Transcript QANTAS AGM 2007

Stephen Mayne: Hi, Margaret. Just a very quick initial question. There's been press reports that we agreed to pay our advisers in the APA deal, Carnegie Wylie and UBS, a $96 million success fee. Can you confirm that that's correct?

Chairperson Margaret Jackson: We actually paid - the cost to Qantas of APA was about $20 million.

Stephen Mayne: But if it had proceeded, had we contracted to pay success fees of $96 million, as was reported in the press?

Margaret Jackson: It is hypothetical because it didn't succeed. However, as is normal in transactions of that nature, the arrangement with your adviser is that there is a base fee that is paid and in the event of the transaction actually happening, there is another payment which is a very, very small proportion. However, it is hypothetical because it wasn't paid.

Stephen Mayne: Because I think the key issue with the APA thing is information flows and managing conflicts and I always find with governance the more information that is on the table, the better everyone can understand the situation, so the best governance situation would be to explain and have explained to the board and even explain now that you had contracts out there that would have given $96 million in success fees to your advisers. So, in effect they had a massive conflict of interest as well. In urging you to accept the bid, they would have got an extra $96 million in their pocket.

Now, it goes to the question of the information flows that the shareholders got. You have already mentioned - you have taken us through the sequence of 15 September, we had an upgrade of 25 to 30 per cent, mid-February 30 to 40 per cent, mid-March upper level of that, so $940 million, and then we got to the end of the bid in early May and you still hadn't changed the record on the $940 million, so the public record at the end of May when the bid closed was that it would be at the upper level of $940 million and you then came in at $1.079 million.

Now, the figure you have used in your address today talks about $1.032 million. I think that's because you backed out the $47 million from the price fixing from the cartel thing, so the like-on-like figures are that you actually came in with 1.079, so here we were, just seven weeks before the end of the financial year, and you are urging shareholders to recommend a takeover and your profit, when you are 85 per cent into the year, your profit actually came in $129 million more than what you were telling your shareholders.

Now, I know that people like Terry McCrann have been writing that ASIC should be having an inquiry into this, as to whether Qantas or someone at Qantas deliberately withheld information. This is a material amount of money. You should have known by early May that you were going to blow your public forecasts by such a huge amount of money, so I would have thought the very first thing the Qantas board would do would be have an internal investigation into the information flows coming up to you from management.

So, you should have been outraged as directors that management had so poorly advised you and you had so poorly advised your shareholders, yet all we hear from you is sort of support and comforting words for management. What has the board done to find out why you were so badly advised by management, who had massive conflicts of interest, who were about to make a fortune themselves based on these completely inadequate forecasts?

And one of the reasons I have asked about the success fees for Carnegie Wylie was I read in the press, just a snippet in the press, that Peter Gregg, our CFO, had been on a fishing trip in Europe somewhere after the bid with Mark Carnegie and they were old friends or something. So I think, you know, you've got the CFO who is about to make a fortune, you've got the adviser who is about to make a fortune, you've got those two who are apparently old mates, they are both going on fishing trips together, and you have a board being advised by both of them who have completely misled their shareholders and given completely inaccurate information.

I have spoken to big bank directors who have said, "I can't believe any of those directors are left". How on earth can you all sit up there, having done this? I mean the honourable thing would be progressively for you to all move on and actually bring in some directors who understand that you should be outraged about this.

So that's why I think we need some answers on: Is the $96 million contracted figure correct? Is the fact of the relationship and the fishing trips and the connections between the adviser and the CFO correct? And what exact inquiries has the board undertaken to find out why you were given such bad information that you then passed on to us so that we were all making decisions that were massively misinformed?

Margaret Jackson: Thank you, Stephen. In the annual report on page 201, we actually disclosed to the shareholders that the contingent fee arrangement with its advisers and valuers as a result of the bid made by APA to acquire Qantas, that if the bid had been successful Qantas would have been required to pay contingent fees of approximately $98 million, so it was $98 million, not 96. That was page 201, sorry, of the target statement, so we did actually disclose the arrangements. As I said, it is a normal arrangement with advisers and at the time we thought we had chosen the best advisers that we could and we did grill our advisers.

In terms of conflict of interest, the procedures and protocols that Qantas put in place to deal with the bid, when we first were approached by the consortium, we looked at other protocols and procedures that had been set up by other companies and we didn't think that they were robust enough, so the procedures and protocols that we actually established to deal with the conflicts were very rigorous.

The first point was that the executive directors were not involved in the decision-making process. We put in place protocols that no meetings with the executives were able to occur with APA during the bid period without either a director being present - a director, any director - and, in the case of Geoff and Peter, without me being present. We also required a representative of our lawyers to be present in all of those meetings and that's a pretty rigorous protocol and it was actually complied with.

The protocols that we established have now been used by companies all over the world as the sort of leading protocols for dealing with conflicts of interest. We took our responsibility very seriously and we did try to protect the interests of shareholders through that period. Indeed, the takeovers panel contacted me in about, I think early March, to compliment us on the detail of our protocols and in fact the takeovers panel then endorsed the majority of the protocols that we had established in their guiding principles for companies if they are subject to a takeover.

So, in terms of managing conflicts of interest we took the matter very seriously. We think we had very rigorous standards and procedures. We did not allow the consortium to talk to the executives and management on the employment arrangements that they were contemplating if the bid had been successful until after the non-executive directors had decided what the recommendation to shareholders would be.

As I said in my earlier comments, as the share price of Qantas had remained within three to four dollars and in fact in July last year the share price of Qantas was about $3.20, so when a bid came along in the mid-fives, it was about 60 per cent higher at the time that the bid was put than the share price had been in the previous six months. As I also said, Stephen, aviation is an industry where predicting the outcome is relatively difficult because the results can increase and can decrease rapidly and I think in the last year the fact that we upgraded three times in a short period of time indicated the strength that the results had increased in the period.

The results for the months of May and June were extraordinarily strong, so the bid failed early in May and at that point we believed that the guidance that had been made to the market at the upper point of the 40 per cent range was where the statistics indicated, but May/June came through very, very strongly. In terms of the bid failing, we thought our job primarily was to get on with the future of Qantas and the board and management acted very quickly after the shareholders voted; one, to secure the management team and to settle everybody down and, two, to rapidly make as many decisions as possible because we had been in a hiatus period for about four or five months.

Yes, it is true that the board relied on information that was made available to it by management, but we also had KPMG auditing the information that was provided or reviewing the information that was provided to the board that was provided to the independent expert and that formed the basis of the information in the bidder's statement. So, we did have a very rigorous process, but the business performed fantastically during the year. Thank you. Peter would like to say something.

Peter Gregg: Like many people, I do things for relaxation. Some people play golf, some people go jogging, some people do a lot of other things. I like to fish and I regularly fish when I can get the opportunity. Yes, I did go fishing with Mark Carnegie a number of months after the deal collapsed, but I also do a lot of other things with Mark Carnegie like aiding him in some of the charities he is involved with for indigenous children and for children in overseas depressed countries, so I make no apologies of going fishing, but I do reject any insinuation that I did something that was illegal or under cover in this process. I don't think you have any right to make that suggestion.

Stephen Mayne: Thanks, chairman. I would like to speak in favour of Leigh Clifford's appointment to the board and as a director. Leigh has a terrific record at
Rio Tinto over a long period of time. I think it is somewhat ironic that Leigh is becoming the chairman of the most patriotic and symbolic company for Australia, when my only criticism of Leigh is that when he was the CEO of Rio Tinto I think there is an argument that Rio Tinto didn't treat Australia very well. Rio Tinto, before Leigh got appointed to the top job, had six of their eight (indistinct) Australian, now they're down to two out of eight. Half the board were Australian when he took over; now we are down to just two out of 16, and you've got the situation of Rio Tinto sitting over there in London running $100 billion of Australian assets.

If ever there was a company which should be based in Australia, it is Rio Tinto, and I would hope that Leigh's answer would be "I tried to persuade all my English directors that this company should be based in Australia but they resisted me", because it is quite an insult, I think, that this company draws so much wealth out of this nation and doesn't deign to base itself here and I hope that you will be a little bit more patriotic in the way you steer Qantas forward given that, despite your terrific record, I think that is a bit disappointing from a national interest point of view and now I just think it is a tremendous irony.

Just one specific question: What is the pay arrangement for your chairmanship? I know Margaret got $592,000 last year. Obviously you have negotiated an arrangement. Can you tell the shareholders what precisely the arrangement is?

Margaret Jackson: Thank you. This is a meeting of Qantas, not a meeting of Rio and I think Leigh is an outstanding Australian that's very excited about taking on the role of chairman of Qantas and is very much aware of the role of Qantas in Australia and the importance of Qantas, not only in Australia but around the world. Leigh's remuneration will be the same as my current remuneration and his future remuneration will be subject to increases, as they have been in the past. So, it is on the public record. He didn't negotiate a better deal than I did, he is just taking the same pay that I have been receiving.

Stephen Mayne: Chairman, I noticed you were quoted in the weekend press talking about - I think Mike was going to retire but you encouraged him to stay on for another year. He is our longest-serving director since 1992. I would suggest that someone who has been I think head of the Prime Minister and Cabinet under a Labor government would be a very suitable long-term director for Qantas going forward if there is about to be a change of government. Qantas has a terrific record of influencing government to our advantage, which we all appreciate, so I think if there is a changing of the guard we need to boost our credentials on that score.

I have got one specific question for Mike: Were you satisfied as an independent director representing us shareholders with the information flows that came to you from management during the APA takeover process?

Margaret Jackson: Thank you, Stephen. Yes, we think Mike's been a terrific director and we are pleased that he has agreed to stay on for one more year. The recommendation to put the bid to the shareholders had the unanimous support of the board. It was a unanimous decision, so Mike agreed, as did all of the directors, that that offer should be put.

Stephen Mayne: Margaret, you are into your last hour as chairman of Qantas. General Cosgrove is going forward. I think it is reasonable that it is General Cosgrove who is facing election here. Some of us will cast our votes based on what he says and you are not facing election, General Cosgrove is facing election. I think it has been disappointing that you have rejected all those TWU resolutions they put up which did go to good governance and should have been put to the shareholders for a vote. I think it is another disappointing step if you are gagging directors. We are not asking you to talk about the solidarity of the decision at the time, we are asking the directors to look back at that situation and that process and to offer us their thoughts on what many of us think was an inadequate and disappointing process.

So, General Cosgrove can talk about wars and cyclones; he should be big enough that he can actually address the shareholders and I again ask the question: With the benefit of hindsight, was he satisfied with the information flows from management during the bid process?

Margaret Jackson: Stephen, you raised the issue in relation to the proposals put by the TWU. The things that were requested of the company secretary to be put before the meeting were not valid things that can be dealt with at an AGM from a legal point of view. A lot of the things that they requested are already covered under the Corporations Law, under general law and under the Qantas Sale Act and also we have on the website of Qantas procedures and protocols if there is another bid that occurs in the future, so it was not a legal document that we could actually put before a meeting and the company secretary replied to the TWU. If you all want to hear from Peter, he is a big guy and he is standing for election and he is probably going to say that we all learnt a lesson. What are you going to say, Peter?

As I said, life is full of lessons and you can always look back and say we could have done things differently, we could have done things better and learned from the lessons, but at the time I think collectively, with the best information that was made available, with the best information management had and with the best information the board had, we tried to make the best decisions that we could at the time.

Stephen Mayne: Just a quick comment, Chair. Look, I think it is an important point that you have put this to the vote. I think Qantas deserves credit for that. A similar situation at Telstra, they didn't do it, and they used the exemption from the listing rule, did not put Sol Trujillo's performance shares to the vote and that was one of the reasons why their remuneration report was voted down because their institutions were sending them a message that they want to be asked about this sort of stuff. I was interested that none of the institutions like Balanced Equity and UBS that complained about the bid process voted against any of the independent directors who are up for election, so clearly they have decided that, despite their misgivings, there was a vote of confidence and I think that this meeting should understand that whilst there were governance issues around the bid, Qantas is performing extremely well financially and the management team that have delivered that should be retained, so the principle of what you are doing I think is absolutely appropriate.

I just ask that you disclose the proxies before we actually push our buttons on this one because I would be very interested to see if any of the institutions have taken issue and I am also a bit confused as to how us little people on the floor are getting rolled in with all the billions of dollars worth of proxies that have been lodged 48 hours ago and put up into one vote within seconds. So, can we see the proxies first before we get the different figures from us pushing our buttons. Thank you.

Margaret Jackson: Thank you, Stephen. CGI, who gives advice to a lot of institutions on how they should cast their votes, actually said that they supported the logic in providing meaningful retention incentives to the two executive directors, especially having regard to the key issue of CEO succession, so I think a number of institutions followed that. And, as you said, we thought it was good governance to actually bring it before the meeting even though it is not required. A number of people that are here present today have already lodged their proxies, so they are in these numbers as well. So, we will display on the board what the proxies in favour and against are. So there you are.

Stephen Mayne: Thanks, Chairman. Just the last point for the day. Once again, companies making record profits, no problems with the executives getting good bonuses and incentives. I was just curious with some comments that John Borghetti made after an American Chamber of Commerce lunch in late August when he said that Geoff, Peter and John, the top three, had to "abandon" their day jobs because they were working on the takeover of the airline and the quote was: "Senior management, Geoff, Peter and me, a lot of time was taken up with this thing. It went for about six months. You couldn't get your job done. You had to sort of abandon it."

And then he said that other executives carried the company through. Now, if these guys weren't doing their day job, I am just curious as to why Geoff got a $2.9 million cash bonus, John got a $1.38 million cash bonus and Peter got a $1.5 million cash bonus, because the KPI during the APA bid process, which apparently took up all of their time over the six months, was getting appropriate information to the appropriate people and that was the key thing that didn't happen. So, I was just curious if they didn't actually really do the work but delivered our record and incredibly surprising profit, then why it was they were getting these huge cash bonuses when they didn't actually do what they were meant to do during the bid process which was provide accurate timely information?

Margaret Jackson: The cash plan structure, which is set out in the remuneration report, is based on profit before tax and the profit before tax, before adjustments, then comes up with an index. Now, this year, because the results were incredibly strong, the number that was applied was 186 per cent and then the individual performance factor of each individual against their personal requirements was then applied to that number.

So, yes, it is true that a lot of time was taken up by our executives with dealing with the APA bid, but in each year, almost every year for the last seven years, there's been some external event that's occurred that hastaken a large amount of management time. Management has also attended to the business of running the airline because, as many people have said today, the airline is in fantastic shape and, when the bid failed, management rolled up their sleeves and got on with making rapid decisions to make Qantas even better and stronger for the future.

Also if you look at the level of incentives that have been paid at Qantas over the years, as I said, at risk is certainly at risk at Qantas with two out of the last seven years no bonuses, a couple of years where it was paid at target, one year where it was paid below target and one year when it was paid equal to target, so at risk is certainly at risk.


Go here for a full chronological list of edited AGM transcripts available from the past decade of shareholder activism.

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