RG: The biggest risk is that complacency can also come with that success. That complacency may result in risk-aversion, or it may simply show up as a lack of urgency, as people take the foot off the accelerator and just assume that success will come as it always has. To prevent this, we need to be encouraging risk-taking and innovation, and make sure that it is always clear what is expected of people, and that we give them both responsibility and accountability for achieving performance.
We've always had a growth focus as a company, which is very helpful in terms of the everyday working climate. People are always looking to do new things, which is important if you want to sustain your performance.
ceoforum.com.au: You mentioned that success could make people in the company risk-averse - do you think it could also work the other way? That is, the success enjoyed to date could make people feel bullet-proof, and thus take risks when they really should be more prudent?
RG: That can happen, of course, but probably the bigger problem is that, as you get more successful, you seem to have more to lose by taking risks! If you look at a company just entering a market, for instance, it generally has to take some risks to get some market share. Once you have the market share, the mindset can become one of defending rather than attacking, so with that you cease to take the risks you may have before. You see this on the sporting field all the time, and in business as well.
Risk aversion can also result because you want to preserve your reputation. Our company, for instance, has a good reputation for getting most decisions right, and there are pressures that go with that not to make mistakes. You don’t have those pressures to the same degree if you don’t have that excellent reputation, so this is another example of where success can work against your willingness to take risks.
RG: We don’t really feel that we dominate any of our major markets, so there is still a lot of room for growth. We do have a strong position in home improvement, or, more specifically, the ‘big box’ type hardware outlets through our Bunnings business, but there are many other players in that more general market.
Even if you have an absolutely dominant position in a market, there is no guarantee you will maintain it, as our own experience has shown. If you look at the fertilizer market in Western Australia in the eighties, for instance, we had virtually 100% market share. Now our market share is more like 65%, because we did get a bit complacent and allowed competitors to get in and take share away from us. More recently, we have improved our service and product offer and regained market share.
RG: Yes. If we define the home improvement market very narrowly as, say, the retail hardware business, we do have a strong market share, but, in the way we define the home improvements market, we have less than 20% share. So there is really a very big market opportunity that we can go out and pursue. That is exactly what our Bunnings business has been doing, and will continue to do. It’s a large and successful business in its own right –more than 20,000 people – and has shown a lot of creativity and innovation in going after that market.
RG: We do have a consistent set of disciplines across all our businesses: how we report, how we plan, how we budget, and how we approve capital expenditures. Probably the most important thing in managing those businesses is making sure we have good people, so this is a very strong focus.
We are getting better at transferring learning between our businesses. With human resources, for instance, we are moving people more between our different businesses: whereas ten or more years ago that was something of a rarity, now it is something we do more often, and want to do more of in the future. That’s been facilitated by some company-wide succession and development planning: our leadership team, for instance, reviews the top hundred people across all our businesses every year, to assess where they are in their careers and how they could fit into new roles. For example, John Gillam, Managing Director of our Bunnings business, joined Wesfarmers in business development, moved to Bunnings in a commercial role, became Wesfarmers’ Company Secretary, then ran our fertilizer business, and two years ago returned to head the Bunnings business. The CFO of our insurance business has also been CFO in our rural and industrial distribution businesses as well. There are many other examples.
We also have some active peer groups across the different businesses: the CFOs, for instance, regularly get together as do the CIOs and the HR leaders, so this helps transfer learning between businesses. There are also some very specific instances of expertise-sharing: our energy business, for instance, recently completed a major implementation of Oracle application software, and one of the key people from that project is now assisting Bunnings implement the same software suite.
ceoforum.com.au: For some time the market held a view that conglomerates were almost inherently less efficient than companies with a narrower focus, despite the very notable exceptions both here and overseas. Is that a view that you still need to counter in explaining your growth strategies to the market?
RG: I think that view is less strong than it was - analysts now tend to look at companies on a case-by-case basis. I think the market generally understands that we've always had a very strong focus on shareholder returns, and are fairly dispassionate about the businesses we are in. We don't fall in love with businesses, and think that we have to run them forever - if they don't make a return for our shareholders, we will put the money somewhere else. We are actively managing our portfolio of businesses: in the last few years, for instance, we've sold our rural businesses, and we sold our interest in a rail group. At other times we have bought into new businesses.
It’s a very simple business philosophy, and I think the challenge is always to maintain that simple and clear focus and not get distracted from that.
RG: We do have a couple of common principles across all our business: a focus on performance, and a strong commitment to employee ownership of our shares. However each individual business has been encouraged to develop its own culture, as long as, of course, it is a healthy culture. As we accelerate the cross-business learnings and personnel transfers, we might see more of a common Wesfarmers culture emerge. Having said that, we don't necessarily want exactly the same culture in all our individual businesses, as retail is different from industrial distribution, which is different again from mining, and so on.
Culture is one of those things that is hard to get right, and easy to destroy. It’s probably taken us five years to get the culture right in the business created by the Bunnings/ BBC Hardware merger.
RG: This really gets to the issue of the balance between short- and long-term performance, particularly on the investor side. We try and run Wesfarmers for a ‘buy and hold’ shareholder: someone whose looking to make returns over time from both dividends and capital growth.
Of course the market can focus on the short-term more at times, and, if you look at the Wesfarmers share price over time, there are periods when the market has had a more negative, or even overly positive, view of the value our company represents. The challenge internally is to stay disciplined, by doing what we said we would do, in the time frame we said we would achieve in, and not get too distracted by that.
I must add here that I absolutely respect the market: it does get things right over time. It’s also true that, for example, some fund managers may very well understand the time frame we are managing to, but have their own time frames in which, for their own reasons, they would like to see results. You just have to accept those different perspectives and agendas.
Interestingly, I find the off-shore funds often have a longer time-frame than some of the local fund managers. I’m not sure why that is: perhaps it is something to do with the fact that, because we are a significant part of the makeup of the local index, local funds probably have to invest in us to some extent, whereas off-shore investors are less compelled to invest and doing so more because they have freely chosen our company.
RG: One thing you realise as a CEO quite quickly is that you don’t get growth simply by demanding it – you get it by creating a culture within the organisation in which people can innovate and create new things and get rewarded for good performance. I dislike setting top-down, unachievable targets – I’m far more interested in seeing people coming forward with ideas, and making sure that we have decision-making processes in place that prevents ideas getting bogged down and people getting frustrated.
RG: That is true, and you do just have to live with that, but you also need to be sure to keep your feet on the ground when people are getting carried away with the company’s prospects. I do find that people sometimes hear what they want to hear: if they think the company is great, no bad news will deflect them from that viewpoint; equally, if they have come to a negative view, no amount of good news will sway them either!
ceoforum.com.au: Those expectations may also have had a particularly personal dimension, given you took over the CEO role from such a long-serving and well-regarded predecessor in Michael Chaney. Did you ever feel the weight of those expectations personally?
RG: Those expectations are there, of course, but the Board, my colleagues, and others have all been very supportive in taking up the challenge of continuing Wesfarmers’ success.
What I have found interesting is how much you do learn simply by virtue of being CEO. I’m much clearer about what I need to do as a CEO than I was when I took up the role. It’s almost as if you can only get that clarity by being in the role, feeling the responsibility and acting accordingly.
RG: The differences in role between CEO and CFO are more significant than I thought they would be. Being CEO is extremely demanding, the constancy never goes away, and I think that’s something you just have to experience.
It is a truly fascinating job: the things you get to see, the people you get to meet, and the decisions you have to make. The weight of responsibility is always there, and it can be lonely at times, as not all the decisions you face are ones you can talk about with colleagues.
As a CEO the microphone is always on: people are always watching and listening for the messages you are sending, and this is different from being even a very senior manager. Your relationship with colleagues does change as a result, because your perspective as CEO is different than from what it was before.