Clock ticking for troubled Nufarm directors as cleanout mooted Rebecca Urban From: The Australian September 11, 2010 12:00AM
TIME could be running out for some of Nufarm's longest-serving directors, with institutions preparing to push for a boardroom clean-out.
This follows a disastrous run of earnings downgrades that has wiped close to $1.5 billion from the company's market value this year.
"I wouldn't want to be a Nufarm director facing re-election at this year's AGM," noted one observer this week.
"Board renewal. I suspect that it will be the first question that many of us will be asking about once Nufarm gets a proper handle on its issues."
Five profit downgrades in 18 months have raised serious questions about governance and management at the once-respected agricultural group.
The timing of the two most recent downgrades -- one three months after the board rejected a $12-a-share takeover offer from China's Sinochem, and the other following a $250 million equity raising -- has caused concerns about disclosure as well as threats of a multi-million-dollar shareholder class action.
Add to that managing director Doug Rathbone's gradual reduction of his personal shareholding over the past two years and it's hardly surprising that investors, including some of Australia's top institutions, are fuming.
"It's probably one of the most disgraceful episodes I've ever seen," one experienced fund manager said of Nufarm's performance.
The company's new chairman, former Telstra chair Donald McGauchie, appears most at risk of copping much of the backlash.
His appointment to the role on July 14 -- the same day the group slashed its full-year earnings forecast by half -- may signal the start of a renewal process, but the Bendigo sheep farmer is hardly a cleanskin, having served as a director since 2003.
One industry insider, who declined to be identified, said the market had been surprised by Mr McGauchie's appointment.
"The guy has been there for seven years, so it could be argued that he has been part of the decisions taken that have gotten the company where it is now," he said.
"There's certainly criticism around that. They probably should have gone looking for an independent, which is exactly what Elders did when they appointed John Ballard as chairman."
Mr McGauchie was last re-elected to the Nufarm board three years ago and, according to the company's constitution, he and fellow director Gary Hounsell are due to face a shareholder vote at this year's annual meeting, on December 2.
The chairman has the added pressure of delivering a strategic review capable of convincing investors that Nufarm can achieve sustainable earnings growth in a changing marketplace.
As well, there is the issue of breaches of banking covenants, over which the company is negotiating waivers from a dozen lenders.
Mr McGauchie could be saved by an unwillingness among institutions to unsettle matters further, but two of his boardroom colleagues might not be so lucky.
John Stocker and Doug Curlewis have been on Nufarm's board for a combined 22 years.
Both were also non-executive directors at Sigma Pharmaceuticals, which was caught off guard by the deterioration of its generics business, leading to massive goodwill writedowns and a $389m full-year loss.
Both Mr Stocker, the drug-maker's long-serving chairman, and Mr Curlewis resigned from the board a month before a fiery annual meeting. Australian Shareholders Association head Stuart Wilson has been keeping a close eye on Nufarm's struggles and believes retail investors support the institutions' push for change.
"I'm sure retail investors would welcome some board renewal and would expect to see directors held accountable for the state of the company," Mr Wilson said.
"It's something that we will be discussing with the board and also sending a message to the company via our voting at the AGM."
Nufarm's other problem is the diminishing credibility of its management team, led by the veteran Mr Rathbone. Having turned a small local manufacturing outfit into a major player in global crop protection, the 64-year-old is undeniably viewed as a legend.
But that has been threatened by recent events.
Nufarm's problems have been caused by a combination of poor cropping seasons, which have reduced demand for its weed killers, and pricing pressure from cheaper generics made in China.
Yet it is the company's apparent inability to forecast the impact of these broader trends on its earnings that the market is struggling to comprehend. This is one of the issues being investigated as part of the strategic review.
The law firms preparing a class action are accusing Nufarm of misleading the market over its financial performance -- a charge it has strenuously denied -- but a former associate of Mr Rathbone doubts there has been any attempt by the company to withhold market-sensitive information.
"The real issue is that Doug was always very hands-on and across everything that was happening in the company," the associate said.
"But as the company has grown it gets more difficult to do that.
"Some people would say that he didn't build the management team around him that was needed to be a global company rather than an Australian company."
Mr Rathbone appears to be digging in his heels, and there is certainly support for him to stay.
Austock Group agricultural analyst Paul Jensz points to Nufarm's strong record for at least 10 years prior to its troubles.
"What any investor wants would be to put money with a company that can see both the opportunities and problems," he said.
"If management can prove that it can change to a more pro-active approach . . . then they are backable and investment grade."
Mr McGauchie declined to be interviewed this week, but corporate affairs manager Robert Reis confirmed that board renewal was on the agenda, with the company's 20 per cent shareholder Sumitomo Chemical to seek representation once it has received clearance from antitrust regulators in several jurisdictions.
Mr Reis said the board would carefully consider any feedback from investors, but he would not be drawn on speculation of a backlash at the annual meeting.
"I don't think that's something we would comment on," he said.
"I don't know whether shareholders would direct their concerns at the chairman and see that as an opportunity to make a statement."
Mr Reis also denied there had been calls for the managing director to step aside.
"Doug Rathbone does take responsibility for the performance of the company . . . and well understands the concerns in the market," he said. "His response to that is to knuckle down and do what he has to do to see a recovery in the business."
Nufarm investors are expecting an update next week on whether the company has secured the support of its lenders.
