Hatchings

MARCH 2022 – ISSUE 2

Short term pain for long term gain:
lessons from James Hardie

“We terminated Jack Truong as the CEO of James Hardie. The termination of employment is immediate with immediate effect. After extensive due diligence, the board determined that Jack’s management style was inconsistent with the James Hardie global code of conduct.”

Michael Hammes, Executive Chairman, James Hardie, 7 January 2022.

It was the first major surprise in corporate Australia in 2022 and starkly showed how, even in well performing companies like James Hardie, boards recognise that having the right culture is fundamental to success.

“A company’s culture is the heart of a business and is the glue which ties all employees together,” says Stephen Butel, Equity Analyst at Platypus. 

“The CEO is paid a large amount of money to set the culture of the business and instill it.

“In the James Hardie case, the board saw behaviour from the CEO that wasn’t in line with the company’s culture and made the hard decision to step in and remove the Managing Director. All of this was in the backdrop of strong company and share price performance.

Kristen Le Mesurier, Head of ESG and Engagement at Platypus, says expectations of boards around culture have changed.

“Boards have come a long way over the past decade and investors now expect much more. High performing businesses need to have right culture at the top,” Le Mesurier says. “And while culture does come from the top, every single team within an organisation has its own sub-culture.” 

That can make managing culture difficult.

The decision by the James Hardie board shows how far companies with good corporate governance have come. 

“Tough decisions made by boards can hurt in the short term, but in the long term are fundamental to a successful business,” says Butel. “Winning at all costs is something from the 80s and 90s, whereas now it’s about winning while respecting all stakeholders.” 

Truong was a good CEO in terms of bottom-line results. 

“He oversaw an operational reset of the business and pivoted the company’s strategy to target higher value products via a direct to consumer (pull) sales model,” Butel says.

“During his time in the role, James Hardie’s share price doubled, reflecting both operational success and a buoyant market backdrop.”

Truong had some help, notably a cyclical uptick in the US and Australian economies, where the company operates. 

“But at the end of the day, the board made a decision for short term pain for long term gain,” Butel says. 

The change has meant shareholders including Platypus have had to reassess the business. After the announcement it sold off sharply and in the weeks afterwards it underperformed the market. The James Hardie position within the Platypus Australian Equity Fund is meaningful, and through this period of price weakness Platypus maintained its position size. 

“James Hardie is a much better business than just the MD, whoever that is,” Butel explains. “The sell-off meant there was a buying opportunity.”

Le Mesurier says when a pivotal moment like the removal of the managing director occurs, investors need to critically examine the whole culture of a business. 

It includes doing due diligence once again; talking to the chair, suppliers, customers and management. 

“Ultimately, a good culture is a necessary condition for success,” she says. 

Butel says that many businesses previously adopted a “do nothing” attitude. But in this case the board was prepared to accept the pain.

“In the past a lot of boards would not have taken the hands-on approach and made such a tough decision,” Butel says. “It’s resulted in a significant amount of short-term pain for the business and personal interruption for the board as they have needed to take on executive roles while the search for a new managing director is conducted.

“But if the board had taken a ‘do nothing’ approach, the market would have been none the wiser until much further along when potentially irreversible damage had been done to the business and its culture.

“It’s about open, honest accountability. What the board has said is that, irrespective of where you sit in the business, you are accountable. And that honesty and transparency with employees and shareholders is a very positive thing for long-term performance indicators.

“As shareholders, we’ve had to go in and have a fresh look at the business. There’s nothing broken within it and by installing a new managing director, more aligned to the culture of the organisation, James Hardie will be able to keep performing well.”

Butel says a good culture really helps companies retain and attract good staff. 

“Right now, it’s a fight for talent. And the only way to attract and retain staff is by having a culture they can align with for the long term.”

“It also demonstrates that, unlike the final couple of decades of the last century, the days of the rock star CEO are dead. No-one is bigger than the business,” he says

Disclaimer: Issued by Platypus Asset Management Pty Ltd ABN 33 118 016 087, AFSL 301294 (PAM). This material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Prior to investing in any financial product, an investor should determine, based on its own independent review and such professional advice as it deems appropriate, the nature and extent of economic risks and merits, the legal, tax accounting characteristics and risk, and the consequences of an investment in the financial product. This material is not a financial product recommendation or an offer or solicitation with respect to the purchase or sale of any financial product. While every care has been taken in the preparation of this material, no warranty of accuracy or reliability is given and no responsibility for the information is accepted by PAM, its officers, employees or agents.