Ahead of a handover

Could your organisation be privatised? If so, Domini Stuart believes you can start preparing for it now and provides some insights into what you can expect.

As head of the government’s Commission of Audit, Tony Shepherd has refused to rule out the privatisation of public assets in his quest for greater efficiency and productivity across all areas of Commonwealth expenditure.

“I imagine that the boards of quite a few Commonwealth entities are entertaining the possibility that they will be privatised,” says Dale Budd OBE FAICD, chairman of consultancy firm Dale Budd & Associates. “And, in the state arena, there are probably government-owned entities in the energy sector thinking along the same lines.”

Even at this uncertain stage, boards can take action.

“Directors should take steps to ensure that all of the relevant assets and liabilities have been identified and that the asset registers are up to date,” says Adrian Ahern MAICD, chairman of law firm Norton Rose Fulbright Australia.

“In any case, this will help them get to get a better understanding of the corporation; nothing will be lost if the privatisation doesn’t go ahead.”

If it does proceed, the board needs to establish a clear idea of the government’s objectives and how these can be achieved.

“In particular, it is incumbent upon the chairman and the CEO to sit down with the operational and financial ministers of interest and have a very frank discussion about issues to be resolved, timing, and resources needed to achieve the end result,” says Barry Murphy FAICD, who oversaw the privatisation of 17 of Australia’s biggest primary, regional and general aviation airports and the creation of Sydney Airport as a stand-alone business.

“Governments can sometimes set unrealistic targets, so these kinds of issues need to be sorted out right at the beginning,” adds Murphy, the former chairman of Australian Rail Track Corporation and a former director of Telstra Sale Company.

In most cases, the state or federal government will request a scoping study to search out any potential problems.

“The primary aim is to ensure that there are no roadblocks,” says Ahern.

“The seller needs to identify any issues that would be of concern to a buyer and then take steps to resolve them prior to the sale.

“For example, if there’s a threat of major litigation, or litigation is in progress, how can that best be dealt with? If it is part of the package being sold, will indemnities be provided? Or can the government continue to deal with the matter directly?”

DIRECT SALE OF ASSETS 

How active a role the board plays will depend largely on whether the organisation is to be sold outright or floated on the stock exchange.
“In the case of a private sale, the main role of the directors is to support the process without actually engaging with the bidders, negotiating any of the sales or handling the bids,” says Herbert Smith Freehills partner Robert Nicholson.

This might involve providing information, making management available for presentations to bidders and answering questions which range from the sublime to the ridiculous.

“I was involved in one process where bidders asked over 8,000 questions, including one about the quality of the view from the corporate box at the Melbourne Cricket Ground,” says Nicholson.

“All of this can be very time-consuming, so boards may need to allocate more resources to ensure no-one is distracted from their primary task of running the business.”

The limitations can be frustrating. Alan Castleman, who is currently chairman of The Board Advisory Group and was chairman of Swanston Trams when it was preparing for privatisation, believes that suggestions from the board are unlikely to carry much weight.

“The government appoints its own experts to provide advice,” he says.

“This is also quite a confidential process and you can’t have a lot of say when you don’t know what’s going on.”

Directors of most state-owned corporations need to comply with the Corporations Act 2001, but they can also be directed by the relevant minister. This can be disconcerting if they are being asked to do something they do not fully understand or which they believe may not be in the best interests of the company.

“The relevant state usually deals with this by passing special purpose legislation making it clear that the minister has this power,” says Ahern. 

“In this case, directors should feel less concerned about committing a technical breach of their duties, though they may also want to take legal advice and even ask the state for some sort of indemnity.”

A STOCK MARKET FLOAT

When the entity is being floated directors need to be much more involved.

“An offering will be made to the market and while the government will certainly have input into preparing the prospectus, the directors will sign off on it,” says Nicholson.

“That means there’s potential liability.”

As the government will, naturally, want to present the business in the most favourable light it is up to the directors to satisfy themselves that there is a sound basis for any predicted reduction in costs or increases in revenue.
 
“When public transport was being privatised in Melbourne some time ago, forecasts of how patronage and revenue would increase after privatisation were wildly optimistic,” says Budd.

“Eventually they did start to grow steadily but only after some years had passed.”

It is very likely that the inevitable drive for efficiency will lead to staff reductions, so this is a stressful time for employees. At best, they will have to cope with a major cultural change. At worst, they could be out of a job.

“The board and management should retain a close focus on their plans for restructuring in this area,” adds Budd. “It’s critical that they get it right.”

As the board moves from a privatised company to one listed on the stock exchange, a different range of skills may be required.

“You’re now dealing with, and responsible to, a broad church of shareholders rather than a single government shareholder,” says Ernst & Young Transactions Leader Graeme Browning.

“There might be more freedom to pursue strategy and one of the big advantages of being a publicly-listed company is that you have access to the public equity markets to fund growth.

“But this is a very different way of accessing capital and it will be important for the directors to understand the process, as well as how to interact with a wide variety of investors and analysts.”

As the government usually determines the remuneration policy of a corporatised organisation, there will also be a need for directors who are familiar with the complexities of the current remuneration system.

“They need to be able to put themselves in the shoes of senior management so that they can understand how best to motivate them,” says Castleman.

CONTINUOUS DISCLOSURE

Directors may also find themselves accountable under the continuous disclosure regime for the first time. They must be very sure about what they need to divulge and also what they should keep to themselves.
 
“It’s important to remember that, as a director of a privatised entity, you have to be much more careful about giving out information that could affect the share price,” says Budd.

While these demands could be quite new to someone who has only sat on government boards, many directors will be able to draw on their experience on boards in the private sector. And many of the skills acquired on a government board will continue to be of value.

“The directors will have gained a thorough knowledge of the business, including the key drivers and the operational challenges,” says Browning.

“And many former government-owned businesses will continue to interact regularly with government as a regulator or counterparty on transactions, so a good understanding of how to manage these interactions is also an important asset.”

If a board restructure is needed to broaden the range of skills, it should be done before the prospectus is finalised.

“The prospectus will include details of the directors,” says Castleman.

“You need to have a board in place that potential investors feel they can trust to do the best job.”

Any directors aspiring to join the board at this stage will need to understand the objectives of the organisation and the path it is likely to follow, but the usual advice to conduct thorough due diligence may be less relevant.

“A newly-privatised company is going to be changing its priorities and its direction, so checking what happened before might not be so important,” says Budd.

THE CEO

The most critical skills in the transition from public to private are those of the CEO.

“Prior experience in the private sector would be invaluable, as would the ability to talk to staff at all levels, to envisage how the organisation will need to change and to anticipate what it will need to do to survive in a more competitive environment,” says Murphy.

The board will need to consider early on whether the current CEO is equipped for the new environment.

“Outside government, appointing the CEO is one of the board’s primary responsibilities but, in the government world, it’s very likely there’s a minister who expects to play a major role,” says Budd.

“That means, in the public sector, one of the board’s key functions either doesn’t exist or is modified, so it’s likely that at least some of the directors will have no experience in this area.”

One of the most significant roles played by the Swanston Trams board was helping to prepare senior management for the transition.

“Our CEO was a very smart and capable man, but he had been in tramways his whole life and had no experience with directors in the private sector. We were able to act as mentors, drawing on our own experience to help him step up to his new position,” says Castleman.

In the privatisation of most of Australia’s federally-owned airports, so-called internal boards were set up at each of the corporation’s   main sites. 

“Each month, the CFO and I would travel to each of these major airports and conduct quasi board meetings as if the airport was already being run on private enterprise lines,” says Murphy.

“This established all the measurements and accountabilities normally found in private operations and helped staff understand the kind of changes that were coming their way. I believe this established a pattern of governance and management competence which was of immediate value to new owners.”

RUNNING THE BUSINESS

Murphy believes that the board’s overall responsibilities during privatisation are to achieve maximum feasible value by delivering the structure to a new owner in a well-functioning form, to establish that there are no hidden agendas and to obtain agreement that the organisation’s people will be treated fairly in the process.

“To lock in these key requirements, the board should set up a financial due diligence committee to ensure there are no unresolved financial or accounting issues, plus a special HR committee to establish policy and processes to deal with staff relocation or redundancy issues,” he says.

“These must be put in place early, be visible, and have at least two board members on each committee.

“Depending on the nature of the organisation, it can also be necessary to establish a special customer interface structure to explain and reassure customers as the process unfolds.
 
“Keeping up the morale and commitment of people in the organisation during the transition is vital.”

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