A famous novelist once wrote, “Now I know what a ghost is. Unfinished business, that’s what.” And so it goes for the Ghost that haunts Treasury Wine Estates (TWE).
The background, win-lose, uneasy results
Let’s start at the beginning. Michael Clarke became the CEO of Treasury Wine Estates (TWE) in 2014 and significant share-owner value was created over the first several years of his tenure. From March 2014 until August 2018, Treasury Wine Estates stock price went from $4 Australian to $20 Australian, or a total market capitalization increase of a little over $2 Billion US$ to over $10 Billion US$.
The South African-born executive was a hard charging, micro-managing, win-lose type of manager. While profits and the share price increased dramatically, government regulators, suppliers, distribution partners and employees felt uneasy. Targets were driven ever higher at all costs and anyone who did not buy into or agree with the Michael Clarke way of doing things was eventually sidelined or removed from the business.
Unprecedented management exodus, the documentation trail
Do not take my word for it – follow the documentation trail, which is broad and deep. There was a series of press articles in the Australian and American press which laid out the full sequence of events as well as the serious problems.
There was a manic-like communication from Clarke about who was really responsible for the success and value creation at TWE. “I, Michael Clarke, am Treasury Wine Estates” and “We are all Treasury Wine Estates, Michael Clarke decides”.
There were detailed summaries of his hard driving management style and an almost world-record setting management exodus from the Company. “The 63 million dollar man”. “Departures and detractors: ASX darling Treasury Wine Estates is under fire”. “Treasury Wine executive exodus continues”. “Michael Clarke’s Vision for Treasury Wine Estates is in Tatters”.
Four Chief Financial Officers, one Chief Operating Officer, three Chief Marketing Officers, six Regional General Managers, three Global Supply Chiefs, three Chief People Officers and many more people change-overs later, the stock price hovers around half of where it was at its high.
And after all the management turnover, when COVID hit, and there were rumblings in the air of significant tariffs on Australian wine going onto China, Clarke just upped and disappeared. What was going to be a “smooth management transition” turned out to be a dropped ball. Value creation, chaos, and then disappearance.
Falling financial performance, market value halved, claw back discussions
Because of the significantly falling financial performance of the company, Clarke did forfeit over 1.1 million shares of unvested long-term incentive (LTI) restricted equity. This, along with his final year forfeit of bonus, totaled to a whopping 26 million A$ gone into thin air (before you shed any tears for Clarke, do not – he is still referred to as the 63 million dollar man based on his total pay package at TWE).
There was even discussion by the TWE Board of Directors on whether the company should “claw back” some of the fortune Clarke made when the stock was on the runup. Current Board members refuse to respond to requests on details, but one former Board member (there was much less turnover at the Board level versus the management level), who asked to remain anonymous, said there was a brief discussion on the “Clarke past remuneration issue” but it was quickly dropped as it was “too complicated and messy”.
That discussion is quite ironic, as an existing employee at the company verified that Clarke used the threat of “clawing back” already vested equity shares as a frequent tactic to threaten employees who exited the company in an effort to keep them from discussing his volatile management style and the toxic company culture with the press.
Of course, actually clawing back already vested shares from ex-employees of a public company is virtually impossible unless there is known fraud in the financial accounts. Clarke surely knew this, but obviously did not care. This was one more part of the toolbox he could use to control outcomes the way he wanted to, regardless of the effect on others. Anyway, let sleeping dogs lie – as they say.
Uncertain future, last man standing, the Ghost in the Machine
But all of this is not the worst of it for TWE. The worst of it is the future outlook for the company, and that brings us back to the Ghost – the Ghost in the Machine of TWE.
Because of the un-precedented level of turnover in the company when Michael Clarke left, there was no one left standing. The people who remained (“last man standing”) became the future leaders of an overvalued company with significant challenges. The company did not add any new talent to replace all the incredible people who had helped to increase the value of the company exponentially and had left in droves.
In addition to this, Clarke left one more “mini ghost” in the company before he disappeared. As one final hail Mary, stock pumping idea, he announced that TWE would spin off into two separate companies on the ASX, one for Penfolds and one for all other brands. While this sounds very elegant in theory, actually implementing the strategy successfully in terms of operational, financial and market realities turned out to be borderline impossible.
Somehow, as the strategy became ever harder to implement, rather than drop it completely, it morphed into a different version of the original idea. This resulted in an important company announcement that they would just do the split internally within the company’s organization to “drive more focus”, dropping the need for any external stock listing activities.
Rumblings inside and outside the company ever since are that this move has created immense confusion internally with employees and externally with distributors and customers.
Again, it makes you question the level of operational expertise left in the company when things like this happen and what parts of the strategy are just leftover Clarke plonk from his sudden exit. We will see how it plays out, but confusion is never a great leading indicator of future success.
TWE is an amazing growth story that has fallen on hard times. Investors are probably wondering if they can do it again. If the company is to succeed in the future, it needs two things. First, it needs to reset the base of the business and future market expectations. Second, it needs to make sure it has a management team that is truly capable of driving global operating and financial performance.
It seems like the company has started the process but still has a long way to go if it is going to be a successful, prosperous company. They release their fiscal year end results in the next several weeks, so let us see if there is any progress we have not yet seen.
I feel for the people left in the business at TWE and wish them the best of luck. In the meantime, it is not on this stock picker’s buy list. At least not until the Ghost is no longer in the Machine.