Formal declaration of attack delivered to Solomon
A tenure turnaround by Stan Wallis and the repercussions of the vote you have when you're not having a vote are just two thorns in Coles Myer's side, writes Jennifer Hewett.
From tomorrow night, a bubbly new advertising campaign for Coles Myer's Target stores will be urging shoppers to "just be happy". Unfortunately, the Coles Myer board won't be able to follow its own advice any time soon.
While a confident-sounding CEO, John Fletcher, was attempting to assure investors and shoppers on Thursday that Coles Myer was finally getting its selling act together, the other directors were busy plotting far more deadly war games. This is a truly brutal battle. As a shareholder, just be very unhappy.
The formal declaration of attack was delivered yesterday afternoon to Solomon Lew and his one ally on the board, Mark Leibler. It was a letter signed by eight of the 10 directors, including John Fletcher, departing chairman Stan Wallis and the man supposed to become the new - but temporary - chairman, Rick Allert. It outlined the reasons they intend to send to shareholders to explain why Lew should not be re-elected to the board.
This is bound to produce another extraordinary explosion in Lew-land. Some directors are sure he will take legal action against any such letter going out to shareholders as part of the notice of the annual general meeting .
But Lew's lengthy and impassioned harangue while putting his position at last Wednesday's board meeting did not dissuade most of the rest of the board from their determination to force him out.
They also come armed with reams of legal advice, aimed at protecting their actions from legal challenge. That is why Lew is being shown the proposed reasoning several days in advance of the next board meeting this Thursday, to finalise the position and also why it is written in terms that are supposedly not emotive, misleading or unbalanced.
Otherwise, based on precedent, the directors would not be entitled to use company funds or authority to support their position. They will also argue - though not in the letter - that they are responding to the call from the Australian Securities and Investments Commission to explain what is going on to confused shareholders ahead of the annual general meeting on November 20.
But Lew will no doubt have his own legal advice to insist that the other directors certainly don't have the right to "inform" shareholders in this way, no matter how carefully they phrase their arguments.
He had already intended to use his own substantial funds to back his pro-Sol advertising campaign to individual shareholders from next week as well as to continue to buy many additional millions of dollars of Coles Myer shares. Now the assaults will only become more intense more quickly.
Phew. Exactly how this will all turn out - other than messily - is uncertain. The betting is still against Lew being able to garner enough support to retain his seat via a combination of his own share buying and an army of traditionally apathetic small shareholders. But his furious determination to do so isn't in doubt. That prospect is more than enough to give his opponents regular cold shivers. What if ...
Besides, any optimism about an imminent outbreak of stability has been undermined by Allert's advice to the board last Wednesday that he will become chairman for six months only. This was certainly not part of the original game plan outlined by Wallis in August when he proposed his exit as chairman and his ambition to drag Lew with him off the fractured board. Nor did the other directors opposed to Lew realise the appeal of the Allert solution would prove so temporary.
One hurdle is that Allert proved unwilling to immediately give up either of his other chairmanships - of Southcorp or AXA Asia Pacific - to take on that of Coles Myer, a pre-condition that several directors thought essential, given the current passion for corporate governance.
It is possible that Allert may change his mind over the six months and decide to retire from the other positions in order to remain as chairman. It is arguably more likely that he will be an interim chairman only, and the board will then have to find another viable candidate to try to lead the wounded giant of retailing out of the corporate wilderness.
Aware of the unsatisfactory nature of this temporary bandaid for such a bloody mess, several directors have approached board member Bill Gurry as an alternative chairman, but he has declined. They may look for someone completely new to take over from Allert and reconstitute the board anew, particularly after the debacle of the past few months.
Yet even this huge dilemma - in the heat of the current battle - seems less pressing than the immediate problem of how to get through the trauma of the annual general meeting. Wallis, fresh from the turmoil at AMP, where he is also chairman, was clearly going to be a soft target for the Lew forces.
This meant that, contrary to Wallis's initial assertion that he would stay on as chair until after the AGM, he and the board subsequently agreed on a plan for him to probably step down next Thursday when Allert would take over. Not that they formally announced this to anyone. Nor did they take a formal vote on that or on supporting Allert as the next chairman. Instead, they went around their table to "indicate" their support. The result was eight to two.
But the distinction about how it was done is crucial. Had it been a formal vote, the board would have been required to advise the stock exchange. Not surprisingly, the Lew camp suggests it was a vote that should have been disclosed.
Equally unsurprisingly, Lew abstained from giving his support to Allert, saying he could not do so unless three conditions were met: that Allert would step aside from other board commitments, that he would spend a minimum amount of time in Melbourne, and that he would explain his views on board composition, including the need for retail experience.
No deal - and no compromise - seem possible now.
After media reports of what had occurred, the board was forced to put out a clarifying statement yesterday afternoon, saying that there had been no vote and therefore was no need to inform anyone. But what happened will certainly form part of Lew's case against the other directors.
No wonder Fletcher's first point - when he stood up to present the annual results at the Melbourne headquarters on Thursday - was to insist that in these "somewhat unusual and difficult circumstances" he would take no questions on board composition . Given that he is both manager and director, it must be like stepping through a landscape littered with landmines. As he said, taking over as CEO a year ago had proved the most difficult year of his corporate life. And it's not about to get any easier, at board or management level.
He and senior management were certainly keen to put off any announcement on the chairmanship last Wednesday, if only because it would distract attention from the presentation of the results the following day.
Instead, Fletcher wanted the focus on his claims that "the worst is behind us" at Myer Grace - despite its $21.6 million loss - and that the year's $354 million net profit overall for the group was the start of much better things to come now that the new management "team" was in place.
Perhaps. The hesitation is that the market has heard many of these promises from management before and yet the company, over many years, has proved consistently unable to get its various businesses all operating profitably at any one time. Let alone when the board is imploding so spectacularly all around it.
The trouble spots have been Kmart, Target and, most particularly, the department store that isn't - Myer Grace. Target has certainly had some early success in renegotiating its appeal to concentrate on what management rather jarringly kept calling "on trend" yet affordable apparel and manchester - effectively going upmarket. Kmart, by contrast, is returning to its original spot as the lowest cost discount store so that it and Target are no longer cannibalising one another. It's at least a coherent strategy. The catch is that Kmart had to lower its prices considerably but hasn't yet reaped the returns of dramatically higher volumes, meanings its margins are even more squeezed in the meantime. Fletcher's argument is that the strategy is working and it just needs more time.
But the big question mark is the hapless Myer Grace and its failure to make any progress at all so far - as shown by its latest loss. Coles Myer did take a long time to find a new manager, US retailer Dawn Robertson, who arrived only in May. She insists she will be able to develop the attractive appearance, brands and the service levels that should bring customers flocking into a department store.
"She talks the talk," says one analyst. "We have to wait to see the walk. It is a very difficult job."
And that's one reason Fletcher so abruptly changed course this year, after the results from Myer Grace made it evident that Coles Myer would miss Fletcher's earlier confident profit predictions. In March he had announced a five-year plan following several months of strategy review.
The gist was that there was no point in breaking up the group at that time and allowing competitors to reap the benefits of any improvements.
Yet by May he suddenly decided that the losses at Myer Grace made it highly unlikely he would reach his stated ambition to double profits by 2006. UBS Warburg was commissioned by management to do a quick study about a possible break-up of the company. By late June, the UBS Warburg preferred option was to sell off Myer Grace - which no-one would want by itself - with Target. The timetable for what was called Project Gold was to be implemented by the first half of next year.
"Fletcher panicked," says one close observer.
Lew had already taken to writing fierce letters of complaint to Wallis about the board being kept in the dark on crucial issues. Astonished and enraged by the sell-off proposal, he repeatedly criticised the speed and adequacy of UBS Warburg's research, demanding that more work be done on the risks and alternative views be sought. The main target was really Fletcher and Wallis.
UBS Warburg made several more presentations to the board over July and August with Mallesons. But by then, several other board members also felt a review of the UBS Warburg work was necessary and commissioned the boutique firm of corporate advisers, Caliburn Partnership. That review was also presented to the board on Tuesday this week. This review looked at the potential value offered by Project Gold, but queried both the practicality and timing, given Myer Grace's poor current performance. It also presented several other options that could be considered as alternatives.
Not now though. The entire board has gone quite cold on the idea of any major change in current conditions. It's back to Plan A, as if the intervening change of heart never happened. Even looking at the issue again has now been put off until at least mid-next year.
A rather testy Fletcher said on Thursday that having missed some short-term milestones at Coles Myer, it had been perfectly reasonable to revisit the issue of structural change.
"And why wouldn't you?" he said. "The answer is, now is not the right time ... For the management team, it's time to get on with the job."
He dismissed the obvious questions about why there had been such sudden zig-zags, saying he "didn't want to get into who said what and when".
This conveniently ignores the reality that the whole issue of "who said what and when" has been like a lighting a match in the combustible atmosphere of the Coles Myer boardroom. It's likely to explode over the next few weeks.
