While the financial press salivates over the scandal engulfing Australia’s most successful large retailer of the past decade, from a business standpoint, the conduct of the David Jones board is a rare example of a large corporation hitting the mark in a corporate governance sense.
It would have become clear to the David Jones board, led by former IBM executive and current Fairfax director, Bob Savage, that the tenure of Mark McInnes as CEO was untenable. While the exact nature of his indiscretions have not been made public, McInnes confirmed at a press conference that “at two recent company functions I behaved in a manner unbecoming of the high standard expected of a chief executive officer to a female staff member … as a result of this conduct I have offered my resignation to the David Jones board and we have agreed on the mutual termination of my employment with the company, effective immediately.” The victim of McInnes’ unwanted advances was a 25-year-old David Jones publicist.
While such conduct is (sadly) still not unusual in the corporate world, the nature of David Jones’ business (the majority of its customers are women) and staff (more than half of David Jones’ employees are female) did not give the board the option to sweep the issue aside. Investment banks and stock brokers have long been breeding grounds for grotesque instances of harassment, with Merrill Lynch, Smith Barney (now part of Citigroup), Deutsch Bank and Morgan Stanley forced to make substantial settlements to female employees after decades of abuse and discrimination towards female staff. Locally, leading accounting firm PwC settled with former partner Christina Rich over her never proved claimed of discrimination (Rich’s lawyers are also representing the David Jones publicist who made the accusations against McInnes). David Jones board member John Harvey was a former CEO of the Australian PwC firm (but before the Rich allegations arose).
Given the corporate world’s willingness to often turn a blind eye to appalling behaviour, the remarkably honest nature of the David Jones’ announcement and action was rare. So too was the sight of an executive actually taking responsibility for his (unacceptable) behaviour.
But most unusual was the David Jones board taking relatively harsh financial action taken against McInnes.
While for most people, an ex-gratia payment of $1.5 million would be akin to winning a lottery, it is virtually unheard of for even the most incompetent senior executive to leave depart without a substantial payout. Owen Hegarty, the former chief executive of Oxiana, led his company into a destructive merger with Zinifex, which almost led to its collapse. Despite his actions, Hegarty received an ex-gratia payment of more than $9 million from the board (after an earlier payment had been rejected by shareholders). Likewise, former Transurban boss Kim Edwards, who witnessed his vision for the toll road company completely repudiated by the board and his successor, walked away with a termination payment of more than $4 million.
Telstra’s Sol Trujillo collected a golden goodbye of more than $4 million, to which he was not even legally entitled while overseeing the destruction of billions of dollars of shareholder wealth. Even Centro’s Andrew Scott, whose actions as CEO caused the company’s market value to fall by almost $10 billion, was given a $3 million termination payment.
By contrast, personal transgressions aside, McInnes was one of Australia’s finest executives over the past decade. The former Myer cadet turned executive (who was responsible, with present David Jones finance director Stephen Goddard, for setting up the very well-performed Officeworks franchise) oversaw David Jones’ share price rise from 98 cents to $4.49 now. Under McInnes’ leadership, David Jones leapt from a loss of $25 million to $156 million profit in 2009. McInnes closed David Jones’ ailing food business, sold unprofitable stores and created exclusive partnerships with premium brands such as Carla Zampatti, Collette Dinigan and Sass & Bide. During his tenure, DJs delivered investors an annual return of 34%, compared with 11.6% of the ASX Accumulation index. Aside from Richard Uechtritz at JB Hi-Fi, few retailers can boast of such a stellar long-term performance.
Despite his remarkably strong performance, McInnes received a relatively miserly termination payment (by CEO standards) of $1.5 million. He was also stripped of $16 million worth of shares, which he would have been entitled to under the company’s long-term incentive scheme. Such action against executives is rare — the only other well-known case of such boardroom discipline was the decision by Amcor directors to strip disgraced for CEO Russell Jones of his incentive shares in the company after his involvement the Visy price-fixing scandal.
The David Jones board should also be commended for its selection of long-term stores and operations manager Paul Zahra as the new CEO. Like JB Hi-Fi (which recently appointed long-time CFO Terry Smart as its new chief executive), Zahra would have an intimate knowledge of David Jones’ business. Moreover, when a company has been as successful as David Jones, it makes more sense to promote an executive who was partially responsible for that success rather than conducting a costly, time-consuming search by an external recruitment firm who would know far less about the business than the board.
The departure of McInnes is an unfortunate event for David Jones shareholders, and his conduct appears to have been utterly inappropriate for an employee of any level, let alone a senior executive – but CEO and board are to be commended for their quick and appropriate response.
Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed, available from bookshops and online at Booktopia.