CORRECT: Shareholders Assn challenges Fletcher board to seek re-election
By Pattrick Smellie
(corrects Australian bank reference in para 7)
July 26 (BusinessDesk) - The board of directors of Fletcher Building has "no choice but to seek a new mandate" at the company's October annual meeting following last week's firing of chief executive Mark Adamson after the second major profit downgrade this year, the New Zealand Shareholders Association says.
"Right until last week, the Fletcher board was uncommunicative to the broader shareholder base and kept faith with Mr Adamson’s abilities," said the association's chief executive Michael Midgley. "The recent disclosures are clear evidence that governance was not as robust as it should have been."
A series of events suggested a serious culture problem at the country's largest listed construction firm, which the NZSA first raised with the Fletcher board last year, he said.
He cited as evidence comments by Adamson in 2013 to the Australian Financial Review suggesting the board didn't understand his strategy but went along with it anyway, an angry email written earlier this year by Adamson attacking senior staff that was leaked to the National Business Review last week, and "high staff turnover in some parts of the company".
Such factors "may have suppressed or filtered the information flow to the board," said Midgley. "We wonder whether it was a coincidence that the latest write-down came to light while the CEO was on leave."
The 2013 comments earned Adamson a public rebuke from the chairman at the time, Ralph Waters.
The Fletcher board is chaired by one of New Zealand's most respected business leaders, Ralph Norris, a former chief executive at Commonwealth Bank of Australia and chairman at Contact Energy. Other big names on the board include Tony Carter, who chairs Air New Zealand and Fisher & Paykel Healthcare and is a director of the New Zealand arm of Australia & New Zealand Banking Group; and John Judge, currently chair of ANZ Bank in New Zealand.
"The disaster was inevitable once former CEO Mark Adamson began insisting on winning large construction contracts almost regardless of price," Midgley in a statement. "The removal of many experienced senior managers and the reliance on construction work being almost entirely subcontracted has created problems and imbalances that may take years to fully address.
"These were entirely foreseeable and NZSA raised cultural issues with the board in 2016," he said. The association had also taken "credible information" to Norris after the first downgrade this year to suggest the $110 million estimate should be more like $230 million.
"Sadly, what we said to the company then and since has come to pass," said Midgley.
"Just days before the most recent downgrade, NZSA had met Adamson and other executives, but the increasing concerns we had were never communicated to the chairman. The former CEO’s response that the problems preceded his appointment five years ago, and that he had since put proper provisions and high quality staff in place, are hard to accept given that he personally signed a number of the larger contracts.
"Even if true, it demonstrates that the response was far too little and far too late," said Midgley.
Despite assurances to shareholders that the construction division was a small part of the company, it was the public face of Fletcher Building and was causing the company serious reputation damage at the same time as creating "a $2 billiion hole which impacts not only on shareholders, but also KiwiSavers and many other managed funds investors".
"NZSA is very concerned about comments made to us by senior outside sources regarding a loss of confidence in the ability of Fletchers to deliver, and what impact this might have", especially as the firm has a large forward order book and "there is no certainty that more issues will not arise".
"Fortunately, the company has a strong balance sheet even with the two additional Australian subsidiaries also being written down, it will recover over time," said Midgley.
Fletcher Building shares were trading mid-afternoon today at $7.71, up 1.3 percent on yesterday's close and well above the $7.38 low point hit during intra-day trading on July 20, when the downgrade and Adamson's departure were both announced. For the year to date, the shares have fallen 28 percent.
In the latest downgrade, Fletcher said operating earnings in the year ended June 30 were about $525 million, down from $682 million in 2016 and below the $610 million-to-$650 million range the company gave in March, itself a 15 percent downgrade against earlier guidance.