-out, the money usually supplied by other people, often insurance companies. The cases never get to court.

Imagine if we could murder the neighbour who destroys one's peace and quiet, and then escape the court by ''settling'' with the murdered person's family, with a satchel full of fivers.

One of the ugly commercial misdeeds, performed routinely, probably every day, has in the last fortnight been given daylight by the courts.

Every New Zealander should be cheering.

First a High Court Judge ruled that a private liquidator had grossly padded the bill and ruled that the liquidator must reduce the bill by around a third.

The liquidator was unknown (to me) but was playing the normal liquidator game of claiming excessively, thus depleting the money available to the pool of creditors.

A week later, another High Court Judge made a similar ruling but, importantly, this was not a misbehaviour of some private liquidator but involved Deloittes, a member of what the accounting firms, somewhat pretentiously, self-describe as The Big Four.

The other members of this dubious foundation club, better known as the Old Boys Network, are KPMG, Ernst & Young and PricewaterhouseCoopers, a group that so routinely over-charges that, like many law firms, it probably no longer realises the thinness of the line between over-charging and theft.

In Deloittes' case, the judge instructed a liquidator to slash its excessive bill, but went further, actually defining the sort of practices that, in my view, make that fine line between over-charge and theft reduce to the breadth of the emperor's fine silk.

Deloittes' bill was based on each task in six-minute lots, and then applied the indefensibly high hourly rates on the number of six-minute lots.

Opening the mail was measured in six minute lots, and charged out at silly rates.

Discussing a subject with a colleague was a six-minute charge-out. Answering an email or a phone call was a six-minute charge-out. Hourly rates are charged in hundreds of dollars. Mailer-openers are paid in low tens of dollars per hour.

The practice of padding legal, accounting and even trustee bills has long infuriated real business people, whose costs and prices have to be validated by customers CHOOSING to buy, not watching deductions made at absurd levels from money held by the ''professional''.

In my book, The Billion Dollar Bonfire, I recorded how some mindless ''professionals'' would charge $10 per page to scan or photocopy legal papers, a pricing ''tax'' that confiscates client money.

One lawyer rather cheekily responded to my book's discussion by noting that he charged only $3 per page, recording that if I gave him the name of the $10 per page law firm, he would write to them, offering to do the work and let them arbitrage his service.

Insolvency practitioners should be amongst the most disliked market professionals, given that by definition they are handling disasters, and given very few, Stephen Tubbs being a rare exception, have the street wisdom and business skills to discover the real value of the goods they flog off. Nor do they have the courage to sue other OBN participants.

The gutless laws, rewritten by the Ministry of Business, Innovation and Employment and re-enacted by Parliament last year, are just dreadful, serving the interests of the Old Boys Network and crassly discounting the rights of unsecured creditors and shareholders.

At a recent meeting with a just-retired chartered accountant, I heard of how receivers are just grossly overpaid servants of the banks, unofficial liquidators playing a game in which banks and liquidators find a way to scratch each other's backs while throwing away other people's money, by selling assets to ''selected'' buyers.

My book highlighted how the South Canterbury Finance receiver, McGrathNicol, paid itself and others $54 million in two years, while discounting assets by an amount that by 2019 was quantifiable at a billion dollars.

The tax payers paid this grossly exorbitant charge

McGrathNicol's receivership was undoubtedly the most incompetent and absurdly expensive receivership I have ever observed. Sadly, there has been no formal action taken against the firm.

For all these reasons I celebrated last week when I read that High Court Judges in recent days have processed complaints, exposed unacceptable behaviour, ruled that liquidators must reduce their bills and shown us that at least our courts, when consulted, are capable of enforcing higher standards.

It is a disgrace that MBIE, our Parliament, the accounting firms, the bankers and the lawyers who helped rig the laws with the Insolvency Practitioners Act, are not guided by standards that fit graciously with community standards. The OBN has a smell as offensive as it did last year, and every other year. Does no-one care?

One wonders whether the laws will improve only when miscreants are personally liable for their misdeeds, and then defined as unfit or improper people to put in charge of other people's money.

_ _ _ _ _ _ _ _ _ _ _

WHEN I wrote recently about the important issues being litigated imminently as a result of litigation funding, I left aside the juicy issue of bank responsibility for fraudulent usage of bank accounts.

This matter arises because the victims of the mining fraudster David Ross are alleging that the ANZ wilfully allowed Ross to misuse investor money in ANZ bank accounts over which Ross had control.

In effect the debate will be whether the bank should oversee a trust account and intervene when it is used to fund the trading company (Ross's personal company).

A bank certainly can observe recipients of trust account cheques and has the ability to question and stop a payment of trust account money that clearly is improper – for example to buy a car, pay for boozy Friday lunch club bills, or pay Ross's rent.

Further, the bank knows that no trust account should ever be in overdraft. Such an occasion must be instantly put right and would red flag either an inadvertent error, awful inefficiency, or misdoings.

The Ross case has really serious implications for bankers for it asks them to intervene at the top of the cliff whereas for years banks have just responded at the bottom, appointing liquidators, knowing that any bank debt is routinely prioritised by any liquidator.  

In this case, the defendant is the ANZ, our biggest bank, and in recent years our worst-governed bank, in my opinion the bank most in need of a different chairman and a board comprising people with a focus on standards, culture, strategy and fastidious execution of strategy.

Perhaps the court case alleging historical negligence and misuse of bank accounts will be the catalyst for a new, more assertive board, led by someone with values and strategic skills suited to the task.

Sadly, I suspect the outcome of the proposed case will result in a ''confidential'' settlement, with huge disincentives for any media leaks on its quantum, the bank denying responsibility or wrong-doing, but settling because of its ''good citizenship'' instincts.

This type of response ensures the circumvention of the law with subsequent lack of enforcement of law and standards, and avoidance of the need for new law, based on a court ruling.

As was the case with the judge mentioned earlier, the judge who lashed Deloittes, the outcome should be newly-established law, public condemnation, and serious disruption to lazy, stupid corporate behaviour.

Real justice will occur when governors or executives who clearly fail in their duty of care are required to dip into their personal funds, wherever those funds may be hidden, and are struck off the list of people who are deemed to be suitable to be in charge of other people's money.

The responding bleat, that such harsh justice would discourage lawyers, politicians, and tired knights from accepting directorships roles, should draw a one-word response – diddums.

 _ _ _ _ _ _ _ _ _ _ _ _

OUR seminars are now all but finalised. Please check dates and times, as some have changed.

Any client or investor wishing to attend is asked to email us with their numbers attending. There is no charge. We need to know approximate numbers to ensure we have an appropriate-sized venue.

Kapiti – Southwards Car Museum – Tuesday, August 4at 11am

Wellington – Wilton Bowling Club – Wednesday, August 5 at 11.30am

Christchurch – Burnside Bowling Club – Monday, August 10at 11.30am

Timaru – Sopheze on the Bay, Caroline Bay – Wednesday, August 12 at 1.30pm

Albany – Albany Executive Motor Lodge, Corinthian Way – Tuesday, August 18at 11:30am

Auckland – Mt Richmond Hotel, Mt Wellington Highway – Wednesday, August 19 at 11.30am

Tauranga – Hotel Armitage - Monday, August 24 at 11.30am

Palmerston North – Distinction Coachman – Monday, August 31 at 11.30am

Napier – Napier Sailing Club, Ahuriri – Tuesday, September 1 at 1.30pm

Nelson - Beachcomber Motel, Tahunanui – Monday, September 7at 11.30am


David Colman will be in Palmerston North on July 22.

Edward will be in the Wairarapa on 6 August and Napier 13 August.

Kevin will be in Christchurch on 6 August and in Ashburton on 19 August.

Please let us know now if you would like an appointment in your town.


Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 9 July 2020

Johnny Lee writes:

THE growing divergence between the forecasts of major economists and the performance of share market indices is reaching levels never seen in recent memory.

The New Zealand share market is now only fractionally short of the record high achieved in February of this year. The Chinese and Japanese indices are close to these levels, while the United States struggles with sentiment changing almost daily.

On good days, buyers seem relaxed that the cushion provided by the Federal Reserve ''money printer'' will underpin market strength. Buyers are reassured that the virus has a limited time span. Buyers are confident that the main constituents of the Dow Jones index, being the likes of Apple, Microsoft, Coca-Cola and Disney, will escape the impacts of Covid-19 relatively unscathed.

During the bad days, the grim reality of the virus takes precedence. In the United States, the three most populous states (California, Texas and Florida) are attempting to re-introduce lockdown restrictions after failed attempts to lift lockdowns, which is being met with resistance from some of their citizens. Small businesses are closing as people choose to stay at home. The death rate from the virus continues to climb.

Here in New Zealand, the major concerns economists have surround the industries reliant on freedom of movement. Tourism and education are seeing large drops in income, with no clear picture as to the timeframe that these restrictions are lifted. Recent developments from Melbourne have not aided the cause. Sadly, our economic fortunes now seem tied to the ability of other governments to control the virus. The United States is one of our largest tourism markets and appears to be in no mood to implement measures similar to what we chose to endure to control the outbreak.

I expect there to be fierce competition domestically from national tourism hotspots. The Hawke's Bay region, for example, seems to be bombarding advertisers with pleas to visit the area. In Queenstown, the ski season has begun and will almost exclusively be occupied by New Zealanders. One hopes the operators of the ski fields will be clever enough to adjust their prices to maximise their revenue.

Nevertheless, a country of five million people cannot practicably replace the four million visitors we receive each year. Failures are inevitable, especially in those companies that have invested heavily for short-term growth.

Supporting industries, such as hospitality, will continue to rely on Government subsidies to make ends meet. Those in tourism hotspots will struggle, as workers leave and belts are tightened. There will be some pressure for the Government to extend wage subsidies if the situation does not dramatically improve – and equal scrutiny over the enormous debt being imposed on future generations to do so.

Despite all this, our sharemarket continues to perform strongly, with the index returning to pre-Covid levels. Our largest company, Fisher and Paykel Healthcare, has reported a record result. Our next largest, A2 Milk, is anticipating an uplift in revenue for the year.

The flow-on effect is one of the larger risks we currently face. If businesses are forced to close and workers lose their jobs, as we are seeing abroad, Government spending on benefits will rise, tax revenue will fall, and consumer spending will fall.

The impact on our education sector will be equally relevant. Currently, fee-paying foreign students help subsidise the education of our own system, a mutually beneficial relationship that is also commonplace overseas. However, global lockdowns have put those relationships in jeopardy, and put a strain on the finances of our largest tertiary educators.

New Zealand has, so far, experienced a far better health outcome than many of our peers in the developed world. The next step will be to position our economy in the right direction to recover from the challenges we now face.

As investors, we need to ensure that the businesses we own are fit for purpose in this new environment and have long-term, sustainable models and a strong balance sheet to support them.

_ _ _ _ _ _ _ _ _ _

ANOTHER reason our share market has seemed to escape the outcomes affecting our broader economy is the relative ease with which the market has facilitated capital raisings, giving companies extra capital to ''weather the storm''.

We have seen capital raisings from a number of our largest and most well-known companies, including Auckland Airport, Infratil, Kathmandu, Sky City, Z Energy and Sky Network Television.

These capital raisings have been underwritten, effectively guaranteeing the money is raised and the company's short-term survival assured. Retail investors have been largely supportive, with several of the offers closing oversubscribed.

Companies, wary of an economic slowdown, were able to formally approach shareholders for additional capital in a straightforward, transparent and efficient manner. Hundreds of millions have been raised in a matter of months, giving companies the opportunity to endure what is likely to be a protracted period of slowing economic fortunes.

The success of these capital raisings indicates that there remains a deep pool of capital for companies to tap. Shareholders are willing to further support good companies, especially those repaying debt and strengthening the company as a whole.

Outside of the listed sharemarket, private or unlisted companies must approach their own shareholders for capital, or borrow from banks that are increasingly wary of lending to certain sectors. Some select companies have even been successful in receiving funding from the taxpayer.

This is an excellent demonstration of one of the key benefits of a public listing – access to capital – and the benefit of treating retail shareholders and the investment community with respect. Shareholders with goodwill towards the companies they own are more likely to assist when times get difficult.

The share purchase plans have been largely successful for those who took part, with Kathmandu and Auckland Airport having staged recoveries in their share price as New Zealand negotiated its way around Covid-19.

The Sky City and Infratil placements have now concluded, and shareholders will be receiving documentation, and any refund for excess applications, in due course.

_ _ _ _ _ _ _ _ _ _

THE Metlifecare takeover saga has delivered yet another twist.

As a recap, in late November last year, the company received an indication that Swedish group EQT, via the investment vehicle Asia Pacific Village Group, would purchase the entire company at a price of $6.50 a share. Metlifecare responded with its own valuation of the company, ''in excess of $8.00 per share''. Eventually, the bid was lifted to $7.00 per share, and the board unanimously recommended shareholders accept the offer.

The share price, obviously, responded positively and shot up to above $6.90. Many shareholders chose to sell, taking risk off the table in exchange for the modest discount.

Following the outbreak of Covid-19, APVG attempted to withdraw its offer, citing its Material Adverse Change clause. This prompted Metlifecare to pursue legal action, demanding that the offer proceed as agreed. Letters were exchanged. Lawyers were paid. It appeared that, if shareholders agreed, a legal showdown was inevitable.

Now APVG has returned, at a revised price of $6.00 per share. The offer is non-binding and only indicative, but seems likely to proceed to a formal offer for shareholders to consider. It has also offered to rescind the Material Adverse Change condition, meaning that shareholders can have slightly more confidence that this offer will not be subject to another last-minute cancellation.

The share price has climbed sharply since this news to return to around $5.80. Volume has also risen, as shareholders tire of the rollercoaster and take the certainty offered by an on-market trade.

Metlifecare's next step will be to approach major shareholders and gauge interest in either pursuing legal action, in an attempt to enforce the original offer, or pursue the new offer of $6.00. The latter seems to be favoured at this point.

Shareholders of Metlifecare can choose to simply wait for the Board's decision. They can also choose to sell their shares on the market, accepting a discounted price in exchange for certainty and expedition of payment.

The entire scenario serves to illustrate why shareholders may choose to sell shares, at a discounted price, when subject to a takeover. Augusta shareholders have also learned this lesson this year.

Metlifecare will update the market in due course.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _

RIO Tinto has announced it intends to close the Tiwai Point aluminium smelter and has decided to terminate its contract with Meridian Energy from August 2021. Up to 1,000 Southlanders will lose their jobs and an estimated 1,600 other jobs around Southland are said to be impacted.

The share price of our electricity companies fell heavily after the announcement, with Meridian and Contact falling almost 20% on open, while the likes of Mercury and Genesis fell about 10%. After the initial reaction, the shares began to rebound sharply. Uncertainty reigns.

The potential closure of the plant has been well forewarned. Rio Tinto indicated its most recent review of the plant's viability last year, warning that market conditions had eroded the economics of operating an aluminium smelter in our corner of the world. Significant concessions offered by our electricity providers have been rebuffed, and political leaders have sent mixed messages in terms of their role in the debate.

Assuming this is the final twist in the story, the impacts will be felt around the country.

Share prices and Government revenue will likely fall, at least in the short term. Kiwisaver balances will fall. New electricity generation will be postponed, at least until demand begins to catch up to the new supply to our grid. Carbon emissions, presumably, will fall.

The impact on consumers is not yet clear. The sector has warned that transmission costs, currently subsidised by Rio Tinto, will spike after the closure. One imagines that the oversupply of electricity would drive the price down, at least in the South Island.

Operators of higher-cost electricity will be nervous about their short-term prospects, as this cheap electricity floods the market. I note in Contact’s response to the closure that the company is considering closing the thermal station in Stratford, and deferring development of the Tauhara geothermal plant east of Taupo.

The electricity sector has traditionally been one of the most stable and predictable earners for those investing for dividends and forms a large part of many investors’ portfolios. This is unlikely to change long term, but investors can expect some short-term volatility as each company determines its next step in the face of the smelter closure.

_ _ _ _ _ _ _ _ _ _ _ _ _ _

Chris Lee writes:

IT seems likely that the widely expected capital raising from Air New Zealand will be announced soon.

The hydraulicked share price should be no indication of the logical strike price for the issue.

The Crown is in charge of the airline today, and with all its commercial inexperience on display will no doubt set the price, and effectively underwrite the issue. It is fortunate it has a kind and highly regarded CEO in Greg Foran. He will be on an impossibly steep learning curve.

The capital raise MUST be set at a price of less than 50 cents to reflect the true value of the business. At any higher price, I would expect the only serious subscriber to be the Crown, a sensible outcome given its singular objective of ensuring New Zealand has a ''bus service'' for domestic travellers.

Next week’s Taking Stock will expand on this view.

_ _ _ _ _ _ _ _ _ _ _ _ _ _



David Colman will be in Palmerston North on July 22.

Edward will be in Auckland (Remuera) on July 27 and Albany on July 28.


Kevin will be in Christchurch on 6 August and in Ashburton on 19 August.

Please let us know now if you would like an appointment in your town.

Planning for the seminars we will hold in ten cities is now taking shape, with some venues confirmed. We urge clients to contact us now if they plan to attend.

The current status is:

Kapiti – Southwards Car Museum – Tuesday, August 4 at 11am

Wellington – Wilton Bowling Club – Wednesday, August 5 at 11.30am

Christchurch – Burnside Bowling Club – Monday, August 10at 11.30am

Timaru – Sopheze on the Bay, Caroline Bay – Wednesday, August 12 at 1.30pm

Albany – Albany Executive Motor Lodge, Corinthian Way – Monday August 17at 11:30am

Auckland - TBA – Tuesday, August 18 TBA

Tauranga – Hotel Armitage - Monday, August 24 at 11am

Palmerston North – Distinction Coachman – Monday, August 31 at 11.30am

Nelson, Beachcomber Motel, Tahunanui – Monday, September 7at 11am

Napier – TBA – Tuesday, September 15th TBA

Please note: at each venue we will put aside time for any guest to meet individually after the seminar. We will begin now to confirm times for those who wish to book a time.

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 2 July 2020

WHEN Covid-19 began its gallop around the world, the risk of severe illness or death to random people naturally spooked financial markets.

Nobody had any idea how many people would be lost to the virus.

I was privileged to be included in the readership of a pandemic plan drawn up in New Zealand by a skilled group that included a thoughtful client.

It was clear that the virus would come in waves, the first ripple of which lapped against our shores while real waves were crashing onto the sea walls in New York, and now the beaches of Rio in Brazil.

The risk was that in NZ tens of thousands might die, with much of this figure made up of losses in rest homes or care facilities where older people live together. Fear of the unknown rampaged.

Businesses were entitled to react vigorously.

None had any idea whether long-term consumer habits would change permanently, nor whether the country could recover gracefully from the massive costs of this unexpected interruption.

Given all this uncertainty, it was logical that business leaders wanted relief from the responsibility of signalling any imminent changes in business performance.

How could a shopping mall owner calculate the amount of rent he would collect next year when he had no basis on which to forecast the length of lockdown, the ability of his tenants to survive, the permanence of change in shopping habits, or even the reduced number of potential shoppers, reduced by premature deaths as well as by the border closures to tourists?

Clearly it would have been unfair to penalise public company directors who were responsible for continuously disclosing business plans and projections.

So the laws were sensibly adjusted, waiving certain responsibilities for a short time.

Note: this waiver was an emergency concession for a short time only.

The waiver came at a time when continuous disclosure was already an area of growing concern, lined to weak governance in NZ at all levels.

Disclosure is vital for investors. Without it, insider trading would be inevitable.

Share prices change every minute in the trading day, as investors react to changes in business conditions and to company guidance.

If a board knows that its business is facing a problem that has not surfaced in public, then investors would be disadvantaged unless the board ensured the total market was informed - simultaneously.

We need symmetry of information.

Complicating matters is the miserably low standards of governance in New Zealand; Fletchers and Fonterra have revealed that incompetence.

The best-informed people would privately calculate that any board with two directors that have a deep knowledge of the business, and have the appropriate skills to set strategies, would be better placed than most.

A contributing factor to this paucity of talent is the process of democracy. Why would a competent busy person agree to work with others with whom he/she may have little in common, disparate people joined at board level by the fickleness of an electorate that is largely guessing, often influenced by the slickest pen portraits sent out with voting papers?

I imagine the best New Zealand leaders would much prefer to head a group of people with whom they can work, rather than a group selected by those who vote on the blind.

Democracy may be the best of the options, but it is an imperfect process.

It often delivers the people most desperate to win votes rather than the people best equipped to achieve the optimal outcome.

Think parliament!

While we grapple with issues like diversity – gender, ethnicity, age etc – we tend to ignore the much more significant subjects of competence, process, and accountability.

So Covid brought relief to directors for a few months, enabling our largely inept public company directors to avoid accountability, the law temporarily waiving the responsibility of continuous disclosure.

Just as Covid-19 can return quickly, so can the repercussions of such a waiver.

Currently investors seek the protection of more assertive regulators, expecting the Financial Markets Authority, the NZX, and the Reserve Bank to display their biceps when governance standards are not met.

As I have often opined, the regulators fail us when they do not maintain the safety fence at the top of the cliff, which is founded on a basis of only ''fit and proper'' people being allowed to accept directorships or key executive roles in sensitive companies, where public money is at risk.

Currently, the regulators seem fixated on the fear that if they barred from directorship as a dubious character, the High Court would hear an appeal and would castigate the regulator for denying the dubious character the right to redeem himself.

So the fence at the top of the cliff comprises some rope laid on the ground, but it is not attached to fence posts, and is hopelessly ineffective as a barrier. Only the most fastidious respect its intention.

That leads to the bottom of the cliff.

In recent years we have developed some useful incentives to deter lazy and incompetent directors, by enabling litigation funders to arrange class actions against those who want the privileges but ignore the responsibilities of governance.

Litigation funders use a model that enables victims to share any awards but not be responsible for paying for the action. If regulators fail us, the litigation funders have a model to repair that failure.

They organise class actions when they believe that some party – usually the directors – has failed to meet legally-required standards, often targeting directors whose decision-making thoroughness, or their openness about imminent, inevitable failures, have been weak.

These funders have come to observe that our banks, so critical to a functioning economy, are amongst the worst-governed entities, bank directorship being the typical reward for those who seek status, rather than seek a relevant outlet for their skills.

It is not entirely a joke when a close observer of boards notes that knights and dames are often a sign that shareholders prefer status to relevant skills or intellect.

As a group, they have included many lightweights, all smiles, full of media training, but with the substance of jellyfish.

(That is not to say that every knight or dame is by definition both dim and a shallow status-seeker, but it is possible to posit that very few such people have ever proved to be people who focus on detail and on their liability to commoners, who make up a share registry.)

Well, surprise, surprise, we now have an ugly war waging, with many directors seeking to have the temporary relief on continuous disclosure obligations converted into permanent, more relaxed, law.

The Institute of Directors (whose definition of aptitude tests would look nothing like the test I would devise), the insurers of directors, and various law firms (acting for privileged directors), seem to be on the same march, their banners and refrains belting out a message that seeks exemptions from the regulators and the courts.

While they march, sing and wave banners, the insurers are doing what insurers do best, that is massively increasing premiums while the other noise distracts those who pay the premiums.

In Australia and New Zealand, I observe 200% to 400% increases in the premiums for insuring directors against negligence claims (like failing to do their jobs properly or to disclose all relevant information).

The insurers blame this increase on the growth in class actions. The premiums are paid not by the at-risk directors and senior executives, but by the shareholders in the company.

In effect, shareholders allow their directors to be appointed, but when the directors are lazy, incompetent, or negligent, the cost is met by an insurer who is paid by the injured party, the shareholders, rather than by the culprit, the director.

The insurers then do their best to ward off shareholder claims!

The IOD, some lawyers, some accountants, the insurers and nearly all directors want the government and the courts either to rewrite the laws that hold them accountable, or to use them kindly, at least while Covid-19 still provides uncertainty.

A much less self-interested view would be that if directors simply communicate accurately, and in a timely manner, having fulfilled all of their legal (and moral) tasks, there would be no need to fear the law.

This subject, if somewhat arcane, is of critical importance to investors.

One has to observe only the appalling behaviour of banks in Australia, America, Germany, France, Britain, Italy, and, yes, here, to develop gratitude for those regulators who do their job, and for litigation funders, who step up when investors have been dudded.

Let the laws stand, let them be properly enforced, let the standards of governance improve dramatically, be rid of political appointments, or status-seekers of the ''entitled''.

Let NZ move up several notches in our productivity, our competitiveness, our returns on capital and on our standards.

Let the world of business begin from the honest base, that public company, highly-paid governance and executive roles are not for pretenders, the morally-weak or a repository for tired lawyers, politicians and political lackeys.

We want strategic thinkers, people who ensure good strategy is executed, and people who recognise the director's role is a privilege, enabling them to serve the public shareholders and the social shareholders.

Investors seeking to find a reliable home for their funds ought to be entitled to assume companies will be well governed.

 _ _ _ _ _ _ _ _ _ _ _ _

SOME of the cases currently being addressed because of litigation fund intervention highlight the need for this specialised model, developed to support investors.

Auckland-based Level Playing Fields (LPF) includes in its directors a retired Supreme Court Judge (Bill Wilson), a highly-experienced public company director (Michael Stiassny), the founder of the NZ Shareholders Association (Bruce Shepherd) and a skilled former lawyer and company director (Phil Newland).

Its current cases demonstrate the breadth of the issues that confound investors.

Its case will require the Court to determine

·         The liability of the Crown when it is negligent, or fails in its duty of care to people or industries it should protect.

·         The personal liability of directors and promoters who produce misleading or false documents to raise money.

·         The personal liability of directors who fail to ensure the information they receive from executives is true and complete.

·         The personal liability of directors who through ignorance or inattention allow a company to trade when it is insolvent.

These are highly relevant issues for investors.

LPF won, then lost in the Court of Appeal, and now seeks a Supreme Court solution, with its case against the Ministry of Primary Industry, which failed in its obligations to Kiwifruit orchardists when it allowed disease-ridden pollen to be imported. The facts are not denied. The Court of Appeal accepted that the MPI failed in its duty.

But the appeal court ruled that the Crown has no financial obligations to repair its error.

Any other provider would be liable but, somehow, not the Crown!

Perhaps this reflects the mind-set that denied South Canterbury Finance preference shareholders compensation when a Companies Office team made egregious errors of fact, leading to inane decisions by John Key's government, not reversed but covered up when the government became aware of the errors, and sought to hide their incompetence from the electorate.

The Court of Appeal seems to believe that there is no accountability for Crown stupidity.

The Supreme Court will be asked to adjudicate on this highly contentious but important issue.

LPF is currently awaiting a trial date against the appalling errors and misdeeds of those who governed Intueri, a tertiary education provider, which collapsed, a wipe-out for investors.

This case will centre on the liability of directors and executives to portray accurately their plans, the nature of their business and their financial progress.

Perhaps the most salacious of the imminent cases involves CBL, an insurance company and provider of contractor bonding.

This company collapsed, wiping out hundreds of millions.

The case will test the liability of directors to ensure that they can attest for management behaviour and are truly able to offer their shareholders some protection from management errors or stupidity.

In this case, about a dozen Queens Councillors are involved, highlighting the extreme sensitivity of the issues involved.

Similar issues are involved with Mainzeal's goofy directors, led by ex-politician Jenny Shipley, whose company is accused of trading when insolvent, a fairly self-evident accusation.

The courts have already found against Shipley and the directors but discounted their liability to the limit of insurance coverage, absolving the directors of the need to write a personal cheque.

The insurer wants a bigger discount. LPF, tellingly, wants more than it was awarded.

One imagines that the directors would have preferred that the insurer had accepted the initial decision.

Perhaps many investors will regard these accusations as being technical and somewhat removed from the considerations that investors contemplate before investing money.

This lack of interest might stem from the assumption that those who seek the status and income of governance roles are competent, well-meaning, informed and well-suited to the governance role.

Such assumptions, sadly, are naïve. Just read the findings of those who investigated banking leadership.

As I have previously noted, there is no meaningful aptitude test for directors, social status is no qualification, many in governance rely on the loudest voice at the table to guide them, and many are almost pig ignorant of the issues that determine success or failure. Many are simply ''yes men'', satisfied by winning a seat at the board.

To test the Court's view of the directors' behaviour is expensive. Any such test will be fought by those wanting to preserve the status quo, and will be funded by insurers, who by definition have deep pockets.

The worry of all of this is that the insurers have had their enormous insurance premiums paid for by the same shareholders who the insurers then attempt to bully into silence.

The litigation funder and the regulations become the only protection for investors.

When we had dopes in charge of regulators, as we did in the decade when finance companies were often behaving illegally, effectively conning the public, we had no active litigation funders.

The directors and executives were not accountable, except in rare cases, once memorably made accountable by the Commerce Commission, not the market regulators.

The regulators like the NZX were fixated on the wrong issues, the Securities Commission was incompetently led, and the New Zealand government had utterly inappropriate people assigned to the task.

And then we had Key's government, whose expertise, focus and standards were better than those exhibited by Donald Trump in America, but not by as much as one might expect.

We need litigation funders. We need law that intimidates lazy, selfish, incompetent and greedy directors.

We also need the punishment to fit the misdoings, that is the stripping of money, as well as status and freedom, from those whose misdeeds stem from cynicism and/or greed.

 _ _ _ _ _ _ _ _ _ _ _ _

THE Financial Markets Authority, which replaced the disgraced Securities Commission, has adopted one function to which it seems ill-suited.

It has taken on the role of the financial advice sector by commenting on the investment behaviour of young investors.

Although this seems an extension of the FMA's brief, it might have a useful outcome, if the FMA itself proves to include prescience in its qualities.

I read with interest that the FMA is questioning share market operators about the bizarre influx of new investors, at a time when the world is adjusting to the grave issues it faces, as a result of the Covid-19 virus, the at least short-term destruction of foreign travel, and the unprecedented levels of debt, used universally to paper over the weakness of household savings.

In these most uncertain times, literally tens of thousands of New Zealanders and millions of youngsters around the world have registered as investors so they could buy small helpings of shares at the prevailing price.

Who knows whether those prices are absurdly high or simply a fair market price.

Nobody knows. Pricing is often irrational.

Yet the FMA has bravely taken the position of forecasting the prices by warning youngsters and market operators that this ''timing'' is inherently dangerous.

I admire the courage implicit in this caution but one wonders where this new advisory role will lead.

Will we wind up with litigation against the FMA if its caution proves to be unnecessary?

Perhaps a better piece of advice from the FMA would be that new investors should seek neutral advice from competent, qualified people before using cheap platforms to punt on hunches.

Some might say an even better piece of advice might be to wait for the data that will flow, as unemployment, business failure, tax policies and consumer spending patterns respond to a distinctly new-look world.

The FMA has some wise people and is much better equipped than the discredited Securities Commission, itself badly let down by political goofs.

But it enters a murky pond when it offers advice to investors, new ones or experienced.

 _ _ _ _ _ _ _ _ _ _ _ _

OUR quarterly newsletter and portfolio reports have now been distributed.

We seek an indication of likely numbers who would attend seminars we will hold in various cities, enabling us to book the right-sized facilities.

Readers of our newsletters are invited to email us if they would wish us to visit their city, naming the relevant city and likely numbers.


David Colman will be in Palmerston North on July 22.

Edward will be in Auckland (Remuera) on July 27 and Albany on July 28.

Please let us know now if you would like an appointment in your town.


Chris Lee

Managing Director

Chris Lee & Partners Limited

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