Taking Stock 15 November 2018

THE Auckland Consumer Trust, Entrust, which owns 75% of the shares in the NZX-listed utility company, Vector, should be dis-established.

The shares should be distributed to the consumers and thus end a battle between a small group of right-wing politicians and an important public company.

There seems no other option but to disestablish Entrust after its takeover by a cabal that is grasping the opportunity to gain power by exploiting the low level of consumer participation in voting on the people who make up the Entrust consumer trust.

This group, chaired by a former Auckland City Councillor and one-time mortgage lender, William Cairns, comprises two National Party people, Paul Hutchison (a former MP), and Alastair Bell, a former National Party board member.

Combining with a former CEO of Hirepool, Michael Buczkowski, and a long-time lawyer, Karen Sherry, these five people captured control of Entrust after standing on a so-called consumer ticket during the election of the trust’s board.

They have since lost their cohesion, Sherry alleging Cairns has tried to intimidate her, but their plan to dismantle the board of Vector has proceeded.

Vector has long been chaired by Michael Stiassny, a professional company director who strengthened his board by appointing infrastructural specialists from Sydney, David Bartholomew and Sibylle Krieger, the former a long-time chief executive of a major Australian infrastructure company, Krieger a lawyer specialising in regulated infrastructural companies.

The means by which consumers are represented is by election of self-nominated candidates.

My experience is that the general public, of whom barely 5% own shares and rarely vote on corporate matters, are easily persuaded when postal elections of such obscure trust positions are held. Roughly 80% of those entitled to vote, choose not to use their vote.

The brochures with pretty pictures and self-written potted histories are often the only source of information that guides the tiny numbers who bother to vote.

So any motivated cabal has a very good chance of capturing control of consumer trusts. If the consumer trust controls the board of a large listed public company like Vector, as is the case now, the threat to corporate governance of a public company is obvious.

In essence, the cabal has more power than the Vector board and ultimately controls Vector.

Indeed, it now is exercising that power.

The Entrust cabal has advised it will vote out the two skilled Australian directors, having previously made it clear that if Stiassny had not retired as Chairman, he too, would be expelled.

Fund managers, institutions and professional investors will own 25% of Vector, unable to obtain more of the shares unless Entrust is disbanded and the shares either distributed to consumers, or tendered to real investors, the proceeds being paid to the consumers who are the underlying shareholders.

I am unaware of the plans of Entrust but as a holder of Vector securities I am most unhappy at the thought of this little group, almost self-appointed, deciding Vector’s future.

The structure simply does not work, it is open to exploitation by a group of motivated people with an unknown agenda.

Many believe that the worst underlying structure of a public company is the co-operative.

They point to Fonterra as an example of an ugly structure, confused by the different objectives of those who hold voting power and those who would participate in rights issues to build a proper balance sheet.

That corporate structure is indeed ugly, but it is no worse than the structure of a public company being controlled by a group of people of no obvious relevance, and possibly very little financial commitment to the company, controlling a one-asset trust.

If consumers want their money managed by elected people, they should at least be served by people with investment skills.

Must the Crown intervene and legislate to restore an appropriate structure?

Or should every single beneficiary of Entrust realise the risk of mediocrity and demand that the 75% of Vector’s shares be passed on, as shares or as cash proceeds from share sales, to the consumers.

The new cabal may be well-meaning and have a cunning plan, but they should not be able to exercise control without the meaningful endorsement of real investors.

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I HAVE often pointed out the hypocrisy of fund managers who seek a marketing advantage by promising not to invest in ‘’sin’’ stocks.

Tobacco, alcohol, armaments, pornography, fossil fuel, fizzy drinks, butter, sugar . . .  you can imagine the products some investors would exclude from their portfolios.

However, Alphabet (Google) facilitate pornography yet none of these funds wants to miss out on the bulging revenues that come from those who advertise on a Google platform.

Hypocrisy may be even worse than some sins.

So it was a nice balancing act that the independent market commentator Brent Sheather introduced recently, highlighting the dishonesty in the claims that sin-free investing produces superior financial returns.

Someone had to point this out sooner or later, just as it must be stated that the views of the markets of index-funds are of no relevance to anyone.

Index funds invest by a formula that must be maintained.

Indeed, there is no need for an index fund to employ any people with investment skills, so they do not.

They employ software people, administrators and salesmen, none of whose views are even remotely relevant to investment or governance debate.

Index funds do no thinking and do not react to the mores of the times. The whole appeal of the concept is based on its avoidance of the cost of attempting to make skilled judgement.

Sheather rightly advises his readers that the claim that a sin-free fund will provide superior returns is about as silly as the claim that the lack of new entrants to NZX listing is the fault of the NZX.

It is a sad truth that tobacco companies, despite all the taxes they pay, make handsome profits, as do those who distribute pornography like Alphabet, Apple and quite possibly Amazon, Netflix and Facebook.

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I WILL be quite possibly in a minority of one when I argue that the country does not need a commission of enquiry into our major trading banks or insurance companies.

My argument would be that an enquiry would not tell us anything we do not know and will not alter the fact that most of us, our business and my personal banking included, are very well served at minimal cost by the banks.

In my case the bank records accurately and instantly all the transactions, provides a cost-free data record that enables us to manage our cash flows and, in my case, stores my money safely, and puts right any mistake made.

If people somehow steal my money from my bank, the bank sorts it out and unless it is my fault, it does so without charge.

My high level of satisfaction is a result of my non-engagement with any bank products or services that I perceive to be falsely priced or of no use to me.

I don’t want its offers of cheap wine, I do not want it to manage my money, or sell me insurance, I do not want its expensive credit cards, and I do not have any need for its KiwiSaver offer, given that at my age there is no subsidy and no justification for parking up money in a fund that is managed for young people, but not those of my age.

I know that the banks are not the community focussed institutions they were when I was younger.

In those days bank branches had managers who were generally wise men with good general knowledge and a commitment to help their customers.

Back then branches sought to protect their long-term competitive advantage by wedding themselves to their clients, making the cost and difficulty of any new entrance to the industry a genuine obstacle.

In those days overdraft rates reflected the overall relationship one had with the bank. If one had large sums on deposit, one’s children found it easy to get a loan.

All of this mindset became Americanised when credit cards arrived.

Banks started a new focus on quarterly profits, based on selling high margin products. They sought to cut costs not just through technological advances (ATMs, etc) but also by dumbing down the community service contribution, eliminating middle managers, and undermining the concept of banking as a lifetime vocation.

They closed down branches in small towns, they bullied staff into becoming salesmen, they sought to reduce services that required capital, and they were even silly enough to reduce their capital, buying back their shares to improve the ratio of income and profit to share capital.

My bank, the ANZ, bought back its own shares for about $32 in the pre-2008 era and then sold more shares at half that price immediately after the crash.

This made them comparable with the British idiot Alan Bond, who went to Australia, bought a Kerry Packer TV station for several billion (with borrowed money), went broke and then sold him back the same channel for about a quarter of the price Bond had paid.

Packer, a taciturn and foul-mouthed character, noted, using my paraphrased words, that you are lucky enough to meet an Alan Bond only once in a lifetime.

The point is that all of the banks’ foibles are known. The poorly-priced offers and silly selling can be avoided by the use of the words ‘’no, thank you’’.

The core services, storing and returning cash, and providing accurate records, are deliverable for a pittance because other overpriced services and products subsidise the core product.

Jacinda Ardern can frown, Winston Peters or Shane Jones can threaten new tax surcharges, and a commission of enquiry can spend hundreds of millions telling us what is clearly evident.

The best way to remedy these abominations is to use the words ‘’no, thank you’’.

Nobody is required to bank with the big four Australian banks.

If the banks break the laws, prosecute them.

If they simply charge excessively, a polite ‘’no, thank you’’ solves the problem.

All that requires is consumer self-control, best exhibited by living within one’s income.

My personal observation is that most of the local branch staff I meet are helpful, nice people, and most of the executives I meet are just as likeable.

If it really is the Aussie bosses who offend us, why do we not let Kiwibank merge with TSB, Heartland and SBS, resulting in a real New Zealand bank with enough market share (it would be 15%) to compete in all areas?

Complete the merger, list 49% of the bank on the NZX, and watch it thrive on the sort of standards we want.

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NEW ZEALAND lost a true champion leader when Sir John Anderson died this week.

I have known, admired and befriended ‘’Andy’’ since the 1960s when we played premier sport together. The club to which we belonged had financial problems in the 1980s, by which time he was CEO of a major investment bank, and as I was CEO of a similar, but much smaller, operation, a sister operation, both of our companies ultimately owned by Lloyds Bank.

Andy rang me and told me he had a plan to fix the club’s problems, unilaterally appointed himself and me to implement the plan, and listed for me my tasks.

It worked. His solution was excellent. He had no time for democracy, or to be wasted with committees; just get it done.

His ability to solve problems became widely known. Ultimately governments of both hues sought him out to solve problems in health, education, broadcasting and, of course, to advise on law changes, especially in banking.

Andy moved from a high-performance investment bank to the chief executive and managing director roles in the National Bank and the ANZ, where he was widely known as our best-ever bank CEO.

A large man, with great presence, he believed in his executives, he nurtured his people, nurtured his clients and has around New Zealand many business people he has encouraged to achieve their potential. Perhaps I am one.

In recent years, after retiring, he took on chairmanships of often troubled companies, inviting a level of stress he did not need, either from a financial, a health or a family viewpoint.

He had had major heart surgery and he had back problems. Perhaps he might have enjoyed his gins and tonic and his cigarettes more than the modern health police would recommend.

His death at 73 is sad but he has had a great life, been a really great New Zealander, in business, as a sports administrator and a family man.

Rarely do I ever use the options of titles but in his case I salute Sir John Anderson. What a great Prime Minister or Governor-General he would have been, when he retired.

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Chorus Senior Bonds – Chorus has announced a minimum interest rate of 4.35% for the first five years of its 10-year senior bonds. The Indicative Terms Sheet is available on our website. This offer is now open and we are taking firm requests. If you wish to participate, please contact our office, specifying an amount and your CSN, before Friday 23 November. Payment is due by 5 December.

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TRAVEL

 

Edward will be in Albany, Auckland on 21 November and has two spots left. This will be our last Auckland trip for the year.

David will be in Palmerston North and Whanganui on November 20 and New Plymouth November 26.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

 

Any person is welcome to contact our office to arrange a free meeting.

 

 

 

Chris Lee

Managing Director

Chris Lee & Partners Limited