commentary The not-so-secret campaign by the Future Fund to evict Donald McGauchie from the chair of Telstra's board doesn't appear to have gained much traction. It is also unclear whether it was necessary.
Despite his well-deserved reputation, for combativeness however, it is unclear whether the fund's attack on McGauchie was soundly based.
Last week a series of reports in The Australian Financial Review revealed that the Future Fund's Guardians, led by former Commonwealth Bank chief executive David Murray, had been directly lobbying individual Telstra directors, urging them to dump McGauchie.
The fund is understandably concerned about the sharp fall in the value of its 16 per cent stake in Telstra since the company was kicked out of the original National Broadband Network process last year.
It would be even more concerned about the implications of the Federal Government's new $43 billion fibre-to-the-premises proposal and the implicit threats of the telco's dismemberment contained in the detailed proposals for regulatory reform the government released with the new proposal.
Despite his well-deserved reputation, for combativeness however, it is unclear whether the fund's attack on McGauchie was soundly based.
From December, after Telstra was shunted from the NBN process on a technicality, McGauchie adopted a far more conciliatory tone towards the process and the government, signalling Telstra's willingness to re-engage with the government if the NBN process didn't generate an acceptable proposal. The more cooperative noises coming from Telstra pre-dated the Future Fund's actions.
The NBN process didn't, of course, produce an acceptable outcome. The government chose to announce the ambitious, and very costly, fibre-to-the-premises proposal rather than restart discussions over the fibre-to-the-node network with Telstra, which would have been politically embarrassing.
It also produced the regulatory reform discussion paper, which could be regarded as either a very large stick with which to threaten Telstra if it didn't cooperate or else as a simple declaration that it has had enough of the endless confrontations with the dominant telco and has decided to break it up.
There is a view among some in the media and elsewhere that Telstra is reaping what it sowed — that had it been less aggressive in defending its interests in the past it may never have faced the threat of the new NBN and radically destructive regulatory reform.
That view is hard to reconcile with Telstra's history — Sol Trujillo's predecessor, Ziggy Switkowski, tried the "softly, softly" approach to dealing with government and all he got was ever-tightening regulation, ever-reducing access prices for his competitors, and never-ending threats of something worse.
While some of Telstra's language in recent years may have been politically insensitive, its basic posture has been in accord with the fiduciary obligations of its directors to protect the interests of the company and its shareholders.
That remains the case — even if McGauchie wants to cooperate with the new NBN process, Telstra's decisions have to be driven by its view of its shareholders' interests.
McGauchie isn't up for re-election this year — he was reappointed to the board at the last annual meeting — and therefore has another two-and-a-half years in the chair, unless there is a boardroom revolt or the Future Fund escalates hostilities dramatically and calls an extraordinary general meeting. It would need to be confident of the support of a substantial slice of the Telstra register — which it might struggle to attract — to take that step.
Given the stakes involved as a result of the nature of the new NBN process and the proposals for regulatory reform, under which Telstra could be structurally separated, forced to divest key infrastructure, denied access to new spectrum and face the imposition of an even tougher access regime, the natural stance for the company — as it is for any incumbent telco — will remain defensively aggressive unless it is prepared to downgrade its shareholder interests.
It would in any event be premature for Telstra to commit to cooperate with the new NBN project. There isn't any detailed business case for the $43 billion concept. Indeed, it isn't at all clear where that number was plucked from or whether the government even considered the potential interaction of the regulatory reforms being considered — which would drive down access prices to Telstra's existing network and significantly reduce its market power and financial strength — and the NBN's need to attract massive volumes of customers to a new network.
Talk of fibre-for-equity swaps will remain fanciful until there is a clear appreciation of its economics — neither Telstra nor any other telco could or would agree to vend in valuable assets unless they were convinced there was commensurate value in the equity on offer.
Equally, it will be interesting to see whether the government is prepared to carve up forcibly the one company in the industry that, in its integrated form, would have the capacity to make a meaningful contribution to a $43 billion project.
The Future Fund's intervention has raised eyebrows because it is a sovereign wealth fund and such direct action by its guardians in one of its investee companies' affairs raises the obvious issue of whether it is simply doing the government's bidding, something that would make other investee companies and projects quite wary of it.
The fund, however, isn't a conventional wealth management business and its guardians aren't analogous to normal directors. The legislation that governs the fund makes it very clear that the guardians are effectively executives, rather than non-executives, with Murray's role that of a chief executive. The Future Fund Management Agency is there to provide advice and support to the guardians rather than as an executive reporting to a conventional board.
It is an unusual and potentially controversial structure — in most funds management business boards set strategy and distance themselves from decisions on investment or voting rights.
The Telstra shareholding is, however, the fund's biggest single investment and isn't travelling well. The guardians have the ability to try to do something about that rather than passively accepting the decline in the value of their holding.
Whether the better course might have been trying to help broker a better relationship between Telstra and the government rather than trying to force a fracturing within the boardroom is now an academic question. Certainly, the breakdown in relations between Telstra and its major shareholder is good for neither party.
This article by Business Spectator's Stephen Bartholomeusz is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.
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