“The twins are going, and theirs will be a tough act to follow,” Murray & Roberts (M&R) chairman Roy Andersen says of the retirement of CEO Brian Bruce and financial director Roger Rees after 10 years leading the construction group.
But did they jump, or were they pushed? Collusion allegations coupled with dismal financial results in the construction sector have damaged confidence, leaving the door open, some have suggested, for a management purge.
Changing management because of collusion is not necessarily the right approach, says Hlelo Giyose, founder and chief investment officer of First Avenue Asset Management If companies started firing executives, it would be necessary to replace the entire industry.
“But when there is evidence of strategic misguidance on the part of executives, as in the case of M&R, it does warrant a change in management. The highly cyclical nature of the construction sector means that executives shouldn’t expand the business at the top of the cycle, which is exactly what Bruce did.”
When the cycle turns and firms find themselves with extra capacity, they are forced to impair their assets or revenue and the business has to shrink. Moreover, they have had problems securing payments for work in Dubai and elsewhere, which suggests further weakness, Giyose says, “and in this context, M&R executives needed to step aside”.
Wilson Bayly Holmes-Ovcon (WBHO) grew its business during the upswing with careful restraint, knowing it was in a position to utilise its resources in a downturn. It also selected its clients more carefully.
Stefanutti Stocks under CEO Marius Heyns is another example of thoughtful management, says Giyose. It chose to keep its contracts small and manageable, unlike M&R’s large Gautrain and Eskom projects, which have been the cause of many of its problems, he says.
But collusion claims have been damaging and companies will have to restore the confidence of the market.
Giyose says: “They need to put governance structures in place to prevent repeat occurrences.” He says leniency should not be extended to offending companies until they prove that they have structures to detect and police collusive practices.
Andersen says M&R’s board will not tolerate collusion and would be ruthless if it uncovered more. Bruce also says that many executives left the organisation in the past 10 years who were “unable to see the difference between the way the company operated in the past and how it needed to operate in future”.
The market may take some confidence from their position, but the departure of Bruce and Rees is a move that most investors will find more reassuring for the sake of its future strategic direction.
Meanwhile, Group Five has filed more than half of the 150 leniency markers received by the competition commission, and CEO Mike Upton could come under the same pressure as Bruce to “retire”.
“Shareholders have to ask why companies believed they needed to behave in that way to be profitable,” says Giyose.
A somewhat different example is Roger Jardine, who has been at the helm of SA’s largest construction firm by revenue, Aveng, since 2008. The company was slapped with a R46,3m fine almost immediately after he took up the job, when Aveng admitted that its subsidiary, Infraset, was colluding to fix prices.
Jardine, a new face in the industry, used the incident to highlight his audit of collusive practices in the organisation.
Aveng has subsequently submitted a number of leniency applications to the commission. This week the company said it would pay an “administrative penalty” of R128m, or 8% of its Steeledale Mesh unit’s annual turnover, after the unit was implicated in collusive activity in 2009.
The departure of Aveng executives last year led some to suggest that it had conducted a purge ahead of the rest.
It will be no surprise, then, if Aveng pursues public-private partnerships, Giyose says. If a firm wants that kind of business, it has to be “squeaky clean”.
