macbanks governance model wins in europe

  • Date:01 Nov 2005
  • Type:CompanyDirectorMagazine

board selection

Macbank’s governance model wins in europe


Macquarie Bank, the colossus of Sydney, has moved rapidly on the world stage thanks to its ability to attract quality directors to its board. Selwyn Parker reports

 

Lord Macdonald of Tradeston is a useful man to have on your side, which is exactly where Macquarie Bank has him.
     As plain Gus Macdonald, he was Tony Blair’s business and industries minister in the Scottish Office, and later minister for transport.
When he was in cabinet, he led the Labour government’s programs on risk management reform of the public sector. He was point man on regulation issues. And he’s an authority on British transport and infrastructure in general, both of which happen to be Macquarie’s sectors of choice.
   With all this experience it’s little wonder then that, after he resigned from the government in 2003 and went to the House of Lords, Macquarie Bank signed him up.
One of Lord Tradeston’s first appointments after leaving government was to the board of Macquarie-owned Birmingham airport. Today he is Macquarie’s senior adviser in Britain - a man to provide guidance and to smooth the bank’s path. As such, he’s quite a coup.
   As the Aussie-listed bank’s footprint in Europe grows rapidly, it urgently needs people like Lord Tradeston who knows everybody who matters.
In the House of Lords he’s a member of the select committee on economic affairs where he sits with such heavy hitters as Lord Lamont and Lord Lawson, both former chancellors of the exchequer and directors of numerous companies across the commercial sector, and with Lord Powell, who is not only a director of luxury goods group LVMH and an airline but also chairman of the China-Britain business council. He is also on good terms with Europe’s commercial leaders and numerous ministers.
To put it mildly, this is a useful milieu for Macquarie to move in.
Macquarie is also careful to engage other British commercial heavyweights for its needs. Dame Patricia Hodgson, a former head of policy at the BBC and a member of the Monopolies and Mergers Commission, has done consultancy work for the bank.
As an Australian-listed company with an all-Australian board, Macquarie Bank needs at least that level of local cover.
Certainly some of the directors, such as executive chairman David Clarke, managing director Allan Moss and former CSR chief executive Peter Kirby, have had plenty of experience abroad. Others travel widely to visit the major assets and meet the teams running the managed funds, which lie at the heart of the Macquarie model. Then there are the 117 non-voting executive directors, who live and work where the businesses are.
But the way things are going for Macquarie in the UK and across the Channel, it will need more Britons like Lord Tradeston to boost its governance, especially if it’s trying to buy a stock exchange.
Macquarie’s investment in UK and Europe is expanding so rapidly that it must put strains on the board. Just five years ago Macquarie’s income from its European investments (including UK) was $14m. By this financial year European income had rocketed to $430m, or 34 percent of all international revenue.
At the same time the value of the bank’s European specialist funds, which own the assets, has gone from almost nothing to $11.1bn.

Adding assets
Since around 2000 Macquarie has vacuumed up stakes in, among other assets, airports in Brussels, Rome and Birmingham, UK’s first toll road - the M6, Arlanda Express rail in Sweden, South East Water - UK’s second largest stand-alone water supplier, Wales and West gas distribution network and YBR - a business directories group.
   Of the 16 major acquisitions in Macquarie Europe’s existing portfolio, nine have come under its wing in the last two years.
   The number of assets Macquarie owns in Europe is literally rising monthly.
In June Macquarie Europe bought 100 percent of Wightlink, a thriving ferry service to the Isle of Wight, and the BBC’s Creative Broadcast Services, specialists in the delivery and promotion of digital media.
   In early September it paid £130m ($239m) for two UK business parks and added a few large storage tanks in Germany.
Not bad for a business that started here in 1989 with six people mainly engaged in flogging Aussie stocks to UK institutions. Now there are 400 staff in the glittering CityPoint building and Macquarie is taking over more floors.

High stakes
The governance stakes for Macquarie are high. Its commercial model, based on holding low-risk assets offering robust, long-term profits, requires a steady-but-sure strategy. That’s what attracts the multitude of pension funds that have been flocking into the Macquarie European Investment Fund.
They like the Macquarie promise of “sustainable cash yields and moderate capital growth from long-term investment in a diversified portfolio of quality infrastructure assets”. It’s a strategy that makes sense of what might otherwise look like a ragbag of assets.
Given the strategic nature of these assets, the watchdogs are never far away. And they demand appropriate levels of governance.
Before the Office of Water Services (Ofwat) signed off Macquarie’s £386m purchase of South East Water in 2003, a breakthrough deal for the bank, it put the bank through the hoops. Citing its duty to make sure the South East’s water and sewage systems worked well, Ofwat noted: “We must be satisfied that the prospective owner has the probity and operational and financial capacity to assume that role.”
Ofwat went through Macquarie with a fine tooth comb before giving the green light, noting with approval Macquarie’s gilt-edged ratings - A from S&P and A2 from Moody’s. The regulator also liked the presence within the MEIF of the pension funds, which are effectively Macquarie’s long-term lenders.
Ofwat was concerned that the new owners of South East Water had an effective process of governance. In the case of this particular asset, it’s effectively a localised version which is built around strategy groups. These are composed of Macquarie’s executive directors, special advisers and consultants, all of whom work with managers on key issues.
Ofwat was concerned the strategy groups didn’t smother the management - there should be “no confusion over who is responsible for key decisions,” it warned.
When the South East Water purchase went through, it was a seal of approval for the Macquarie model.
Over the years Macquarie has built up a finely-honed system of governance. All the independent directors are encouraged to seek at the bank’s expense outside professional advice about practically any issue. Of the 11-member board, seven are independent.
Managers are free to take any “significant matter” to any director.
And there are a series of board committees devoted to key standing issues such as the risk committee, which meets quarterly but can do so more often if necessary.
Its members have a direct, two-way link with the risk management division which monitors group-wide risk on a daily basis.
As Macquarie continues to race ahead in Europe, it will surely have to strengthen its directorial presence in Britain. And it would surely be unacceptable to the City that an ASX-listed organisation held the controlling interest in its exchange.
If only for diplomatic reasons, Macquarie must be looking at a more European-style re-configuration of its board.
In short, the bank needs more people like Lord Tradeston on the ground.