Richard Pratt's enduring lessons

PORTFOLIO POINT: Investors, business people and even families can learn from Richard Pratt’s experience.

The adventures of Richard Pratt, the gravely ill paper and packaging billionaire behind Visy group, have lessons for everyone – investors, business people '¦ even members of a family. I have chosen Eureka Report as the place to relate some of my experiences with the Pratt family because it is not as public as our sister publication Business Spectator.

Almost 20 years ago I attended a dinner in a large marquee and was sitting next to Jeanne Pratt, who married Richard in 1959 and stayed with him for the next half century. Richard was outside the marquee and looked worried. Jeanne was even more concerned and she asked me whether I could explain what I thought was happening to Richard’s business affairs.

Jeanne Pratt had always been kept up to date on most of the major financial decisions in the Pratt family but during the 1980s Richard had close links with a series of entrepreneurs in the Carlton football club, led by John Elliott. They told him that making cardboard boxes was “boring” and that he should leverage his cash flow and invest in other, more exciting areas.

Richard bought control of a company called Battery, which owned the insurance companies known as Occidental and Regal. It was sheer lunacy for the man then becoming known as “the cardboard king”. Richard knew nothing about insurance and by 1990 Australia had plunged into a recession, with high interest rates. Battery was an unmitigated disaster and Richard, had large borrowings both in his box business and his plunge into Battery. He was probably technically insolvent.

In the past decade a great many companies have strayed from their prime area of expertise into new businesses, which are now struggling. Similarly, a great many investors in recent times, like Pratt in the 1980s, became over leveraged during a time of unlimited credit.

One of the most important lessons that has come out of the Pratt business experience is simple: Don’t invest in companies you don’t understand. During the recent boom many investors bought shares in companies without understanding the forces that would drive the company to success or failure. And, of course, when you add the dangers of high gearing your are left very exposed in a downturn.

While Richard confided most major business milestones to Jeanne around 1990, she knew something very serious was wrong and she feared he had not fully explained the gravity of the problems at that time. Accordingly, she wanted my views. One of the great difficulties of families is that when a crisis gets deep, the person in control of the money often does not tell their spouse or partner the full details. About the same time as my dinner discussion with Jeanne there were many crises.

In contrast to Pratt, the remarkable entrepreneur Robert Holmes a Court (who died in 1990 aged 53) confided everything to his wife Janet and her strength helped get him through.

Nevertheless, Richard’s pragmatism in recognising the problem and making the necessary decisions was the key to his survival. Interestingly, about the same time, media mogul Rupert Murdoch was also technically insolvent and he too had to tackle the mountains of debt he had taken into the 1990 recession. Almost two decades on and people are now having the same experiences.

To get through the current crisis many business people and investors will need to be very strong and pragmatic. In 2009, most investors have followed the example of Robert Holmes a Court and involved their spouses in the very difficult decisions. But in the early days of 2008 not everyone confided in their spouse, which has caused significant later problems – especially if the spouse kept spending.

Both Murdoch and Pratt inherited relatively small businesses that had been started by their fathers. They built them up via a deep and personal understanding of the business and a preparedness to take on the majors with a more innovative and lower-cost operation.

Nothing gave Richard Pratt more delight than to outmanoeuvre the then giant Australian Paper Manufacturers, which later became Amcor. In the years that followed 1990, Jeanne Pratt made sure she understood the key decisions Richard was making. And this role is going to make her pivotal when Richard dies.

I am sure she played a role in making sure that each of the children had an area where they had space and were not subjected to Richard’s very strong will. And so Anthony went off to the US to develop the Pratt business in the land of the stars and stripes. Richard was on the phone a lot, but Anthony had to make his own way and was able to move from an awkward youngster to a person with many of his father’s traits.

Pratt’s daughter Heloise and her husband Alex Waislitz were allowed to develop an investment business, Thorney Holdings, which has key stakes in many stockmarket-listed companies. Heloise also looked after the Pratt Foundation. Fiona and her husband Raphael Geminder manage the packaging business. That left Richard to concentrate on the Australian operation. It is very difficult for a family business to cater for the next generation and so many fail.

Rupert Murdoch tried hard and is clearly grooming son James to be his successor but, perhaps because he was operating a public company, he wasn’t able to segment the business among his children.

There can be no excuse for Richard Pratt’s Amcor mistake. A civil investigation by the ACCC led to Pratt admitting his cardboard box business had operated a price-fixing cartel with Amcor and he was fined $36 million, the biggest-ever corporate fine in Australia.

But one of his weaknesses was that he had a traditional view about business and making profits. He did not move with the times, which saw a whole set of new anti-cartel rules developed. Yet in a strange way the ACCC’s original action *(not the criminal one, which remains before the courts) was probably the best thing that could have happened to the Australian Visy business.

Prior to the crisis, Richard had around him a series of loyal lieutenants who had helped him build Visy to its dominant force. They weren’t exactly yes men, but they were of a particular mould that reflected past years.

The ACCC crisis forced him to change the management and the culture, which will now make it much easier for Anthony Pratt when he returns to Australia. John Murphy will continue to manage Visy, reporting to Anthony as co-chairman, and Anthony will own the US business so will spend a lot of time over there, giving Murphy room to move.

Each of the other children will own their business, and will be shareholders in the Australian box business. Jeanne Pratt will be co-chairman with Anthony and if there is a dispute Jeanne will adjudicate. She will be very capable of doing that. Richard and Jeanne thought long and hard on how best to pass his business down to their family. And whether their formula succeeds or fails will be determined by the events of next few years, but it has been very cleverly crafted and has an excellent chance of success.

Whether you own a business of merely have a share portfolio, it is important to realise you are mortal and must make it straightforward for your family to manage the estate. If you don’t do it well, and you have substantial wealth, the family is likely to end up in the courts.

Finally, as happens in so many marriages, one of the partners has an extra-marital affair. In the Pratt case, it was Richard. In almost any other marriage, the wife would have demanded a divorce, which would have blown the business apart. But with incredible courage and far-sightedness, Jeanne Pratt stayed with Richard and so the business was not broken up and was able to be handed on to each of her children.

(The girlfriend Shari Lea-Hitchcock and their child, Paula, were looked after along the way but didn’t share in the big prize. Paula will receive a large payment in 2016 when she turns 18.)

Jeanne Pratt is a unique individual and her example is one that many should consider, particularly when large sums of money are involved. Although Richard Pratt worked long hours he also loved entertaining and family dinners on Sunday evenings were an important part of his life.

Richard Pratt will be sadly missed.

* The Commonwealth Director of Public Prosecutions (DPP) withdrew all criminal charges against Richard Pratt on Monday April 27 2009.