Rod Oram on Fonterra's Chinese debacle; Russell McVeagh's #metoo moment worsens; Weekend Reads

This morning's email focused on how Fonterra's efforts to break into China have led to it facing the possibility of writing off a $1 billion investment.

1. How Fonterra hit the wall in China

In this week's column for Newsroom Pro, Rod Oram has followed a trail of bad management decisions and poor governance to discover why Fonterra is staring down the barrel of a massive writedown on its investment in Beingmate.

After speaking to a large number of insiders, including current and former board members and shareholders, he raises questions about the role of Fonterra's auditor, PwC, and a stifled culture of debate on its board.

I highly recommend a click through to Rod's full and comprehensive analysis of a swathe of shareholder wealth destruction through Fonterra's various efforts to get into China.

My view is if Fonterra finally decides to clear the decks with Beingmate and write off its $1 billion value with its March results then John Wilson and Theo Spierings will have to fall on their swords.

The detail in Rod's piece is stunning, including that Beingmate's driving force hasn't been involved much since Fonterra bought in and that one of Fonterra's directors on the Beingmate board can't speak Mandarin and needs an interpreter.

Given the dramas in the boardroom at Fletcher Building, this is shaping up as an awful year for governance at two of New Zealand's biggest and most iconic companies.

2. Russell McVeagh's #metoo moment

Newsroom's publication of its months-long investigation into allegations of sexual harassment of Victoria University interns by senior Russell McVeagh lawyers was a major story on various media yesterday, including the NZ Herald's excellent cartoonist Rod Emmerson (above via Twitter).

Russell McVeagh partner Pip Greenwood said the firm had a zero tolerance policy on sexual harassment, but admitted the firm had been naive by not communicating it directly to senior staff. Greenwood confirmed that two staff members had been allowed to resign, and that one was still working on legacy cases for Russell McVeagh clients, albeit not from the law firms offices and female staff were not allowed to be present.

However, this is not the last of it. Newsroom published two more articles yesterday challenging the Russell McVeagh argument that it did everything it could and that it had a zero tolerance policy.

The details are shocking in this one reporting former staff views.

One male former lawyer said photos in bio-booklets of prospective law clerks from universities had been referred to by senior male lawyers in the past as the summer "menu".

Another ex-Russell McVeagh support staff person told Newsroom that events organised for summer clerks catered for three bottles of wine each to ensure they enjoyed the evening. Incidents occurred time and time again. "It was like watching a trainwreck waiting to happen in slow motion."

There has been no indication that either of two lawyers accused of sexual wrongdoing during the summer clerk programme was disciplined by the firm after complaints to its human resources department of sexual assault and inappropriate behaviour at two Christmas functions and a Wellington bar. One serious incident allegedly occurred at the home of a senior Russell McVeagh staff member.

While Russell McVeagh says it was "shocked and horrified at the events that happened" and always took staff concerns "extremely seriously", a former member of staff who is well briefed on the episode demurred.

He told Newsroom he was critical of how the firm dealt with the two men at the centre of the allegations, saying the firm's internal inquiry was like "window-dressing".

The former lawyer from the firm told Newsroom: "My impression of how they handled it this time is that they fully realised this posed a substantial risk to them commercially and in terms of their perception in the market.

"My understanding of what they did is that they followed the path of least resistance with the men involved."

He claimed a woman who supported clerks after they raised concerns was "ostracised and chastised for her involvement", including receiving a call from a woman lawyer berating her.

The ex-staff lawyer named one partner as "leader of the clean-up crew".

He said sexual harassment issues went beyond the summer in question.

"The summer clerks, before they arrive, they issue a booklet with photos and a bio, that was referred to as 'the menu' ... by more senior male solicitors who would trawl through it and mark it up and send it around."

Newsroom's Sasha Borissenko reported on how it was Wellington's worst kept secret.

Elsewhere on the #metoo front, the Human Rights Commission faces criticism for keeping its CFO on staff after being accused of sexual harassment by an intern. (Stuff)

3. Ardern kicks off abortion debate

Newsroom's Thomas Coughlan reported yesterday on the Labour Government's moves to reform the laws around abortion.

Prime Minister Jacinda Ardern said in the second election debate she wanted to reform the laws and it emerged yesterday she had written to her Attorney General Andrew Little to begin the process of a Law Commission review.

Attorney General Andrew Little surprised observers when he revealed yesterday before going into Parliament that a draft referral on reforming New Zealand's abortion law had been circulated to New Zealand First and the Greens.

Little said he received a letter from Prime Minister Jacinda Ardern after the coalition was formed directing him to begin the process of reforming the law. Once the two parties give feedback, the referral will be sent to the Law Commission to make a recommendation.

Abortion in New Zealand is a crime under the Crimes Act, although the Contraception, Sterilisation, and Abortion Act of 1977 allows a woman to have an abortion if she meets certain criteria and proves her need to two physicians.

Critics argue that the current legislation is out of date, inequitable, and the cause of unnecessary distress.

4. MBIE bats back Australian leaks

Newsroom's Sam Sachdeva reported from the Foreign Affairs Select Committee yesterday that Immigration New Zealand said there has been no increase in the risk of people smugglers making trips here, backing up MFAT comments countering Australian reports of increased “chatter”.

During a trip to Asia last year, Prime Minister Jacinda Ardern spoke out about conditions facing refugees on Manus Island, saying she saw “the human face” of the conditions facing those at the shuttered detention centre and reiterating New Zealand’s 2013 offer to take up to 150 refugees from the Papua New Guinea island or Nauru.

Following the remarks, Australian media cited “genuine fears within intelligence communities” that New Zealand’s stance could prove an incentive for more people smugglers to make the trip, while the Opposition has been quick to suggest Ardern had put New Zealand at greater risk.

Speaking to Parliament’s Foreign Affairs, Defence and Trade Committee, Immigration NZ head Nigel Bickle said people smugglers ran the third-largest criminal enterprise in the world, behind only drugs and guns, and would do whatever they could to encourage people to take a risk.

“Smugglers will use any opportunity and any public comment, whether it’s by a government, an opposition...anything that might further their cause, which is about getting bums on boats basically,” Bickle said.

However, Bickle said there were no signs of any increased risk for New Zealand following Ardern’s comments.

See Sam's full article here on Newsroom Pro, where it was first published yesterday.

5. Briefly in the political economy...

Warming up again - The Real Estate Institute reported that house sales volumes warmed up again in January from December and that prices continued to rise outside Auckland. It reported the number of properties sold in New Zealand during January 2018 rose 2.7 percent from a year ago, which was the first annual rise in 19 months. The number of properties sold in Auckland increased 0.9 percent year-on-year to 1,157. The House Price Index showed prices up 0.7 percent in December from January for New Zealand excluding Auckland, while prices fell 0.6 percent in Auckland.

A proper review - Parliament passed changes to the Dairy Industry Restructuring Act (DIRA) last night that preserve the current contestability provisions in the South Island that mean Fonterra still has to take anyone's milk. The provisions were set to expire on May 31 because Fonterra's market share had fallen below 80 percent in the South Island.

Agriculture Minister Damien O’Connor said the change gave the Government time for a comprehensive review of the DIRA, including environmental impact, land use, Fonterra’s obligation to collect milk, "and how to achieve the best outcomes for farmers, consumers and the New Zealand economy." He said the details on timing, delivery and definitive scope would be considered by Cabinet in the coming weeks.

Cartel criminals - Commerce and Consumer Affairs Minister Kris Faafoi announced he had tabled the Commerce (Criminalisation of Cartels) Amendment Bill, which includes imprisonment as a criminal penalty. The previous Government dropped a plan to criminalise cartels. "This Government wants to take a strong stance against business people who collude against the interests of consumers. Many of our trading partners, including Australia, have a criminal offence for cartel conduct," Faafoi said. See more detail here via MBIE.

Longer bright line - Following through on an election promise, Revenue Minister Stuart Nash announced plans to introduce a Supplementary Order Paper to the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) bill to extend the current two year bright line test for rental property investors to five years. The test means any property bought and sold within that period is treated as trading income and is therefore subject to taxation -- effectively becoming a capital gains tax.

A big job - MBIE yesterday advertised the role of head of its Kiwibuild unit. It's arguably the most important job in the Government right now. "The Head of KiwiBuild will bring together new and existing functions to procure land for housing and affordable housing outcomes – these being the two critical components of the KiwiBuild Unit's work," MBIE wrote. You betcha.

Media moves - TV3's London correspondent and former Press Gallery Reporter Tova O'Brien is returning to become Newshub's Political Editor in the Parliamentary Press Gallery, replacing Patrick Gower, who is now a Wellington-based national correspondent. Also, The Nation's host Lisa Owen will start hosting Radio Live Drive with Ryan Bridge (also a former Press Gallery reporter). Owen will continue to host The Nation.

I'm out - Jonathan Coleman confirmed he would not stand for the National leadership. Steven Joyce and Mark Mitchell have yet to confirm their plans. Judith Collins complained yesterday that Amy Adams broke a caucus agreement by displaying her supporters in public. Chief Whip Jami-lee Ross said there was no such agreement.

Don't drop her - David Seymour has signed up to be a contestant on the next series of Dancing with the Stars. He will be stepping into the shoes of previous ACT leader Rodney Hide, who infamously dropped his partner during a dance.

6. Weekend Reads

Here's a few longer reads for your weekend pleasure.

Ambrose Evans Pritchard is typically apocalyptic in his writing that new US banking legislation would stop the Fed from rescuing the world again from another 2008-style financial armageddon. I don't buy it. As a veteran of reporting financial crises that threaten banking systems, I'm now sure there will always be a bailout for banks if armageddon is threatened. I was reminded this week by a correspondent of this quote from Adam Smith about how supposedly democratic Governments work.

He said: "Most government is by the rich for the rich. Government comprises a large part of the organized injustice in any society, ancient or modern. Civil government, insofar as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, and for the defence of those who have property against those who have none."

The Treasury Secretary is an alumni of Goldman Sachs. Of course the US Government will bail out the banks and financial markets. It is the most brutal form of moral hazard, but it is now baked in to expectations all around the world. The first person to challenge it will be run over by lobbyists and donors knocking down 'their' politicians' doors. And the same is true for New Zealand, despite our figleaf of a system of Open Bank Resolution. It is simply a way for term depositers and banks to get a government guarantee without paying for deposit insurance.

I hadn't really thought about this, but bitcoin and these other block-chain based currencies that rely on currency 'mining' systems to generate their cryptography, are actually really bad for the environment, as Wired reports in this piece.

The days of PPPs seem numbered in many places, including here under the current Government. That's partly because of the poor experiences in Britain and Australia. This New York Times piece summarises the latest British debacles.

This piece from Suzanne Berger in the Boston Review on how globalisation can survive is thoughtful and sorts through the history nicely, including how the threats to the first age of globalisation (1870 to 1914) were overcome.

The tide is turning fast against Facebook and Google over the issue of the effects of their services on democracy, public discourse, security and mental health. The New York Times reports a group of Silicon Valley technologists who were early employees at Facebook and Google are so alarmed over the ill effects of social networks and smartphones they are banding together to challenge the companies they helped build.

On that topic, here's the always excellent Farhad Manjoo on the topic of tech addiction.

7. One fun thing...

Bethells Beach always seemed like a fun place to me, but in a certain light...

From Ryan Mearns on Twitter: "The new Borgen looks really good."

8. This morning's political links

These are available in the morning email.