Public v Private business
At what point does the public have a right to interfere with a private business? We know that a Government has the ability to interfere through regulations, taxes and contractual terms in contracts. For a private business (and I’m including listed companies in this group), the general expectation is that Government will take a hands-off approach. But where public money is involved, is that a fair approach for the country, and where should the line be drawn?
A lesson from the UK
What has not been well published in New Zealand is the downfall of U.K. construction giant Carillion Plc. Here’s what the Financial Post reports on the company, now the subject of a UK parliamentarian inquiry:
Carillion was not just a major employer, with 43,000 employees worldwide, almost 20,000 of them in Britain. It was a large government contractor, with responsibility for building hospitals, roads and other critical infrastructure for the taxpayer. So why did the government, a major customer and stakeholder, take so long to plan for Carillion’s collapse, especially after three profit warnings in six months last year, which sent the company’s stock into a nosedive? Where were the pension fund trustees, auditors and the Pensions Regulator as the company’s pension scheme deficit grew and the directors avoided paying in what was owed, while still rewarding shareholders with handsome dividends?
Carillion was a large listed company, it had 12 separate businesses in 11 diverse sectors. Yet had a small Board of just seven directors. Two executives, four independent non-executive directors and a chair. Five governance committees and four executive committees all reported directly to the Board. The latter group all chaired by a former CEO. The Financial Post asks why, when the UK Government and local authorities were so heavily committed to construction with Carillion they could allow it to fail. The other question is whether this private business had lost the right to be private, when so much public money was committed to it.
There was surprise and criticism in many quarters that the UK Government did not step in to save Carillion. The risk of stepping in means the public would be propping up a private company. This risk of not stepping in means that all those Government projects could fall over at worst, or costs in time and money blow out at best.
Of course, you and I would not want to give a major client a seat on our Board, but maybe if our major client was committing billions of pounds, then we might expect our client to demand some visibility on decision making and the impacts of those decisions.
In significant long-term contracts, it is not uncommon for the contractor to be required to make financial disclosures on margins, which enables an increase in the base contract (where underlying costs have increased), or a discount (where profit margins have increased). The risk and the reward become shared, and the client has greater certainty that their project will be finished on time and within budget. Inserting penalty clauses look good on paper for Government negotiators, but can have a disastrous implications for both client and contractor.
Does New Zealand have a company that is so important to the public of New Zealand that it cannot be allowed to fail? Certainly, previous Governments have thought so. Bank of New Zealand, Air New Zealand and South Canterbury Finance to name just three.
Currently, our mind turns to the large building contracts with Fletcher Building and the Government. Can Fletcher Building be allowed to fail?
It would appear that Fletcher Building has six Board Members (5 male, 1 female, 2017:6 & 2). According to their website, all are independent. The website also has 11 Executives (8 male, 2 female, 2017: 8 & 2).
Fletcher Building is listed on both the New Zealand and Australia Stock Exchanges, and as of today (Tuesday 13 February 2018) the company has been in a trading halt since Thursday 8th February, pending further announcements. It is widely assumed the company has, or may about to, breeched its banking covenants and is in urgent talks with its bankers. On wonders if it is also in talks with the Government? It is reported to have NZ$2B in external debt (over 50% in private placement debt). The company has over 21,000 employees world-wide, with hundreds of projects across the globe. It manufactures, distributes and has residential and commercial property development and build projects. Fletcher’s is arguably the largest building supply chain manufacturer and distributor in New Zealand. Most new homes in New Zealand are constructed with materials that have passed through one, two or more Fletcher subsidiaries – each one clipping the ticket. A fact that is disturbing in itself.
Stuff media reported (13th February 2018) Professor Jilnaught Wong, from the department of Accounting and Finance at the University of Auckland business school, estimated the company had suffered between $1.7 and $2.7billion in total wealth loss over the past nine years as a result of not earning enough to cover the cost of its capital. Professor Wong appears to speculate that the while management knew what was happening on the ground, it seems not to have filtered through to the Board. And yet the Board and the public have known for at least a year that the company was in trouble. Chief Executive, Mark Adamson announced in February 2017 the company’s second profit downgrade in 12 months, before unceremonially being dropped from the job in July 2017; other senior management having left in 2016.
With so much Government money and key projects invested in Fletcher Building, we can only hope that the company will solve its problems. But it won’t happen in the short-term, and hopefully not with more Government money (i.e. public money) being part of the solution.
When the immediate crisis is over, perhaps there will be an examination on whether the Government (a key client) should require more say in the Board of a very public company. We certainly don’t want a version of Carillion here! And the success of BNZ and Air New Zealand are proof that Government bailouts can work.
Posted: Wednesday 14 February 2018