The Bill Beerworth interview

Michael Pascoe interviews Bill Beerworth, managing director of Beerworth Partners.
Michael Pascoe: There’s a lot of discussion about what directors should do but what should investors look for in directors on a board? What should they be looking for the board to do?

Bill Beerworth: I think it’s a very good point because there’s so much talk about the negative side of corporate governance and very little about the positive side of corporate governance, which is what we’re really talking about.

One of the companies that most impressed me years ago in terms of communications '” because I think, number one, if you’re a canny investor the first thing you should be looking for is what I would call honest and useful and quite direct communications '” was what is now Perpetual.

The old Perpetual before Graham Bradley and John Lamble got fully involved was a very sleepy ancient trust company and when I was a young solicitor it was nowhere. What happened after Lamble and Bradley took over '” they basically said, 'Hey we’re going to transform this company. It’s going to take some years. We’re going to do it in steps. We’re going to tell you what we’re going to do’.

The remarkable thing was they said, 'We will follow up and tell you what we have done and we’ll give ourselves a report card’. Now if you follow it through what they did over a period of some years was very interesting. What they did every six months was put out what I would call a report card. They said, 'This is what we said we would do and this is what we’ve done. We’ve achieved three of the five things we said we would do. We’re going to work harder on four or five and, by the way, we’re going to do these things’.

Over the period of time they did something quite remarkable. They actually formed a bond between themselves and the investment community because they were very genuinely prepared to communicate, and honestly communicate, about their failures, etc.

Now in an age of spin doctoring '” and you understand that much better than I do '” when a company is very honestly doing that, you can get the share price effect. It makes sense for the company and it makes sense for the investor, so I think the number one thing I would look for is what I would call honest communication.

How do you cut through the spin doctoring? You can usually do it if you read some of the company reports and understand what they’re doing. I think, number two, you can usually work out what the relationship is between board and management. I do believe quite strongly that it’s useful to have a separate chairman and separate chief executive, etc. That’s the Australian/English way, compared to the United States, as you know, but in that tension between the two and between the board, if you like, and management I think you can read something in the reports as to whether or not it’s actually happening.

You can usually find out certainly if it isn’t happening and if there is an over degree of power in the executive versus the board.

And what do you look for to see that? It’s a hard thing to read between the lines to find.

It is but I think if you read the news, you can’t as an investor of course just read annual reports, etc, and you can’t just rely on brokers. You clearly have to read the financial press. You can usually find out from the tone of the statements made by the chairman or occasionally by the board what’s really going on in the company, and I like to see an involvement by the chairman because it relates to my third point, which is strategy.

I like to see a board that’s very much involved in strategy. If you talk to a number of quite prominent directors in Australia, they’ll quite often tell you that the strategy isn’t really for the board; it’s for management to set the strategy '” the board tick off on it, but nonetheless for the board to be not too deeply involved.

I don’t agree with that at all. I think one of the primary roles of the board is strategy. Sure, the management puts up the plan, you have a weekend and you agree it, etc, but the board has to be deeply involved from the very top down of understanding the strategy; making sure the strategy is on track so, for example, on a couple of boards that I’m on I very much insist that we what I call upend the schedule for a few board meetings because you could easily spend half a day or a full day going through the compliance issues but the compliance issues are usually secondary and you can do them quickly but if you start with them and work your way through it, it will take the whole day.

Much better every now and then to stop, take a deep breath and say, 'Hey, what’s really important here? What are the external circumstances? Are we on track? What has changed? That form of discussion, I think, is extremely important and not all boards do it by any means. There is a strong view, quite often by management, that directors should discuss very much what’s between the railway tracks that are delivered to them in the board papers. I think it’s very helpful every now and then to throw the board papers over the side and say, 'Gentlemen, let’s really talk about what’s going on here’.

And again there, that’s what directors should do, but how does an investor suss out to see that they are doing it?

My view is I’ve given you the Perpetual example. That’s probably one of the best in history in Australia.

Is it also a rare example?

To be honest, yes. I think most is spin doctoring, as we both know. Most people have so many PR folks by whatever name, call it corporate relations and so on. It is sometimes difficult to see through what’s technically called bullshit, but I think if you carefully read the tea leaves, which is obviously what astute investors have to do, you can discover something about what’s really going on in the company. You need to read a lot. You need to read most of the announcements that come out. You need to see who’s making the announcement, what it’s about. The sorts of deals the company is doing.

One of the things you can insist when you go to meetings is instead of asking minor questions, ask about the strategy. Ask about how the board sees if it’s on track with the strategy. Where we’re going to be in five years time, and so on and so forth.

That could mean a whole new lease of life for AGMs, which now often verge on farce.

Yes, I think they have become a bit of a farce. It’s very unfortunate and by and large boards, even quite prominent boards take, as you know, a very closed attitude towards AGMs. They take the view, We shouldn’t be saying too much. We have to be cautious’. Lawyers make them cautious but there are some boards that I think are quite open. I think someone like Leighton, when you see Wally King respond very directly to questions and quite honestly probably over-responds as far as his PR folks are concerned, that’s the sort of person that’s telling what’s going on '” fairly frank about what he’s doing in most areas and the sharemarket tends to respond equally.

So investors should be looking for a chairman and a board who are not invisible? You do want to feel a presence?

I think that’s correct. It’s a question, to my mind anyway, of trying to look in the whites of their eyes, as it were, and find out whether they are telling you the truth. Are they telling you what’s really going on and, by the way, do they understand what’s really going on. Those are the big issues at the end of the day and if you work back through those wonderful reports from Warren Buffett, ultimately that’s what he’s on about: directness, openness, clear, simple strategy. Follow it, stick to it and report on it.

You’ve got a view that the governance crusade may have gone too far in some cases. You actually want to see the chairman and board more involved.

Very much so. I think the whole idea of corporate governance '” I’m a corporate lawyer, you know, as my background and I’m very strong on corporate governance, '” and there’s no question that the last couple of years, if you’re a director of a public company you’ve been through hell if you’ve taken the new rules very seriously.

I do think that we’ve gone too far. I’m not sure that we can go backwards, which is part of the problem. Everybody who says to you, 'Oh, we don’t believe in lock sticking the ASX, Sandy Easterbrook with his crowd and so on and so forth. They all say, 'Oh, no, no, we’re interested in reality, not lock sticking’.

It’s a big fib and that’s what worries me because at the end of the day some of the firms that tick the boxes '” and they do tick boxes '” for the major international investors, ultimately if you don’t get through 49 of the 50 boxes you’re not going to get investments and that’s very unfortunate because a lot of the box ticking isn’t real. It doesn’t relate to real values, real issues. There’s no way you can do that stuff on paper.

It’s an attempt but at the end of the day it, ultimately doesn’t work. You’re still going to have Alan Bonds out there. It’s the nature of the free enterprise process.

Should investors be able to expect directors to have a feeling for the culture of a company to not always walk in the front door, but to walk in the back door, sometimes across the factory floor, so to speak?

Absolutely. I agree with that very strongly and I think directors should be asking difficult questions. Management shouldn’t much like a number of the non-executive directors if they’re being effective. It doesn’t mean that you have to be deliberately a pain in the arse but you should be asking questions. I won’t mention the company, but in a particular case I’ve been extremely interested in IT, and what we’ve spent in certain areas. It’s very easy for management to gloss over that stuff, particularly with directors who aren’t terribly IT literate, but you have to press on, leaving aside duties and so on.

You have to press on until you get the right answers and that’s the sort of areas you say through the back door, areas that people don’t normally expect you to come in. That’s the way you’ve got to find out and you’ve got to ask the questions.

Seeing as the management is often very protective of not wanting non-executive directors to talk to people lower down the chain in the company '¦

Correct, yes.

An investor at an AGM should be prepared to ask directors if they do that?

I think it’s very important. There is a healthy tension that should be maintained in a company between management and the board. I think it’s critically important always to tell the CEO what you’re doing, but to make sure that the CEO gives you access to the next level of management.

You don’t want to go too far down or you’ll upset the wrong people, but certainly the senior management or the intermediate management should be accessible to directors and my way of handling that is to send an email to the CEO saying, 'I’d like to talk to so and so about X’.

Invariably the answer has to be, 'Well of course, but you do have to [write the CEO present] but the CEO knows what’s going on. I think it’s that that helps keep people on their toes. Another way of doing it of course is to ask.. again not to be difficult or a pain in the arse but if you’re not getting the answers you want, to send an email directly to a quite senior executive, a CFO for example and say look would you mind awfully explaining this or giving me a report on that but always copy the CEO so that no one can complain.

The chairman obviously has a much closer contact with those senior executives.

Yes.

To what extent do the boards rely upon the chairman to do a lot of what you’re talking about?

I think very much so. Certainly a good chairman does. People say the chairman runs the board. I think running the board troubles me slightly. If you’ve got good directors, they’re not going to be run, anyway; they’re going to be independent but they’re going to ask their own questions.

The boards typically expect a CEO and the chairman to have a reasonably close relationship and particularly for the chairman to understand the core issues of the company and what’s really going on. In one particular case we have a briefing just with the chairman without the CEO to discuss the core issues as we see them in the company and that’s in advance, quite often, of the board meeting so that you can be better prepared to ask questions.

You certainly expect complete directions from the chairman and if the chairman isn’t doing his job as in one case I can think of, the non-executive directors can make it pretty clear that they’re expecting better things or that perhaps it’s fine for him to move on. By the way, another interesting area I think for investors in this day and age is to look at what’s called the board matrix or the diversity of the board.

I think more and more we’re finding that boards are using external professional recruitment firms to bring in new directors. You don’t have to do that. I don’t think you necessarily have to have complete gender or faith diversity or something like that, but it is important to see that genuine new blood is coming into companies and a number of companies do that quite clearly and quite deliberately and one assumes that the new directors are making a worthwhile contribution, even if by reflecting a point of view of a particular segment of society.

Is it a danger signal for you to see a board of mates of people who serve together on various company boards?

Clearly. It’s been years since I’ve seen a cross linkage or a cross directorship analysis in Australia, but it’s still very considerable, as you know. Some of that has to do with competence. You’re dealing with a number of people at the top of some Australian companies who are enormously competent, but as we saw in the NAB situation it’s sometimes quite useful to, as you put it, break open the back door and let some sunshine in and that’s what really needs to happen across the board to Australian companies.

Some are becoming more and more active in trying to bring in those new directors and I think that’s a good thing for investors to see that happening and to ensure that it happens.