COMMENT

28/10/2011.AFR.......QANTAS AGM held at the university of sydney kensington campus.ALAN JOYCE ceo of qantas with chairman LEIGH CLIFFORD

Qantas CEO Alan Joyce (left) and chairman Leigh Clifford. Photo: Rob Homer RZH

We called for the sacking of Alan Joyce before it became fashionable, but the media campaign to dispose of him is still surprising.

CEOs are typically removed quietly, by ‘mutual agreement’.

Qantas Chairman Leigh Clifford’s op-ed for Fairfax Media on Saturday effectively shuts this option down.

Whilst a public letter of support for an embattled CEO is in itself unusual, Clifford’s article is more revealing for what it does not say, which is that he won’t be the person to push Joyce out.

Institutional shareholders, especially those at Franklin Resources, a global fund manager based in San Mateo, California, or their local office at 101 Collins Street, Melbourne, must be getting a little edgy.

It is the willingness of institutions like Franklin to continue to back a failing strategy that will determine whether Alan Joyce remains CEO and, ultimately, the airline’s future profitability.

My bet is, despite Clifford’s pleadings, they won’t tolerate it for too much longer.

Chief executive officers are hired and fired by the board. If Joyce is to be removed, it is only with the board’s say-so. What Clifford’s letter reveals is that the he and his CEO are travelling in lockstep, grasping at each other’s clothes as they lurch toward the cliff’s edge.

Last Thursday, Joyce recommitted Qantas to its 65 per cent market share ‘line in the sand’, the main cause of over-capacity in the domestic market and the principal reason for the huge fall in the airline’s domestic earnings.

Would Joyce have made that re-commitment without the board agreeing to it? Unlikely.

Same goes for the decision to channel funds to Jetstar Asia (now on hold), to hand over international passengers to Emirates and to close down the airline to help it win an industrial dispute. Joyce isn’t acting alone here.

If the board is to sack him, it can’t do so without implicating itself in the disaster.

Shareholders have two options to get the ball rolling. The first is for at least 100 shareholders, or investors owning a total of 5 per cent or more of voting stock, to write to the board telling it to call an extraordinary general meeting.

The letter must state any resolution to be put to the meeting and be signed by the shareholders requesting it. If these criteria are met, the board must call a meeting.

Public pressure on the Qantas board would increase but the likelihood of the resolutions actually getting up are somewhere between Buckley’s and no chance.

With the top 20 shareholders owning 81 per cent of Qantas stock, if you can’t persuade the institutions to let the guillotine fall you can forget it.

This is where the second option comes in. Small shareholders dutifully turn up at AGMs but their vote makes almost no difference. Once the chair’s proxy votes are cast everyone retires for tea and bikkies, resigned to the charade. Without the institutions on side, change rarely occurs.

The institution Qantas shareholders need to convince is fund manager Franklin Resources, which appears to be taking a growing interest in the fate of the flying potoroo.

Last Friday, one day after Joyce declared a $252m first half loss and reaffirmed the strategy that produced it, Franklin Resources increased its holding in Qantas from 15.4 per cent to 16.42 per cent. Interesting, no?

Better known as Franklin Templeton Investments, Franklin Resources is based in San Mateo, California. This giant US value-based fund manager has local representation in the form of wholly-owned subsidiary Balanced Equity Management in Melbourne.

Clearly, it believes there’s value in Qantas. Whether it believes that value will be realised under current management remains to be seen.

So, if you’d like to see the back of current management, Balanced Equity, led by managing director Andrew Sisson, is one of the institutions to convince. Remember that it was Balanced Equity that famously refused the $5.60 a share bid from private equity way back in 2006.

You’d expect a few discreet calls between major Qantas shareholders this week. My guess is that after last week’s display, they’ll be reassessing the Qantas management team. Perhaps one of them will soon call Clifford, suggesting he pushes Joyce out. Then, after a suitable face-saving period, Clifford will leave Qantas to ‘pursue other interests’.

That’s what all shareholders, customers and employees need to get Qantas back on track.

This article contains general investment advice only (under AFSL 282288).

John Addis is a director of Intelligent Investor. You can unlock all of Share Advisor's stock research and buy recommendations by taking out a 15-day free membership.