Wesfarmers chairman Dr Bob Every talks to Tony Featherstone about the Coles acquisition and other challenges faced by his board.
Q&A with Bob Every
Dr Bob Every FAICD likens the chairman’s role to being captain of a cricket team, with the board needing its batsmen, fast and slow bowlers and wicket keeper working as one. To strangle the metaphor, Every might have felt Wesfarmers was eight wickets down, out of form and facing a barrage of bouncers when he became non-executive chairman in November.
Every, a keen sportsman, has big shoes to fill: Trevor Eastwood, a former Wesfarmers managing director, served as chairman for six years during a period of tremendous growth. Every joined the Wesfarmers board in 2006 and is also non-executive chairman of Iluka Resources and Boral, and on the board of the cancer fund for children, RedKite.
The former OneSteel CEO and BHP Steel president has had a tough initiation as Wesfarmers chairman, but is handling the new role well in a difficult market.
The diversified conglomerate has come under fire for its 2007 acquisition of Coles Group. Critics claim Wesfarmers overpaid for Coles, bought just before the financial crisis began in November 2007 and the global mayhem that followed. Others say Wesfarmers erred strategically in buying Coles, a diverse group of businesses with few synergies.
The acquisition, combined with the sharp fall in asset values globally, seriously stretched Wesfarmers’ balance sheet and there were fears the company would struggle to meet debt obligations in 2010. One of Australia’s most lauded companies, more used to plaudits from investors and the media, was suddenly a whipping boy for critics, hedge funds and short sellers.
Wesfarmers stock, $38.60 at its peak last year, has dived to as low as $14.24. Rather than wait for debt markets to improve, Wesfarmers raised $2.9 billion early this year through a rights issue and placement to solve its debt problems, but had to issue more stock at a depressed share price. The board also cut the dividend to preserve cash, in turn irking retail shareholders.
If that was not enough, Wesfarmers’ coal operation, a star performer, faced tumbling coal prices and the flagship asset, the Bunnings hardware chain, had to deal with a slowing housing market. Every part of the Wesfarmers empire has great challenges at a time when the company must engineer a turnaround in the ailing Coles businesses and soothe market fears that the acquisition could destroy a stellar record of high shareholder returns.
Every and the board clearly thrive on challenges. Wesfarmers is arguably one of Australia’s hardest companies to govern given the huge diversity of its operations across hardware, supermarkets, discount stores, chemicals, fertilisers, energy, insurance, industrial safety and coal.
Most divisions could be large listed companies in their own right, a reason why each has its own board that relays information to the main Wesfarmers board. It is an unusual structure, though one that works well for a company that doggedly remains an industrial conglomerate at a time when this type of business model has lost favour.
In an interview with Company Director, Every talks openly about challenges facing the Wesfarmers board, the Coles transaction, the state of retailing, and provides insights into how the board works. Here is an edited extract of his interview:
Company Director (CD): How have you found the job so far?
Dr Bob Every (BE): It’s been a tough 12 months for most boards and directors. Financial markets and business conditions have deteriorated more rapidly than most people anticipated and this is presenting serious challenges for most companies, including Wesfarmers. That said, I’m enjoying the new role and have enjoyed my time generally on the board over the last few years. Wesfarmers is a very prestigious company to chair and has an outstanding board, so I feel very privileged to govern what is an outstanding company.
CD:What has been the board’s biggest challenge in the past 12 months?
BE: Clearly the debt refinancing and getting the balance sheet right has been front of mind. General volatility has been another huge issue. Few people expected the Australian dollar, oil or other commodity prices to fall as quickly as they have, for example. But I’d stress that these are management issues; the board’s role has been to support management in a difficult market, where challenging decisions were needed, acting in the interests of all stakeholders.
CD: Is there anything the Wesfarmers board would have done differently?
BE: No. We knew we had to address the debt situation so we put in place a game plan that provided a whole solution in terms of raising capital and deferring the refinancing of debt to 2010 and 2011. I don’t agree with criticism that Wesfarmers waited too long to raise funds. We recognised the problem, took appropriate action and, in my view, nailed the problem due to management’s efforts.
CD: Your critics say Wesfarmers paid far too much for Coles and that Wesfarmers is losing its edge. How do you respond?
BE: Most criticism stems from the Coles acquisition and as we’ve said almost ad nauseam to the market, we approached Coles as a five-year turnaround. It’s true that Australian and global economic and market conditions are more difficult than we envisaged when we bought Coles. You can’t ignore the criticism, but we have a game plan and we are sticking to it. Trevor Eastwood, Michael Chaney (former Wesfarmers CEO) and Richard Goyder (current CEO) have all run the Wesfarmers business to maximise return on capital and at the same time, have recognised that you have to step out every so often with a company-changing transaction to achieve growth. You need both growth and a focus on return on capital to sustain growth in shareholder value.
CD: How involved was the Wesfarmers board in the Coles transaction?
BE: The board met over 25 times on that transaction. It was obviously a very large transaction so the board spent much time looking at financial analyses and other factors, such as the effect of the transaction on Wesfarmers’ people, the culture, and how it would affect the diversified conglomerate model. There’s been so much focus on Coles, but I’m very sensitive to the fact that Wesfarmers has a number of other businesses that make up 60 to 70 per cent of revenue. The board is very aware of the need to get across the entire Wesfarmers business rather than focus only on Coles.
CD:What advice would you give directors of other companies that find themselves on the front pages of business newspapers and under attack from hedge funds and disgruntled investors?
BE: I wouldn’t presume to tell other directors what to do. All I can say is that you can’t ignore the criticism and lock yourself in a bunker. You have to listen to it, take it in, but decide which criticism is valid and which is not. The board’s role is to challenge management to come up with the right game plan and once agreed on, ensure it is being executed effectively.
CD: Have you spent more time in the market listening to investor concerns?
BE: Yes. I’ve only been in the job a few months, but I did a full round of the investment community and major shareholders before I took on the role. I do think there is an increasing role for chairmen to spend more time in the market listening to shareholder concerns. It’s healthy to attend these meetings without management because it gives shareholders a chance to voice concerns they might otherwise not if management was present. My goal is to continue talks with major shareholders, at least annually. I have a role to keep communicating the Wesfarmers strategy and the role of the board, while leaving management to discuss business performance.
CD: As the owner of Bunnings, Coles, K-Mart, Target and Officeworks, Wesfarmers has an excellent vantage point on the state of retailing. How is the Australian economy faring in your view?
BE: The retail figures we’ve seen, reported in our half-year result, have held up pretty well, all things considered. Christmas was strong and January sales seemed to hold up. Most of our retail businesses are in consumer staples, so we are in the right place in a difficult market. And, Bunnings is still doing well, possibly due to more activity in the DIY sector. However, we still see a lot of uncertainty about the outlook for retail spending in the next 12 months, which is why we haven’t given guidance.
CD: The market saw some improvement in Coles recently with the supermarket holding its market share. Is the Wesfarmers board happy with how the Coles turnaround is progressing?
BE: Yes, we are definitely on track with our Coles plan. The board looks at a lot of financial metrics of its performance and also some non-financial metrics such as customer satisfaction, product availability and the like that don’t get reported. We have very clear key performance indicators and so far they are being met. And, again, I’d stress the Coles turnaround is a long-term project. We won’t turn those businesses around overnight.
CD:Your critics contend Wesfarmers paid way too much for Coles. What is your response?
BE: We certainly don’t think that at all, and remember the transaction was funded by a mixture of cash and Wesfarmers shares (trading at a much higher price at the time). Clearly we have entered some pretty dramatic years in terms of the global economic slowdown, but we are very confident Coles is going to create significant value for Wesfarmers shareholders in the long term.
CD: Another criticism about the Coles transaction was the lack of synergies between the various Coles enterprises and existing Wesfarmers businesses.
BE: Wesfarmers is a diversified conglomerate – we’re used to creating value across a range of very diverse operations that don’t have natural synergies. That is what we do.
CD: There are also concerns Wesfarmers is losing its “corporate parenting” advantage – that its ability to spot undervalued enterprises and create higher returns is being eroded by more competition from private equity firms for assets and more management pressure to perform.
BE: Again, I disagree. The value Wesfarmers is adding to Coles is a good example of its corporate parenting skills and ability to create long-term shareholder value in my view. Also, I don’t believe private equity is nearly as rampant as it was two or three years ago in this market.
CD: Wesfarmers shareholders voted down a remuneration report last November that included a $450,000 pay rise for Richard Goyder. How big a problem was this?
BE: The issue was one of transparency in Wesfarmers’ remuneration policy and certainly something the board has taken very seriously. We did not disclose for competitive reasons one of the return on equity hurdles for a long-term incentive. It’s a sensitive issue. I chair the Remuneration Committee and it is something we are looking at very closely. I would say Goyder’s remuneration is around 50th when ranked against other CEOs in Australia, yet Wesfarmers is a top 20 company. The board does not feel the remuneration is excessive.
CD: You have a strong background in the resources sector from your time in the steel industry. What is your view on the outlook for this sector over the next three years?
BE: I subscribe to the “longer-for-stronger” bull argument for resources, driven by urbanisation in China. That said, the picture I’m seeing out of China is unclear and there are mixed signals. I still believe the medium-term outlook for the resources sector is strong and that the risk is higher for commodity prices as supply capacity is turned off.
CD: Moving to the Wesfarmers board, you have a small board (seven non-executive directors/chairman and two executive directors) for a company your size. Also, most directors have a strong finance or strategy background. Can you explain the logic behind the board’s size and composition?
BE: I don’t believe there is magic number for board size. Most important is the quality of the people on the board and their skills. On this front, I’m very confident in our board strength. We might add another non-executive director if the right person comes along, but I can’t see our board getting much bigger. Also, each division of Wesfarmers has its own board consisting of key executives and their key staff. The Wesfarmers board gets information from divisional boards right across the company. This structure ensures we have tight and loose parameters across the company that encourage entrepreneurship at an individual level within an overall governance framework.
CD: Many Wesfarmers directors have been on the board for well over five years. That goes against current thinking about the need to refresh boards with new directors. What is the advantage of having such long-term directors?
BE: Experience counts and if you have good people, of course you want to keep them. I think it takes Wesfarmers directors at least a year to get their heads around the diversity of this business and probably three years to deeply understand the issues, though, of course, they add value from day one. That’s probably true of many boards of large companies. But the diversity of Wesfarmers does add an extra layer of complexity for directors to consider issues across so many businesses.
CD: In your view, what qualities make a good chairman and non-executive director?
BE: Listening. A good chairman has an ability to really listen to key executives and external stakeholders and to quickly cut through to the heart of issues. Good directors are independent thinkers, commercial, transparent, smart and challenging, but not confronting.
CD: How much interaction does the board have with key executives at Wesfarmers?
BE: We have a “fire-side” chat with the head of a division before each board meeting and sometimes they bring one of their key executives. There are no presentations, no hard facts and figures, just a chance for the board to learn about the key issues in a division and for the head of that division to interact with the board.
CD: What are the specific challenges of chairing a diversified conglomerate compared with a company with one main focus?
BE: Wesfarmers’ board papers, for example, represent half a dozen companies that could all be free-standing, large companies in their own right. You learn a technique to grasp the key issues in each division and how they affect the larger entity, rather than get bogged down in the detail. The challenge for our directors is to always think of the bigger strategic picture for Wesfarmers while ensuring we meet our governance obligations. But it is true that new directors can find Wesfarmers an incredibly challenging company – I know I did when I joined. But that is also an attraction.
CD: How would you describe your relationship with Goyder?
BE: Excellent. He is one of Australia’s outstanding CEOs and I really admire the way he handled himself through the Coles transaction and debt refinancing. Our relationship is based on mutual respect – a chairman and CEO can’t be each other’s best mate or in each other’s pocket. We meet formally before each board meeting and probably talk two or three times a week, most weeks, usually him calling me. I’m a great believer that good boards let management get on with the job.
CD: Can we expect to see you on any more boards?
BE: Chairing two listed companies and being on the board of another is a full plate for me. It’s not the same as when you are CEO, working 24/7, but the demands are still very constant. Still, I love the association you have with very bright people through board roles and the range of challenges you come across. I also like mentoring other executives and passing on a few things – there has to be some benefit of getting older! It’s easy to undervalue what you have to share with others, though I’ve found the key with mentoring is not shoving advice down someone’s throat and is about taking stock regularly of whether you are adding value. People have to really want to be mentored for it to work.
CD: How do you relax away from work?
BE: I love playing and watching sport. I’m a keen golfer [Every’s handicap is 12], and I walk a lot for exercise. My wife and I have four kids, two boys, two girls, and now seven grandchildren, so that keeps me busy. I retired from executive roles at age 60 and am now 63. Health willing, I’ll keep working on boards for a while yet.
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