BANK AND STATE.

Dominion, Volume 6, Issue 1807, 21 July 1913, Page 6

BANK AND STATE.

T POSITION REVIEWED. \ - • ' . — ;

SHAREHOLDERS' POINT OF VIEW. '

WHAT IS WANTED,

PRIVATE CONTROL WITH STATE SUPERVISION.

. The following interesting and important letter from' the shareholders' representatives on the Board of Directors of the Bank of New Zealand has beon forwarded to tho Minister of Finance (the Hon. James Allen):— To the Honourable tho Minister of Finance, Wellington. Sir,—"We, ad the two directors of the Board of the Bank of New Zealand sleeted by the shareholders, and as two of tho live fii'St directors of the bank appointed in 1894 (our then colleagues beiug since df.ad), respectfully submit for your consideration our views and opinions with respect to the proposals by the chairman relating to the capital of tho bank and other matters contained in a memorandum addressed by him to you, dated May 15, 1913. "(1) That proposal may be briefly summarised as follows.:— '(a) It contemplates no change in tho constitution of the board as laid down by tne Act of lbSJa, but on tlio contrary,' proposes that the State should at' alt tunes havo a controlling representation on tho board. : -'(bj It proposes that the XI,(WO,000 stock guaranteed by the Government ' V maturing in July, 1914, should not bo paid off, but should be renewedi for years on condition that the . bank establish a sinking fund suf- - fiewnt' to pay off tile JJ1,000,000 at ' maturity. '(c) That legislative authority be given . to the bank to issue fresh capital to the amount of ,£'3,000,000, -,£1,000,000 of which capital is to consist of preference shares to be offered to the Government and ,£2,000,000 of ordinary shares .to be. offered to shareholders. The new preference shares are to have attached to them condi- " tions which givi? them preference as to capital over all ordinary shares in tho ease of the winding up of the bank. ■ Such increased capital to be ; issued at such time and oh such terms as tho board, with the approval of the Minister of Finance may. prescribe.' • "(2) We respectfully dissent from tho proposals submitted by the chairman, which we regard as noither fair nor just to shareholders, nor in the true interests of ths State itself, and we propose to state categorically our reasons lor this dissent. . . "(3) It is admitted that the bank is now in a position to retire the guaranteed debentures of <£1,000,000 maturing in 1914, ■ and thiis extinguish all liabilities of tho bank guaranteed by tho Government, or for which the Government is in any way liable. • It cannot be denied that the bank has a statutory right to retire the deben- „ tures at their due date if it is in t'he intertst of the bank that this course Should be adopted. If the guaranteed stock were retired at maturity,-the- Government would hold a valuable investment Of £500,000 shares in tho capital of the bank, on which it ha? drawn 10_ per cent, interest for some years. In this condition of the affairs of the bank it is clear that 4 the shareholders' are fairly and justly entitled to have the constitution of tho Board of 'Directors as fixed by the Act of 1898 reconsidered and reviewed, with a view of determining what in the future should be> the respective representations on tho Board of Directors of tlito. Government and the shareholders. "In 1894 and 1895, when the Government came to the assistance of the bank the legislation of these years, provided for "the protection of the interests of the v Government by creating.the office of president, having a right of veto, and the office of one director to bo appointed by the Government. The suspensory power > of the ' chief auditor was subsequently brought into existence. Tho board, therefore, consisted, of a president and one director appointed by the Government, and three directors elected by tho shareholders. These provisions were regarded by the Legislature at tho time wlim ' its liability on behalf of the bank was greatest, and when the assets of the wink were of tlia kiast value, when tho bank had no reserve fund as sufficient for the protection and security of .the interests of the Government, and they continued unaltered until the legislation of 1898, which will be hereafter referred to. It is abundantly evident, not only from the provisions of these Acts, but from the Parliamentary'debates in tho House of Representatives when these Acts were passed, that it was the clear intention of the Government and Parliament to Tetain the supervision and control- of the affairs of the bank only in order to ensure redemption by the bank of the obligations entered into by the Colony on its behalf, and on such redemption the control of the affairs of the bank by the Government was intended, to cease. Section ,47 of the Act of 1895' is an explicit declaration of ' -this fact. It provides that the powers conferred by the Share Guarantee Act or tho Act of 1895 on tho Government, the A°i?nt-General, and the Colonial Treasurer, respectively, for the appointment ' of, and with respect to. tho president of the bank and the auditors respectively, and the powiCT of veto conferred on the / president of the bank by the last-mention-!nd Act, and this Act, should respectively subsist so long as any liability ;on, the part of the colony should subsist under tho Share Guarantee.Act or this Act. It is ctear/therefore, that the Leg l * l / 1 ' ture contemplated that tho control of tho affairs of the bank should revert to shareholders as soon as tho liability on the part 6f tho Colony in respect of tho bank should cease. , "(4) Ifr the Act of 1898 the Government increased the' number of directors of the bank, from four to six-four -of whom were to bo appointed by tlw , G o ver " or ; l J"* Council and two to be elected by the shareholders of the bank. The result, therefore, was that tlu- representatives of tin shareholders were in a minority on the Board of Directors, instead of being a majority oi the board as theretofore. Shareholders were not in any way consulted or given an opportunity of expressing their vient when this revolution in the_ control ol the board was effected. It is proper tc point out. that for the in 189S the bank made a profit of ,£172,400, this showing plainly that no mismanagement on the part of the Board of Directors since the year 1894 could bo suggested as the reason for tlio change. It i: proper also to observe that soon aftei this reconstruction cf I'he hoard (namely in tlio year 1990) the 3J preferenci shares issued to the Government undei the Act of 1895 were repurchased by th< bank in exercise of its statutory righ to purchase these shares. "(5) In the year 1903 the board ap proached the Government to t™ew it: guarantee for ,61,000,000 only of the bank : stock until the year.l9l4. At this timi there existed .£1,800,000 of the Asset Realisation Board debentures, but it ma; be noted that theso debentures were thei held by the bank its treasury, and th. balance of the Assets Realisation Board assets had by this time so improved n value that the .6500,000 of the bank s un called capital pledged to the Asset Board was released, and made part of th- . capital of tho bank. Indeed, two year 7 after the renewal of the stock becam' operative namely in 190G, the Assets Real Nation Board was dissolved pursuant b the provisions of the statute os a valua tion of its assets showed that a dehcienc; no longer existed. "In consideration of the renewal of it guarantee for ,£1,000,000 of the bank ctn'pl.- the Government nnder this statut obtained the right to purchase .£500,00 of share capital, in the form of prefei ence shares, having priority v capital, and carrying a mimmni dividend of 5 per oent., and a maximum dividend ( of 10 per cent., l lieu of tho fixed dividend of Si per cent payable on the preference shares issue in 1895. In point of fact theso prefei enco shares, £ts wo ha-v© already sau have carried a dividend of 10 per con 1 . It is worthy of note that when thes urofsrencs Aarea jvere allotted to~xti

Government at par, they were worth in the open market a premium of 40 to 50 per centum. "Again, the shareholders were not consulted by the, Government concerning this legislation nor were they given any opportunity of expressing their opinions. The further interest of .£500,000 preference shares in the capital of the bank was demanded by the Government, and tlio directors were not in ft position to resist the demand, but there was a clear understanding with the Government of the day that the acquisition of these preference shares in the capital of the bank should be a complete recompense to the Government for the assistance which it had rendered to the bank, and that the Government would not in tho future claim any further share capital in the bank. "(6) In 1903, when the abovementioned .£500,000 of shareholders' capital pledged to the Assets Realisation Board was made a part of tho capital of the bank it was understood by the shareholders' representatives of tho board that such capital was to be called up, and although we, repeatedly urged that this course should be adopted, the majority of the board has always declined to call up this capital. That it was the intention that _ this capital should be called up is plain because otherwise the Legislature .has committed a wrong towards the shareholders in making its capital, liable to be called up at any time instead of what it really was, viz., a'liability which could called up in' the event of the bank being unable to meet its engagements. "1. The brief outline we have given of the history of the bank since 1894 ha 9, we submit. plainly > demonstrated: '(a) That the' Legislature contemplated that the Government control of the affairs of the bank should subsist so long only as the Government remained liable under its . , guarantee for the bank; and that Section 47 of the Act of 1895, which > still remains unrepealed, is an ex--1 press declaration to this effect; '(b) That the allotment to the Government of the half million preference shares in 1903 (in place of the half 1 million shares repurchased by the bank pursuant to the statutory power) was exacted by the Government of the day as full compensa>t.ion for the assistance which it had in the past rendered the bank. 1 "(8) The proposals of the board to which we have referred were only disclosed under pressure to shareholders on July 4, 1913. As about half of the . ordinary shareholders of the bank reside in England it is impossible that they con have any knowledge of the proposals; or be in a position to express their opinion upon them before the termination of the session. As representing them, we protest that .in justice to the nbsent shareholders,; no legislation should be passed affecting tho interests of shareholders until they havo an opportunity of considering the proposals - and submitting their views to the Legislature. As wo shall point out hereafter, it is clear that the Board of Directors do not, and do not profess to, represent them; and we, their representatives, being a minority on the board, have not the power to effectively represent them. In case our reasonable request that no legislation should be passed until a reasonable opportunity is afforded of ascertaining the views of English shareholders is not acceded to, we think it wise to express our opinion upon tho board's proposals. "(9) We respectfully submit that now that the bank'is prepared to pay and is desirous of paying oif all liabilities guaranteed by the Government, the shareholders have an undoubted right to be reinstated in the control of the affairs of the bank which was taken away from them until, and only until, the liabilities guaranteed by the Government were discharged. The utmost claim that the Government now has to interfere in the management of the bank (except the ordinary right to which their holding in tho share capital of the bank admittedly entitles them), is to take such part in the management as will ensure that the business of the bank will in future be safely and prudently conduoted; and that the bank will have no need to have recourse to the Government at any time hereafter for further financial assistance. We concede this claim; but it cannot justify' the appointment by the Government of the majority of the members ' of tho board and thus ' place the control of the bank entirely' in the hands of the Government nominees on the board and deny the right of shareholders to any effective voice in the management of the bank. We are prepared to concede full and adequate representation of the Government on tho _ board with such suspensory powers entrusted to the Chief Auditor as have been vested in him by the Act of 1898 and such powers of veto exercisable by tho Qovernor-in-Council as may bo thought necessary. But we fearlessly and confidently maintain that". justice and fair play require that the members eleetcd by tho shareholders should constitute, a' majority of the board. We aro confident that it is utterly impossible to have sound, strong, and prudent management of so great a commercial institution as the Bank of New Zealand, if political influence is to predominate on the board as it certainly will if each successive Government is to. have power to nominate the majority of tho Board of Directors. Furthermore the position taken up by the nominated majority of the board is proof and demonstration of the reasonableness of our claims. The nominated majority, claimed that they were not only supreme in the conduct of the affairs of the bank; but that shareholders had at meetings of shareholders no right to voice their opinions; that if they did their opinions would not be considered by the directors, and that tho directors would not even act as the medium for communicating the opinions of shareholders to tho Government. Wo hold that- it is in the interests both of the country and tho bank' that the control of the business of tho bank should be managed by tho elected directors—subject to such effective checks as will be furnished by a fair representation on the board of the interests of the Government, coupled with tho suspensory power and power of veto' to which we have alluded. "(10) We do not think it is possible, nor have wo any reason to believe, that; the Government will claim a further interest than it now possesses in tho capital of tho bank. There can be no just foundation •for such a claim. If the interest exacted by the Government in 1903 should bo made the basis of the claim, it would bo making ono exaction tho justification for another; and shareholders both in England nnd New Zealand would be justified in entertaining the opinion that rights of property and justice are loosely regarded by tho Government of this country. "We, therefore, dissent from the proposal of the board made without in any way consulting; shareholders to offer to the Government the .option of taking up the proposed new issue of capital; and of taking it up on .more advantageous terms than the portion of such issue offered to shareholders. ' "The proposal appears to us to involvo the right of tho Government, if it thinks lit to do so, to tako up one-third of all future issues of new capital. We respectfully dissent from this.as unjust and unreasonable. We are aware that the Government, by legislation, has tho power to imposo this further condition upon the shareholders of the bank. If it should do so, it will be done, we respectfully say, without, our consont, and despite our respectful but emphatic protest. "(11) Wo are satisfied that shareholders will havo no difficulty in raising any increased capital that may bo required. Indeed, shareholders are desirous of putting further capital into the bank. The bank's ' capital (apart from tho .£1,000,000 Stock Guaranteed by tho State) amounts to ,£2,375,000, and in 1914 will amount to .£2,550,000, made up as follows:— £ .£ State-owned preference shares 500,000 Ordinary shares 500,000 Reserve Fund: At present ;•••• 1,375,000 At the annual meeting of shareholders in June next, there will be added, a further sum of at least 175,000 Consequently the reserve fund, before the 1,000,000 Guaranteed Stock is pali l out in . July, 1914, will then total i 1,550,000 Total capital and reserve 2,550,000 Add uncalled capital 500,000 =£3,050,000 "We are not satisfied that legislative > authority is required to authorise the 11 shareholders to increase tho capital ox the.

I bank provided that tho priorities and privileges attached to tho preferenco I shares owned by the Government are not prejudiced or all'ected. We, however, are desirous that this power should bo put beyond question; but new issues of shares should bo offered in the iirst to existing shareholders. - As we have said, shareholders will find no difficulty whatever in providing any further capital that may on due consideration be thought necessary. ~ "(12) 'Wo further dissent from the proposal of tho board to renew tho ,£1,000,000 stock for twenty years. The bank is in a position to exercise its statutory right to retire this stock at maturity. In December, 1907, at ft meeting of the shareholders of the bank, tho pressnfc chairman said: 'If the board continued tho existing policy of steadily piling up( the reserve, they wore hopeful they would bo able to pay the .£1,000,000 maturing' in 1911 without increasing jhe present share capital of the bank. lt"Vas a consummation devoutly to be wished. "We are unaware of any reason to justify this 'volte face' of tho chairman. The object of the chairman's proposal to renew the stock can only .be. to serve as a pretext to justify further demands by the Government on the bank. We are of opinion that it is in the interests of shareholders that the bank (as it is clearly entitled to d°)> should retire the stock maturing in i 914. We confess that we are unable to understand cither the necessity or expediency of the recommendation of the cliairman relating to tho provision of a sinking fund to provide for the retirement of the stock. "13. We are constrained to remind you that we are • acting as trustees for tho shareholders of the bank—about one-half of whom are resident in England. They have no other representative. The Board of Directors do not, and do not profess, to represent them. The nominated board has unequivocally said that they would not listen to or consider the views of shareholders; and the inference is plain that they profess to represent one interest that is the interest of tho Government. In these circumstances a great responsibility is cast upon us—the only representatives of shareholders who are without an effective voice on the Board of Directors. We, therefore, .are entitled to claim careful consideration of the views which we submit on behalf of shareholders. If the Government accept the views of the board, we must point out that these views cannot, do not, and do not profess to represent the opinion's of shareholders—and, in fact, arc diametrically opposed to the wishes of the great majority of shareholders. It is a unique position. The shareholders who admittedly own the business of the bank are powerless to express an official or effective opinion. The board nominated, it is true, by the Government, but bound in honour to discharge tho duties of trustees for the shareholders, have disregarded their sacred .obligations. "14. W r e are satisfied that the shareholders are asking no more than theyare justly entitled to. Indeed, we claim that the Legislature ought not this session to pass any legislation affecting the bank, so that English shareholders may represent their views to the Legislature before any legislative action is taken. _ "We are not unmindful that Parliament is omnipotent, and has power to regard the just rights of- shareholders. The Board of Directors have, in our opinion, failed in their duty to.shareholders; we shall not fail to do our duty. It may'be that we shall fail in oui advocacy of the rights of shareholders. If. we do we shall at least make it clear that any invasion of these rights will be effected despite our strenuous protest. We have the honour to "be, Sir; Your Obedient Servants, (Signed) - ' • MARTIN KENNEDY. WILLIAM WATSON.