Drama at the Qantas AGM

The Qantas AGM was a lively affair but outgoing chairman Margaret Jackson would have been pleased with the level of voting support all the resolutions received from big and small shareholders. Whilst the “crazies” were noticeably absent from Telstra and the Commonwealth Bank in Sydney last week, we were out in force yesterday with Jack Tilburn, the Australian Shareholders' Associations, your truly and an army of unionists all giving the microphone a decent workout.

CEO Geoff Dixon was his usual cranky self, giving the unionists plenty of lip and looking like a man who really wished he was making tens of millions in the private equity world.

I went into the meeting an hour late and ill-prepared but printed out four Terry McCrann Qantas columns before leaving home which provided a truckload of material to give Australia's most high powered board a real spray. The Age picked up part of it in this story.

McCrann is an infuriating guy. On his employer News Corp, he keeps talking down the importance of good governance and producing sycophantic stuff about Rupert Murdoch, but on Qantas he has been superb, leading the field in his calls for an ASIC inquiry.

The Weekend Australian of 25 August was when McCrann really pulled it all together with this marvellous column.

It is worth spelling out the timeline:

* September 2006: Qantas told the market they were expecting a 25-30% rise in pre-tax profit for 2007-08.
* February 2007: upgraded forecast to 30-40% profit growth.
* March 2007: upgraded to “upper end” of the 30-40% profit growth range.
* March 20, 2007: Jackson made her infamous “mental problem” attack on institutions predicting the share price would plunge if the bid failed.
* Early May: APA bid fails with shareholders still being told a $940m full year pre-tax profit was coming.
* August 2007: Qantas unveils $1079 million pre-tax profit, 60% up on the previous year and $139 million ahead of the forecast directors used to urge shareholders to sell.

I told the board they should be outraged by this inaccurate information flow coming from management and that we need a decent internal inquiry to establish how they so badly misled shareholders about a financial year that was already more than 10 months old when the bid collapsed.

Jackson's defence was that airline earnings are volatile and Qantas had an absolutely bumper May and June . Think about it for a moment and this really does stretch credulity. Were the budgets really showing profits of just $1 million a day and then suddenly $60 million for May-June became $199 million – more than $3 million a day. Surely the forward bookings in early May as the bid was closing would have pointed to this.

For mine, McCrann is absolutely right that ASIC should be investigating – because Jackson's comments at the AGM suggest the board is showing no interest.

You just can't miss $139 million in profit a time when you're meant to be talking up your prospects and maximising shareholder value.
Instead, this is how Jackson attempted to neutralise the issue in her formal address:

“We handled it with impeccable integrity and with the toughest protocols ever established to manage conflicts of interests. We took advice from the best lawyers and financial advisers in the country. The Directors made the unanimous decision to put the bid to shareholders and we believe we did exactly the right thing. The Bid period coincided with a dramatic increase in Australian and international markets.”

All of this completely misses the point because the sudden $139 million end of year profit boost had nothing to do with sharemarkets. Yes, the bid should have been recommended but that recommendation should have been withdrawn as new information came to light.

Instead, Jackson abused her shareholders who made a far better decision based on far less information than APA, the board and management had.

MARGARET JACKSON'S SPIN

The chief criticism of Jackson is that she was too close to Geoff Dixon. Her spinners have tried to air-brush this back to an inappropriate hug when the deal was first inked and some unfortunate comments made from a hospital bed.

Truth be known, this is a pure and simple question about access to accurate information and the quality of advice. Right up until the very last Qantas is still not ponying up all the relevant information.

For instance, Jackson has told The Bulletin her health was so bad as the bid was climaxing thay “I nearly died on more than one occasion.”

This will probably sound churlish in the circumstances but Jackson now reveals she spent three months in hospital this year, yet the Qantas board never appointed an interim chairman to help out and the market was never advised of her health problems.

By some definitions her lengthy service and cosy relationship with management meant Margaret wasn't independent, yet the board never appointed a “lead independent director” or a deputy chairman.

MUTE DIRECTORS STICK TO THE CHAIRMAN'S SCRIPT

The board have clearly decided to stick together through these difficult times because Jackson explicitly protected the directors facing election at the AGM from answering questions.

I asked the longest serving director Mike Codd, Bob Hawke's former chief bureaucrat and now a director of Therese Rein's Ingeus Ltd, whether he was satisfied with the information flows that directors received during the bid process. Codd showed no interest in answering and Jackson protected him, stressing that it was a “unanimous recommendation”.

General Peter Cosgrove was up next so I specifically pointed out that it was the former head of our defence forces, not Margaret herself, who was facing re-election on this resolution and some of us wanted him to answer the same question before deciding how to vote.

Jackson reluctantly prepared to hand over the microphone suggesting he would say that “we've all learnt some lessons” but then Cosgrove declined to engage. This man who charges $20,000 to speak at corporate functions and can inspire people in war and cyclones, was rendered mute.

STRONG SUPPORT FOR ALL RESOLUTIONS

Mike Codd faced the biggest protest vote with 60 million proxies going against him – probably based on his 15 years of service – but none of the major shareholders such as UBS, Balanced Equity, CBA or Capital Group voted against any of the resolutions.

This delivered Jackson very high support for the retention bonuses for Geoff Dixon and Peter Gregg, plus the remuneration report. Some of this support came because the board voluntarily put the retention payments to a vote when a new loophole in the ASX listing rules could have avoided this. That's exactly what Telstra did with Sol Trujillo's package which partly explains why the protest vote against its remuneration report was so overwhelming.

Qantas deserves credit for this, but the decision to reject all the TWU shareholder resolutions was very ordinary because a couple of them were sensible and went to the very processes which so failed shareholders last time.

The Qantas board must have been in a very difficult situation after the bid collapsed. Dixon and the management team run a brutally effective operation beating up on unions, manipulating government, marketing well and extracting super profits from its dominant market position.

Therefore, the board could hardly give Dixon and his cohorts the sack for undercooking the profit figures but it equally wasn't a good look to give Dixon a $2.9 million cash bonus in 2006-07 and then serve up 1 million new performance shares as part of a retention package.

But that's what they did and the institutions all waved it through – with Jackson even quoting approvingly from a report sent out by proxy adviser Corporate Governance International.

THE CARNEGIE WYLIE CONNECTION

There was reportedly $1.2 billion in fees riding on the APA takeover bid and Jackson confirmed that $98 million of them were success fees for the Qantas advisers, UBS and Carnegie Wylie.

These are the guys who urged the board to keep recommending the bid to the death and clearly had the same massive conflicts as the management team because they would have all been hugely enriched if the deal had gone through.

I pointed this out and then asked about a recent press report that Qantas finance director Peter Gregg had been to Europe on a fishing trip with Mark Carnegie – the very adviser who stood to personally receive more than $10 million in fees if the deal went through.

Gregg got all defensive rejecting the insinuation in the question and then proudly declaring that he also supports Mark Carnegie's various charitable endeavours.

That's swell – but the conflict remains because. Besides, I'm not aware of Carnegie directly advising on other multi-billion dollar takeover deals because that's usually done by his partner John Wylie, who has just pocketed a huge fee after shepherding the Coles takeover through.

The AFR picked up this debate with the following in the November 15 edition on page 24 in a Mark Skulley story:

"The closest to an ace serve came when shareholder activist Stephen Mayne queried whether a $96 million success fee was payable to the airline's advisers, including Carnegie Wylie, if the private equity bid had succeeded. Chief financial officer Peter Gregg confirmed he had enjoyed a spot of fishing with Mark Carnegie after after the takeover bid failed and that he also did charity work with him. 'I make no apologies for fishing, but I do reject any insinuation that I did something that was illegal or undercover in this process. I don't think you have any right to make that insinuation'."

This letter to The AFR the following day sums up the situation pretty well:

Jackson's failing

Mark Skulley reports (November 15) that Peter Gregg was apparently a little upset by Stephen Mayne's question whether a $96 million success fee was payable to Qantas's advisers if the $11.1 billion private equity bid had succeeded. Nowhere can I find an answer to the question. Is it self-evident or did I miss something?

THE TASK AHEAD FOR LEIGH CLIFFORD

New Qantas chairman Leigh Clifford has a big job ahead of him because the directors who “unanimously” backed the APA bid really are tarred by the brush of those wildly inaccurate forecasts and the misguided sell recommendation.

Whilst the ordinary response would be to quickly turn over several of the directors, only Jackson and James Packer have quit so far and Jackson persuaded Mike Codd to stay on board for another year. I told the meeting that a Labor man like Codd was exactly the sort of person who Qantas needed to help deal with the incoming Rudd Government - but Codd will also be conflicted because he is paid by Rudd's wife.

Clifford simply won't have the numbers to purge the board so he'll need to build support internally, plus recruit a couple of new cleanskin directors. By the time Dixon retires in 2009 it would be appropriate for most of the board to have also been turned over.

If individual directors really want to stake their claim to stay, then they should publicly voice concerns about the process and demonstrate this point by backing some form of independent inquiry. Now that Jackson is gone after her third farewell dinner at Crown Casino, maybe some of them will be emboldened to speak up.

Management won't like it but that's just too bad because it was management who almost pulled off an almighty heist.

POST AGM PRESS COVERAGE

Based on the press reports after the AGM, it really does lool like the Qantas board really have got away with it. The PR strategy was clearly to create a diversion through the $4 billion aircraft order and it worked a treat with most of the coverage starting with that angle.

Terry McCrann has not filed at all on the AGM debate and The AFR's Chanticleer columnist Alan Jury had a mild go, but it could have been far more robust.