Woolworths AGM 2007 transcript

Stephen Mayne: Good morning, Chairman. That's Templestowe in Melbourne, for anyone that's never heard of it. I'm a very small shareholder. I've just got a couple of quick issues to raise today.

Following on from the question on smoke, I want to raise a question about the fact that Woolworths is Australia's largest operator of poker machines. I think we have about 6,000. It's a sad fact that Australians are the most addicted gamblers in the world. We lose more per capita than any other country. I know you'll say, "It's a legal product, Coles was getting into it, we needed to match our competitor", so I want to go to the question of responsible pokies policies. My local hotel - you guys display signs advertising for kiddies meals and Wiggles shows, and you walk - to get to where that happens, you've got to walk straight past the pokies venue. You have the ATMs right next to
where the pokies are, and you don't even have things like self-exclusion signs, which the law requires in Queensland; so Queensland forces you to put up self-exclusion signs for those who are problem gamblers, and you don't choose to do that voluntarily in Victoria.

I am not aware of you doing anything to put anything back into problem gambling. I think last year you mentioned your membership of the Australian Hotels Association - well, the Australian Hotels Association is a lobby group for poker machines, and they do diddly-squat for problem gamblers; so, as a great Australian brand, we have Woolworths basically totally pushing the envelope and sending a lot of families to their destruction financially, and not really giving a toss about that, and I think it's time we actually had some more responsible policies.

My other issue is the pending prices inquiry by the incoming Rudd Government. We have pushed the envelope, I think, a long way, in terms of squeezing our suppliers driving efficiencies. I think the culture that is displayed in our poker machine operation shows an almost ruthless approach that Woolies takes to driving efficiencies and making dollars, and we've now helped generate a backlash - people are complaining, politicians have mentioned it, we are now going to get an inquiry. Kevin Rudd has used the word "rip-offs" in talking about supermarket prices.

So my question is how prepared are we for a change of Government and an inquiry, because I'm an incredibly happy shareholder financially. The numbers all point to the fact that we are making massive profits; the share price is up, you know, almost eightfold in the last
decade. It's been fantastic financially, but that's all come from somewhere, and the fear I've got is that you've been too brutal, you've been too ruthless, you have abused your market share, and you have squeezed your suppliers too much, and you are about to suffer a regulatory and political backlash from going so far.

So I'd like you to explain how you propose to manage the risks associated with that, because the regulatory environment is looking somewhat hostile, if there is going to be a change of Government. Thank you.


James Strong, Chairman: Well, I'll ask Michael to respond to that, thanks, Stephen; and thanks for the tip on the election. That will help us all next week. And we follow a funny procedure in relation to inquiries. If there's going to be one, we wait until it's set up and then we actually find out what the inquiry finds before we start talking about rip-offs and so on. So apart from that, I'll ask Michael to respond to the
questions about the poker machines, and the pricing.

Michael Luscombe (MD & CEO): Well, I might address Mr Mayne's second question first, and that is clearly we've been involved in a number of pricing inquiries over the years, and none of them have found any wrongdoing in the case of Woolworths.

Mr Mayne would also be a keen student of our accounts, and would see that the spread between our sell price and our cost price back in 2000 was about 29%. It's now about 27%, so that actually says we've gone the other way.

Thirdly, I'd say that if you have a look at just one part of our business, produce, we have around about 70% of our product comes direct from farmers. Around about 70% of those farmers have been with us for at least 15 years, some of them as long as 40 years. They are
not compelled to stay with us. They are very happy as a result of doing business with Woolworths. Those farmers have been able to grow their business and invest in their business and are very, very happy with us.

So there is nothing that makes me nervous about any price inquiry. When Kevin Rudd came out and said that there was going to be one, I immediately came out with a statement saying, "We welcome it", because there is so much rubbish that's out there in the media about why
prices are going up. People seem to ignore the fact that worldwide imports such as grain, oil and milk products and others are going through the roof.

On the second point, on the gaming machines - yes, we do have a number of machines, in fact, the number is not 6,000. We have 11,000. However, that represents only 6% of electronic gaming machines in the country. A recent study that I've seen - in fact, two studies - also said that problem gambling is not purely associated with electronic gaming machines. Equally, it applies to those
that buy lottery tickets, wager on horses, and gamble in casinos. The percentages of problem gamblers are exactly the same.

The second point I would make is that I would refute the fact that we don't take a very responsible attitude. Our partners in the hotel business, ALH, do take that and, in fact, at our Board meetings at ALH, we spend an inordinate amount of time talking about efforts that we put into responsible selling of alcohol, and responsible
gamings.

For instance, in Victoria we have engaged the services of David Schwarz, who, for the audience here, was a very famous AFL captain, captain of the Melbourne football team, who had a problem with gaming. He's got over that. We are now using him as an ambassador,
and he is going, at our expense, giving talks on how he fell down, and how he's made his way back, and giving advice on how people might follow the same trail. We don't have ATMs in our gaming areas. We don't cash cheques in those hotels. We do have facilities for simple barring in all of our hotels - is that right, Bruce?

On all of our gaming machines there are signs talking about the fact that you cannot win on those machines, right in front of the face of that area. We don't allow people to eat in those areas. There are clocks in all of the gaming areas so people understand how long they've been there.

We take this very, very, very seriously, and I'm a little bit disappointed that, you know, a shareholder would not have recognised that when visiting one of our hotels that that's the case, because I can assure you that from the ALH Board down, and the management - Bruce Matheson senior, in particular - would take this very, very seriously, and we want to the take a leadership position in our industry and, in fact, our internal covenant to that is to take a leadership position in the area of problem gaming.

Stephen Mayne: Chairman, I have got a question on the Remuneration Report. As a supplementary to the comments about Alan Jones, I'm happy to inform the meeting that I was down at the Macquarie Radio annual meeting earlier this morning, giving their Board an absolute bollicking for putting up with that disgrace to broadcasting.

Chairman: Good man, Stephen, good man. Do you think it will have any effect on him?

Stephen Mayne: Well, you know, I don't believe he's still on the air after the Cronulla riots, but his Board had their head in the sand, I can tell you.

Chairman: Thank you.

Stephen Mayne: My question on the Remuneration Report - I was talking to a friend the other week, who's a senior player in the international consumer goods company that deals with Woolworths, and he made the comment that one of the great secrets of your success, from a remuneration point of view, was that you gave a large amount of options and incentives to your buyers a number of years ago - it might have even been a decade ago - and that your buyers are very focused, very commercial, and that the Woolies culture is to back their buyers.

So if someone complains, "Oh, the buyer's negotiating too aggressively", the management sticks by the buyers. Now, I'm just curious as to whether that is correct, and I think in financial terms, you can only heap praise on Woolworths, and I think that you have got the incentives obviously right - my only worry would be if you have enriched significantly your buyers, are we having a problem now of people being able to retire early, worth two, three, $4 million, because my understanding is that the clear profits from your incentive scheme, your option
scheme over the years is well in excess of a billion dollars, including Roger, and then all the way down, so of the 33 billion, the value clearly more than a billion in share appreciation incentive payments has gone collectively to your highly successful management team, and are you now encountering the problem of people having made so much money that they retire earlier, and if that's the case, how are you dealing with having any new incentives to keep that momentum going?

Chairman: Stephen, you've got all of our buying people really excited down here. They are wondering what they are really
missing out on actually. They'll probably have delegation after this meeting. Michael, would you like t make a comment?

CEO: Stephen, the incentive program started back in 1999. The first one was obviously payable five years hence from that. Buyers were actually just dealt with in the same manner as other people on a similar salary range, so it basically - the number of options really was a multiple of, or a representative of both their short-term incentive and their salary base, so buyers weren't actually given disproportionately more.

On the second part of your question - are we seeing a lot of people retire early - well, in fact, we are not because each year from '99, so long as we met our hurdles, there's been a further grant and, of course, the longer people stay, then the more they get rewarded.

This little badge that I've got here is for our little club called the "25 Year Club", and there's only one entry that you can - entry price into the club, and that is that you've got to have 25 years continuous service with our business.

This year we have our annual dinners for both those that work with us, and those that retire. We have 4,100 members now that have completed at least 25 years service with our company.

So what we aren't seeing are mass exodus of people. People actually come to work because they want to work for a company, they want to work for a successful company, they want to work for a company that involves them, and we focus very much on developing a culture
in our business where people feel part of the team, and are rewarded as part of the team, and it's actually one of the hardest things for people to do, is to actually retire. We hope that our executives keep working and working and working.

Now, this notion that people have their use-by date at 55 or 60 or 65 is just a nonsense, and given the way our population growth has been, we want to encourage as many people to work past that period of time, and we are putting in place a number of options where people can work, you know, not quite at the same pace, part time, et cetera, et cetera, so we can encourage people to stay in the workplace, be active and be part of a successful team.

Chairman: Hope that was helpful Stephen.

Stephen Mayne: I'd like to speak in favour of Mr Macfarlane's recruitment to the Board. He obviously has impeccable credentials,
connections. I've got a broader question on the Board, which partly ties in with Mr Macfarlane. Chairman, when you made your push to potentially become the next Qantas Chairman - which didn't work out for a couple of reasons, one of which was missives from IAG and Woolworths, that they wanted you to stay - I was just curious as to which one of those you were intending to relinquish, because clearly you couldn't have been Chairman of three top 50 companies.

And I'm also curious as to whether there is a lead independent director outside of yourself, as there isn't an obvious Deputy Chairman. If you fell under a bus, or went off to Qantas, who would be the next most senior director at the moment, because I think it's quite unfortunate that a number of large public companies are mismanaging their succession, and are just going straight for an outsider to come in from nowhere to be the Chairman.

We've seen it just recently with Qantas and Lee Clifford; we've seen with the ASX and David Gonski; Andrew Peacock and MFS It happens time and time again, and I think it is not a good practice; that it's better to have someone that's been on the Board for three or five years, who understands the culture and is then ready to become the Chairman; so, I'm hoping that Ian Macfarlane, who has obviously been an Executive Chairman of the Reserve Bank, but managed a very high powered Board and some very complex issues - I'm
hoping that he would potentially be a contender to be a future Chairman of Woolies, as I am sure I suspect the ANZ Board also feels about him when Charles Goode eventually retires, but I am curious as to who is at the moment the sort of second in charge after you, Chairman. Thank you.

Chairman: You are not related to Ian, are you, Stephen, or his campaign manager? No, it's a serious question. The way in which we operate within Woolworths is that it's an extremely collegiate Board. We don't have a deputy chair, and that's a deliberate policy - we used to have years ago - and the process about who would succeed me - I am not sure whether you've got a bus parked outside waiting for me when I come out of this meeting, but if there was a short-term changeover would be a matter for the directors of this company, for them to work through.

Without - I don't want to say too much about it, but your point about it's often very helpful if you have somebody who knows the background and the company and the management - I think it's a very important factor, and I hope you can see that it's always been a very important\ factor for us in choosing our leaders in the management side as well.

And, you know, if - I think we obviously have very highly qualified and very experienced directors already amongst us. So that would just be a collegiate decision. I'm confident that there are people on this Board who would ensure that there was no derailment in that sort of case. I'll pick up the bait just a little bit about my situation. I'm absolutely gob-smacked, Stephen. You started a crikey.com and you actually believe what you read in the media. I mean, I'm really worried now. I did never do anything to run for the chairmanship of Qantas, and I confronted the journalist who wrote that first and said, "You tell me what I ever did to run for the chairmanship of Qantas?", and he said, "Oh well, somebody told me that", and I said, "Well, what did I do?", and he said, "I don't know, actually, I can't tell you." So will you do your little bit to destroy that myth?

I decided that I both enjoyed the two Boards I was working on, and I think you are probably right - it would have been a little bit of a stretch to do three. So I hope I'll just put that on the record as well. Are there any other questions?

Stephen Mayne: Just a follow-up, Chairman. I do remember - I mean, Margaret Jackson was discussing it in the press on the weekend about the yes's and no's, and I thought it was a given, and I remember you appearing on 'Lateline' business to announce that you changed your mind.

Chairman: No, no, did not. Said that I would not stand. You've got to listen to things carefully, Stephen.

Stephen Mayne: Well, this is a major change of the public record, as far as I understand, that you were never interested in the Qantas chair.

Chairman: I didn't say I was ever interested, I said I didn't run for. I had to make a decision whether I wanted to be a Chairman of Qantas or stay a Chairman of the companies I was already chairing, just as you said. So accuracy is really important, Stephen.

Stephen Mayne: Okay. Look, as a general comment, Chairman, I think all of us who have made so much money out of Woolworths, and seen such fantastic performances, aren't going to begrudge you continuing the way you've done your remuneration policies over the years.

The only thing I'd ask is that we haven't seen any proxies today, and I know that the market is working quite effectively at the moment, in terms of remuneration report voting, where if there's a problem, the proxy advisor - ISS or CGI - recommend institutions vote against - then you get some pretty big against votes.

So I'd just like to ask you the question seeing we are not going to see the proxies, it seems, before the debate is over, have any of the pay resolutions today, including this one, including the next one, and including the remuneration report - have any of them had more than 10% of the proxies cast against them.

Chairman: No.

Stephen Mayne: Well, obviously you've got a clean bill of health and everything's fantastic.

Chairman: Thanks, Stephen. It's an interesting issue when you show proxies and that, and I am sure we'll keep discussing it whether you show them each time, but anyway, the answer is no to the question you were asking.

Stephen Mayne: look, my only objection to the new Constitution is item 10.1(b), which allows for the Board to choose any number of directors between three and 12 is the maximum, for their own purposes.

Now, I have to confess to a bit of history here. I'm Australia's most unsuccessful Board candidate. I've run 28 times. I've had the "no vacancy" rort used against me about 22 to 23 of those times, and the no vacancy rort is where a Board has this provision in the constitution which says they decide how many directors there will be, not the shareholders.

Now, when I ran for the Woolworths Board in 2000, I got 58% of the proxies in favour, and I was almost elected, because the Board says there is a vacancy. They said the shareholders can decide if they want to expand the Board by one. What did Woolworths do in response -
the next year they changed their Constitution, and they inserted this protective clause.

Now, the real statistic which shows what an outrage that this clause is, is that in 16 of my 29 Board tilts, I still would have lost if I got 100% of the proxies in favour. In other words, it is statistically impossible for an outside candidate to get onto a Board - and in my case I've actually run the numbers on 16 times. 100% of the proxies would not have been enough, because this defensive mechanism allows the Board to say, "50% is not good enough, you must knock off one of the incumbents", and we all know that your typical incumbent, as we'll see in the proxy shortly, gets 99% of the vote.

So I simply say that this is a rort. It's actually the worst rort in our boardrooms - that they use as a defensive mechanism. Woolworths didn't used to exploit this. They changed their Constitution in 2001, and they used it against me last year when I ran for the Board. I am not complaining that my vote fell to 3% from 58%, but it literally made it statistically impossible.

So I simply ask that next year you do what Telstra, and News Corp and a number of other companies do, and you remove this provision, and you let the shareholders decide if they would rather have an extra director on the Board, rather than you being able to say to even Warren Buffet, "No, sorry, Warren, there's no vacancy mate, you can't come on here."

So I think this is the most disappointing aspect of the Constitution, and for that reason I'll be voting against it.
Thank you.

Chairman: Thanks, Stephen. I won't enter into a push and shove about that; but, you know, I think it's up to shareholders to vote according to how they think a Board has performed. I understand the point that you are making, so you've recorded it.

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