Guinness Peat Group

Conflict of interest is a serious issue in the business sector. This is clearly demonstrated by Justice Raynor Asher's decision to overturn an Auckland District Health Board contract with Labtests because of Tony Bierre's conflict of interest.

The conflict of interest issue also arises with listed companies, particularly Guinness Peat Group (GPG). 

GPG's four executive directors, who dominate the company's board and remuneration committee, have received combined salaries, bonuses and gains on options of $74 million over the past five years.  They also had unexercised options worth another $48.1 million as at December 31.  This is an average of $30.5 million for each executive director.

These generous remuneration and options schemes create a potential conflict of interest even though the company believes "Sir Ron Brierley has qualities which are sufficient to ensure the integrity and independence of the remuneration committee in fulfilling its duties".

The huge increase in GPG's executive remuneration has occurred during an era when a UK corporate governance code has been introduced to reduce potential conflicts of interest at the board table. This Combined Code on Corporate Governance, is relevant to GPG because it is a British-registered company.

UK listed companies are expected to comply with the code, although it is recognised that departure from the provisions of the code may be justified in particular circumstances.

Several code provisions are relevant to GPG's executive remuneration. They include:

* The board should establish a remuneration committee of at least three members who should all be independent non-executive directors.
* No director should be involved in deciding his or her remuneration.
* Upper limits should be set on annual bonuses, and should be disclosed.
* The chairman should ensure that the company maintains contact as required with its principal shareholders about remuneration.
* Shareholders should be invited to approve all new long-term incentive schemes and significant changes to existing schemes.

The New York Stock Exchange also requires that all remuneration committee members should be non-executive directors.

But GPG's board is dominated by executive directors. The current board consists of Sir Ron Brierley (chairman), Graeme Cureton, Tony Gibbs, Blake Nixon and Gary Weiss.  Brierley has been classified as a non-executive director since 2000 - even though the Australian media still credits him with most of the company's successful deals.

The other four directors are executives.  Last year's annual report says the remuneration committee is Brierley, Nixon and Weiss. Thus, two of three committee members are executives.

GPG's board and committee structure creates a potential conflict of interest even though the company insists that no director is involved in deciding his own remuneration.

Most corporate governance codes recommend no executives be on the remuneration committee because they could put the interests of their fellow executives ahead of those of shareholders.

As well, Brierley has worked with Cureton, Gibbs, Nixon and Weiss for many years and has demonstrated in earlier situations, particularly at Brierley Investments, that he is not particularly forceful when dealing with strong personalities.

GPG's executive directors receive a combination of a base salary, cash bonuses, accrued leave entitlements and share options.  Base salaries paid to Cureton, Gibbs, Nixon and Weiss have risen by between 42 per cent and 108 per cent since 2002.

In 2001, GPG introduced a staff bonus scheme, with the proviso that "no bonus will be payable in respect of any year where net profits attributable to GPG shareholders do not achieve a 12.5 per cent return on opening shareholders' funds".

No limits have been put on these bonuses, contrary to the recommendations of the combined code, and these payments have accounted for the huge increase in executive directors' remuneration in recent years.

GPG's generous option scheme, which expires in 2012, was approved by Brunel shareholders before the 2002 Brunel/GPG merger.  Details of the scheme were included in a highly technical 226-page merger document.  This says that "when granting options, the board should specify objective conditions by way of performance targets, to be satisfied before options may be exercised".

The exercise price is determined by the board but may not be less than the higher of the nominal value of the shares (5 pence) and the middle market price per share on the last dealing date before the options are granted.

There is no evidence of any public statements regarding the targets executives have to achieve to be granted these options. The directors appear to have issued all options at the lowest exercise price allowed under the scheme.

How can GPG shareholders be sure the performance targets are realistic and the exercise price of the options is fair and reasonable when all of the directors, including Brierley, participate in the scheme?

The 2005 financial year was a bonanza period for GPG's executive directors because the company achieved a return of 22.3 per cent, well above the benchmark target of 12.5 per cent. The combined payment for the four executive directors was $22 million made up of: salaries, $4.5 million; cash bonuses, $12.7 million; accrued leave, $1 million; gains on the exercise of options, $3.8 million.

The 12.5 per cent measurement is highly questionable as far as an investment company is concerned, because gains can be unusually high in a bull market, particularly when opening shareholders' funds include subsidiaries and associate companies valued at cost.

Last year, GPG's return was only 4.1 per cent and no bonuses were paid. Total executive director payments of of $11.6 million comprised: salaries, $4.9 million; accrued leave, $100,000; gains on options exercised, $6.6 million.

As well as these generous remuneration schemes the four executive directors had 27.5 million ordinary shares as at December 31, now worth $63.3 million, and can receive 18 months pay if dismissed and two years' pay if GPG is taken over.

This issue is not about the total payments received by executive directors; it is about the way decisions are made on payments and options issued to them.  The decision-making process raises the possibility of a conflict of interest as far as GPG's executive directors are concerned.

Shareholders should be concerned because GPG's share price performance, relative to the ASX, NZX and London Stock Exchange benchmark indices, has declined in recent years as the payments to executive directors have increased.

The remuneration committee will probably be in a position to approve further huge bonuses this year, because the sale of the 19.4 per cent Australian Wealth Management stake on Thursday should enable the group to exceed the 12.5 per cent target for extra executive compensation.

Shareholders should also be concerned because the demise of Brierley Investments, the effective predecessor to GPG, was mainly due to an employee-dominated board that wasn't scrutinised by strong independent directors or shareholders.

Sir Ron Brierley is the darling of many New Zealand retail investors but no one, including Brierley and his highly successful GPG executive team, should be immune from shareholder scrutiny.

Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management and a Guinness Peat Group shareholder.  bgaynor@Milfordasset.com

Guinness Peat Group has sold its 19.4 per cent stake in Australian Wealth Management - the former funds management arm of Tower Group.

The investment company sold its shares in AWM via an institutional placement at A$2.435 (NZ$2.741) a share, making a profit of NZ$194 million on the sale.

AWM was spun off from Tower and listed on the ASX in early 2005. In June last year it merged with Select Managed Funds, decreasing GPG's stake in the company from around 34 per cent.

"Following the completion of the merger and the release of AWM's 2007 half-year result, we believe that it is an appropriate time for GPG to divest its shareholding and reinvest the proceeds in investment opportunities where GPG can be more actively involved in enhancing value," GPG executive director Gary Weiss said.

But he was tight-lipped about whether any acquisitions were imminent.

"We always have a range of investment opportunities available to us. As always we will continue to actively monitor these situations."

Listed in Britain, Australia and New Zealand, GPG has investments in a range of companies in those three countries.

AWM was its second largest investment after British thread manufacture Coats, which accounts for about a third of its assets.

In New Zealand it has a controlling stake in Turners & Growers and about 20 per cent of Tower NZ.

Macquarie Equities investment director Arthur Lim said he was surprised GPG did not sell its AWM stake to a trade buyer, where it would likely have received a higher price.

Analysts and fund managers were unsure what GPG's next move would be.

The AWM sale had put GPG back in its normal position in terms of cash and debt, Forsyth Barr analyst Guy Hallwright said.

He estimated that GPG would have about $660 million available for acquisitions.

"But they always have quite a chunk of cash sitting around. That's normal for them," he said.

Tower portfolio manager equities Paul Robertshawe said it was possible GPG might sit on its hands for a while and not make any investments.

Mr Lim said that GPG had been preoccupied with its investments in Coats, which has not been performing well recently, and with Tower Australia and Tower NZ during the past couple of years.

"They have done superbly in re-capitalising and re-vitalising Tower," he said.

"But in a market where there has been a lot of merger and acquisition activity, GPG has been remarkably quiet."

Hellaby Holdings managing director David Houldsworth's pay packet has been something like a rollercoaster in the past two years but he wouldn't have it any other way.

Houldsworth took the sharpest proportional pay cut in the Business Herald's 2005 survey of executive pay but also got the steepest rise last year. His remuneration dropped by nearly a third from $939,000 in 2004 to $632,000 in 2005 before surging almost 50 per cent last year to hit $946,000.

The dramatic swings are the result of a link between pay and company performance, with half of Houldsworth's remuneration last year being performance pay.

According to a study of 504 New Zealand bosses by human resources consultancy firm Sheffield, performance pay made up only about 14 per cent of the total salary packages of those who received it, compared with about 62 per cent of US chief executives' pay.

Houldsworth's pay packet stood out even when compared with those given by larger firms, which commonly had a 30 per cent performance-related element.

Jarrod Moyle, Sheffield reward team leader, said the pay of chief executives of larger local companies was similar to same-sized organisations in Australia, although some New Zealand managers shied away from talking about performance.

"Many New Zealanders don't want to separate themselves or put themselves ahead by becoming overtly wealthy. If you contrasted that with the United States ... more is always better and that's quite acceptable."

A Business Herald investigation of 56 of New Zealand's largest companies found that chief executives got an average pay rise of 8 per cent last year, with an average pay packet of more than $1 million.

Westpac's Ann Sherry topped the podium on $3.1 million, followed by one employee at Fonterra - probably chief executive Andrew Ferrier - on $2.9 million and then Telecom's Theresa Gattung.

However, Guinness Peat Group's New Zealand executive director Tony Gibbs' salary 2005 salary of $5.3 million - not available for last year's survey - would have put him well ahead of the pack.

This year's top six, at the time of writing, were rounded out by Fletcher Building chief executive Ralph Waters also on $2.9 million, ANZ Banking Group's Graham Hodges on $2.8 million and The Warehouse boss Ian Morrice on $2.3 million.

Linking executive remuneration to company performance sounds like a no-brainer but there is debate on how to best structure performance pay and whether it even works.

Houldsworth said he met the targets needed to get his maximum bonus last year because of Hellaby's profit performance.

Performance pay was used throughout the group, sometimes for other employees as well as the chief executive.

"Certainly we believe the best way to get performance from people is to make them responsible and remunerate them appropriately for success," Houldsworth said.

"And really that's profit-driven and no other measure. We're very much against the concept of linking it to share price and external factors.

"The share price may well increase or decrease as a function of profitability but it can also go up and down for totally extraneous factors ... therefore we don't believe that the chief executive should either benefit particularly or in fact be penalised."

Hellaby Holdings used cash rather than share options to reward performance. "It's pretty simplistic really and we think that simple works best."

Alternative schemes could average out payments over time but that could mean receiving extra pay in years the company failed to perform, Houldsworth said.

The potential for fluctuating pay was not a cause for concern, he added. "I'm happier when it's a good year but I'm very happy with the overall scheme anyway, I think it's quite appropriate."

However, Mark Harcourt, professor of strategy and human resource management at Waikato University's Management School, said more performance pay did not necessarily lead to better performance.

"If you were giving chief executives an extra 20 grand and some years they got it and some years they didn't they might complain and bitch about that far more and react negatively to it than if they never got it in the first place."

Some pay structures could actually attract the wrong person for the job.

"Options can induce executives to act more conservatively, ironically, because so much is riding on how well the share price does. Executives in some cases, particularly in a rising market, can choose more conservative but more certain investment returns," Harcourt said.

"The shareholders may prefer a higher average return, risk is less of an issue with them because they've diversified their portfolio into potentially several stocks and assets."

In more extreme cases stock options could encourage fraud.

"It's just been too tempting ... They [executives] cook the books to make the firm look more profitable or at least look like profit is increasing."

Fraudulent action could boost the share price and increase the payback on stock options.

But most people faced with a regular pay packet were generally trustworthy and would not shirk responsibilities, Harcourt said.

Stewardship theory explained why executives receiving a more basic pay packet still performed.

"[It] emphasises goodwill and general willingness and motivation ... to do the right thing, to do a good job and to take the long-term interests of the firm or the organisation into account in making decisions."

A failure to take fairness into consideration when setting workers' pay could also hurt the business.

The Business Herald survey found the average chief executive remuneration for New Zealand's largest companies was more than $1 million last year - more than 27 times the average pre-tax pay of wage and salaried employees of about $38,500.

"If anything it's probably more relevant here [in New Zealand] because this is a society that's not keen on status differences," Harcourt said. "This is a society where the tall poppy syndrome predominates.'

But Bruce Sheppard, Shareholders Association chairman, said New Zealand needed to get over that.

"We need to have an aspiration society, where we aspire to do better and we aspire to create great businesses that generate wealth for all stakeholders," Sheppard said.

Sheppard wanted more uncapped performance pay that was robustly structured and aligned with long-term creation of shareholder wealth.

However, company boards could over-complicate the process, he said.

"If the person you are paying it to doesn't understand how it works and what the performance hurdles are and what he has to do ... and if what he has to do isn't measurable and capable of being reported real time, guess what? It doesn't work."

Sheppard wants performance rewards to be aligned across management teams and spread throughout organisations.

"How do you get a team of horses to all run in the same direction? You put the same bag of hay in front of them."

The association also wanted to see increased disclosure of executive pay.

The Business Herald investigation found 13 companies did not specifically disclose the pay of the chief executive other than to list the number of employees in remuneration bands above $100,000.

"The reason we need it is if you know how your executives are being paid you know what the business' strategy is," Sheppard said.

The use of share options as an incentive was anathema to the association, he added.

"[For example] we want to give you [a] $100,000 incentive so we're going to give you $1 million in shares you don't have to pay for for a period of time and based on some bullshit calculation that equals $100,000 a year of value," Sheppard said.

Sheffield's Moyle said performance payments in New Zealand were mainly paid annually in cash but he didn't rule out the use of share options.

"[If] one of the primary objectives of the organisation is to improve shareholder value then shares or share options do have their place," he said.

Greater disclosure in annual reports would go a long way to changing the nature of executive pay.

Listed Australian firms had to provide a detailed breakdown of the top five executives, including their names, position and pay.

The Australian system, which was more the international norm, provided greater accountability and information to shareholders.

"It's a cultural issue that we don't like to discuss what we're being paid."

Sir Ron Brierly's Guinness Peat Group is in for a multimillion-dollar windfall as a result of the takeover activity surrounding Australian retail giant Coles.

One of GPG's investments is a 16 per cent stake in Premier Investments, which announced agreements yesterday to sell its 5.9 per cent stake in Coles for $A16.47 ($NZ18.67) a share to Perth-based conglomerate Wesfarmers. The sale would reap Premier more than $A1.14 billion.

News of the deal caused the Premier share price to soar, increasing the value of GPG's holding in the company by $A14 million ($NZ15.8 million) yesterday alone.

Since the end of GPG's 2006 financial year its investment in Premier has increased in value by more than A$40 million.

Premier has not given any indication what it will do with the money, but GPG would stand to benefit directly if it opted to return some of the proceeds to shareholders. GPG shares rose four cents to $2.31 yesterday.

Meanwhile, the involvement in the Coles takeover plans of Australian private equity group Pacific Equity Partners has potential ramifications on this side of the Tasman, given that PEP is also interested in being part of any takeover of The Warehouse. PEP is believed to be keen to team up with Foodstuffs to buy The Warehouse.

The Warehouse has indicated that it might be interested in some parts of the Coles business if they are available for sale, so some shuffling of trans-Tasman assets is possible if PEP becomes involved with both Coles and The Warehouse.

In New Zealand, Coles operates 11 K-mart discount stores in competition to The Warehouse.

Companies Office records show that Coles Group New Zealand Holdings made an after tax profit of nearly $14 million for the year to July 2006, compared with under $10 million the year before.

However, sales dropped by about $5 million to $176 million. The Kiwi K-mart business has often been rumoured in the past to be available for sale.

Wesfarmers, the senior figure in the potential takeover, also has substantial operations in New Zealand.

It runs about 40 hardware stores under the Bunnings and Benchmark labels, while it also has the Lumley insurance business, which has 10 offices in New Zealand.