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
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
"Every shareholder wants to see Telstra and the Government in
constructive dialogue as opposed to firing public missiles at
These past two Januarys, Telstra's board has held its board
meeting in the world's gambling capital of
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
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.
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,
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
It hasn't got any better for McGauchie. As he and three
other directors interviewed internal candidates to replace
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:
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.
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
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
really the executive chairman, particularly for his first 18
"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
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
and the Telstra chair will be very much a hands-on job for some
"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
Shareholders are hoping that Telstra's directors will now start
earning their money.
With Mitchell Bingemann