Opinion: Directors' skins may be thicker than pollies

By Simon Louisson of NZPA

Friday 26th October 2007

When a cabinet minister behaves badly and biffs a colleague many are quick to call for his resignation, particularly those in the business community.

When company directors behave badly or perform poorly, they seem to have even thicker skins than politicians and are even more reluctant to quit their fat remuneration packages.

The Contact Energy shareholder meeting has become something of an annual battle, although thankfully confined to words.

Today's action in Christchurch, however, was more in keeping with the Garden City's genteel image and the verbal biffo about as tame as Trevor Mallard's "handbag".

A number of issues were relitigated and are unlikely to disappear until Contact's parent, Origin Energy of Australia, addresses them.

The first and simplest is that independent director Tim Saunders carries the baggage of being chairman of Feltex Carpets. The Shareholders Association and many others believe he should do the honourable thing and quit all his numerous directorships.

Like politicians, there are times when leaders must take responsibility.

The association has sought to get him banned as a director for five years for his role with Feltex. It argues his board misled investors and as well it allowed the company to be mismanaged.

Saunders has also been criticised for being on so many boards -- around a dozen at one stage -- with the association querying how he can do justice to so many companies. He has since resigned from some, including his embarrassing directorship of the stock exchange, NZX.

There are two other more fundamental issues -- one the independent directors' support of two previous failed takeovers, and a related issue of the validity of their actual independence.

Saunders, former chairman Phil Pryke, and fellow independent John Milne vigorously supported firstly the 2001 $4.14/share takeover bid by California's Edison Mission and then the 2006 planned merger with Origin.

What vexed institutional investors was the trio supported Edison's bid despite it being at the bottom, or below, independent valuations.

Subsequent share price rises showed the institutions were right and the directors wrong. Had investors followed the independent directors' advice, they would have surrendered $2.84 billion of the company's current $5.2 billion value.

In a repeat hash, they recommended the Origin merger proposal before the independent report was released. There must also be questions raised about the integrity of their advice when this year's annual report reveals the trio were paid $288,000 for their work on the failed merger.

Pryke said today in answer to a shareholder's challenge about why he twice tried to persuade shareholders to sell their shares, he had no regrets. Contact's share price fell after Edison pulled its bid, and he estimated $500m of shareholder value was "left on the table" as a result of opposition to the Origin merger, he said.

Institutions such as Brook Asset Management argue the independent directors failed to properly inform shareholders about the merger and last year it proposed removing the independent directors.

The fact they survived thanks to the Origin's 51% shareholding deepened suspicions about their independence.

Twenty-three percent of shareholders last year voted against the directors and without the Origin vote they would have been turfed out.

Shareholders Association Canterbury branch chairman Alan Best asked King how independent "our so-called independent directors" were.

He told today's meeting the association held proxies for 219,000 shares against Mr Saunders' re-election, compared with 9516 supporting him.

"It's very clear that our members, for various reasons, do not consider Saunders to be a proper independent director of this company," he said.

Contact chairman Grant King, who is managing director of Origin, pointed out that independent directors of all companies were reliant on the support of the major shareholder.

"In our view that does not in any way prejudice the independence of directors, because it applies to all directors."

But a simple way around that would be for the major shareholder to abstain from voting on the election of independents.

King, on questioning by Best, said the board had considered the recent Securities Commission report into Feltex, where it found the directors failed to disclose important information. But it saw no reason to change its view Mr Saunders had made a "very good contribution to the ongoing governance and supervision of the company".

Pryke repeated his previous attack on the media and fund managers as "arrogant" and "uninformed".

He decried "shareholder activism" as destroying value in Contact.

Brian Gaynor, a renowned activist, of Milford Asset Management, noted that last year when Origin wanted to reduce the Contact board from eight to six, an independent director acquiesced to Origin's request. As well, Mr Pryke meekly stepped aside for Mr King, as chairman, surrendering the chair's crucial casting vote.

Saunders has called his detractors a "minority of self-interested vocal shareholders", arguing his performance at Contact should be judged on its own merit.

But when it comes to arguing self interest it might be as well to look at the facts. Saunders received $155,565 last year for his services to Contact, Pryke received $258,658 and Milne $256,278.

Gaynor's argument is independents have been too quick to accept takeover or merger offers and they allowed Origin to gain control of the board.

"How can investors have confidence in independent directors when they appear to acquiesce to the controlling shareholder and only remain on the board through the support of this shareholder?" he wrote in a column.

There is a formal process as part of the stock exchange's listing rules about declaring a director independent. Perhaps, if the exchange wants to get serious about ensuring directors are both independent and to be seen to be independent, rules should restrict majority shareholders from voting.

As for getting directors to resign for poor performance or poor decision making -- well that seems about as likely as winning another Rugby World Cup.

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