Telstra shareholders victims
By Michael Sainsbury
Monday, April 27, 2009
Two weeks after Sol Trujillo strode into his new offices at
Telstra, he summoned his chairman, Donald McGauchie, to dinner
at a Melbourne restaurant.
What he told McGauchie that night would make the Victorian
farmer's blood boil. Telstra was on the verge of collapse and
the government was trying to ruin the company.
The action had to be fast and it had to be radical. Trujillo proposed, or rather demanded, a
The first was an unprecedented spending spree to fix a company
that certainly had its problems but was in no way broken.
And all connected to bonus payments.
Part two was a rehash of Trujillo's
successful strategy in provincial
during the 1990s when he ran telecoms group US West, or at least
most of it.
The idea was to use corporate muscle to bend the organs of
democratically elected governments to the will of powerful,
near-monopoly telecommunications companies. Well, that works in
proposing a complete about-face of the strategy that had been
executed with some success by Ziggy Switkowski for 5 1/2 years.
Switkowski's subtle idea had been to develop a robust and
profitable Telstra wholesale business, responsive to customers
and alive to the demands of the competition regulator. Under
Switkowski, Telstra's wholesale division had margins that helped
the group as whole. Shareholders were winning, and Telstra's
profits and margins were strong.
strategy would inadvertently hand McGauchie the lit fuse to blow
up the company he had inherited in July 2004 as the last man
standing in a bloody boardroom coup.
and spent and spent. And as his attack dogs snarled,
abused and bit -- in his blind and wilful ignorance of Australia and its politics -- the
preening American laid the foundations of Telstra's demise.
All the time, McGauchie joined in with often embarrassing gusto
-- and the Telstra board, independent directors all of them,
stood by. John Stocker, Catherine Livingstone, Charles "Mr
Corporate Governance" Macek. And the two that slipped out
quietly, John Fletcher and Belinda Hutchison.
Clearly, under the Corporations Act, Telstra directors must have
known what they were signing off on in the very best interests
of their shareholders.
For anyone that had watched the global telecommunications
industry, it was quite a throw of the dice.
Can anyone name a telecoms group that had increased earnings and
profits but not felt the sharp axe of policymakers and
regulators? Yet Telstra's board made a bet on Sol
Trujillo, wagering that an Australian company would defy
gravity. Quite a bet. And what, in signing off on an
extra $12 billion in capital spending, did they think they would
get? By the way, no one knows the real number.
Multi-billion-dollar company overhauls never ever deliver on
their promises. It's a rule of thumb. Particularly
when new information technology platforms were involved.
Ask the ATO, any of the banks, Qantas, Customs. An endless
list where the consultants get richer and shareholders suffer.
Some of them go really bad. Generally, the biggest go
But Telstra's board knew and understood these risks. And
they were prepared to take them.
Early board meetings with
were to prove something of a shock for Telstra's directors.
The new boss wanted full charge of the company's strategy.
Not one of Telstra's directors at the time had any executive
experience in one of the world's most complex industries.
That night in Melbourne,
knew that he had his man, his next fortune and, he desperately
hoped, one more chance at the only thing that had eluded him
during a long but not so illustrious career spent mainly in the
equivalent of Adelaide:
the chance to run a blue-chip global technology or media
McGauchie had been smitten by
Trujillo's pitch. Now the man who
helped John Howard bust the waterfront unions with the help of
illegal labour was being offered a once-in-a-lifetime chance to
put his stamp on corporate
Not bad for a middle-ranking Geelong Grammar student with no
corporate executive experience. His seat on the Telstra
board had been a gift from a government keen to say thanks,
which picked him to represent rural customers.
In early 2005 Trujillo,
who had had a spotty career since walking away from US West in
2000 with golden parachute worth about $US90 million, quickly
became McGauchie's only pick to succeed Switkowski, whom
McGauchie had knifed the previous December.
Yet Telstra was not
Trujillo's first pick. After
throwing his hat in the ring, charming the chairman and flying
in to sell his schtick to the board, he pulled out.
A sexier gig was on offer running Italian mobiles group Wind --
a company that had been bought by an Egyptian telecom group Trujillo had been advising.
In his widely read and well regarded analysis of corporate
success, Good to Great, author Jim Clark warned against
superstar CEOs. They tended to reduce value, rather than
increase it. But Telstra's board would have taken all this
into account. By law.
operandi became apparent. A bewildering array of
management consultants led by Bain and Co were paid tens of
millions of dollars to flesh out his pitch. Bain remains
on the payroll. Dozens of former colleagues were brought
in -- a lovely retirement bonus if you like.
A string of investigative stories led by this newspaper were
dismissed out of hand by
Trujillo, McGauchie and their
spokespeople. Everything was AOK.
Trapped in its desire to flog the rest of Telstra, the Howard
government wilfully ignored the warning signs that were, by
mid-2007, starting to flash bright red.
beginning to spend more and more time in the first-class cabins
of aircraft and cosseted in the world's most expensive hotels --
at the expense of Australian mums and dads.
McGauchie and Telstra's board appeared to sit by without a
In December 2004, McGauchie, only six months into what may be
his only chairmanship, made his first stumble, sacking
Switkowski. A beginner's blunder: to sack a CEO
without any idea of who should succeed him, the chairman's most
He's done it again, of course. Telstra is now a rudderless
company facing the biggest choice of its corporate life.
Embarrassingly, its board completely misread clear signs from
Kevin Rudd's Government. Shareholders should be furious.
The dogs are now barking loudly. The belated howling of
institutional shareholders, the guardians of the billions in
ordinary Australians' superannuation -- who also swallowed the
snake oil peddled by Trujillo and McGauchie.
But Telstra's shareholders should all be asking: what did
Telstra's board know, and when should the Telstra chairman
Donald McGuachie be allowed to make a wrong bet -- again?
has a sad history of rewarding failure at the board level.
It's time to make a change.