1998 Fairfax AGM transcript

July 9, 2008

Here is an edited transcript of our exchanges at the 1998 Fairfax AGM.

Stephen Mayne: Mr Chairman, I should confess at the outset that I am also the Business Editor of The Daily Telegraph in Sydney.

Chairman Brian Powers: Are you here social climbing?

Stephen Mayne: I'm looking for a job, yes.

Brian Powers: We're all here for social climbing.

Stephen Mayne: You are advertising for a business editor at the moment I have noticed. I have used my own money to buy shares in fifty companies with the intention of attending annual meetings, asking a few pertinent and hopefully, sensible questions, and writing it up as a series from the perspective of an active investor.

I should say at the outset, that this is not just a cheap shot, at a competitor, Fairfax. Fairfax is an important company that faces many challenges and issues and I at one point owned as many as 23,000 shares. Unfortunately, I sold most of them for less than $1.50. If I could also deal at the outset with the fact that Kerry Stokes and Kerry Packer raised at their respective annual meetings, and I did not attend the Newscorp meeting in Adelaide and ask questions. There's two reasons for that, one as an employee I didn't think it was appropriate, and two I'm acting within existing budget and I won't be flying anywhere to any other city for a single meeting in Adelaide be it Southcorp, Fauldings, Newscorp, Normandy.

Anyway, I've got a few questions, I know others have questions so I'll ask them one at a time. The Annual Report says that the two highest paid executives for the year received $1.9 million and $1.1 million. The Hera/dCBD column reported that this was the sacked Herald publisher John Alexander and the former Age editor Bruce Guthrie. I've just got two questions on this matter. Why were the most senior editorial executives in Melbourne Sydney retrenched during the year? Also Mr Alexander gave a speech last night in Sydney and I just want to quote from that speech

"To this day I have not been given a direct reason, there was no lead up discussions or tussles."

is this Ule case that he wasn't directly talked to about this and if so, why was he sacked without the Board giving him a reason? And why has no action been taken against him when he appears to be in breach of his non-poach agreement and the hiring of Max Walsh to the Bulletin?

Brian Powers: I think you have three questions in there. I don't propose to discuss individual personnel matters. Now a decision taken by the previous Chief Executive about the composition of this senior management team and who he thought would best deliver the results he was looking for. He took that decision, it was endorsed by the Board and he acted on it. Now that is as much as I'm going to say about it. Some way on the prior order of The Age. You had two more questions in there. The non-poach.

Technically, Max Walsh was not an employee of ours but when we expressed our intention to bring a law suit if he tried to poach people who were employees it would violate his contract, they ceased and desisted, so they stopped when we made it quite clear we were going to sue them to enforce those rights. I might say they didn't have a particularly good batting average while they were trying either.

Stephen Mayne: Mr Chairman, a fairly low-key question on a little gold mine hiding in the balance sheet.

I note the surge in share price of Mobile Communications which owns a 4.5% stake in Vodaphone Australia. I also note the similar success of AAPT since it floated late last year. We at Fairfax own more than 40% of AAP Information Services which in turn also owns 4.5% ofVodaphoneAustralia, and a 36% stake in AAPT. Now on the back of my Daily Telegraph envelope, that would suggest that we're sitting on an asset worth around $300 million.

My question is why isn't this reflected in the annual accounts, particularly now that it is effectively valued on the market and is this stake regarded as a core asset or are we looking at selling, floating or in any other way unlocking this value, particularly given the present world-wide share market boom in telecommunication companies?

Brian Powers: It's a good question. I'll answer the business side of it and then I'll ask John Greaves, the Finance Director, to speak to the question of carrying values.

The stock has performed quite well since it went public, and we continue to monitor share performance. We do not consider it an essential core asset. So at the right time we would consider selling that stake. We looked at it six months ago we are well served that we did not sell it then, the stock has depreciated noticeably in value, but as an asset we don't think it is instrumental in this Company going forward. So at some point in the future, when we think the timing is right we'll sell that asset.

John would you speak to the carrying value question?

John Greaves: Sure. Note 30 to the Statutory Accounts reflects a carrying amount of investments and alongside that is the net fair value of the assets. Included in that is our share of AAPT. We hadn't booked it, but we disclose it.

Stephen Mayne: Why not book it given that it has been valued on the market ...

John Greaves: It hasn't been our policy to book unrealised gains.

Brian Powers: The problem, Stephen, as you know, if you booked it and the marketplace went down next year you are going to have to run it through your P & L as a profit loss. Not good for shareholder value.

Stephen Mayne: .... it could be very conservative to book $100 million plus ...

Brian Powers: Yes, well when you start taking the arbitrary lines, it's very difficult. And that's why we disclosed it in the footnotes, so that people were aware of it. ... follow very closely and aware of it.

Stephen Mayne: Mr Chairman, I would also like to refer to one of your interviews with Pam Williams in the Fin Review. The article stated that when it was proposed that Neville Miles, a representative of the SFX Trust, be placed on the Board, the majority of the Board rejected this on the basis that he did not have any newspaper experience. At least that's what the article said.

Now I note that the Board still does not have a single newspaper industry person on it and I ask, given the unfortunate experience that we've had with Bob Mansfield , the last non-newspaper Chief Executive of this Company, why has the Board now committed to a long term five year contract, rather than a one or two year contract which would be less risky, with the new Chief Executive, Fred Hilmer, given that he is also a non-newspaper person, despite his obvious capabilities?

Brian Powers: I think if you look in... Contracts work both ways. First of all, we wanted someone who will make a substantial time commitment to this Company. So we wanted Fred to be committed for five years. Conversely, it is not easy to attract senior executives with a one or two year contract, as you say. So we came to a five year contract. And we hope Fred Stays, not only through that contract but beyond it. And we are confident that, notwithstanding lack of newspaper experience, he will perform well.

It's important to explain the reason for it. First of all there are no strong candidates from within the newspaper industry outside of Fairfax to head this Company. More importantly, we have a huge amount of journalistic and newspaper talent in this Company. Now what we have been a bit short on, quite frankly, is leadership from the Chief Executive level on non-day-to-day newspaper issues, such as helping us on our management structure, cost control, and most importantly how to generate new revenue sources and aspects for growth. The world's changing very quickly around us and someone with Fred's intellect and ability to reason through those issues, in some ways unencumbered from a 30 year past in newspapers, is what we thought were the most essential elements of Chief Executive.

Now we have very strong publishers right beneath Fred. We have very strong operational people, very experienced in newspaper business. So Fred will be leading, what I think is far and away the strongest team of newspapers executives in Australia.

I might also say that it is the strong wish of this Board that we don't have to go outside this Company for Chief Executive again. I think we have several excellent managers coming through the ranks that will be well positioned to lead this Company for a long time in the future. And that is, I think one of Fred's key priorities in this job is basically to bring along that next generation of management.

Brian Powers: Stephen, in the interests of time can you finish up? Fine, let's ask them both at once, thank you.

Stephen Mayne: I notice there's been an increasing amount of cross promotions between the Fairfax titles and your old employer Publishing and Broadcasting. Will there be more of this? Can you tell us more about what the strategic relationship between the companies is? Are all these deals done, the cross promotion deals, done on a strictly commercial and arm's length basis? And also can you inform us where negotiations are at or whether there are any negotiations on whether NineMSN is going to be given access to the highly valuable Fairfax content for its Internet site?

Brian Powers: On the first question, the series of promotions you are talking about with Fairfax and PBl or ACP, I'm only aware of one that took place, and it was a Sunday promotion where, when you bought Sun-Herald you got a coupon from one of their magazines. I didn't know about that until it was running, as a matter of fact.

It was highly beneficial to us. It didn't work out well for them, so I don't think they will be doing it again. Assumingly negotiated absolutely at an arm's length basis.

The question on the on-line area, it raises a broader strategic question. I think we will look at either going as we are now as a stand-alone family of sites or we will form a partnership with one or more people. One hopes, if you did that, would be that would be to have a bigger site, brings more trains, more traffic, gives you critical mass to tum to a profitable business that in response to an earlier question, I said is our long term goal.

We've had talks with PBl, we've had talks with virtually every player in the market and we're not close to doing a deal with anyone.

In terms of access to valuable content, that's available to anybody over the Internet. As you know it's one of the most popular sites in Australia. It's available directly.

Stephen Mayne: This is the last question. Can you give us an update as to where the ABA enquiry is at? It's been going a lot longer than was originally foreshadowed. What do you know of it? How many discussions have you had with them? And does the Company have any sort of contingency plan in place in the event that your appointment is deemed to be in breach of the cross-ownership laws and you are unable to continue on as Chairman?

Brian Powers: As far as a contingency plan, the Board would meet and make a decision then on who they would appoint Chairman. I don't know much more about the ABA enquiry than you do. I obviously testified a couple of times in front of them, not at all recently. I'm a bit surprised that it's, taken as long as they have to come to a conclusion. I am 100% confident, because I know all the facts that my serving as Chairman of this Company or on the Board of this Company, doesn't violate the cross-media rules in any way shape or form. So I don't lose any sleep about it.

Stephen Mayne: Mr Chairman, I've noticed that Mr Gonski's name has come up, just in my job as a journalist over the last seven or eight years, in relation to deals, and from I can understand, he is if not the single closest external adviser to Mr Packer, then he would be the second. Can you give us your insight when you were at PBl, and Cons. Press, on how many different deals Mr Gonski worked on for Mr Packer? And can you think of another example, in Australia we've got basically three major media groups, there's the Murdoch, there's the Packer and there's Fairfax, would be the three largest, can you think of another example where a very, very dose and intimate adviser to one of those three sits on the Board, or acts very closely with another of those three?

Brian Powers: In respect to the first half of your question, when was employed by Consolidated Press, I worked with Mr Gonski frequently when he provided advice to us. I can say in that capacity I saw that he never put himself in a conflict situation. David advises a great number of people around town and he is, I think, remarkably good and successful which is why he is trusted by his most senior, all his most senior clients, understands where there is potential conflict you declare it and you either excuse yourself if both people, if either would like you to, or if those people would ask you to stay involved. In Fairfax there was never a conflict.

Equally important, going forward I don't expect there to be a conflict at this stage, with one exception, PBl is not a competitor of this Company. We are competing in the online area. If that business got very, very large, you could say that you wouldn't sit on the News Board and the Fairfax Board if that became immaterial (? material?). I mean in this business then it may be difficult. make the problem more difficult.

In this situation, if we have talks with PBL, or anyone else that Mr Gonski or anyone else on this Board has a relationship with on-line, he would excuse himself from those discussions. And that is perfectly normal and again in a country and more importantly in a city of this size, it happens all the time. The Directors wearing one hat or the other on any specific issue may have to excuse themselves. But I have every confidence that with Fairfax, that I'm 100% there will be no breach of any confidentiality or duty to this Company by Mr Gonski.

Stephen Mayne: Just one last comment for the meeting.

Brian Powers: I'm trying to walk the fine line between letting legitimate shareholders having their say and having a heavy hand, so bear with me.

Stephen Mayne: Last question. Fairfax newspapers are proudly regarded as being independent for a long time. I would submit that there is a perception that Mr Gonski is closely associated with the Packer camp. My recollection is that Conrad Black when he was the controlling shareholder in Fairfax submitted, I think it was to the ABA, that the Packer associated Directors voted as a block on the Fairfax Board.

Now I've just got two questions here. Has Mr Gonski's position been brought into the ABA enquiry at all, has he had to give evidence to the ABA? I would also point out that we seem to be a very Sydney-centric company. We have only one Melbourne based Director, Sir Rod Carnegie, The Age is our second biggest business and whether it would better if perhaps we didn't have Mr Gonski on the Board to deal with the perceptions issue, and we appointed a Melbourne based Director to reduce the imbalance that presently exists.

Brian Powers: The first question on the ABA, you'll have to ask them. I think we are not supposed to be discussing or disclosing what they do.

Second question, I think it would actually be very good if we had another Melbourne Director. That doesn't necessarily you substitute one for the other. In a question raised before, if we could find a Director who had the time and no conflicts to serve and who had extensive newspaper experience, that would also be beneficial to this Company. But because of the small nature of the market and the potential conflicts with current employers, makes it difficult.

I take your point on a Melbourne Director and I think they are two strengths we would like to add to the Board over the next year or so.

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