GOVERNANCE : Gearing for growth

This year could be the year, if they choose, in which company directors stop the “three Bs” syndrome dead in its tracks. You know the one. It’s when business owners work hard to gain the trinkets of success then, once they’ve accumulated the beach-house, boat and BMW, their business growth plateaus out.
One of the more recent and seminal commentaries on this syndrome was the annual ANZ privately owned Business Barometer. The last edition of the Barometer was published several months ago. But for companies keen to shrug off mediocrity and break through the so-called glass ceiling, it offers work-in-progress template for continually refining and finessing good governance.
The Barometer (which NZ Management initially covered in September 2007) doesn’t shy away from addressing pertinent and pressing issues. It questions whether willingness in some parts of New Zealand business to settle for complacency could be stifling business growth. It also asks if lack of ambition to take business to the next level, or lack of knowledge on how to grow or fund that growth, could be key drivers of this complacency.
The businesses in these categories typically have turn­overs ranging from $10 million to $150 million and are strong contributors to economic growth. Most of them are controlled and managed by their main shareholders, many of whom also founded the business. As ANZ noted, their hallmark is that they have been successful and have established platform with the potential to create further wealth for the benefit of shareholders, stakeholders and the country’s economy.
So why is realising their maximum growth potential, for some, so elusive? Unsurprisingly, the Barometer highlighted that the role of boards is major factor among several confronting the privately owned business sector.
At first glance, the results from ANZ’s sampling of just over 1000 businesses seemed encouraging: two-thirds of companies have boards, most meet reasonably frequently, and more than half have non-executive directors in place. Closer examination of the results uncovered some more disturbing trends. One in three companies had no board at all – which ANZ dubbed surprising statistic given the size of many businesses.
Only half of boards meet ‘regularly’ (monthly or bimonthly), raising questions as to the involvement and hence effectiveness of many boards. Nearly half the respondents (48 percent) had no non-executives on their boards. The true percentage could be much higher if other family members and/or the company’s lawyer or accountant were eliminated from the result.
ANZ’s experience is that high growth potential companies of this size have much to gain from employing truly independent director on the board. Independent directors bring focus on the drivers for growth and the future direction of the company, rather than just governance. They often bring international experience and wealth of expertise to the table.
Dunedin-based tissue-converting company Cottonsoft is classic example of this.
Now in majority Indonesian ownership, Cottonsoft has access to greater variety of tissue grades and enhanced technology. It also has improved scope for research and
development.
Indonesian-based Asia Pulp and Paper (APP), the fifth-largest pulp and paper manufacturer in the world, bought 75 percent of privately held Cottonsoft last year. It represents another major step up in the company’s growth curve.
In 1988, Dunedin investors Roy Shanks, Merv Wilson, Marty Hughes and Allan Collie plucked the former Plypac Industries from receivership and turned it into the country’s second-
largest maker of toilet tissue, paper towels and serviettes. Since then, Cottonsoft has grown 20 percent year on year for the past eight years to be number two in the country behind Carter Holt Harvey. The company has an annual turnover of $50 million and mainly supplies the grocery trade.
Although the company’s former managing director Allan Collie moved to Auckland in 2001, Cottonsoft remained firmly in southern ownership.
Historically, all the company’s product has been made in Dunedin and freighted around the country – but for every dollar the company spent on the factory floor, it spent $2 on getting its product to its mainly North Island customers.
Last year Cottonsoft blamed record fuel prices for its decision to shift part of its manufacturing operation to Auckland, which saw 19 employees in Dunedin lose their jobs. new processing plant in East Tamaki, Auckland now serves its North Island market, while the existing Dunedin plant continues to service the South Island.
This restructuring was part of long hard look directors and senior management had taken at the company’s future during the past two years, according to chief executive Steve Silvey.
The subsequent decision to sell to APP was borne out of desire to strengthen the company’s supply chains and align itself with major supplier of raw materials, he said.
APP wanted to enter the Australasian market but wasn’t able to do so directly. It wanted access to local market knowledge and know-how, and strong brand, Silvey said. Informal discussions between the two companies led to the takeover by APP.
Founding Cottonsoft director and shareholder Roy Shanks credits the board’s collective decision to appoint experienced company directors Alan McConnon (2003) and Bill Baylis (2004) to bringing the company full circle to point where new owner could grow the business further.
Baylis, recently retired as chairman of rural servicing giant PGG Wrightson, is highly experienced in public and private company governance and at one point did share valuation of the company in his capacity as Dunedin accountant.
McConnon is former senior executive of the iconic Mainland Products cheese maker, who, with his brother Baird and former Fonterra chief executive Craig Norgate, was poised at the time to help shape radical change in the corporate agribusiness landscape with their takeover of Wrightson with their Rural Portfolio Investment joint venture.
At one point in his tenure on the company’s board, Roy Shanks remembers being so hands-on he’d be sweeping the factory floor one day and helping shape its strategic direction the next.
As time wore on, and the company grew, it became more and more apparent that stricter demarcation was needed. Today, Shanks has no issue with that at all.
“If you want to compete and succeed in business, you have to be prepared to impose some checks and balances,” he said.
While Shanks and his fellow investors sold out of Cottonsoft to ensure the value they had built up over many years was preserved, the ANZ survey worries there are not nearly enough companies with similarly creative mindset.
“The desire of principal shareholders to be less active as managers in the next three years suggests significant oncoming change in ownership.”
But are business owners preparing for this? Will they let go of the reins – in stages or at once, or will New Zealand end up with an ageing ownership demographic either unwilling to pursue, or unsure how to tackle, the next phase of business growth?
If the latter, there will be bunch of Kiwi businesses failing to pursue opportunities or to invest in maintaining competitiveness, the survey suggests.
Could this lead to the loss of “frustrated next generation” of middle managers and even significant decline in the prospects for business and its value over time?
There are other telling statistics in the Barometer which back up ANZ’s plea for systemic and attitudinal change, particularly in the approach companies have (or don’t) to the recruitment of independent directors.
Its figures showed independent directors were present in just 52 percent of companies, with just under half appointing only one. However it was an encouraging sign that of the 48 percent not employing professional director, half agreed they could benefit from doing so as part of range of “growth initiatives”.
ANZ says the role o