Tony Featherstone chats to the inaugural chairman of Infrastructure Australia about the many challenges of being a director, especially in tough times.
Sir Rod Eddington knows how to handle a crisis or two. The former CEO of British Airways has managed airlines through the 9/11 terrorists attacks, the Gulf War, the outbreak of Severe Acute Respiratory Syndrome (SARS) and the Air France Concorde crash in 2000. He was also executive chairman of Ansett Australia, leaving a year before it collapsed
Now Eddington is seeing the global credit crisis firsthand as non-executive chairman of JP Morgan Australia and New Zealand. The US bank is faring much better than most, having acquired Bear Stearns and Washington Mutual’s banking operations at fire sale prices. But being chairman of any financial institution in this global economic storm is a tough job.
Eddington is also a non-executive director of Rio Tinto, the mining giant that has spent this year fending off BHP Billiton’s hostile bid, one that is looking more likely to succeed. But no doubt his most challenging non-executive directorship in the past two years has been on a much smaller company, Allco Finance Group. Shares in the investment and aviation leasing business collapsed from a 52-week high of $9.67 to a low of 12 cents. Allco, an early casualty of the credit crisis, damaged the reputations of its management and board.
Eddington also has a long connection with News Corp and remains a non-executive director. Its shares, like those of most media companies, have fallen this year as investors fret about an advertising slowdown and the effect of the internet on print media.
If that wasn’t enough, Eddington was appointed the inaugural chairman of Infrastructure Australia in February. His brief: to lead the new national body to develop long-term solutions to the country’s critical infrastructure bottlenecks, a result of decades of under-investment.
Eddington can’t get enough of infrastructure; last year he produced The Eddington Transport Study (at his own cost) for the Victorian Government to develop options for Melbourne’s East-West transport link. This followed his 2006 report for the British Government on the future of its transport infrastructure.
In an interview with Company Director, Eddington, who has a doctorate in engineering science from Oxford University, talks candidly about the role of boards and their directors in crisis situations. Here is an edited extract of the interview:
Company Director (CD): Do you think directors of Australian companies have enough experience in dealing with turbulent economic and market conditions?
Sir Rod Eddington (RE): Through no fault of their own, if somebody has only been a director of a company for, say, 10 years, they’ve only ever really governed through good times where the economy was expanding. Australia is fortunate it has many very experienced non-executive directors and senior managers who have lived through several up and down economic cycles. That experience is more important to companies than ever before.
CD: What advice would you give managers and directors in dealing with a crisis?
RE: First, you have to spend your time as effectively as possible to really understand what is causing the crisis and its implications for the company you govern. This sounds obvious, but it can be very hard to do well when things are moving quickly. You need as much clarity as possible. You can’t panic. British Airways (BA) was losing two million pounds a day at one point just after the 9/11 attacks. We moved quickly, but still took a very measured and considered approach. Once you know the best course, think about what changes the board will have to make if the company is going to recover and get the support of management to implement them.
The danger is throwing out a management team and bringing in a whole new one. In some instances, this is appropriate. But if you do, the chances are the company won’t make the journey to recovery. It’s usually more instructive to find people in the management team who are capable of leading the business forward under the new conditions. Nobody understands how the enterprise works, its strength and weaknesses, better than people from within the company. That was one of the key things with BA after 9/11: we looked for people inside the company who could deliver the necessary changes.
CD: What type of managers fit the bill in such situations?
RE: Well, it’s not just about finding people who can cut costs. You need people who are on board with the new strategy, who can move quickly, think differently and stay motivated when conditions are terrible. Their ability to keep their teams motivated and upbeat is critical.
CD: You joined the Allco board in 2006 when the company was flying high and have remained on the board through its collapse. What advice would you give directors in similar situations?
RE: I joined the Allco board primarily because of its aviation leasing business. I had a lot of respect for Allco management and the board, and still do. When the share price crashed, I was keen to stay the course. Bob Mansfield has now taken over as chairman of Allco and he and the new managing director, David Clarke, are doing a terrific job in extremely difficult circumstances. The management team has moved heaven and earth to try and resurrect that business by selling assets quickly and renegotiating debt, albeit it’s now a much smaller company with a much lower share price.
CD: Some commentators believe a lack of regulation is the root cause of the US financial crisis. Do you believe global finance markets and institutions need more regulation?
RE: Be very careful with regulation because inappropriate regulation can constrain an economy. To jump to the conclusion that the global economy would be in better shape if the US financial sector had more regulation is to miss the point. The US economy hit the wall because the 1977 Community Reinvestment Act provided housing loans to people who couldn’t afford them. Bad policy, bad economics, bad outcome. Policy formulated on the run is usually bad policy. If governments are going to substantially change regulation, they should do so after they have had a chance to reflect when markets have settled. It’s hard to have true insight into the real cause of a problem when you are in the middle of a maelstrom.
I think Australian regulators have acted appropriately and resisted the temptation to jump in with a long list of new regulations. Our financial services industry is in pretty good shape all things considered, in no small part due to intelligent and effective regulation.
CD: You’re seeing one of the largest takeover attempts first-hand in your position on the Rio board. What advice would you give directors of companies that attract suitors?
RE: Directors have to be clear about what their decisions mean for shareholder value. You put the interests of the company and its shareholders above all else. The Rio Tinto management team has stayed absolutely focused on the core business during the past 12 months and that is impressive. It would have been easy for [Rio Tinto CEO] Tom Albanese and his team to get distracted at a time when there are so many major projects for Rio Tinto on the go. So the key advice is to keep running and growing the business well – that is the best takeover defence.
I think directors have to be supportive of management during takeover attempts and think about what they are going through. Takeovers create a lot of uncertainty and a lot of extra work for key managers as well as the board.
CD: You’ve been on the board of News Corp for a long time. What is the future of print media?
RE: If media companies produce great content, people will still beat a path to their door to get it. You have to be imaginative about how you distribute that content through different channels. If you are spending your money producing content for print alone, you have challenges. I really admire what Rupert Murdoch and the other senior managers at News Corp have done in what is a very challenging industry. In my time on the News Corp board, the whole architecture of the global media industry has changed. One of the great things about Rupert Murdoch is that he has been energised by those changes. New Corp’s decision to acquire Dow Jones and the Wall Street Journal is an example of that. The challenge for directors is to always stay abreast of changing market conditions and think about current and emerging trends. Good directors always spend time thinking about where a company will be in five to 10 years time as well as dealing with shorter-term issues.
CD: How do you form a strong relationship between a chairman and the CEO?
RE: This is critical because the chairman and CEO relationship is the single most important relationship in a company. As obvious as it sounds, the key is mutual respect and trust. The chairman and CEO have to respect each other’s roles and skill sets and work together to create shareholder value. I was fortunate to have strong and supportive chairmen when I was in executive roles. Problems arise when the CEO thinks he or she is bigger than the company, and when the company is too reliant on one or two individuals. Good boards help develop structures and systems, and build a culture where the organisation is about much more than one or two people. In my experience, CEOs welcome their chair getting out and talking to institutional investors, for example, because it shares the investor relations workload which has increased a lot in recent years.
CD: You have a reputation as someone who likes to spend a lot of time talking to staff. Do you think directors spend enough time at the coalface?
RE: It’s a fine line. Directors have to be careful they don’t overstep their mark and get involved in executive responsibilities. But good companies do create opportunities for directors to meet staff and customers and get a more hands-on feel for the organisation. Take Rio Tinto, for example. Once a year, the whole board comes to Australia and we spend time going around the country and visiting Rio Tinto facilities. I always come away from these visits re-energised because they give non-executive directors a much better sense of the commitment that people at all levels have to the business. I also think there is a role for non-executive directors to be more visible to staff during times such as these.
CD: What makes a good non-executive director?
RE: Making the transition from executive to non-executive director can be quite a challenge for many people. Some can’t make the transition. Some don’t want to. As a director, you must be prepared to speak up and give your advice without fear or favour. But you can’t micro-manage the company. That is management’s job. The board must always be clear about strategy and be confident key executives are well chosen and properly focused. Good non-executive directors recognise it is the managers who run the business. They should support and guide management, while ensuring they are acting in the best interests of all company stakeholders.
CD: What attracted you to the chair position at Infrastructure Australia?
RE: Having spent my life in transport, I know successful cities and countries are built around world-class hard infrastructure such as roads, water and power and soft infrastructure such as education and the rule of law. Infrastructure needs to be constantly reassessed and requires continual investment. It’s fair to say Australia took infrastructure for granted for too long.
CD: What does Australian infrastructure policy need?
RE: I can give you a better answer in a few months time as I pull together all the submissions from the states on where their infrastructure stands. I don’t want to say too much until I’ve been through these in detail and I have a clearer understanding of the issues. What I will say is there is absolutely no room for complacency when it comes to infrastructure and there is plenty of work to do.
CD: Your appointment was seen as an attempt by the Federal Government to rebuild its bridges with big business. Can you comment on that?
RE: The Prime Minister [Kevin Rudd] and Federal Treasurer [Wayne Swan] have been determined to rebuild the Australian Labor Party’s (ALP’s) bridges with the business community. In the 1990s, when I was a member of the Business Council of Australia, the business community had an entirely sensible working relationship with both sides of politics. I came back to Australia at the start of 2006 and the relationship with the ALP had gone. Business has to leave politics to the politicians, but there has to be an effective relationship between both sides of politics and Australian business, large and small. I do believe the current Federal Government is building an active and effective relationship with the business community.
CD: Have you ever thought of entering politics?
RE: No. I’m interested in the formation of good policy and doing what I can to support that process. I have some good friends in politics and I admire them, but it’s not something I’ve ever wanted to do myself.
CD: How did you cope without a Western Australian team in the AFL finals [Eddington is a self-confessed Fremantle Dockers tragic]?
RE: Not very easily! I love sport. I’m not a great spectator, although I do enjoy watching my 14-year-old son play. I played cricket and Aussie Rules in my school and university days and became interested in soccer while studying in the UK [Eddington is a Liverpool fan].
CD: I understand you have an interest in executive health?
RE: I do. I’ve always thought physical and mental stamina is really important to be an effective executive or director. I go to the gym, though my wife would probably say not enough. Having a teenage son and 12-year daughter keeps me very active. My wife is Korean and our children were born in Hong Kong. I wanted them to experience an Australian lifestyle rather than be gypsies. That’s why we moved back here.
CD: Will you move back to your home state of Western Australia one day?
RE: In some ways, WA still feels like home, but I truly love Melbourne and Victoria. I’m a Melburnian now and don’t want to change that.
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