Lessons from LombardTIM HUNTER
In the last year before Lombard Finance went pear-shaped, Sir Douglas Graham was paid $81,104 to be its chairman.
Fellow directors Bill Jefferies and Lawrence Bryant received $42,187 and $33,750 respectively.
It doesn't sound like much, really, when you're carrying the can for $160 million of investors' money.
Top earner on the board was Michael Reeves, who got $397,929, reflecting his operational role as chief executive.
With the exception of Reeves, Lombard's directors would not have seen their roles as full-time jobs and their pay reflected that.
But part-time clearly doesn't mean part responsibility - all four are firmly in the firing line for the huge losses incurred by investors after Lombard called in receivers in April 2008.
This has led to expressions of sympathy in some quarters and we'll probably see a call for higher directors' fees to compensate for the onerous burden of board service.
Well, let's not get all soft just yet. After all, there are plenty of people whose remuneration arguably doesn't reflect their important responsibilities - nurses, say, or policemen and women, or teachers.
Pro rata, all three groups receive typically less than the Lombard directors did.
All three also receive considerable job-specific training to help them carry out their responsibilities.
Directors, however, are often appointed on the assumption their existing knowledge and skills are appropriate.
In my view the finance company disasters, including Lombard, show this assumption is incorrect.
In Lombard's case, secured debenture holders owed $110 million are likely to recover just 22c in the dollar - so far they've received 11.5c. That's about $86 million up in smoke.
It's the usual story of making capitalised interest loans to high risk property development projects on second ranking security, and the Kiwi investors who lost their life savings as a result are typically unimpressed by arguments that lenders were caught out by an imploding economy.
But the question of who, or what, was responsible for losses at Lombard didn't form part of the latest case.
At issue was the narrow matter of whether aspects of Lombard's investment documents were untrue, and whether directors should have known they were untrue.
The court found in key respects the answer was yes, and yes.
In particular, Lombard's claims around its liquidity - how much cash would be available to pay its debts - were found to be wrong.
Fair enough, but it didn't need a hugely expensive court case to demonstrate that.
Lombard, like other mezzanine property financiers, routinely made false liquidity statements in its prospectus documents, but it was perfectly legal at the time.
The detail was in the way they reported loan maturities. Even if a development project had a multi-year timeframe before yielding cash from sales, finance companies were lending short-term, usually over six to 12 months.
Technically this gave the opportunity to review progress and reconsider loan terms as the project progressed - a sensible thing to do.
But it also allowed the lender to present the loan as contractually repayable within six to 12 months, even though repayment would be impossible without refinance.
In the real world, repayment was achieved by rolling over the loan, which meant no cash actually came in to repay debentures.
Lombard's September 2007 prospectus, one of its last, said it had $104.8m of loans maturing within six months, apparently more than enough to cover debenture repayments of $52.4m.
This was legally true but wildly wrong in the real world.
Reflecting on the Lombard board, only the CEO, Reeves, had directly relevant financial experience.
Two of the directors, Sir Douglas and Jefferies, were particularly eminent politicians with a strong legal background - high calibre people in their field.
Personally I would tend to see a preponderance of lawyers on a company board as a negative factor - they are useful folk to have around but I wouldn't want to ask one for financial advice.
More than legal knowledge, I'd regard financial and commercial nous as pretty fundamental for board service.
I recall a few years ago the chairman of a $100m investment fund cheerfully admitting to me he was "not a numbers man" and wasn't entirely familiar with the details of the fund's financial arrangements.
It was probably no surprise the fund went on to lose a fortune.
Anyway the Lombard judgment is a sign, as if more were needed, that the age of the amateur director is over.
If these people are to be held responsible for their actions - and they should be - they need the tools of the trade.
For those needing a financial upskill, training in finance should be mandatory.
For those skilled in finance but lacking industry specific knowledge, likewise formal training in the relevant industry should be provided.
What they don't need is higher fees - that won't change anything.
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