Functional separation could cost $1.2b: Telstra Chairman

Five years minimum to separate and the company's $12 billion IT transformation would be pulled apart

The functional separation of Telstra will cost the company between $500m and $1.2 billion and take a minimum of five years to carry out Telstra’s Chairman Catherine Livingstone has said.

Speaking at the company’s AGM, Livingstone said that it was unclear what functional separation meant in practice as the definition of the term was up to the communications minister.

“What we do know is that if the UK approach is adopted, it would force us to pull apart the new IT system we have just built as part of the transformation – and would cost anywhere between $500 million and $1.2 billion and take at least five years,” she said.

Livingstone also suggested that separating Telstra would impede the company’s ability to invest in the telecommunications sector and could affect funding for the rollout of the NBN.

“The Board’s view is that maintaining a healthy Telstra is in the best interests of ongoing innovation and investment in the [telecommunications] sector in general, and of the NBN in particular,” she said. “Without parallel investment of the magnitude undertaken by Telstra, the NBN will fall short of its potential.

Remuneration

Livingstone also used the AGM to argue that the remuneration packages awarded its management had been driven by performance.

“Let me say this about 2009: We achieved good results in difficult times,” she said. "We achieved revenue growth – at a time when many organisations have reported revenue contraction; we managed our liquidity – we haven’t need to call on shareholders for additional funds; and we maintained shareholder dividends.”

Livingstone said that senior executive remuneration was made of fixed and at-risk components, with the majority at risk, and tied to performance targets in both short term and long term incentive plans.

“In relation to fixed remuneration, given the global financial crisis and having regard to prudence the Board has decided to freeze the fixed remuneration of all members of our senior executive team for 2009-10 – except where they have been promoted into a new position or have had a significant increase in the scope of their responsibilities,” she said.

“In relation to short term incentives, or STI, the awards to senior executives were significantly lower in 2009 than 2008 as Telstra did not meet its aspirational targets.”

The company’s long term incentive is determined 50 per cent by reference to total shareholder return hurdle and 50 per cent to a return on investment measure, Livingstone said.

“It is important to note that the remuneration structure – including at-risk components – of our new CEO, David Thodey, is fully aligned with that of the senior executive team,” she said.

As reported to the market, Thodey’s contract was based on a fixed remuneration component of $2 million, while non-executive director fees had been frozen at 2008 levels until at least 2010-11, Livingstone said.

In August Telstra reported sales revenue growth of 2.9 per cent to $25.4 billion; profit after tax growth of 10.4 per cent to $4.1 billion; and free cash flow growth of 13.2 per cent to $4.4 billion. The company’s dividend remained at 28 cents per share.

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