This article appeared in The Australian – Media Section 7 November 2002 p4-5
Fred's Theory Lesson
Fred Hilmer has brought modern management to Australia's oldest newspaper company, but now needs growth to keep his job Management academic and competition policy architect Fred Hilmer has found it hard managing Fairfax by the book. Elisabeth Wynhausen reports
`YOU'LL come to the evil empire," says Fred Hilmer's consigliore Bruce Wolpe. Hilmer, the chief executive of newspaper publisher John Fairfax Holdings, has agreed to an interview, in his office in Darling Park in Sydney. The 19th floor of the evil empire looks a little denuded, as if someone is moving in - or out. There are empty niches and large, empty wall spaces. In a recent, contentious decision, Hilmer decided to sell off the art collection, disposing of a piece of the company history like so much dead weight. It is as emblematic a gesture as anything he has done.
The company held its annual general meeting yesterday. But the bad news was already out (see box), the bad news for Hilmer included: the board of directors has said his contract will be extended on a 12-month basis, which seems as tepid an endorsement as possible.
Those who know him generally agree on one thing. Hilmer, 57, a former dean of the Australian Graduate School of Management at NSW University and former Australian head of management firm McKinsey & Company, has a lively mind, courtly manners and an impish way about him. Friends tell of bursts of inspired eccentricity. "He has a door closer that's electrically operated," says David Gonski. "He believes in an open door policy, but if he ever needs to shut the door he can do it without getting to his feet."
But Hilmer himself seems closed off. Though he has agreed to an interview on the understanding that The Australian is publishing a profile of him, he is intent on giving nothing away. We sit at the big conference table in his office, too far from his desk to see if he keeps souvenirs of his travels or photographs of his wife and children around him. Soon after he has lowered himself into the chair, and handed over the concise annual report, I ask about his childhood. The idea is to get him talking. If questions can ever be innocent this is one. "Tell me what sort of article you're writing," he says.
I suppose it was naive to imagine that he would see an emissary from News Limited as neutral, like one of those UN bluecaps. The companies, Australia's two largest newspaper publishers, are fighting a series of turf wars: in Melbourne where The Age and the Herald Sun are competing for middle-market readers, and lately, over rival papers on the NSW Central Coast. Business battles aside, News Limited executives keep having a go at Fairfax and firing broadsides about "elite" journalism.
On this occasion Hilmer fires back. He had done a lot of things before he was installed at Fairfax to put his management theories into practice. He had turned a small, failing management firm into a big one, made AGSM one of the two best business schools in the country, and gained national prominence as the author of the Hilmer Report, the blueprint of competition policy. He was on the boards of Westfield, Foster's, Pacific Power and Coca-Cola Amatil; as a consultant for Port Jackson Partners, he advised blue-chips on management strategies.
Yet most were astounded by his elevation (the flutter of conspiracy theories included the suggestion that Fairfax chairman Brian Powers had installed him to make sure not much happened there before Kerry Packer gained control of The Sydney Morning Herald): as Hilmer was the first to admit, he knew nothing about newspapers; in fact he was widely quoted as having said he didn't often read them.
"I didn't say that," he says now, in his light, mild voice. "I said I didn't read every paper. I always read quality papers ... I guess what I said is I don't sit down in the morning and read through the Tele and the Herald Sun and I do that now. Part of it is work, I have to say I don't enjoy some of those other papers."
For all his measured style, Hilmer, a man of considerable intellectual substance, has an implacable confidence in his judgment - his judgment of newspapers now included.
Last winter he was the keynote speaker at an Australian Competition and Consumer Commission conference at the Manly Pacific Hotel in Sydney. There were no journalists among the hundreds of guests, but one man who was present recalls taking notice when Hilmer talked about the function of newspapers. "He said we don't break news on the newspaper, they're there to provide context and analysis" - a statement shocking to journalists.
SADLY, there is no copy of his speech. Hilmer spoke from dot points as he often does, heaping praises on the head of a beaming Allan Fels, the ACCC chairman. The two are somehow a little alike, though Fels would be cast as Star Trek's Dr Spock to Hilmer's Yoda from Star Wars.
Hilmer's role at the ACCC conference was all the more intriguing in retrospect, for he was rumoured to be a successor to Fels, who retires in 2004, a rumour apparently scotched, now the Government has named Graeme Samuel, head of the National Competition Council, as his replacement. But at the conference, according to our source, Hilmer, who was waxing enthusiastic, unexpectedly let the audience in on a little secret. "He said the ACCC had done a raid or two where the Herald had the heads-up."
This won't surprise anyone who has noticed the number of times a newspaper photographer was somehow lurking around as the ACCC's operatives burst into a building. The surprise is that Hilmer not only needlessly confirmed it, but did so shortly before his own name was linked with the organisation.
What about the job, then? "I said it was speculation. I'm really committed to staying here," says Hilmer, falling silent for a moment. I almost imagine I hear the scratch of pen on paper. Company spokesman Bruce Wolpe, a dishevelled American who used to work for the PR firm Hill & Knowlton, sits at the table, writing notes rather than using a tape recorder.
"Bruce is better than any tape recorder," Hilmer remarks. Others said to be close to the CEO include The Australian Financial Review publisher and editor-in-chief Michael Gill and Mark Scott, the former Saturday editor of the Herald, who was made head of human resources soon after Hilmer joined Fairfax.
If you ask the obvious question - after all those years of telling people how to run a company what was it like to have his own company to run, a tiny frown creases his high, domed forehead and he talks about building up McKinsey and AGSM.
"People said that's very different. I don't think I would have been appointed by the board if it was so very different. I don't think the board was in a mind to do a social experiment here."
Though he has some mantras he repeats, for instance "we've got to be clever" and "we have to think outside the square", Hilmer denies management consultants believe that their systems and their sayings can as readily be applied to one company (or one industry) as another. In fact, he says, he wrote a book about it, saying there aren't any general rules for management. The book, Management Redeemed, was co-authored with Lex Donaldson. "It's the book that's been most recognised, worldwide."
WHATEVER his approach, Fairfax journalists complained of Hilmer's consultant-speak. He referred to them as "content providers" and to newspapers as "advertising platforms". "Fairfax felt like it was run by an amorphous group of fund managers," says freelance journalist Bernard Lagan, a former Herald reporter and chief-of-staff, who resigned last year after being caught hacking into the email accounts of Hilmer and other staff.
"He came into the company with the McKinseyite idea that everything could be quantified and objectified," says former Australian Financial Review journalist Stephen Long, now finance correspondent for ABC Radio. Indeed, at a conference on media ethics last June, Hilmer said Fairfax papers had classified errors into four types and was aiming to eradicate types (a) grammatical and spelling errors and (b) errors of fact, while making fewer type (c) and (d) errors - namely, errors that can't easily be checked and errors that only prove wrong in hindsight. The Herald has since decided the acceptable error level is 3.1 per broadsheet page.
From the perspective of the News Limited bunker, across town, Fairfax journalists, Sydney Morning Herald journalists especially, have a somewhat inflated sense of their own importance, treating almost every chief executive in turn as the enemy within. In Hilmer's case, it has to be said, there was a profound culture clash. "The biggest surprise to me was how unmanaged the company was," says Hilmer. "I came here and said what's our meeting structure. People said, `well, what do you want it to be'."
Fairfax staff were inundated with memos about who was reporting to whom.
In one delirious moment Hilmer gave Brad Hooper, the former head of industrial relations, the title Director of Continuous Improvement. He even made a speech about the subject himself, explaining to tittering Fairfax staff that before he went to the front door to get the newspapers in the morning, he left the muesli with the milk soaking into it - continuously improving it, so to speak.
"He says things and you think that's um, odd. He has a strange way of looking at things," says one man who has had some dealings with him. "Ten people can watch someone being shot. If the eleventh person watching is Fred Hilmer, he'll say `did you see that - that guy ran straight into the bullet'."
Though lacking in intuition, as if ideas and theories make more sense to him than people, he has a formidable intelligence. David Gonksi is on the Fairfax board, and like Hilmer, on the board of Westfield (with the two of them orbiting around Westfield boss Frank Lowy). So what does Gonski think of first when he thinks of Hilmer? "His brain," he says. Investment banker Tony Berg, an old friend, says, "He's obviously a brilliant person - he's got an incisive mind, he gets to the nub of an issue very quickly."
The eldest son of a Jewish couple who separated when he was four or five, Hilmer had an unconventional childhood. "My father was a classic entrepreneur ... we had periods where we had considerable wealth, living in a big house in Point Piper, and we had periods where all of us, basically, had to work from the minute we came home from school in order to have enough money to keep ourselves fed."
He was in high school in Queensland then, "We had a restaurant, the Nosh Bar, in Surfers. We always had a family member who looked at the cash register. When family members weren't looking at the cash register, not as much cash came in. It was probably one of my most important business lessons."
He started out studying medicine, switched to law, then picked up a clutch of postgraduate degrees in America, including a Masters of Business Administration from Wharton, the oldest business school in the US.
The American experience left its mark on him but that may be because the management theory in which he is steeped fuses the innocent American faith in self-improvement with a still more innocent faith in the perfectability of business practice.
"Soon after he arrived at Fairfax," says Lagan, "groups of 12 of us were called into the conference room on the 27th floor. A bloke from McKinseys would walk in in a dark suit and a white shirt and cover the glass wall in butcher's paper. He'd say `what ideas have you got'. Someone would say `a new computer system' and the McKinseys bloke would write it on the butcher's paper. It was all designed to make us feel included in the cost-cutting."
The five-star accommodation senior journalists had come to expect was downgraded. "After Fred came in you got put up in shitty hotels," says a journalist who noticed Hilmer staying at the same shitty hotel. It was all part of the cost containment some regard as his greatest achievement at Fairfax - and one in which Hilmer himself takes pride. "We now have ... discipline around the budget. I couldn't believe a company this size didn't have that."
There's no doubt that Hilmer improved processes and systems. "He's shortened the management line - there's direct access to him and senior management," says Harold Mitchell, the biggest media buyer in Australia. "He's given apparent power to senior executives like Greg Hywood [editor-in-chief and publisher of The Age]. He's shown a great interest in the revenue side of the market. So, I ask myself, `why is the share price where it is'. For whatever reason," says Mitchell, "the company's out of favour with the analysts and the market."
A year ago, AAP reported that rumours that Hilmer was leaving the company caused the shares to rise 5c to a 10-week high; after he dismissed the rumours the share price fell 7c.
"He hasn't made a bold move," says a successful Sydney businessman. Though it was rumoured for a time that Fairfax was, in the words of a media executive, "kicking the tyres" of West Australian Newspapers, nothing seemed to come of it or of any other strategic mergers or acquisitions mentioned in dispatches.
"I don't know anybody that's bought anything, frankly, in the media industry in the last five years, that doesn't regret it," says Hilmer. "Ten bought Eye Corp News and PBL went and bought One.Tel They were not, in my judgment, sensible things to buy.
"Sometimes you have to back a hunch," says the businessman. Hunches defy management rules, even logic, which poses a problem for Hilmer. "He's a good learner, but he doesn't have the instincts," says a newspaper man.
"I suppose he's used to coming and looking at a company and saying that should go like that and that should go like that," says a student of the industry, "and what we need to do with this business - Fairfax - is create a new business, the City Search directory." The directory was the company's attempt to create an alternative to the Yellow Pages. This quixotic project pitted City Search against Telstra, which happens to deliver 6 million copies of the Yellow Pages around the country.
When Hilmer was preoccupied with competition policy he had another idea about tackling the phone company head-on. Rather than treating the Telstra infrastructure (the phone lines) as a natural monopoly, he insisted that it could be replicated by Optus, which may have made sense in a smaller country with a larger population - but not this one.
But Hilmer is an ideologue inclined to think of the world itself as a kind of blank on which he can impose his idealised models.
SOME of his ideas have been tested, of course. As the architect of competition policy - a role that means he is detested in the bush to this day - Hilmer was appointed chairman of Pacific Power (part of the old NSW Electricity Commission). The idea was to make the company more competitive. But the new competitive spirit led to a stupendous blunder at Pacific Power, which agreed to supply Powercor, a utility in Victoria, with power at absurdly low prices, then refused to honour the deal - or even to settle after Victoria offered a compromise that would have saved NSW taxpayers a big bundle of money.
IF Fred Hilmer has an optimistic disposition it can only be tested by problems that cross his desk every day. Running Australia's second-largest media company amid what Hilmer has described as the worst advertising environment in 20 to 25 years must be disheartening, especially when financial markets are cruelling media shares and questioning your leadership. Unlike so many media companies, Fairfax has largely ignored opportunities to diverge from its core business of publishing newspapers. Since its 1983 acquisition of full ownership of Melbourne's David Syme & Co, publisher of The Age, the company's only big strategic initiative has been the creation of the online media unit f2. Despite Hilmer's continued insistence that the Fairfax online strategy is more robust than its competitors, the company has managed to chalk up more than $100 million in losses. The latest write-offs at f2 helped drag down the company's profits in the year to June 30 by 58 per cent to $53.66 million. The internet write-down was $36.5 million - a heavy impost even if the core newspaper business was booming, but in the ad downturn an even harder load to carry. All newspapers have had a tough time since the 2000 ad boom bust, but Fairfax's heavy reliance on car, house and job classified ads in its big Saturday papers has increased the company's pain. Despite the recent volatility, the Saturday classified revenue continues to represent the fabled "rivers of gold" that have excited potential suitors from Rupert Murdoch to Kerry Packer and investors including Conrad Black and Ron Brierley. Protecting that revenue in a changing marketplace is a challenge Hilmer has handed to Nigel Dews, the 39-year-old former Reserve Bank staffer and McKinsey management consultant who had been with f2 since its inception. In May, Hilmer appointed Dews to run both its online and print classified businesses. "I think what we've got now is really good, a very focused news and classifieds business that works with our mastheads," Hilmer says. "We committed $150 million to the internet. When we decided that the market wasn't going to be what everyone once thought it would be, in a very orderly and sensible way, we got $50 million back." Fairfax sold its auction site to Yahoo! its City Search investment to Telstra and a shopping site to David Jones. "In terms of what we got for what we spent we stack up very well against any media company around the world," Hilmer insists. For a man who has great faith in the market, the market so far has not been kind to him. In October 1998, just before his appointment was announced, Fairfax shares were trading at $2.87. On Monday the share price closed at $2.94, a negligible difference. Is the market wrong in keeping the share price so depressed? Hilmer allows himself a small wry grin. "The markets are always right ..." he says. "The market has treated us much the same as other media companies and better than some." And in a shot at his larger competitor: "You'd be better off if, when I joined, you'd sold News Limited and bought Fairfax."
Two years ago a judge ordered Pacific Power to honour the contracts. The NSW Treasury signed off on a payout of a reported $600 million. So much for the competitive spirit. "They didn't put any risk management mechanisms in place," says someone familiar with the deal, approved while Hilmer was chairman.
But he still radiates the same serene confidence in his own judgment.
Two years ago The Australian's energy writer interviewed Hilmer about the model he had used in his plan for opening up public utilities to competition. He had based it on the model the British had used to restructure their power industry, but the British had gone on to scrap the system, on the grounds that it gave too much control to the organisations that generated the electricity. The same thing has happened in Australia, one reason that the new privatised power companies in Victoria couldn't make any money (which means consumers are paying more for electricity, after all). But Hilmer insisted that the fault did not lie with his system. "It just takes time to work it through," he said.
With his 12-month revolving contract at Fairfax, time may not be on Hilmer's side as he searches for a way to grow the company.
Dr Frederick Hilmer, AO