The Association of U S West Retirees



Telstra shareholders victims
By Michael Sainsbury
The Australian
Monday, April 27, 2009

Two weeks after Sol Trujillo strode into his new offices at Telstra, he summoned his chairman, Donald McGauchie, to dinner at a Melbourne restaurant.

What he told McGauchie that night would make the Victorian farmer's blood boil. Telstra was on the verge of collapse and the government was trying to ruin the company.

The action had to be fast and it had to be radical. Trujillo proposed, or rather demanded, a two-pronged strategy.

The first was an unprecedented spending spree to fix a company that certainly had its problems but was in no way broken.

And all connected to bonus payments.

Part two was a rehash of Trujillo's successful strategy in provincial America during the 1990s when he ran telecoms group US West, or at least most of it.

The idea was to use corporate muscle to bend the organs of democratically elected governments to the will of powerful, near-monopoly telecommunications companies. Well, that works in Australia.

Trujillo was proposing a complete about-face of the strategy that had been executed with some success by Ziggy Switkowski for 5 1/2 years.

Switkowski's subtle idea had been to develop a robust and profitable Telstra wholesale business, responsive to customers and alive to the demands of the competition regulator. Under Switkowski, Telstra's wholesale division had margins that helped the group as whole. Shareholders were winning, and Telstra's profits and margins were strong.

But Trujillo's strategy would inadvertently hand McGauchie the lit fuse to blow up the company he had inherited in July 2004 as the last man standing in a bloody boardroom coup.

Trujillo spent and spent and spent.  And as his attack dogs snarled, abused and bit -- in his blind and wilful ignorance of Australia and its politics -- the preening American laid the foundations of Telstra's demise.  All the time, McGauchie joined in with often embarrassing gusto -- and the Telstra board, independent directors all of them, stood by. John Stocker, Catherine Livingstone, Charles "Mr Corporate Governance" Macek. And the two that slipped out quietly, John Fletcher and Belinda Hutchison.

Clearly, under the Corporations Act, Telstra directors must have known what they were signing off on in the very best interests of their shareholders.

For anyone that had watched the global telecommunications industry, it was quite a throw of the dice.

Can anyone name a telecoms group that had increased earnings and profits but not felt the sharp axe of policymakers and regulators?  Yet Telstra's board made a bet on Sol Trujillo, wagering that an Australian company would defy gravity.  Quite a bet.  And what, in signing off on an extra $12 billion in capital spending, did they think they would get?  By the way, no one knows the real number.

Multi-billion-dollar company overhauls never ever deliver on their promises.  It's a rule of thumb.  Particularly when new information technology platforms were involved.

Ask the ATO, any of the banks, Qantas, Customs.  An endless list where the consultants get richer and shareholders suffer.  Some of them go really bad.  Generally, the biggest go worst.

But Telstra's board knew and understood these risks.  And they were prepared to take them.

Early board meetings with Trujillo were to prove something of a shock for Telstra's directors.

The new boss wanted full charge of the company's strategy.  Not one of Telstra's directors at the time had any executive experience in one of the world's most complex industries.

That night in Melbourne, Trujillo knew that he had his man, his next fortune and, he desperately hoped, one more chance at the only thing that had eluded him during a long but not so illustrious career spent mainly in the US equivalent of Adelaide:  the chance to run a blue-chip global technology or media company.

McGauchie had been smitten by Trujillo's pitch.  Now the man who helped John Howard bust the waterfront unions with the help of illegal labour was being offered a once-in-a-lifetime chance to put his stamp on corporate Australia.

Not bad for a middle-ranking Geelong Grammar student with no corporate executive experience.  His seat on the Telstra board had been a gift from a government keen to say thanks, which picked him to represent rural customers.

In early 2005 Trujillo, who had had a spotty career since walking away from US West in 2000 with golden parachute worth about $US90 million, quickly became McGauchie's only pick to succeed Switkowski, whom McGauchie had knifed the previous December.

Yet Telstra was not Trujillo's first pick.  After throwing his hat in the ring, charming the chairman and flying in to sell his schtick to the board, he pulled out.

A sexier gig was on offer running Italian mobiles group Wind -- a company that had been bought by an Egyptian telecom group Trujillo had been advising.

In his widely read and well regarded analysis of corporate success, Good to Great, author Jim Clark warned against superstar CEOs.  They tended to reduce value, rather than increase it.  But Telstra's board would have taken all this into account.  By law.

Trujillo's modus operandi became apparent.  A bewildering array of management consultants led by Bain and Co were paid tens of millions of dollars to flesh out his pitch.  Bain remains on the payroll.  Dozens of former colleagues were brought in -- a lovely retirement bonus if you like.

A string of investigative stories led by this newspaper were dismissed out of hand by Trujillo, McGauchie and their spokespeople.  Everything was AOK.

Trapped in its desire to flog the rest of Telstra, the Howard government wilfully ignored the warning signs that were, by mid-2007, starting to flash bright red.

Trujillo was beginning to spend more and more time in the first-class cabins of aircraft and cosseted in the world's most expensive hotels -- at the expense of Australian mums and dads.

McGauchie and Telstra's board appeared to sit by without a murmur.

In December 2004, McGauchie, only six months into what may be his only chairmanship, made his first stumble, sacking Switkowski.  A beginner's blunder:  to sack a CEO without any idea of who should succeed him, the chairman's most important job.

He's done it again, of course.  Telstra is now a rudderless company facing the biggest choice of its corporate life.  Embarrassingly, its board completely misread clear signs from Kevin Rudd's Government.  Shareholders should be furious.

The dogs are now barking loudly.  The belated howling of institutional shareholders, the guardians of the billions in ordinary Australians' superannuation -- who also swallowed the snake oil peddled by Trujillo and McGauchie.

But Telstra's shareholders should all be asking:  what did Telstra's board know, and when should the Telstra chairman Donald McGuachie be allowed to make a wrong bet -- again?  Australia has a sad history of rewarding failure at the board level.  It's time to make a change.,28124,25388843-5018020,00.html