Mighty River Monster| 500 Words
What if the Mixed Ownership Model as expressed in the form of a power company with a controlling Govt. shareholding and on-going obligations under the Treaty of Waitangi turns out to be - in commercial terms - a Mighty River Monster?
There are several reasons to fear this may be the case.
These have been fairly neatly illustrated by the recent events with Solid Energy and Meridian Energy (via Tiwai Point).
Large unexpected things happen in commercial markets. Companies win and companies lose - spectacularly, regularly, sometimes accidentally and on occasion through stupidity. MOMs are being sold as de-risked income stocks - and that is certainly what they look like under full state ownership.
The question is, will being partially privatised increase or reduce this risk?
The "market" assumption that a would-be shareholder might make is that partial privatisation will reduce risk because:
1. Outside capital will bring experience and know-how;
2. Greater efficiency will be achieved as the businesses are subject to greater scrutiny via continuous market disclosure at the NZX;
3. MOMs will be more flexible and able to adapt as independent listed companies than they are able to as state owned enterprises.
But are these credible assumptions?
It depends a lot on your views on the dynamics of how Government Ownership is expressed in Governance terms. And it depends on an assessment of whether in the New Zealand context these dynamics will improve post IPO.
"Outside capital will bring experience and
While this is true, what will be the experience of the outside capital be when they arrive? And if they don't get listened to, will they stay and fight or walk away and wait for the Government to sell the rest of the companies?
The myth that New Zealand's State Owned Enterprises are well run businesses was well and truly burst by the Solid Energy fiasco.
The debacle was no surprise to those who remember the 1990s (the same thing happened at the end of the 1990s with Solid Energy over foreign exchange contracts) - nor was it a surprise to the financial analysts who believe there is an opportunity to unlock value in the MOM float.
Digging deep into annual reports by the MOMs they see plenty of wasted expenditure and programmes which should not have proceeded, and which can now be cut improving the bottom lines of the businesses. Solid Energy showed how these excesses taken to an extreme can destroy all the value in a business.
Solid Energy's fall from grace carries with sanguine lessons on the nature of the business risks which are accentuated by State Ownership and the need to play a tune to entertain a Government master:
- Solid Energy used (we presume, albeit somewhat generously perhaps) generally acceptable accounting practices to convince the Government of John Key that it was sitting on an energy goldmine with billions of dollars of upside for the Nation and the Government's coffers. Turns out this was nonsense and the Government did nothing to stop them - seemingly because ministers believed the bull shit. Could this happen under a MOM model?
- Even after finding itself donkey deep in debt Solid Energy seems to have been encouraged to purchase Pike River mine by the Government, not only because it was a business decision, but because it helped to manage issues around the recovery of the bodies of the 29 miners who are entombed underground and which the Prime Minister said all efforts would be made to recover. Again could this happen under a MOM model.
So could these things happen under an MOM model?
If you take a culture of pandering to political masters and partially remove the chains - but maintain much of the dysfunctional governance aspects of state ownership - do you run a risk of making the situation worse?
In The End It’s All Down To The Boards
While you would certainly hope MOM is not a governance nightmare - lets not simply take this on faith.
How does the new governance situation look vis a vis the old one?
Ultimately a great deal rests on the quality of the boards running the MOMs - the quality of their appointment - and the quality of the arms length supervision provided by the Government.
For this reason while the pay rises for board members of SOEs are probably necessary in the long run - simply giving these pay rises to the existing board members before the companies are floated may be a mistake.
I.E. it may make these board members harder to get rid of post float - and that may be what is necessary.
SOE Boards vs MOM Boards - Whats The Difference?
- get paid modestly;
- have no opportunity for performance pay or stock options;
- are appointed by (and often shoulder tapped into the jobs) by Ministers but recruited and vetted by Treasury;
- serve at the pleasure of the Minister (i.e. can be sacked on the spot) and when sacked do not receive golden parachutes;
- are required to take into account the principles of the Treaty of Waitangi in making their decisions;
- report to Treasury and the SOE Minister as shareholder & face scrutiny at select committees.
- will be paid in line with NZX market norms (with decisions made by a remuneration sub-committee of the board);
- may have the opportunity for performance pay and stock options (this may become a political issue);
- may have the opportunity to provide themselves with golden parachute clauses (this may become a political issue)
- will be appointed by shareholders at AGM ( but as the Government will hold 51% it will have a very powerful perspective on the question and so Ministers and Treasury will continue to play a powerful role);
- typically can only be replaced at AGMs;
- are required to take into account the principles of the Treaty of Waitangi in making their decisions (albeit this responsibility arrives on them indirectly via their responsibility to look after the interests of their major shareholder in this regard);
- report continuously to shareholders via the NZX disclosure regime (NOTE: it is likely that there will also be a parallel monitoring role played by Treasury reporting to the Finance Minister and select committees).
Is this change a mitigation or an aggravation of the Governance burden?
So what about the motives of outside capital?
At which point smart outside capital might very understandably decide it would prefer to see partial privatisation become full privatisation as quickly as possible.
If only to remove unnecessary complexity and burden at a Governance level.
will be achieved as the businesses are subject to greater
scrutiny via continuous market disclosure at the NZX.
This is arguably the only part of the "pro MOM sale" analysis which holds any water.
However it presupposes that the MOM organisations will be able to find their heads sufficiently to identify and pursue greater efficiency.
In other words is there is a risk that upon listing there will immediately commence a complex scrap between competing interests with different views on what the company should do?
Treasury will have a view, the Government will have a view, the Prime Minister may have a different view, institutional incoming shareholders will have a view, the board will have multiple views and management will also have a view.
The prospectus presumably contains the current strategic thinking but that is not determinative. Post float who will be in charge?
Definitely not the Minister or Treasury - as what would the point of the float be if it were - in which case the answer has to be the board and management.
We can expect them to move rapidly to form a remuneration subcommittee. On this they will be in agreement with management and most probably immediately run into a dispute with shareholders. At least we are likely to find out who wins this battle swiftly.
Ultimately this may become a recipe for organisational chaos notwithstanding continuous market disclosure.
"And they will be more flexible and able to adapt as independent listed companies than they are able to as state owned enterprises."
If the fears expressed above prove correct then here is where you have to conclude that the theory behind the MOM process is just plain wrong.
The gen-tailer MOMs will be creatures of three (or possibly even four) masters.
Whereas as SOEs they have one master - the Government. MOMs will need to be cognisant of the views of Government, the NZX and the Treaty of Waitangi (+ their customers).
Ultimately their multiple masters will push them and pull them in different directions and prevent them from being able to provide real benefit to anyone, neither the people of NZ as shareholders and customer, their shareholders, nor the Tangata Whenua - who thanks to the Supreme Court decision (which is not yet well understood) continue to have an on-going stake in these businesses and what they do.
- Alastair Thompson | 500
Words | Monday, 8 April