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Wednesday
Sep262018

An Object Lesson In Governance

Here are extracts from today's NZH article on the demise of Mainzeal Construction - a signal event in New Zealand's less that glorious history of corporate governance.

Why I post this information is because this set of top-shelf directors relied as have so many others before them, on the information provided by auditors. As readers of this blog will understand from the content of relevant posts in the past, I remain totally uncovinced regarding good governance of our councils - particularly those that have entered into commercial activities, or the ability of couincillors to exercise due diligence while relying on the fickle oversight of auditors - both Government and private.

"Significant governance risks existed at failed construction company Mainzeal almost a decade before the company collapsed, according to evidence from veteran company director Sandy Maier. But directors, including former Prime Minister Jenny Shipley, didn't act.

Mainzeal Property and Construction, one of New Zealand's largest building companies at the time, went into liquidation in February 2013 owing creditors, including numerous sub-contractors, more than $115 million.

In his statement of evidence prepared for the high-profile case brought by Mainzeal liquidators BDO against the former directors, Maier argued there were warning signs as early as 2004, when Shipley became an independent director on the Mainzeal board.

These included the fact that independent directors had virtually no control over multi-million dollar related-party loans, and relied solely on assurances - which turned out to be wrong - that the money would be repaid. Mainzeal went into liquidation in February 2013 owing creditors, including numerous sub-contractors, more than $115 million.

Maier first came to New Zealand from the US in 1986 as chief executive of Citibank and has been on more than 500 boards in his career.

He said in his evidence that between 2004 and 2008 the debt owed to Mainzeal by related company MLG Trading rose to almost $30m. At the same time, MLG got into financial difficulty, going from having more than $2m in its coffers, to having almost $45m of negative equity.

Yet Mainzeal directors didn't tell shareholders and contractors about the problems."Despite MLG's clear inability to repay that debt, the MLG loans were not impaired in MPC's statements," Maier said. "it was irrelevant that auditors signed off the company's annual accounts and didn't signal any problems until 2010."

"The role of a director is not simply to rely on the auditors' figures without questions or separate assessment. A director is required to look beyond the numbers to consider their reliability and test the risks that may affect the company's position.

in the case against Mainzeal's former directors, BDO is trying to recover $75m from the former directors - or rather the professional liability insurance companies standing behind them. The Mainzeal directors - Shipley, Paul Collins, the former Brierley Investments chief executive knighted in the 2015 New Year's honours list, Peter Gomm and Clive Tilby - reject BDO's arguments. Theeir defence counsel - Jack Hodder QC, argued in court last week they were "intelligent, thoughtful, involved and conscientious directors of Mainzeal".

Note that Mr Maier questioned the actions of the Mainzeal directors over a period of several years, and  that their defence Counsel - Jack Hodder QC, claims that "They were intelligent, thoughtful, involved and conscientious."

The only problem is that he could equally have said that they had proven to be serially incompetent over several years. Does it seems likely that our councillors are likely to be materially more competent in their governance role?

 

 

 

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