No time for strategy on busy boards, says Telstra chair John Mullen

Telstra chairman warns of governance overload leaving directors with little time for strategy.

Telstra chairman John Mullen. Picture: Hollie Adams

Telstra chairman John Mullen says the tall poppy syndrome that tars successful Australian business people will only get worse in an age of increasing populism, and he fears increasing corporate governance demands are leaving boards with too little time to discuss strategy.

In a wide-ranging interview with The Australian, Mr Mullen — who is also chairman of the logistics giant Toll Holdings — acknowledged that while executive salaries were still too high, there was too little appreciation of the sacrifices executives made to get to the top in business.

“If you want to go to the Olympics, you have to make the sacrifices. It is not much different in business. I missed every single school engagement of my kids during my executive career,’’ said Mr Mullen, who was formerly the chief executive of rail and ports operator Asciano.

“There is such a resentment towards people who get to the top in business compared to in sport, entertainment and other pursuits. There is a stigma when a business person does that. And I think it is going to get worse.”

The retiring chair of the Australian Institute of Company Directors, Elizabeth Proust, claimed last week there was a grave misunderstanding across the broader community about the role of directors on for-profit and not-for-profit boards. She said talented business people would shun serving on listed company boards as the risks of being a director increased sharply following the Hayne royal commission.

Mr Mullen said the governance obligations at the listed Telstra and Toll — a wholly owned subsidiary of Japan Post — were like “chalk and cheese”.

“I could do without the countless hours of governance … that is what I am paid for at Telstra so I am not complaining. But it is getting worse. I know the reaction to any more bad behaviour is more legislation, more rules and oversight. Yet we are so heavily governed already,’’ he said.

“As a board you have to constantly fight to fit business strategy in because you have all these other things to do.

“I do think it is going to be more difficult to get the quality directors (on boards in the future).”

Mr Mullen acknowledged boards had not been focused enough in recent times on how their companies conducted business, as has been highlighted across the financial services sector by the Hayne royal commission.  “We need to put ourselves in the customer’s shoes more to ensure we do the right thing by them,’’ he said.

But he said the current focus of boards on “doing the right thing” on issues such as executive remuneration was “unbelievable” and underappreciated.

“We agonise over remuneration reports and always ask, ‘have we done the right thing?’. Boards take it extraordinarily seriously,’’ he said, noting that the countless hours spent on the issue could distract the board from being alert to what Telstra’s competitors were doing in the marketplace.

The telco received a first strike against its remuneration report at its annual general meeting in October, in part because of the bonus paid to chief executive Andy Penn in a year when profits and the share price went backwards and dividends were cut.

But Mr Mullen reiterated the comments he made at the AGM that investors needed to recognise that working hard in difficult times needed some reward.

“The one thing that has been the most difficult for me and my board colleagues is the assumption that if the share price is down, that equates to bad performance. It is such a superficial judgment,’’ he said, noting he had recently received a letter from a Telstra investor making the same assertion.

“To say they get zero comp in a year when they work their backsides off, that is demotivating and illogical. If you look at the drivers of the share price, the biggest one by far is the NBN — we are losing 50 per cent of our net profit. Andy and the team are paid to deal with the march of technology, new entrants and other strategic issues. But when the government nationalises half your business and you lose half your profit, how is that their fault as well?”

Telstra has confirmed over the past year that it will lose the $3 billion in annual earnings it would have previously banked from its wholesale broadband and fixed-line businesses once the NBN rollout is completed.

The critics argue Telstra took far too long to adjust its cost base to take account of the new reality of the post-NBN world, yet Mr Mullen reckons the government changed the rules of the game mid-match.

He argues that two years ago Telstra thought the NBN pricing would be such that it could still make a 20 per cent EBITDA margin on its fixed-line broadband business.

“Now it is a loss-making business for us. We can’t have a new strategy every day that the government changes the rules,’’ he says.

He and Mr Penn also argue that the $10bn compensation payment made by the federal government to cover the earnings loss was inadequate.

Mr Penn has seen his remuneration drop by nearly 50 per cent over the past two years yet in 2018 he still received bonuses on top of his base salary of $2.4m, to be paid a total of $4.5m.

Three big proxy firms — Ownership Matters, ISS and CGI Glass Lews — all recommended their clients vote against the Telstra remuneration report.

The 62 per cent “no” vote at the AGM was one of the worst ever registered by an ASX50 company.

At the time Mark Delaney, the chief investment officer of the $140bn Australian Super — which voted against the report — said it was “primarily interested in appropriate pay for performance outcomes”.

Ownership Matters principal Dean Paatsch also noted that the Telstra pay scheme initially awarded Mr Penn more than 90 per cent of his target bonus. But he is modestly paid compared to the last two Telstra CEOs: in 2008, American Sol Trujillo received $13.4m, while David Thodey pocketed $14.5m in 2015.