KGB Interview: Richard Goyder

Wesfarmers chief executive and B20 chair Richard Goyder tells Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

-- why the B20 is so important

-- how governments can help plug the infrastructure spending gap

-- why the private sector taking less risk isn’t necessarily a bad thing

-- growing the global wealth pie is still the best way to address inequality

-- Wesfarmers is on the lookout for buying opportunities

-- how he thinks shareholders would react to a fall in ROE on the back of an acquisition

Alan Kohler: Richard, welcome to Business Spectator. Thanks for joining us.

Richard Goyder: Thanks. Nice to be with you.

AK: Now, you get the impression with the G20 that it’s all happening anyway. They’ve got 900 actions, which we’ll get to in a moment, that are going to increase global GDP by 2 per cent, so why do they B20 to give them a shove up?

Goyder: Alan, I think B20’s been really important, I think, because governments can’t do this on their own. Governments post the crisis, you know, monetary policy’s pretty well exhausted, there’s no room to move. Fiscal policy’s almost done. So, business is a big part of driving economic growth and I think everyone agrees the world hasn’t got enough growth. There aren’t enough jobs. There’s something like more than 200 million people around the world unemployed at the moment and around 300 million youth either not in jobs or not studying. So, there is a significant issue.

So, business is part of a solution and it’s appropriate that business works closely with the G20 and, in our case, with the Australian government to formulate policies. And, you know, I think the policy recommendations we’ve got do go hand-in-hand with where the Prime Minister and the Treasurer want to take the G20 this year under Australia’s chairmanship as well.

And I think it’s really important that business has a voice and we’ve brought a whole bunch of people, you know, 400-500 business leaders from around the world into the process this year and the voice from business is pretty loud and pretty consistent.

AK: Now, there are apparently 900 actions that are going to increase, as I said, GDP by 2 per cent, but isn’t it the case that countries basically look after their own national interest? I mean either they were going to do those things anyway or they’re not going to do it because it’s not in their interests, but so if it is in each country’s interest, they will do those things anyway?

Goyder: Yeah. I think that’s right and certainly in all of these things countries need to go back and implement them in their own country and, if you think about it, you know, let’s assume – and it’s not the case -- but let’s assume all G20 countries are democracies and any one year there are probably half a dozen that are facing elections, there are always issues they’ve got in implementing things in any case.

But I think what the 2 per cent has done is galvanise. What can we do specifically that will give above trend growth over five years? And I think anything that gets implemented that otherwise wasn’t going to be as a positive and if it brings forward policy implementation, that’s not a bad thing as well. And the key thing to me will be how this is now monitored and measured because some things will be easily monitored and measured and other things will be difficult.

Stephen Bartholomeusz: Richard, as you said earlier, monetary policy and fiscal policy in most of the larger economies within the G20 has been exhausted.

RG: Yeah.

SB: So, where does the funding come to kick start this massive investment in infrastructure?

RG: Yeah. So Stephen, there’s a big infrastructure spending gap by 2030 of $10 to $20 trillion or so. It’s huge. And there’s a significant gap now, in fact. Jack Lew said at the Infrastructure Roundtable on Friday that in the US they’ve identified $1 trillion of need right now. So, I actually think the Australian policy on this is pretty good policy, which is government gets involved early stage to take out some of the initial risk, so the private sector can then invest once a project is investable and then governments can get out and recycle. So, I think that’s one particular way forward. The other one is in too many projects and too many countries, money’s not flowing and that’s as a consequence of some of the financial regulations that have been put in place post the crisis, so that’s got to be sorted out as well. So, there’s a bunch of things that needs to be done to solve the issue, but it’s worth doing because infrastructure spending brings about economic growth and jobs and productivity improvements down the track, so it’s actually a big prize I reckon if we can get it going.

Robert Gottliebsen: Do you think we’re going to have an infrastructure boom globally?

Goyder: I think it’s one of the things, Robert, governments can help facilitate that can give a pretty quick shot into the economy and I think we’re going to. I mean there’s no doubt that the Australian government’s focused on infrastructure and based on Secretary Lew’s comments on the weekend and the German Finance Minister’s and others, I think there’s a very strong focus on infrastructure.

And the developing countries, you know, there was a Finance Minister from Indonesia made an impassioned speech, if you like, about the need for the policies to be implemented, so that the infrastructure in Indonesia can get up and running. And I mean you’ve got to try and drive from Jakarta airport into the city to understand the need for that in a country like Indonesia.

So, I think if we’re thinking about ways where the global economy can grow at a faster rate, infrastructure’s going to be a big part of that.

SB: Within both the B20 and the G20 Finance Ministers’ outcomes there’s this kind of applause for the financial sector reforms, so more capital, more liquidity and all the rest and yet that’s the opposite of expansionary, isn’t it? At a time when you want the global economy to expand, you’re actually constraining the capacity of the financial system to provide the funding.

Goyder: Yeah. And that’s been our concern. And we’ve had SMEs and countries say that’s causing them grief and business people around the world are saying that. But what we’re saying is understanding the political imperative of getting the regulations put in place, what we’ve said is let’s get them in as soon as we possibly can, so that we can then understand any unforeseen consequences.

AK: But is it just a political imperative or is it actually an imperative full stop, given what occurred in 2008?

RG: Yeah. It’s a good question. Well, there’s no doubt it’s a political imperative. People expect governments to do it and they don’t want to see failures like Lehman Brothers and others, so there’s no doubt there’s a political imperative and there was a need to act. I don’t think anyone would, you know, disagree with that. And these regulations are well met. And again business isn’t saying unwind it all. You know, that’s totally unrealistic. And the banking sector’s been particularly pragmatic on this. They’re basically saying this has to be done because our credibility actually depends on getting it done, but then there are impacts, effects that aren’t what was meant to happen and we need to then look at those and unwind them.

AK: Because the 2 per cent growth target from G20 is really 2 per cent above what would otherwise have happened, right?

Goyder: Yes.

AK: So, it’s not actually some sort of absolute target. It’s a relative one. And, in fact, given the contraction that Stephen’s talking about in the financial sector that still has to occur, and is going to occur, in a sense it could be seen as just offsetting what’s going to happen.

Goyder: Yeah. Well, Alan, the economic environment that the G20 leaders will be staring into when they come together in Brisbane in November is weaker than when Australia assumed the chair of the G20 late last year, so you could argue that. You know, I would argue that therefore the need to reform in countries and across borders, particularly on trade, is now greater than ever because otherwise what’s going to kick start these economies. And so, my great hope is that that will galvanise the leaders into some action and I’m sure the Prime Minister will be working hard between now and then to get leaders onto the same page that the Australian government’s on.

Gottliebsen: Do you think one of the problems is that large, public companies globally are much more risk averse than they were, say, five, six, seven years ago?

Goyder: Yeah, understandably, Robert. I think, you know, lots of people in companies, on boards and companies themselves went through difficult periods when things that we took for granted, such as access to debt disappeared for a period of time, so I think, everyone says businesses are sitting on strong balance sheets, that’s right and that’s a good thing and companies aren’t easily going to give that up I think, so potentially companies are more risk averse. Governor Stevens has made that comment about Australia, but you know that’s not necessarily a bad thing as long as the environment’s there that businesses can actually on and invest and take appropriate, calculated risks in the future.

Gottliebsen: Look, it looks as though if governments can’t fill the gap, it’s got to be a private sector and the private sector, for whatever reason, is just not as risk-taking as it was.

RG: As I say, I think that’s right, but you know markets are pretty unrelenting on requiring companies to grow and to look for growth avenues and I think we’ll find that people do take more growth steps in the years ahead, on the basis that the regulatory environment is clear and relatively certain dnd an expectation there’s no big shocks around the corner. I think you’ll see a pickup in activity and I think also you’ll see businesses like ours invest in their own businesses pretty heavily to grow them as well because that’s a safer way of growing.

SB: One of the interesting things about the B20 process is you get to meet very senior businesspeople from all over the world, all the world’s more important economies. Were there wide variances in mindset and confidence between people from the various regions?

RG: No, amazingly the other way, Stephen. What has really struck me has been the uniformity of views. So, there hasn’t been a wide a range of views in the areas we focused on anyway, on infrastructure, trade, financing for growth and human capital. We really quickly got to a common set of views on this and there’s been a really strong, as I say, uniformity of views from business leaders around the world.

SB: Did you expect that?

Goyder: No, I didn’t. In fact, I thought get a whole bunch of CEOs in the room and it’s going to be like getting a whole lot of, you know, bureaucrats in a room who are negotiating some of these things, but it hasn’t been like that and that’s been quite gratifying actually.

AK: But what have they been saying about inequality, which is clearly a major problem in the world? Do they want to do something about it and if so, what?

Goyder: Yeah. I think, Alan, everyone sees it as a risk and as something that does need to be dealt with and we would argue best dealt with by growing economies, growing the pies and then making sure that the way money is distributed…

AK: I would have thought that idea has been discredited really because I mean that’s what everyone was supposed to be doing is growing the pie and now you grow the pie, but it just helped the people at the top.

Goyder: There’s a wide range of views between governments on this matter and that’ll play itself out I’m sure a bit in Brisbane in November, but I think everyone accepts it’s a serious issue and not just the G20. I think the World Economic Forum and others are saying we’ve somehow got to address this. And I think again eventually it’s going to have to be addressed at a national and an enterprise level, but it’s not going away.

AK: In fact, do you get the sense -- I mean this is possibly the subject of a whole other interview -- but do you get the sense that everyone’s out of ideas, right? I mean the whole idea that’s dominated the paradigm of economic thought for -- I don’t know -- 30 or 40 years has been that if you grow the pie and grow the economy and it’ll work out okay, but actually it didn’t work out okay, so now what?

Goyder: I think you could argue in Australia the economic growth over the last 20 years has on balance helped most people, not all. Certainly the disadvantaged are probably more disadvantaged. So, I think Australia’s been okay, but you’re right, around the world it hasn’t worked out that way. I mean, it’s pretty obvious when you think about it, it’s about who’s got access to capital, who’s got the capacity to take risks and make investments, and that’s where the wealth is flowing.

AK: Which is Thomas Piketty’s thesis.

Goyder: Yeah. Yeah, that’s right. So, you’re right, it’s probably a subject for another day. What’s the way through it? That’s a challenge, but one’s thing for sure, it’s not by shrinking the pie because if you reduce the pie, then that’s going to create more issues I think.

SB: And do we take too narrow a view of that because we tend to look within individual economies? Because if you look at the last 20 years, the transfer of capital and knowledge and everything, and the improvement in living standards in the developing world has been profound.

Goyder: Yeah. So, look at China, for example. We take a Western view on it, which is serious. But if you look at China, then they would argue that economic growth has been a terrific outcome for the people in that country or for many people in that country.

Gottliebsen: What are we going to do with our labour restrictions in whether it be Australia or be Europe, perhaps less so in the US, which keep people in jobs maybe, but make it very hard for young people to get jobs?

Goyder: Yeah well, one of the themes of the B20 recommendations, Robert, is the flexibility, and labour is a key part of that. And that’s not just in terms of some of the old ways we think about labour, but it’s also across borders. I had a conversation with a businessperson from Silicon Valley who’d established a business there and he wanted to employ a couple of thousand technical people to work in his digital business and would happily have gone to get them from Spain and done it online and the rules and regulations won’t let him do that.

So, there’s a bunch of things that we can do I think to unravel that and create more flexibility across borders, but again it’s one of these issues that goes to country sovereign border issues and they are politically hot issues, but the world will be a better place if there’s more flexibility. But I’d hasten to add that doesn’t mean that what we’re saying is more flexibility means you pay people less. You know, it goes to Alan’s point. And actually flexibility’s got to lead to a situation where wealth is better distributed among the people who need it.

AK: Can we just talk about Wesfarmers for a minute?

Goyder: Yeah.

AK: Everyone’s assuming you’re going to make a big takeover offer fairly soon, so first question is, is that right?

Goyder: Well, they can assume all they like, Alan, but you know we’re a very financially disciplined organisation. We’re investing heavily in our businesses. You know, we look to manage the portfolio. We’ve sold our insurance business and if an opportunity comes up, we’ll take it, but we’ll be disciplined about it and patient.

AK: Okay. Alright, but are you looking for opportunities?

Goyder: Yes, we are.

AK: You’re not sitting there waiting for the opportunity to come through the door?

Goyder: No. No, we look because we’ve got a balance sheet that has the capacity to do things. We’ve got we think the human resource capacity which is a really important part of our ability to bring businesses into the group and create value. So, certainly we’ve got the capacity.

AK: How much capacity do you have?

Goyder: Oh, as much as we want, I think. My view on that is if the right opportunity comes along and we need the support of our shareholders and financiers, then they will do it for the right opportunity.

AK: Could you double the size of Wesfarmers?

Goyder: Oh, I mean… We could do anything potentially, but…

AK: That’s a yes.

RG: Well, yeah, but I mean that’s a really hypothetical yes; there aren’t too many companies around, so probably not actually, but we don’t rule anything out if it makes sense, but then you’ve got to be able to fund it and you’ve got to have the human resource capacity.

SB: To put that a different way, to move the dial at Wesfarmers, so something other than an incremental deal, to move the dial, what’s the minimum size of a deal you need to do? Is it a $5 billion a year or $10 billion dollar a year deal?

Goyder: Oh, well yeah, we think we can move the dial just by investing the money we own in our existing businesses over time.

SB: You won’t move it much though.

Goyder: Yeah well, I mean there’s still…

AK: We don’t believe that, actually.

RG: I know that. I know you don’t. There’s still a way to go in Coles and Target and other businesses… Bunnings. Yeah. To move the dial now, you know, we’ve got 1.1 million shares on issue, so you can do the sums, to get a reasonable uplift and we don’t look at EPS but the market does, so if you want a decent uplift in EPS and long run TSR, then it has to be of a size, But, you know, we’ll still do small things like the Pac Brands workwear thing because it adds, you know, to a business we’ve got and we’ll still look at those things.

SB: Do you feel the pressure to do something because the big gains on the Coles portfolio are behind you and to the rate of growth from that has to taper?

RG: Yeah. I can absolutely stare you in the eyes and say I don’t feel the pressure from doing it. And actually the more people who say you guys should be doing something, the more pressure I don’t feel. Because I’ve been around long enough to know that the euphoria of announcing a deal lasts for about a week and the consequences of doing a bad deal last for a lifetime. And so, I don’t.

I don’t think our shareholders expect us to do stupid things either. You know, we’ve got a lot of retail shareholders. They love the dividend flow. If we’ve got excess money and we give it back to them, they’re quite happy with that and if we find a need, we’ll come asking for it again.

Gottliebsen: Just taking you up on “stupid things”… When you bought Coles, you told your shareholders that there would be a fall in equity returns for a year or two. Could you do that today? Whatever the purchase might be, could you say to your shareholders look this is a long-term view and return on our equity will fall for the next two or three years?

Goyder: I think it’s much harder now, Robert, and certainly it would be hard if we said to them your dividend’s going to fall. I think that’d be…

Gottliebsen: And that’s what happened with Coles, isn’t it?

Goyder: Well, it did, unfortunately.

Gottliebsen: Yes.

Goyder: So, return on equity’s one thing, but if shareholders felt in the near term there was going to be a price to pay, then they’d I think struggle to support it.  I think we’re in a different world.

Gottliebsen: And yet you transformed the company with that takeover?

Goyder: Yeah. Yeah.

Gottliebsen: It was well worth the reduction in dividend.

Goyder: Yeah, it was. It’s been good. And, you know, we said at the time give us five years. It’s harder I think to go to markets these days and say give us five years.

Gottliebsen: Isn’t that tragic?

RG: Yeah well, maybe we’ll try it again one day.

AK: Hey, what do you think of the hospitals business?

Goyder: Oh, we like the sector. Alan, we look at things that we think have got, you know, unstoppable momentum, so energy, water, food, aged care and health would all fall into that category, but then we put a financial sieve in place and, you know, can we make investment that’s going to work. And so, we’ve looked at businesses in that sector. We just haven’t been able to come up with a valuation that makes sense from our point of view.

AK: Thanks for joining us, Richard.

Goyder: Thank you.