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RURAL AND REGIONAL AFFAIRS AND TRANSPORT LEGISLATION COMMITTEE
25/05/2010
AGRICULTURE, FISHERIES AND FORESTRY PORTFOLIO
Australian Wool Innovation

CHAIR —I will take this opportunity to thank the officers of Australian Wool Innovation for providing their services to us a lot earlier than was on the original agenda. I welcome Mr Merriman, Mr Fletcher and Mr McCullough. Senator McGauran.

Senator McGAURAN —Previously we were talking to the department about an internal report apparently commissioned by the board regarding governance matters and, more specifically, as it was reported, conflict of interest matters in relation to the board. Can you confirm whether or not that report has been undertaken.

Mr Merriman —Where did the information come from?

Senator McGAURAN —The newspaper.

Mr Merriman —What report are you referring to?

Senator McGAURAN —The Weekly Times of 19 May claims it is ‘a damning report’, but that may be poetic licence. It alleges undue interference by directors:

The internal report was commissioned by AWI directors … following the resignations of chief executive Brenda McGahan—

et cetera.

Mr Merriman —That is correct and not correct. Since the Arche report our governance has been questioned, and this is, yes, another report on our governance, the same as the one we have with Cameron Ralph and the ongoing governance we have with a crowd called John Harrison and Associates. That is the context, and they would have looked at the last five to six months of our business.

Senator McGAURAN —Okay, we have established that there has been a report regarding governance—

Mr Merriman —There have been three reports.

Senator McGAURAN —Have they been presented to the board?

Mr Merriman —Those three have, yes.

Senator McGAURAN —Do any of those reports go to the question of possible board members’ conflicts of interest?

Mr Merriman —I will talk about conflicts of interest in a little while, if you like; I have spoken about how we manage any perceived conflict of interest in this forum before. All those reports are for our governance and they are privy to and confidential to the board, as the people who gave the report want it. I cannot divulge to you what those reports say, and I am not going to. They are for the board only.

Senator McGAURAN —If the minister were to request the three reports, would you present them to him?

Mr Merriman —I would take advice from the board and our legal people. The board are privy to the reports and they are not for everybody else. I do not have the authority to present any of those reports.

Senator McGAURAN —Minister, you were listening to that. There are three reports and in some way or fashion they go to the governance problems of AWI.

Mr Merriman —Sorry, not governance problems. The Arche report on our performance stated that we should do something to improve our governance, and this is part of that program of improving our governance.

Senator McGAURAN —All right, to improve the governance, which has been subject to criticism, Minister. You might be interested to know, following my previous request on notice, that there is extreme reluctance—you might want to pass that on to the minister too—and legal advice would have to be taken first before any of those reports go to the minister. I would ask you to take that on advice, and whether you have any further comments.

Senator Sherry —Firstly, I note from Mr Merriman that as a matter of fact there have been three reports carried out. Secondly, they go in part to improved governance, so I think it could be reasonably supposed that they criticise existing governance. I think that would be a reasonable supposition. As to the legal position of declining to make those public, I would have to take that on notice, because I do not know whether that is the correct legal position in terms of whether or not the committee’s request should be met.

Senator McGAURAN —Yes, to take advice on whether they can be made public would be good. I was really pointing out to you the reluctance of the board, who would take legal advice prior to presenting them to the minister. I am just doing your work, if you like, wanting the reports to at least get onto the minister’s table. If they are as damning as is reported, I have enough faith in him to believe he would act upon them. My concern is whether they will even get to the minister’s desk.

Senator Sherry —I can only take that on notice for the minister.

Senator McGAURAN —I point out, though, that the board is resisting already.

Senator Sherry —You have asked a reasonable question about the availability of those reports for this committee.

Senator McGAURAN —I did not. You have extrapolated that. It was initially just to get them to the minister, but I now add, ‘Yeah, why not?’

Senator Sherry —I may have misheard you. I thought you actually requested information on them yourself as a member of the committee.

Senator McGAURAN —No, I had not asked them to be tabled to this committee. I was asking for them to be tabled to the minister. I think the minister is going to have enough problems, without the committee getting them, quite frankly.

Senator Sherry —I will take it on notice, but the board will obviously have to consider whether or not to provide them to the minister should the minister request them. I will pass that on to the minister and then he will act as he determines.

Mr Merriman —I would like to point out before we leave this topic that this Arche report was over a three-year period, not the one-year period that this board was in power.

Senator FIERRAVANTI-WELLS —I know that, Mr Merriman, but it does traverse directors that were previously on the board, so it did look at the performance of AWI over a three-year period, as you correctly said, and it also made a series of recommendations which one would assume that the current board would take on board.

Mr Merriman —Which is what they are doing with these three reports.

Senator FIERRAVANTI-WELLS —Thank you, Mr Merriman. You are here to answer questions; I am here to ask them. Minister, I think the point that Senator McGauran was making was that, within the purview of the minister’s obligations under the agreement that is currently being reviewed—and you were not here previously for that part of the exchange with Mr Grant—it is open to the minister to require AWI to provide, apart from regular briefings to the minister on company performance in performing its functions and in delivery of the government’s priorities for research and development, such other matters as the minister may request.

Our question to you is: within the purview of those responsibilities, could you take on notice whether the minister will request those documents? If so, then they can be dealt with accordingly at further estimates or, potentially, their release can be considered within the parameters of the minister’s purview.

Senator Sherry —Yes, I think that is perfectly reasonable.

Senator FIERRAVANTI-WELLS —Thank you.

CHAIR —I take it by the nodding, Senator McGauran, that Senator Fierravanti-Wells has taken the words right out of your mouth.

Senator FIERRAVANTI-WELLS —He concurs with Senator Fierravanti-Wells. On that note, Mr Fletcher, could I ask you this question: the report in the Weekly Times of 19 May alleges that:

The internal report was commissioned by AWI directors Brian van Rooyen and Roger Fletcher following the resignations of chief executive Brenda McGahan and company secretary Sue Myers in February.

Is that correct?

Mr Fletcher —Yes, we looked at the situation and then passed it off to someone to go through it. We thought it was a bit over us. We did not think it was our job, after having a look at the papers, and moved it off to—

Senator FIERRAVANTI-WELLS —Following the resignation of Ms McGahan and other people in senior positions, have there been provided to the board or to the management of AWI reasons for departure?

Mr Fletcher —People leave the board at different times all the time. One thing you have to realise is that if we had not pulled back on a lot of things 18 months ago, we would have run out of money; there is no doubt. In the last 18 months, the board has cut expenditure back and to do that we had to downsize a lot of the jobs that we were doing and a lot of the people who were doing them. When you do that, naturally some people are not happy. It is a difficult job. The easy job is putting people on. It is not an easy job putting people off. Anyone who runs a large company knows that.

Senator FIERRAVANTI-WELLS —Certainly, I accept that. Just looking at the last annual report—2008-09—note 26 at ‘Notes to the financial statements’, I notice there that there is a list of key management personnel. There are the non-executive directors, of course, and other key management personnel. Of the 25 or so listed there, a considerable number would be still employed with AWI; or no longer employed?

Mr Fletcher —There are still a lot employed there. Of course we have downsized. We are trying to build a staff that can go forward on what we are doing. We are representing the woolgrowers and I can assure you that our job is to make sure that the woolgrowers are getting the best money value out of the funds that come in. You cannot do that if you have too many people sitting on their backsides.

Senator FIERRAVANTI-WELLS —One of the allegations that has been made in relation to AWI—and indeed, this article refers to it—is that there is undue interference by directors. Is that the case? Has the perception of interference by directors in the day-to-day activity of the corporation been the cause of considerable angst and problems at AWI?

Mr Fletcher —There is always strong debate on what we are operating in. Eighteen months ago we went through a period where we virtually had no CEO for a time. Some of the board members did help put some things together. Naturally, there is always serious debate within a board. If everyone just went ‘aye’ and passively went along with it, it would be no different to parliament. It would not work very well. I think some of the media pick some of that stuff up but can go a bit overboard; and naturally, the media is there to sell the papers.

Senator FIERRAVANTI-WELLS —That may be the case. I have had some more personal knowledge of these matters, but I will leave it there. You are aware, of course, of the Productivity Commission’s review into R&D corporations. Will AWI be making a submission to the Productivity Commission?

Mr Merriman —This is where I would like to hand it to Stuart. We will.

Senator FIERRAVANTI-WELLS —My question was to Mr Fletcher, if I may get his view first.

Mr Fletcher —Yes, we realise that. I would not be on the board if I did not know that.

Senator FIERRAVANTI-WELLS —Thank you. Mr McCullough?

Mr McCullough —Yes, we will be making a submission. That is due by 25 June. We have commissioned a company to help us with that and it is well on track. It is probably 85 per cent done. We will meet that target.

Senator FIERRAVANTI-WELLS —Sorry, you have commissioned a company?

Mr McCullough —Pricewaterhouse Coopers.

Senator FIERRAVANTI-WELLS —So there was not sufficient expertise in-house to be able to prepare that report?

Mr McCullough —No, that is not the case. This is quite a specific challenge, one that we have not been a party to before; certainly I have not been. We felt the resources—some expertise and talent—needed to be brought in to help us prepare that. That is what we did. I believe that we are within our rights to do that.

Senator FIERRAVANTI-WELLS —Mr Merriman, have you dealt with the correspondence that was sent to you in February from a group of people in Italy?

Mr Merriman —Have I dealt with it? Which letter do you mean?

Senator FIERRAVANTI-WELLS —The letter dated 23 February 2010 which was forwarded to you by a group of about 10 companies.

Mr Merriman —I got one on 24 February, yes. That is the one where they offered to do joint marketing with us.

Senator FIERRAVANTI-WELLS —My concerns were more about: ‘The reasons for our disappointment are as follows’. I was wondering if you would care to comment on that.

Mr Merriman —I have the letter here. I wish you would read the back of it instead of the front. I gave an open letter in the papers explaining this. What the board did was to send a group of people over as part of the due diligence for our strategic plan, to find out what our shareholders and stakeholders in overseas mills and their brand people wanted and were interested in. That was what this trip was about. In this first letter, yes, we have some criticism. I regard it as criticism from friends, because I personally know three-quarters of that group. If you look over the back of the page—

Senator FIERRAVANTI-WELLS —I did see your photograph on the odd wall in Italy when I went over there, Mr Merriman.

Mr Merriman —Good. You will have seen some of my rams there, too.

Senator FIERRAVANTI-WELLS —I did see some of your rams too.

Mr Merriman —But on the back of that document—it is the first time in my memory; I have never seen it before—these top brands in Italy are offering to do joint ventures, dollar for dollar. I have never seen that before, and I have a similar follow-up letter here.

Senator FIERRAVANTI-WELLS —I would like to go on to ask AWI what its intentions are in relation to that. Perhaps Mr McCullough or Mr Merriman could answer that?

Mr Merriman —There are projects there. Stuart can fill you in on that.

Mr McCullough —This speaks to the point that we may not be investing appropriate figure amounts of money into that particular market. I did some analysis before I came down here, knowing that that may be—

Senator FIERRAVANTI-WELLS —You may have read my report, Mr McCullough?

Mr McCullough —I did. I have it right here.

Senator FIERRAVANTI-WELLS —Very good. Does that mean that you agree with that part of my conclusions?

Mr McCullough —There are a few tags here but we will not go into all that tonight.

Senator FIERRAVANTI-WELLS —No, it will suffice to tell me what your intentions are.

Mr McCullough —One of the things I did analyse was our operational and project spend in that market. In terms of volume consumed in that market—and this is not the only stat that we should follow, because it is a flagship market as I think you referred to it—they are consuming about 3½ per cent of the Australian wool clip at the moment. If you compare them against China, who are up around 75 per cent, in Italy we spend double the amount of money that we spend in China on projects and operations. However, they only represent five per cent of what China is consuming. In terms of investment, we are spending there appropriately—maybe a little too much.

However, we have committed some funds. After this letter was sent to us, I put a project up to the board to liberate some funds to joint-venture invest with those processes and people that signed on to that letter, and to make sure that we had that money on the table so that we could go and then talk to them seriously about co-investing on marketing. So we have liberated a little bit more money.

Senator FIERRAVANTI-WELLS —I am conscious of the time. From reports in the paper, marketing appears to have caused a degree of angst on the board. Has that been an issue?

Mr McCullough —No, not for me.

Senator FIERRAVANTI-WELLS —You are not on the board.

Mr McCullough —No, but I have had to present a strategic plan for the next three years to the board in the last five days and that has been prepared over the last 70 days. We have done a strategic plan and an operating plan that dovetails into that; and at the back of the operating plan, of course, are the budgets.

Those three pieces of work were submitted to the board on Thursday or Friday last week and, apart from a few formatting and synergy changes, they have been approved. Key to the strategic plan of that document is a large piece of marketing. All the marketing that we do—and it will flow across three different channels—will be leveraged as per what we stated in WoolPoll and leveraged with retailer and brand partners. We have extracted a strategy out of the board over the last couple of months. I have prepared a strategic plan—it has gone to the board—and it is ready to come down to Canberra for—

Senator FIERRAVANTI-WELLS —Mr McCullough, as part of the discussions for the renewal of the agreement, have you looked at the definition of the use of R&D moneys?

Mr McCullough —In the step? The other piece of work that we are doing is renegotiating the statutory funding agreement. That is at a point now where it has left our building and comes down to the minister. The definition of research and development spend and how we jam-jar the funds for R&D spend are clearly articulated in that document.

Senator FIERRAVANTI-WELLS —On the marketing issue, can you tell us a bit about your relationship with the UK based agency keep and how that relationship started. What is the basis of that and what is your engagement with them?

Mr McCullough —AWI’s at the moment?

Senator FIERRAVANTI-WELLS —Yes.

Mr McCullough —AWI has no contract with the keep agency at the moment.

Senator FIERRAVANTI-WELLS —Did I understand correctly—and I am asking you the direct question rather than relying on reports in papers. Did you go out into the marketplace for bids or interest in relation to market?

Mr McCullough —Yes, we did.

Senator FIERRAVANTI-WELLS —Did you put that out to a tender process?

Mr McCullough —Yes, we did. The keep agency had done a piece of work for us in the past, so we included them in that bid process. When I got the role as acting CEO there were only executives on the selection panel of that, which I changed immediately. We kept some of the executives on there, but what I did add to that selection were five people who had international marketing credentials, international talent. I was not on there and the person that I have looking after that project was not on there either. For example, we had the chief marketing officer of the Commonwealth Bank sitting on that committee. I wanted it to be independent. We went for the first cull, a reduction in the eight people that bid, and we are now down to four. We will move onto a second phase of that. That will be decided in two weeks time.

Senator FIERRAVANTI-WELLS —So you had about seven or eight companies initially?

Mr McCullough —We asked 10 and we got eight.

Senator FIERRAVANTI-WELLS —You asked 10?

Mr McCullough —Yes.

Senator FIERRAVANTI-WELLS —And you have culled that down to four?

Mr McCullough —Yes.

Senator FIERRAVANTI-WELLS —Presumably that process is still confidential.

Mr McCullough —Yes. It is ongoing, except in this stage I am planning to beef up that selection talent even more. This is an important piece of work and something that we are going to have to live with for three years. I want to make sure that we choose the best agency that has the ability to roll this out globally, in particular with talent in the Northern Hemisphere.

Senator FIERRAVANTI-WELLS —How will the timing of that affect your autumn—

Mr McCullough —Northern Hemisphere this year?

Senator FIERRAVANTI-WELLS —Yes.

Mr McCullough —For winter in the Northern Hemisphere this year. That will be in the marketplace this year.

Senator FIERRAVANTI-WELLS —Sorry, Mr McCullough. It is not a process yet that is in the public domain?

Mr McCullough —No. There is a bit of staging to go on there. The first thing is that—

Senator FIERRAVANTI-WELLS —No, I did not want to ask you the details of it because I am asking you—

Mr McCullough —Not yet.

Senator FIERRAVANTI-WELLS —Not yet. We are not at that point—

Mr McCullough —But as soon as we can, we will make it public.

Senator FIERRAVANTI-WELLS —Could I ask you about this UK based campaign, which I have also read something about, with His Royal Highness and his comments in relation to wool. Is AWI formally part of that campaign? What is the situation there?

Mr McCullough —Yes, we are. The board has approved ₤100,000 to be committed to that project. It is a bit more than a tripartite arrangement. We have the British Wool Marketing Board and New Zealand involved, but then we have the Netherlands—they have dropped a little money in—and the International Wool Textile Organisation have dropped a modest amount of money in as well. Essentially, it is a tripartite arrangement between us, the British Wool Marketing Board and New Zealand Wool—

Senator FIERRAVANTI-WELLS —Without canvassing the concept of marketing, one of the alleged points of difference on the board has been between targeted marketing and generic wool marketing. Is that now something that this process is going to look into?

Mr McCullough —No.

Senator FIERRAVANTI-WELLS —I ask that specific question, Mr McCullough, for obvious reasons: members of your board, because of their background and what they do, may be swayed towards a particular type of marketing as opposed to another type of marketing.

Mr McCullough —The first thing—and this is explicit in the strategic plan—is some definition on ‘marketing’ and no marketer knows the word ‘generic’ promotion or marketing. It is a wool growers’ word. If I understand what wool growers might mean by that word, I think they mean that they do not want a woolmark in Times Square on a billboard saying, ‘Wool is good.’ I do not think they want that. They voted very clearly in 2000 about that. We will absolutely not 100 per cent be doing anything like that. That is what you call business-to-consumer marketing, with no call to action. There are very few companies in the world that do it now—some FMCG companies and a few car companies actually use that style of marketing.

What we will be doing is leveraging all our marketing. What we have done in the past is that we have piggybacked off other brands and retailers’ marketing and attached our brand to that marketing. The only difference will be a new channel of marketing that we are doing—we are going to continue doing that one as well—where we will be commissioning the marketing and we will be having brands and retailers swinging off our marketing. That is very much along the lines of the HRH program. We have 100 retailers interested in co-investing or being part of that HRH Campaign for Wool program. So, no, the strategic plan has no generic promotion, no business-to-consumer promotion without a partner in it at all.

Senator FIERRAVANTI-WELLS —You have heard the various comments in relation to the selection process. The minister himself has made comments in relation to the problems at AWI—you know the comments that I refer to.

Mr McCullough —Yes.

Senator FIERRAVANTI-WELLS —Has AWI, because of the nature of its corporate structure, given some thought to changing its constitution to incorporate a more arm’s length selection committee process, perhaps in line with potentially MLA or some other model?

Mr McCullough —Do you want to answer this, Wal, or will I?

Mr Merriman —That is a board matter.

Senator FIERRAVANTI-WELLS —I have just asked you, Mr Merriman: has the board given consideration—

Mr Merriman —Are you asking me?

Senator FIERRAVANTI-WELLS —I am asking: in light of the comments that the minister has made, has the board given some consideration to the issues that the minister has raised and, in particular, when he publicly makes comments to the effect that it is the structure of AWI not the people who have been behind its chequered and volatile past. Following those sorts of comments—and there are a raft of them out there—has the board given any consideration to some internal changes to its constitution?

Mr Merriman —I like to think that I have a very good rapport with the minister. Our staff and government and DAFF have come up with the new statutory marketing—

Mr McCullough —Funding.

Mr Merriman —Statutory funding agreement.

Senator FIERRAVANTI-WELLS —Mr Merriman, a simple yes or no would suffice. I have just asked—

Mr Merriman —I am not going to comment on our new statutory funding agreement before the minister has even signed it, so I think you will just have to wait.

Senator FIERRAVANTI-WELLS —Mr Merriman, if you had listened to my question, my question was: following the comments that the minister has made about the structure of AWI, has the board given any consideration to proactively itself making some changes to the constitution?

Mr Merriman —Yes, the board has considered it.

Senator FIERRAVANTI-WELLS —Thank you, Mr Merriman. That was my question. Are they formal changes or is it just a consideration that you are giving?

Mr Merriman —The results of it will be in the statutory funding agreement.

Senator FIERRAVANTI-WELLS —I see. So part of the statutory funding agreement will be a commitment to change your structure?

Mr Merriman —The statutory agreement has it in it. It is part of it. We have signed it, it has gone to the minister and I cannot comment on what the minister has done with it.

Senator FIERRAVANTI-WELLS —Sorry, I have not understood, Mr Merriman. Are you saying that the agreement or what you have sent to the minister includes a proposed change to the structure of your organisation, or a constitutional change to—

Mr Merriman —I am sorry, I am not going to comment on that document.

Senator HEFFERNAN —Fair enough.

Mr McCullough —I think it is best that the minister gets it and considers it before we start predicting what might or might not be inside that document.

Senator FIERRAVANTI-WELLS —All right, thank you.

Mr McCullough —But the answer to your first question: was it considered? Yes, it has been considered.

Senator FIERRAVANTI-WELLS —Yes, thank you, Mr McCullough. That is what I wanted to know. I know other senators have questions, so I did not want to take too much more time.

CHAIR —Thank you. Senator O’Brien.

Senator O’BRIEN —We are hearing that there is a letter, addressed apparently to Mr Merriman, from key Italian wool stakeholders who have raised concerns about AWI. We are being told that the letter expressed disappointment about a recent visit of three members of the AWI board of directors to Italy and it claimed the delegation did not express official AWI thinking. Can I have your comments on those reports?

Mr Merriman —I was not there, but I have got every confidence in those people who attended that delegation. To circumvent a lot of this, there is a second Italian letter. Unfortunately good news does not get leaked these days, but I would like to pass this over to you.

CHAIR —Senator Heffernan, the secretariat will do that. It is not your role.

Mr McCullough —Actually there are some copies here, if you—

Mr Merriman —I will just make sure it is the right one.

CHAIR —Not that we do not trust Senator Heffernan, but the paper will probably be a different colour by the time we get it.

Senator Sherry —It might be useful, Chair, if we actually identify which letter we are referring to in terms of questions.

Senator O’BRIEN —Mr Merriman, you have said there are two letters. Can you differentiate the letters—dates, addressees? Can you tell us what the dates of the two letters were?

Mr Merriman —I have given it away.

Mr McCullough —The first one is dated 24 February and the second one is dated 25 March.

Senator O’BRIEN —From the same source?

Mr McCullough —They are from the same signatories of the first letter, yes. That is prefaced in the top line of the second letter.

Senator O’BRIEN —And they are Italian wool stakeholders, are they?

Mr Merriman —Yes.

Dr Sheil —I am prepared to answer that question. I was there.

Mr Merriman —Yes, excuse me. Dr Sheil was at that meeting.

Senator O’BRIEN —Dr Sheil, can you give us your response to the reports about the concerns raised by the stakeholders, and the claim that the delegation did not express official AWI thinking?

Dr Sheil —Yes, I can. I think that there has been some misunderstanding in the letter. The letter was drafted by somebody who was not at the meeting. In fact, half the people who signed it were not at the meeting either. I think one of the most important things to understand is that there is a fair amount of, probably understandable, anger towards Australian Wool Innovation from within the Italian community—I think Senator Fierravanti-Wells picked up on that in her comments—which has developed over a period of time. In the meeting that we held with them, that combined anger was expressed at the opening of the meeting. I felt that we dealt with it very constructively and went on to have a very positive meeting. I, in fact, took quite detailed notes of that meeting. The object of the meeting was to gain their input into our strategic planning process and we were able to get fantastic input from them. So it was a very positive meeting. I think the letter that came subsequently, as I said, was from people who were not actually at the meeting and did not have the opportunity to discuss some of the issues that they raised in the letter.

Senator O’BRIEN —I have not seen this second letter. Does that qualify the first letter or change the position of the signatories?

Dr Sheil —I think the second letter talks very strongly about wanting to work together with the Australian wool industry in the way that the chairman mentioned, in a way that—

Senator HEFFERNAN —Better read it into the Hansard.

Dr Sheil —historically has not been present before, so I think very much there is a mood to move on from the past now.

Senator O’BRIEN —The difficulty we have, of course, is that the letter may have been tabled, but we have not actually seen it yet—

Senator HEFFERNAN —Read it into the Hansard.

Senator O’BRIEN —I am not sure why.

Senator HEFFERNAN —It would only take a minute to read it.

Senator O’BRIEN —I am happy for Dr Sheil to read the second letter into the Hansard, because that will assist us.

Mr Merriman —Stuart has got a copy there. Meredith, do you want Stuart to read it?

Senator O’BRIEN —Mr McCullough, you can read it; someone read it into the Hansard.

Mr McCullough —It reads:

We know that our letter of February 23rd, for some reason, went to the press: we were not the ones who distributed this as our goal was to simply stimulate the importance of the unity of the AWI Board and get to a commonly agreed future advertising campaign, absolutely needed for the relaunch of wool in the international market.

A few days ago we were informed of a potential project connected with HRH Prince Charles.

We have given some thoughts to it—even though we don't know any detail—and have come to the conclusion that Prince Charles would in fact be an “excellent first testimonial” to speak in favour and passing a positive message about wool in general.

What we suggest is to take advantage of such opportunity and quickly study through a competitive tender process involving a number of top international Advertising Creative agencies, how it could be used as the starting step of an AWI “medium term” campaign that. after Prince Charles, could involve other International Testimonials, either VIPs or top manufacturers, or retailers or whoever is recognized worth to pass new positive messages on wool to final consumers (especially to the younger generation).

If the Prince of Wales campaign make sense to the AWI Board, in our opinion such subject should immediately be added to a brief to pass to the selected bunch of International Advertising agencies. The AWI Board should then take the decision of the winning one.

The Italian manufacturers offer their availability to contribute and express their opinion about the message to opt for.

If we all move quickly, we are confident we are still on time for a presence in the press next Autumn-Winter 2010-2011 season.

We sincerely hope our suggestion will find your and AWI Board agreement. We are confident on the fact that, if we agree on the subject of the campaign, if we look at it as a “first step” of something which should have a “continuity threat” for 2-3 years, if we launch a competition to various top Advertising agencies to select the best of them, all the above will recreate, inside the AWI Board and within producers and users, the necessary harmony to join the efforts and aim to a strong and positive repositioning of our precious fibre.

We look forward to receive your feedback.

In the meanwhile we send you our best regards.

That is prefaced by saying:

In agreement with the same signatories as the previous letter.

Senator O’BRIEN —So there is a bit of a mixed message out there. The first letter is reported as being quite critical of AWI, talking about potential conflicts of interest of board directors and about the purpose of the visit being misrepresented. Dr Sheil, you are suggesting that the author of the letter was not at the meeting.

Dr Sheil —Yes, that is correct. In fact, official Australian Wool Innovation thinking was expressed because the meeting was opened by the general manager for marketing for Europe, Mr Nagy Bensid, who did a presentation of Australian Wool Innovation’s current marketing strategy and plan, then we opened the floor for discussion about potential future directions to gain their input. It mostly was a listening brief—the reason that we were there. So I think that that part of the letter was incorrect. As I said, there was some incorrect information in the letter.

Senator O’BRIEN —Has the board inquired as to why that took place, or are you simply satisfied that the second letter corrects the record?

Mr Merriman —I am satisfied with that delegation. The second letter not so much corrects it, but they were highly embarrassed that that letter got leaked. It was in-house criticism and I have accepted that on behalf of the board. I think it is a misunderstanding. But the second letter is the true intent of Italy and it is the work of that delegation that got us to this point.

Senator O’BRIEN —Does the board know how the letter was leaked?

Mr Merriman —If you can tell me how things leak, that would be lovely!

Senator O’BRIEN —It is obviously a matter that reflects on the reputation of the board. I would not laugh it off if I were on the board.

Mr Merriman —Our company people have tracked the PDF, and they know the author in Australia. It certainly was not anyone on the board—that author in Australia who has gone to the press.

Mr McCullough —So the letter had been scanned in Australia and put into a PDF file.

Senator O’BRIEN —So somebody—

Mr McCullough —But the person who scanned it left their signature in the PDF file.

Dr Sheil —It is fair to say that we are doing an investigation. There have been a series of leaks from the company and the information that is being leaked is biased, inaccurate and misleading.

Senator BACK —What are you doing about it? It is very unfair.

Dr Sheil —Clearly it is causing damage to directors, the board and the company and, yes, the company is doing an investigation into that at the moment.

Senator O’BRIEN —I take it the board is concerned that it, as an industry owned research body, is in the media so frequently in relation to in-fighting between its board members?

Mr Merriman —We get all that press. We get one person, from a paper called the Weekly Times, who dreams up these things. At the end of the day here is the document: the strategic plan, the operational plan, all signed, sealed and delivered and, with the exception of some formatting, ready to go to industry. It has been ticked off by our shareholders and it is ready to be presented to government.

Senator O’BRIEN —Will that, when it is released, stop the internal politics finding their way into the media, and will it stop us seeing more reports about—

Mr Merriman —That is for the media. As far as I am concerned, the board and staff have put out an excellent document and that is the blueprint for the next three to five years.

Dr Sheil —That has been through the united work of the board. All the corporate governance advisers that we have commissioned have all said the same thing—that they all applaud diligent boards which do not just sit back and let things go, and that actually look into the proper functioning of the company. Of course, particularly at this time, that requires a lot of debate. We came into a company undergoing quite a lot of change related to financial issues, because of the global financial crisis and due to the falling sheep flock numbers. The company had recently taken on the Woolmark company and was shifting from being a predominantly R&D body to being a predominantly marketing and R&D body and there were major shifts in the strategic direction that were required.

It has been a time of great change within the company and that requires a diligent board. Certainly there has been a lot of discussion on the board and, personally, I believe that has been managed extremely well. The issue for us is that the discussion on the board is ending up in the press in a manner that in my opinion is biased, misleading and causing inaccurate information to go into the public place.

Senator O’BRIEN —Does that reflect divisions in the board?

Dr Sheil —No. As the chairman just said, the board is united. The board has just passed a united strategy for marketing, a united strategy for R&D, a united strategy for business development. We are clearly cohesive on the road ahead and that has come through a well-functioning board with a lot of good debate.

CHAIR —And the leak?

Senator O’BRIEN —You are suggesting the leak does not come from the board. Is that what you are saying?

Dr Sheil —I said we are doing an investigation into that.

Senator O’BRIEN —I can read between the lines, I think.

Mr Fletcher —Can I just say something too? The Italian industry has probably gone through more turmoil than AWI. The industry has dramatically dropped off there. They are under massive pressure from competition with Asia, where the wages are about 40 to one. As a client of the Italians, I know more about it than anyone in this room because I cannot get my money. It is a very difficult situation. In Australia the insurance companies would not accept the insurance any more, which I could accept—if I were an insurance company, I would be in the same boat. I know one company in Australia very well that has left a lot of money up there in the last 12 months. So they are under strain and, naturally, they are coming back to people to blame—AWI. That is no different from when you see low cattle prices—they blame the processor or the government or someone else.

Senator O’BRIEN —Yes.

Mr Fletcher —They are under pressure and I accept that. Ten per cent went bankrupt in the last 12 months. You just have to look at it on balance.

Senator O’BRIEN —I am going to quote you next time Senator Heffernan is going on about cattle prices. That is another story.

Senator HEFFERNAN —And blaming the government. Can I just ask a couple of questions?

CHAIR —No, you cannot.

Senator O’BRIEN —No. I have not finished yet but then you can.

CHAIR —Just wait.

Senator McGAURAN —I have only had one!

Senator HEFFERNAN —Yes, but you have had one go. I have not had one go yet.

CHAIR —Just wait—order!

Senator O’BRIEN —You have had a go, Senator McGauran, but I wanted to ask about another matter—

CHAIR —It was a pretty modest go from Senator McGauran. It is rare that I spring to his defence. He only got one or two questions in.

Senator O’BRIEN —I want AWI’s view on how the Australian Wool Exchange Ltd’s National Wool Declaration and the On-Farm Audit Program have worked and how any government investment in that area might benefit the industry.

Mr Merriman —How it works?

Senator O’BRIEN —Yes.

Mr McCullough —How the declaration—

Mr Merriman —It is pretty simple how it works. It is there; it is identified.

Senator O’BRIEN —Is that of benefit to the industry?

Mr Merriman —I presume. Stuart can talk to this—but it is one thing you might have seen in the press. The company brought Erik Autor out here from the American Retailers Group and that was one thing they were very keen and insistent on; that the wools are declared so people can see the amount of unmulesed, ceased mulesed and pain relief wool.

Mr McCullough —To give you a bit of an update on our participation in that, we have certainly supported that from day one. We have invested money in the formation of the National Wool Declaration—$30,000. The National Wool Declaration was instigated for declaring ceased mulesed, non-mulesed and pain relief treated wool in August 2008. We continue to support that document and will continue to support it. We want to flush out as much of that wool, as possible and identify it in the auction system. So should retailers and brands wish to buy that, they can send the money down, find it and purchase it in the auction room. To find it is important.

Senator O’BRIEN —And the system will identify it?

Mr McCullough —The system identifies non-mulesed, ceased mulesed or wool that has been treated with pain relief.

CHAIR —I am very mindful that no-one wanted to ask any questions. I welcome healthy debate. The time is ticking away. Senator McGauran has had a chance, but she—

Senator McGAURAN —Senator Adams has yielded to me because it follows directly in regard to the letters and it is only one question—I really meant that.

CHAIR —Okay. Senator McGauran, sorry.

Senator McGAURAN —I have read this second letter. Perhaps the CEO could explain this to me, seeing he read the letter. It was said by Mr Merriman that the first letter was an in-house criticism that should never have leaked out. Part of that criticism was in fact a serious allegation of conflict of interest on the board. Can you point out to me how the second letter retracts that serious criticism?

Mr McCullough —The chairman said it was a criticism amongst friends, I think, not in-house. The point that was being made here is that the theme of the end of the first letter and of all of the second letter indicate a great willingness to cooperate with the Australian wool industry, which we are willing to do on an ongoing basis. We invest a lot of money there and we are continuing to do that, as Senator Fierravanti-Wells would say, as a flagship market.

Senator McGAURAN —But it is a criticism nevertheless, and a serious one. Have you addressed it?

Senator HEFFERNAN —By someone who was not at the meeting.

Mr Merriman —I am sorry, we—

Dr Sheil —Can I address that because again it is a question of conflict of interest which is directed against me. I must say that it is an issue that I am finding particularly frustrating. As you know, I was involved with developing and inventing the product Tri-Solfen. That has always been widely publicised. It was well known before I was elected to the board and I was still voted onto the board, with the second highest vote in the history of the Australian Wool Board elections. I have a very strong understanding of the need to maintain proper corporate governance in managing any interests that I have on the board. I have always fully declared my interest in the matter and, in any discussions or board deliberations on the issues, I always withdraw. I know that the chairman has always, before this committee, confirmed that that is the case.

The letter does not make an allegation of conflict of interest. It does not make any substantial accusation. All it said was that they were disappointed to see people with conflicts of interest appearing before them. Everybody, on any board, has areas in which they have an interest.

Senator Heffernan interjecting—

CHAIR —Sorry, I am going to pull this up. Dr Sheil, I appreciate your answering the question from Senator McGauran. But in good faith we had an agreement on this committee, with the assistance of you all  in front of us when you made yourselves available, that the staff would give up their dinner break on the proviso that we would get this wrapped up asap. I am not one to kill debate but, in all fairness, I am not going to sit by and abuse the agreement that we made. That is the last question, Senator McGauran. Senator Adams, I am not going to encourage you to ask a stream of questions. If you have one or two very quick ones to ask, please do. I would encourage the officers from AWI to keep the answers as short as possible so that we can honour the agreement we have with the staff. Thank you.

Senator ADAMS —Thank you very much. Firstly, Mr McCullough, my congratulations on your appointment. I think that you will do well.

Mr McCullough —Thank you.

Senator ADAMS —I have a quick question on the North American market position for Australian wool. Could you tell me where we are going with that at the moment?

Mr McCullough —Yes. I know that market pretty well; I spent three years working in that market for AWI. In my view, we have been very lean on the ground there in terms of not only our operating costs  but also the amount of money we have allocated for projects there in the last 10 years. I have allocated a significant piece of money, as part of our new marketing strategy, for a rollout of the marketing program in the North American market in fall-winter this season.

Senator ADAMS —Are they getting better money for the certified non-mulesed wool now? What is the situation?

Mr McCullough —They are not actually getting any premium in the auction system, which makes things a little tough. As you know, the auction system works on interest. If there are two people bidding on a lot of wool the price may not go up, but if there are 10 people bidding on it the price will go up, and that sends a little signal to us. But we certainly encourage people to use the National Wool Declaration.

In the last couple of weeks we had out here in Australia Erik Autor, Vice-President of the National Retail Federation. We did that to show him—so that he can be the conduit, if you like, between the Australian wool industry and North American retailers—the size of the Australian wool industry and the size of this particular problem, flystrike prevention. I do not know whether you have read any of the press or heard some of the exit interviews that he did on his departure to North America, but they certainly looked positive. There is no doubt that, in the latter half of this year as 2010 closes out, these retailers will come under increasing pressure from animal rights groups.

Senator HEFFERNAN —We are still getting flystrike.

Senator ADAMS —Are the activists ramping up their program or are they keeping quiet for a while?

Mr McCullough —I think we can expect it to ramp up a little in the latter part of this year as 2010 closes out.

Senator ADAMS —As far as the mulesing program goes, what has happened with clips and all the rest of it?

Mr McCullough —We continue to invest in this market. I think we have $3 million allocated in the operating budget against this particular problem. It is No. 1 in terms of our priorities in research and development. We have a commercial product in the market—the clips. We have another product, intradermals, which is getting very close, with registration at the APVMA at the moment, and towards the end of this year or early next year we might be doing some commercial trials. And, of course, the genetic work continues in the background: ultimately that is going to be our solution I think, but it takes time.

CHAIR —Thank you, Senator Adams. Mr McCullough, congratulations. You may be only new to the CEO’s role but you sound like a seasoned CEO in your short answers.

Mr McCullough —It is only day 2, Senator Sterle!

CHAIR —And God help us when you have been in the job for a couple of years!

Mr McCullough —The shine might be off me in a few months.

CHAIR —Congratulations on beating 92 people to the job and, on behalf of the committee, thank you. Good luck to Australia’s wool producers—they certainly need all the help they can get.

Mr McCullough —Thank you.

CHAIR —You can take this question on notice, because I am keen to wind up: it is reported that your predecessor was on $350,000 per year. You, Mr McCullough, like us, do not do this job for the money; it is for the love. It does say that you are being paid well below your predecessor. If you can let the committee know that, we would appreciate it.

Mr McCullough —We are just going through some finalisations of that contract, but it will be very public in the annual report, I am sure.

CHAIR —That is fine; take it on notice, Mr McCullough. Mr Merriman, Mr Fletcher and Dr Sheil, thank you very much. Drive safely, and thank you for coming to us earlier than was expected. On behalf of the committee, I do sincerely want to thank the staff. Thank you, Hansard and Broadcasting, as always, and also our committee secretariat, the minister and officials. Dr O’Connell, thank you very much. That concludes today’s hearing.

Committee adjourned at 8.06 pm