Chairman Chaney urges business to focus on returns

As one of WA’s most influential directors, when Michael Chaney talks, the business community listens.

Business leaders must keep their focus on shareholder returns and avoid empire building, Wesfarmers chairman Michael Chaney told last week’s Business News Success & Leadership breakfast.

Mr Chaney, who recently stepped into the role of chairman at Wesfarmers and has served as chairman of Woodside Petroleum since 2007, is currently heading the boards of three of the top 20 ASX companies.

It is a rare feat, but one Mr Chaney won’t maintain for long, as he will soon step down as chairman of National Australia Bank.

Mr Chaney said one of the best aspects of Wesfarmers, where he served as chief executive officer until 2005, was that it was focused on shareholders

That was not as common as one might expect, he said.

“One of the most important things is culture,” Mr Chaney told the breakfast forum.

“If you have the right culture at a company you’ll end up being much more successful than if you have a poor culture.

“I think (the right culture) is a clear understanding of where you’re going, very little politics, people marching to the beat of their own drum.”

While a good culture had room for prioritising issues such as safety and good corporate citizenship, this was in stark contrast to businesses focused on empire building, especially when it came to mergers and acquisitions.

“The alternative is often … you see a board paper that says ‘these are the reasons we should do this, we’ll go from number four to number three, we’ll be more important, basically’,” Mr Chaney said.

“And you get to the financials and there’s a small section that says ‘it’s not that compelling financially but it’s really important strategically’.

“You wouldn’t see that at Wesfarmers.”

Mr Chaney said it was something he felt really strongly about.

“People establish companies in order to get a good return,” he said.

Succession and balance

Mr Chaney told the forum it was common for people who were interested in boards to misunderstand how long the process to achieve their objectives might take.

Replacements for board positions at Woodside, as an example, were often identified more than a year in advance based on the skills necessary for the role.

“The same thing happens at Nab, we’re looking years out,” Mr Chaney said.

He reiterated his support for improving gender balance on boards, in line with the Australian Institute of Company Directors’ targeted 30 per cent program, which is seeking to achieve 30 per cent female representation on boards.

“I’ve been a strong supporter of it,” Mr Chaney said.

“Nab will have 30 per cent next month, Wesfarmers already has … Woodside will have.

“My mission is to have 50 per cent women at Woodside by the time I retire in 2017.”

He said the biggest challenge was to get women into senior management to build the skills for board positions.

Companies needed seasoned people on boards who were capable of governing and guiding the chief executive, and that required experience, he said.

At not-for-profit institutions, such as the University of Western Australia, where he serves as chancellor, it is more difficult to determine a goal.

The key point, however, is to still have a strategic objective and ensure that all stakeholders, such as student and staff representatives, have at heart a commitment to the university and not their electorates.

Investment hurdles

On economic matters, Mr Chaney disagreed with Reserve Bank of Australia governor Glenn Stevens’ view that big companies had not reduced ‘hurdle rates’ for investment decisions as interest rates have fallen.

He said the rates, which determined whether a company would proceed with a project, had fallen about by about 5 percentage points in the past five years, a position in line with comments by his predecessor as Wesfarmers chair, Bob Every.

“The governor and the deputy governor of the Reserve Bank have made statements about companies setting hurdle rates too high, not reflecting low interest rates, and not being willing to invest,” Mr Chaney said.

“I’ve said to (them) I just don’t agree with that at all.

“Companies use the capital asset pricing model, to work out their weighted average cost of capital.

“You’ve got the cost of debt, which has come right down, and you’ve got the cost of equity, which is the cost of debt plus an equity risk premium.

“And you look at the portion of each that you want to carry and you do a blend of those and say ‘this is our weighted average cost of capital’.

“I’d rather not say what companies are using, because it’s a competitive issue, but where it used to be about 15 per cent it is about 10 per cent after tax now, and actually lower in some cases.”

However, RBA data from June suggested that about two thirds of firms did not update hurdle rates as frequently as their weighted cost of capital calculations.

Productivity

On industrial relations, Mr Chaney advocated for a return to individual agreements, noting their successful implementation at Rio Tinto.

“I think we need to have much more flexibility in the system nationally,” he said.

Such arrangements would provide a boost to productivity, as workers were encouraged to work in collaboration with businesses to find improvements, Mr Chaney said.

He acknowledged that a federally managed system, although making it easier for businesses to have consistency across the country, had some problems, and Australia was now stuck with changes by Labor.

In terms of local economic activity, Mr Chaney was careful not to comment on the future movements of oil prices or other indices, except to say that projects should be chosen when they could withstand a variety of prices.

“None of us can predict the oil price,” he said.

“When we look at projections for Browse, which goes over 40 years, the only thing we know about these projections is that they’re wrong.

“We just don’t know which direction they’re wrong in, or by how much.

“Make sure that, if the really bad downside occurs, you don’t go broke … sometimes you can hedge.”

Mr Chaney said Curragh coal mine, where the coal price had performed well above projections after the company had bought the asset, was an example of the upside potential.

“You don’t have to make too many mistakes like that to be a hero.”

Private times

Mr Chaney also gave the audience insight into how he compartmentalised his life, with woodworking being a favourite pastime, conducted in a special studio at his home.

He said he had found it was the ideal hobby because it provided a different outlet, and he could walk away from a job at any time, resuming where he left off when the next opportunity arose.

The non-executive director said he had made a speciality of building tables and had promised to build one for each of his nieces and nephews, a commitment that was quite daunting given the considerable size of his family.

But not all his work was for family.

He had agreed to build an altar for a local church and was very satisfied with the result, having completed it close to a deadline revolving around it being consecrated.

However, a last-minute clerical inspection revealed that a number of crosses had not been carved into the top of the altar.

“This was after I’d French polished it,” Mr Chaney said.

He had to engage in some emergency diary changes in order to get the job done in time.