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Mainzeal and the mad men who drive the economy

HIDESIGHT

Mainzeal Property & Construction’s collapse generated the usual and expected kneejerk bewailing and bemoaning.  

It’s as if it should never have happened. We had this big company yesterday. We should still have it today. It should go on forever.

And because it should never have happened, something must have gone wrong. And so someone is to blame.  

The fault is invariably greed or business ignorance or both. The fingers predictably point to directors and the company’s owners. And to the government.

The business failure is reported as an economic calamity. And a sign that all is not well within the wider New Zealand economy.

It’s all nonsense, of course. The business collapse shows we have an economy that is working. We would be better off with more.

It is traumatic and upsetting for those involved. But so, too, is life. The trauma and upset doesn’t make life less worthwhile or desirable. It’s simply a part, and a very necessary part, of living.

Business collapse is part and parcel of a successful economy. It’s simply not possible to sit back and design once and for all the perfect business and business structure.

Even if we could, it wouldn’t work for all time. The world is simply too dynamic a place.

And so we have instead a system that is constantly turning over ideas and business practice. Businesses are continually coming and going. There’s continual innovation and entrepreneurial success – and failure. It’s what gives an economy its dynamism.

We have had economies in which businesses never failed. The economies were sclerotic. The end result wasn’t business failure but the failure of the entire economy.

It’s the turnover of businesses – as traumatic as it is – that makes an economy strong, robust and, ultimately, successful.  

There should be no surprise in any of this. The strongest and most resilient systems are underpinned by a continual turnover and evolution.

The obvious example is life itself and the extraordinary strength and wondrous diversity produced through trial and error. The English language, science and common law are other examples.

Esperanto is a cleverly designed language. But it lacks the evolutionary adaptive power of English. No one designed the English language. No one controls it but it works.

Business start-ups, mergers, takeovers and collapses are tweaks and hacks to the economy, making it better and stronger. They are the neologisms and, ultimately, obsolete words of yesteryear.

The economy is an organic, growing, evolving system. Business ideas are tested and tested through trial and error. It’s messy and it’s difficult. It’s not a clock that’s been engineered but a living, growing, evolving thing.

But there is a driver. A driver on which the entire system depends. A driver that generates the very things that we need to sustain ourselves. That driver is entrepreneurship.

Entrepreneurs are the rarest of people. The madness. The hubris. The focus. The drive. The wild, misplaced optimism.

These are the souls that make the difference between an economy that ticks along and one that flies. Do they get it wrong? More often than not. Do they make mistakes? More in a day than commentators make in a lifetime. Are they mad? Of course.

When they succeed, lesser folks regard them as excessively wealthy and rapacious. When they fail, they’re greedy fools.

We should be gentle on entrepreneurs, both when they succeed and when they fail. Not for their sakes. They have personality types that don’t much care. But for ours. There’s enough ignorance and negativity in the world without adding to it.

More by Rodney Hide

Comments and questions
42

Interesting perspective.
Be gentle on entrepreneurs is advice I appreciate for those at the tail end of a life on that particular roller coaster, my nerves are shot and I now see what people mean when they say money or health.

Exactly right Rodney. A very good article.

Yes. And its a pity governments continually intervene to save banks?

It's the same with the circle of life and even the Aussie bush fires. Not to take anything away from those who lost a loved one or precious belongings - however, the bush needs the fires for renewal and regeneration to survive. Go figure.

Oxymoron dichotomy indeed. Similar to the unions attempting to claim they increase productivity and are there for the workers. Yeah Right!

Hmmmmm, the whole dynamic part is why we have skilled directors that can attract large pay packets, I think you remove too much blame from them. Yes businesses fail, but the messier a failure is the worse it is for the wider economy (which is why we have rules about trading when insolvent and bankruptcy protection).

Of course in the case of Mainzeal part of the blame is on the subbies who did not negotiate contracts with appropriate clauses and payment schedules, which meant they were taking on more risk (which is totally fine, until they start moaning when that tail probability becomes reality).

Turnover of business is a good thing, it is evolution. But top quality directors and entrepreneurs should be able too see in advance that a business is not viable into the future and begin to wind up/restructure/redirect before failure. I think there is a bit too much of a "wait and see, maybe things will change and we will be ok" approach here.

Personal opinion on Mainzeal: they should have called the investment bankers before going to the receivers. The company (I assume) is far more valuable as a going concern and broad parts of their operations are profitable. Structurally separate into separate companies, possibly one for each project, sell it to other stakeholders and pay as much of the bills for the remaining company as possible with the proceeds.

There are no rules about trading while insolvent in NZ. The rules are about trading recklessly or taking on obligations without reasonable belief that those obligations can be met (sections 135 and 136 of the Companies Act 1993) . These rules apply whether or not the company is solvent or insolvent. The only time solvency in itself is a factor is when distributions (like dividends) are made to shareholders.

You're out to lunch. Trading recklessly almost always involves an element of insolvent trading. Enough with the semantics already.

'Skilled directors?'!!! Seems to me that the root cause of most of these failures is the lack of skills at director and CEO level. Many of these people are drawing salaries well beyond that justified by their demonstrated competence.
How many of these senior manager/directors can show 'head hunting' letters or approaches from large international conglomerates; few, if any, I would guess.
Look at the salaries 'creamed off' by the management of the failed finance companies, and note the exposed dishonesty of these people.
Our commercial world operates in a climate of 'moral irresponsibility'.

There is a gaping hole in Mainzeal`s account. The rot really kicked in when it took a $22 m hit on Vector Arena, with the stuff-up on the roof ; and under-quoting on projects has aggravated the problems.

Correct philosophy Rodney, but it fails to adress the problem that costs us all, the increase in building costs that arises from such failures. All the subcontractors and suppliers need excessively high margins because of repeated failuures and lack of protection for the money that is due to them. Protect that money and the margins will reduce while the profits for subcointractors and suppliers will remain. Affordability of housing and commercial property is directly linked to the cowboy environment of the industry.

If the cause of the failure was reasonable business risk. But before making that assumption you first need to investigate whether that was indeed the cause and not some reprehensible activity. That is why there are director liabilities.

Good to read opinions devoid of political spin; a rarity in NZ.
How about re-entering parliament; your talents are missed
Please keep reporting.
WG

Re-enter Parliament, a good thought. What say you, Rodney?

We need him to fix the benighted mess he has let Loopy Len make of the 'super' city (as successful as Seven Sharp).
Time for him to make amends....first.

"It is traumatic and upsetting for those involved. But so, too, is life. The trauma and upset doesn’t make life less worthwhile or desirable. It’s simply a part, and a very necessary part, of living." Sad but true. Thanks for writing this, Rodney!

I was a victim of a big redundancy back in mid-2009 (along with my other 67 colleagues). The redundancy was not reported on the news or radio. So we didn't get the wailing and moaning that Mainzeal employees received on national TV. No one knew I lost a job and struggled to find one in the next 9 months (it was the first wave of the global economic crisis to hit NZ). Most of my ex-colleagues, too, had it really rough. Some remained jobless for a year.

Now, looking back, I reckon it was the best thing to have ever happened to me (albeit it wasn't the most pleasant experience).

To all former Mainzeal employees who experienced the 'sudden company-wide meeting early in the morning' and the subsequent DCM, I say "suck it up. You have it better than countless others who were sacked in 2008 to 2010. The economy is now on the rise. There are plenty of construction jobs on offer today, especially in Christchurch. The worst of the biggest recession is nearly over. Suck it up. And stop wailing. Someday you'll look back and realise: it was a good thing that I left Mainzeal".

Thought-provoking and ameliorating stuff from Rodney. Just part of the churn, etc. But there is a bit more to it and there are consequences.

In terms of construction, one of our largest builders has made 70% of its profit from its monopoly on building products - let's see if the Commerce Commission makes any difference whatsoever - and watch the spy doctors at play.

With reference to the regurgitated comment above about subbies, well for those who understand the sector better, that is one of the very reasons why the Construction Contracts Act is the law of the land. However, saying subbies should run a tighter ship and down tools the minute a head- ontractor's payments becomes more than 30 days due will never work. The reality is, there needs to be a little give and take on large projects and that sort of comment about a " diligent subbie " and blame allocation is straight bullderdash.

And here is the future which Rodney can feel but not quite see - Chinese building products after a period of time will ultimately become the norm here after a lot of diddling around with things like NZ fire rating and earthquake rules. And then our largest builder, which has the existing monopoly on building products which makes our little nation one of the most expensive to build in in the world, will lose share value - unless, of course, they are nimble and agile and exploit other building and construction opportunities, which is a fair bet.

But its is all a bit like the duopoly of the telcos - now we have only Fletchers and Hawkins, and if the consumer is to win and peasants like myself need some more gib-board, then ...

And, finally, it should be noted that serious contractors always call their business a mug's game as the margins are often very tight.

Anyway evolutionary, predatory, whatever. These sorts of corporate insolvencies are the cutting edge of captialism - and PwC fingers out if not already actioned - every working bloke needs his tools to earn a living, after all.

Oh, and if I was a betting man I would be pretty confident that the Mainzeal team hunted from here to China and back for investors well before the bank stepped in.

Very good point.

The opposite to the highs and lows of an economy is trying to have the peaks and troughs levelled out so that there is no pain.

Taking out the pain, of couse, is what the US and others (ours with South Canterbury Finance) have done with the socialising of the losses of businesses in the past four years, in particular.

What they should have done, of course, is not bailout these companies - there is no such thing as too big to fail. All we have learnt from this excercise is that someone will come to the rescue, we can throw caution to the win and be reckless with little or no consequence. Part of the SCF problem, as I understand it, was that once they got into the government guarantee they went even more risky than they had been in terms of their behaviour.

The same thing has happened with our local governments making stupid decisions aka the Dunedin Stadium, and hiding the problems financially by, say, stretching out the loan terms rather than tacking the problem head-on by increasing rates. If the rates were truly what they should be, then there is no way the ratepayers (and councillors) would fall for the next grandious scheme so readily. Well, one would hope that is the case as it depends on a knowledgable electorate, something that is, I believe, not the case these days.

Back the Rodney's original point about ups and downs of economy, the opposite system to capitalism which has the ups and downs, of course, is social democratic or communist society, and both those have been proven not to work.

Unethical capitalism has been shown not to work too...

Rodney is correct, of course, but probably doesn't go far enough, I suspect.

Rodney, how do feel about currencies failing and being replaced by other better, improved currencies in a free-market competition to find the best monetary information technologies we can have for our societies?

http://monetaryfreedom.org/

Good article from the armchair. Nice if it were true.
Entrepreneurs – very few these days. They made sure there was “cash” in the bank before you took on the next project. Over the last few years, appears they “sail close or forward of the wind!”.
The Construction industry in the 1980’s had the “lien system” [repealed 1987].
The 1990’s “untreated timber framing”, “modern cladding systems” [monolithic] and “cowboy builders” - to date, these problems still keep rearing their ugly head!
Lien system now The Construction Contracts Act (CCA). They say it was designed for “subbies” but also works well for builders. Why are there still so many problems?
Some companies hold their contractors, etc, retainer in a trust. Where and what happened to Mainzeal’s?

All quite true in a general sense, but pretty bland and trite. Maybe some people would disagree with this, but not many NBR readers. The thing that made this Mainzeal case interesting was the possibility the directors stuffed up. The article sheds no light on this. I've a feeling RH is tending to pick pretty low hanging fruit these days. On the odd occasion he goes for something challenging he ends up at the ludicrous point of coconsidering us all worse off than African slaves. Do a bit of digging, Rodney. Your fairly conventional statements of liberal economics are getting a bit obvious.

" Big ideas are so fragile, so easy to kill. Don't forget that all of you who don't have them." Go, fellow entrepreneurs.

Kiwis tend to look to "derisk" everything. It cannot be done. Plenty of punters want to buy a ticket after the horse has won, but, alas, that's not the way it is. Well wrritten, Rodney.

So refreshing to read sanity in both column and comments on this subject. Such an incredible contrast to the brain dead nonsense that passes for commentary in our MSM and political circus. So destructive that the latter drives political agendas.

Exhibit A in mainstream media moronic commentary: today's Herald editorial on tax deductibility of mortgages. That journalists get paid to write such utter drivel is beyond belief.

Rodney summed it all up rather well. I thought he was writing about his old mate David Henderson of Chch fame.
Without those few who have the drive vision and optimistic outlook what could we really get done, provided these men are honest they should be celebrated, not shafted. These are few that need a reality check who have never lived commerce. Wise words from the sideline, I think .

For those people reluctant and frightened of change I suggest you read,"Who moved my Cheese". A little story with a huge meaning.

Like most things, Attitude,Attitude and Attitude.

What a lot of nonsense from someone who has never had skin in the game

I absolutely uphold the law that limits the liability of companies so that shareholders put all the money they invest at risk, but cannot be called on for more if the company fails. I publicly criticised Chamber of Commerce CEO Michael Barnett some years back when he called for recourse to directors/shareholders of a significant failed airline that went belly up, leaving in its wake a long list of unpaid unsecured creditors, one of which was the airlines catering company. Its owner was naturally calling for someone (shareholders/directors) to step up and pay his and other creditors' bills. Barnett supported them with a call which I saw undermined the whole basis of capitalism and free/risk enterprise. But, when company directors fail to respect both their shareholders and their creditors by trading recklessly, or failing to know what is going on or maintaining good stewardship, then all the law has to deal with that should be thrown at them. I don't know how good Dame Jenny Shipley et al were as Mainzeal directors, but I do not assume they were fantastic. I start from the assumption that when a company fails, something went badly wrong and I want to know what it was. Just because you resign as a director at the very last minute, or even last few months, is not a defence for not being guilty of poor governance, such as letting your CEO run you. It is also possible that the directors stayed on to the bitter end trying hard to save the day, and Shipley et al have said they thought they or the CEO could save the day by getting new loans and or capital in place for that purpose, but it did not eventuate. Brian Gaynor said back in 2010, and again recently, that the record of ex-cabinet ministers, deputy prime ministers and prime ministers as commercially savvy directors has, on the whole, been abysmal. He named a long list of them. Most, unsurprisingly, were ex-National big political names, some of whom had never actually run or owned a business.

One must wonder how this firm can fail after being around for over 40 years. Just follow the money trail and there will lie the truth. The liqiudators need to do their job properly here.

We all know that sharks live in the sea;
but does that stop us going for a swim?

If the outcome was certain it would be communism.

There is an absolute certainty to the boom and bust cycle of capitalism Dory.

Business' fail when they lose money. The construction industry in NZ is geared to undermine the profitability of the builders.
The BIA was dismantled to avoid govt liability over a compromised building code and BRANZ , material suppliers and architects deny responsibility for poor design creating buildings out of materials that are sure to fail.
Government Departments set budgets for construction contracts that are ridiculous, so architects design silly boxes out of ticky tack to achieve architectural statements within the govt. budgets
The builder and the subcontractors cop the liability .

Maurice Williamson needs to use the failure of MZ to bring the industry to accountability. Builders need to be rewarded for taking the risk of building in NZ with dodgy governance and excessive "design"

The Morgan Poll has too high a margin of error to ever be taken seriously. The Colmar-Brunton Poll is far more accurate, because it asks a larger number of Kiwis what they think.

The Greens/Labour can't get into Government without kissing up to Hone Hariwera.

Honest failures are a normal part of starting out in entrepreneurship. But in the case of Mainzeal, there sounds like far more to it than just honest failure, given it had no shortage of projects on its schedule. And as mentioned upthread, Brian Gaynor cites the poor track record of ex-Cabinet ministers in recent business appointments.

Businesses fail because of mismanagement, end of story!!!

Bang on the money again, Rodney.

The thing is it needs to be carried right to the top - i.e., banks etc - that have been ruled too big to fail, and now too big to jail.

I often skip this column because of the self fulfilling loony diatribe.

Reading it today was a rare mistake.

Admit it. You love it.

What a lot of socialist drivel RH's (very sensible) column has generated.
Makes one despair for the future of New Zealand!

Peter Martin

RH should be back in parliament, where his talents are necessary, given the directionless efforts of the current bunch and likely replacements.
Peter Martin

I just love the way an economy running on overdraft is described as a "successful economy".

Keynes would be pleased.

Indeed. And isn't it odd how National's massive borrowing programme has quietly slipped into the media's selective amnesia.