Contact Energy – Abusing its goodwill

One of the more important lessons from the US$700 billion bailout rejection in the House of Representatives earlier this week is that the business community doesn’t have unlimited goodwill. When business people abuse their goodwill, as Wall Street executives have with the American public, then the consequences can be severe.

Telecom, under the stewardship of Chairman Sir Roderick Deane, abused its goodwill with New Zealand politicians and shareholders are now paying a huge price.  Contact Energy, which has its head in the sand as far as shareholders and politicians are concerned, could be heading in the same direction. 

The problem with Contact Energy is that it is almost totally insensitive to the interest of outside parties.  The company continues to have Phil Pryke and Tim Saunders on its board when a majority of shareholders do not appear to want them.  Saunders was only re-elected as an independent director at last year’s annual meeting because of the support of majority shareholder Origin Energy.

The company is also proposing a massive increase in directors’ fees, from $770,000 to $1,500,000, at the 23 October annual meeting. A 95% fee hike is insensitive in a recessionary environment. 

However, the company hit a new low this week when it announced a 10-12% price increase for Wellington and parts of the South Island.  This announcement was ill conceived because it was during a general election campaign and in the midst of an international banking crisis when there has been talk of job losses and difficult times ahead.

The political response was immediate with Commerce Minister Lianne Dalziel saying “these price rises are alarming and I fail to see how they can be justified”. She said she would be asking Cabinet on Monday to consider a broad inquiry into these price increases.  This brings back memories of the brinkmanship employed by Telecom and its loss of goodwill with politicians. 

Contact Energy’s Chief Executive David Baldwin didn’t help the situation by using some questionable arguments in a media interview. 

Baldwin said that shareholders needed to receive an acceptable return on their investment. He indicated that net earnings of $232.8 million represented a return of only 8.0% on total equity of $2,904.1 million.  He failed to note that the total equity contained $1,898.4 million of revaluations. Excluding revaluations the return on equity was a more respectable 23.1%.

Milford Asset Management fully supports the right of companies to maximise their profits but it is important that they take into account outside interests, particularly political considerations. Too many New Zealand companies, including Telecom, have failed to do this and, as a consequence, shareholders have suffered.
       
Brian Gaynor, 3 October 2008