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The problem with trophy directors

Photo/Getty Images/Listener illustration

When former MPs accept an offer of a seat on a company board, the results can be disastrous.

Retired politicians can come a terrible cropper when they accept appointments to company boards. Just ask former Cabinet ministers Sir Douglas Graham and Bill Jeffries, both convicted last year of misleading investors while serving on the board of Lombard Finance and Investments. The Court of Appeal may yet overturn those convictions, but the stain on the men’s reputations – and the image of them standing forlornly in the dock – may not be easily erased.

Graham and Jeffries are hardly the first high-profile political figures to experience the taint associated with corporate failure. Wyatt Creech and John Luxton, senior Cabinet ministers in the National Government of the 1990s, both made the mistake of accepting appointments to the board of the infamous Blue Chip property group, which collapsed in 2008 with catastrophic consequences for investors.

Both men quit well before the Blue Chip house of cards imploded, but not soon enough to avoid legal proceedings brought by the liquidators – proceedings that were “reluctantly” suspended last month because the liquidators said they could no longer afford to fund the action.

More recently, the reputation of former Prime Minister Dame Jenny Shipley took a substantial hit with the failure of the big construction company Mainzeal, whose board she had chaired. Shipley’s involvement in the company led to questions about her suitability to remain chairwoman of state-owned energy firm Genesis.

Shipley also chairs Seniors Money International, whose subsidiary Sentinel Assurance, a leading provider of reverse mortgages, has been placed on notice because it doesn’t meet new minimum solvency standards. In a statement last month, Shipley said she was confident Sentinel was on target to meet Reserve Bank requirements.

Another former political high-flyer who has served on company boards with a less than stellar track record is Ruth Richardson, the slash-and-burn Minister of Finance in the 1990-93 National Government. Richardson chaired the failed private investment fund I-Cap Equity Partners, in which investors lost millions.

Dame Jenny Shipley. Photo/David White

Her other boardroom appointments, of which there have been many, include Jade Software Corporation and Syft Technologies, both of which she chairs, and dairy company Synlait – all regarded by business commentators as patchy performers. Kapiti Coast sharebroker Chris Lee, a forthright critic of poor corporate governance, describes I-Cap and Syft as “abject disasters”, although he expects better things of Canterbury-based Synlait, now under Chinese control.

And what about former National and Act Party leader Don Brash and his protégé, Epsom MP John Banks, who co-founded Huljich Wealth Management with Auckland society figure Peter Huljich? Brash was chairman when Huljich resigned over claims he had used his own money to top up funds in the firm’s KiwiSaver scheme to make its performance look better.

The financial penalties subsequently imposed on Huljich and the firm came to $446,500, but the Securities Commission decided against prosecuting Brash and Banks after concluding there was insufficient evidence that they knew the Huljich KiwiSaver Fund prospectus contained misleading information.

You don’t have to be Hercule Poirot to detect a pattern here. Former politicians seem careless, to say the very least, about some of the companies they get involved in.

It’s an issue that vexes Auckland investment commentator Brian Gaynor, of Milford Asset Management. Writing in the New Zealand Herald, Gaynor said the Mainzeal collapse showed that former politicians continued to make bad decisions about accepting board seats. Besides those mentioned above, he listed Sir Roger Douglas, Fran Wilde and Philip Burdon – all former ministers who served on the board of Brierley Investments when it was floundering – and Sir William Birch, who got caught up in messy goings-on at investment companies Viking Capital and Dorchester Pacific.

Even Sir Brian Talboys – a former National Deputy Prime Minister with a squeaky-clean record in politics – made the mistake of getting embroiled in Pacer Pacific, a company whose name became synonymous with corporate excess and ultimate meltdown during the sharemarket boom of the 1980s.

John Banks. Photo/Chris Loufte/HoS

Why they do it

Why ex-politicians are offered such appointments, even when they have no relevant business experience (Shipley was a schoolteacher before entering politics), is no mystery. As Gaynor explained to the Listener, a former prime minister or Cabinet minister is perceived as bringing an aura of credibility and respectability to a board.

They may not realise it, but some boardroom appointees are shoulder-tapped not for their perceived ability but purely for their name; hence the term “trophy director”.

A second reason is that politicians are valued for their connections. They are seen as opening doors in Wellington and providing access to decision-makers, though the perception of influence isn’t always matched by the reality. Gaynor observes that a former politician on the board is less useful now than in the days when the government exerted much closer control over business, such as through the issue of import licences.

Companies with Asian connections – such as Mainzeal, which was controlled by Chinese-born Richard Yan – particularly value the prestige that comes with the appointment of someone such as a former prime minister. “The Chinese place some weight on political status,” says Gaynor. That may explain why Shipley is one of only two non-Chinese directors on the 14-strong board of China Construction Bank, one of the world’s biggest financial institutions. (The other is banker Lord Peter Levene, a former Lord Mayor of London and chairman of Lloyd’s.)

Why ex-politicians accept such appointments is possibly even less of a mystery. Put bluntly, it often comes down to vanity.

As Gaynor puts it, a boardroom seat may seem attractive to a retired cabinet minister sitting at home with time on his or her hands. The money can be good – typically $60,000-80,000 a year but sometimes more, with perks – and the duties may not seem onerous: one meeting a month, which is probably a lot more appealing than long days at Parliament.

“They think it’s going to be easy, and it’s not. It’s a different kind of challenge,” Gaynor says. He suspects some boardroom recruits don’t bother to carry out due diligence – a thorough investigation of the company’s history, management and financial strength.

Lee calls them “figurehead directors” and says there are far too many in New Zealand. Often they know little about what’s required of board members. He adds that professional training in law or accounting isn’t necessarily enough to be an effective director; a board member needs to be streetwise, particularly if the company is involved in “murky” activities such as property development, to which finance companies such as Lombard and Blue Chip were heavily exposed.

The hardest companies to govern, he adds, are those with troubled histories and shifty chief executives who need to raise money quickly.

Economist Gareth Morgan, who founded his own investment company and has been a scathing critic of poor company governance, agrees that former politicians don’t always grasp the responsibilities and pressures that come with being a company director, including the cold reality that if things turn bad, the directors are the last men standing – the ones who must carry the can.

In fact, Morgan is concerned about the calibre of company directors generally, saying too many are appointed just to make up the numbers. Some company chairmen, he says, are interested only in appointing patsies – “yes-men and yes-women who make life peaceful for the rest of the board”. And that is bad for the shareholders whose interests they are supposed to protect.

Doug Graham. Photo/Mark Mitchell/NZH

The good and the bad

Gaynor concedes that although many political appointees to boardrooms lack relevant credentials, that isn’t always the case. Richard Prebble sits on the board of successful listed company Mainfreight, where his previous experience as Minister of Transport presumably comes in handy.

And although Creech and Luxton may have made a bad choice in joining Blue Chip, their political backgrounds would have been useful in establishing the cheese company Open Country, now second only to Fonterra in the dairy industry. Luxton is a former Minister of Agriculture, and Creech, as Gaynor points out, was involved in the restructuring of the dairy industry before he left Parliament.

Given those sorts of connections, is there a risk that former politicians will take improper advantage of inside knowledge and old boys’ networks? Gaynor thinks not. New Zealand politicians might sometimes make silly decisions, he says, but he has seen no evidence of them behaving unethically or abusing their position.

His biggest concern is with the type of company some politicians have been seduced into joining, by which he generally means finance companies. “That’s where a lot of the shenanigans happen,” he says in his soft Irish brogue.

Gaynor feels sorry for Graham, the patrician Minister of Justice in the Bolger and Shipley governments, with whom he served on the board of the New Zealand Superannuation Fund. “They are not crooks,” he says of the former ministers who got caught up in the collapse of the finance sector.

But it does seem reasonable to ask whether some former politicians overestimate their ability and underestimate the challenges of company governance.

John Hawkins, chairman of the New Zealand Shareholders’ Association, says there are two problems with appointing directors on the strength of their high political profile. The first is that they may lack relevant commercial experience; the second is that they are often recruited as a marketing tool to attract investors, just as TV personalities and sporting heroes were (think former newsreader Richard Long and rugby legend Sir Colin Meads) during the finance sector boom.

Problems are more likely to arise with private companies than those listed on the stock exchange, Hawkins says, because they are less accountable and less transparent. He agrees that ego can be a factor in accepting appointments. “We all like to feel we are valued and can contribute. Unfortunately, the contribution that’s required doesn’t always match the abilities of the person.” He adds that there’s no room on company boards for seat warmers.

The political advantage

Former Act MP and respected commercial lawyer Stephen Franks takes a more forgiving view of ex-politicians serving on company boards, pointing out that in some cases they bring useful skills to the table. He says it’s a matter of horses for courses, and points to his former Act colleague Prebble’s appointment at Mainfreight as an example of a politician successfully making the transition to the boardroom.

A person who has survived a career in politics often contributes useful insights that might otherwise be lacking at board level, Franks believes. He suggests Telecom might not have fallen out of public and political favour so spectacularly several years ago if its board had included a shrewd ex-politician with sensitive antennae. As it was, Telecom’s schmoozing and corporate-box hospitality masked the reality that the company had become loathed and no one would defend it when it became a political target.

“Former politicians who can keep a board from being blindsided may be worth more than all the others at times,” says Franks. “I’d venture that Michael Cullen [who chairs New Zealand Post and sits on the board of Kiwibank], Jim Bolger [former chairman of New Zealand Post, Kiwibank and KiwiRail] and Bill Birch [a director of Freightways] have done that over and over for the companies they’ve served.”

Politicians have other talents they can bring to bear. Franks says Helen Clark’s Labour Government appointed Bolger to head the board of New Zealand Post because of his chairmanship skills. Similarly, Gaynor says he has heard very positive reports about Shipley’s chairing of the Genesis board.

Hawkins, too, accepts there are situations in which it may be helpful to appoint a board member who understands politics.

He gives the example of former Commerce Minister Simon Power, a rising star in the Key Government who surprised colleagues by quitting politics in 2011 and was subsequently appointed to the board of NZX, which runs the stock exchange.

Franks also argues there’s some validity to the perception that ex-politicians can help make things happen in Wellington.

He says people with a political background, even those from opposing parties, have a rapport derived from shared experience and can relate to each other, which may be beneficial to a company trying to get a favourable decision.

“Auckland business people think the way to get the right decision out of Wellington is to fly down, talk reason and persuade people, and if that doesn’t work it must be because the people they’re dealing with don’t understand or are lazy.

“They can’t understand that it might just be that the people in Wellington are working to a totally different type of pressure, and that pressure is called democracy. The politician is looking two years ahead and thinking, ‘If I do this and this, will I get votes?’”

That may exasperate corporate types, Franks says, but a former politician understands it perfectly. “A politician is going to have a natural instinct for how people will react to something, rather than how they should react.”

He adds that a former politician on a company board doesn’t necessarily need to exert direct influence on Wellington. It simply helps to know how the system works and to understand the process of policy formation.

Too few "jobs for the boys"

Just how many former politicians sit on company boards? Not as many as you might imagine, and probably not as many as in previous eras. The Listener checked the boards of companies on the stock exchange’s top-50 index and found only three: Prebble at Mainfreight, Power at NZX and Birch, a former Minister of Finance and all-round political Mr Fixit, at Freightways.

Perhaps more surprising is the almost total absence of former politicians from the boards of state-owned enterprises. The only current examples the Listener could find on major SOEs were Shipley at Genesis and Cullen at NZ Post and Kiwibank.

Gaynor and Franks suspect governments avoid appointing ex-politicians to SOEs for fear of being accused of cronyism – the “jobs for the boys” syndrome. Yet it’s on the boards of companies such as these, which operate in politically sensitive sectors and may be subject to a high degree of regulation, that ex-politicians may have something to contribute.

Far from arguing against the appointment of former politicians, Franks thinks the National Government has been too feeble. As an example, he argues that Creech and Luxton would have been better used on the board of an SOE than on one overseeing a shonky finance company.

Gaynor even wonders whether it was government reluctance to appoint former colleagues to SOE boards – where they might have had relevant expertise – that resulted in some accepting invitations from less savoury enterprises, with unfortunate results. There’s surely a lesson there somewhere.

This article was first published in the March 16, 2013 issue of the New Zealand Listener.