Stephen Mayne: I'm actually a proxy holder, my wife is a shareholder. Firstly on Jack's attack on Andrew Rule. I thought that was a bit unfair. That was a terrific piece of journalism and I think most people in the industry felt that it thoroughly deserved the Gold Walkley.
A couple of issues. I'd like to raise some issues about the Board but I think it's preferable that we deal with those when we're dealing with the election of directors.
Just on some operational issues. The Tullamarine plant, I think when you announced that you were going to build it, the time frame was that it would be fully operating by now. I think the time frame has slipped somewhat, can you just let us know exactly what the scale of the slippage is? There was some mention I think in the IR Royal Commission that we suffered a six million dollar blow-out because of some difficult work practices or problems with the CFMEU or something along those lines. I was wondering if you could clarify what that was?
Chairman Brian Powers: We are marginally behind on timing but within budget and in the difficult building conditions generally in Australia, I think we've done very, very well to do that.
Stephen Mayne: There's a capitalised interest cost in the accounts, I think it was ten million two years back and fifteen million last year. Do they both apply to Tullamarine?
Brian Powers: Partly to Tullamarine and partly to Chullora where we're doing a major upgrade for extra colour capacity.
Stephen Mayne: Right, so the final total cost is what, $220 million?
Brian Powers: Yes, we're within that budget.
Stephen Mayne: Just an issue on the CEO's engagement. He's finished his five year contract, you decided to put him on a rolling twelve month contract, can you tell us if it's the same terms and conditions that he had with his previous five year contract in terms of the base and possibility of a bonus. I think we've had a pretty difficult couple of years, I think a lot of people in the market were expecting that you would have sought a new CEO for the Company. Did you look externally when deciding whether to replace Mr Hilmer or not, and how extensive was that search?
I'm also a little disappointed that it appears that Mr Hilmer hasn't yet exercised any of his options. I understand that he could have exercised 2.1 million options so far at the price of $2.85 and the share price has spent much of the year well about that, yet he appears not to have shown any faith in the Company in exercising his options when he could have. I was just wondering if you could explain why that is the case?
Brian Powers: There are several points there, I'll start with the last one. The fact that he didn't exercise options and sell the stock exhibits faith in it. You would understand that one of the benefits of options to whoever receives them is the fact that you don't have to pay for stock until the options expire. It would be foolish financially to exercise early and hold, it's just common sense.
We certainly didn't do a search for a new chief executive. The Board reviews carefully the chief executive's performance each year, as does the chief executive then review the performance of everyone who reports to him each year, carefully monitored, and the decision is made then obviously whether that person retains their job. I think Fred has grown tremendously in his job and he is now the longest serving chief executive of all the major media companies, and I think we are very pleased with this performance. So, there certainly wasn't any search because there's no need for one.
His contract is very similar to the current one, it would be a slight invasion of privacy to go into great detail, but it's very much in line with the existing contract. We followed what I think is corporate best practice. He goes on to a twelve month holding basis.
Stephen Mayne: A question on the revenues that have gone from $1.4 billion to $1.3 billion to $1.2 billion over the last three years, so we've been dropping $100 million a year in revenue, and the EBITDA has gone broadly $390 million, $290 million, $190 million, so it seems like every dollar of revenue we lose it comes straight off the EBITDA. I know there is that question of cyclical with classified advertising and that means there are higher margins when you get the extra growth, but you've talked about a 15% increase in EBIT in the first half, which I think is an encouraging sign that we've at least turned the corner on the trend. Can you tell us what's happening on the revenue line, whether we're going to continue to see those revenues trending down, or if you actually think that's going to grow as well this year?
Brian Powers: I think, as both Fred and I both said, for the year to date we're up marginally, that's the first time we've been able to say that in over two years, and the trend over the last four or five weeks is actually a bit stronger than that. It's very hard to predict the advertising market because it's very hard to predict the economy, but for the first time we see signs that overall the market has turned. Now obviously there's segments of substantial strain and there's still segments that are week, but the trend for the first time has been like it's going to improve. If that happens, we have very substantial operating leverage, so a high percentage of the extra revenues don't carry many marginal costs, and that will basically anchor the bottom line.
Stephen Mayne: Three quick operating questions on your newspapers. There was much debate and a bit of consternation internally about the proposed merger of the Canberra bureaus of the Sydney Morning Herald and The Age. I think the journalists are feeling a little brow beaten in terms of the cost crunching that has gone on, but you did appear to draw the line at the bureaus. I know that a memo has just gone round to all the Fin Review staff saying that they're starting with a blank sheet on editorial processes and the suggestion is there's another big cost cut coming, can you give us any indication as to where you are at with your cost cutting program in the Company?
A separate question, I've noticed that you are working the businesses very hard, on the Fin Review front you're really I would argue, gouging your customers now, you've probably got the most expensively financial daily in the world at $2.50, even when you take the weak currency into consideration. And as someone who uses your archive, you've just jacked up the cost of getting an article out of your archive by sixty per cent, four days ago, so you really seem to be squeezing us. What's the strategy with the Fin Review, how far do you think you can push it in terms of eking out bigger profits. I know the Fin Review staff in Melbourne are very disappointed that you've cut them down from two floors to one floor. I think Alan Kohler is now preferring to work out of the ABC than the Fin Review because it's all a bit sardine like in there. Where do you draw the line on these editorial cost cuts?
Brian Powers: I'll answer generally and then let Fred answer specifically. It's obviously very hard where you do draw that line and that's the hardest decision in business. Obviously, as Fred said, we're asking people to do more with less. That being said, we are absolutely committed to make sure that these papers have the resources, which they do, to continue to be journals of record and provide outstanding journalism. People do have to work harder, and more efficiently, that as we all know is a fact of life. We all see it in everything we do, specifically in The AFR.
Fred Hilmer: We've had a difficult period in terms of revenue, we've also had a company that did not have strong cost disciplines in place, and we've been remedying that. One of the points that I make continually is that this isn't something you just do in the down cycle, you need to manage your costs through the cycle, and we will be doing that indefinitely. That means continually looking at all of our businesses and saying, is there a way to do this better? Is there a way to do more with less? Is there a way to do an even better job than we do? We will also look at our markets continually and say, what is it that we believe we can properly get from those markets? It's only by doing that we're able to properly look after your interests as shareholders and also continue the Company's great traditions in terms of quality journalism and quality production.
Stephen Mayne: One last question. We haven't really done much strategically in the last few years. I know for instance, James Packer went on the record as saying we were crazy not to buy Wilson Horton a few years ago. We've had this relatively stable five year period but we haven't really done anything strategically, apart from get into f2 and then get out of it. You're seeing quite a few media outlets under distress at the moment, say Terra Planet, Television Media Services and Data Commerce are all effectively in bankruptcy. There's a lot of distressed media outlets out there. Where are you at? You've got three investment bankers on the Board. If there ever was a board equipped to do a strategic, smart acquisition, it's this board, yet you seem to have sat strategically sterile almost, and just running the business and churning out the cash without doing anything to grow the business. Are you changing your focus a bit now that media valuations have plummeted, and there are a whole range of distressed media assets coming on the market, albeit not necessarily in newspapers?
Brian Powers: On the point of distressed assets you mentioned, I don't think any of those are of a size or scale that would justify the effort to turn them around. Also, I think that buying companies that have gone into receivership because they're losing money, as part of your core business is a pretty risky endeavour. The broader point I think is a valid one. We look at virtually any complementary business in Australia and New Zealand that we think would be available. It sometimes takes us further afield than pure media. Sometimes we do look at electronic, but we certainly look at all the newspapers.
While you say that media values have plummeted, if you look at the ones that would be natural growth for us, they're actually stock trading in a very small range, they haven't plummeted all that much, in fact they're still highly valued. We would love to make an acquisition if we can make the financial benefits work for this company. We haven't yet been able to do it, but we look at it constantly. These are acquisitions that would enhance this company if they can be done on the right terms.
Number two, I'm personally disappointed that we haven't seen a change in the laws. I think there would be great benefits for this company to be merged with a television network in Australia, who buys who, and which one, are things to be resolved, but I think we would have a very complementary group of assets and we would have the scale that would be important. Hopefully, those laws will be changed but it isn't lack of attention. Also, if you look at most of the media acquisitions made over the past four or five years in Australia, most people wish they hadn't done them, so I think our prudence has probably been proven right.
Stephen Mayne: I trust that means that we will be seeing Jack at the Computershare meeting tomorrow. I would also welcome the fact that Roy Dallimore has been on his feet. Few people would realise that Roy was the only person who got on and tackled the Yannon issue before it became a public issue.
The Fairfax Board - where do you start? You've announced today, you've ambushed us, three new directors, casual vacancies. What would The Age say if the Bracks government came along and said on election day they were appointing three casual vacancies, this guy's going to be deputy premier and these two are going to be in the cabinet. Why couldn't you have announced this six or eight weeks ago in the Notice of Meeting and put them up for election, rather than do the casual vacancy?
Brian Powers: Good question, because they were not available to serve until the new year. As I explained, finding the right directors takes time and when they feel that they're freer from other duties and have the time to serve properly on a board is not always something that coincides with the convenience of the board trying to recruit them. I didn't want to wait to have them join until next year, the sooner we can get them on the better. We announced it today to give as much notice as possible.
Stephen Mayne: The Nominations Committee hasn't met for the entire year and you've lost three directors over the past year, so what was the process? Did the Nominations Committee meet subsequent to June 30? You knew you'd lost David Shein, you knew you were going, yet the Nominations Committee hasn't met for the entire year. Why was that?
Brian Powers: We're a small board and while we have the Nominations Committee we decided that we would meet as a committee of the whole, so we basically covered these issues in the Board meetings, and discussed over many Board meetings.
Stephen Mayne: Composition of the Audit Committee. We have yourself and Mr Pinshaw are both leaving the Audit Committee, which leaves the Packer-friendly Mr Gonski and the Murdoch-friendly Mr Burrows, as the only two people on the Audit Committee. Can you tell us what the new composition of the Audit Committee will be, will any of the new directors be joining that?
Brian Powers: Jonathan Pinshaw will continue to chair that Committee until February when the new directors join. The Board will then make a decision as to who will join Mr Gonski and Mr Burrows on that Committee.
Stephen Mayne: I read in the Fin Review earlier this year that Mr Gonski was going to be taking over as the Chairman of Fairfax. Was that the plan, and why was that changed? When I heard that, I was immediately concerned that you would have the Chairman and CEO of Fairfax being the entire two-man Westfield Holdings audit committee. Was that a consideration?
Brian Powers: You keep coming back to this Westfield thing. Why is that relevant?
Stephen Mayne: There's a Westfield Holdings faction on the Fairfax Board. There's a three person faction on the Board of Fairfax. Westfield is one of the most controversial companies in Australia and board factions, cross directorships are unhealthy, that's why I keep coming back to it.
Brian Powers: But we don't do any essential business with Westfield so there's no conflict in that regard whatsoever. You were a journalist, do you think the fact that one or more board members are from Westfield would influence how you would write as a journalist?
Stephen Mayne: I remember chatting with Frank Lowy after the Westfield meeting three years ago when I was a journalist on the Fin Review, and he told me that Fred Hilmer was on his boat at St Tropez, and he told me I wouldn't mention it because he was the CEO of the company, so that was a classic example of ....
Brian Powers: Did you mention it?
Stephen Mayne: No.
Brian Powers: Well, you should have. First of all, painting Westfield as some dark force. Westfield I think is one of Australia's terrific companies. It competes overseas and it's been more successful than any other Australian company I've ever seen. When Westfield is newsworthy, they are covered robustly and I don't think there is anyone in this room who feels that any of our journalists or editors or publishers feel any compunction about covering Westfield. In fact, I feel that as good journalists like to prove their independence, they probably go a bit overboard every now and then, but good on them.
Stephen Mayne: I haven't read too much in the Fairfax papers about the problems of having these three cross directorships and these factions. That's exactly the sort of issue that the Fin Review should be discussing, as to whether it's appropriate to have Dean Wills sitting on the Westfield board with Fred Hilmer and then coming in as his chairman at Fairfax.
Brian Powers: Stephen, I think that would be a very valid point if we did any business with Westfield so there were conflicts. The Coles Myer situation, obviously that issue of conflict, very relevant inquiry. We don't do any substantial business with Westfield.
Stephen Mayne: Roger Corbett and the Woolworth's advertising account then, if that's the criteria. Woolworth's publishes Australian Good Taste, arguably in competition with some parts of our publishing arm. Woolworth's are one of the biggest advertisers.
Brian Powers: They don't publish it, they outsource it.
Stephen Mayne: If the criteria are whether you have any dealings with them, then what's your answer about Roger Corbett joining?
Brian Powers: We have minimum dealings with them and you can see those dealings are very transparent.
Stephen Mayne: Traditionally, the chairman and CEO have an arm's length relationship, you don't want them to be personal friends, you don't want them to have too many other associations. Because one day your chairman is going to have to fire, possibly, the CEO, and I'm concerned. My understanding is that Dean Wills and Fred Hilmer are personal friends, and they've had long dealings together over many years, particularly on the Westfield board. Is that an issue you feel is relevant, or perhaps Dean should answer that, as to whether he feels he could independently deal with his CEO in an unemotional transparent way, so that if he has to be sacked one day he isn't compromised by any personal relationship he has with him?
Brian Powers: We do annual reviews of Fred, and people who are friends of his or have served on the Westfield board with him are full participants in that, and I think Fred would agree, those reviews are very open and robust.
Mr Wills: I've never resiled at any time from my duty as a director of as a chairman under any circumstance and never will. That's the first point. The second is, that personal friendships - I've been kicking around on boards and in business and have built some reputation in this country for a long time, and if I'm in a position where I would not be joining a board because I had personal friends, I wouldn't be on any board. You and I used to get along pretty well too.
Stephen Mayne: Who will be up for re-election next year?
Brian Powers: Well, obviously, anyone who joins the Board, so it's the three people I've mentioned and anyone who hasn't stood in the last three years.
Stephen Mayne: OK, then I guess my biggest concern is the appointment of Ron Walker to the Board. Fairfax has a special place in Australian society, as the independent quality media publishing house that acts in the public interest. Why would you be appointing a controversial property developer from Melbourne, who's the prominent fundraiser for one of the political parties, or who has just retired as, who raised a hundred and seventy million over the years, who has sued The Age for defamation, who has been a vehement critic of The Age, along with his great mate Jeff Kennett. I would argue that it sends a terrible message that Fairfax is putting such a controversial figure on their Board.
Is it because you want the Commonwealth Games publishing contract, is it because you want the Grand Prix publishing contract? He's going to have conflicts to start with, and he's just completely inappropriate. I've heard from many of the journalists that they are not happy with such a controversial figure joining such a respected board, for all the messages that it sends.
Brian Powers: Look at what we are looking for in Ron's case as a director. First of all, I think he's a man of high integrity. Secondly, I think he knows Melbourne as well as anybody. A huge promoter to Melbourne. Terrific salesman, and active in the community. We've all realised we're too low profile here in the company, so I'm delighted that we're now going to have three directors. In terms of controversial because he was federal treasurer for the Liberal Party, he's no longer doing that. It's like saying if Bob Carr retired from politics in New South Wales, he wouldn't be an appropriate member of the Board. I don't understand that.
I think, Stephen, you both underestimate the Board but more importantly, underestimate your fellow journalists. I do not think, I certainly hope not and I would be disappointed if it were the case, that they're influenced by the opinions of board members. Demand for quality and accuracy, that's what we should do as a board, but in terms of anyone writing about politics or anything because Ron Walker's on the board, I don't have any worries that it will colour their coverage of anything.
Stephen Mayne: I can tell you that when I wrote column pieces in The Sun on the Grand Prix, Ron Walker would ring the editor in chief and the managing director and complain vehemently.
Brian Powers: Good, he's an interventional, controversial figure, let him inside the hallowed Fairfax board. We get calls all the time if there's an inaccurate story.
Stephen Mayne: You're going to have him ringing up Greg Hywood and putting the heavies on him about how the Com Games is reported, the Grand Prix. This is the guy who said the Grand Prix would make a profit, it lost sixteen million dollars last year. It's a controversial issue. The Age should be at the forefront of holding people accountable when things like that happen.
Brian Powers: I don't think that will change one iota.
Stephen Mayne: I'd like you to consider that there should be a formal protocol put in place where Mr Walker is not allowed to have any personal dealings with Mr Hywood or any of the journalists about how events which he has any remote involvement in, are covered. I think that should be a specific protocol put in place, and I can tell you, from personal experience, he has a history of interfering and trying to manipulate how media reports key events in Melbourne.
Brian Powers: As a practice, I don't think that I shouldn't be able to talk to a journalist or anyone else on this Board shouldn't be able to talk to a journalist when he sees one. I certainly interact with Greg as a publisher quite frequently, he presents at board meetings etcetera, and if I think something's a great article I say so, if I think something's missed the point or inaccurate I say it. You encourage quality and accuracy. I think there is zero risk of our publishers or journalists being swayed by the opinion of a board member, unless they're convinced. If the paper's got something wrong, terrific, everyone's got the right to make that point and you shouldn't lose it if you're a director.
Mr Hilmer: There's a very strong protocol and it's no different in this company than in any other properly managed company, that if members of the Company want to have contact about an issue that affects the management, it's done through me. That's not going to be any different with any directors of the Company, that's the proper way a company will operate, it's the way we always operate, it's the way we'll continue to operate. I do think creating this bogeyman is out of step with any sort of reality, as are a lot of your opinions of what you think is appropriate or inappropriate journalism. We have editors and publishers who operate independently, and make those decisions every day based on their judgements and I have great confidence in them.
Stephen Mayne: Have you run these three new appointments past your top six shareholders who collectively own over fifty per cent of the Company?
Brian Powers: No, we have not.
Stephen Mayne: So, it's completely news to them?
Brian Powers: Yes, I don't believe in running board appointments or corporate decisions past shareholders before you take them. That's our job, to make a case to them. There's plenty of interaction between senior management and shareholders, so we're very mindful of their views generally, but I think if you get to stage where you start checking your decisions beforehand with individual shareholders, it's a very slippery slope.
Stephen Mayne: I'd like to support the earlier comments about Margaret Jackson. She's had some good boards, but the fact of the matter is that she was on the audit committee of Pacific Dunlop and BHP for many years when they - in BHP's case, they wrote off ten million dollars. I just think it sends the wrong message. I'm also a little concerned that she's a close personal friend of Michael Gill, your head of business publications and in terms of how individual business units are performing, that's an area where there might be some change. You've had the Strategic acquisition which I think is one acquisition you've done in the last five years which hasn't been a disaster from what I've heard. It's nowhere nearly as big a concern as the Ron Walker appointment, but I'm a little bit conscious that she's had two disastrous board seats on Melbourne based companies, and now we've rewarded her for her fantastic service at BHP and Pacific Dunlop, by giving her this trophy board seat.
Brian Powers: Current form is probably a better indication. Her leadership of Qantas has been outstanding.
Stephen Mayne: Yes, Qantas has been good and Billabong is going fine as well. Lastly, the physical location of directors. You've been three years in California. Is Julia King back from India on a fulltime basis now?
Mrs King: I left India over a year ago.
Stephen Mayne: What about Mr Burrows. I read somewhere he spent the last two years in London. Is Mr Burrows still working in London, or is he back in Australia fulltime.
Mr Burrows: I'm still in London. I come back here once a month.
Stephen Mayne: That's a satisfactory arrangement for the rest of the Board, is it?
Brian Powers: It certainly is. I think the perspective of having someone who is active in dealing with media companies over there at least observing, that knowledge has been very helpful to us. If it went on for ten years, it may be an issue, but there's certainly no sign that he's losing touch with anything that's going on here, not with anything that's going on with the Company.
Stephen Mayne: I've mentioned at previous Annual General Meetings that I think there's a perception problem with having one of Rupert Murdoch's favourite investment bankers on the Board, the fact that he's not even in the country strengthens the argument that maybe Mr Burrows and Fairfax should part company. I don't want to have someone who's a close friend of Rupert Murdoch, who's been an investment banker to Rupert Murdoch over the years, who's not even in the country, sitting on the Board of the pre-eminent blue chip publishing house in Australia.
Brian Powers: We've disagreed on that before, he continues to provide very valuable service, but he'll come up for a vote before long, as he has in the past, and the point's been made, he's been overwhelmingly re-elected.
Stephen Mayne: Thanks for your time, Mr Chairman.
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