Keeping it all above board

Graphic by Jeremy Gordon.
Graphic by Jeremy Gordon.
You do not need silver hair, a dark suit, a school tie and an expensive car to be a company director. To form a company and give yourself a seat on the board all you need is $163.55 and the time for a little Companies Office form-filling.

But with Dunedin City Council-owned companies undergoing a restructuring, and question marks over who will fill more than a dozen directors' seats, Mark Price has taken a look at what else is required of an effective company director.

J. Denham Shale has the silver hair and the dark suit. He is an old boy of Auckland's Sacred Heart College. He is part of that loose network of New Zealand business leaders.

And he is the man the Dunedin City Council appointed in November to its top business job - the chairmanship of Dunedin City Holdings Ltd (DCHL).

The holding company is the umbrella organisation for the other companies wholly- or partly-owned by the council - Aurora Energy, Taieri Gorge Railway, City Forests, Dunedin City Treasury, Dunedin International Airport and Delta Utility Services.

Together they are worth almost a billion dollars and last year the council decided the way they were being run needed to change.

Shale was appointed by the council after the "Larsen review" delivered the council a list of recommendations to improve the running of its companies - city councillors being barred from the company boardrooms the most radical of them.

Shale's arrival, along with that of deputy Bill Bayliss, of Queenstown, coincided with the resignation of some members of the old holding company board and the sacking of the others, including chairman and city councillor Paul Hudson.

Shale and Bayliss are just the interim board - given 12 months to restructure the holding company and its subsidiaries.

Recruiting new directors is part of that job.

The Larsen review recommended a recruitment consultant find the three for the new DCHL board - with the council to appoint which should take the chair.

Appointing the other directors, for the boards of the subsidiary companies, is a job for Shale and Bayliss, consulting with executive staff.

Before the end of the year at least a dozen directors' seats should have been filled.

With a variety of New Zealand's directors busy standing in the dock of various courtrooms around the country at present, the Otago Daily Times was curious to find out how directors are appointed and about the qualities they should have - starting with the interim chairman, Shale.

Dunedin Mayor Dave Cull believes Shale's name was one suggested by the author of the Larsen report, Warren Larsen, as one of "a handful" of potential candidates.

Mr Cull says Shale's name "came to the top" because he is president of the Institute of Directors, while Bayliss was local and considered "extremely experienced and highly thought of".

And it helped that one (Shale) was a lawyer and the other an accountant.

"We felt they had the skill set and the experience and the mana to be the transition board."

Shale began corporate life with a law degree obtained under an old system of part-time work in a law practice mixed with part-time study.

"We went to university at eight o'clock in the morning and went to work at 10; left work at four and went to the university until six or so."

The day Shale qualified he also became a partner in the firm of Richardson, Shale and Burns.

His first job as a company director, more than 20 years ago, was with the Les Mills Corporation.

"I looked after Les Mills and all his business activities and when it was decided the company be listed [on the stock exchange] I was one of the people he asked to go on the board."

Shale believes he has since developed skills beyond being simply "the lawyer on the board".

"Now I'm more of a business person going on a board because you really need good experience to be a first-class director.

"It's not just your professional skills."

Shale acknowledges a certain amount of luck was involved -"... if the ball bounces the right way".

"Who knows what would have happened to me if Les Mills hadn't asked me to be a director of his company back in the '80s."

But he denies the popular image of an "old boys' network" at work when new directors are chosen.

"When you talk about old boys' networks, people often think of people you went to school with, played golf with or drank on Friday night with.

"I'm saying to you that I might like to have certain people on a board with me but they are not going to fall into those categories.

"They are going to be people whose abilities I respect and who I know are going to use the same judgement abilities and business acumen as I would want to myself."

Mr Cull acknowledges reputation plays an important part in the appointment process "... and you judge people on the results".

"If they've been a director of successful companies ... that's what you judge them on."

One change that Shale has noted since he first sat on the board of Les Mills is the higher expectation of new directors' financial abilities.

"You really need to really understand financial accounts and all the rigours these days of international financial reporting standards and so on.

"You would be silly to go on a board today if you didn't understand financial statements."

He considers one of the first tasks of a new director is to quickly develop an understanding of the company's product.

"When I went on the board of Zespri, the kiwifruit exporter, I spent three days down in the Bay of Plenty going around orchards, packhouses, the Port of Tauranga to see how they treated the fruit and so on.

"You really need to be up with the play with all of the aspects of the industry."

New Zealand Shareholders' Association chairman John Hawkins believes a board needs a mix of skills among its directors, ranging from strong knowledge of the product to "a higher level of financial understanding or higher level of governance expertise".

"It's a complementary situation but everyone in a forestry company doesn't have to know a great deal about forestry ... everyone can't be an expert in everything."

The Shareholders Association was formed in 2001 to stick up for small shareholders and one of its roles is to keep an eye on company directors.

"We hold directors to account by asking them to explain their actions and provide reasoning behind decisions made," says its website.

Mr Hawkins says there is no legal requirement as to the skills directors must have but there is one skill he rates highly.

"People that are directors must bring to the board an inquiring mind and must have sufficient knowledge to understand what's going on and be able to ask pertinent questions."

One of the Larsen review recommendations - initially censored out of the publicly released version - was a three-fold increase in pay for directors of the holding company.

Larsen considered "penny-pinching" would be a mistake and that it was unlikely "the appropriate people" would be attracted below $75,000 per year.

Hawkins is unenthusiastic about the way consultants base their fee recommendations on levels set by previous consultants' reports.

" . . . the next person that comes along looks at it and says `Well the average is this' and they then use that slightly higher average when they give their recommendations. So this becomes a spiral.

"It's very rare, it's unheard of really that they would come along and say you are paying too much."

He suggests consultants should be asked to justify the increase they are recommending and show what "comparative group" they used.

"They compare against a range of other groups or companies or councils or whatever but very rarely is that information shared with shareholders or the public."

But he also believes that when it comes to directors you get what you pay for.

"There's an old expression: you pay peanuts; you get monkeys. I think it still applies to a fair extent."

Mr Cull says there is a tension when it comes to directors' fees.

"On the one hand we might be told that we have got to spend vast amounts of money to attract the right people and to be honest, given the value of the asset we are dealing with [the council companies], we certainly wouldn't want to be scrimping to save a few cents here and there.

"But ... there is a limit to how much money you need to throw at something to get the right people."

Shale does not think there will be any shortage of suitable people seeking a place on the Dunedin boards although some might "look twice" before accepting a directorship because of the "extra responsibility and the liability that you can sustain".

"That's not going to become any easier with the new legislation that is coming into being."

The Financial Markets Conduct Bill is progressing through Parliament and Shale says it will open up for prosecution wrong-doing as a director or wrong decision-making as a director.

"This is going to be much more specific as to what can be wrongdoing."

He says two recent court decisions have shown a director's ignorance of wrongdoing in a company is already no defence.

"Those judgements are quite clear that ignorance is no excuse at all.

"If you are a director, you have got to keep up to speed."

Mr Cull sees that as a reason to pay directors "reasonably.

"Because why would they take all that risk if they weren't being recompensed for it. There's a lot of responsibility and accountability, as there ought to be."

Accountability landed high-profile former politicians Sir Douglas Graham and Bill Jefferies on the wrong side of the ledger in court last month - convicted, as directors of collapsed Lombard Finance, of offences under the Securities Act.

University of Otago business school lecturer Dr Helen Roberts, who has studied corporate governance, sees the Lombard case as an example of more questions being asked about the suitability of individuals as directors.

"These people were appointed more for their notoriety, or some sort of belief that they were good people and would do the right job, and they don't really have any other credentials."

Dr Roberts says while financial advisers have recently come under government regulation the position of directors "is not heavily regulated in New Zealand".

"For directors there's not really any sort of measure."

She believes the way directors are appointed to the boards of the council-owned companies is a "big question" to consider.

"Is there some sort of independent process through which these names are brought before the council or a sub-committee of the council who can then fairly determine if these people will truly act without any conflict of interest to oversee the best interests of the parties that they represent?"

She considers an individual would be unsuitable as a director if they did not have up-to-date accounting, finance and economic qualifications.

"I think those three are essential."

While she agrees experience in a successful business of a similar size would be valuable, she does not regard experience as a substitute for qualifications.

Keeping tabs on the performance of directors is quite a business in itself for shareholders [the council] and ratepayers.

Hawkins suggests monitoring the company's profitability, balance sheet, strategy and adherence to legislation.

But, he says, there is one other measure of performance important for a company owned by councils.

"How can I put this delicately - did it have the gumption to say what the company needs and that the council can't take every possible last cent from it.

"A company needs a certain amount of money to operate and to grow and to be able to work in an efficient manner.

"That's one of the real special problems you have when you are a director of a council-owned company.

"A council has an insatiable appetite for sucking every last dollar out.

"You have to have people who are prepared to say: 'No. There is a certain amount we will be able to give to the council and that is it.'

"Setting that percentage of the profits and being able to negotiate that is another particular skill that any director of a council-controlled company needs to have."

Hawkins points to Ports of Auckland as an example of where that has gone badly.

"The council has sucked a lot of money out of Ports of Auckland.

"There hasn't been sufficient reinvestment in the company, probably as a result, and Ports of Auckland are currently returning I think, off the top of my head, something like a 6% return on the money invested in it. That's way too low.

"The council wants the company to return about twice that but they have to actually have enough resources to do that.

"You can't take every last dollar and then say 'well why haven't you reinvested and done better?'."

 

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