Welcome to the April 2015 edition of The Director’s Dilemma. To read this email in your browser, go to www.mclellan.com.au/newsletter.html and click on ‘read the latest issue’.
This month we consider the problems that arise when political imperatives impact corporate plans. If this was your friend; what would you advise him to do?
Simon chairs a government owned utility company. He has a long history as an executive and director both overseas and domestically and is well regarded as a pragmatic and sensible team member. Now he feels as though he has suddenly been dragged through the looking glass into a parallel reality.
Simon’s company has always been profitable. This is not surprising as it is efficiently run, has rationed capital in recent years and has a geographic monopoly with clients who pay a market rate for service. Simon was recruited for the role, served as a director for three years, then replaced his predecessor in a well-planned succession. The Minister wanted Simon to get accustomed to the government arena before taking the chair role and was keen to reverse the capitol rationing and upgrade the assets.
Recently the press reported that the company makes an ‘obscene’ profit and hence must be ‘gouging’ its customers. The Minister’s office and relevant Department were embarrassed and the opposition asked questions in parliament. Now Treasury has announced a change in the asset valuation, based on ‘value in use’ rather than ‘written down value’ which will double the assets value. Depreciation will rise and reduce profits. The government is not much affected by these changes because the dividend off-take is based on free cash generated.
Simon has been told to forget any asset upgrades and concentrate instead on maintaining the existing assets so they remain reliable; a feat he is not sure is possible and which doesn’t excite him at all.
The CEO and senior executives have incentive payments related to profit, service and the asset upgrade plan which will all now need to be revised. Treasury are intransigent and reluctant to authorise any changes, especially when these make incentives more likely and the company is about to return its first ever negative result. Their sign off is required.
The Minister has suddenly become hard to reach and Simon’s regular monthly meetings have been cancelled until further notice.
What should Simon do?