Mar 14, 2014

Behind the scenes at DJs, a management coup that wasn’t

Plenty is being said about David Jones chief Paul Zahra and the boardroom machinations that led to the resignations of several directors. Problem is, most of it is rubbish.

Paddy Manning

Crikey business editor

There is a revisionist whispering campaign going on, particularly in the business pages of The Australian, pushing a bizarre line that somehow David Jones chief Paul Zahra has staged an improbable management coup, offing former chairman Peter Mason after a phoney dummy spit resignation that was a tactical stunt. It's a version of history at odds with the facts, and it whitewashes over some serious corporate governance breaches -- if not actual law-breaking -- that not only destabilised DJs but also raised questions about the performance of our corporate regulator. What's more, it is a version of history that would tarnish the reputation, not just of Zahra but of the institutional shareholders who rightly took Mason to task over governance failures at David Jones -- serious professionals like Vince Pezzullo at fund manager Perpetual, Crispin Murray at BT, Paul Xiradis at Ausbil Dexia, and Simon Marais at Allan Gray. Are we to believe they were all party to an improper coup, somehow in cahoots with Zahra? It has been widely reported that there was tension between Zahra, on the one hand, and David Jones directors including Mason, Steve Vamos and Leigh Clapham. A degree of tension between board and management is normal, possibly even healthy. We want independent directors to test executives -- that's what they're there for. But it's a fine line between questioning and challenging on the one hand and interfering in management on the other. From the outside, without knowing all the ins and outs, it is impossible to say when the line has been crossed. There is no question, however, who is boss: the board is steward of shareholder funds. The board appoints the chief executive. The buck stops with the chair, so when tensions with a CEO become unworkable, there is no doubt who must prevail. By yielding to Mason and offering to resign -- not in a hurry, not in a huff, but only once an orderly succession was organised -- Zahra did the right and honourable thing. Far from having a dummy spit or orchestrating a coup, he did the opposite: he put the company's interests ahead of his own. It's what Mason did next that really set the ball rolling, and the exact chronology is important. Zahra's intention to resign was offered verbally to a hurriedly convened board meeting on Monday, October 21. David Jones' own legal and communications advisers were of the view it did not need to be -- and should not be -- disclosed under the ASX listing rules. Mason ignored that advice and pushed out a statement later that day, just before the 4pm market close, with no succession plan in place and with no credible explanation for Zahra's decision beyond personal reasons. Why do that? That week Vamos and Clapham applied in writing for Mason's approval to buy shares, in the allowable window of six weeks after the full-year profit result, as was required under the DJ share trading policy. Apparently, their decision to buy shares was an expression of support for the company in the wake of Zahra's resignation. In weighing his approval, the policy required Mason to confirm they were not in possession of price-sensitive information. Mason gave that approval even though every week, as a result of a policy he had introduced, directors were given an update on DJs sales figures -- they were already showing a marked recovery -- and at the Monday meeting the board had agreed to release its full quarterly sales on the Friday, November 1.
"David Jones was one of those extremely rare cases when institutional shareholders were rightly furious and took action."
We now know that on Monday, October 28 -- exactly a week after the Zahra announcement --David Jones received the conditional, nil-premium merger proposal from Myer. All directors were told and also received copies of quarterly sales figures. Vamos and Clapham still had not bought their shares. Arguably, this approach was price-sensitive information and Mason should have revoked his approval of the share purchases then and there. Over at Myer, on the day the DJs offer was made, chairman Paul McClintock wrote to all directors to close their trading window. Vamos and Clapham bought their shares the next day, however, on Tuesday, October 29, and the trades were disclosed to the market on the Thursday, October 31. Vamos and Claphan bought a combined 32,500 shares at between $2.67 and $2.69 a share, worth $87,000. When the quarterly sales figures came out on the Friday November 1, DJs shares jumped and people started asking questions. The rest is history. In his appearance before the Senate inquiry into the performance of the Australian Securities and Investments Commission in February, commissioner Greg Medcraft made much of the fact that Vamos and Clapham had applied to buy their DJs before they received the quarterly update:
"I think we should mention that the two directors concerned had actually announced their intention to buy the shares a week before the Myer proposal or sales data were received. I think that is quite relevant. In fact, their intention in writing was to acquire shares."
But even so, the directors had applied when they had all but one week's sales figures, and by the time they bought the following week, they had both the full quarter's figures and the knowledge of the Myer bid. ASIC did investigate possible insider trading, and early this year issued a "no further action" notice, finding among other things there was insufficient evidence -- in particular, that the information was market-sensitive. It is old ground now, and Mason, Vamos and Clapham have all paid a price by resigning from the DJs board. That does not mean we have to stomach a smear campaign against Zahra or the concerned shareholders who took up the issue, including by voting against the remuneration report at the AGM last year, after Mason apologised "unreservedly the company and all our shareholders for the concerns that have been raised on this matter". It is bad enough that we have a soft regulator in ASIC. If anything our financial institutions are most often too passive, too reluctant to challenge our top boards. The last thing we need, is to undermine those fund managers who, for once, drew the line and did the right thing. David Jones was one of those extremely rare cases when institutional shareholders were rightly furious and took action.

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2 thoughts on “Behind the scenes at DJs, a management coup that wasn’t

  1. Dogs breakfast

    I am hopeful that the institutional shareholders did what you suggest. That is what they should be doing. Mason was asleep at the wheel, at best.

    And ASIC’s work was just deplorable.

    Kudos to the fund managers. All strength to their arm if they are finally picking up the ball. It may be the only way we will get the codgers out of their sinecures.

  2. Gavin Moodie

    Thanx for this careful report and judicious analysis.

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