ESG: STAKEHOLDER RISKS Spotlight on Woolworths Limited Authored by Mark Barraclough Is Australia’s most valuable brand gambling with shareholder value? The case for reform: Woolworths’ current heavy investment in high loss poker machines is potentially risky business due to the high social cost of the industry, particularly as it relates to problem gambling. The implications of a large and growing investment in electronic gaming machines that cause significant social harm could range from political or community obstacles to brand contamination of not only the Woolworths brand but also related potentially more vulnerable brands such as Dan Murphy’s, BWS and Thomas Dux. To date, self-regulation by WOW appears to have failed to the extent that it is not transparent or demonstrably effective. The reforms called for by the Productivity Commission, independent experts, multiple politicians, advocacy groups such as GetUp and individual customers and shareholders go beyond where WOW is currently willing to go. This is why GetUp members who are also WOW shareholders have called for engagement, disclosure and reform by calling for an Extraordinary General Meeting of WOW. These calls for reform have been public, sustained and of significant national profile and pose a legitimate threat to business as usual by management and the board. To date, WOW has not disputed shareholder claims that problem gamblers’ contributions to gaming revenues are estimated at least 40% of total gaming revenues, a statistic that highlights how a good deal more needs to be done to reduce the harm being caused by high velocity poker machines. GetUp questions whether the lack of transparency, oversight and engagement on such an important issue of social justice is indicative of wider issues within WOW’s strategic capability to prioritise and execute decisions based on its shareholders’ interests. In an effort to chase further profits to maintain shareholder value, Woolworths through its investment in ALH is diving even deeper into the poker machine business without addressing the risks these operations pose to its core operations. This report will show that Woolworths has a significant stake in the gambling industry –earning a conservative estimate of approximately $92 million in EBIT from its poker machine interests in FY11. An August 2nd, 2012 report by Citi Group put that number at $139 million. There are many instances of companies embracing pro-social reforms especially when those reforms are backed by membership or stakeholder alliances with vocal and impactful industry, political and community groups with a longstanding commitment to change. Embracing responsible social reform can lead to the passage of legislative reform that would serve a greater good and apply to competitors, especially if the EGM reaches a national profile where it could act as a catalyst for even further public support for reform. The below report was commissioned by GetUp and written by independent ESG analyst Mark Barraclough, formerly of MSCI and RiskMetrics. The report lays out the growing stakeholder risks incurred by WOW’s ongoing gambling interests specifically as they relate to electronic gaming machines. Scope of Report: • Growing Stakeholder Risk Over Gambling Interests: With pro poker machine reform organisations frustrated by the Gillard Government’s watering down of poker machine reform legislation, social activist organisations such as Getup have turned attention to the largest operator of poker machines in Australia, Woolworths Limited (Woolworths). • This report examines Woolworths’ risk exposure over its involvement in the poker machine business and explores the potential risks to shareholder value should this issue continue to gather momentum. Recent Developments: Engagement Becomes Adversarial On the 25th June 2012 Woolworths’ shareholders and Getup members submitted requests to hold an Extraordinary General Meeting (EGM) to vote on motions seeking to amend the company's constitution to prevent it from owning or operating poker machines with more than a $1 maximum bet from 2016. The resolution would also impose a revenue limit of $120 per hour and restrict the use of gaming machines to no more than 18 hours a day from 2016. On 3rd July 2012 Woolworths took the matter to the Federal Court requesting that the motions be rolled into its AGM in November. While the Federal Court decided to defer the resolutions until November, Woolworths withdrew its request to call off the EGM. Meanwhile, GetUp filed complaints with the Australian Stock Exchange and the Australian Securities and Investments Commission arguing that Woolworths has yet to notify shareholders of the request for an EGM. With engagement between Woolworths and Getup becoming increasingly adversarial, there is potential for this stakeholder issue to expand to more public forms of agitation ahead of the EGM and beyond. With over 600 000 members across Australia and with over 80 000 of its members already signing a petition supporting the campaign, Getup is well positioned to pursue its agenda. Under these circumstances, the question is how much could this issue potentially damage the Woolworths brand, and conversely, could adopting the suggested reforms be financially justified purely from a strategic risk management perspective? Can Woolworths Carry The Public Debate Over $1 betting limits? If one aligns the arguments for and against the suggested reforms the conclusion is no. Social activist groups pushing for reform make a cogent case for why lower betting limits are warranted and their arguments are in line with the Productivity Commission Inquiry into Gambling 2010 recommendations. The introduction of $1 betting limits is also well supported by a broad coalition of Church groups and social welfare organisations. The logic behind the proposal to introduce lower betting limits is simple to understand. Currently many ‘high velocity’ poker machines allow gamblers to lose up to $1200 an hour. Lowering the betting limit from $10 per spin (or $5 in Victoria) to $1 per button press will dramatically slow the process whereby problem gamblers can lose substantial sums of money and get into a position where they are chasing their losses. Once limited in this way poker machines will also not be able to take more than $120 in any given hour. The Productivity Commission Inquiry into Gambling proposed both the introduction of $1 betting limits and a trial of mandatory pre-commitment technology as a means to minimising the harm caused by high velocity poker machines. From the Productivity Commission Draft Report 2010 Chapter 11: “There is a strong case on net social benefit grounds for a much lower bet limit: a limit of around $1 (which would still be equivalent to an average $120 per hour of play if the gambler plays quickly) would reduce harm from high intensity gambling without unduly affecting recreational gamblers (who typically bet at quite low levels).” By comparison, Woolworths appears to acknowledge that there is a “serious problem” which needs to be addressed and yet its majority owned ALH Group opposes lower betting limits. At its annual general meeting in 2011 the Woolworths chairman, James Strong stated : “We do not deny that there is a serious problem about people who have gambling problems “. The company also states in public releases that “Woolworths absolutely supports proven reforms that will genuinely help problem gamblers without preventing responsible players enjoying a flutter.” In its submission responding to the Productivity Commission draft report, the ALH Group stated that its preferred outcome would be to see further voluntary pre-commitment trials rolled out and Woolworths has stated it also supports this initiative. However, ALH Group is already trialling voluntary card based pre-commitment at one of its hotels in Queensland and reportedly only 11 % of patrons have taken part in the trial. Voluntary pre-commitment has been widely criticised as ineffective because problem gamblers are unlikely to participate, or if they do, there are a number of ways they can step around the technology when it suits them. Regarding the $ 1 betting limit recommendation, the ALH Group made the following comment in its response submission to the Productivity Commission draft report: “Even if such policy measures could be demonstrated to have some level of impact on reducing the level of problem gambling, the benefit would be unlikely to be outweighed by the substantial detriment to recreational players and the industry overall - thus imposing a social net cost.” ALH Group supplied no supporting evidence illustrating what the ‘substantial detriment’ would be to recreational players, however it did state that such an initiative could see a drop in gaming revenue of 40% . Another point Woolworths is making is to emphasise that the company controls only 6% of the nation’s poker machines. However, as the largest operator of poker machines in Australia it is difficult to see many people agreeing that it is unreasonable to single Woolworths out over the issue of poker machine reform. The fact is a majority of the Australian population support measures to reduce the harm being caused by high velocity poker machines and this means most people will be sympathetic to the campaign being run by activist groups and disinclined to accept the arguments being made by a large corporation who profits from the poker machine industry. A poll conducted by the Australian National University in 2011 showed 74% of Australians support further initiatives to reduce the harm caused by poker machines. Under these circumstances it is difficult to see Woolworths being able to maintain its current position and not sustain damage to its brand as activist campaigners work to educate the general public about their involvement in the poker machine business. *Australian National University Poll July 2011 The Scope of the Problem. The Productivity Commission Inquiry into Gambling report of 2010 found* among other things that: Australians spent more than $19 billion on gambling in 2008-09 and around $12 billion of this sum was spent playing poker machines.