Three months ago I covered the questionable purchase of David Jones Limited (ASX: DJS) shares by directors of that company. "Some unfortunate souls did sell their David Jones shares right before the long-awaited positive results," I wrote. "Not only that, but the David Jones insiders they sold to are directors of the company. Directors Steve Vamos and Leigh Clapham bought shares in the company just a few days before the public release of the retailer's quarterly sales numbers."
It turns out that the situation was even worse than I'd imagined: just days prior to the share purchase, the board had received a merger approach from competitor, Myer Holdings Ltd (ASX: MYR). So price sensitive was this information, that its subsequent revelation to the market moved David Jones' share price.
As I wrote three months ago: "Appallingly, this behaviour is considered legal. The chairman of the company also endorses it." In a sign that shareholders will, occasionally, insist on basic levels of respect, the two directors and the very highly esteemed chairman who approved this mess, Peter Mason, will finally be out the door.
Hilariously, having previously admitted that: "Both directors obtained my prior approval to their share purchases," Mason subsequently told shareholders that he was prepared to replace the pair and hire new directors, according to the Australian Financial Review. It is fitting that he follows them out the door.
Warren Buffett's long time business partner Charlie Munger famously said: "Well I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it." All investors should have a look at the incentives for the David Jones board to reject the Myer proposal. Does anyone think that a combined company would have two boards? After all, it would be a lot harder to buy shares at the right moment, if they weren't privy to sales figures before the market! I can't see how any of the board members would have benefitted from a merger, so perhaps it is no surprise that they didn't mention the proposition to shareholders.
In my opinion a merger would make a lot of sense, although it would be likely to face regulatory hurdles. Nevertheless, in an age where the department stores' business model is under threat from both malls and internet retailers, I actually think there would be a good case to allow the merger. Even if the merger does not go ahead, the clearing out of the board reportedly increases the chances that the company will retain CEO, Paul Zahra, who is considered to have done a good job.
Foolish takeaway
Temporary uncertainty regarding board and management is a small price to pay for a shot at good corporate governance. For too long, I have had to classify David Jones as a speculative investment, due to my doubts about corporate culture and governance (recall that the CEO prior to Zahra resigned after a sexual harassment scandal and received a golden handshake from the board). The best result would be for a chairman with a reputation for integrity to join the board, along with some directors who have identifiable retail experience. If Zahra also decided to extend his tenure, then that would certainly bode well for the future. However, in my opinion, investors looking for solid stocks at attractive prices can find better options than David Jones.
