Wesfarmers chair Michael Chaney AO on governing in a crisis

Getting through the COVID-19 crisis will require boards to be prepared and flexible, says Wesfarmers chair Michael Chaney AO.

With millions of Australians out of work, many for the first time, and thousands of businesses trying to gear up as isolation restrictions ease, Wesfarmers chair Michael Chaney AO FAICD says September is the month to watch to judge how Australian business will come out of the COVID-19 crisis.

“The question is where we’ll be when the six months of JobKeeper is finished,” says Chaney. “Because I suspect quite a few people, and quite a few small businesses, are going to find it difficult to survive because revenues won’t be up where they were before. Unless the government extends its support, they’ll find they have real cashflow issues.”

During February–March, Wesfarmers sold two thirds of its stake in retailer Coles for $2.2b. It also extended its debt facilities from $2b to $5.3b, and is keeping an eye out for possible friendly takeover targets — although Chaney recently noted the board would steer clear of making hostile takeovers.

The company, which owns Bunnings, Kmart, Target*, Officeworks, industrial supplier Blackwoods and lithium miner Kidman Resources, has 220,000 employees. Chaney says it hadn’t needed to apply for JobKeeper because it “had a strong balance sheet”.

Extending the JobKeeper scheme after September, he says, is a matter for government to consider in view of the fiscal position, what’s affordable, and how the economy is opening up.

The Perth-born corporate leader, chair of NAB during the 2007–08 global financial crisis, says the fallout from COVID-19 will be larger than the GFC “because of the effect disappearing revenues are having on companies” and, as with the GFC, economic recovery will take years.

“This, of course, is totally different in the sense that it’s a health problem that’s led to an economic problem that’s required government response, which has been appropriate,” he says.

Be prepared

Chaney says the first lesson for boards from the crisis is the value of a strong balance sheet during the good times “because the bad times are going to come, you just don’t know when and how bad they’ll be”.

“Like the government, you need to have a financial structure that can survive difficult circumstances,” he says. “That’s a lesson often forgotten as people overgear and take on too much debt, hoping the good times will roll on.

“The second lesson is that the future is always unknown,” says Chaney. “You can listen to all the experts predicting where interest rates, oil prices or coal prices will go, but you should never assume what they’re saying can be relied on.”

While commending the federal government’s response, including the JobKeeper scheme, Chaney supports Reserve Bank governor Philip Lowe’s calls for an overhaul of the tax and industrial relations systems. “Industrial relations reform, because the system is far too complex, and tax reform. By that, I mean the rate of corporate tax and investment allowances, and the replacement of inefficient taxes with things like broadening the GST and probably increasing the rate,” says Chaney.

He refuses to offer a suggestion on how high. “There are trade-offs with everything,” he says. “Obviously, if you increase the rate of GST and broaden it to include everything, you’ve got to then provide fiscal transfers to those who are less well off. That’s a complex modeling exercise. It’s politically difficult, but during times of crisis, you’d hope they would think about what’s good for the economy rather than what’s good for votes.”

Chaney’s banking career showed him that in normal times, many businesses don’t operate at a profit, which could pose a problem after the crisis has passed. “They struggle along and might generate a positive cashflow, but eventually it all gets too difficult,” he says. “In some cases, in small businesses, the management accounting systems aren’t as good as they ought to be and they get surprised at the end of the year when they find they didn’t make a profit. Medium and larger businesses are often in the same situation in terms of lack of profitability. So when a crisis like this occurs, it just tips them over the edge. The government’s initiatives have prevented that happening for most, but what happens when we’re coming out of this if revenues aren’t back to where they were before?”

Be flexible

Chaney joined Wesfarmers in 1983 as administration manager and company secretary. He was promoted to managing director in 1992, a position he held until switching to a board career in 2005. His previous roles have included chair of Woodside Petroleum and chancellor of the University of Western Australia.

Chaney regards flexibility and readiness to change as key to success in business and governance. “I used to say, if it ain’t broke, get ready to change it,” he says. “Circumstances aren’t going to stay the same. Somebody is going to compete against you and you better be innovative.”

The crisis has come with an upside for Chaney, saving him travelling from Perth to meetings around the nation. He’s using the extra hours participating in online conferences and catch-up sessions with colleagues. While he rates virtual board meetings, which Wesfarmers began in March, as “effective” and shorter, he misses the casual side conversations. “Often, maybe while you’re getting coffee, someone says something, then you reconvene and discuss it. These are often the valuable conversations. When you’re on video, there’s a tendency for everyone to feel a need to be more precise.”

Chaney says it’s unlikely virtual board meetings will continue once travel restrictions are lifted. As for virtual AGMs, he says mum and dad shareholders might feel they’ve missed out. “We’ll go back to physical gatherings as soon as it’s safe to do so.”

Overall, Chaney says there have been some benefits from operating during COVID-19. “I haven’t found it stressful or taxing,” he says. “It’s freed up some time and the technologies work satisfactorily. At a personal level, the lesson is you never quite know what’s around the corner so you should be prepared to be flexible.”

*On May 22, Wesfarmers managing director Rob Scott announced plans to close and restructure a substantial part of its Target retail network over the next year and increase digital investment. It also flagged $780 million in writedowns on its Kmart Group and industrial and safety division. "COVID-19 is not the cause of this shift but it is accelerating a number of the changes," Scott said. "We've seen a number of disruptive trends in the market."