The Shoeshine Column: Contact caning sets director dilemma

Friday 2nd February 2001

But if it subjects directors to public abuse with as little reason as Contact's shareholders employed we will shortly have a serious problem. Nobody with a grain of sense will want to act as a public company director.

Like chairman Phil Pryke, Shoeshine bowled up to Contact Energy's annual meeting on Tuesday expecting a spot of small shareholder grumpiness.

What actually happened reminded your boot buffer of one of his three-year old's more artistic tanties.

Speaker after speaker grabbed the microphones to denounce the company's "dismal" performance.

Chairman Pryke endured personal abuse from the Wellington media's new darling, David Zwartz. Pryke was invited to resign but declined to do so.

With shareholders obviously determined to vent their spleen on directors, Pryke was wasting his breath defending the company's record. That's a pity. Most of what he said was perfectly reasonable and bears repeating.

Many of the shareholders professing themselves so disappointed with Contact bought, like Shoeshine, at the time of the float in May 1999. As Pryke pointed out, the prospectus forecasts were for a profit last year of $78.4 million and a 10.3c dividend payout.

The actual profit for the September year was $97 million, 24% higher than forecast, and the dividend was 17.36c, up 68%. That's a return on the float price of 5.6%, about what you'd get from the banks for a call deposit.

The company has increased massively in size. Total assets are $2.7 billion, against $1.6 billion at the time of the float (although $600 million of the increase is due to revaluations).

There's no denying $97 million is a pretty meagre return on the money employed.

But the fact remains investors were happy to pay $3.10 for a company they thought would make only $78 million last year. It seems a bit rough now to turn around and accuse the directors of slacking when the company has done better than expected.

Much of the stroppiness is, of course, related to the share price, which is trailing along at about 11% below the issue price. That's disappointing but it's hardly catastrophic.

Why the shares have performed so poorly is a bit of a mystery. Professional investors have no doubt factored in last winter's warm, wet weather; relatively low prices on the wholesale electricity market; the general poor performance of New Zealand's larger listed stocks; slowing overseas economies; etc. None of these, incidentally, are under directors' control.

But the pros were also happy to pay $3.10. In fact they indicated, by institutional tender, that was what they thought the company was worth.

Pryke blamed the previous government for setting the price, in hindsight, "too high." Maybe so, but the convention on asset sales dictates the government must get the best price possible on the taxpayers' behalf.

Shoeshine suspects the share price would be lower still were it not supported by Contact's share buyback. One shareholder at Tuesday's meeting criticised the directors for buying back shares rather than paying a higher dividend but that's debatable - if the shares are the best investment a company can make it makes sense to buy them back, thereby increasing earnings and dividends per share.

Then there's the fuss about the proposed increase in directors' fees. Pryke said Zwartz, abetted by the media, had blown the issue out of all proportion.

Considering the board was asking only for a further $27,000 a year, to be split among five directors, he's probably right. But the issue isn't one of quantum but whether the board's worth it.

Again, Pryke's arguments went unheeded but make sense. Contact is a vastly more complex company now than pre-privatisation, when it was a pure generator. It has 380,000 electricity customers, 110,000 gas customers and operations in Australia. It competes with five other generators, not just ECNZ.

As a consequence directors have to devote a lot more time to it - Pryke cited 16 board meetings and "innumerable" informal meetings last year. If it was simply a question of pay, he said, he doubted any of his colleagues would bother.

One shareholder did have a valid point. He recounted how he had switched to Contact as his electricity supplier, as the company has encouraged shareholders to do. Unlike many customers who have switched he began receiving estimated bills immediately and was pleasantly surprised at the amounts.

On January 12 he got an actual bill, to be paid by January 8, for $1300. On complaining to the company he eventually got through to a manager who told him the company had been unable to find a meter reader for his area.

This reply astonished him. Six months to find a meter reader? With 100,000 unemployed? How hard can it be to read meters?

Acting chief executive Steve Barrett denied the company was slack on customer service but almost in the same breath admitted addressing that area was the top priority for 2001.

Whatever, there are similar horror stories about every supplier in the new electricity market. The last government reformed the sector at breakneck pace and companies had little choice but to join the lolly scramble for customers, even though they didn't have the systems in place to handle them properly.

The test now is to be the first to sort it out.

Shoeshine is the last person to defend greedy or incompetent boards. He castigated Brierley Investments directors last year for asking for a pay rise.

But BIL is shrinking, not growing, and the board last year blew $416 million of its shareholders' money.

Maybe, as Zwartz suggests, New Zealand does need a local equivalent of the Australian Shareholders Association.

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