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Coles Myer shareholder criticises as unethical the bargaining position of Solomon Lew as a supplier to the company while holding the position of Executive Chairman

ADRIAN THIRSK: There are signs of frustration this morning at the Australian Stock Exchange as it continues to probe past dealings of embattled retailer Coles Myer. The Exchange is not satisfied it is being provided with all the available information about companies linked to Coles Executive Chairman, Solomon Lew. And it says it still believes there might have been a breach of one or more of its listing rules in the course of the so-called Yannon transaction.

The share price of Coles Myer has held steady this week. The lack of movement could be taken as something of a metaphor for the response so far from the Coles board to demands by institutional investors. The investors are concerned at the implications of Mr Lew's large private dealings as a Coles supplier.

But the Australian Investment Managers' Association expects an announcement next week from Coles Myer on proposed changes to the board composition. Long-time shareholder-activist, Laurence Gruzman QC, has a clear notion of the perils facing Mr Lew, having taken a keen interest in the company structure Mr Lew has built around himself.

LAURENCE GRUZMAN: Well, mainly you have the Voyager Solo group, and that's a very large organisation. They supply all kinds of things to Coles Myer, from clothing to cutlery, but especially toys. They have a buying office in Hong Kong, and they employ quite a few people there. And their sole job is buying things from manufacturers, which they subsequently sell to Coles Myer.

ADRIAN THIRSK: So, taking that operation then, what is effectively the outcome in terms of Coles' purchasing power?

LAURENCE GRUZMAN: If Coles Myer buys through one of Solomon Lew's private companies, it's the private company which can go to the manufacturer and say, 'Hey, we'll buy your entire output if you give us an exclusive and charge us 75 per cent'. Then comes the ethical problem. Mr Lew now has control of that product. What does he do? Does he pass on the savings to Coles Myer? Does he sell it to Coles Myer for 75 per cent? Obviously not! In other words, he is controlling effectively both sides of the bargain.

ADRIAN THIRSK: So, are you aware of Coles actually paying marked up prices for supplies from Mr Lew's companies?

LAURENCE GRUZMAN: I am aware of a number of cases people have communicated with me, where they are selling the same product to Woolworths and Coles, and the Woolworths price is less than the Coles price. Because when they sell to Coles, they have to sell through the private company, because in many cases, Coles won't deal directly with the manufacturer or the supplier.

ADRIAN THIRSK: Well, in 1993, Coles drew up a policy document regarding relationships with suppliers. And part of that document stated that the relationship was to be beneficial to both parties, suppliers and Coles. Is that a normal business practice?

LAURENCE GRUZMAN: Yes, I think it is. A big company such as Coles can't afford to bankrupt its suppliers. But where you've got the problem is where Mr Lew is sitting on both sides of the fence. And the summation of the ethical problems is such as to make the practice highly undesirable, and it ought to be illegal. In practice it is impossible to make it illegal. The only solution is to get rid of the directors who have placed themselves in an impossible ethical position.

ADRIAN THIRSK: So, if there were to be a spill of board positions at Coles and a more independent board installed, as you suggest, could Mr Lew's supply contracts with Coles be under threat?

LAURENCE GRUZMAN: Most certainly they could. It would be possible that the independent board might say, 'Well look, Lew's companies are selling us goods cheaper and better than anyone else.' It's equally possible that they may come to a different conclusion, that they wouldn't be held to ransom by these private companies who had obtained brand names and exclusive items on the strength of their connection with Coles. And the same would apply to Mr Fox, with independent contracts, tenders called with independent contractors. And it wouldn't be very long before the $150 million annual trading between Fox and Lew's private companies and Coles Myer would have diminished, possibly to zero.

ADRIAN THIRSK: And what would that loss of the Coles business mean for Solomon Lew then?

LAURENCE GRUZMAN: Well, if you have a business which is geared to selling $100 million a year to one customer, and that comprises the greater part of the business by far, and you take that away, then of course the business is inevitably going to collapse. He has to cling onto control of Coles Myer. He has to have a complacent board who will allow him to continue in this way.

ADRIAN THIRSK: Laurence Gruzman QC.