The Association of U S West Retirees



Telstra on hold as contenders vie for top job
By Michael Sainsbury
The Australian (WSJ)
Monday, May 4, 2009

TELSTRA this week faces its most critical board meeting since listing in 1996 as it mulls the appointment of a new chief executive to replace Sol Trujillo and prepares for a restructure of the telecoms sector.

At the weekend, Telstra ruled out bringing in a chief executive from North America, leaving only one possible external candidate from Britain to face off against three internal candidates.

Telstra's enterprise and government division group managing director David Thodey is warming as the favourite.

"The best thing they could do is pick one of the internal candidates at this upcoming board meeting, send Trujillo packing and announce that Donald (McGauchie) will go in six months or a year, and start looking for his replacement," a person close to the company said.

The speed with which the board's strategy of attacking the Government and regulators has collapsed, has sent shockwaves through the company at all levels and, with no effective chief executive, the board must pick up the pieces.  "I think the new CEO will be an Australian internal candidate who will hopefully help in terms of opening the lines of communication with the Government," IML investment director Anton Tagliaferro said.

"Every shareholder wants to see Telstra and the Government in constructive dialogue as opposed to firing public missiles at each other."

These past two Januarys, Telstra's board has held its board meeting in the world's gambling capital of Las Vegas.

This year, as they visited the recession-plagued Consumer Electronics Show and met to talk about how they would deal with the results of the Rudd Government's national broadband tender -- from which they were excluded the previous month -- a number of the directors reconsidered the bet they had made on Solomon Dennis Trujillo.

It is a punt that will cost them the company in its present form.  So far the tally is $15 billion in lost value and the clock is still ticking.

As they meet again this week, the group, paid a collective $6.5 million in the past three years, must try to salvage something of what Trujillo has left them and find a strategy that will salvage some value for shareholders in the face of a government determined to downsize the company.  And they are keen to choose a new chief executive who can lead the group into this new era.

In Las Vegas, Trujillo's only active board critic, former AT&T executive John Zeglis, an American, once again stood up to Trujillo over his planned response to the government tender.  This time others joined in.  They had had enough.  Trujillo had been behind Telstra's exclusion from the process -- he hadn't wanted to respond at all.

The board rushed a slim document to the Government just in time, which it was not put through the company usually rigorous legal process, and was rejected as insufficient.

In Las Vegas, the board had finally split over its McGauchie's personal appointment.  Six weeks later, Trujillo officially announced his departure with no ready replacement.  Two months later, Treasury head Ken Henry told fellow Reserve Bank board member McGauchie that he faced his biggest nightmare:  play ball with the Government and voluntarily restructure the company, or have his business destroyed.

There is a growing group of institutional shareholders led by the Future Fund who want the board to seriously consider voluntarily breaking up the company to release value for shareholders and put in place a structure that gives it an easier, more transparent way to deal with the government on the NBN network.

It hasn't got any better for McGauchie.  As he and three other directors interviewed internal candidates to replace Trujillo last month, they were suddenly shown a rather different side to Trujillo's $12 billion overhaul of the company's networks, information technology systems and marketing.  Instead of the stunning successes broadcast in endless PowerPoint presentations at the telco's annual investor day, they were warned that things were not as they seemed.  Quite how badly the transformation has gone wrong in terms of timing, scope and budget remains to be seen.

Replacing Trujillo is now the board's most urgent task:  Trujillo has been pushed aside from the group's operations and will leave by June 30.

Of the senior managers, Thodey, Sensis directories boss Bruce Akhurst and business chief Deena Shiff are probably the least tainted by association with Trujillo.

Their respective businesses are at some distance from the main consumer and small business hub of Telstra.  Trujillo and his mates were traditional retail telco guys and didn't have as much understanding of the big end of town or media.  So Thodey and Akhurst have a vested interest in starting to rip the covers off now.

The other candidate, John Stanhope, has few places to turn, being the co-promoter of Trujillo's transformation plan.  He fended off a report in The Australian last week that Telstra will have to consider large writedowns as result of cost blowouts and delays by not really answering the question.

The other internal hope, perennial also-ran David Moffatt, had the misfortune of being backed by Trujillo -- and earlier McGauchie -- just as the board turned on him, as well as having no support from his colleagues when headhunter Egon Zendher conducted interviews.

Since 2005, the combined pay for Telstra's top eight executives has shot up from $25 million to $46 million, while shareholders have seen their nest eggs in the company shrink.

Once a CEO is picked, some think investors will want to see the back of McGauchie, who has cost them dearly.

"There's no doubt that the investing public at this stage don't view him in a favourable way," White Funds Management managing director Angus Gluskie said.

"If they continue forward with him they are running up against the gauntlet of investor dissatisfaction.  But having said that, sometimes it's a good thing for a board to run against the volatile perspective of investors if there is justification.

"But if they want to get that monkey off their back then they might decide it's time for a change.

"If they really want to clear the decks and move forward with as little tainting from the last year or two then they will need to run with a different chairman."

The problem is that just as McGauchie has pushed out two chief executives without any idea who should replace them -- Ziggy Switkowski in 2005 and then Trujillo -- he has done the same thing at board level.

Unusually, McGauchie didn't have a deputy chairman although insiders joked that Trujillo was really the executive chairman, particularly for his first 18 months.

"Succession is a swear word at Telstra -- there is no succession planning," one analyst said.

"They all got dazzled by the Sol Trujillo show but when the lights fade the board will look back at the Trujillo era and realise they were big schmucks for believing it.  Sol has done such a good job of convincing the market, most analysts and some journalists of what a great job he's done, and frankly it's insulting.

"The only way McGauchie will get the boot is if the Future Fund calls an extraordinary AGM, and then you have to figure out who will succeed him?"

Successors on the board would be hard to find.  Three board members who, with McGauchie, overthrew Bob Mansfield and Switkowski after years of support, are forever tainted:  Charles Macek, Catherine Livingstone and John Stocker.

Geoffrey Cousins' triumph of destroying Optus Vision should forever exclude him.  Controversy in the James Hardie case will exclude Peter Willcox.  John Stewart is too new.  John Mullen lives offshore, only joined last year and has no telecoms or other Australian board experience.

Board agitator Zeglis lives in Wisconsin and the Telstra chair will be very much a hands-on job for some time yet.

"Are you going to parachute someone in from outside of Telstra?," the analyst said.

"If you're not, then who of the existing board members will get support?  Zeglis is the only one who understands telecoms but he's an American and the board has already copped enough flak with its outside appointments."

It's yet another nasty dilemma for a board that has sat back far too comfortably for the past few years, outsourcing management and fatally leaving the hard questions to those outside the company.

Shareholders are hoping that Telstra's directors will now start earning their money.

With Mitchell Bingemann,28124,25423078-5018020,00.html