McDonald knows all great department stores have a sense of theatre, and that food is a key part of the show.
On a muggy Melbourne morning, Howard McDonald MAICD arrives just in time for his interview with Company Director. The Myer Holdings chairman had been in meetings about the proposed café for Myer’s soon-to-be redeveloped flagship store. “I want the food offering to be busy and bustling,” says McDonald. “It should provide a sense of a community and be a place our customers love.”
McDonald knows all great department stores have a sense of theatre, and that food is a key part of the show. Yet Myer’s critics may contend the chairman of a newly floated, billion-dollar company – one that shed almost a quarter of its value within months of listing and has so far disappointed investors – should have more pressing issues than coffee and cake.
Such conclusions are glib at best. McDonald, most known for increasing profit tenfold at the then-ailing The Just Group, is no ordinary chairman.
Retailing is in his veins. Asked what runs through his mind during a Myer store visit, McDonald says instinctively: “How many customers are in the store, how long it takes to be served, the store’s look and cleanliness, stock availability, whether staff are making eye contact and saying ‘good morning’…”
The 59-year-old’s attention to detail – so vital in an industry where fractions of effort can multiply profits or losses – is intriguing. Would a bank chairman give as much thought to a branch? And, aren’t company directors supposed to avoid management minutiae? McDonald has probably already thought about the size of the café’s cakes and smell of its coffee, and how they will affect the Myer shopping experience and average transaction. The cafe is yet another small piece in one of Australia’s more impressive corporate turnarounds.
Not that McDonald wants to push his or the board’s role in the Myer transformation too hard. He mildly protests about having his picture taken for this story and asks our photographer to shoot the Myer store and its staff instead. And, this is McDonald’s first detailed print interview in a few years. For a born salesman, McDonald had a reasonably low profile during Myer’s float last year, conducting a few meetings with institutions and “town hall” sessions to support management.
Myer CEO Bernie Brookes, among the market’s best communicators, drove the sales effort. It made sense for McDonald to take a backseat in the IPO selling phase given his delicate balancing act on the board. As chairman, McDonald had to help the seller (private equity firm, Texas Pacific Group (TPG)) maximise value and represent the interests of buyers – share investors.
Such positions are never easy for chairmen of IPOs, especially when Myer’s float was the biggest in years. Myer was also a bellwether float for a pipeline of other IPOs, including several retailers, and a critical gauge of investor sentiment after two years of market hell. Myer faced a mountain of market objections and suspicions. Some funds thought the float was opportunistic, cashing in on a spike in retail sales due to government handouts, and a market rebound last year.
Others were wary of private equity involvement. Such firms have mixed records when exiting investments through share market floats. There were concerns that TPG had already taken most gains from Myer and was leaving little value “on the table” for other investors. Some fund managers said the float was “grossly overpriced” at the top end of its indicative share price range of $3.90 to $4.90.
Myer shares, offered at $4.10, quickly fell after listing – albeit in a weak market – and touched $3.12 earlier this year. Small investors watched their investment in a blue-chip company shrink 23 per cent in a matter of months. If price weakness continues, McDonald could front angry investors when Myer holds its first annual general meeting later this year, even though he has a good short-term operational story to tell.
Longer term, Myer has to deal with issues such the future of department stores and whether there is scope to open 15 stores over five years. The department store sector worldwide is growing slower than the global economy as consumers favour specialist retailers and discount department stores.
Myer’s positioning, designed to attract “everybody” as McDonald puts it, overlaps parts of the discount department store market and upmarket retailers such as David Jones. Myer’s strategic position confounds strategy purists who prefer more focused retailers. The fear is Myer, by being all things to all shoppers, cannot compete on the cost front with discount department stores, on service and range with specialist retailers, or on brand against David Jones.
McDonald disagrees. He repeatedly refers to the “prize” yet to be unveiled in Myer – a restructuring goal four years in the making, and still at least two years away. Getting there seems almost personal for McDonald. He joined Myer in 2006 as a consulting director to help Brookes and former Myer executive chairman Bill Wavish fix the company. McDonald became a non-executive director (NED) in 2009 and accepted the chairman’s role before the IPO.
In many respects, McDonald breaks the traditional mould of chairman. He has been involved in two troubled companies (The Just Group and Myer) going from public to private ownership, before their relisting as much stronger organisations. He has spent years working with private equity firms to restructure companies. He went from a de-facto executive role at Myer, to NED, then chairman – a route governance experts often frown on. He strongly believes in chairmen having specialist experience in companies they govern and is seemingly more hands-on than many peers. And, McDonald owns two million Myer shares.
In a wide-ranging interview, McDonald talks about Myer’s transformation, governing private equity owned companies and his plans for the Myer board. Here is an edited extract of that interview:
Company Director (CD): How did you come to join the Myer board and what attracted you to the chairman’s role?
Howard McDonald (HD): After nine years at Just, it was time to move on. Towards the end, I was saying “no” to a lot of proposals. When that happens, you have to question whether you are embedded to the emphatic success of the past, or still prepared to listen to ideas. I was approached to run Myer when it was owned by Coles, but had not been interested. I wondered whether department stores could still be relevant. Bill Wavish asked if I would work four days at Myer on the fashion side of things and join the board. A few years later, I became a NED and Wavish asked me last year to chair the board. I wouldn’t have taken the role if I didn’t have such confidence in Bernie Brookes as CEO and his executive team.
CD: There’s a view that private equity firms maximise all the value for themselves in turnarounds. What’s your response?
HD: That hasn’t been the case in Just Group or Myer. When I joined Just from Pacific Dunlop in 1999, the business was foundering. The market didn’t want to know Just, the stock was illiquid, and the Kimberly family, which owned 60 per cent, wanted to exit. Catalyst (a private equity firm) suggested we take Just private – the first public-to-private transaction in Australia. Management kept 13 per cent and Catalyst kept the rest, with Just valued at $110 million. We took the EBIT (earnings before interest and tax) from $8 million to $80 million in about five years. We doubled store numbers, bought several excellent brands and re-listed the company at $500 million. Later it was bought for around $800 million by Solomon Lew (through Premier Investments). Much value was created after private equity sold out.
The same will be true of Myer in time. Thanks to management, we have come an enormous way in a few years, but the journey is far from over. The big prize is yet to be revealed. We still haven’t leveraged the full power of the Myer network, from a buyer idea through to a cash sale. That’s a few years away, but when it happens Myer will be a world-class retailer. I have no doubt about that.
CD: What was it like being on the board of a private equity-owned company?
HD: I had a terrific experience at Just and Myer, but have been careful to choose the people I work with. TPG approved Brookes’ and Wavish’s plan and let us get on with the job. Going private can accelerate change – I don’t think Myer’s transformation could have happened if we were still listed. The market is too impatient. We had quarterly board meetings with TPG and decided to run Myer like a listed company, in terms of disclosure and governance, from day one. We even decided on detailed quarterly reporting when there was no requirement. I think all boards of private companies that hope to list should be run like listed companies for a good time before their float.
CD: How involved were you in the transformation?
HD: I was very involved, but the effort was led by Brookes and Wavish. They created 101 change processes for Myer. The business had been starved of capital and attention. It would be easy to criticise previous management but they worked diligently to make something of a business that had had no investment in technology, point-of-sale, distribution or brand for years – and had a competitor (David Jones) 10 years ahead of it. Still, we were shocked at how bad aspects of Myer were.
For example, we closed 31 of 32 distribution centres (DCs) and built four state-of-the-art DCs. Stock was going from the DC to a Myer store and back to the DC because nobody was tracking it. One DC even hoisted the Myer flag when Brookes came to visit because nobody from the executive team had ever visited this particular centre. We went to China and took two weeks out of Myer’s supply chain in a single day. Two weeks is life or death in retailing.
CD: You’ve been through two large turnarounds now. What advice would you give boards of companies undergoing significant restructure?
HD: No matter how dramatic the plan is, or how bold the vision is, go harder. You only get one chance with a turnaround. The board needs to be very clear on the strategy and have very clear key performance indicators to measure the success of that strategy. Boards should also think about where they want the company valuation to get to and what needs to be done to realise the prize and create that value. The Myer board expects the company to return two times its weighted average cost of capital (WACC) for a department store. Everything is measured against that goal.
CD: Some governance experts think its better that an executive has a least a few years away from the company before joining the board. But you’ve gone straight from what was effectively an executive role in Myer, to NED, to chairman.
HD: After Just, I was approached for some board roles in banks and airlines. The headhunters said I had retail experience and an understanding of consumers that would transfer into other industries. But I said no, because I don’t know anything about those industries. I can’t understand why somebody who has great experience in an industry, and loves it, should move to a different industry they know nothing about. In a turnaround situation, I think it is entirely appropriate that somebody who’s been through that turnaround goes on to lead the board. Continuity is a vital asset when companies are going through immensely difficult restructurings. That’s why I got the job.
CD: Do you think there’s enough passion on boards these days?
HD: Directors should be incredibly passionate about companies they govern, their customers and industry. I don’t want to be a chairman who just reads board papers, meets the CEO now and then and gives the benefit of his or her experience. I love retailing. I love the product, the people at Myer and the change process. I truly want Myer to be restored to its former prominence. Myer was such a wonderfully philanthropic organisation that helped the homeless and the disadvantaged – that should never be forgotten. I want Myer to take the best parts of its history and move forward with more purpose and structure. I want this company to better serve customers who, despite all the false starts and promises, have stuck by us. I want to help build a winning culture – it’s easy to talk about the culture, but the big culture changes begin when you start winning. I want staff to have what I call the “Saturday night” effect when they go home on the weekend and say they are proud to work at Myer. I want my daughter to say she’s proud her dad chairs Myer. As you can see, we get emotional about such things at Myer. Brookes is even worse!
CD: Has Myer’s sinking share price sapped that passion?
HD: Not at all. Look, I’m disappointed by the share price. I won’t pretend otherwise. But this is a significant, multi-year turnaround. You can’t judge that by a share price that has traded for a few months. We have a big job to do. We have to make our prospectus numbers and get the share price back to the issue price and above, through strong performance.
CD: Do you think the investment community understands Myer?
HD: It’s easy for a chairman to say his company is not understood when the share price is down. But I do think some investors have just looked at our price earnings multiple, compared it with David Jones, and considered the difference. This is a very complex restructuring. You have to understand all the pieces that are coming together to unveil the final prize. Retailing looks easy but is incredibly hard to execute well. It’s equal parts art and science. I learnt in China 20 years ago that retailing is not about the big versus the small. It’s about the fast versus the slow. Myer has to get faster. We have to respond better to buyer ideas, customer preferences and so on, in whatever economic environment confronts us. It’s thrilling seeing Myer move towards that prize.
CD: How did you manage the juggling act of working for Myer’s private equity owner and having to represent shareholders when you became chairman?
HD: The very day I became chairman I reported to 60,000 Myer shareholders. Simple as that. Of course, the valuation parameters of the firm are ultimately set by the private equity owners. It’s their business until it’s sold. But the board had very strong governance processes in place and Myer was running like a public company anyway. We wanted to explain the journey to the market from day one, even though we were private. The journey was part of the valuation. The board was involved right through the IPO process and had to be 100 per cent comfortable that Myer was fairly and accurately portrayed to investors. I’m very proud of the prospectus.
CD: How would you describe the relationship between Myer’s board and its executive team?
HD: It’s probably closer than in many other companies. That happens when you go through an amazing transformation and everybody is working together to make things happen. There’s a lot of pressure, excitement, passion and emotion. Three million people visit a Myer store every week and everyone’s opinion can be changed by a good or bad experience. It does build a stronger bond between the board and executive, with all the appropriate governance mechanisms still in place.
CD: The Myer board kept a low profile during the IPO selling process. Was that deliberate? Should other boards of companies undergoing IPOs do the same?
HD: I believe so. The focus should be on management and its plans. I was always available if needed. I hope to slightly lift the profile of my role after the half-year profit is announced in June.
CD: Myer has a small board for a big company, with six directors? What is the logic behind the board composition?
HD: We might go to seven directors, but I don’t see us being a 10-director board. It’s not my preference. With myself, Brookes and Tom Flood (another former Woolworths executive who also worked on the Myer turnaround before the IPO), we have enough retail experience on the board. Rupert Myer AM FAICD (a NED) brings a great depth of ethical retailing to the board, knowledge of Myer’s history and what the name stands for. He has made a wonderful contribution. Anne Brennan MAICD, (the former CFO of CSR, who joined the Myer board before the IPO), is a great finance person and immensely capable. Peter Hays (a lawyer and investment banker who recently joined the board) brings terrific legal and governance skills. We have our eye out for another director and if the right person comes along, he or she will be interviewed by all our directors.
CD: Why do you hold monthly board meetings and what does a typical meeting look like?
HD: We have to meet regularly given Myer has quarterly reporting. I want the Myer board to be competency based, even before gender. I want every board member to contribute vigorously at every meeting. I want a great sense of ethics and governance on the board, great passion and clear purpose. At our last board meeting, five key issues were presented. Three were going better than expected, two not as well. The board dived into the two aspects and pulled the key issues apart to aid management. That’s the type of pragmatic, results-focused board I want to lead. So long as the ideas go through the CEO, I want directors to be thinking about value creation at Myer. I absolutely love the board meetings.
CD: How hands on do you expect directors to be?
HD: We know a year out what Myer’s key events are and have a rotation policy so directors take turns attending events. Each director has a “buddy” store (McDonald’s is the Myer store at his beloved Chadstone shopping centre in Melbourne). Myer’s top 50 executives go on a four-day management workshop. I used to go to that but feel it’s no longer appropriate I attend as chairman. The executive team has to be liberated to run the business. The board then has a two-day retreat to discuss outcomes from the executive retreat and other board issues. It’s a fine line when it comes to being hands on. I encourage directors to get involved, in the right way.
CD: You’re involved with several charitable organisations. Will we see you join other listed company boards?
HD: I’m not looking to. I still can’t see myself doing anything outside of retailing. I spend two-and-a-half days on the Myer role and hope to get that back to two days in time. I want to govern this company through the turnaround, which has at least another two years to run, and may reconsider my role depending on the circumstances at the time. A different style of chairman may be required once the turnaround is complete.
CD: What do you do to relax away from work?
HD: I spend plenty of time with my daughter, a champion horse rider. And, my wife and I still love shopping at Chadstone. It’s great when everyone in your family loves shopping and you can call it work. I started taking Fridays off, but it hasn’t gone well. I love business too much. I still get up at 5.30am every morning and can’t wait to get to the office to see how things are going.
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