New Zealanders have a history of worshipping at the feet of small businesses and the small business way.
We admire the number 8 wire approach to solving problems. She'll be right, we say. We prefer to rely on our own resources rather than ask for help or create a process or a corporatised system.
We distrust 'corporateness' or big businesses. We think they lack soul and smother creativity. Often they do.
We don't like corporate big wigs with their uppity ways, their flashy suits and their MBA-esque language of 'value-add' and 'value chains' and 'shareholder value'.
We love the idea of the do-it-yourself approach winning every time over throwing money and bureaucrats at a problem. We see the rigour of heavy process and documentation as unnecessary and remote and wasteful.
This distrust of the big and the rich seems to be baked into New Zealand's social and economic DNA.
We have a history of trusting the little guy over the big guy. The Liberal Party reforms of the 1890s of Prime Ministers Ballance and Seddon broke up the large land holdings of the squattocracy, including in North Canterbury, and sold them off to family farmers. Prime Ministers Holyoake and Muldoon governed much more for small business people and farmers than organised labour, big government and big busineses.
My own grandfather was granted 'rehab' land in the 1930s to farm. I now much prefer working to grow a small business than working in a large corporate for a faceless shareholder. We're a nation of small business people born of rural migrants from the mother country who just wanted to create our own farms and be the lords of our own little manors. It may be something to do with a Scottish Protestant background, particularly in the South Island, that values hard work and frugality and independence over corporate greed and status.
Our iconography is all about self-reliance, modesty, restraint and 'not making a fuss'.
The 'Southern Man' of the Speights ad or the dryness of Fred Dagg give us a flavour of how we see ourselves and who we want to be.
One of the reasons Mark Hotchin and Eric Watson have never been truly popular is they were seen as 'flash Harries', driving fast cars and living in mansions from the profits of their big businesses.
There's something about wealth and governments and corporates and just-plain-big we just don't trust.
So we now have the Allan Hubbard situation. He is still worshipped and backed by many, often in the South Island, who see him as the ideal financier.
Restrained rather than flashy, selfless rather than selfish, a small businessman backing other small businessmen in his community and a man more interested in building businesses than building processes and profits for shareholders. He is seen as always on the side of the little guy. A man who looked you straight in the eye and did a deal with the shake of the hand. A man who wrote out a cheque on the spot and answered his mail personally. (I'll come back to the cheques and the mail later).
He was as far away from the clever, slick and pin-striped lawyers and brokers and property developers of Auckland and Wellington as you could get.
He drove a 1971 VW while they drove their new Porsches.
His supporters think he is being beaten up by the shiny arses in Wellington and Auckland simply because he failed to dot a few i's and cross a few t's. They think this giant of a 'Southern Man' is being crucified for not playing by the rules of the bureaucrats in Wellington and corporate lawyers in Auckland.
They think small and personal is always better than big and corporate. They think Allan Hubbard has done nothing wrong and he would have been fine if only had been left alone and given a bit more time.
But let's have a closer look at Allan Hubbard's affairs.
We can't look too closely because he has never opened up his affairs to public scrutiny. In fact, he actively discouraged it and has never wanted to become part of the public business sphere in New Zealand.
It is now legendary in investment banking circles how Forsyth Barr once sent a team to convince Allan Hubbard that he should list on the NZX and he simply sent them back to the big smoke without ever even considering the proposal.
He consistently rejected the idea of South Canterbury Finance ever becoming a bank. He still does. It's clear he never wanted the fancy pants lawyers and brokers and analysts and fund managers poking around inside his affairs. And he was admired for this distrust of the big end of town.
New Zealanders now deeply distrust the official apparatus around investments and finance companies. Rightly, they feel trustees, financial advisors, the Securities Commission, the Companies Office and the Serious Fraud Office have failed to provide much protection or justice.
So surely Allan Hubbard's small end of town approach and his personal touch is better?
Maybe not. The report by Grant Thornton released this week is the first real peek behind the curtains of Allan Hubbard's financial affairs.
It is not reassuring. Grant Thornton reports it is concerned about a lack of paperwork, about a "complex and intricate intermingling of affairs", about a lack of security for some loans, about finding investments that were supposed to be secured by first ranking mortgages on land actually being ranked behind banks or not secured at all. They also flagged their concerns about how some loans were on interest free terms to trusts and other businesses associated with Hubbard.
Grant Thornton also discovered an entirely new entity called Hubbard Management Funds that seems to be managing around NZ$70 million, although it's not clear exactly how much is in there because the records are inadequate. It is not listed in the companies office.
"We understand Mr Hubbard has maintained the client investment records manually by way of a hand written cashbook and journal entries, which are then posted to an electronic ledger account," Grant Thornton said.
This is not the first time Hubbard's approach to paperwork has been questioned. Rebecca Macfie wrote an excellent profile of Hubbard in May in the Listener, which cited his approach to record keeping and his appetite for risk.
Associates say he operated on a handshake, and liked to back “battlers” with a strong work ethic. In business deals he loved the chase. “He was all for going wherever the growth was,” according to one source, who says he was very self-assured and strong-willed, but under estimated the role of good process. “And he had been getting away with it for 60 years.”
Not so simple after all
Untangling Hubbard's empire is proving difficult and time consuming for Grant Thornton.
It also proved very difficult for others who tried to figure it out. Several investors have told me they decided not to invest in South Canterbury when they tried to track down the various related parties that sprawled between South Canterbury, Southbury Holdings and various family and charitable trusts. They made similar decisions not to invest in Bridgecorp and Hanover after becoming similarly baffled by their complicated related party dealings. A Companies Office search for companies where Allan Hubbard is a director and shareholder finds 552 results.
For a man who is renowned among his supporters for his simplicity and straightforward approach, Allan Hubbard's financial affairs have rarely been straitforward. His dealings with the public in the form of the media and officialdom have also been far from simple or straightforward.
I look back on my experiences in reporting on South Canterbury Finance since 2006 with a growing sense of unease.
The moment when I started becoming a lot more sceptical was when South Canterbury Finance released its annual report in October 2009, detailing how its bank, BNZ, had withdrawn its NZ$100 million funding line and that its auditor, a Timaru firm called Woodnorth Myers & Co, had warned about South Canterbury's ability to continue as a going concern. There was never a public announcement about these developments.
Up until then I'd taken Hubbard's word that everything was going fine. After all, he had announced an equity injection just months earlier.
The trouble was that equity injection was actually a money go round where South Canterbury bought a one third stake in Dairy Holdings off Hubbard, who then promptly recycled the money into South Canterbury. There's more detail here in this Sunday Star Times article.
Hubbard represented that deal as an equity injection at the time it happened in May 2009. Standard and Poor's was sceptical and downgraded South Canterbury from its investment grade rating to junk status. Check out Page 29 of the annual report.
I became a lot more sceptical after that.
This is no small matter
It's clear to me that Allan Hubbard had no time for people from Wellington and Auckland peeking into his affairs or doing the 'corporate thing' with his business. His auditor was from Timaru, a company called Woodnorth Myers. For most of late 2009 he operated as an executive chairman without any independent directors.
He did not have a typical corporate board for such a big corporate. Despite being nominally just a Chairman of South Canterbury Finance, he was deeply involved on a day to day basis. Hubbard was legendary for working from early til late 7 days a week from the South Canterbury offices.
He opened the mail. He corresponded directly with lenders and investors. He wrote the cheques.
This surprised me when I was told he was still doing this right up until he stood down as Chairman and a Statutory Manager was appointed. One of the most basic disciplines in any reasonably large busineses is to separate the cheque writing from the mail opening. It's always a good idea to watch carefully who doesn't take holidays.
This is no provincial accountancy running a few million dollars worth of assets.
At its peak South Canterbury Finance had NZ$2.35 billion worth of assets. It had well over 10,000 investors. As well as that, it's clear now that Hubbard and his own accounting firm, Hubbard Churcher, was managing a further NZ$200 million or so via Aorangi Securities and Hubbard Management Funds.
How did he keep all that in his head? How can any one person manage to keep all those balls in the air? And write the cheques. And open the mail. While on dialysis three times a week.
South Canterbury Finance's new auditors Ernst and Young, who replaced Woodnorth Myers, also thought some balls had been dropped. On April 12 this year it rewrote the already announced but unaudited accounts and increased the loss for the half year to December 31 by NZ$43.7 million. This was Ernst and Young essentially saying that Allan Hubbard incorrectly valued his assets. By NZ$43.7 million.
So he is now in Statutory Management
It's clear now from the Grant Thornton report and comments made by the Commerce Minister Simon Power that there were enough concerns about all those balls being in the air that the authorities decided to freeze matters to stop any more falling down and breaking or falling through the cracks.
Yet many people in and around Hubbard's home town, Timaru, believe the authorities and the shiny suits from Wellington and Auckland should have given their great Southern Man more time to keep juggling those balls and writing those cheques and creating those charitable trusts to keep things going for a little bit longer until things were ok.
We all just needed to trust this one man, just as they had for so long. For just a bit longer.
Hubbard's supporters believe that anyone who drives a 1971 VW and works 7 days a week opening the mail and writing cheques is just like them. He's different from all those corporate types with their independent directors and unconflicted interests and big city accountants and lawyers. How could he possibly be doing anything wrong?
Personality based faith
Rightly, New Zealanders like the idea of the toiling small business man doing his best to build a better life for them and their families.
When a personality as large and as respected as Allan Hubbard seemed to embody all those values of small town New Zealand it was natural people took his promises on faith, particularly when the faceless big city slickers had lost so much of Mums and Dads money in finance companies and on the stock market.
But the problem is Allan Hubbard cultivated that faith in his personality and relied on it to fund his "complex intermingling of affairs".
Again, Rebecca Macfie's Listener report tells of how Hubbard understood deeply how the 'man of the people' image helped win him the trust of investors. The VW, in particular, has become part of his legend. He even used a picture of himself standing in front of it when sending updates to investors.
It’s “like a faithful workhorse. I’ve never been a person who had to have a Mercedes and things like that. I think it’s basically wrong. I do believe the Christian values. When there are so many people suffering in the world, there is ultimately the judgment we all face. And I just don’t think I could explain my life by living a life of luxury.”
The car has also been used as a flag of integrity: parenting guru Ian Grant, whose Parenting Place in Auckland owes its existence to a $6 million donation from Hubbard, recalls how the titan once said of the old VW:
“It’s my sign. Accountants always waste their money on cars, and people see that I drive this and they can trust me with their money.”
Substituting faith for process
My point here is that Hubbard's supporters have made a typically New Zealand mistake of believing that small business is better, more noble and more reliable than big business. They made the mistake of believing that faith in the individual is more reliable than faith in an institution.
Allan Hubbard is a provincial accountant who built a personal and business empire worth close to NZ$2.5 billion at its peak. He could no longer operate solely on the basis of his personality and his own ability to keep all the balls in the air. The authorities eventually decided he should not continue to operate that way.
Just as any small business that becomes very large should institute the disciplines and protections of corporate rigour, investors should have expected those same disciplines and rigours from Allan Hubbard. They didn't get that.
Yet still they believe Hubbard is in the right and the bureaucrats are in the wrong.
New Zealanders' deep love for the cult of the small businessman is alive and kicking.
Hard.
That's a pity. New Zealand needs a lot more really big businesses that thrive and grow and outperform on a global stage. The only one we have at the moment is Fonterra, and it too is handicapped by the cult of the small business man. Family farmers have consistently blocked attempts to make Fonterra more corporate and open it up to the disciplines of shareholder capitalism.
While we think small and remain small minded about business and investing, we are handicapping our future as NZ Inc.
The tragic case of Allan Hubbard has reinforced again the problems we face in our national pysche.
Unfortunately it has also opened up a gap between small town New Zealand and metroplitan New Zealand, between small business and big business, and between individuals and institutions.
It's time we challenged some of these national traits.
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