John Borghetti thrown under the Virgin bus as Bryan ducks the issue

Cartoon: John Spooner.

Elizabeth Bryan is in the midst of a CEO search for IAG, which is a key role for any board, but what happens next is subject to some unfortunately nonsensical debate, especially when things go badly.

That’s when some directors duck their heads and say it wasn’t our fault — that was management’s job.

Think Virgin, Westpac and the former CBA board as just three recent high-profile examples.

In the latter cases thankfully both directors and executives lost their jobs in the wake of their respective snafus, which is a fair acceptance of the reality that corporate governance is a shared responsibility.

Ultimately it is the board’s responsibility to govern the company and set in place procedures to ensure the right flags are waved when the business is going off track and have the courage to make the decisions required to set them straight.

Sometimes you wonder what directors actually think they are doing, because if it’s just up to the CEO then once that decision is made they might as well take a break and do something else for the next five years before the new person is chosen.

Shareholders could pocket the million of dollars in saved directors fees and insurance premiums.

In reality of course the board is responsible for setting strategy, reviewing strategy, monitoring performance and importantly representing shareholder interests.

Bryan confided this week in a Four Corners interview: “In the end, a CEO runs the operations of a company and not a board. And what the board can do if they don’t like the way the CEO is running the company is to change the CEO.”

Later she added: “I have put five hard years into trying to mould the second airline so it was a stable competitor …”

The two statements are in obvious conflict, which highlights the point.

As to former Virgin chief John Borghetti, she said he was the face of the airline but “he did not build a good enough business”.

That is obviously the reality, which explains why the company is in the midst of a voluntary administration, having been acquired by Bain.

Borghetti gold-plated the business, creating a great airline, but ran out of time to recoup the costs faced with a fearsome behemoth in Qantas as a competitor.

But he did so with the support, backing and encouragement of Bryan and her board colleagues.

Bryan ran a dysfunctional board with five shareholders controlling 92 per cent of the company. Among them were airlines with directly competing aims, being Singapore and Etihad, who controlled 40 per cent but were chasing customers to fly to Europe on different sides of the world.

That made governance impossible, but was not a surprise to Bryan who took the job with her eyes open.

Unfortunately the company was a listed vehicle, not privatised as she once floated, and as chair for five years sorting out the shareholders was surely a key role.

Having backed Borghetti with a 26 per cent pay rise in 2016, 12 months after Bryan becoming chair in 2015, she obviously liked his plans and as chair would presumably have led a board which would review and second-guess his decisions. These included selling 30 per cent of Velocity in 2014 to raise $335m before spending $700m five years later to buy it back.

Boards also tend to consider major capital-raising issues like debt, equity and fixed interest issues, all of which helped lift Virgin’s debt to over $7bn, due in part to an extra $2bn in debt caused by an accounting change forcing aircraft leases on to the books.

In the end Borghetti flagged his retirement in June 2018 with Paul Scurrah taking his place in March 2019.

Bryan is a highly regarded director, which means she would understand any failings at the company were collective problems for which she as chair must assume ultimate responsibility.

This comes right down to the belated decision to call in the corporate undertakers on April 21 this year, by which time the coronavirus lockdown was in force and cash reserves had dwindled to $30m, leaving little room to move.

Just who gets the top job at IAG remains to be seen, with CFO Nick Hawkins nominated as outgoing boss Peter Harmer’s deputy, with Australian boss Mark Milliner also in the running.

Harmer announced his departure in April.

The board is looking offshore for potential competitors and the good news for Bryan is at least IAG is the leader in a cosy general insurance duopoly with natural perils the main danger.

John Borghetti is an unlikely starter for the job.

Lion’s share

Lion Australia boss Stuart Irvine is hoping politics doesn’t get in the way of his $600m sale of parent company Kirin’s Lion Dairy and Drinks business to China’s Mengniu Dairy.

The November deal was cleared by the Australian Competition & Consumer Commission in February, and according to the talk the Foreign Investment Review Board has also given the sale the go-ahead with some conditions.

The report is sitting on Treasurer Josh Frydenberg’s desk awaiting his tick.

The Chinese state-backed Mengniu is already a big owner of Australian dairy, having spent $1.5bn to buy infant formula group Bellamy’s last year.

That deal was cleared by Frydenberg after he imposed conditions including retaining an Australian head office for 10 years, investing $12m in Australian dairy and maintaining a majority of Australian directors.

The conditions were considered strict at the time but the political heat against China has ramped up considerably since then in the wake of COVID-19.

Frydenberg has a tricky balancing act about when to announce any deal.

The Chinese government is already talking about boycotts on Australian barley and beef and there are worries about iron ore exports.

Chinese steel mills are looking to investments in west Africa to balance Australia’s iron ore dominance.

The tonnages are just 60 million tonnes in a 1.1 billion tonne market, but the strategy is clear — to diversify sources of supply, just as Japan did in the 1970s.

Indeed it‘s what every manufacturer in the world is trying to do right now to diversify out of China.

All this makes it difficult for Frydenberg to unveil his decision to sell the producer of Pura Milk, Big M and Berri fruit juices to a Chinese company.

In this case Mengniu already controls Burra Foods in Victoria’s Gippsland region and the combined company would buy around 25 per cent of Gippsland milk.

Lion’s Irvine has been trying to sell his dairy assets for 18 months or more, so blocking the sale would be a blow to his Japanese parent company Kirin and local drinks boss Kathy Karabatsas.

Frydenberg has recently floated a significant tightening of foreign investment rules to increase the weight of security considerations in the approval process.

On the surface this should not affect a dairy deal, but this is politics, not economics for Frydenberg, who has a few other issues on his plate.