CHAPTER 1: Telstra
Dialling up a loser
Once Iâve developed a strategy, I want everyone to fall behind it â you either catch the vision or catch the bus.
Sol Trujillo, prior to his appointment as CEO of Telstra in 20051
There have been few more polarising figures in Australian corporate history than former Telstra chief executive Solomon Trujillo. He brought an American style of leadership to what was once Australiaâs largest company. Despite being paid like a king, Trujillo is widely believed to have left Telstra in a far worse state than when he arrived four years earlier.
For critics of Telstra, the Trujillo experiment represented an extreme case of a board of directors, appointed by shareholders to represent their interests and reduce agency costs, utterly failing. As business commentator Ian Verrender observed, âbetween them, Trujillo and [Donald] McGauchie in the past five years have infuriated and alienated almost everyone who has come into contact with them; federal politicians on both sides of the house, regulators, customers, even their own shareholdersâ.2
BS: before Sol (1992â2005)
Telstra under Trujillo was a long way from the government-owned monopoly that had been in existence for the best part of a century. Australiaâs pre-eminent telecommunications company grew out of the ashes of Telecom, the formerly government-owned phone carrier that was established in 1901 when the Postmaster-Generalâs Department was created to run domestic telephone, telegraph and postal services. In 1992, Telecom merged with the government-owned Overseas Telecommunications Corporation, and the following year the company was renamed Telstra.3
Telstra was partially privatised in 1997 when the Howard government sold off one-third of the company as part of the global shift towards private ownership of assets. At the same time as Telstra was being sold, the federal government opened the Australian telecommunications sector to full competition. (Telstraâs full monopoly over telecommunications was gradually eroded from 1991 when competition began in the long-distance and international markets.)
From 1992, Telstra was led by American former AT&T executive Frank Blount. In 1996, shortly before Telstra was partially privatised, it earned $3.2 billion in profits and paid its American CEO $1.2 million in salary and bonuses. A decade later, Telstra managed to improve earnings by 59 per cent (to $5.1 billion) but saw executive remuneration skyrocket. In fact, over that time Telstra increased the amount it paid its senior management by more than 1000 per cent. (The Telstra directors did not fare too poorly either in the financial stakes. While former Telstra chairman David Hoare was paid $124 495 in 1999 for his services, in 2008 outgoing chairman Donald McGauchie collected $602 500 â an increase of 385 per cent in less than a decade. Similarly, Telstra director John Stocker witnessed his directorâs fees increase from $53 500 in 1999 to $277 370 in 2008.)
By late 1999 the federal government sold off a second tranche of Telstra (reducing the Commonwealthâs stake to 51.3 per cent), with the company then under the guidance of former Optus CEO Ziggy Switkowski, who had become CEO in March 1999.
The Switkowski era was highlighted by the internet boom which enveloped the IT and telecommunications sectors. Under Switkowski (and key lieutenant and former lawyer Ted Pretty), Telstra embarked on various failed endeavours, including the Reach joint venture with Pacific Century Cyberworks (which would culminate in a $1 billion write-down four years later). Telstra also acquired cornerstone stakes in local IT companies â including Sausage Software, Solution 6 and Keycorp â as well as overseas joint ventures such as Dutch satellite operator Xantic and New Zealand data services company Telstra Saturn. The vast majority of these ventures would prove to be financial blunders (Telstra had planned to merge Solution and Sausage, but the deal was scuttled after the share prices of both companies slumped), and would lead to a loss of confidence in Switkowskiâs leadership.
Switkowskiâs other problem was that, politically, he had lost his power base in the Telstra boardroom after former chairman Bob Mansfield was forced from his role in April 2004. (Mansfield, who had been with Switkowski at Optus, was a long-time supporter.)
By December 2004, the Telstra board had had enough. Led by a new chairman, former Farmersâ Federation boss Donald McGauchie, Telstra terminated Switkowski two years before his contract was due to end. While Telstra never outlined why Switkowski was sacked, many believe that the board lost faith in his ability to grow Telstraâs revenues or facilitate the controversial sale of the governmentâs remaining 51 per cent stake in the carrier. For that, they would need a showman.
Shortly after firing Switkowski, McGauchie publicly praised the former executive, stating that he had âdeveloped an outstanding executive team and Telstra is now well positioned as a competitive, full-service, integrated telecommunications company that is committed to delivering for its shareholders and the nationâ.4 McGauchieâs comments would have surprised many of those outstanding Telstra executives, who were soon forced out of their roles.
Switkowskiâs replacement would also certainly not deliver the solid returns for Telstraâs shareholders that McGauchie foreshadowed.
You gotta have Sol
At the time of Switkowskiâs termination, the Telstra board had not put in place any genuine succession plans. Speculation had mounted that the company would appoint an internal replacement, such as former IBM executive David Thodey or Sensis boss Bruce Akhurst. However, McGauchie and the Telstra board shocked onlookers by hiring a locally unknown US executive by the name of Solomon Trujillo. Trujillo almost didnât take the Telstra job, with the former US West boss earlier offered a role as head of Italian mobile communications carrier Wind, which had recently been acquired by an Egyptian telecom group associated with Trujillo.
The decision by Telstra to appoint Solomon Trujillo as CEO brought immediate and widespread publicity, much of it critical of the appointment of a âMexicanâ to the helm of Australiaâs dominant telecommunications company (Trujillo was actually born in the US state of Wyoming to Hispanic parents). Unlike Switkowski, Trujillo immediately embarked on a confrontational approach with government and regulators. Trujilloâs brash style made him a favourite target for the media. After Trujillo hired former close associates Phil Burgess, Bill Stewart and Greg Winn, commentators began calling the Telstra executive team the âThree Amigosâ, a reference to Trujilloâs allegedly Hispanic roots.
Even before Trujillo officially commenced his executive duties, he was described as possessing âAmerican brashness, even arroganceâ.5 While his self-confidence would allow Trujillo to negotiate one of the richest contracts paid to an executive in Australia, it is often forgotten that he was a very wealthy man before he set foot in the Telstra boardroom.
Trujillo had begun his career in the US telecommunications industry in 1974. At the age of 32, he was appointed an officer of US telco AT&T, before becoming CEO and president of US West in 1995. (US West was one of the seven âBaby Bellsâ formed after the break up of AT&T in 1983.) Trujillo would later be appointed CEO and chairman of US West in 1998, before departing after the company controversially merged with Qwest in 2000.
While Trujilloâs Telstra biography hailed his time at US West, noting that âinnovation was the by-word for the company amongst its 30 million customersâ6, that view was not shared by US Westâs customers. US West faced legal action from AT&T, which had accused the company of starving its traditional telephone business while expanding its data and internet business. Allegations included claims that US West had failed to follow through on promises to connect services and neglected to develop facilities to handle new network traffic. US West also faced a âslew of customer complaintsâ due to substandard levels of customer service.7 Shortly after Qwest took over US West, it was forced to pay US$50 million to settle a class action resulting from poor services provided by US West. The companyâs shoddy customer service earned it the nickname âUS Worstâ. (Perhaps coincidentally, Telstra customers also fared badly during Trujilloâs reign. According to a report prepared by the Telecommunications Ombudsman, over Trujilloâs four-year tenure complaints against Telstra increased by 241 per cent.8 Many of the grievances related to Telstraâs billing systems, a key area of focus for Trujillo.)
Not only was US West criticised for its levels of customer ser-vice, it was also maligned for anti-competitive behaviour (the company faced several lawsuits from the state of Oregon) and its share price performance left much to be desired. Shortly after Trujillo departed, the companyâs share price slumped from US$69 to less than US$11 per share. (Trujillo shrewdly sold a large amount of stock at US$89 per share prior to US Westâs merger with Qwest, reaping more than US$30 million.9)
Controversially, only one day before Qwest took over US West, Qwest agreed to pay Trujillo what was a very golden goodbye. While never revealed directly to Qwest shareholders (the package was discovered accidentally after a lawyer for the US West retirees stumbled across court documents and released them to a Colorado newspaper), Trujillo received a termination payment of more than US$72 million, largely in consideration for ending his contract but also as part of a deal by which Trujillo agreed to not make âdisparaging commentsâ about US West or its employees.
Trujillo also felt it necessary to clean out his office. Quite literally.
According to his termination agreement, the former CEO took with him the âcomputer, monitor docking station, printer, fax machine, scanner, pager, wireless telephone, palm pilot [and] accessoriesâ.10
Included in the golden goodbye was a US$36.9 million âchange-in-controlâ payment (ironically, the actual change in control that eventuated was orchestrated by Trujillo), US$13.7 million in pensions, US$10 million for signing the employment agreement and US$2 million for office space and administrative support. In addition, Trujillo also received perks such as country club memberships (worth more than US$900 000) and limousine services valued at more than US$320 000, indicating that Solâs driving abilities appear even less developed than his managerial skills. To ensure that he remained up to date with world affairs, Trujillo also demanded that US West continue to pay for his subscription to The Denver Post â at a cost of US$65 per year.
Even more controversial than the extraordinary amount of cash collected by Trujillo was the non-payment of a final dividend to US West shareholders; well, almost all US West shareholders.
Prior to its merger with Qwest, the US West board had determined to pay a dividend of US$270 million. Qwest later sought to have the dividend withheld (because the payment would effectively have been made by Qwest as the new owner of US West).
The US West board initially refused to withdraw the dividend, but shortly after it agreed to alter the ârecord dateâ for the merger from 10 July 2000 to 30 June 2000 â this had the practical effect of allowing Qwest itself to si...