Come back, all is forgiven

Shareholders want Paul Zahra to stay on at David Jones, writes Elizabeth Knight.

David Jones chairman Peter Mason, flanked by fellow director Steve Vamos, were wearing out their leather soles visiting the company's shareholders on Friday - but the message they were receiving from some was particularly unpalatable.

Large investors want David Jones chief executive Paul Zahra to be

re-signed to the top job.

Several are planning to vote against the company's remuneration report and the election of director Leigh Clapham at next Friday's annual meeting.

Whether the shareholders have the numbers to oust Clapham is unknown. It's probably line-ball.

But the remuneration report can be torpedoed with a 25 per cent vote against. Chances are we will witness strike one next Friday.

Twice a year the seventh floor of David Jones' flagship store in Elizabeth Street, Sydney, comes to life. The town's A-listers in fashion, the media and the glitterati file into the cavernous space to experience the glamorous theatre of models strutting the catwalk showcasing the department store's designers.

This week, a different crowd will fill the seventh floor, and a not-so-glamorous group of nine will adorn the stage in suits. The audience will be the company's shareholders. They will hear directors explain why Zahra is leaving halfway though implementing a strategy the board has approved and which is now gaining traction.

They will get the chance to ask the board why the corporate regulator, the Australian Securities and Investments Commission, is trawling through emails between the Mason and two directors, Vamos and Clapham, regarding the latter two buying shares in the days before the release of the company's quarterly sales - an announcement that was tagged by the company to the stock exchange as price-sensitive.

There won't be champagne and canapes flowing next Friday at 10.30am when the shareholder show starts.

But there might still be plenty of theatre. It will be the finale to a drama that has been playing out for a month since DJs unveiled its shock announcement that Zahra had given notice of his intention to resign.

The message the company conveyed was that Zahra decided to leave because he was tired of the long hours and the personal toll they exacted. But this didn't ring true, nor did the message from chairman Mason appear effusive in its gratitude: "The board records is appreciation of Paul's leadership, his fine contribution and the dedication he has shown over 15 years of service to David Jones ..."

The announcement also jarred with many of the comments made by Zahra in the preceding weeks. He told Fairfax Media he was looking forward to executing the strategy and couldn't see himself doing anything else but running the premium department store chain.

Stranger still was the company's own notice of meeting, which included the vote on granting Zahra a swag of performance rights he can cash in in 2016. This document was filed with the stock exchange four days before the Zahra "succession plan" was announced.

Within days of Zahra's departure announcement, cracks began to emerge in the board's carefully scripted version of events.

What emerged was the more-accurate account that Mason and a couple of directors had been at loggerheads with Zahra, who had become exasperated with what he believed was unnecessary interference in DJs' day-to-day affairs.

At a Monday board meeting on October 21, the chief executive issued an ultimatum. Late that afternoon, the press release was dispatched. Zahra had given notice of his intention to resign.

No replacement had been lined up but the headhunters had been chosen. Katie Lahey, the head of executive recruitment firm Korn/Ferry and a former DJs director, would spearhead the search.

The main flaw in Mason's decision was his misreading of investor support for Zahra. Perhaps he had been focusing on the smoke signals from analysts, most of which had been overtly critical of David Jones management.

To the extent he could be accused of meddling in the affairs of David Jones, he was not a chairman whose involvement extended to regular meetings with major investors.

Mason could well have been blindsided by the avalanche of support for Zahra.

By Friday, we will know whether Clapham will have the numbers to retain his seat. But in the end, the large investors have to choose between the board and management, and that is where the battle lines are drawn. History shows investors have little appetite for rocking board boats, particularly in companies where performance has met expectations.

But David Jones has some form on governance hiccups. The previous chief executive, Mark McInnes, left under a sexual-harassment cloud that raised plenty of questions about internal systems.

Zahra was parachuted into the top job, which resulted in the departure of a number of his direct reports.

Shareholders now face a choice between Zahra and the board - two members of which have displayed questionable judgment buying David Jones shares during a period when they had information that might have been price-sensitive.

Under normal circumstances, these acquisitions might have stayed under the radar. But with battle lines drawn, potential errors of judgment move to centre stage.

Vamos, Clapham and Mason argue the quarterly sales data is not price-sensitive, but some investors do not agree. The 6.6 per cent gain in David Jones' share price in response to the release of the sales number supports the shareholders' view.

Mason has wheeled out the big guns from legal giant Herbert Smith Freehills to deal with ASIC, the firm that boasts David Jones director Philippa Stone as one of its partners.