The esteemed business leader and non-executive director speaks to Christopher Niesche about building a successful business and the need for greater reform in the financial services sector.
When Mark Johnson AO FAICD was a young man tossing up whether to come to Australia or to remain in Fiji where he grew up and lived a privileged life, a friend of his father gave him some advice: “You can try and be a big fish in a small pond or a small fish in a bigger pond,” Johnson recalls.
Nearly six decades later, Johnson could be described as a big fish in Australian business. Along with David Clark, he helped transform the Macquarie Group into an investment banking giant; he advised his former neighbour in Sydney’s Bellevue Hill, Kerry Packer, on the privatisation of Consolidated Press and then advised Packer’s opponents on the bidding for Fairfax Media after it entered into receivership in the late 1980s.
Johnson was also one of the three Australian representatives on the APEC Business Advisory Council from 2002 to 2013 to be called on by the government to write a report on how Australia could export more financial services. He has chaired companies including Guinness Peat Group, AGL and Macquarie Infrastructure Group, and has held the position of deputy chair of the Macquarie Group.
Currently, Johnson is chairman of Alinta Energy, a director of Westfield Group, and an advisor at advisory firm Gresham.
“I joined Gresham three or four years ago,” he says. “When I left Macquarie, I set up my own office because I wanted to show that I was independent. And then, I got lonely and [Gresham chair] James Graham AM FAICD, who I had hired into Hill Samuel many years ago took pity on me and took me in as the old guy,” Johnson jokes. “So, I’m the old guy and they still see it as a useful role – having an old guy around.”
Johnson doesn’t get involved in specific transactions, instead performing more of a mentoring role. “It’s good being around young people because they’ve got a lot of ideas that keep you feeling that you know a little bit about what’s going on.”
After leaving Fiji, Johnson studied law at the University of Melbourne, not because he wanted to be a lawyer, but because he wanted to work in business and at the time, Australian universities didn’t offer much in terms of specialist business degrees. His next move was to Harvard University to study for an MBA.
At Harvard he met Clark, a fellow Australian, with whom he would later work to build Macquarie into Australia’s global investment bank, but first they were both approached by banker and former World Bank chief executive officer (CEO), James Wolfensohn, to join investment bank Darling & Co in Sydney, where they stayed for five years. Later, in 1971 Clark and Johnson joined Hill Samuel Australia, which later went on to become Macquarie.
“I think the Harvard experience was very important to David and me,” he says. “In his welcome to students, the dean said we were there to learn ‘concepts, ideas, tools and techniques, and currently useful generalisations for modern management’. At that time only a handful of schools in the US provided this approach and the US was regarded as singular in the field of management. Now, hundreds of universities around the world provide this level of teaching.”
Many of the lessons Johnson learned at Harvard and in building up Macquarie have stayed with him throughout his career and inform his work around the boardroom table. “David and I were strongly influenced by the managerial behaviour courses at Harvard, which were leading the way towards individual responsibility and smaller business units, in contrast to the prescriptive approach more suited to mass production,” Johnson says.
From the outset, Macquarie made a point of hiring the best and smartest people, which was a significant departure from the clubby atmosphere of Australian banking and stockbroking, where many people owed their positions to their backgrounds and families. “We were pretty impervious to people’s backgrounds and we hired women when we could,” he says.
They also kept recruiting during downturns so the bank had capacity when the economy turned around. “We had an optimistic view of the world.”
Banking and stockbroking were heavily regulated until the early 1980’s when Keating instigated radical reforms of the industries. In this environment, Macquarie was at a significant disadvantage to its larger, licenced rivals. It was forced to become entrepreneurial in seeking out opportunity. So when Macquarie staffer Philip Gardner suggested setting up a bullion desk, they backed the idea and joined the global trade in spot and forward gold. Macquarie was able to leverage the expertise gained when foreign exchange was deregulated in 1983. It meant it was able to take a much larger slice of the foreign exchange (FX) market than its reputation or balance sheet would imply. It also became an important financier of gold mines, at a time when the gold price was supporting significant mine development.
Such success is an example of one of Johnson’s fundamental beliefs in practice – that most business opportunities come from lower down in the company. Johnson knows that in the era of the visionary tech founder, it’s an unfashionable view, but he says: “In my experience, most businesses grow and prosper because they have set themselves up to pick up the good ideas that the people out in the marketplace detect. You need to be organised to foster these and develop them.”
He continues: “Our role as joint managing directors was to get everybody to run their own little businesses and those little businesses always had enough fat in their budgets so that the guy running that little business could spend a little bit of money on trying something out.”
Johnson says external directors who joined Macquarie expecting to set strategy and allocate capital were often surprised to find out how the firm actually worked. “Macquarie was built on a hundred little initiatives,” he says.
The bank also took a very disciplined approach to global expansion. Although Macquarie now operates in 27 different countries, there was no grand strategic vision, no map of the world with Macquarie flags planted on it.
Instead, Macquarie only ever entered a new market where an executive saw a sustained competitive advantage for a particular product area. And they never went in as “Macquarie”. It was always a single division or unit of the bank entering an offshore market where there was an opportunity to develop a profitable business using as little capital as possible. “The strategic thinking has been ‘don’t be strategic with Macquarie’s balance sheet’,” Johnson says.
Johnson retired as deputy chairman in 2007. He says there was “a smell in the air” at the time and in hindsight it was a good decision to leave then, because had he stayed, he would have had to have committed to a much longer tenure to help see the bank through the global financial crisis.
“Maybe I wouldn’t have had as much to contribute as Nicholas Moore [who became CEO of Macquarie in May 2008] who did that job superbly,” he says.
He was also concerned that investment banking pay and incentives had grown too large and were too short-term, increasing the “temptation for aberrant behaviour”. In part, the investment banks and trading banks were adopting US bonus structures which, from the 1980s, had been adopted by many western financial institutions.
Macquarie got around this problem by locking bonuses in for seven years, which incentivised behaviour that would benefit the bank in the longer term. “Senior Macquarie people think like old fashioned proprietors – it’s their own money they are looking after,” Johnson says.
A change of pace
On leaving Macquarie, Johnson continued his career as a non-executive director – while at Macquarie, he had been on the boards of Pioneer International, AGL and the Sydney Futures Exchange. He divides a director’s responsibility into two buckets – the legal bucket and the capitalist bucket.
Johnson says he doesn’t have much time for complaints that compliance obligations place too much of a burden on directors. “If your company needs access to the equity markets, realpolitik says you’ve got to deal with these things anyway,” he says.
“You can’t treat compliance, governance and reporting requirements in any kind of cavalier or derisory fashion because they are very important. You’ve actually got to have really good people doing that really boring stuff so that, when it’s done, you can be confident that it’s been done to the highest standards, consistent with the rest of the business,” he says.
“You’ve just got to organise your board and committee structure and your supporting corporate affairs structure to deal with those as efficiently as you can, so you don’t get too distracted from the capitalist bucket which is where you add value.” He says Macquarie and Westfield do this “extremely well”.
The role of the director
In keeping with his view that opportunities work their way up from the bottom of a company, Johnson says the primary role of a director is assisting management to do its best. “That means you’ve got to have recruiting systems that get you the best people – most notably of course the CEO – and the kind of people who are going to put in place appropriate cultures. You’ve also got to have a reward and incentive system that’s really transparent all the way through the company,” he says.
“One of my strongly held opinions is that the signals that go through a company have to be consistent because nobody is better at detecting hypocrisy in their superiors than somebody a layer of management below in an organisation.”
Johnson says he is highly sceptical about the value of skills matrices in helping to assemble a high-performing board. While the traditional technical skills are important, the “soft” skills that are not captured in a skills matrix are equally, if not more, important. Along with intelligence and common sense, these include the ability to act collegially and the ability to get things done in an organisation.
Likewise, he is opposed to quotas to meet diversity targets. “It’s like retainers in business – somebody gets the short end of the stick and there’s tension after a while. It is better to encourage people and I think the message about diversity is now just part of sensible business,” he says. “We want to have more women. Obviously, there are other minority groups who you’ve got to cater to and should cater to.”
He is also reluctant to sign up to the idea that companies should have a “social licence” – seeking acceptance and approval of various community constituencies, outside of any formal regulatory process.
“I don’t think any of those kinds of groups ought to be able to claim rights which would interfere quite gravely with the mission of the company,” he says.
“If you sign up to that, you’ll actually concede that there a whole lot of people who control licences for you to do business, and many of them are self-appointed. If they become recognised, you’re answering to a whole lot of other constituencies. If those constituencies are ultimately legitimate, it’s then a big political decision and the governments should change the law.”
Until that time, the primary duty of the director is to make the business as profitable as it can be in the long term. However, that doesn’t mean that all of the issues which “social licences” typically cover should be ignored, as it can be counterproductive to hold views that are contrary to those of employees or consumers.
“Any sensible business understands that it has many constituencies, and running a good business requires that you satisfy them. But that is within the control of a good business which should not be spending time complying with the requirements of often self-appointed gatekeepers.”
On social issues such as gay marriage, Johnson says many companies are leading the way. “I think our politicians at the moment are way behind the corporate world in both environmental values which many individual companies are applying, and human social values,” he says. “To put it another way, maybe the flat earth part of the Liberal Party has got too much leverage at the moment.”
In general, however, he opposes companies doing too much campaigning on social issues. There is a wide market in these issues and companies should look to their own interests, rather than taking on wide social missions for which they have no mandate, he says.
The Johnson Report
Outside of his specific corporate and board roles, in 2009, Johnson was also the lead author of the report titled Australia as a Financial Centre – Building on Our Strengths. Generally known as The Johnson Report, the government-commissioned report looked at how Australia could export more of the funds management expertise that has been built up in the country from two decades of managing superannuation funds.
“The fact that we have built up this big pot of superannuation means that we have investment skills, and all sorts of backup skills – actuarial, computer systems, data analysis, and so on – which are highly relevant to much of the world – which falls behind us on this – and we ought to give our superannuation industry the opportunity to export those skills,” he says. “We ought to give them every opportunity to be competitive. Our superannuation investment management industry is probably superior to anything in the world – except for the US.”
There is also the issue that as Australia’s own domestic superannuation savings continue to grow, prudence will require that more of it is invested overseas. In that event, Australian fund managers should be encouraged to develop global management reach.
The government endorsed all but one of The Johnson Report’s recommendations, and while some of have been implemented, others have been ignored or shelved, and Australia’s financial services exports have only increased marginally since then.
Nonetheless, Johnson says some key recommendations have progressed very well. He points to tax changes, which have simplified the complexity for overseas investors who put money here or in Australian funds, particularly the Investment Manager Regime (IMR) introduced in 2015.
The IMR clarifies tax rules so that foreign-sourced incomes and gains made on behalf of offshore investors using Australian managers are not taxable. It brings Australia into line with other offshore financial centres which already had IMR regimes, including Hong Kong, Singapore, New York, Tokyo and London.
However, what is yet to be done, says Johnson, is the introduction of an alternative funds management vehicle. The trust structure inherited from English law used by Australian funds, is unfamiliar and unpalatable to the rest of the world. An alternative corporate funds management vehicle should be introduced to allow Australian fund managers to package products for the rest of the world. “That could be done easily and quickly and ought to be done. You just need a minister to give it priority,” Johnson says.
Close to a decade after Johnson wrote the initial report, he says there is some urgency to these reforms. “The opportunity is slipping us by because knowledge in financial markets is transmitted very quickly – much quicker than policy responses,” he says. “You’ll see all the Asian economies getting well ahead on this.”
Johnson is also chair of Alinta Energy, which was bought out by a private equity consortium in 2007. While he had previously helped conduct private equity transactions, Johnson says it is the first time he has worked inside a private equity structure.
Private equity is highly focused and disciplined, and he says that in the case of Alinta it has “converted a very ill-managed group of assets into an excellent company, and highlights an important issue.” The drag of conformance, compliance and reporting as a public company increases the relative attraction of remaining private.
He notes that the private equity managers were able to take all governance and remuneration issues offline and out of the hands of the executives.
“The company doesn’t worry about a whole lot of that conformance stuff and focuses very much on the business,” he says. Plans for a $4 billion share market float were shelved earlier this year when family-owned Hong Kong company, Chow Tai Fook Enterprises Limited, bought the company for an undisclosed sum.
Johnson is also a director of Westfield Group, which owns and manages the foreign assets of the shopping centre company founded by Frank Lowy AC FAICD nearly six decades ago.
He says it fulfils his expectations for a “really good board”. It manages many of its conformance and reporting obligations through a well-organised committee structure, allowing the wider board to sign off on the work fairly quickly.
“It actually allows the Westfield board to focus on strategy and it’s the best strategy-focused board that I have ever come across. Their business is planting big licks of capital in places so that you can’t take it away in under 50 years, and then operating the assets to excellent standards. The strategy is very important.”
Johnson says chairman Lowy “enjoys an arm wrestle with his co-directors more than he enjoys agreement.
“Despite his exceptional experience and knowledge, Mr Lowy is always restless with what he knows and always prepared to debate any substantial point,” he says. “He’s unlike many successful people who end up surrounded with ‘yes’ men. The last thing he wants is ‘yes’ men.”
Johnson was made an Officer of the Order of Australia in 2010 for services to business. He also has a more unusual honour – Commander of the Order of the Crown of Tonga – a result of his childhood in Fiji, where his family had a long association with the Tongan royal family.
Ultimately he facilitated some meetings between the previous Tongan King and people in southern Fiji, which Tonga had dominated in the 18th and 19th centuries. He was granted the honour when he attended the coronation of the late King George Tupou V, “It was very nice,” he says.
Outside of work, Johnson is a boating enthusiast. A few years ago he purchased “quite a big” boat, which he brought across the Pacific, stopping off at the Marquesas and Tahiti. He keeps the boat in Fiji and returns for periodic holidays. Any more boating than that is not on the agenda for 76 year-old Johnson.
“Helping build businesses is all I’ve ever done – whether it was inside Macquarie or in our advisory business, working for clients. I’ve enjoyed it and had some success at it,” he says. “So I’d like to continue doing as much of that as I can. And I don’t play golf either.”
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