Cover Story: Kerryn Downey – Receiving confessions

A receiver’s lot might not, on the face of it, seem like particularly happy one. But Kerryn Downey, retiring senior partner of McGrathNicol, receivers of high-profile busts like South Canterbury Finance (SCF) and HIH Insurance, doesn’t see it that way.
On the contrary, he considers the governance and management lessons his almost 40 years of tidying up after lazy, incompetent, bent and sometimes just unlucky business leaders taught him were invaluable and often fun to grapple with.
Bad governance kills companies. But Downey believes that management is more often than not most responsible for laying enterprises to waste. Between them managers and directors drove 252 companies into receivership last year – down from 296 in 2010.
“Businesses fail for combination of reasons,” says Downey. But in 90 percent of cases incompetent or fraudulent management sits at the core. And directors are invariably ill equipped or unable to deal with management or the problem.
“One management failing or another precipitates collapse. It is rarely the actions of competitor, employee or even single bad business decision that brings business down,” he adds.
Poor governance in New Zealand is, in Downey’s experience, usually linked to director longevity – not age so much as years spent in the same boardroom. Under-motivated, under-equipped but handily connected individuals – not that Downey would express it this way – serve time and take director fees and leave shareholders with inadequate investment returns. Companies like, for example, Rubicon, which Weekend Herald columnist Brian Gaynor suggests retained directors whose many years of tenure were inverse to the marginal measure of company performance.
There is, according to Downey, too much cronyism in Kiwi governance. Directors shield each other from criticism and keep underperformers at the board table. There are, he adds, too few independent directors or, if independents are appointed they are too often incapable of doing the job. “Board composition, invariably lacking in diversity of experience, is significant problem. We saw it clearly in the finance sector where directors couldn’t contribute because they did not understand the business sufficiently,” he says.
And then there are directors who fail to put enough time and effort into the job to arm themselves with the right questions to ask at board meetings. Directors don’t need all the answers, but they must ask the right questions. Failure to ask good questions is, Downey thinks, consequence of directors being un-schooled in accounting and financial reporting skills. “They must also understand the regulatory requirements of governance. Too few directors understand the fundamentals and affairs of the businesses they govern,” he adds.
Successful companies, on the other hand, “generally have good directors”. New Zealand’s pool of competent directors may be too small, but there is, to Downey’s mind, direct relationship between good directors and good company. “A good board comprises mix of individuals who know the business, include independents and display diversity of understanding. They are seasoned,” he says.
New Zealand companies frequently lack clearly defined strategies, particularly ones for difficult economic times. “Poor strategies understate what is really happening in the world economy,” says Downey. “Both directors and managers invariably fail to comprehend the full implications of events like the global financial collapse (GFC). They ignore the fact New Zealand is increasingly and directly exposed to world events.”
Downey’s on the side of those calling for more director accountability. “Managers are subject to the spotlight through performance reviews,” he says. “Directors should be too. Governance in New Zealand has been too cosy for too long. It’s been like club.” But he also thinks things are changing. “There is more focus on director education and on finding good independent directors.”

Fell, not pushed
Downey fell into the receivership or “corporate recovery” business when he worked as young auditor in Canada 30 something years ago. He worked on receivership and enjoyed it. “I enjoyed the cut and thrust, running business and dealing with real people. It was rewarding to rebuild the company,” he says, reflecting on his first salvage operation.
He returned to auditing work in New Zealand, but it wasn’t the same. Back to Canada in 1982 he joined global accounting firm KPMG in Toronto to resume salvaging sick enterprises. He stayed until 1998 when he returned to New Zealand to lead KPMG’s Auckland recovery practice, business McGrathNicol acquired in 2004 and of which he became senior partner.
What made corporate salvage so attractive? “I liked problem solving,” he says. And there was something “exciting” about getting call to report immediately to business about to implode.
So how did Downey become an instant industry expert in order to deal with the specific problems of collapsing enterprise. He is, after all, critical of directors whose understanding of the business they govern is not up to scratch.
The first rule is not to fire everyone at the top. “Keep the capable managers,” he says. “Then assemble management team and empower them to do what they were doing before, with some guidance. Then get alongside them to learn as much about the business as possible as quickly as possible. Walk around and ask questions.”
It’s important to find out what the problem is, to understand why it occurred and to then search for the fix. If it can’t be fixed, then get ready to sell up and realise the best possible return.
Depending on the circumstances of their appointment, receivers like Downey are viewed as both satan and saviour. “In the case of SCF, management was worn out by the time we were appointed. They’d had advisors and government all over them for months,” he says. “We identified the right individuals and then got alongside them to work together on the problem. They were motivated to find solutions.”
Downey believes his empathy with people differentiates him as receiver. “You have to help people head in the right direction. I have always enjoyed that part of my job. Working with management was the plan we took to Government for SCF and they liked the approach. I believe the outcomes we achieved are evidence that our approach worked.”
Downey’s receivership style is, he says, collaborative. “Receivers used to be more dictatorial and heavy handed, but that’s changed. Banks don’t like desk thumping receivers any more. They tend to attract law suits and litigation. I have style which, if the banks didn’t like it, they wouldn’t use me,” he adds.
“I like to lead from the front. I talk and confer with others, but I don’t hold back from making decisions. Good judgement and being collaborative and decisive have been fundamental to my career successes.”
So how does receiver or liquidator measure success? “Meeting the expectations of the stakeholders that put you in place,” he says, after moment’s reflection. Those expectations can vary markedly. In the case of SCF for example, he thinks resolving the issue in 18 months at cost which, while high, was probably not as high as it might have been, was success enough.

Downey is not afraid to fix problems. “I enjoy identifying problems and finding solutions. Then I persevere with providing the solution. I’m like dog with bone when it comes to getting result.” The characteristic has, it seems, worked well for him.
He doesn’t suffer fools gladly and respects intelligence, he admits somewhat reluctantly. “In this business you soon get to know when someone is trying to snow you. Equally, you soon realise when someone knows what he or she is talking about.”
The lessons New Zealand can take from the finance sector’s rash of collapses are, to Downey’s mind, as significant as they are obvious. “You can’t put them down to any one thing, but what happened is indisputab

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