Friday, September 01, 2006

A question of governance

I have resisted blogging about matters relating to my day job here - but recent trevails over Telstra and its privatisation raise some interesting questions of corporate governance.

The first is about the meaning of "the company". On the Friday of the announcement of T3 we saw the Telstra communications chief repeat some comments about regulation, we saw the CEO back the executive and we saw the Chair say the views expressed were not those of the company. Now the latter of these means the company as constituted by the Board, and I trust the Chair did not purport to speak on behalf of the Board without some clarity from the whole Board as to their view. If that is the case, the CEO expressed a view contrary to the view of the Board of which he is a member. In normal circumstances this would be a terminal position for one or the other.

But not in the case of Telstra. One of the key assumptions of corporate governance is that Boards are responsible to shareholders, but because the average shareholder owns such a small slice it is not in the cost/benefit payoff to any shareholder to put the effort in to address Board issues. Usually though there are big institutional shareholders or proprietorial shareholders who do take that interest. In the case of Telstra there are none.

Telstra does have one majority shareholder, but that majority shareholder wants to sell because its leader (the PM) has a philosophical belief that Government shouldn't run businesses. We know the PM looked at a number of options for "intervention" but didn't. Why? Fundamentally because the overriding philosophical belief takes presedence over the expediency of sorting out the management issue.

Will the situation change post T3? Unfortunately not, as no institution will want to be "overweight" this stock. Worse, the other governance saving grace is the possibility of takeover. But that discipline doesn't apply to Telstra because of shareholding restrictions.

The contrast to how the 6% shareholder of Telecom NZ reacted when they received bad results is stark. There the investor basically demanded the head of the Chair or the CEO - he got the chair's.

So the privatisation of Telstra perhaps leaves us in the embarassing position that no one is running the show.

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