ELIZABETH KNIGHT June 23, 2012
The Fairfax printing plant at Tullamarine. Photo: Michele Mossop
With the mining magnate destined to gain seats in the Fairfax boardroom, shareholders will want to know what effect that will have on the company's fortunes.
NERVES are frayed around the Fairfax board table. The quest to find a compromise with the company's largest shareholder, Gina Rinehart, is both testing and unconventional.
Despite the critical nature of the deal, Fairfax chairman Roger Corbett can't simply pick up the phone and call Rinehart. One uses email to request a conversation with the Perth iron ore billionaire. When she is ready, she calls Corbett.
The intensity of the negotiations notwithstanding, Rinehart has spoken to Corbett at most three times. On these occasions she has been reserved but amiable.
Normally dealings are done Fairfax chairman to Rinehart factotum.
There was another round of talks this week as Rinehart pressed her case for three board seats and restated her unwillingness to sign anything that would prevent her from influencing the company's editorial direction. The board offered some small concessions and Rinehart said she would think about it.
This seems to be the pattern of negotiation. She sits in Perth distanced from the travails of the toing and froing while the directors engage in regular hook-ups with each other, workshopping and receiving updates.
The board is resigned to inviting Rinehart into the tent as long as she meets their conditions. Given she has 19 per cent of the stock this seems fair.
Meanwhile, Corbett and Fairfax chief executive Greg Hywood have been pounding the pavement - between the offices of Fairfax's other large shareholders. Two of Rinehart's executives from Hancock Prospecting were this week following the same trail.
In the commercial matter of Rinehart v the Fairfax board the lofty issue of editorial interference comes a poor second.
The board is fighting its case for shareholder support using well-tested arguments. If Rinehart wants control she has to pay for it. Institutional shareholders are keenly aware that if they give too much away to Rinehart, she wins control by stealth - and they receive no premium for their shares.
Whether she would run the company better is a matter for conjecture - they would rather have (Rinehart's) money in the hand.
She already has ''negative control'' in that she can block any other player from mounting a successful bid. Even from outside the boardroom, she has become the gatekeeper.
The principles were stated concisely yesterday by the chairman of the corporate regulator, Greg Medcraft. He did not mention Rinehart or Fairfax by name, but given the extensive public debate this week, he didn't need to.
''We notice that there is activity in the sharemarket where some players are currently seeking to aggressively seek control of businesses without paying a premium for other investors' shares,'' Medcraft said.
The Australian Securities and Investments Commission was ''concerned about such activity and its consequence for market integrity and good corporate governance, and we are watching these developments closely'', he said.
''It's very clear that we have a takeovers law, and we want to make sure that both the letter and the spirit of that law is respected.''
Meanwhile, another group of Fairfax's constituents - its readers and advertisers - care very much about the editorial content. They hold the real key to the company's commercial future; without them there is no business.
From the scattered crumbs of information tossed by Rinehart's friends, such as burger king Jack Cowin and advertising entrepreneur John Singleton, and her refusal to agree to a charter of editorial independence, the consensus is that Rinehart's main goal in seeking control of Fairfax is to influence its editorial content.
If making money by increasing the value of the shares she has bought in Fairfax was the aim of the exercise, one would need to question her commercial acumen.
But if having editorial control over the views of Fairfax's influential mastheads such as The Sydney Morning Herald, The Age and The Australian Financial Review could further her mining interests, then in the short term at least, the money spent on buying shares could be viewed as a rather wise investment.
It's a cheap insurance policy in the event any Australian government wants to gain public support for increased action on initiatives she opposes such as the mining tax, the carbon tax, the cut in the diesel fuel rebate - and the list goes on.
It makes sense for Rinehart but what about the rest of the Fairfax shareholders?
A former Fairfax chief executive, David Kirk, has a strong opinion that delivering biased views to the newspaper's audiences is not good for business.
When he was chief executive from 2005 to 2008, ''The board did not sign a charter for editorial independence but it had a critical view that editorial independence was in the best interest of the business,'' Kirk says.
''All businesses have brand value and they try and stand for something in people's minds,'' he says.
The appeal of an independent press goes beyond just readers, according to Kirk.
''Advertisers will flee if they think the tone is not what they want to see associated with their brand,'' he says.
It's a view shared by Communications Minister Stephen Conroy.
''She's entitled to [board] representation, but what she's not entitled to do is trash the brand for all the other shareholders,'' Conroy told ABC radio this week.
Rinehart should be aware that the readership of The Age and The Sydney Morning Herald had believed in and supported the charter over many years, he said.
''And if she was to directly interfere and breach that charter, it would actually lead to a crisis of confidence - among the readership and if the readership deserted, then the share price for every shareholder would decline. And that's not in the interests of all of the other shareholders,'' he said.
''If Rinehart wants to turn it into the Mining Gazette, well Ms Rinehart's entitled to, but the shareholders, the other 80 per cent, the 80 per cent of shareholders who will see the share price fall, need to know that that's what's behind it.''
Treasurer Wayne Swan, whose scathing views on billionaires such as Rinehart and their tinkering in national affairs are well heralded, was more blunt. Swan said Rinehart's bid for board seats could undermine democracy.
A former deputy chairman, John B. Fairfax, who sat on the board from 1979 to 1987 and from 2007 to 2010, said he had never signed a charter for editorial independence, but added that the directors did not get involved in editorial matters.
''When Warwick Fairfax was chairman there was more inclination to take an interest in what the Herald was saying,'' Fairfax says of his father's cousin who chaired the company from 1930 until 1977 and remained on the board until his death in 1987.
He recalls the board discussing an election in the presence of the editor. ''There were certainly occasions when The Sydney Morning Herald supported Labor, which was contrary to the politics of board members, so their influence was not profound,'' he says.
None of a number of former Fairfax directors polled by BusinessDay this week suggested that serious editorial interference was ever countenanced.
According to Dean Paatsch, founder of Ownership Matters, the issue comes down to mutual economic benefit. Rinehart's main agenda could suit her broader mining interests but this may not be commercially favourable for the remainder of the Fairfax shareholders who want the media company's financial fortunes to improve.
Undoubtedly she would like to see her investment in Fairfax make money. It could well be that Rinehart takes the view that her editorial influence might sell more newspapers.
The question then arises whether at 19 per cent of the shares, she is democratically entitled to control of Fairfax.
Few would contest that she is owed at least one seat on the board.
There are eight directors, so even if three Rinehart representatives were added to the mix she would not have the numbers unless she could take existing board members along with her views.
A former chairman, Ron Walker, who says he does not want to be seen as Rinehart's mouthpiece, believes there is an unwritten law that directors don't interfere with editorial.
That said, ''any individual shareholder who invests $350 million and buys 19 per cent deserves consideration for a board seat'', says Walker, who was on the board from 2003 to 2009.
''I don't think it should be tied up in conditions around freedom of speech,'' he says.
One of the issues around denying Rinehart more than one seat is that Fairfax's own board set a poor precedent on the matter as recently as 2007. John B. Fairfax was given two seats with around 12 per cent of the shares and retained them for a period after his stake had fallen below 10 per cent.
But he did not not have control.
Thus at what point would Rinehart be in a position to exercise control of the board and therefore management?
According to Paatsch, effective control would kick in around 35 per cent. Experience of boardroom battles suggests the figure is lower.
If Rinehart decides not to launch a takeover bid, she would get near the 20 per cent takeover threshhold and, under corporate law, creep up 3 per cent every six months, thus within a year she would move to 26 per cent.
At this point it might be possible - but not easy - to call a shareholder meeting and take control of the board, with some support from the minority stakeholders that turned up to vote.
They would have to be of the view that her interests were harmonised with theirs or that her presence on the board would trigger some activity that improved the stock price.
Paatsch reckons that for now at least she does not have the support of enough retail shareholders to push for control of the board.
John Murray, the managing director of the fifth-largest Fairfax shareholder, Perennial Value, says it is reasonable for an 18.7 per cent shareholder to have two board seats.
That stake is not large enough for any ''special privileges'', Murray says.
''We are strongly opposed to a number of other demands, such as three board seats, the deputy chairmanship and the ability to hire and fire editorial staff,'' he says.
Fairfax's second-largest shareholder, with 9 per cent, is Allan Gray Australia. Its chairman, Simon Marais, has been vocal over the past few weeks as an advocate for Rinehart's right to board representation.
He said of Rinehart's push: ''I don't have a problem and I think it's good for the company to have people [on the board] with their own money invested - they tend to be more careful.''
Like most former directors contacted by BusinessDay this week, Marais says he supports the motherhood notion of directors having ''skin in the game''.
Marais' underlying motives are more simple. He wants Fairfax shares to go up to a price at which he can exit at a profit, or at least break even.
He, like other large shareholders, must run a very delicate line.
According to one analyst, Marais' public support of Rinehart could be tantamount to a stick he is using to push Fairfax into pursuing deeper cost cuts or, more likely, into breaking the company up and selling the individual parts.
If Rinehart were to have control of say, BHP Billiton, no one would question her right to invest in Olympic Dam or sell a diamond mine.
Fairfax may be viewed as a special case because of the importance of its products to democracy and the wider public interest. But corporate law does not contemplate this.
Instead the Fairfax assets are housed in a public company, vulnerable to corporate raiders and their vested interests, but without the financial support of larger and more profitable assets to offset the struggling metropolitan newspaper business.
Kirk notes that some of the more important newspapers around the globe are in more appropriate structures - like Britain's Guardian which is held in a trust.
He also maintains that Rinehart has no right to put her interests above the remainder of the shareholders unless she owns virtually all the company.
One principle the corporate law does insist upon is that a board member must act in the best interests of all shareholders.