Australian Corporate Governance Wrap March 2010
The Value of Good Governance
It would have been very easy this month to lead with a commentary highlighting the findings of various corporate autopsies which have been featured in the press (more on those below). However, we thought it might be nice to start on a positive note and draw your attention to the corporate governance ratings provided by Regnan, and utilised by Goldman Sachs, which show a direct link between high governance standards and outstanding market performance http://ow.ly/1oKmQ.
During March 2010, the Department of Innovation, Industry, Science and Research (that’s a mouthful) released a research paper titled “Management Matters in Australia” which also found a strong positive relationship between good management practices and firm productivity http://ow.ly/1dzqG. One of the key implications from the study was that investing in management practices is usually a much more cost effective way for firms to boost productivity, relative to hiring additional employees or direct investment in fixed capital.
Corporate Autopsies
Ok now for the corporate autopsies. Where do we start? It’s hard to go past Lehman Bros and its use of what has become known as “Repo 105s” to hide $50 Billion in assets through off-balance-sheet transactions. Repo 105s were an accounting trick that allowed Lehman to sell packages of mortgages, Treasury bonds, Eurobonds etc on a temporary basis at the end of an accounting quarter, with an obligation to buy them back a few weeks later. This money-go-round had the effect of making Lehman’s look a lot healthier than it actually was, and probably sealed its fate.
This month we also got a first glimpse of the world inside Allco with Independent Director Bob Mansfield famously asking before a board meeting whether Rubicon was a “pile of sh#t” http://ow.ly/1rwFb. History of course, shows that it was. However, not before three Rubicon shareholders, including Allco directors David Coe and Gordon Fell, shared in $63m cash and $132m of Allco stock when they sold out in a classic related party transaction. Then, of course, there was the little matter of the $50m loan to help cover margin calls on Allco shares held by a group of senior executives. Nice work if you can get it!
Finally it would be very hard not to mention the purchasing procedures at ABC Learning which showed Eddy Groves’ former brother-in-law Frank Zullo, provided maintenance services and low balled cleaning bills, but invoiced $100,000 for a sink. Now why would that be?
Banks and SME Business
When the Reserve Bank comes out and says it, you know it must be true. Banks are squeezing small-business customers with higher fees and fatter margins while competition between lenders has fallen http://ow.ly/1qUf5.
The big banks’ share of small-business lending has jumped to 75 per cent, from under 65 per cent before the GFC. Spreads on business loans have increased more than those on home loans and, of course, as competition dwindles banks are taking a more cautious approach to lending. All of this when Westpac, NAB and ANZ locked in a combined $7.4 Billion in profits http://ow.ly/1sQ9h in the first half of the financial year.
The need for fatter margins to cover the perceived “risk” of small business is, of course, a fallacy given that most small business owners have their houses and years of “blood sweat and tears” on the line if their businesses fail. If you want to see where the real “risk” lies, you really need to go no further than the spectacular list of Australian corporate failures including Babcock & Brown, Storm Financial and Opes Prime. It’s a great business model the banks have where they can make fundamental credit risk errors at one end of town and then just claw back the losses from the “engine room of the economy”.
ASX Disclosure Regulations Being Ignored
ASX listing rules require companies to immediately disclose information that could be considered material to their share price. Unfortunately some companies just don’t seem to get it. In March, ASX took a leaf out of Pauline Hanson’s book and sent a series of “please explain” letters. Star recipients have been Gunns, Nufarm, Toll Holdings and Sims Metal Management http://ow.ly/1gqX3.
Complispace 