Fairfax opts for a Cowin circuit-breaker

Fairfax Media's decision to appoint Gina Rinehart's friend and nominee director Jack Cowin to its board is both shrewd and sensible at a number of levels.

The first, and most fundamental, is that Cowin is a widely-respected businessman with considerable experience of investing and being involved in media. He's well-qualified to be on the Fairfax board and brings an element of entrepreneurialism to what is largely, albeit not entirely, an otherwise quite conventional group of directors. (Trade Me founder Sam Morgan is the notable exception).

Fairfax chairman Roger Corbett made it very clear today that Cowin had been appointed on his own merits after he had come to know him during the period when Cowin acted as something of an intermediary for Rinehart during her so-far-unsuccessful quest for several Fairfax board seats.

"Neither Mr Cowin nor Fairfax Media consider his appointment as being indicative or connected to the potential outcomes of the company's inconclusive discussion with (Rinehart's) Hancock Prospecting Pty Ltd," Corbett said.

The Cowin appointment will appease those institutional shareholders that have been urging Fairfax to add more media expertise and diversity to its board as the company embarks on a radical, risky and painful – and unavoidable – transformation strategy. Cowin, a director of Ten Network since 1998, made his name and fortune by building the Competitive Foods fast foods empire.

While Fairfax was at pains to distance the appointment from the negotiations, now stalled, with Rinehart, it does send out some signals that strengthen its case for refusing her representation on the terms she has demanded.

Rinehart originally wanted three board seats, including the deputy chairman's role, with Cowin her nominee as the independent among them.

Apart from the extent of the representation she was seeking for her original 18.7 per cent shareholding, the sticking points for Fairfax were her refusal to agree to being bound by the media group's governance principles and her unwillingness to waive the right to sue her fellow directors.

That was an issue under the Fairfax directors' and officers' insurance policy, where the professional indemnity covers fall away if a director holding more than 15 per cent of the company's capital sues a fellow director.

Rinehart resolved that issue earlier this month when she sold down to just under 15 per cent of Fairfax's capital but she remains unwilling to accept Fairfax governance principles. A core principle is that day-to-day editorial matters and decisions are matters for the group's editors, not directors, which precludes directors from discussing company matters with editorial staff without first informing the chairman. Rinehart appears to want influence over Fairfax's editorial policies.

Corbett said today that Cowin had joined the board "on the same basis as all other directors", a clear inference that Cowin, with his media experience, had willingly agreed to observe those contentious (for Rinehart) governance principles.

That sends a signal to the market that those principles aren't unreasonable and another to Rinehart that they remain an immovable obstacle to her Fairfax ambitions. Corbett, having established his line-in-the-sand, is not the type to back down.

There don't appear to be any continuing negotiations between Fairfax and Rinehart, with the situation described as a "stalemate".

It is possible, however, that once Cowin has settled into the Fairfax boardroom and gained an understanding of the practical working of the media group and the interactions between the board and senior commercial and editorial management, he might be able to convince Rinehart that the governance principles aren't as limiting as she appears to believe and do act to protect the commercial value of the group's mastheads.

At the very least, having her friend within the Fairfax boardroom might help improve the relations between Fairfax and its biggest shareholder.

The problem for Rinehart is that unless she is prepared to endorse the governance principles and accept that she isn't going to be able to direct the group's editorial policies she's not going to be able to get into the Fairfax boardroom with any level of representation at all without making a full takeover offer.

If she were to lift her shareholding back towards the 20 per cent takeover threshold to strengthen her negotiating position the insurance issue would be reactivated and in any event there is unlikely to be any institutional support for an attempt to gain disproportionate influence over Fairfax's affairs in the absence of a takeover offer.

The Cowin appointment isn't exactly an olive branch – Corbett made that clear – but it could help defuse some of the tensions and suspicions in the relationship between Fairfax and Rinehart, distractions the group doesn't need as it embarks on a desperate attempt to reposition its metropolitan mastheads for a hoped-for digital future.