Learning from the Mainzeal collapse

Today several former Mainzeal company directors were ordered to pay N.Z.$36 million in a high court ruling. The ruling is the latest phase of a long running saga that started with Mainzeal going into liquidation in 2013 owing $110 million.

At the core of the problem is the fact that the boardroom directors of the company knew full well that it was in a parlous state, yet they continued to allow it to trade until it imploded. Four directors have now been ordered to pay $36 million in damages including former Prime Minister and National Party leader Jenny Shipley.

So how did Mainzeal get to this point and what lessons does it have for those in corporate positions of responsibility?

A Richard Yan was working for Mainzeal during the school holidays in 1981. In 1996, after completing a business degree, he oversaw the takeover of Mainzeal and the creation of Richina Pacific Group to manage his business assets. During the pivotal year of 2004, several things happened:

  1. Dame Jenny Shipley was asked to join
  2. Capital was extracted from the company to prop up business assets in China
  3. Mainzeal made a small profit that was wiped the following year, and then see-sawed in 2006-07

In 2009 PriceWaterhouseCooper had concerns about the solvency of Mainzeal. The following year Dame Jenny Shipley raised concerns about the worsening balance sheet. By the end of 2011 the working relationship between Mainzeal and the rest of Richina Pacific Group had deteriorated to the point that Ernst & Young were commissioned to do a governance report on Mainzeal.

And all this time fresh attempts to recapitalize Mainzeal were being attempted using various means, such as a pre-paid goods agreement, getting money back from China based assets and setting up entities in New Zealand to distract claimants.

Perhaps the death knell was a spat with Siemens in 2012 that saw them withhold payments over work upgrading the electricity links between the North and South Islands. Coupled with leaky building claims targetting Mainzeal work and the possibility Mr Yan’s wife might be made bankrupt if the company collapsed – leading Mr Yan to warn he would walk if his wife was not released from a guarantee she made to B.N.Z.

The final blow was struck when an emergency meeting in January 2013 saw a motion passed to invite B.N.Z. as the major bank involved to appoint receivers. It immediately suspended loans and shortly after the company caved in.

For years until being liquidated in 2013, it continued to trade, during which time it racked up $110 million in debt that will largely never be recovered.

The directors might have been ordered to pay $36 million, but as holders of liability insurance, it will come out of their company and not their personal pockets. Clearly not smart enough to realize that Mainzeal was in trouble, but smart enough to make sure their pockets were protected by insurance.

For me this is not good enough. If a person or company continues to trade and rack up debt despite knowing it is not in a position where it can realistically trade, then when balancing the books – or what is left of them, the creditors should be able to require the forfeiture of luxury assets to make up the difference.

Of course this would bring howls of rage from the defendants, highly expensive attempts to get the case thrown out in court and warnings of doom and gloom. With similar certainty, the allure of a directorship on a corporate board and the opportunities to make significant money would be enough to overcome the doom saying.

Historic examples of collapses make me wonder if New Zealand has learnt anything from corporate failure. Based on those examples, which include Bridgecorp in 2007 owing $490 million, Equiticorp in 1989 with $1.4 billion in assets and $550 million in debt, among others I think the answer is a resounding no. Whilst not as big, public expectations around the application of the law, the need for greater accountability and the Global Financial Crisis of 2007-2009 have all focussed the spotlight on these types of businesses in ways I think some with influence do not like.

The death of a New Zealand and Australian retail institution

“Dick Smith – that’s where you go…”

How many people remember that familiar jingle?

For decades Dick Smith was a New Zealand and Australian retail institution. It was a store where you went for to get parts for your electronics project – whether it was diodes, L.E.D. lights, or spare wire, Dick Smith had it all. The chain of stores that was set up by its name sake was

On Thursday I decided to say my farewells to this dying chain. I will say dying instead of calling it a store about to be executed because wandering around inside it looked depressing, as dying is. There were staff milling around not quite sure what to do with themselves. Some were just staring at empty shelves. Others were helping customers. None of the exchanges I heard either between staff or between staff and customers sounded particularly happy or chirpy. Many of the customers were just milling around too, perhaps taking in the fact that this would be probably the last time they entered a Dick Smith store.

The shelves were barren and will have become more so since I wandered around the Riccarton store in Christchurch on Thursday afternoon. What was left were a few phones from the major mobile companies, cords, plugs, U.S.B. bits and memory sticks. All around were signs noting what else other than stock was for sale. As the shelves themselves, and other fittings such as the security gates that detect anyone trying to steal items without paying for them are for sale as well, the death of Dick Smith stores will be when they are empty spaces with no character or life left in them.

After some wandering around, taking in the sight of a dying retail chain, knowing this is happening in stores all over Australia and New Zealand – Dick Smith had 363 stores across the two countries, including 35 in New Zealand, which will be closed by 29 April – I purchased a couple of memory sticks. All the good stuff had gone, despite the number of customers milling around possibly suggesting otherwise. After taking a couple photos of the store, I took a final look around and concluded that this particular store would be lucky to still be open at the end of trading on Sunday.

It is sad to see such an institution go, though I have been told their decision to make a foray into things such as flat screens may have been their undoing as there were numerous chains already in a competitive market. It is shocking because of the way in which the staff have been treated by management, though in some ways lower level management was as much a victim as the staff they were responsible for.

Come 30 April, New Zealand will be in the post Dick Smith era. We cannot save the store or the staff from losing their jobs, but if there are any lessons to be learnt they must surely be about how to treat staff in such situations as this, as the communication by all accounts has been abysmal at best.


The problem with shell companies

A shell company is a business with no active business activities or assets. It is not necessarily an illegal enterprise as often they are the foundation for a potential start up company. In saying that shell companies are not always genuine businesses and often – intentionally or not – they are the front for illegal business such as money laundering, bribery, scams and so forth. Numerous examples are known to exist in New Zealand, but one of the more spectacular cases is one that has just been outed.

This is not the first time that New Zealand has faced embarrassment in dealing with shell companies. In 2012 an investigation by the B.B.C., Guardian and International Consortium of Investigative Journalists uncovered evidence that New Zealand shell companies had been the front for the illicit business activities by the Russian Mafia, drug barons in Mexico among others. The same investigation found that New Zealand had been struck off the list of favoured countries by European banks because of money laundering activities by New Zealand registered companies based in Latvia.

Problems with shell companies in New Zealand have been known about at least since 2011, when the then Minister for Commerce, Simon Upton called out SP Trading following an investigation that found it had chartered a plane for an illegal North Korean armaments transfer. Months before that 2012 investigation came to the surface, New Zealand Government officials had claimed to be cracking down on shell companies. The then Minister for Commerce, Craig Foss, said that New Zealand was preparing legislation to be put through Parliament to address the problem. Two years later, an intellectual property firm called Baldwins noted the law change requires companies to have a director living in New Zealand; and introduced offences for very serious acts.

I think New Zealanders would be unimpressed – to put it mildly – if they knew that Iranian and North Korean arms shipments were being handled by agents with a shell company for a face registered in New Zealand. Given that nearly four years after the Government first acknowledged a problem existed, we now have shell companies linked to a damaging oil company bribery scandal, I wonder if the legislative changes a) went far enough and b) are being properly enforced.

I do not want by any means to discourage people from starting legitimate businesses in New Zealand. The ease with which people can do business in New Zealand is well admired around the world, and justly so. Although the law change was definitely a step forward, it is obvious that it needs calibrating or changes made if there can be a link  between a New Zealand shell company and Unanoil. New Zealand’s image as a transparent and non-corrupt country also comes into question if such activities are allowed to continue unchallenged. That is not okay.


Cashless society will not happen in New Zealand

How often do you withdraw money from the A.T.M. at your bank? I do so semi-regularly, as much out of necessity for paying for small cost items instead of loading them into my E.F.T.P.O.S. card. I also have a bit on hand in case of emergencies or unforeseen/unavoidable spending. And so do many other people. And yet there are people who believe that one day society will be cashless.

There are several reasons to believe that society has definitely reduced its reliance on hard cash. And there is no doubt that for those who are able to use such technology, the benefits are considerable. Constant changes in information technology mean that products and services can be purchased using a smart phone, or even a *relatively* dumb phone (as long as it has internet access). The fact that pay wave technology is now common, means one can simply wave their credit card over the surface of a pay-wave capable E.F.T.P.O.S. machine, and provided can read the card, accept the transaction. The introduction of debit cards to enable the purchase of items paid straight from ones working bank account removes the need to get a wad of cash out to pay for that $600 phone or camera that you have been eyeing up, but didn’t have a credit card to pay for.

But there are significantly socio-economic issues that would have to be addressed before a cashless society can become a realistic prospect. One is a simple perception of trust in banks. Because they are such an integral part of our entire financial system, banks have to have a degree of trust in their customers and vice versa. This is something that has taken a whammy in recent years with perceptions of bankers having ulterior motives, but also following the Global Financial Crisis Mk, good reasons exist for believing . For older people and the socially disadvantaged, being able to adapt to a society that is changing rapidly and sometimes can be quite fairly accused of leaving them behind, the simple act of being able to see/handle ones finances is quite important. For those unable to afford internet access and smart phones making cash a digital commodity is simply impractical, and the number of people who fall into this category is high enough to impact on how the banking system works.

At the end of the day there are several very good reasons why a cashless society is never going to happen:

  1. For a lot of people – and businesses – it is simply inconvienient to only use cards and small change is very useful in dairies, supermarkets, paying to park the car in metered locations, among a whole host of other reasons
  2. Having money on hand in case of an emergency, such as an earthquake where bank A.T.M.’s or E.F.T.P.O.S. might be down or inaccessible for several days is always useful
  3. The potential for cyber crime targetting ones finances is very real, and although reputable banks generally take what steps they can to avoid their clients being cleaned out including guards on the card slots of their devices, passwords, text message notifications and so forth, there is no such thing as a fool proof bank account in the digital age
  4. Perhaps the one most would agree with is that there is something cool about having cold hard cash in your hands
  5. Trust – a corner stone on which banks and banking is founded – take away the corner stone and the whole industry is in a potentially existential crisis

So, as exciting as it might be for proponents of a totally digital age, I sincerely doubt it will happen, and given the potential for wrong doing, accidental or deliberate, that might not be a bad thing.

End of a Kiwi (and Australian)electronics retailer?

When I was much younger, Dick Smith was where you went to buy electronic kits to make various projects and learn about physics. The LED lights, diodes, wire and pin bits were all purchased from there. Either my brother or myself got an electronics kit for Christmas from Dick Smith once. That would have been in the early 1990s.  Since then, much has changed with the digital age and as the types of electronics in demand changed, Dick Smith had to adapt to consumer preferences. The rise of of bigger players and the diversification of the range of electronics meant that Dick Smith had to make a choice between sticking with its niche market and developing that or diversifying its range and trying to attract new customers.

Yesterday Dick Smith Electronics was put into receivership and its stock frozen on the sharemarket. Since those days that are described above, in order to compete with other players such as Harvey Norman and Power Store, it diversified its range of products. Some people have told me that it would have up to a years worth of stock that it was probably aware it would not be able to realistically sell. At Christmas time  in 2015 it overestimated the value of its stock, meaning it was not worth nearly as much as claimed.

I wonder what the future holds for Dick Smith, as probably significantly more than 100 jobs are on the line here if it collapses and potentially thousands are on the line in Australia. The future does not seem promising if the refusal to honour customer coupons, is anything to go by. It is perhaps notable that Dick Smith himself actually sold the company that bears his name in 1988 for a total of $25 million. The company was relatively small then. The range of devices that includes iPods, iPads, iPhones was some distance in the future and cellphones were still big bulky things far too big for ones pocket. The digital cameras, weather stations and other specialist items that might have been symbols of Dick Smith’s attempts to become something it was not – an everything for everyone type chain – were also some way off.

Fast forward to December 2013. Dick Smith is floated on the Stock Exchanges, starting at $2.20 a share. It peaked a month later at $2.40 a share before going into what some speculate now could be a terminal decline. Terminal, not least because in Australia it’s shares had more than half their value wiped off in a single day on Monday. Horrified at its losses, Dick Smith asked for trading to be suspended in its shares so it could buy time to fix its money woes. But will this be enough for a chain with 395 stores across Australia and New Zealand, with plans to add another 25-35 over time?

Time will tell.