Newspaper commentators failed to reveal that the former company of the year was in dire straights.
Listener 18 May, 1996.
Keywords: Business & Finance; Macroeconomics & Money;
The Fortex Group, a South Island meat company went into receivership in March 1994. Two years later its managing director, Graham Thompson, was jailed for six and a half years. General manager Michael Mullin had been jailed for four years. The newspaper files which record how the company became the darling of meat industry commentators, give little hint that the company was in trouble, until right at the end. (Unsourced quotations come from journalists, who would prefer not to be remembered.)
1985: Cattle Services, Fort Export, and Canterbury Venison merged to form Fortex, which owned a small processing plant in Seafield, Ashburton.
August 1988: “Financially, Fortex has yet to prove its approach works.” (Rebecca McFie)
1988: First of a series of loans booked as income. (Convictions for fraudulent accounting only went back to 1991.)
December 1988: Awarded Public Relations Institute’s Gloombreaker’s award.
1988, 1989: Pioneering agreements with workers which enabled the plant to run 22 hours a day, six days a week. Thompson member of New Zealand Business Roundtable.
June 1990: “Fortex lists on the Stock Exchange this month and should be in the top 30 companies by the end of the year.”
November 1990: Fortex wins Company of the Year award made by Deloitte accountants and Management magazine. Thompson runner up Chief Executive of the Year. One judge said “Fortex did its homework. It floated off a company when no one else could raise money in that sector.” Treasury Post-Election Briefing cites Fortex for its labour relations.
December 1990: Minister of Agriculture likens Fortex to Watties when opening the newly built Silverstream (Dunedin) plant (planned cost $35m, actual cost $50m). “Speaking as a farmer, I wish they would get into the North Island.”
1991 New Years Honours List : Thompson awarded OBE.
April 1991: Fortex frequently commended by supporters of the Employments Contract Bill in parliament as an example of successful labour relations.
July 1991: Chief economist of Buttle Wilson, described as “New Zealand’s leading investment banker and brokerage firm” in an article in the international magazine Institutional Investor, describes Fortex shares as “undervalued”.
November 1991: “Fortex Group has shown strains of its rapid expansion in the past year, with a negative cash flow.” (James Weir) This and the 1988 McFie quotation were the only clippings I found which had any cautions. Immediately after the collapse, Canterbury University accountant, Alan Robb, showed the pre-crash accounts reported cumulative operating cash flow (after interest and dividends) had sunk $40m between 1989 and 1993 which should have been an early warning to anyone who had cared to do the sums.
1991: $2.9m profit reported (actually a $4.4m loss).
May 1992: “Inefficient given protection says Fortex chief”. (In 1996 it was admitted Fortex’s “accounting section calculated its costs were `significantly’ higher than its competitors.” So much for the superior labour relations?)
1992: TVNZ Best Corporate Company Strategy. $9.2m profit reported (actual loss $5000)
January 1993: “A gamble by the meat industry’s biggest innovator appears to have paid off. Farmers flock to Fortex pay plan.”
November 1993: While Fortex had its first setback in its fifteen year history last season, the company is still in a strong financial position.”
1993: Tradenz exporting award. TVNZ Marketing award. “Finance Minister Ruth Richardson mentioned the company at every opportunity.” $4.8m loss reported (actual loss $10.4m)
March 1994: Receiver called in. (It would appear that there are $90m of assets and $160m of liabilities). 1800 workers lose their jobs. “Fortex deserves to be given whatever reasonable chance it may have to trade its way out of misfortune.” Dominion editorial.
March 1996: Thompson found guilty on 12 fraud charges, involving misleading accounting (but not misappropriation of funds). Their effect was to understate the company deficit, rather than add to it, keeping the company in business for longer than was financially justified. Farmers, workers, contractors and investors lost money committed when it was not viable.
It is a sad story, given that Fortex was committed to value added processing of the meat. While it “added value” to 90 plus percent of its carcasses, the conventional companies treated only 30 percent. Yet the high foreign exchange rate penalized it against more other companies, reducing the domestic return to the value-added processor, encouraging the raw commodity trader.
Fortex’s enthusiasm for innovation and value-adding overrode the financial discipline of the market. If an unfavourable exchange rate signals against value-added exporting, and high interest rates signal against expanding, then a business must respect the signals. If it does not, eventually and inevitably the company will be bankrupted. The fraud at Fortex obscured and prolonged the dire state the company was in, rather than caused it. Value added exporting is not viable when the macroeconomic settings are hostile.
Not a single one of the clippings I looked at discussed this. Perhaps we should be more cautious about applauding companies and business people puffed on our financial pages. As German poet and essayist Hans Magnus Enzenberger (who was here for the recent Arts Festival) wrote “The reader of the Financial Times shouldn’t be deprived of what the reader of a popular newspaper gets. Everybody has a right to a daily horoscope.”