Something’s rotten in Howden’s boardroom

YOU probably haven’t heard of Howden, a small company specialising in providing fans and heating units for mines and industry. But it’s a company whose cavalier disregard for minority shareholders this week earned it the epithet of being the “unacceptable face of capitalism”.

It might seem a tad harsh to lump Howden — a R2.2-billion company formed in Glasgow in 1854, which opened its doors in South Africa in 1952 — alongside Tiny Rowland, the former CEO of Lonrho, who merrily bribed African leaders in the 1970s.

But Howden’s recent actions suggest that, at the least, it falls on the wrong side of acceptable 21st-century governance behaviour.

This week, Anthony Clark, an analyst from Vunani Securities, ripped into Howden, saying good corporate governance seems to be “anathema to Howden management”. “All they have managed to do recently is destroy value and antagonise shareholders,” he said.

Given that Howden’s stock has tumbled 36% in a year, he isn’t wrong.

“This case smells as sulphurous as the emissions from Eskom that Howden cleans — it stinks,” said Clark.

But it’s not just an isolated corporate story: this sorry tale firstly reflects poorly on our JSE, and has resonance for any number of South African firms that have been yoked by an overseas company intent on ripping out every cent it can.

It’s also disappointing because, for years, Howden was a steady performer on the JSE, servicing mines and Eskom without fuss. In 2012, however, 55.3% of its shares were bought by a US firm called Colfax — and the trouble started.

Immediately, Colfax began charging Howden a fat “management services” , technology and “software licensing” fee, effectively forcing its South African subsidiary to pay for services it had done in-house for decades.

For 2012, Colfax charged Howden R3.8-million, but this soared ninefold to R32.3-million the next year, before dropping marginally to R25.2-million in 2014.

Surprisingly, Howden didn’t bother asking shareholders to vote on whether to approve this related-party deal until this January — and only then due to heavy pressure from investors.

But even that vote was a farce. Howden’s board, in its wisdom, decided that even though Colfax was a related party, it would be allowed to vote its stock. And, with only 50% needed to pass the resolution, this made it a slam dunk.

Minority shareholders, including Nedgroup Investments and Abax Investments, protested to the JSE. But the exchange showed a startlingly tin ear for minority investors.

This week, the JSE’s Andre Visser said Howden’s resolution on the Colfax fee was put to shareholders under the Companies Act — not the JSE rules. “The JSE has not provided any ruling on the eligibility of Colfax to vote as it falls outside of our jurisdiction [because] the shareholders’ resolution was proposed in terms of the Companies Act,” he said.

Be that as it may, the JSE could still have intervened to protect minority shareholders. But it didn’t.

Visser did say, however, that the JSE had again been asked by shareholders to review the case and “this matter is currently being considered”.

The final straw for investors was Howden’s announcement on Monday that it would be scrapping dividends “for the foreseeable future” to give it “strategic flexibility”. This was curious because it has R627-million in cash on its balance sheet — equal to R9.64 per share — so it could have afforded to pay a dividend.

Investors fled, and the share price sank 20.5% this week to R31.90 — a R525million loss in value within five days.

Clark said Howden’s move smacked of a bid to either “drive the share price lower to do a sneaky minority buyout [or] rape and pillage the South African business for the parent’s gain”.

CEO Thomas Barwald shrugs when asked about being branded the unacceptable face of capitalism.

“Well, there’s not much I can do about that [view]. But what I can say is that we certainly do not waste money, and we’re certainly independent,” he said.

He said that given Howden’s growth from a small-cap to a mid-cap company, the Colfax fee was “very little compared to the value we get’’.

Barwald also shrugs off the complaints, saying, “I don’t know if you can make everyone happy.” Sure, but you can at least try. At its AGM, 17% of shareholders voted against its proposal to issue new shares, 13% voted against its remuneration policy, and 10.5% voted against the reappointment of two directors, Humphrey Mathe and Morongwe Malebye.

Strip out Colfax’s “yes” vote, and it’s clear many investors weren’t pleased.

And yet, Barwald, surprisingly, says support for the resolutions proposed at the AGM was “excellent”.

The details of the Howden scrap will fade into history. But the bigger issues, including the JSE’s apparent disregard for minority shareholders, are not likely to recede any time soon.