Wellington Combined is not a ‘public’ company in the typical sense of the word. It isn’t listed on any regulated exchange and it is not an investment that can be accessed by retail investors. The company’s constitution notes that each shareholder must hold an “operating contract” with Wellington Combined Taxi – essentially, a form of co-operative arrangement with its origins in the land of good intentions.
Over time, however, the law of market forces means that not all shareholders operate taxis. That has allowed different motivations to affect the interests of shareholders. Perhaps the company might say that there is only one class of shareholders (defined by an operating contract), but in practice it is clear that some shareholders are more equal than others.
Since 2020, the company has suffered from disquiet amongst its shareholder base (predominantly taxi drivers) as it has re-focused its revenue policies. While this was initially in response to the Covid-19 pandemic, the company later enshrined the policy that saw shareholders that did not operate taxis (but retained an operating contract) pay a significantly reduced monthly levy of only $40 per month, compared with driver-shareholders paying $370 per month. The company argued that this was a way to keep drivers. The policy was voted ‘in favour’ by a majority of shareholders at the company’s 2020 annual meeting.
Unsurprisingly, driver-shareholders have made the argument that this has cost Wellington Combined revenue, reduced the incentive to continue driving and increased the incentives for non-drivers to increase their shareholding. And last week, Judge Andrew Skelton agreed, allowing driver-shareholders to pursue a derivative action (as reported by Emma Hatton at Newsroom) that will see Wellington Combined take its Board to court, questioning whether they were acting in the best interests of the company.
Judge Skelton appears to have acknowledged that there are indeed different shareholder classes at Wellington Combined, with scope for one group to be disadvantaged vis-a-vis another. This is a key statement: it implies that the resolution should not have succeeded or failed on a simple majority, instead being a special resolution that required a majority vote across each shareholder class.
Relevance to retail investors
Wellington Combined is one of many companies in New Zealand that operate with a widespread shareholder base in an unlisted environment. That means the degree of independence and transparency it offers to its shareholders is focused on compliance with the Companies Act 1993; a 30-year-old piece of legislation that could never have envisaged continuous disclosure, large-scale internet use and the significant improvement in governance standards that have swept the globe. While the NZX rules and voluntary Governance Code ensures a relatively strong (and improving) degree of transparency for investors, directors in unlisted companies are under no motivation to do more for their shareholders than mere compliance with the Act.
And that level of compliance does not set a high bar.
It’s in all investors interest to ensure that companies are operating on a level playing field when it comes to transparency and governance quality. After all, if a director is faced with the enhanced capability & compliance requirement of operating as a listed company, but can happily ignore that as an unlisted entity – well, why list?
At least Wellington Combined produce audited accounts and continue to have an AGM each year (not necessarily a requirement under the Companies Act for widely-held companies). Gosh.
But Wellington Combined’s co-operative roots form fertile ground for conflicts of interest and unconscious bias to thrive. They’re not alone; New Zealand has a long history of encouraging co-operative models that conflate the interests of suppliers and shareholders (think Fonterra). That also leads to the potential for capital starvation; the focus on maintaining minimal cash investment is seen as a positive benchmark as a means of ultimately increasing supplier payments or returns to (supplier) shareholders. Arguably, the advent of Uber and other ride-sharing services place a greater need than ever on the traditional taxi co-op to evolve significantly. Such evolution will take both capital and people capability – both of which are likely in short supply right now.
While the Board may disagree, Wellington Combined’s actions in reducing its revenue from non-driver shareholders has likely affected its ability to maintain sufficient cashflow headroom to undertake much-needed investment.
Scope for conflicts of interest
I’ll preface this by stating that it is not for me to determine whether Board members of Wellington Combined are actually conflicted in their decision-making. The factors below merely highlight the potential for conflicts to occur.
Given the co-op structure of Wellington Combined, what might be interesting for shareholders is a disclosure of the process used to determine independence on a particular decision and how they manage the risk. A degree of nuance that is far too sophisticated for our Companies Act.
Directors must own shares
A typical requirement of a co-operative, one might say. In the case of Wellington Combined, however, the three largest shareholders, holding just over 10% between them, comprise half of the 6-person Board. All have increased their shareholding since 2020, particularly Rajesh Kumar who has taken his stake from 2 shares (0.4%) to 23 shares (4.64%) and Delfin de Guzman (11 to 18 shares).
This is in a company where 324 (out of 365) shareholders only own one share and where shareholding is limited to 5% unless director’s agree that the limit can be exceeded (incidentally, the requirement for a shareholder vote in terms of ownership is only triggered at 8%).
That in itself creates a conflict – were Rajesh Kumar wish to increase their shareholding further, the other five directors, with whom Kumar is likely to have a strong working relationship, would be the decision-maker.
It isn’t clear from disclosures which directors are actually operating taxis, although all must have an operating contract under the company’s constitution. Judge Skelton notes in his comments that five out of six directors are “investor shareholders” – ie, do not operate taxis.
Many investors might argue that this is a positive sign – I can hear the cries of “skin in the game” already. The difference is that we as investors in public markets have a choice; we’re able to make an assessment as to whether our interests as minority investors are aligned with those of the major shareholder. Even then, we might apply a ‘risk factor’ that reduces the value that we are prepared to pay for such shares.
An operating taxi driver for Wellington Combined is offered no such choice. To drive for Wellington Combined, you must be a shareholder as well.
Directors fix fair value of shares
So if a new driver agrees to an operating contract with Wellington Combined, how do they become a shareholder? The company’s constitution notes that “The Directors shall at least once a year or more often if they deem it desirable to do so, fix the fair value of the ordinary Shares“.
The joys of a non-tradeable, private market. No scope for negotiation or market forces here. And no mention of whether any such fair value need be supported or undertaken by an independent valuer or financial analyst. The potential for conflict is clear – especially where the company’s Board are the major shareholders of Wellington Combined.
This is a common issue in industry associations or co-operative type structures. I have little doubt that the Board of Wellington Combined are excellent taxi drivers and business people. However, that is not necessarily the best mix of skills to run a taxi business in the disruptive world of technology-driven, ride-sharing, self-driving cars and decarbonisation. Wellington Combined can have 6 directors, all of whom must be shareholders and maintain an operating contract. It is allowed to appoint one further independent director.
One out of seven doth not a majority make.
More critically, it may also limit the ability of Wellington Combined to ensure it has the requisite skills on the Board to drive the significant transformation required.
In the Board’s decision to reduce monthly levies for non-operating shareholders, the Board noted it had legal advice supporting the policy. In another example of the different rules applying to unlisted companies, this no doubt sage advice was not released to shareholders of Wellington Combined.
This is a key document that would no doubt have influenced shareholders.
When it comes to widely-held companies, the rules should not differ based on whether they are public, co-operative or private.
I’ll caveat that statement, however. The Wellington Combined saga suggests that where shareholding compulsion exists alongside operating agreements, there may be a case for an even higher standard of disclosure and governance independence than that associated with listed companies.
These comments are an opinion only, as a case study of the relationship between private and public markets and their impact on investors.