A lifeline for Pacific Brands

Most companies have a disaster plan to handle a crisis that involves human lives. Few have a disaster plan to cater for an event that occurs because decisions of the board, top management and bankers become so publicly vilified that the value of the company's main assets is threatened. That's the crisis facing Pacific Brands, and solving it will not be easy.

When a management/ board disasters occur, boards need to forget past event justifications and post mortems – they can come later – but get down to the task of saving the company. In this case, removing the CEO may be required.

Rightly or wrongly the Pacific Brand's CEO has become the number one corporate villain in Australia because she took a big pay rise while planning to sack workers in the middle of a recession. The company's life blood, its brands, are being ridiculed in newspapers and on television and radio and the board that made the decisions that led to this crisis must be in a state of shock.

Saving Pacific Brands starts by examining the balance sheet. Pacific Brands shareholders funds stand at $1.1 billion but the biggest asset, intangibles, totals $1.3 billion – $200 million more than shareholders funds. The Pacific Brands banks are owed $900 million and for them to be paid, those Pacific Brands intangible assets, which are effectively brands or the value of the brands' cash flow , must have substantial value.

So in a Pacific Brands-style disaster the first action is to determine whether the crisis is having a substantial effect on sales and brand value. If there is no noticeable effect on sales in the next few weeks, Pacific Brands might be able to tough it out.

However, that's a dangerous course because one of the strengths of Pacific Brands has been its ability to convince the likes of Sarah Murdoch, Pat Rafter, Michael Clarke and others put their names and reputations behind its key brand, Bonds. The promotional strategy worked, but now the Bonds brand has been tarnished, so in future brand promotion of any sort let alone high profile personalities will be much harder. Without that promotion, generic branded products win.

If sales are currently being affected by the crisis, every Pacific Brands alarm bell needs to be ringing. Among the strategies that need to be considered will be replacing the tarnished CEO with a marketing oriented up-front CEO who brings back Australian manufacturing for the icon brands – Bonds and Yakka (the hosiery brands are not icons, so aren't a problem).

My guess is that there will be outdated legacy manufacturing work practices, so to salvage something from the mess a way might be found to re-start manufacturing with modern work practices. A new CEO bringing back Australian manufacturing could create an enormous upsurge in brand goodwill and value. Rafter, Clarke and Murdoch might be scrambling to sign up again. The revenue impacts of saving the brand are many times greater than the imagined cost reductions of shifting manufacturing to China.

And all boards can learn from what happened to the Pacific Brands directors – James Mackenzie (chairman) Andrew Cummins, Dominique Fisher and Max Ould were well intentioned people who made a combination of decisions that went horribly wrong.

They paid their new CEO Sue Morphet what they believed to be the market price in accordance with her agreement. But they did not link her payments to the damage she was about to inflict on the value of Pacific Brands by closing local manufacturing. The whole exercise smells of appeasing the banks, who clearly had no idea that the labour shedding could affect the value of the key assets they need in order to be repaid.

The Pacific disaster underlines the fact that the climate for management and director pay rates has changed. All companies need to watch their CEO salaries when planning major retrenchments – but if they have taken government assistance and derive their income from iconic brands, then get ready for the backlash because it could kill the brands and the business.