Magazine article New Zealand Management

The Director: Kerryn Downey. Receiving Confessions; Governance and Organisational Leadership So Bad That It Drove Enterprises into Receivership and Liquidation Have Kept Kerryn Downey Busy for 30 Years Reconstructing or Rubbish-Binning Them. Now He Wants to Share Some of the Lessons He Has Learned

Magazine article New Zealand Management

The Director: Kerryn Downey. Receiving Confessions; Governance and Organisational Leadership So Bad That It Drove Enterprises into Receivership and Liquidation Have Kept Kerryn Downey Busy for 30 Years Reconstructing or Rubbish-Binning Them. Now He Wants to Share Some of the Lessons He Has Learned

Article excerpt

Byline: Reg Birchfield

A receiver's lot might not, on the face of it, seem like a 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 a 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 a collapse. It is rarely the actions of a competitor, employee or even a single bad business decision that brings a 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 a 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, a 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, a direct relationship between good directors and a good company. "A good board comprises a mix of individuals who know the business, include independents and display a 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 a club." But he also thinks things are changing. …

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