This looks like a science fair experiment,” one of Toll’s divisional presidents told his head of strategy.
As part of a company-wide effort under new owners Japan Post to turn around the logistics group, the strategist had spent three months working out how to merge three businesses that delivered parcels.
He had analysed how Toll’s products were priced and sold – usually on the basis of long-standing personal relationships – and believed the system could be become more efficient and professional.
The president was one of the five so-called “war lords” who reported to managing director Brian Kruger. He was an important man. And he wasn’t interested. “I just want the headcount,” he said. “Just give me the org chart.”
The weekly report
In 2016, when the conversation took place, Japan Post was discovering what insiders already knew: Toll was a sprawling corporate federation that defied conventional management.
Eight former Toll managers have spoken to The Australian Financial Review about their experience at the company, describing poor internal controls, competing divisions and corruption, for a series exploring why the acquisition by Japan Post failed.
Toll was built over a quarter of a century by transport entrepreneur Paul Little, who turned a Melbourne 100-man trucking company into a 45,000-person international logistics giant. It operated with the swashbuckling confidence and style of the footballers at Little’s beloved Essendon Football Club.
As much as Toll was the manifestation of founder Little’s ambition, it was a creation of the modern economy. In a world of global manufacturing, Toll operated supply chains and distribution networks that moved everything from shower curtains to military tanks.
Every week, 36 business units across five divisions and six continents submitted profit and loss accounts to head office at 380 St Kilda Road, Melbourne.
The weekly numbers held Toll hostage. They could make or break careers. They were Toll’s primary management tool, and helped make long-term planning – or even a reasonable level of intra-company co-operation – almost impossible. Medium- and long-term financial forecasts were irrelevant, and no one believed them anyway. It was all about the weekly P&L.
Foreign acquisition novice
When Japan Post took control, in May, 2015, it asked the existing management team to stay. As an incentive, it promised to pay out all employee share options for those who remained two years. While the decision was well intended, it sucked $152 million in cash out of the business at a time when it was struggling financially.
Japan Post, which could date its history to 1871, had never made a major foreign acquisition. The Japanese had spent a lot of money on Toll, and didn’t want to make any mistakes. They had invested in the Australians, and wanted them to lead Japan Post into the first echelon of global logistics groups.
Kruger, who had run the company since Little retired in 2012, was one of the many who stayed. While Kruger was friendly and charming, he had a reputation for avoiding problems. Toll was full of them.
Others are sympathetic to their former leader, and say that Kruger’s refusal to respond to every complaint was a strength.
“He was a great listener,” says a former Toll manager who worked with him. “He had his views but was always ready to hear a counterargument. He didn’t just jump to action.”
Kruger says he improved internal governance, broke down fiefdoms and set higher expected standards of conduct. “The focus was always on making Toll a better business,” he says.
Bad news blocked
Bad news rarely flowed upwards. When a business unit finance director told Kruger that profit in his area was going to fall sharply, he was warned that his comments were inappropriate. Profit in the business fell anyway, and far more than the forecast agreed on.
“I was counselled afterwards that wasn’t something to put to the CEO and CFO,” he says. “The outcome was 10 times worse than what was accepted finally.”
While Toll’s leaders avoided bad news, Japan Post struggled to find out what was going on. Toll was meant to learn from the parent’s expertise in running a large, complex company. Toll was going to teach the Japanese the secrets of the global supply chains.
Instead, the Australians treated the Japanese as shareholders who needed to be kept at a distance.
“I always got the impression that Japan Post was asking the right questions and trying to get to the bottom of what was going on – and Toll managed to not give them that visibility and keep them at arm’s length,” says a former finance director from one of the operating divisions.
“They were taken advantage of,” says a former head office executive. “They were very naive.”
In many ways, Toll’s success had made it complacent. The six divisional directors, who were cut to five in 2014, were giants in the industry, and knew how important Toll was to their clients’ supply chains.
Paul Coutts, now chief executive of Singapore Post, was CEO of global forwarding, which shipped freight around the world in ships and planes. Shane O’Neill ran global express, which moved time-sensitive goods within Australia and Japan (and wasn’t really global). Chris Pearce still leads global logistics, which ships cars and other goods around Asia.
David Jackson ran global resources, which moved equipment and parts for mining, energy and other industrial customers in Australia, Asia and Africa. Mark Kellett was president of domestic forwarding, which specialised in moving and storing freight on pallets in Australia and New Zealand, and owns two cargo ships. Mal Grimmond oversaw specialised and domestic freight, which could get a giraffe from Cape Town to Los Angeles, or The Australian Ballet’s wardrobe from Sydney to London.
“There was sometimes an attitude internally that the customers needed Toll more than Toll needed them,” says a former manager who worked in head office.
Toll had trained and employed some of the best supply chain and logistics operators in Australia. It excelled at delivering freight efficiently and quickly. But the short-term focus and powerful fiefdoms meant it was difficult to implement badly needed projects across the whole company.
Kruger, a former BHP executive, had been Little’s chief financial officer, and struggled to assert his authority over the transport-industry veterans who ran Toll businesses, according to people who worked with him.
The war lords’ confidence meant that decisions were sometimes taken that were not backed by rigorous analysis. Assertions were used as proof. Long-term relationships with customers, training, upgrading equipment and avoiding public embarrassment were less important than the weekly profit scorecard.
“It was strong tactically and focused on day-to-day operational metrics but it was strategically weak,” a former manager says. “Over the longer term, the lack of investment, especially in updated technology, began to tell across the dozens of business units in quick succession.”
Internal financial controls suffered from a lack of investment and oversight. An auditing partner at KPMG told one Toll executive she didn’t look at revenue or expenditure less than $100 million because it wasn’t big enough to affect the business, according to the former executive.
The formal accounts didn’t always reflect financial reality. At one point, Toll’s accountants realised they had $30 million less cash in the bank than their financial accounts said they should have, according to the former executive.
“This number is not accurate,” a Toll spokeswoman says. “Toll is an $8.5 billion company and variations of this nature, if it were true, would represent a 0.03 per cent adjustment.”
A check by the corporate acquisitions department discovered that the finance department had been incorrectly calculating the value of the financial covenants over part of the company’s $2.5 billion debts, according to former executives.
In 2015 and 2016, the first and second years of Japanese ownership, Toll was in breach of the covenants, which are a requirement of loan agreements, according to one of the former executives.
“Toll has not had any financial covenants on its external bank debt facilities for a number of years,” a Toll spokeswoman says.
The infamous ‘Donkeygate’
The lack of professionalism emerged in other ways.
With a history in trucking, no one expected Toll workplaces to be Australian versions of Yves Saint Laurent. But aggression was the currency of senior management, and contributed to a culture that didn’t share information or power, and sometimes basic civilities.
“I have very fond memories of Toll and very painful memories of Toll,” a former national sales manager says. “They had an absolute complacency for doing anything about bullying.”
Toll had a “culture of sledging that went right to the top,” a former executive says. “It’s not a very collegiate place at all.”
“I have been to meetings when men swore, shouted or screamed at people,” says a former Toll executive and transport industry veteran. “I have been around but I had never seen anything like it.”
In 2012, during a team-building exercise for the leaders of the Global Express division in Sydney, some wore aprons with penises stuck to them, including a manager who simulated sex with a toy donkey in front of his colleagues.
Two women complained the behaviour reflected a sexist and bullying culture, according to a report at the time. The incident, which was known as Donkeygate, became part of the folklore of Toll’s freewheeling culture.
A Toll spokeswoman says: “Toll has long had a zero-tolerance policy regarding bullying and harassment of any kind.”
In 2015, as Japan Post took over, Toll was caught by a shift in the market. The resources boom was tapering off. Billions invested building mines and gas plants had been great for logistics companies, which would frequently be called on to deliver crucial parts to remote locations at short notice.
Department stores such as Coles and Woolworths were other important clients. With $330 billion of groceries, clothing, electronic devices and other retail goods sold every year, the industry was an important driver of Toll profits.
Consumer spending was changing. More people were shopping online, and home delivery was dominated by Australia Post.
A downswing in consumer spending was particularly painful for transport companies, which had big overheads they couldn’t quickly dispose of, including warehouses, trucks, ships and helicopters.
Even if they were almost empty, Toll’s vehicles had to head out every night to deliver promised services. Instead of dropping off pallets at a few warehouses, Toll drivers would have to drive around suburbs dropping off many individual parcels, which took longer and paid less.
Competing with Australia Post, TNT, FedEx and other smaller operators, Toll sometimes found itself operating at 40 per cent of its capacity in its most important market.
As demand slowed, some in the company urged a big push into Australian government work, including moving equipment and parts for the defence forces.
They met with resistance. Although Toll had a division that specialised in government contracts, its culture wasn’t a great fit for public service work.
Toll sales staff were used to entertaining mining and retail clients. Some public servant procurement managers wouldn’t accept a cup of coffee from suppliers. The financial terms were often tight too.
The middle men
“It was all about mining and retail,” a former national sales manager says. “They would wine and dine all the mining and retail clients. That made sense. They didn’t understand government or defence.”
The big retail contracts were lucrative but sometimes marred by corruption. So many containers and pallets needed to be moved to Kmart, Coles, Myer and other retailers, that independent brokers emerged to help retailers cut their transport costs.
“Freight brokers knew the market and could pick a big retailer and offer to get a cheaper freight deal and get you better service,” says a former Toll manager.
The rise of freight brokers exposed the weakness of Toll’s old-fashioned method of managing clients. Toll sales staff could be paid as little as $50,000 to $60,000, plus commissions on the contracts they sold.
Brokers would pay kickbacks, from their own fees, to cut the price, according to the ex-manager. The illicit payments were worth more than the loss of commission, and tax free.
“We ended up with horrible rates and dodgy deals,” the manager said. “The deals were so idiotic. No one would go into these willingly. I spent my first six months cleaning it up.”
Toll’s weak governance and blue-collar workforce made it an attractive target for unions. Essentially an arm of the Japanese government, Toll seemed to lose the willpower to bargain hard with the Transport Workers’ Union, which represented most of its workforce.
In 2017, the TWU secured an industry-leading 5 per cent wage increase from Toll over two years. Superannuation contributions were increased from 12.5 per cent to 14.75 per cent by 2019, the highest in the industry.
Superannuation was a sore point with the workforce. Toll’s 49-odd payroll systems in Australia struggled and millions of dollars of compensation had to be made because super payments were calculated incorrectly, according to a former senior manager.
A clause in the 2017 union agreement provided what is known in finance as an “inflation collar”. If inflation was higher than the pay increase, then Toll workers would receive an automatic top-up to protect their real earnings.
With negligible pricing power, falling revenue and badly needed internal investment, Toll had conceded a pay hike 75 basis points higher than Australia Post and 100 points higher than Linfox, its two main competitors.
“Our labour arrangements are very comparable to other major industry players,” a spokeswoman says. “Toll this year secured an agreement that holds wage rates where they are for the 2020-21 financial year.”
Not giving up
On April 26, at its annual results in Tokyo, proud Japan Post acknowledged it had blown almost all its money on the troubled Australian company. Operating earnings had fallen from $444 million the year before Toll was sold to a forecast $69 million profit that financial year.
The $6.5 billion acquisition price was written down by $4.9 billion.
Still, institutional Japan wasn’t going to give up easily.
“This is one step backwards for two or three steps forward,” chief executive Masatsugu Nagato told the Financial Review at the time. “We are fully committed to Toll because without Toll we cannot be in the global market.”
There were reasons to be cautiously optimistic. Share and house prices were strengthening, buoying consumer confidence. And Kruger was replaced by Michael Byrne, who had been CEO of Toll’s great rival, Linfox, on New Year’s Day, 2017.
If Byrne’s considerable experience wasn’t enough, he would report to John Mullen, a former chief executive of Asciano, DHL Express and TNT Express Worldwide. To cap it off, Mullen was chairman of Telstra, one of Australia’s biggest companies.
Japan could take heart. Finally, professionals were in charge.
Tomorrow, part three: ‘She did an amazing job but we broke her’