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Ex-chairman Donald McGauchie loses last Telstra fight
By Jennifer Hewett
The Australian News

Saturday, May 9, 2009

The simmering Telstra showdown came out into the open at the company's board meeting on Wednesday.

Donald McGauchie went into the meeting believing he should remain as chairman.

It was clear, if unstated, that some members of his board, particularly former adman Geoffrey Cousins, wanted to replace him.  Despite the persistent pressure from a few fellow directors, the public criticism from some large and key investors, and the combative history with the federal government, Donald McGauchie still thought he would survive.

More importantly, he thought he should stay to protect the shareholder interests.  It was a typically feisty reaction to a high-risk game.  By that evening, however, it was all over.  McGauchie would be replaced by Catherine Livingstone and David Thodey appointed Telstra's new chief executive.  The fractious board meeting that day reflected the acrimonious divisions among the directors.  Dealing with the Government at such a crucial and dangerous time for Telstra is only feasible with a relatively united board.

Once those doubts were stated and the arguments made, it made it impossible for McGauchie to continue, with the timing of the announcement allowing a convenient rationale for promoting his exit as a changing of the guard.

The simultaneous decision to make a diplomatic and well-regarded Telstra executive, Thodey, the successor to Sol Trujillo as CEO would make it all a neat and reassuring package.  With that bottom line obvious, it was left to McGauchie to bow out as gracefully as possible and head back to the farm.

The new chairwoman was to be fellow director Livingstone, a member of the board since 2000.  It was a choice that would surprise the market and telco analysts, most of whom question whether she has the commercial expertise to lead the company through such a difficult period.  She is generally regarded as more oriented towards rules, details and issues of corporate governance than market results.  She is also a long-time member of the board that strongly endorsed the choice of Trujillo and his hard-charging strategy over the past four years.

But in the end none of this mattered given the impetus, internal and external, to force out McGauchie and declare an overhaul at the top of one of Australia's most important companies.

Besides, there was a distinct lack of alternatives on the board, given McGauchie's lack of a deputy chairman and the recent damning judgment against the otherwise well-positioned director Peter Willcox over his directorship at James Hardie.  The aggressive Cousins, forcefully imposed on the board by the Howard government before the T3 privatisation, was hardly going to improve relations with a Labor government -- nor even with a Liberal Opposition, given his attacks on Malcolm Turnbull over the Tasmanian pulp mill during the last election campaign.

Charles Macek was too associated with the Trujillo era.  John Stocker was seen as too old-guard;  John Stewart, fresh out of NAB, too new and lacking telco experience.  Richard Zeglis did have telco experience but is another American -- not a good look in Canberra after the past few years.

This left Livingstone to sell herself as the new, calmer and co-operative face of Telstra, well used to dealing with government from her time at the CSIRO and trading on her experience running the successful medical services company Cochlear in the late 1990s.

The aim of the double whammy with Thodey was to impress on everyone the significance and comprehensiveness of the change in approach at Telstra.

McGauchie made a brief, carefully worded statement as part of the Telstra release on the changes yesterday.

"It is my view speculation on my tenure was a distraction to the business," he said.  "Nothing should be allowed to get in the way of David and the management team getting on with the important job ahead of them."

That's the polite way of putting it.  The most important job ahead will be trying to embrace a closer relationship with the Government, despite a virtual declaration of war that only ended last month.

The cessation of hostilities followed the Government's demonstration of overwhelming force -- a surprise announcement of its willingness to bet on a $43 billion fibre-to-the-home network.

Along with that promise came the threat of doing much more to harm Telstra's prospects unless it co-operated, including forcing it to sell out of Foxtel as well as its cable network.

As a result, McGauchie was determined to sound -- and be -- much more conciliatory, a concession that a delighted Government duly noted.

But this was not enough to ward off many of the other pressures building on McGauchie from the market.  That was intensified by the disastrous botching late last year of the Telstra submission to be involved in the Howard government's original choice of a builder for a fibre-to-the-node network.

Telstra may have been excluded on a technicality but it confirmed to many in the investment community that relations between Canberra and the telco were basically unmanageable.  The collapsed share price was Exhibit A.

Telstra could argue that no one else could build the network, which was true but ultimately irrelevant given the Government's willingness to up the stakes with shareholder funds.

The upshot was that McGauchie and the board gave Trujillo his marching orders and decided to look for a new chief executive as part of the shift in dealings with the Government.

But Trujillo's imminent exit didn't satisfy some major shareholders, including the Future Fund's David Murray, a 16 per cent shareholder.  Murray and other big investors such as Kerry Stokes believed McGauchie should go the way of the CEO he had championed for so long.

Others argued having a new CEO as well as a new chairman was shocking timing, and that McGauchie had learned his lesson about trying to defeat Canberra.  In the end, that sentiment in favour of stability was overwhelmed by the reality of a deeply anxious, divided board and the uncertainty of what comes next.

McGauchie was nowhere in sight as Livingstone and Thodey tag-teamed for a deliberately limited appearance and press conference yesterday morning.

Communications Minister Stephen Conroy was quick to welcome the new chiefs, saying he looked forward to a "positive and constructive relationship with Telstra and to working closely with David and Catherine in the months ahead".

But under the polite rhetoric, he has never actually met David Thodey or had anything more than perfunctory handshake chats at various business functions with Catherine Livingstone.

Yet they will now be Conroy's new partners in delivering one of the Government's most ambitious promises, a promise that many in the market simply don't believe is viable as a commercial proposition.

The Government wants Telstra to build as much of the new system as possible.  Telstra wants the Government to pay for as much of it as possible.  The lever will be forcing Telstra to split itself in two parts -- the wholesale network and the retail business.

To help negotiate that, the Government is set to announce the new head of its own new network company, which will own 51 per cent of the new broadband network.

The strongest possibility for this role looks to be the former chief executive of Singtel Optus, Chris Anderson, who will also be keen to drive a hard bargain with Telstra.

Livingstone and Thodey will be trying to demonstrate that being more accommodating to the Rudd Government doesn't mean selling out the interests of their own shareholders.

Life at the top of Telstra may be less openly confrontational minus McGauchie and Trujillo.  But it will be just as hard.

http://www.theaustralian.news.com.au/business/story/0,28124,25451762-643,00.html