For Japan Post, which was briefed by Toll in advance about the profit downgrade, the acquisition turned out to be a disaster. Toll was riven by internal conflict and weak governance controls, was in financial decline and suffered from corruption.
Eight former Toll executives have agreed to describe, for the first time, the inner workings of the company for a three-part Australian Financial Review series. All held leadership positions or worked with the company’s top executives. They asked that their identities be kept secret to protect themselves from professional recriminations. Most say they have been scarred personally by their experience.
“It comes down to culture,” says one. “I have worked in a lot of large businesses, most of which are very reputable. At Toll, many of the HR and financial practices were questionable. In other businesses you wouldn’t dream of seeing that activity.”
Planes, trains and automobiles
Until it was sold, Toll was an Australian success story. The company’s teal-coloured trucks, trains, ships and helicopters move parcels in Melbourne, freight across Bass Strait, iron ore in the Pilbara and oil drillers in the Pacific.
Toll’s creation sowed the seeds of its failure. Built through some 120 acquisitions over 28 years – many of them struggling independent outfits – it was a complex, unruly business that operated in more than 50 countries, operated 567 computer networks and, in Australia, paid wages through 49 payroll systems.
The safety culture was lax. In nine years 169 men and women died in accidents on Toll premises or with Toll vehicles – the equivalent of one every three weeks. Safety information that should have been available every day took months to compile.
Toll’s safety and technology problems were compounded by the industries and countries in which it operated. The operations in France couldn’t make money because of rigid labour laws. In Russia, Toll navigated an economy mired in corruption. In Afghanistan and the Congo it dodged civil wars. In Australia it was infiltrated by organised crime.
Within two years Japan Post wrote off most of its investment, and abandoned its plan to use Toll as a vehicle into the first league of global logistics. After five-and-a-half years trying to turn around an organisation riven by fiefdoms, mismanagement and corruption, the Japanese gave up.
Toll is up for sale. Whether Japan Post can salvage any of its $6.5 billion investment is unclear. It has refused to guarantee Toll’s banking facilities beyond this financial year.
Perhaps no unit illustrated Toll’s problems more aptly that the Global Express division, which, despite its name, was mainly an Australian delivery service for books, toys, televisions and other parcels delivered by hand.
The division oversaw the IPEC delivery business, which suffered a serious corruption problem, according to three former managers who had access to internal security reports.
One of IPEC’s major transport contractors was the brother of a floor manager in an IPEC distribution centre. The contractor had changed his surname by deed poll, which meant that Toll executives didn’t realise the two men were related. The delivery company allegedly charged 30 to 40 per cent above some other delivery companies, according to a former Toll executive.
When the company eventually discovered the relationship, after hiring private investigators from KordaMentha to review the business, they referred the matter to the police, according to several ex-executives.
The floor manager, who earned less than $100,000 a year, put his house up for sale and moved to Europe. Toll executives checked out the house on a real estate website, which showed it was listed for about $5 million, according to two former employees.
Another delivery company had become an important contractor for Toll over several years, and charged the company about $20 million a year. As part of an investigation into its operations, Toll conducted a police check and review on the ASIC databases of all IPEC suppliers.
One of its directors had spent nine years in jail. Another, 15. One had set up the company within three weeks of being released. Their first and only client was Toll.
Another contractor, which was charging above the regular market price, had subcontracted its deliveries to a motorcycle gang, which used Toll-branded trailers, driven by trucks, to transport drugs interstate, the investigation found.
The contractor was cancelled on the spot and the police informed. Then, a few weeks later on March 2, 2016, Toll executives watched the evening news with shock. Twenty-three IPEC-branded trailers had caught fire in a paddock in a northern suburb of Adelaide, sending a thick pillar of black smoke into the sky.
The trailers weren’t owned by Toll and the cause of the fire was unclear. Still, Toll executives felt the events were connected.
“You could be in a business a long time and not see that,” one says. “Everyone had their side hustles going on.”
Other anomalies were uncovered after Japan Post took over. An unusual contract with Sharp, the Japanese consumer electronics manufacturer, required Toll to purchase any Sharp products being shipped that suffered damage to their packaging, according to two sources.
In one year, Toll purchased $1.4 million of Sharp fridges, monitors, microwaves and other goods, one source says. (Sharp didn’t respond to a request for comment.)
In theory, the products, which were usually untouched, were sold to the public at auction. When an investigator tracked down the auctioneer, they found it specialised in agricultural machinery. No Sharp fridges were present.
“The slightest scratch on a box meant IPEC was deemed to have bought it, and it was then meant to be sold through an auction process,” an ex-executive says.
Toll executives believed a criminal gang in a Melbourne distribution centre was stealing products to order, figuring the company would write off the relatively small losses.
Another problem discovered was a $5 million pallet “deficit” owed by Toll for lost pallets. Every year, Toll rented hundreds of thousands of pallets from CHEP and Loscam. The wooden or plastic trays are used to transport and store goods.
When a truck arrived at a Toll warehouse with pallets, employees would sometimes pay the driver to steal the pallets, an internal investigation found.
When a shortage of pallets was identified on the company’s ledger, the employees would rent replacement pallets from a delivery contractor. Sometimes the same pallets that were stolen were leased back.
The scam could be repeated using the same pallets. The payments were split between the participants in the scheme, according to a former company executive.
A second chance
Toll’s corruption problems may have been exacerbated by a recruitment program called Second Step.
Designed as a philanthropic project, Second Step placed former prison inmates and other people struggling to find stable employment in relatively well paid but low-skilled jobs in Toll warehouses and distribution centres. Some were on day release from prison, according to a former executive.
An in-house recruitment unit called Toll People would assign employees from Second Step across the company. Operating units, which were required to take the workers sent by Toll People, didn’t know who had been through the criminal justice system. Some, though, had facial tattoos and may have been responsible for a drug problem at Toll work sites.
“In the way it was executed all these parcels were being taken around or sorted or delivered by people part of the program,” says an ex-executive. “The managers weren’t allowed to know what was going on. It took me seven months to work out what was happening.”
A former manager says: “One guy I had to fire had been charged with murder, twice. He was a leading hand in one of the states. I don’t know who brought him in.”
A company spokeswoman says a small “overall” group of former prisoners participated and the program had a success rate of 95 per cent. It was cancelled in 2018.
She says there have been a number of successful criminal prosecutions following investigations by Toll, which has “vast security and compliance strategies in place”.
“If there is even the slightest indication of something untoward happening, we will immediately investigate and notify relevant authorities,” she says.
The rushed deal
Toll was, almost by accident, a component of Prime Minister Shinzo Abe’s plan to restart Japan’s sclerotic economy. Abe wanted to demonstrate that he could break apart Japanese state capitalism by forcing the giant Japan Post to submit to the rigours of market scrutiny. He wanted big, slow companies like Japan Post to grow through overseas expansion.
Conducting an initial public offering of Japan Post would also help cover the huge cost of the Fukushima earthquake and tsunami, which had displaced 100,000 people.
The most important Japanese IPO of the Abe era, which was in the works a decade, didn’t give Japan Post and the Japanese government long to sort out an important detail: how the newly listed company would deliver growth.
While it operated 24,000 post offices, most revenue came from banking and life insurance sold to millions of Japanese. Japan Post was a classic, challenged incumbent, selling products going out of fashion in a country getting old.
After what appeared to be a quick survey across Asia, Japan Post settled on Toll.
Toll had always been good at expansion, and was run in a time zone that wouldn’t require Japanese public servants to work overnight. Besides, Australia had a reputation for enforcing good corporate governance, unlike much of Asia. Takeover talks began in late 2014.
Target and predator were operating under time constraints. On Boxing Day, Japan Post disclosed it planned a float as soon as August, a short time frame for a large and politically sensitive privatisation.
On February 18, Toll’s first-half results would be public. Toll stipulated the sale talks had to be completed by then, according to one of its advisers, because Kruger didn’t want to appear before analysts and investors knowing price-sensitive information that he couldn’t disclose. The profit downgrade must have helped focus Kruger’s mind.
The deal was agreed that morning. The Japanese planned nothing less than a global assault. “Japan Post is aiming to be a leading global logistics player and has selected Toll as the key growth platform,” the company said.
Japan Post chief executive Toru Takahashi told reporters: “We have also been through a very extensive due diligence process.”
Initially, the deal looked like a success. Analysts bought the go-global story, and Japan Post listed on the Tokyo Stock Exchange five months later near the top end of its stockbrokers’ price range.
The new owners took formal ownership of Toll on May 29, 70 years to the day after six Royal Australian Navy destroyers participated in the bloody Battle of Okinawa, the last large-scale military engagement of World War II.
The Japanese were respectful, but confused, owners. They couldn’t understand how Toll made decisions, and why it seemed unable to control its business units.
Thursday, part two: Former execs say Toll was all tactics, no strategy.