Dick WarburtonBoardroom Warrior Cover StoryDick Warburton Boardroom Warrior

Saturday, 01 February 2003


    A lord of ancient China once asked his physician, a member of a family of healers, which of them was the most skilled in the art. The physician, whose reputation was such that his name became synonymous with medical science in China...

    A lord of ancient China once asked his physician, a member of a family of healers, which of them was the most skilled in the art. The physician, whose reputation was such that his name became synonymous with medical science in China, replied, " My eldest brother sees the spirit of sickness and removes it before it takes shape, so his name does not get out of the house. My elder brother cures sickness when it is still extremely minute, so his name does not get out of the neighbourhood. As for me, I puncture veins, prescribe potions, and massage skin, so from time to time my name gets out and is heard among the lords" Dick Warburton Boardroom Warrior

    In Sun Tzu's book of philosophy, The Art of War, the peak efficiency of knowledge and strategy is to make conflict altogether unnecessary. It is also a timely parable for boards and directors both inside and outside the boardroom. But as Dick Warburton has learned in the past year, this is not always easy. He provides John Arbouw with a few tales from the corporate battlefield.

    By any measurement, last year was a tough year for Dick Warburton. As chairman of David Jones he came under fire from the media and from dissident shareholders who called for his head as a result of the disappointing and costly (around $50 million) effort to launch the David Jones Foodchain. As chairman of Caltex he fought a running battle with the ACCC's Allan Fels over the handling of the raid on Caltex's office and Fels's use of the media to shame companies over alleged offences before a case had been prepared. In his role as chairman of the Board of Taxation he was also under pressure to show a sceptical business community that the board was far more than a rubber stamp for government taxation policies and, in reverse, prove to Treasury that the board wa s not an industry lobby group. And in his role as a director of the Reserve Bank and companies such as Southcorp, he was criticised for being on too many boards. Sun Tzu's philosophy on healing and war would never approve of conflict on so many fronts but the spate of corporate disasters has changed the once gentlemanly art of business and profit into a battlefield. And, anyone who still clings to the naive view that being a director is a function that can be performed by well-meaning amateurs with noble intentions is still hoping that the game of cricket returns to the way it was played in the 1800s.

    Even a casual glance around the Australian and for that matter global boardroom scene will graphically illustrate that being a director in the current business climate has become a blood sport reminiscent of the Roman Coliseum. And Dick Warburton has survived because he knows that being a company director is a profession requiring specialised knowledge and experience. In the wake of HIH, One.Tel, Harris Scarfe and others, it is also a profession that is not for the fainthearted.

    Directors are under attack from almost every quarter. The Government is under pressure to curb board and management practices that contribute to corporate failures. Shareholders are using AGMs in a way reminiscent of the Paris mob calling for La Guillotine to meet out justice during the French Revolution.

    Institutional investors who are under pressure to enhance their meagre returns are having more than a quiet word in the ear of a chairman calling for instant growth and an instant share price rise. Merchant banks, which make huge profits from transactions such as the sell-off of Telstra, also provide a source of constant pressure on companies to do deals. Professional indemnity insurance has become a minefield and legal action against directors for a variety of real or imagined sins are now the norm rather than the exception. Little wonder Warburton told a Sydney newspaper that he wonders why anyone would want to be a director. It is not an isolated view. While his image as a company director has taken a bit of hammering as a result of recent corporate events, Warburton is unfailingly resolute in his belief that it is not a time to leave the corporate battlefield \endash a t least as far as he is concerned. As a professional director he believes that he can contribute on a number of levels. He gets his chance this month when the Board of Taxation tables its report on international taxation. While the business community fears that any changes would simply be more band-aids to shore up a faulty international tax structure, Warburton says his report will be ground-breaking. " What people have to realise is that the BoT's function in this instance has changed from monitoring of existing legislation and policies to drafting policy recommendations from scratch," he says. "It is also a tax policy that, in this instance, has not been driven by Treasury. While there are Treasury officials on, and working with, the board, they were part of the process, not the drivers of policy recommendations. We took advice from a number of quarters and I believe that the report and subsequent government legislation on international taxation, if implemented, will become the foundation of Australia 's global competitiveness." While much of the business community has criticised the HIH mess in general terms of a lack of corporate governance and is waiting for the legal process to deliver its verdict, the community through the media is exacting its revenge through the public shaming of directors, lawyers, accountants and the coterie of advisers who all kept quiet while collecting their fees. "We seem to get a wake-up call every 10 years or so," says Warburton. "We get people who push the envelop too far and allow greed to take over. We then have a cataclysmic event to bring everybody back to reality. That's what you are seeing now. "There was a newspaper article a month ago that asserted that the final washout of HIH was that no one would go to jail. However, they showed the photos and listed the involvement of a number of people who were players in the HIH saga as an exercise in public shaming. "It certainly has an effect but this has to be a last resort. I contend that the vast majority of directors, CEOs, bankers and accountants do not act in the manner of what appears to have happened at HIH." Warburton is without doubt one of Australia's most recognised company directors and he has never shied away from publicly expressing a point of view. His well-publicised stoush with Allan Fels is a case in point. The media may have lost interest in a headline of "Caltex guilty", but as far as Warburton is concerned the headline of "Caltex innocent" still has to be played out. "I didn't go on the board of Caltex until I was thoroughly convinced that there were proper corporate governance processes and proper management practices in place," he says. "

    It is why I am absolutely certain that Caltex has behaved properly despite the insidious allegations of price collusion that were raised. "When I stood up to be counted in refuting Fels' allegations, I wasn' t fearful for myself, despite the danger that somewhere in the bowels of the Caltex organisation somebody had written an e-mail or a memo that would embarrass the company. "If that was the case it would have been reproduced on the front pages around the country and there would be egg on my face like you wouldn't believe. "In seven months they haven't found a thing despite the fact that we provided everything that was asked including all e-mails and hard disks. This doesn' t surprise me. The longer this goes on the more confident I am that the systems in place at Caltex have worked. "The trouble is that in the eyes of the public you are guilty based solely on unproven headlines. This is damaging to the brand."

    Warburton's stoush with the ACCC is both understandable and open. Of more concern to him is the silent and hidden struggle boards and management have to stave off the influence and pressure for growth from the fee and tr ansaction-driven consulting and advisory sector. "The financial industry says you must have growth and therefore you are driven to have growth," he says. "This can be achieved organically or by acquisition or merger. However, no one seems to want organic g rowth. Boards and management are being pushed by the ratings industry to be rated as a growth company. "But if you are a mature industry and have cash but no growth you hardly get rated. This means a CEO and a board is under great pressure to find growth and this can lead to silly mergers, acquisitions or growth strategies. "The other big driving factor is the industry itself which is desperate for transactions because they get a lot of money from these deals. They are constantly pushing for mergers and acquisitions. It is easy to say that the board and the CEO should be strong enough to say no but the pressure is relentless. I don't think we have been good enough to recognise when growth is not necessarily a good idea. "As well, we are very good in going to funds and to investors and telling them why we are growing but we have to be better in explaining tha t there are instances where we can achieve good capital gains or dividends or both without mergers or acquisitions." As Warburton points out, one of the reasons dividends are held back is because transactions gobble up excess capital. He says boards have to be better at telling the institutions that they won' t get huge growth but that the company will produce steady dividends. It is not a message institutional fund managers want to hear because dividends are primarily of benefit to the mum and dad shareholders looking for a steady income stream from their shareholding rather than instant equity growth. "There are very few boards or individual directors who have had the courage to buck this trend," says Warburton. "I have been guilty of this myself and the move by David Jones to expand through the Foodchain concept was a case in point." "I am not convinced yet that Foodchain is not a goer. However, it is fair to say that we didn't implement it well. The institutions pressured us and we did make the mistake of raising expectations. We put the spin on it on the assumption that was what the market wanted to hear. "In hindsight we should have started with just one or two shops and used them to quietly test the concept. We are currently testing a few concepts now.

    We have learned from the experience and we want growth as much as the institutions do but we have to implement that growth our way and not necessarily what the institutions want." So if an experienced chairman/director like Dick Warburton can succumb to pressure from the institutions and the financial markets for growth at any cost, how can chairmen/directors of other boards cope with this? "I believe we can do this through the Australian Institute of Company Directors using people like myself or Don Argus in their training programs," he replies. " I have done a number of fireside chats (Chatham rules) and I found them invaluable because I am responding to people asking me why I did this or why I did that. This has helped me to understand and at the same ti me pass on my experiences. (AICD has now set up an Alumni association and its courses are run by directors for directors) "I don't think the Australian Shareholders' Association or the press put enough value on director experience. We live in a culture of blame and shame. If you make one mistake then it is off with your head.

    "In anyone's career there are mistakes made but the issue is not to punish the mistakes but learn from them. You take Hugh Morgan at WMC. He should possibly have been put out to pastu re back in the early 90s over the apparent mistakes he made. "However, the chairman of WMC Arvi Parbo took a different view and believed that Morgan was the best person to correct that mistake. The end result is that WMC is a top-flight company in the process of splitting off some of its assets. " Retaining director experience is one thing but the criticism from a number of quarters is that the end result is the retention of a directors' club of greying, white men in suits with similar educational and professional backgrounds. Warburton admits that the boardroom club still exists when it comes to choosing directors, but says it is far less significant than it used to be. He says that boards now spend a lot of time and money ensuring that they have the right skills mix.

    "When we set up the David Jones board I had the luxury of starting with a clean sheet of paper. Normally, the process is that you are either adding or subtracting to an existing board. "One of the things that I didn't want was a club. I w anted to go as wide as possible in attracting people with the right skills to add value. It was interesting that when we announced the board the very people who had been against the club, including the institutions, criticised us because they didn' t recognise some of the directors. But whether a club exists or not, there is still a great number of aspiring directors who find it very difficult to get that first board position. "I can't recall the number of times people have come into this office seeking advice on how to get on boards. It may sound trite to say this but you have to get on your first board. "What I mean by that is that you can't be overly choosy on the first board you get on. This could be a government board or a board of a smaller company. Too often someone wants to get on the board of one of the top 100 companies.

    "If you have not had any board experience start small including the boards of not for profit. You also have to be diligent in getting around the people you know and letting them know that you are interested in sitting on a board. What about the ongoing debate on the role of NEDs and whether they should be more proactive? "Once a decision has been made then it is important for the board to be unified but during the decision making pr ocess, the chairman has to encourage debate and discussion. If a director holds back and, after a mistake has been made, says he thought this would happen but didn't say anything at the time then I am very cross with that person. "However, if that dissent is so determined and material then a NED has to rethink his or her position on the board. However, you may be better off to stay on the board and retain the ability to influence the board." And what about the touchy issue of how many boards one director should sit on?

    "I am very strong on this," Warburton replies. "I do not believe that you should have a numerical number. There are some many variations on the individual workload for each particular board. " The ASA comes out and says you should only be on five boards and that one chairmanship is worth three boards. If that is the case I would need to spend 60 percent of my time at David Jones and become in effect an executive chairman and no wants that.

    "I also believe that there is a far greater efficiency in you decision-making if you are on a number of boards. Obviously, you can be on too many but the majority of decisions you make on a board are generic decisions regarding capital, the environment or ma rkets. I find that the things I am doing on one board applies absolutely to another board in a totally different industry. "My experience is that the part-time director who is only on one or two boards is nowhere near as effective as the person who is a full time professional director. Being a director today is a profession. "The biggest trouble I have particularly for ad hoc meetings is getting the ones who are only part-time directors because they are far more relaxed and often they are on a trip somewhere or they have a golf match they have to play at. "The professional director is far more accessible because he allows for situations such as ad hoc meetings to occur." Warburton's sentiments about part-time directors will not endear him to a number of directors including some of his friends. He has, however, never been afraid to express his views on the issues he feels are important.

    As a boardroom and corporate warrior Warburton has suffered his fair share of the slings and arrows of outrageous fortune and this year will be no different. Southcorp is under siege because of market perceptions that it is time to change the management.

    The profit expectations versus the profit reality for David Jones will be a constant source of speculation. The imminent US invasion of Iraq has already scared the markets and the rise in the oil price will lead to domestic price rises and accusations of oil company price collusion. And the ASA will keep up its pressure on boards through acrimonious and often openly hostile AGMs. All in all, it is a corporate landscape that would test the patience, goodwill and strength of any director. As a boardroom warrior, Dick Warburton has a few more battles yet to fight and he will need all his professional skills if he wants to leave t he field on his terms.


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