What’s in store for Zahra

It did not take long for David Jones’ new chairman Gordon Cairns to convince his CEO Paul Zahra to stay on, but they will have a lot on their plates if they are to improve profitability.

It’s remarkable how a bit of boardroom blood-letting can rejuvenate a burned-out executive. Less than five months ago, Paul Zahra flagged his retirement as chief executive of David Jones, citing exhaustion and stress. Today he committed himself to remaining with the department store group.

The ink had barely dried on the announcement today that former Lion Nathan chief executive and experienced non-executive Gordon Cairns had been appointed the new chairman of David Jones before the company announced Zahra would be staying on, with Cairns lavishing praise on his CEO.

It had become apparent some time ago – once chairman Peter Mason and two of his fellow David Jones directors had announced their resignations – that Zahra was having second thoughts about relinquishing his role, making the point that he hadn’t actually resigned despite announcing his intention to resign last October. David Jones had hired Korn Ferry to find his replacement but discontinued that search today.

There had been significant speculation that Zahra’s statement last year that he would resign because he was tired and wanted to rest, travel and then experience new challenges was prompted by tension between him and some of his directors over their interventions in what he considered to be management issues.

Last month’s purging of the David Jones board -- chairman Peter Mason and two other directors, Leigh Clapham and Steve Vamos announced their departures after becoming embroiled in a share-trading controversy -- may have resolved his concerns.

The removal of Mason in particular cleared a path for his retention. Mason, under extreme pressure from some of David Jones’ institutional shareholders to retain Zahra, had argued that no public company could ask a CEO to undo a resignation once it had been announced.

Cairns is a corporate veteran and a very experienced non-executive. (He was a Westpac director for nearly a decade and is the current chairman of Origin Energy). He’s also highly pragmatic and would have realised before he accepted the chairman’s role that his first task was to retain Zahra.

Quite apart from the traumas and destabilisation within the boardroom, Cairns will have to deal with the uninvited but persistent approaches from arch rival Myer for a merger of the two department store groups.

David Jones, having instantly dismissed the initial approach from Myer last year, reluctantly -- under pressure from its own shareholders -- agreed to give the proposal more serious consideration. It would be difficult to do that, and difficult to convince the market it could continue to chart an independent course if it rejects Myer again, without a permanent CEO in place.

It would also have been difficult to attract a new high-calibre CEO to replace Zahra while uncertainty about David Jones’ future remains.

Cairns would have appreciated the necessity of keeping Zahra, who is regarded as a talented retailer and who has the strong support of some of the company’s key shareholders, at least until the Myer proposal has been dealt with, one way or another. If the merger were agreed, Myer’s Bernie Brookes has put himself forward as its prospective CEO and would have the market’s support.

Cairns’ appointment was the first and most important board seat to fill in the boardroom renewal process being conducted by deputy chairman, Jane Harvey. It cleared the way for the immediate resignation today of Mason, who announced a month ago he would resign within three months after giving Harvey time to conduct her search. It didn’t take her that long.

Re-stocking the rest of the boardroom, settling the organisation and dealing with Myer are the obvious priorities for Cairns, while Zahra will need to keep implementing his strategic plan to reposition David Jones, which has lost about 10 per cent of its sales base over the past three years in what has been (and which remains) a very difficult period for department stores.

The group also faces a challenge as its financial services alliance with American Express changes form this year, roughly halving the profitability of that business for David Jones.

Previously Amex underwrote the profits of the alliance, which contributed almost $50 million to David Jones’ earnings before interest and tax last year.

From this year, David Jones will receive only its share of the alliance’s actual underlying earnings, so Zahra and his new chairman have a lot on their plates if they are to improve the venerable department store group’s profitability and strengthen its ability to either negotiate from a strong position with Myer -- or see off its proposal.