Chairman Donald McGauchie at the 2013 AACo AGM.IT IS not clear why Donald McGauchie has a reputation as one of the hard men of Australian business, given that he has allowed at least three chief executives to stay in the job too long.
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As chairman of Telstra he should have moved much faster to rid the company of Sol Trujillo, the American CEO who tried to teach Canberra how to play toxic politics.

That was a dumb strategy considering telecommunications is one of the most heavily regulated industries in the country. It resulted in the departure of Trujillo in February 2009 and McGauchie in May 2009.

McGauchie’s replacement as chairman, Catherine Livingstone, had to rebuild the relationship with Canberra from scratch.

She showed how astute she is by hiring Russell Higgins as a non-executive director. Higgins is a former secretary of the Department of Industry, Science and Resources and served on the boards of a wide range of government business enterprises.

He quickly smoothed the troubled waters in the nation’s capital.

The most important positive development to come out of the McGauchie debacle at Telstra was the appointment of David Thodey as chief executive.

Telstra shares fell 36 per cent under McGauchie’s reign as chairman. The stock has doubled under the stewardship of Livingstone and Thodey.

McGauchie’s tendency to have unflinching loyalty to his CEOs was on display in 2012 when he was chairman of Australian Agricultural Company.

He sat back and did nothing when AACo’s CEO David Farley delivered what is arguably the lowest, gutter-level remark ever made by the head of an Australian public company.

While outlining plans for a new abattoir to process old cows, Farley was quoted as saying: “So the old cows that become non-productive, instead of making a decision to either let her die in the paddock or put her in the truck, this gives us a chance to take non-productive animals off and put them through the processing system. So it’s designed for non-productive old cows. Julia Gillard’s got to watch out.”

McGauchie, who has always declared a commitment to equal opportunity and diversity, sat back and watched.

At the time the remark was made, AACo had no women non-executive directors or top managers, even though 36 per cent of its staff was female. It still does not have one female non-executive director.

Farley did not leave the company until almost a year after his outrageous remarks. His departure in July 2013 marked a turning point in the company’s fortunes. The stock has since risen about 52 per cent.

Loyalty in the way of senseTo his credit, McGauchie did not rush the CEO appointment at AACo. He did the usual international search then appointed as CEO Jason Strong, who was the former general manager of marketing.

Once again loyalty appears to have stood in the way of common sense. Nufarm is the latest example of McGauchie standing by while a CEO stays too long.

Doug Rathbone, who founded Nufarm and has been its CEO since 1987, clearly should have gone long ago. The company has performed poorly for years despite a succession of restructurings and asset disposals. Rathbone moved the deck chairs but failed to take really tough decisions.

The company was blindsided by the shift by farmers in Australia to the use of generic glyphosate herbicides.

Nufarm holds the unenviable record of consistently surprising the market with earnings on the downside for the past seven years. Rathbone and McGauchie cannot be blamed for big structural shifts in markets but it is only with Rathbone’s departure that the cost base is being brought into line with revenue.

McGauchie said on Wednesday that the management team at Nufarm would pursue a $100 million “reduction and continuous improvement program” as well as “a separate program to aggressively reduce working capital to meet the company’s target of 40 per cent average net working capital to sales by the end of the 2016 financial year”.

To be fair, the company’s performance has suffered from volatile weather. However, earnings per share are today half what they were 10 years ago. Nufarm shares have gone nowhere for about five years.

Rathbone has had his fair share of controversy. In 2011, Rathbone sold 4.5 million shares just two months before Nufarm downgraded earnings. That prompted fund managers to steer clear of the stock. Another lowlight was in April 2010, when Nufarm completed a $250 million equity raising only to breach its banking covenants and suffer a credit rating downgrade weeks later, prompting an ASIC investigation and a shareholder class action, which was settled for $46.6 million in 2012.

McGauchie has been in a difficult situation at Nufarm because as founder and major shareholder Rathbone was, in effect, more powerful than chairman and board.

As one fund manager told Chanticleer, while McGauchie was an independent director by name he had no hope of moving Rathbone along until recently, when his shareholding was reduced to levels carrying little influence.

If you read between the lines of the Nufarm announcement revealing Rathbone’s decision to step down, it is clear McGauchie finally had to nudge Rathbone out the door.

The company says it is on a growth path and that is backed up by analysts’ forecasts for earnings, according to data compiled by S&P Capital IQ.

The lesson for investors is to closely examine the track record of company chairmen and CEOs before trusting that the corporate governance systems will work in your favour.

Superannuation fee squeezeA new paper on superannuation and behavioural economics being released on Thursday by Industry Super Australia presents strong arguments in favour of union-aligned default super accounts.

In a nutshell, it says the Wallis Inquiry 13 years ago got it wrong when it assumed consumers would act rationally. The assumption was that when faced with free choice in super, consumers would find and understand all relevant information and make informed financial decisions.

Industry Super Australia, which represents industry funds, concludes workers “forced” into default super options achieved better performance than those who made active choices about where to place contributions or who were sold retail super funds.

The flaw in this analysis is that it does not take account of the big shift to self-managed super. Also, it does not include sufficient analysis of the new MySuper products. They just have not been around long enough.

The Industry Super Australia analysis conveniently ignores recommendations made in relation to improving the governance of industry funds.

Another factor that needs to be taken into account when assessing default super using industry funds is the looming structural changes which will force up fees.

Analysis by Alun Stevens at actuaries RiceWarner says there are two big trends that will force up fees: increasing numbers of retirees and account consolidation.

Stevens says that the shift to an increasing number of retirement accounts caused by baby-boomers entering the retirement years will lift costs because these accounts are much more costly to administer.

He says the level of service demanded by pension accounts and retirement accounts is much higher than that demanded by accumulation funds which have significant scale benefits from dealing in bulk via employers. “The large numbers of members retiring from the system will have an impact on fees as funds will need to increase their resources to service their members approaching and in retirement,” he says.

He says another factor is the shrinkage of the number of accounts within funds, which will impact heavily on industry funds with flat rate fees. Stevens says funds which deploy a flat-fee model and expect to pay for everything within that fairly inflexible pricing structure will be found wanting.

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