David Jacobson's External Insights

Board succession planning: Westpac

I recently discussed CEO succession planning in the context of ANZ Bank's Chairman's decision to stay in the position (after having already served 15 years as a director, 11 as Chairman) and conduct the search for a new CEO.

Westpac's Chair Leon Davis has announced a different approach to his own position in light of Westpac's search for a new CEO to replace the incumbent who retires in December 2007.

Mr Davis (who joined the Westpac Board in 1999 and has been its Chairman since December 2000) said:

“The timing of my retirement has been influenced by the completion of David Morgan’s current contract on 31st December next year. David has advised the Board that he will not be seeking a new contract.
“The Board began the CEO succession process some time ago, which includes a search both inside and outside the company.
“It is important that the Chairman responsible for the final selection of the new CEO is able to commit for a number of years to work with the board and the person who succeeds David. Consequently, the good governance choice for me was to retire in the near future or to commit to remain Chairman for several more years."

CEO succession planning

The interest shown in ANZ Bank's announcement that it has extended its CEO's contract by 3 months highlights the importance of succession planning especially for listed public companies.

In ANZ's case, the discussion centres on when should a successful CEO retire, should the successor be external or internal and whether the Chairman (who has been a director for 15 years, 11 as Chairman) should also be replaced.

In governance terms, the issues are how do you achieve  renewal and "refreshing" of a successful and experienced Board  and how do you ensure you attract and retain senior managers who could succeed to the CEO position.

ANZ's current CEO was appointed in 1997. One of the Board's most important roles is succession planning and ensuring that transitions are smooth. Fixed term employment contracts tend to fix attention on particular dates rather than the changeover itself.

Global warming impact

The movie An Inconvenient Truth has opened in Australia with a big promotion by Al Gore and mixed reactions from politicians.

What do businesses think about global warming?

At a recent International Financial Ombudsmans Conference, Bill Peck, AON's General Manager Risk Management and Compliance, delivered a paper on Global Warming-Impact on Financial Services.

Whilst the link is not the full speech, the notes themselves are sobering (starting with a tsunami crashing over the Opera House) and clearly indicate that some industries are acknowledging global warming as a growing risk and are planning for it.
 

AWB Index

This is an index of my postings on AWB and the Oil for Food Inquiry conducted by Commissioner Cole ("the Cole Inquiry"):

Australian companies and Iraq Oil For Food Inquiry (19 Jan)

Reputation risk: the AWB experience  (31 Jan)

Oil-for-Food Inquiry: expansion of terms of reference (3 Feb)

AWB and Oil for Food Inquiry: Managing Director resigns and corporate governance to be reviewed (9 Feb)

AWB and Oil for Food Inquiry: who knows what and where is it kept? (16 Feb)

AWB: monopoly and governance issues (22 Feb)

Cole Inquiry: what did the AWB Board know and when and why is it important? (11 March)

Cole Inquiry terms of reference amended (3) (20 March)

Cole Inquiry: isn't there a summary of AWB facts and where are the missing emails?  (25 March)

Cole Inquiry: AWB risk management advice is not legally privileged (6 April)

AWB challenges Cole (6 April)

Cole Inquiry : AWB corporate secretaries resign (12 April)

Cole Inquiry: what the Government knew about AWB contracts (14 April)

Cole Inquiry and AWB: corporate culture and criminal responsibility (25 April)

What offences might AWB have committed? (27 April)

Cole: no action over political comments  (28 April)

AWB Inquiry update (12 May)

Federal Court decision on AWB apology (17 May)

Cole publishes AWB document (18 May)

Royal Commissions Act to be amended (24 May)

Cole Inquiry: AWB goes back to court (30 May)

Royal Commissions Act amended (13 June)

AWB obtains injunction against Cole (21 June)

AWB Oil for Food Inquiry reporting date extended (22 June)

US class action against AWB (11 July)

AWB v Cole update (19 July)

Cole Inquiry and AWB update (10 August)

AWB: case study in the difficulty of apologising (17 August)

Cole Inquiry hearings resume (24 August)

Federal Court decides on AWB's claim for privilege (18 September)

Cole Inquiry reporting date extended (22 September)

Murdoch Newscorp succession planning

Lachlan Murdoch has resigned as a News Corporation executive.

Whilst he will stay on the Board, the news confirms the difficulty in ensuring that the next generation stays in the family business. The only reason given for the move was Lachlan's desire to return to Australia.

Even though News Corporation is an international listed company, the Murdoch family has a significant interest in it and Rupert Murdoch is a strong chairman. He still has one son, James, working in the company.

UPDATE: News Corp has disclosed that Lachlan Murdoch will get a termination payout  and has signed a two year consulting and non-compete agreement. Lachlan will receive a separation payment equivalent to his salary and bonus for 2004-05, which has not yet been disclosed.

Another new CEO: Commonwealth Bank of Australia

Within days of Telstra, Australia's largest telco, announcing its new CEO, one of Australia's largest banks, the Commonwealth Bank of Australia has announced its new CEO, Ralph Norris.

As in the case of Telstra, the CBA has disclosed its CEO remuneration agreement to the ASX.  Whilst Telstra's was in the form of a concise letter of appointment, CBA's consists of a 2 page covering letter containing some transitional arrangements plus a formal 20 page "Executive Service Agreement".

As with Telstra, CBA's CEO remuneration has 3 elements: base remuneration of $1.9 million per annum, a discretionary annual cash short term incentive of up to $1.9 million and an initial long term incentive allocation of Bank shares to the value of $3.8 million, subject to shareholder approval, achievement of performance hurdles determined by the Board and any necessary regulatory consent.

Similar to Telstra, the service agreement has no fixed term.

However the termination provisions are different. Whereas Telstra or its CEO can terminate on 30 days notice (with penalties early in the term), CBA's new CEO must give 6 months' notice whilst CBA can terminate on 12 months' notice in the first year and 6 months after that. There are the usual rights of CBA to terminate immediately for misconduct.

The differences are interesting: Telstra is about to go through a period of change involving privatisation. CBA has nearly finished its culture change project after privatising some time ago. The differing requirements for a CEO are relected in their employment terms.

CEO remuneration disclosure: Telstra

Telstra is Australia's largest telco. It is also in the process of being privatised, with the Government's majority shareholding about to be sold.

So when it appointed a new CEO this week there was a lot of interest. Sol Trujillo will become Telstra's CEO on 1 July 2005.

The business media interviews with Trujillo have been probing (for example Alan Kohler's interview on ABC TV's Inside Business).

What has been interesting is the level of Telstra's  disclosure in accordance with the ASX Corporate Governance Principles (especially Principle 9 which says " disclosing the remuneration policy is a fundamental requirement for remuneration reporting. The interests of shareholders and the market are best served through a transparent and readily understandable framework for executive compensation and its costs and benefits").

Telstra has released a copy of its contract with Trujillo (in the form of a letter of offer of employment). While the dollars are interesting (AU$3million per annum fixed plus bonus payments depending on meeting unspecified performance targets plus a $1million sign on fee with $1.5million of his first year's bonus paid in advance on sign on)  the contract implicitly says some things about the way Telstra may evolve in the future through its termination provisions:

• the contract is not for a fixed term, either party can terminate on 30 days notice;
• but if the board terminates without good reason (in which case there are special provisions) within the first 12 months Trujillo gets 24 months termination pay;
• if Trujillo terminates within the first 3 years, there are special provisions;
• if Trujillo terminates because of a takeover of Telstra there are special provisions.

Rather than focus on the amounts, it is important to look at an employment contract as a possible plan for the future. What this contract says is that the parties are giving themselves a 2-3 year "look see" term during which Trujillo has to finish Telstra's privatisation.  After that, Telstra is keeping its options open.

DISCLOSURE: I have a small shareholding in Telstra, bought in Telstra 2 which is currently in the red.

Sustainability and Banking

I have just returned from the launch of mecu's policy on social responsibility and sustainability.

I was impressed by the diversity of people present including those involved in the environment. science, sustainability and building.

mecu says it is the first credit union in the world to become a signatory to the United Nations Environment Programme's Statement by Financial Institutions on the Environment & Sustainable Development.

I spoke to an ex IT person who is now developing an environmentally sound retirement village. He referred me to Natural Capitalism which I will have to read.

Buyouts may increase productivity

Australian Venture Capital Association Limited (AVCAL) has released the Labour Productivity Study it commissioned from Meyrick and Associates.

Based on a study of seven Management Buyouts (MBO's) from 2001-2003 involving companies employing nearly 13,000 people, the study concludes that MBO's had productivity growth of 6.3%, almost twice the national average of 3.3%.

The study does not discuss the causes and makes clear that not all companies had the same results.