Transparency is not Stan Wallis’s strong suit based on his performance as chairman of the Coles Myer AGM in Sydney this week.

From the absence of Farmland butter on the shelves of a Coles store, to errant shopping trolleys finding their way into creeks 2 miles from the store, to grumpy checkout chicks, shareholders gave their chairman every chance to find different ways of solemnly intoning “that’s something the board is very concerned about and we’ll have our top people look right into it”.

In a meeting that dragged out to almost four hours, there was plenty of customer-related whingeing, which you tend to get in your Coles Myers or Telstras. But amongst the customer prattle, there was some insightful probing, in particular on the company’s poor 2001 results and the outrageous payout to the under-performing and now ousted CEO Dennis Eck.

Chairman Stan employed a couple of novel tactics to stifle debate. The first was to bring forward the re-election of directors before discussion on the accounts. He justified this on the basis that most people were there to cast their (ineffectual) vote on the directors rather than sit through hours of discussion on the accounts.

He did put this to the meeting to decide, as he was happy to proceed on the more conventional basis of discussing the accounts first and then voting on directors next.

Yeah, right.

Stan knows as well as anyone that the “bikkies and tea brigade” just want to get in there, cast their vote, get out and get their fill of morning tea as quickly as possible.

And the mindless majority didn’t disappoint, voting overwhelmingly in favour of the chairman’s departure from the norm.

Stan did offer a pre-emptive rebuttal to the argument that there might be some discussion on the accounts which would affect the way some at the meeting might vote. But he said this was irrelevant as the large number of proxies already cast has determined the outcome of the vote.

Thank you, institutional investors.

It was interesting that several of the more astute shareholders during their probing voiced their objections to the chairman’s change in procedure, which was ever so predictably endorsed by the meeting.

The chairman’s second initiative was to go straight to a poll rather than a show of hands first on the re-election of directors.

This is a gutless cop-out by chairmen who don’t want their boards to receive a public slap in the face when facing shareholders for re-election. Instead, they just reveal the proxy votes to the meeting and hide behind the comfort of institutional investors supporting the old guard.

The most galling of the chairman’s procedural schemes, however, was his insistence that each shareholder ask all their questions at once and the chairman would answer them all in one hit. As soon as the questioner was finished asking his questions and the chairman started responding, the spotlights were turned off the questioner and their microphone was turned off, giving them no chance to engage in lively debate with the chairman as he responded to each question.

Now while this would cut down on unnecessary argy bargy with the brainless prattlers, there were several shareholders who could hold their own and would have benefited from having the opportunity to challenge the chairman on his responses.

I would have preferred to have seen this, even if it involved another hour of crapping on, if it produced, say, another half hour of intelligent debate.

A pity I only thought of this after the event and didn’t raise it during the meeting!

An hour into the meeting after the chairman’s and CEO’s addresses, Wallis opened the floor for questioning on the directors, who were each given an opportunity to address the meeting and outline their credentials. Many astute shareholders used the opportunity to tie in their concerns with the company’s results to the directors’ performance.

First up to the microphone was the corporate terminator who needed no introduction but got two one from the microphone attendant, the second from himself. “Yes, thank you very much, Mr Chairman, I’d just like to repeat that very eloquent introduction, Mr Jack Tilburn, shareholder card number 04860, 05”

Jack’s fiery rant was about his distaste for the annual report, which contains the watered down financial accounts, lots of glossy pictures and the chairman and CEO’s positive spin-doctoring, but nothing on the crucial issues that Jack wanted to know about. In this instance, directors’ shareholdings, directors’ remuneration and directors’ attendance at meetings.

The chairman dutifully explained that this was all available in the company’s full financial report, available on request from the company’s share registrar.

Wallis 1, Tilburn 0.

Another shareholder stepped up to give a long winded rant sledging each director’s credentials, and when Wallis finally prodded him to ask a question, the shareholder sat down and the floor went to Stephen Matthews from the ASA, who had so impressed at the DJs AGM the previous day.

Matthews slammed the board for their pathetic lack of judgment on re-negotiating Dennis Eck’s employment contract and said it showed the board panicked into making a decision they thought would see him leave the company but instead tied them to a huge payout.

While Wallis questioned Matthews’ mathematics and said the press had grossly exaggerated the final payout figure, whatever the quantum was, it was way too much and Matthews rightly stuck it to the board for a monumental stuff up.

Wallis 0, Matthews 1.

Matthews then with some delightful sarcasm referred to the chairman’s earlier spin that “underlying EPS” was up over the past 5 years. Matthews said “underlying EPS is a concept that I must say I am not familiar with, but something I am familiar with is basic EPS”, which he said had plummeted from 34 cents in 1997 to 10 cents in 2001. The directors standing for re-election had overseen this lamentable slide.

Wallis tried to argue that underlying EPS was a fairer yardstick because it took out all those nasty one-offs. He said that the 1997 figures were boosted by profits from one-off property sales and 2001 was brought down by one-off hits like the $130 million cost of implementing the GST.

Now this lowly hack isn’t going to accuse someone like Stan Wallis of blatant stupidity, rather, I’ll just assume that our Stanley is doing his level best to massage the numbers in the hope of papering over a bad result.

Sorry Stan, not even close and certainly no cigar.

While Stan might like to think “underlying EPS” is a fairer illustration of a company’s performance, all that shareholders care about is money in their pockets. And that is best reflected by basic EPS, which takes into account everything the company has done during the year in a financial sense, one-offs and all.

And Stan knows it.

Stan can say all he likes that underlying EPS is the most reliable yardstick, but these “one-offs” that he detests happen all the time obviously not the same things, because they wouldn’t be one-offs. But a Coles Myer can be certain that there will be nasties coming to bite them in the bum in the future, just as sure as there will be pleasant little surprises like one-off profitable property sales every now and then.

Shareholders expect their boards to manage these one-offs effectively and make the most of the pleasant little surprises and make sure the nasties cost the company as little as possible.

Shareholders don’t expect boards to waste their time at year-end coming up with rubbery figures to justify poor results that have left the shareholders out of pocket.

Wallis 0, Matthews 2

Another shareholder deplored the lack of retailing experience among the board. Wallis was challenged to name the board members who had retailing experience but embarrassingly the best he could do was say “well, we have them”!

Wallis 0, Fire E. Shareholder 1.

Admittedly, Wallis later went through the board members’ relevant experience, but again this was some pretty transparent spinning by the chairman. Apart from Solly Lew, the retail experience of every other board member is pretty flimsy. In fact, in all of the directors’ profiles, the word “retailing” only appears once!

Now while it is healthy for boards to have a diverse mix of talents, you want at least a few with the ability to bring significant input to the board’s deliberations on your core business.

Giles Edwards from the ASA latched onto Wallis’ use of the GST as an excuse and said that, GST or no GST, Woolworths have managed to lift their share price from $5 to $11 in the same time that Coles’ share price has headed south.

Wallis again trotted out his line on the “underlying return on investment” and implored Edwards that “you have to look at the facts”!

How about these for a couple of facts, Stan Coles Myer’s shareholders are out of pocket and they think it stinks!

Wallis did make the valid point that Woolworths was fundamentally a food business whereas Coles also has apparel and white goods etc which were hard hit by the GST and the two companies are “chalk and cheese”.

Fair point, but Woolworths have so drastically outperformed Coles that honours will have to be shared on this joust.

Wallis 1, Edwards 1.

At one stage a shareholder questioned the independence of the directors who were standing for re-election, noting their numerous other interests such as Martin Myer’s investment services business. Wallis said there were no conflicts from the particular outside interests that those directors have and said “we do have some fiercely independent directors around the board table”.

Forgotten Yannon already, have we, Stanley?

Or perhaps the reference to “some” was intended to deliberately exclude Solly Lew from the “fiercely independent” directors!

After an hour of questioning the directors, the matter went straight to a poll rather than a show of hands. As I said before, this is totally gutless and a slap in the face of shareholders. All they want to do is wave a little blue card in an under-performing director’s face once every three years to let them know they don’t like the job they are doing.

Naturally, the incumbents got home with the usual outrageously high majorities, so the shareholders didn’t even get the satisfaction of seeing some slapping over the wrists by the instos.

The ASA’s Stephen Matthews was quick to his feet and continued his bollocking of the board for the Dennis Eck farce. He reminded the meeting that Wallis is also the chairman of AMP and the whole situation was “George Trumbull revisited”!

Wallis 0, Matthews 3.

He said the board “lacks judgment, avoids accountability, is unable to provide strategic direction and is unable to boost EPS”. Kaboom!

Wallis again spent a lot of time talking down the figures and noting where Matthews had got his numbers wrong but in doing so missed the point the board completely cocked up on Dennis Eck. It doesn’t matter whether it was $5 million or $15 million, it was a big mistake and shareholders didn’t like it.

Another shareholder rightly pointed out that Woolworth’s high-flying CEO Roger Corbett was an ex-Grace Brothers man and yet Coles Myer is bringing in a bunch of over-priced and in some cases inappropriate outsiders.

There were numerous complaints about customer service there’s no Farmland butter, there’s no staff in Grace Brothers, the check-out chicks are surly when you try to use your own plastic bag which Wallis handled patiently.

Finally, an hour into questions on the accounts, Crazy Jack got back up and announced “let me get on my Harley Davidson and kick-start this drooping meeting. No one has picked on Solomon Lew yet, but I’m not afraid to, 05” Jack then ranted on about Solly’s 15 years on the board, all to no avail as Solly wasn’t standing for re-election this year.

Wallis quipped “I was going to ask you how many terms you’ll be doing but it might get me into trouble!”

Crikey’s correspondent came armed with plenty of questions but after listening to a lot of the gripes about Eck, concentrated on the more generic business issues facing the company.

In my first tranche, I asked:

1. What was the “re-positioning” of Myer / Grace Brothers, K-Mart and Target all about. My impression from the press was that Myer / Grace Brothers has been heading “down market”, while K-Mart and Target were heading “up-market”. I said this didn’t make sense to me as it seemed the three were all encroaching on the same market.

2. What will be the company’s ongoing GST costs? I noted that the ATO were being lenient on GST compliance in its first year but now the honeymoon period was over, had Coles Myer received the “knock on the door” from the tax man?

3. When do they expect their online venture, eColesMyer, to turn a profit? How does its profitability projection compare to a bricks and mortar store.

Wallis dealt with the GST question first, saying that it was something they were “managing” and it was embedded in their overall systems costs and he didn’t expect it to blow out.

Let’s hope the tax man doesn’t come knocking and find something untoward!

Wallis let CEO John Fletcher deal with the first and third questions. Fletcher said the “re-positioning” was to reverse the observations that I had picked up in the press. To this end, he’s recruited a couple of Yank retailers to head up K-Mart and Target just what we need, a couple more Americans at the top of Coles!

Now, lest I be accused of racism over that last remark, might I remind Crikey readers that anti-Americanism is perfectly acceptable.

Fletcher didn’t really give any indication of when he thought the online division would turn a profit, and it was impossible to compare to a bricks and mortar store as it comprised so many different parts of the business.

My next set of questions related to the termination of Dennis Eck’s contract and the terms of John Fletcher’s contract. It was at this point that I was frustrated with the chairman’s manner of conducting the meeting, as my sequence of questions often depended on the answer to the previous question.

I started by saying that shareholders are sick to the back teeth of executives flying in on a huge package, then turning out to be duds and getting paid out the bulk of their contract. While I hoped Mr Fletcher did well and noted that the market was positive about his appointment, I sincerely hoped this wouldn’t happen to Coles Myer if Fletcher didn’t turn out alright.

1. I sarcastically pointed out that in the real world where most of us plodders live, most employees (including those at Coles Myer) are subject to an arbitrary probation period of, say, 3 or 6 months. If it doesn’t work out, both parties move on without further obligation. I knew this would be answered in the negative and it was but I asked whether Fletcher was subject to any such probationary period.

2. I then asked whether Fletcher would be paid out in full if his contract was terminated for poor performance. I don’t recall the chairman actually addressing this one in his response (although he may have and I just didn’t pick it up), which cheesed me off as I didn’t get the chance to press him on this one once my string of questions was done.

3. On my next point, I invited the chairman to take this as a comment and choose whether or not to respond. I re-iterated earlier comments and said I was disappointed that the company had to go outside to find a CEO. I noted that there were 10 execs earning more than half a million a year and 4 of them were on more than a million surely those salaries indicate that there must be somebody in the organisation ready to fill the top gig? If not, then I thought that spoke volumes for the company’s succession planning at the top and noted that it is probably worse at the lower end of the management chain.

4. I asked whether Fletcher was paid any transfer premium Wallis answered that Fletcher wasn’t as he’d already resigned from Brambles and it was a matter of enticing him off the golf course.

5. I asked who was it who had made the decision to appoint Fletcher and his predecessor, the much-maligned Dennis Eck. Was it the Board alone, or was a recruitment agency involved? Was Coles Myer entitled to a refund if any fee was paid to a recruitment agency for the dud Eck appointment and would any fee be refundable if Fletcher failed? Again, I don’t recall Wallis answering this one either!

6. I asked a question about whether Fletcher was on a fixed term contract and what this said about Coles Myer’s reputation as an employer if they had to give fixed term contracts. Weren’t they a stable enough employer to not have to get locked into such deals? Again, I don’t recall Wallis answering this one either!

7. Finally, I made the point that I was disappointed that the chairman had chosen to argue earlier that we needed to compete dollar for dollar with the US on executive remuneration other factors such as quality of life could come into it. I think I said that Stan and I could “agree to disagree” on this one so no answer required.

So it was a disappointing exchange from my perspective a whole lot of questions from my end and some selective answering from the chairman.

Again, he may have answered more than I’ve given him credit for, but I was on my feet thinking of questions on the fly so I couldn’t take detailed notes of everything he said.

But the chairman’s question and answer protocol leaves a lot to be desired in my book.

The final piece of official business was to vote on the CEO’s new 2.5 million option package. Stephen Matthews made the point that the board had acted in undue haste in putting up the options package only 11 weeks into Fletcher’s reign. Crazy Jack was at his hottest and claimed that we the shareholders had been completely disregarded by the board in not putting it to a show of hands. He noted that “at Goodman Fielder last week we got a vote. I voted against it of course, 05”

No kidding!

Giles Edwards of the ASA astutely pointed out that it was unfair that if a target was not met in a particular year, the un-vested option would carry forward to the next year.

Wallis responded that the targets were cumulative. Say that they required a 15% profit increase per year, this meant profit had to be up 15% over year one, 32.25% over years one and two combined, 52.0875% over years one, two and three combined etc.

In the end, shareholders could only assume the options got voted in, because the chairman didn’t even reveal the proxies to the meeting!

Another slap in the face to the shareholders from transparent Stan!

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Peter Fray

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