Top 200 Thinking

Collectively, the results delivered by companies that made it into NZ Management’s Top200 list this year only tell story of continued recovery from the world’s worst economic downturn in 40 years. But individually, they could suggest something little more promising.
Revenue generated by the top 200 companies increased 7.9 percent on last year’s $141.5 billion to $152.8 billion. The top 30 financial institutions went backwards, with revenue down 9.1 percent. Add the two groups together, and revenue increased five percent to $179 billion. Given the world economic climate, that’s not bad amount of growth.
The after-tax profitability of the top 200 dropped 0.6 percent on 2010 to $3.99 billion. The finance sector did better, following the hit inflicted by the global financial crisis (GFC). They lifted their collective net profit by 420.7 percent to $2.6 billion, well up on last year’s low of $500 million.
None of this helped the Government’s revenue coffers much, however. The combined tax paid by our top 200 companies plus the top 30 financial institutions collapsed almost 50 percent to just $3.25 billion compared to last year’s $6.2 billion.
Tax paid by the top 200 companies fell 29.8 percent and 66.5 percent by the financial institutions. Little wonder the Government spending squeeze continues, which doesn’t help economic growth either.
The top 20 of the nation’s 200 largest companies generated 50 percent of the total revenue and 63 percent of the collective net profit. Revenue nudged up just one percent on last year and the tax garnered lifted just three percent.
The top 100, or half the list, generated 86 percent of the total revenue and earned 108 percent of the profits (reflecting collective decline in profits in the other 100 companies). That was something of an improvement on 2010 when the top 100 accumulated only 90 percent of net profits.
When it comes to making the largest profits, the banks had it pretty much to themselves. Only Fonterra, which came in second behind ANZ National, could match their numbers.
Fonterra’s lift in revenue was also impressive, climbing from $17 billion last year to break the $20 billion barrier this year – far and away our largest company and almost three times bigger than its nearest rival, Fletcher Building. World prices for dairy products made big difference.
The agricultural sector had good year. Strong commodity prices and consequent high returns meant farmers splashed out on fertiliser and other sector-related products and services.
Companies like Rayonier (forestry), Open Country Dairy, Combined Rural Traders Society, Seeka Kiwifruit, Landcorp Farming, Viterra (grain), Balance Agri-Nutrients, Ravensdown Fertiliser, Westland Co-op Dairy and Livestock Improvement Corp all featured among those with significantly improved revenue or profitability.
However, this year’s Top 200 Awards judges think there is more to the enhanced performance of some agriculture-based enterprises than just the godsend of strong commodity prices – though they undoubtedly provide the premium.
“There is an underlying sophistication coming through in many of New Zealand’s largest businesses, and particularly in the agricultural sector,” says Janine Smith, principal of The Boardroom Practice and professional company director. “It is very heartening and I think we can feel more confident about New Zealand going forward if this continues.”
The other two judges, Asia-Pacific Risk Management director Roger Kerr and Neil Paviour-Smith, managing director of Forsyth Barr, agree with Smith.
There is, says Kerr, greater sophistication in management processes, in the use of smart technologies, in the management of capital, and in managers’ and directors’ strategic approach to doing and building their businesses.
“Farmers are inherently risk takers,” says Smith. “And farmers that are now sitting around board tables are taking more calculated and better informed risks. They are competent directors and smart business people.”
And while strong commodity prices had positive knock-on effect on companies such as the Port of Tauranga and transport operators like Mainfreight – this year’s Deloitte/Management magazine Company of the Year – the judges felt that more New Zealand companies were emerging from the rubble of the recession determined and equipped to tackle the world.
Companies such as outdoor equipment and clothing retailer Kathmandu and aged care enterprise Ryman are good examples. Both are category finalists in this year’s awards. Both companies, said the judges, think more professionally about where they are going and how they might get there – in the home and global markets.
All three judges identified improved governance as key factor in the emergence of smarter, more strategic and ambitious thinking. There is little doubt in their minds that any improvement in the corporate performance of New Zealand companies will have to come from the top – from the nation’s boardrooms.
It seems that, finally, there are more competent directors sitting around the board tables of greater percentage of Top 200 companies than there used to be.
Directors need better understanding of the companies in which they serve and the industries in which they operate.
“[We need more] like the directors of Mainfreight,” says Kerr. “They know the freight and transport industry inside out. They are well informed about the business and world trends, and consequently they are now operating successfully around the globe. They really know what they are doing.”
New Zealand enterprise needs more than just suite of competent executives. It needs even more competent directors who do more than simply attend board meetings and ensure compliance with governance regulations.
“They need to understand strategies too and have deep understanding of the sectors in which they are involved,” says Smith.
“Directors don’t need to get involved with the operational detail, but they do need to understand great deal more about the markets they are in. They must know more about what drives and motivates successful enterprise than simply complying with all the rules of good governance.”
Directors must do more than read and note management representation letter or rely on external advice as way of outsourcing their duties and obligations, the judges warned.
“There is an expectation that where individuals have specific capabilities and knowledge they will use them,” says Paviour-Smith. “They do that through astute (boardroom) questioning and analysis of management actions.”
Competent and committed directors are critical to the process of turning New Zealand’s largest, and even its medium-size companies, into world-class performers. “They need to make greater strategic personal contribution and be able to cope with the increasing complexity of business,” says Kerr.
Highly competent directors are as important to the success of an enterprise as equally competent managers. Boards can’t, said the judges, pad out their numbers with accountants and lawyers. Directors need to know how to ask the hard questions.
“Executives are learning that it is acceptable for directors to ask penetrating questions and to delve more deeply into the business,” says Smith. “The extent to which directors are allowed to do that, however, goes back to the effectiveness of board chairs.”
The judges agreed there are signs of positive change in the quality of chairs. This too is having positive impact on the performance and ambitions of more Top 200 companies.
“The sooner we do away with the ‘don’t interfere with management’-type chair, the better,” says Smith.
Better performing boards should be priority. “Even institutional investors are demanding it,” says Kerr, who thinks investor expectations have lifted in the wake of the corporate and financial disasters of recent years. As guardians of shareholders’ interests and as the scrutineers of executive performance, directors should