How’s this for a self-serving speech from Rodney Adler full of cop-outs? Read it and make your own judgement but the Crikey view is that Rodney is a slippery character who is not to be trusted.
Platitudes, implausibilities, buck-passing and silver spoons
By Rodney Adler
Good afternoon ladies and gentlemen. I have been asked to speak today on a subject which until recently dear to my heart – me.
When Josh Liberman first asked me to speak at this function, my world was very different. These last two weeks have completely changed my universe and will profoundly affect my life for the next three to five years.
Considering the intense publicity and scrutiny that I have received – the reality is, this was a commitment I made and I am not in the habit of breaking commitments. Therefore, due to self respect and respect for the people who asked me, I did not cancel this address. Also, why should I? We still live in a democracy . I have done nothing wrong, I have nothing to be ashamed about. In fact, as I will explain a little later , I did take action about HIH, 8 months ago. And today I will tell you what happened.
I am honoured to be able to speak with you all today. Thank you very much for inviting me. It’s rather ironic, isn’t it? The topic of todays talk , 05″my personal experiences on business, life and success at the top”.
It certainly pays to keep ones sense of humor at moments like these. I think it might be considered somewhat “arrogant” and “rather inappropriate” to now speak about that topic, as per the original invitation.
And let me tell you, there has been considerable opposition to me speaking here today by my various advisors and depending on what the press says tomorrow, they may be right!
During this difficult period ahead of me, I have vowed that it is, to the best of my ability, “business as usual” and I will try to maintain my life as “normal” a life as possible, considering the incredible number of issues that will face me over the coming few years.
Throughout my life, I have been on one hand considered very fortunate but on the other hand, inheritance can be considered a double-edged sword for me. From an outsider’s perspective, the “silver spoon” in my mouth may seem very large, I believe I have worked very long and very hard.
I have enjoyed every minute of it, both the good and bad times, however I do believe that “success at the top” comes with a price I am currently paying.
Although I was prepared to talk on my personal experiences in business, over the past decade, I believe, it is now more important to talk about the recent events and share with you some of my observations, as someone caught up in a terrible situation and the resulting media firestorm. And that’s something I would not wish on anyone.
I have already expresseed my deep regret and sorrow for the terrible fate that has befallen all those involved with HIH. My sympathies also go out to the One.tel workers, and all of those damaged by the collapse of One.tel.
I am still trying to comprehend, as we all are, just how devastating the situation is for those who are going through this period of loss and trauma.
On a personal note, may I say at this time that I am in an evolutionary period and probably what should happen is that I return here to cover this same topic, in a few years time, in order to complete the picture.
I would now like to discuss the recent series of corporate failures, obviously, including HIH and One.tel. I will “pepper” throughout this part of my address, some views on the duties and obligations of directors and point out some observations which I would like to share with you.
Certainly there have been lessons learnt due to my recent experiences. As a non-executive director of two of the larger recent collapses in corporate Australia, and with the knowledge that the duties and obligations of directors are going to be an issue of intense scrutiny and be written about and discussed for some time to come, I believe, my views may be of some interest.
Although everyone appears to only concentrate on the HIH and One.tel collapses, there are actually four significant collapses recently which I would like to discuss. Interestingly, all four have aspects in common.
I would like to discuss the collapse of Franklins, HIH, Impulse Airlines and One.tel. They have all gone out of business this year; they were all discounters operating in industries that could be defined as duopolies; each was the lowest price operator in its respective field and each failed.
A number of commentators have touched on this topic recently. Alan Kohler made some observations about this in the Australian Financial Review, and I would like to give my take on it, and add to the discussion.
Each company failed for specific reasons but the common denominator to all four was clearly excessive discounting and poor management practices.
There are, of course, individual circumstances relating to each one, but all four must be considered as having been under capitalised relative to their competitors. It cannot be forgotten, and must be stated in very strong terms, that each has been affected by the economic down-turn that we are all experiencing.
Corporate collapses of this nature are not unusual at the beginning and/or at the end of a recession. The difference between the collapses at the beginning of the 21st century and the collapses in the late eighties/early nineties is that in the past, the collapses were the highly geared asset speculators caught by the stock market collapse where as this time, other than the demise of the companies in the technology sector, it is the discounters and price cutters that have failed.
Let us start with the supermarket chain, Franklins, its whole motive for being in business was, in effect, to take on Coles and Woolworths and for many years, it was successful. However, as Coles and Woolworths became, shall we say much smarter, and as the extended hours regime cut heavily into Franklins operations, Franklins did not react positively to the challenge.
The successful creator and owner of Franklins sold out to Dairy Farmers of Hong Kong and then the new management was not responsive enough. Unfortunately, due to the strength of Franklins holding company, they lasted years after they should have either closed down or sold out.
Franklins’ collapse is clearly one of a discounter trying to compete with a better capitalised Coles and Woolworths across a broad range of products instead of their original strategy which was a very focused discounter on only a few items (such as Aldi does today). They broadened their range and tried to go upmarket to fight Coles and Woolworths. They laid the seeds of their own destruction by that strategy.
Likewise, Impulse Airlines, or shall we say Compass mark three, failed when they could not gain profitable market share at the expense of Qantas and Ansett by significantly discounting their prices on major routes. Impulse were undercapitalised and did not have the strength to continue the fight, especially when Qantas rose to the challenge.
One of the main differences between the four cases mentioned is that Gerry Mcgowan, founder and managing director of Impulse Airlines, had the wherewithal and management ability to realise their problems early and subsequently sold out to Qantas, thereby protecting his shareholders from the embarrassment of what would have been insolvency.
This brings me to HIH, and I must be very careful with what I say because there will be a Royal Commission, and it is up to them to get to the bottom of all of this. I am not here to pre-empt their work.
But this is what I believe they may be investigating. Gross mismanagement; poor accounting and financial systems; weak and long term employed senior executives; a dysfunctional board led by an ineffective chairman and poor underwriting procedures which culminated in charging the lowest premium rates for an insurance company in this land; all of this complicated by an ill-advised, and ill-conceived international expansion into the United Kingdom and the United States which cost the company, to the best of my knowledge, over $1 billion Australian dollars, over this last four years.
Some of these matters are addressed in my letters to senior management of HIH. More about those letters shortly. And some are matters that have subsequently been discovered.
Let me ask the question that you are all dying to ask: did the FAI acquisition cause the downfall of HIH? Absolutely not. This is not my opinion, it is fact.
Let us not forget that HIH approached FAI at the time that FAI was publicly listed. A negotiation took place and the price was set. That price was set, by definition, between consenting, intelligent parties with appropriate advisors on both sides, nearly 3 years ago. FAI was not insolvent at the time of the acquistion by HIH, as the rumor mill suggests.
FAI was considered one of the most savvy direct marketing insurance companies in Australia, with a great brand name and 1.7 million customers.
HIH mis-managed FAI and mis-treated the intellectual capital and the brand name of FAI. They then very successfully sold the business at the wrong price.
History will record, after intense investigations over the next few years, that FAI was a strategically sensible acquisition for HIH but it was poorly integrated by the management of HIH at that time.
I would now like to turn to the role of the non-executive director. When I accepted the board seat on the HIH board, subject to the FAI acquistion, I unknowingly was invited into a club where I was not a welcome member. The board had been together for some time and I was clearly an interloper.
No matter how smart or diligent you are, it does take several board meetings before you become familiar with the practices of any new company. If you assume that a major company has a board meeting once every six weeks and if you assume that they only meet at those times (which, by the way, appears the norm), then after three meetings, some 18 weeks would have passed which is approximately one third of a year and that is just to become familiar with the operations and practices of the company.
Then, you must start to assess the quality of the information given to you and the management of the company. In essence, it takes at least half a year to understand the company where you have taken a board seat.
After that half-year, you start to formulate your opinion about the calibre of management and the quality of information before you. Of course, if everything is travelling well, you have no reason to become concerned, nor do you act with haste.
As a result of the facts that have come to light since I resigned as a director and the HIH collapse, I have learnt a number of personal lessons which I would like to share with you.
When next accepting a board seat, at any company, one should try to meet every director privately and, if possible, spend time with the senior management to start the process of understanding.
If the managing director and chairman have been in place for a long time as well as the senior management team, it is fair to say that inertia may play a role in keeping important information from the board.
Now, to One.tel: the collapse of one.tel is most disturbing and intriguing to me at this time. I will tell you why. When John Greaves, the chairman, and I left the board, on the information we had, everything was on track to meet the projections that had been announced to the market. However, it does appear quite clear now that the major shareholders, in particular PBL and News Corp, who were the capital support of the business were not kept up-to-date to the level to their satisfaction (their words).
When they were asked for some funds to keep the business afloat they decided they had enough, and were concerned about the future and therefore denied access to that “cash chest”.
One.tel was an excellent marketing company but it was up against Telstra, Optus and Vodaphone. Even though One.tel outperformed Hutchison and Telecom New Zealand, the reality is that these two other companies were, and are, much better capitalised.
So what should the relationship be in general terms, between a board and the management? One thing is for sure: a board must be both thankful and wary of strong management. It is a double edged sword. If the cost of that strong management is a quarantined version of the facts being presented to the board, then that is too high a price to pay for strong management. Also, if the optimism of the CEO gets out of hand, be very careful, because, maybe, just maybe, the facts become obscured by the vision of the CEO.
Both HIH and One.tel have brought proper public focus on the role of the non-executive director. A non-executive director is not involved in the day to day running of the company. I was a non-executive director of both HIH and One.tel.
So, what does a director do when he/she starts to form an opinion that the company is not travelling well? My comments now relate mainly to HIH.
My considered view was that to inform and consult with the board was the right and proper thing to do. And that’s what I did.
I was concerned about what was happening at HIH; I was concerned from what I was not being told. So, I did act .
I wrote this letter on 18 October 2000 to Ray Williams, the then chief executive officer of HIH, outlining my concerns. This letter was included in the board papers of that time.
Going through that three page letter, let me just quote some of what i wrote to Ray Williams 8 months ago:
“Ray, HIH is in turmoil, it is not a question of profitability, it is a question of survival, 05..leaving aside raw fundamentals: our stated net assets are just shy of $0.90 per share (which no-one believes)..
the company has no vision nor any real structure that will successfully lend itself to the 21st century, 05, 05..”
“the group structure of HIH is hopelessly inefficient, every product has a general manager and basically its own computer system, 05, 05..”
“why have I been selling shares when all the other directors are buying – very simply, there is no real vision, no plan, no understanding of the future – it is not an asset problem that scares me and not even a lack of profitability, it is cash flow that wakens me at night, 05..we will slowly die a death of a thousand cuts”
That was part of the letter that I sent on the 18th October 2000.
I wrote to Dominic Fodera, the finance director of HIH, on 30 October 2000, again 8 months ago, and asked several questions.
Question: what is the state of negotiations /relationship with APRA?
Question: are there any issues that the directors should be made aware of?
Question: has APRA written to us at all that we as directors should be made aware of?
Question: has APRA expressed any concerns, in regard to our current situation?
And, on 8 December 2000, I wrote to the chairman of HIH and said, and I quote:
“as we approach the annual general meeting, I think it is commercially sensible of me to ask for you to verify for me, in writing, that HIH is solvent and can meet all its debts.
we will be positioned before an angry group of shareholders and I would like to have an answer to the above question, prior to that meeting.”
I have these letters with me today and these are but a few of the letters that I wrote outlining my concerns. In the end, I wrote a five page letter addressed to the chairman outlining my concerns in February 2001, on the basis that if I did not receive acceptable answers, I must resign – I didn’t receive those answers, so I did resign. I believe that was the proper thing to do.
It takes a long time to come to such a decision. You must actually argue and isolate yourself against a group of people, your colleagues on the board.
Another observation: if you have any concerns about the company that you sit on the board of, instantly get legal advice and make your concerns known to your colleagues on the board. Despite the fact that this may culminate in you being asked to leave.
If my intuition and market experience leads me to have questions about the information being provided to the board by management, then I will again raise these questions with management.
Overall ladies and gentlemen, I would be very interested in taking questions as, I believe, they will be far more stimulating than my address today but, please be patient with me as I am sure you will understand if there are some areas I just can’t comment on.