It's been a great week for the business press.
In one corner, the iconic and irascible Gerry Harvey has been at his ever-quotable best as he slaps down criticism of the way he runs the partly eponymous Harvey Norman.
In the other, the gone and the going at Westpac, which is reeling from allegations — and they're not even close to being tested in court yet — that the bank's systems may have failed to meet regulatory requirements 23 million times — almost once for each Australian, and which may have resulted in funds making their way to people engaged in child exploitation.
It's a helluva mess all round — unless, of course, you're paid to comment on these things, in which case it's manna from heaven.
Me? Well, I guess I'm paid to comment, at least as a small part of my role.
My bigger responsibility is to the members of the investment services I run, and as the head of the team of people who run all of our Motley Fool investment services.
What to make of the whole palava? And what does it mean for corporate governance in Australia?
As you may have realised, I'm not one for tabloid pronouncements, or simplistic solutions. That probably disqualifies me from ever being Editor in Chief of one of our erstwhile-afternoon dailies, and doesn't make me quite as quotable.
But hopefully it gives me time and space to propose a more thoughtful (and hopefully useful) view, both as an example of how I think corporate governance should be applied, but also as an input into your own investing.
Here goes, and let's kick off with Gerry.
The problem with corporate governance rules is that they have to — as do all rules and regulations — address the lowest common denominator.
As I read today in an Elizabeth Knight column in the Nine Newspapers press:
"As Argo Investments chief executive Jason Beddow recently told media: "It's like those people who buy a house next door to a noisy pub and then complain about the noisy pub next door.""
Gerry has been in charge for a very long time. It's many days' march — in any direction — to find someone who'll argue he's all of a sudden changed approach or style.
Frankly, Gerry has been Gerry longer than any current shareholder has owned Harvey Norman shares.
Presumably, almost every one of those shareholders bought shares because they believed that the combination of the company's brand and assets was the best place for their money, and the then- (and now-) current management were the best people to run the place.
And if anyone seriously bought shares with a plan to overthrow the current board and management, they pretty much deserve whatever they get for being so silly as to both try, and assume they'd succeed, such was the share registry and company history.
Remember, too, that corporate governance 'experts' think — at least according to their 'best practice' rules — Warren Buffett should have less power at Berkshire Hathaway (I own shares, for the record), and that his board is not independent and needs renewal.
Again, this is the Warren Buffett who is the world's greatest ever investor, and who has been running Berkshire for more than half a century. Warren isn't perfect, but does anyone really want to pit him against the rule-makers and back the latter?
Gerry is, well, Gerry. You might think he's brash. Bombastic. Old-fashioned. Fair enough.
But you knew that — or should have known — when you bought shares. If you don't like it, I wonder why you own shares. And if you do like it, I assume you're happy for him to continue in the role.
Alternatively? Just sell your shares.
ASIC should be fearless in making sure every company — including those run by controlling founders and executives — are meeting every single law, rule and regulation. But if and when there are no breaches, I dare say shareholders are better off voting with their feet, rather than crying over spilt milk.
Now to Westpac.
The breaches — alleged, anyway — are egregious. They suggest a lack of process and might hint at a lack of interest in making sure the bank's systems are compliant with relevant laws. It might reflect badly on the bank's culture and/or the ability for whistleblowers to be heard.
All of that is still to be proven — again, let's remember that they're allegations.
But here's my question, for the mob who bayed for — and got — the CEO's head: Feel better now?
I mean, is the bank now obviously better managed, thanks to the boss' removal? Was he okay 8 days ago, and completely unworthy of the post today?
And what of the past executives and board members — some of whom moved on before the fallout happened?
Doesn't it feel, just a little, like mob justice, rather than due process?
Was CEO Hartzer jettisoned because he was incapable of leading the bank through this issue, or just because the baying crown needed their bloodlust sated?
"Well, there have to be consequences!"
Really? Measured how, exactly? What's a sackable offence, and what's just worth losing a bonus for?
And where was the board — current and past — during this whole multi-year (alleged) fiasco.
Let's say, after all that, you think the punishment fits the (metaphorical) crime.
What of those other metaphorical crimes being committed elsewhere, as we speak, and that aren't being picked up.
It wouldn't be the first time a 'CEO of the Year' in one year went on to deliver awful performance a few years hence (or to leave before the true extent of the shaky foundations of the current successes are known).
Does Hartzer objectively need to go? I doubt it, other than to address the opportunism of the politicians and the whipped-up hysteria of the usual media suspects.
Of course, there's a lesson we might draw from the Westpac brouhaha — incentives matter.
Who was incentivised to slow down growth, or add to costs, or to double-check compliance, when the greater incentives were to deliver growing profits to the market?
Who do you reckon gets the most face time with the CEO and Board: the lady with concerns about cutting corners on compliance in some small corner of the bank, or the guy who is tasked with juicing the profit machine by cutting costs or rolling out a new marketing effort?
Now, to be fair, I don't want to prejudge the Westpac case (even though the board has already seemed to do that, and more, in terminating Hartzer). We might be in a 24-hour, social media world, but I believe in due process and the presumption of innocence.
So let's instead think about corporate Australia, writ large.
Do you really want executives and board members who are 'independent', have little or no 'skin in the game' (through ownership of shares), and who might be more likely to get new appointments because they don't 'rock the boat'?
Or do you want a group of people whose net worth is meaningfully leveraged to the company they oversee, and where the results of one year (or a single quarter) simply don't matter because their shareholding term is measured in decades?
Foolish takeaway
I'm all for top-notch corporate governance. But the 'experts' are focussed on the wrong things.
As Charlie Munger has often reminded us, incentives matter far more than almost anything else.
Gerry isn't everyone's cup of tea. Brian Hartzer has paid a high price for the bank's (alleged) inability to ensure they are compliant with the necessary regulations.
Given the choice, I'll take a board and management who own a meaningful chunk of the company, any time, and who aren't at the mercy of a fickle and short-term polity, media and shareholder base.
Fool on!
