Defenceless DJs' dangerous board games

The gutting of the David Jones board that was announced late yesterday has two major implications. The institutional campaign to force the board to retain its retiring chief executive, Paul Zahra, has ousted the retailer’s chairman and two other non-executives, and the Myer proposal to merge the two department stores is still alive.

The immediate resignation of Steve Vamos, to be followed by the departures of Leigh Clapham and the embattled chairman Peter Mason within three months, ends a two-month battle by institutional supporters of Zahra to impose their will on the company.

The institutions seized on the disclosure of share purchases by Vamos and Clapham three days before David Jones announced its first-quarter sales on November 1 last year. The purchases were made with the prior approval of Mason.

The campaign against Mason and his fellow directors received a major boost when Myer confirmed it had tabled a merger proposal with David Jones the day before the purchases were made.

Despite the Australian Securities and Investments Commission investigating the purchases and determining that, whether or not they represented good practice, they didn’t constitute insider trading, the revelation of the Myer approach and its instant rejection gave the institutional lobby the leverage it needed to blow open the boardroom.

A surviving non-executive, Jane Harvey, has been appointed deputy chairman and charged with finding three new non-executive directors. A key issue for her – and for Mason before he departs – is whether they should defy the institutions and appoint a successor to Zahra before the board is remade.

There have been suggestions that Zahra’s original decision to resign – which he said was because he was tired and wanted to rest, travel and then experience new challenges – had more to do with his relationship with the board than the personal reasons he put forward. It was that belief that he could be convinced to rescind the resignation that appears to have fuelled the campaign against the board.

As Peter Mason has said, however, no public company board would ask a chief executive to undo a resignation once it had been announced.

Apart from the question mark over Zahra’s energy and commitment to the role, if the real issue was his relationship with the board (or some members of it) it would be a gross breach of corporate governance principles to allow the executive to prevail over the board, one amplified by the fact of the resignations of the non-executives.

The turmoil within the boardroom and the tensions between the board and some institutional shareholders – and, perhaps, the retiring chief executive – has reopened a door which Mason had previously slammed shut on Myer’s proposed all-shares “merger of equals”.

Mason has defended the timing of the purchases of shares by Vamos and Clapham on the basis that the approach from Myer had been summarily rejected virtually as soon as it was received.

It is quite remarkable, however, that a serious approach from a serious party that could generate very substantial synergies and strategic benefits was essentially dismissed within 24 hours.

While there would clearly have been a discussion about relative values – the proposed terms don’t reflect current share price relativities – and the risks of trying to merge two businesses with overlapping footprints and a long history of intense rivalry, the proposal, given the structural threats to the department store operators, was surely worthy of at least some substantial discussion and thought.

The prospect of a new and more open-minded boardroom and the now-demonstrated force of David Jones’ institutional shareholders might encourage Myer to table a revised proposal in the belief that it might receive more serious consideration.

The destabilisation of the company might also, of course, attract interest from other parties. There is a long history of private equity fascination with retailers. And, of course, Solomon Lew and former David Jones chief executive Mark McInnes are watching, cashed-up, on the sidelines.

Until the new board and a permanent chief executive are in place, David Jones will remain acutely vulnerable.