Jenni McManus in The Independent published a list of the seven most value destructive decisions of CEOs last week.  At the top of the list was Theresa Gattung and her foot in mouth guffaw.

McManus ascribed all that has happened at Telecom to Gattung’s comment that Telecom’s marketing strategy was based on creating market confusion. She then went on to say that the realization of this reality by consumers and government resulted in the backlash that saw Telecom lose the confidence of its customers with resultant loss of market share and margin and the ultimate opportunity for government intervention and asset value destruction.

The Hanover meeting was an eye opener on human nature. It was indeed a meeting for clichés and “you can lead a horse to water but you can’t make it drink” immediately comes to mind.

On arriving at the meeting I gained the impression immediately that the people present just wanted it over. They wanted certainty or at least the belief that they had certainty before Xmas.

Having listened to Justice Heath the day before it was clear that he felt that if bond holders wanted an adjournment it was for them to determine that, and vote on it if they wished. The sentiment was not ready for that.

The Fletcher Building disclosures by the insider whistle blowers highlight a very real issue in business and also highlights the underlying corporate culture of New Zealand, or for that matter the world.

To a very significant degree it also explains the stagnation of earnings across the board from business.

I guess it is accepted that profit and business improvement comes from innovation, and innovative people are generally free thinkers and often contrarian, and that mostly innovation requires change and change is generally resisted. In short innovation generally comes from the rebels within a team not from the compliant administrators who happily or unhappily tow the company line.

Thus smart business operators must have a culture of nurturing rather than ridiculing or dumping rebels. Only American company 3M has managed that over a long time frame.

Sadly human nature is what it is and in corporate life when big groups of people congregate politics and team consensus peer pressure elevate. In big businesses it is hard to be a rebel or an innovator.

Culture in any organization comes from leadership and in corporate life leadership starts with the board of directors. I have often said to chairman, every board needs a contrarian, a table thumper a person who challenges pack mentality and that boards need to learn methods for harnessing such people and also learning how not to harbor grudges.

Just as investors do not always get their timing right when buying shares and trying to second guess the bottom or top of cycles with foresight, nor do boards and managers.

Intelligent investors expect boards to take a long-term view of the business and deliver long-term business value to shareholders. This starts with a very clear view of the business strategy and, based on this strategy, assessment that all activity and acquisitions move forward.

In respect of Fletcher Building, Formica was an acquisition undertaken as part of a considered strategy that Fletcher commenced executing when it purchased the Australian group Laminex.

In essence the strategy was this: Prior to the purchase of Laminex, Fletcher was a low value product producer of medium density fibreboard (MDF) and particleboard with a very minor exposure to high value laminates. Laminex was in the same market space and provided the opportunity to expand market share and reach, while also increasing Fletcher’s presence in the value added end of the market. Thus increasing the margin spread on what otherwise is a low value commoditised product.

Don’t be stupid… Receivership is the best outcome for Hanover and Dorchester if you are a debenture holder.

Let’s recap on Hanover.

Firstly the cash component now is not $36 million it is $10m, the balance is in the form of a second mortgage for $26m as if Hanover did not have enough of these already.

In return for the $10m cash, the $26m second mortgage and $40m of property assets (as if Hanover didn’t have enough of these already) and a default promise for whatever that is worth of another $20m, bond holders are giving up the right to sue the shareholders to recover dividends.

They are giving up control of the enforcement of related party loans, they are giving up any right to sue the directors for possible breaches of fiduciary duty, and or the Fair Trading Act. And they are giving up the right to pursue the trustee for any malfeasance on their part in approving, when required, all of the stupid lending, related party asset sales and dividends, all of which may well be actionable.

In addition debenture holders are giving up the right to receive interest if things go well. Instead they are allowing the shareholders a first bite of $120m and 50% of anything above that. If there is anything after repaying them, which is unlikely, why would debenture holders give up their contractual rights?

On balance what debenture holders are giving up is more than the cash they are getting.

This blog does not purport to be tax advice, but rather a superficial overview of land transactions to point out that we already have a partial capital gains tax on land related activities and further that certain proposed changes will extend this further.

It is a common misapprehension among many if not most of NZ taxpayers that investing in property results in the gains being non taxable.

NZ does not have a capital gains tax and this is why most think this way.

Ever since the 1976 Tax Act, successive governments on the self serving advice from the IRD have initiated a number of reforms to the taxing of land transactions so as to bring what most would think of as capital gains into the ordinary income definition.

For the avoidance of doubt even under the 1955 Tax Act any profit making scheme or undertaking was a taxable income event. The 1976 Act to a point codified it and the most recent Act and proposed additional amendments will extend it further.

When a finance company defaults, which many have, the trustees have two choices. Appoint a receiver immediately, or call in advisors to advise them and all of the recent crop of failures have done the latter.

The trustee also works with the board and the shareholders when the company is a private company to establish the level of commitment to fixing the problem that the bottom of the food chain stake holders have.

Out of this comes a plan for reconstruction to in essence save the company for the benefit of the shareholders. Part of the plan is the request for concessions from bond holders, both in respect of the liquidity of their investment and also in respect of the expected return that bond holder will receive. This is the moratorium plan, and usually such plans ask for both time and forfeiture of contractual rights to a return.

Before bond holder and others get to vote on these plans it is a prerequisite that the trustee approve it. Trustees who are paid to look after your securities are loath to make any hard decisions for fear that they will get sued. So it does actually beggar belief that we should have to pay them at all. Enter the consultants again, who are then asked to express an opinion to the trustee on the merits of the plan. These consultants are the winning occupation in these times. PricewaterhouseCoopers have derived fees in excess of $1 million to pore over the plan and Hanover.

Before I begin, don’t forget that the objective of any plan at this time is to kick start us out of recession and also build a sound playing field for NZ to be internationally competitive and foster an aspirational ownership society in which all can participate.

This is predicated upon us individually earning more and being more productive, spending less and investing the bit left wisely, preferably in NZ, to create a knock on wealth effect through jobs and taxes.

This blog is on the tax system in NZ.

Well red is not dead, But Helen Clark and Michael Cullen are.

You do, however, have to admire her for decisiveness and also for sound base political instinct. For Labour to get re-elected in 3 or even 6 years’ time they need to reinvent themselves and to do this they need as much time as possible. While Phil Goff is the likely successor, any bets on who the deputy will be? Regardless, Goff does indicate a lurch back into the centre.

Now is blue really new?

National managed to run a campaign with virtually no substantive new policy. Frankly it was all they could do.

The difference between the two is this…

Labour was motivated by turning us all into beneficiaries dependent on the state, and thus as clients of the state naturally supportive of the incumbent that doled out the dollars. At last enough New Zealanders said enough: “We want our freedom and independence back.”

National on the other hand in the runup to the election looked like it would out-Labour Labour in the state handouts and thus looked like it was intent on perpetrating the dependence cycle.

But to the extent the National Party had a secret agenda let’s hope that was to build a society based on aspiration, underpinned by an acceptance of personal responsibility. And through this approach build a society of free adults who vote in the interests of our nation and not themselves individually.

I have now cast 10 votes in general elections. Over that time I have only voted red or blue twice, and once each so I am your classic floating voter.

Mostly therefore I have voted for third parties. Three of those times were for Social Credit and its idiotic successor the Democrats and, believe it or not, five times for Winston and NZ First.

Let me explain the Winston phenomena. Initially it was because good people, ex- Social Credit, joined that party and I do believe in supporting good people. Subsequently it just became a bad habit in the belief that Winston and his lot supported “NZ First” and I am fundamentally a nationalist, not a globalist. Of course Winston doesn’t support NZ First, he supports Winston First.

Sometimes, however, events occur in your country that make it imperative to make a real choice. The first was in 1984 when I stood for Social Credit and voted Labour. I moved from my home electorate of Mount Albert, where even an idiot would win for labour and some would say that an idiot did. I would say that a mercurial politician did. Thus my vote in Mount Albert would not count in the overall result. The quirk of first past the post is that the most marginal electorates in the country decide the fate of the nation. Thus the last 200 voters in Mount Eden were likely to change our nation’s future. To tactically vote under first past the post, you had to think about where you choose to live.