MBO puts spotlight back on Perth

“It’s an embarrassment,” said one highly experienced company director. “When I go to Sydney now they all raise this ‘cowboys from the west’ stuff again.”

Company directors usually don’t like to be quoted, especially when they are criticising one of their own, and at the moment there is a lot of criticism being thrown about.

The prime target is former Alinta Ltd chairman John Poynton, although former managing director Bob Browning and the company’s independent directors have also been on the receiving end over their handling of the proposed management buy-out.

Since the proposal was announced to a somnolent market three weeks ago, WA Business News has spoken with or been contacted by numerous business people.

While there is a range of opinion, the MBO has stirred up passions in a way that few business issues have done in recent years.

One of the common themes is that WA’s business community was meant to have grown up, and would not get mired in this kind of controversy.

Instead of being synonymous with Alan Bond and the late Laurie Connell, Perth was being characterised by the likes of Woodside, Wesfarmers, Rio Tinto and Chevron.

Several senior business people have told WA Business News they are dismayed that the Alinta story has revived stereotypes about reckless cowboys from the west playing fast and loose with the rules.

“There has been reputational damage not just for the company but for the Perth business community and that is very disappointing,” said another senior director.

Alinta was meant to be beyond this type of controversy: while its management had entrepreneurial flair and aggressively pursued growth, it was a solid, blue chip company run by members of Perth’s business elite.

John Poynton AM has received Australia Day honours and last June was named WA Citizen of The Year for his contribution to industry and commerce.

This newspaper ranked him – and Mr Browning, a regular church-goer with an undoubted commitment to business ethics – among WA’s ten most influential people.

Their reputations have counted for little over the past three weeks, as they have been crucified by just about every business commentator in the country.

Their principal sin was thinking they could look after the interests of Alinta shareholders by staying on the company’s board while also looking after themselves as members of the MBO group.

Messrs Poynton and Browning have resigned from Alinta’s board but that has done little to temper the condemnation.

Mr Poynton’s role in recruiting Alinta’s trusted long-time adviser Macquarie Bank as an adviser to the MBO group added to the controversy.

Some critics believe Mr Poynton was the wrong person to chair Alinta, which arguably needed a steady hand on the tiller rather than an inveterate dealmaker as chairman.

“He should do what he does well and that’s an investment banker,” said one business executive.

Amidst the feeding frenzy of criticism - fuelled in part because Alinta was the big business story during a quiet summer - Alinta’s directors have gained some high profile supporters.

Most notably, Business Council of Australia president and former Wesfarmers managing director Michael Chaney has been quoted as saying the conflicts of interest inherent in the proposed MBO could be managed.

Ironically, that has made Mr Chaney a target.

“He might be St Michael but he makes mistakes too,” said one company director.

Mr Chaney’s comments were described by another director as “inane”.

The subdued contribution of the Australian Institute of Company Directors – whose state president Fiona Harris is a non-executive director of Alinta – has also been questioned.

The AICD issued a position paper earlier this month on director’s responsibilities, but Alinta’s critics want the institute – or ASIC, or the ASX, or someone – to be specific in their criticism.

The Alinta episode has raised questions about the influence of Perth’s “directors’ club” and whether this affected the ability of independent directors to discharge their duties.

The accompanying table highlights the network around Mr Poynton and his partners at investment bank Azure Capital.

This influence is illustrated by the ‘blue chip’ membership of the University of WA Business School board, which is chaired by Azure managing director Mark Barnaba and includes Messrs Poynton, Browning and Akehurst, as well as Mr Poynton’s predecessor as Alinta chairman, Tony Howarth.

Other members of the UWA business school board include Multiplex managing director Andrew Roberts (Mr Poynton is also a director of Multiplex) and Clinical Cell Culture director and former Australian of the Year Fiona Wood (Mr Barnaba is also a director of 3C).

It also includes the likes of Wesfarmers chief Richard Goyder and Woodside boss Don Voelte who do not have professional links to Azure.

Mr Barnaba was chairman of Alinta’s short-lived infrastructure spin-off while Mr Poynton and Mr Browning sit together on the board of ship builder Austal.

In practice, the Azure team were not always central to these links.

For instance, Messrs Poynton and Akehurst were long-serving directors of UWA’s graduate school of management prior to Mr Barnaba becoming chair of the reconstituted business school.

In addition, it was Mr Howarth who recruited Mr Barnaba as Alinta Infrastructure chairman and Mr Akehurst as an Alinta director.

Mr Akehurst largely dropped out of the business scene after being dumped as Woodside managing director in 2003 but is now well and truly in the middle of the action.

He is renowned for his sharp intellect and has impeccable credentials for his board roles, as do all of the directors discussed above.

But is it more difficult for an independent director to challenge and even confront his or her board colleagues when they are closely associated?

Most commentators believe Alinta’s independent directors were found wanting when they first learned of the proposed management buy-out on November 30 last year.

It has been argued that the MBO proposal should have been disclosed immediately to the market (see article next page) and that Messrs Poynton and Browning should have stood down – or been forced to stand down - as soon as they agreed to work on the MBO proposal.

The independent directors didn’t take those steps, although they did establish protocols for dealing with the conflicts and appointed independent advisers.

Critics of the independent directors gloss over some of the challenges they faced.

The proposed MBO created a unique scenario with little precedent to guide them.

The MBO group comprised the company’s chairman and four top executives and immediately forcing them out would have disrupted the running of the business.

And while Perth may have a directors’ club, there is a surprisingly small group of company directors that dominate blue-chip boards in Sydney and Melbourne also.

Critics of the MBO group believe its members have abused their privileged position and must be sitting on ‘inside’ information that would allow them to earn higher profits than is currently projected.

How else could they justify offering a “significant premium” to existing shareholders, the critics ask rhetorically.

This misses the point about the MBO. It is designed to take advantage of low-cost debt to fund highly leveraged transactions.

The MBO group, no doubt employing the strategic thinking they are paid for, believes capital markets have changed fundamentally, making it possible for businesses to carry more debt than historically has been the case.

High debt, rather than any secret growth plans, explains the premium the MBO group plans to offer.

An MBO would also allow the new owners to take a longer-term view on value creation, without having to meet short-term earnings per share goals demanded by stockbrokers and investors.

The one line of criticism that most WA business people do not accept was that Messrs Poynton and Browning were in any way dishonest or simply trying to enrich themselves.

They agree that the MBO group was trying to pursue a win-win for shareholders and themselves but went about it the wrong way.

“It could have been a win-win but you can’t do it while you are on the board,” said a corporate lawyer.

“Independent chairman just shouldn’t participate in these transactions.”