I was not expecting to see a buff guy wearing naught but a pair of board shorts when walking into the Wesfarmers AGM. No, it wasn’t Richard Goyder taking Perth’s casualisation of business wear to a new level but a model parading Target’s summer range. With a shareholder base that are also existing or potential customers, the opportunity for a cross sale is too good to miss!
Wesfarmers’ singular focus on achieving shareholder value was why I was here. Being an unabashed fan of the Wesfarmers strategic planning discipline (drawn from John Argenti’s Corporate Planning process devised in the sixties) I wanted to see if the methodology that has assisted in giving Wesfarmers shareholders a 19.5% CAGR return since 1984, will have currency going forward.
Wesfarmers strategic planning process starts with a simple brace of questions – who is Wesfarmers here for and what do they want? The answer is prominently displayed on the inside cover of the 2016 Shareholder Review, “to provide a satisfactory return for shareholders”. Comparing this to, say, Telstra’s purpose which is to “to create a brilliant connected future for everyone”, it is diametrically dour. However, the knife point efficiency of plain speak has an inherent beauty. It is very difficult to misinterpret a purpose that is so simple and clear. The only subjective element is the definition of satisfactory and that is set by the board based as a return over the cost of capital (legend has it that satisfactory meant 18% return on capital up until central banks anxiously started severing interest rates post GFC). With single minded clarity, all of Wesfarmers management know what they are employed to do. Reinforcing the written words, an essential element of Wesfarmers’ primary objective is that it must be measurable which means management reward can simply aligned.
I was particularly curious as to whether contemporary corporate responsibility was placing pressure on Wesfarmers’ potentially unfashionable focus on shareholder return. I didn’t have to wait long for the questions from the AGM floor asking about carbon emissions and the health of workers (black lung linked to Wesfarmers Coal assets) and the plight of dairy farmers (in relation to primary producers supplying Coles with milk). On multiple occasions, the line of questioning drew appreciation, evidenced by bursts of applause, from the roughly 1000 in attendance. These shareholders sanctioned and acknowledged wealth creation but were clearly indicating that they want Wesfarmers to be a good corporate as well.
A second line of questioning, on remuneration, added another viewpoint. The omnipresent AGM groupies, Australian Shareholders Association (ASA), expressed their displeasure at the increasing relevance of soft (read non-financial) measures in Executive remuneration. This was seemingly counter to the prevailing mood in the room but every Yin has its Yang. Allaying the ASA concerns was the disclosure that Richard Goyder had been admonished with a 40% reduction in remuneration due to a failure to meet the 2012 LTI financial targets as at vesting date. That is – hard targets are still king – for the moment.
It was Board Director Vanessa Wallace, who for me summed up the increasing complexity facing Boards during her address to the shareholders. Ms Wallace observed that mindful leadership and long term multi stakeholder governance was essential to steer Wesfarmers through heightened societal expectations and complexities. She observed the challenge when external loud voices influence the operating environment and even more so when changes need to happen quickly. Interestingly, with an organization so dominant in Australian retail and with the previously mentioned overlap between customer and shareholder, “external” is also often “internal”.
Ms Wallace in effect used her address to augment the Wesfarmers objective, satisfactory shareholder return, with three additional adjectives – mindful, sustainable and long term – plus an additional beneficiary – the broader community.
Subjectivity has no bounds when it comes to judging the value of one community interest over another. Shutting a coal mine will ostensibly stop that coal from contributing to climate change but it will also impact the viability of an Australian community and the mine’s workers. Ultimately, when that coal mine is profitable and providing satisfactory shareholder returns (and not negatively impacting longer term/sustainable returns) , the Board would be hard pressed to say they were acting in the best interests of the company to do anything other than continue to run this business well (or sell it for fair value). Objectivity wins the day.
At the end of the day, satisfactory shareholder return is why Wesfarmers exists. However, the Board is conscious that shareholder return will fall if societal expectations are ignored. The Board’s role is one of delicate optimization with the weighting given to stakeholder/community interest gaining.
The question remains whether “satisfactory return” is being slowly redefined by the shareholder to include qualitive conditions relating to being a good corporate. Time will tell.
Mark is a Director and Principal Consultant of Pivotal Point Strategic Directions and regularly assist organisations to define their Purpose. Mark is also an insignificant holder of Wesfarmers shares.