Reynolds bows to the inevitable

00:32, Aug 31 2011

Surprise surprise, Paul Reynolds will not be staying on to lead Telecom after its demerger of Chorus.

No-one seriously expected Reynolds to want the much smaller job of running Telecom retail after handling the complexities of the last few years.

But after four years as CEO - he started work in September 2007 - the inevitable question about Reynolds is whether he was good for business.

Without a doubt he's had a tough gig. The company has experienced constant regulatory pressure over Reynolds' tenure which has probably done more to affect the company's value than anything else.

When he joined, Telecom's share price was well above $4. It's now around $2.50 having clawed its way back from the depths below $2.

When Reynolds leaves next year, however, Telecom should have achieved a level of stability it has not enjoyed for many years. The retail market in both fixed line and mobile will be more competitive, implying less regulatory risk, and the big capital investment issues will be dealt with.

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For shareholders the future looks better than it has for some time.

But in my view, Reynolds' role in that process has not been the shining example of strategic positioning you would want from such an expensive executive.

There is strong evidence he was instrumental in persuading the board to ditch its plans for structural separation back in 2007, the move it is now being forced to pursue.

Once National came to power the choice for Telecom became clear - it had to structurally separate or compete with the Government's fibre roll out, yet Reynolds maintained an unnecessary shroud of uncertainty over Telecom's plans that eroded its share price the longer it went on. 

He also accelerated investment in infrastructure to prolong the useful life of Telecom's copper local loop - in itself a practical thing to do but a potentially wasteful option given National's clear intention to promote fibre to the home.

It's open to debate how much Reynolds was to blame for the debacle of Telecom's XT mobile network deployment, but as CEO he obviously had to bear some responsibility for it. On the plus side, his personal handling of the problem was skilful and probably helped mitigate the damage.

For all his personal skills however, Reynolds had an enormous public relations handicap to overcome - his huge pay package.

Put all those issues together and I'm not convinced the board made the right decision in appointing an outsider as CEO, even one as able as Reynolds.

Some interesting research on this issue was carried out by Jim Collins, American author of business bestseller "Good to Great: Why some companies make the leap . . . and others don't."

In a follow-up book "How the Mighty Fall" he looked at why some faltering companies keep falling to oblivion while others recover.

He wrote: "Our research across multiple studies . . . shows a distinct negative correlation between building great companies and going outside for a CEO. Eight of the 11 fallen companies in this analysis went for an outside CEO during their era of decline, where only one of the success contrasts went outside during the eras of comparison."

Looking back at his previous research, he said, "over 90 per cent of the CEOs that led companies from good to great came from the inside; meanwhile, over two-thirds of the comparison companies in that study hired a CEO from the outside yet failed to make a comparable leap".

Of course, so much of what drives corporate decision making and performance can only be guessed at from the outside, so our judgments have to be circumspect. But I think Reynolds probably made a big strategic mistake right at the outset and was thereafter destined to underachieve.

What do you think?

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