Bruce Sheppard: When the going gets tough...

If my readers haven't already read Bruce Sheppard's Stirring the Pot Blog his latest post is right on the money, so I have added to my blog below. It is essential reading and you need a gander at it before you invest in the sharemarket, or any business for that matter.

The focus by an investor on the quality of management, before anything else, is one of the main criteria for picking a good company to invest in.

If you have good management , it will follow that the business that they management will probably be a good investment.

It is at these times of market stress and economic downturns that good management can get through the tough times.

Bruce Sheppard in Stirring the Pot | 4:03 pm 8 February 2008

When investing in a share you are investing in a business. A business is an opportunity run by management with your capital.

But how do you judge the quality of management? It is easy to judge the numbers but hard to judge the resilience, integrity and determination of people, particularly if you never eye ball them.

You have one opportunity a year to do this and it is the annual general meeting. Once the prepared speeches are done, the response of management to shareholder questioning gives a wonderful opportunity for insight into these people who have the responsibility for the prudent and rewarding use of your capital.

Over the next 18 months, shareholders are likely to see reversals in profit performance and it may even flow though into reduced dividends. Mr Market, as imperfect as ever, is anticipating this and as a result share prices have fallen.

But the real entertainment, and the chance for insight, will come as our managers seek to explain the situation to shareholders.

The explanations will fall into these broad categories:

1. “The profit is down, and we know the mistakes we made. We have changed the way we do things to evolve our practices to adjust to the changed environment.”

2. Some will go a step further and analyse the mistake for the benefit of shareholders and will also advise the lessons learned.

3. A few, but not many, might actually admit that conditions are difficult but may still report improved earnings. Of this group, some might admit that it was luck more than good management. Others might share a little of the decisions they made to make their own luck, of course taking care not to give away operational secrets.

4. Some will seek to blame others for the earnings reversal. “It is all the fault of the economy and in due course earnings will improve.”

Those that adopt the fourth approach are useless tossers who should not be left in charge of running a bath. Their management style is reactive, they take what is given to them and if you are lucky make the best of it. They don’t try to alter their environment and or even anticipate it.

Businesses run by such people will never perform long term without luck, and luck favours those who make it. Hopefully the board will recognise this and move the management team on, replacing it with a more dynamic approach. But generally boards recruit people that are similar in temperament to them so don’t hold your breath waiting for the board to react.

Generally “blame others” management only gets moved on when the business is at or near the precipice. Such managers should not be provided by shareholders with the custody of the wealth of others, so sell. A difficult business with an inspirational manger will outperform a business with favourable economics and a tosser running it.

Those that prosper in recession, and are self aware enough to admit when it is luck, give shareholders the confidence to know that they will in future make their own luck. These are safe guys to back.

Those that are honest enough to admit their mistakes and tell you what they have learned are okay too. They are learning, and honest. Honesty is a really good start. If, however, as the years unfold they descend into a pattern of making new and distressing mistakes each year, they are honest fools and should also be avoided.

So in picking a recession proof investment, look for simple businesses run by honest, hard working people who over time will make their own luck and beat the market.

We have 160 listed companies, and not many fall into this category. And in reality you won’t know which do unless you analysis the history, review critically the prospects and understand the underlying strength of management. Sounds like a lot of work. Well it is to a point. But if you keep your focus and apply the work to five or 10 good businesses, and don’t waste your time on trying to adopt portfolio theory with hundreds of separate investments, it is not too hard, and what’s more it is fun.

In the words of Warren Buffett: “Modern finance theory teaches students to do average” with my addendum “less costs.” Just as you don’t want your mangers to do average, why would you aspire to it?

Related Share Investor reading

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Business Mis-Management


C Share Investor & Stuff.co.nz 20o8

Sky City Management: blind, deaf and numb

The absolute garbage that masquerades as management at Sky City Entertainment has got to come to a logical conclusion some time soon.



The lobby of the 5 star Sky City Grand Hotel
The company let the market know that the only remaining suitor, which was rumoured as US private equity funds TPG and Apollo Management, was still attempting to arrange financing for a takeover bid.

Sky City management have been effusive, misleading and amateurish in their attempts to keep the market informed accurately and sheppard a deal with a prospective buyer.

If market experience from this end is as deficient as we know it, one can only imagine how the prospective buyer was treated.

Were Sky City management clear, precise and upfront with the two rumoured funds?

I seriously doubt it.

Now I'm not displeased that a deal looks like it is going to fall through but can you imagine this motley crew turning around the company and having the potential to put things back on track?

Not bloody likely mate.

Brook Asset Management, a large Sky City shareholder, has been angling for a board clean out for a long time and I would have to concur with that, for I cant see a way forward with sub standard people at the helm.

TPG and Apollo Management have apparently fallen short in the moola stakes because of the global "credit crunch" but I'm finding that a little hard to stomach considering the timing of the initial bid interest in September and at that time easy credit had already become a thing of the past.

What shareholders need is a clear assessment of where things are with any bid and it is certainly not up to Sky City management to wait around for a possible buyer to raise funds.

There needs to be an understanding from this last possible bidder that they are serious, give them a definite deadline-Sky City management have moved their deadline several times-and if they are not interested tell them to bugger off so we can all move on.

Without the current board of course.

You can bet the current state of indecision will also be permeating the business side of the company as well, not forgetting the considerable amount of money it will be costing shareholders in putting any bid together.

Roll the dice.

Disclosure: I own Sky City shares


C Share Investor 2007

A Rare Breed

The bullshit that passes for accountability amongst our leaders; politicians and business leaders alike, makes a farce of the meaning of the word "leader".

What does a leader do Darren?

Well, it is quite simple really, even though some individuals in the positions that they find themselves in and in rarer and rarer cases those than actually achieve those positions, would like others to think that being a leader is a complex issue only understood by the likes of those with over sized craniums.

Being a leader as such is as straightforward as setting examples for those that you lead, for it is clear, even to a two year old, for those that observe a good leader doing good things are likely to model themselves on good behavior. Psych 101 really.

Conversely, bad behaviour by a leader will almost guarantee a negative culture: at the workplace or anywhere else for that matter.

Bad leadership flows down to individuals in a company. It can cause resentment among workers, gossip and it saps productivity, morale and effects the long term viability of the organisation or business.

The worst and most public example of leadership failure in New Zealand would have to be Teresa Gattung, the recent retiring CEO of Telecom New Zealand [TEL.NZ]

Her culture of blame, resentment, lies and underhanded competition at leadership level managed to pervade the company culture to such a core extent that any customer getting in touch with a customer services representative at Telecom would have been well aware that there was something going horribly wrong at head office.

Gattung was the head at that head office and she was fully responsible for the disastrous mess that she managed her way into while in tenure behind the big desk.

After leaving of course she was rewarded for her mismanagement with a bundle of cash and plaudits from other mediocre managers of other businesses and arse kissing mainstream "business media" who patted her on the back for "a job well done".

Excuse me!!

On the other hand, the quiet achievers like Don Braid, the CEO and Bruce Plested from Mainfreight Ltd [MFT.NZ]:


"As we grow to become a world player we must maintain our culture and style of business by keeping a strong grip on our policy of being anti-bureaucratic; continuing to allow branch managers to make bold decisions; being energetic and entrepreneurial; and so continue to grow our business.

Don Braid, GM 2007.


Braid and Plested lead from the front and as a result an excellent company culture has evolved. The workers love working there and most of all customers enjoy their contact with Mainfreight.

Without this strong, leader led, focused running of this business Mainfreight would no doubt be floundering in the extremely competitive business environment that they operate in.

Plested and Braid would be sorely missed if they ever left the company so hopefully they can pick a good replacement when that happens.

Given that company culture is so good, the likelihood is that other good leaders will emerge, thanks to the example set by Mainfreight's leaders.

The lack of accountability by leaders when things go wrong in an organisation or business is probably the biggest barrier to business excellence for the medium and long term in this country.

Corporate history in NZ is littered with the corpses of businesses mismanaged to the point of surrender and over the last 8 years the level of managerial incompetence has continued.

The difference over the last 8 or so years though is that management and specifically leaders of that management haven't been accountable or been made accountable by fellow board members, shareholders and customers.

We have had a litany of cases of unaccountable leaders recently. Tim Saunders, former director at failed Feltex Carpets has recently been voted back in as a director of Contact Energy Ltd [CEN.NZ] after being found by an independent body as being partly culpable for Feltex's demise.

Is it any wonder why those working at the coal face at Contact are suffering from low morale. Its CEO or its board should have summarily dumped Saunders. Totally the wrong message sent to the troops and not good for the long term health of the company, global warming fuzzies or not.

Countless heads at the restaurant operator, Restaurant Brands Ltd [RBD.NZ] have failed miserably at the helm, none of them were held responsible in any way, other than they were forced to leave, long after the rot of their management had set in. RBD continue to suffer this vacuum of leadership all the way down to store level and it is obvious in almost every aspect of the business, from the non responsive middle managers all the way down to the surly staff serving customers.

There is a more successful culture in low fat yogurt than at RBD head office.

Sky City Entertainment Group Ltd [SKC.NZ] CEO Evan Davies made a series of mistakes that ended in his being pushed out the door earlier this year but not before he resided over dramatically falling fortunes in gaming profits, a couple of bad asset purchases and a conflict of interest case when his wife was promoted to a position of significant importance in the company.

Davies was allowed to stay at the helm despite his failures because his fellow board members and Sky City shareholders failed to make him responsible and he himself failed to realize that he wasn't managing the company the way it should have been and to fall on his own gilt edged sword.

Management under him at the time are still there at head office and continue to run around like headless chooks wondering what to do, while bargain hunters are hanging around, presumably with better management skills, waiting to pounce on the mismanaged beast that is Sky City.

When is it that leaders will take responsibility for company success and its failures?

It will happen when others make them responsible for those failures. In the case of company leaders; shareholders, employees and customers fail to make them accountable and need desperately to do so.

It shouldn't be up to others to make individual leaders responsible though. Being taught to be a leader from an early age is the antidote to the sickness that we as a society are suffering in terms of leadership.

The New Zealand Prime Minister, Helen Clark, should be a leader to look up to but her copybook is unfortunately blotted with so much irresponsibility and lack of accountability the ink is turning into a sickly red and spilling over the whole corpse.

With good role models in New Zealand being as rare as 15 year old virgins it looks like the problem is going to get worse before it gets better.

Our socialist education system where it is taught that it is OK to lose and that the word"failure" has been erased from the school vocab to be replaced by the phrase "did not achieve" is certainly only going to make the problem of future good leadership a goal that is "not achieved".


Disclosure: I own SKC & MFT shares in the Share Investor Portfolio

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c Share Investor 2007

Mainfreight keeps on Truckin

I'm a very recent convert to the Mainfreight Ltd [MFT.NZ] convoy but shareholder or not one cannot help but be impressed by this company.

It all starts at the top with great management. Don Braid, Managing Director and Bruce Plested, Executive Chairman, along with a great team locally and globally help drive this company forward.

Management are decisive, show strong leadership, and have very clear goals about where the company is going and significantly how they are going to get there:

"As we grow to become a world player we must maintain our culture and style of business by keeping a strong grip on our policy of being anti-bureaucratic; continuing to allow branch managers to make bold decisions; being energetic and entrepreneurial; and so continue to grow our business.

We expect to double the size of our business over the next 3-5 years."

Don Braid, GM, 2007

Mainfreight's management "style" then starts at the top and filters through all aspects of the business. Local decision making is crucial to the smooth running of the business and a smooth running business is more efficient, grows faster and makes more money.

One of the first things Warren Buffett looks at when buying into a company is the quality of its leadership. The management of Mainfreight and its people set it in a class above all, in my opinion, of listed companies in New Zealand and if it was large enough I believe Buffett would put this company in his portfolio because it is a well run, with a business that is easy to understand, revenues that continue to grow and an efficient use of shareholders capital, with good returns to shareholders. Certainly Mainfreight's historical financial background would attest to how well run the company has been.

The company is not afraid to ruffle political and financial analysts feathers either:


"To the financial analysts and other scaremongers who downgraded us in the early part of the 21st century as we put together our offshore strategy, you were wrong, and we were right. Stop discouraging New Zealand companies from expanding offshore – of greatest risk is the low growth available in New Zealand.

More and more the New Zealand economy slides down the OECD economic rankings as we milk our productive sector in the hope of remaining a first world country with taxpayer funded hospitals, education and social welfare.

There needs to be a clear understanding that the productive sector is the only means by which a country can prosper – interesting, challenging enterprises earning profits are the mechanism which creates opportunities for people to do well for themselves, the enterprise, and for mankind". Bruce Plested, Mainfreight, annual report 2007


The same approach is used when dealing with shareholders. Information in company reports is straight to the point with little or no "corporate speak", so one can actually read their company report and understand what the hell is going on. A rarity but an essential ingredient. Shareholders must know how their investment is doing and they must be able to do that easily.

The focus by the company on global growth has enabled Mainfreight to slowly assemble a network of operations around the globe that encompass a wide number of countries. With bases now in Australia, Asia and various states in the USA, Mainfreight is starting to have the ability to lever its logistics capabilities off an increasingly enlarged network and customer base.

Their current expansion goals have largely been met and medium term goals have already been mapped out and management are working towards achieving theses goals. Acquisitions have been a cornerstone to Mainfreight's expansion but once purchased and integrated, organic growth is a feature of these add-ons.

Mainfreight intend to have "global significance" in international logistics in the US, Europe, China and Australasia, with an aim to double revenue growth from the present 1 Billion NZ dollars. With full year profit of 55 Million NZ Dollars for 2007 the future for profit growth also looks good if margins can be maintained or even improved as logistical costs come down as the company grows.

In Bruce Plested's closing remark in his 2007 Chairman's report he takes a swipe at New Zealand's current economic decline and unfriendly business climate:

"In summary, we do not have a large enough or vibrant enough business sector in New Zealand. Economically, New Zealand has been on a long slow decline relative to other OECD countries for close to forty years, and this decline has accelerated in recent years. Surely with the benefit of hindsight, New Zealand governments can recognise that our productive sector is not performing to the level necessary to ensure this nation’s future health and prosperity.

Right now we need bold new initiatives and inspirational leadership. Other countries have found ways to reverse economic decline, and that has involved low company tax rates as in Singapore and Ireland and a reduction in the weight of compliance costs.

Whatever the outcome, Mainfreight has a determination to remain a New Zealand owned and operated business while continuing to pursue global aspirations".

Like many New Zealand businesses and business people, Bruce seems to be implying that Mainfreight exists in spite of what the current Labour government are doing to screw our economy and is clearly annoyed at the impediments that his business faces.

While it would be nice to have a government being "business friendly" we all know that the opposite is more than often the truth.

It is to Mainfreight's obvious advantage then that they see global expansion as their way to grow. They clearly cannot easily expand in their country of origin.

As I write this Mainfreight are in discussions with 3 freight forwarding companies with a view to purchase, with one company already in the hole.

I own shares In Mainfreight and I am looking to buy more for the long-term portfolio at any weakness.

The closing price of MFT shares today is $NZ 7.40, 1c above my original purchase price.


Disclosure I own MFT shares in the Share Investor Portfolio.


Mainfreight @ Share Investor

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c Share Investor 2007