The demise of Gunns, Tasmania's biggest paper and pulp mill, has been greeted as a triumph of environmentalists over business. The saga encompasses much more than that. It poses some deep questions about ownership and accountability in Australia's financial system which are yet to be answered persuasively.
One of the intriguing aspects of the campaign against Gunns is that it was not just waged against the managers of the company and the board. Pressure was also brought to bear on the fund managers who were investing superannuants' money to fund the company. The tactic is unusual. There have been some instances when lobbyists have targeted the funds industry — the failed campaign to stop Campbell Soup from taking over Arnotts in 1997 was one instance — but for the most part it is rare.
This is surprising, because when managers and directors of public companies say they are 'answerable to shareholders' they usually mean they are answerable to the fund managers who invest on superannuants' behalf. Australia's superannuation savings are about $1.4 trillion, more than the value of the Australian stock market. This means that the largest blocks of capital are in the hands of those who administer the superannuation funds.
Speaking on ABC Radio, Alec Marr, general manager of Triabunna Investments, which owns Tasmania's largest pulp mill, and former executive director of the Wilderness Society, was scathing of the investment community.
The bulk of this money came from people's superannuation funds handed over by imbeciles in the investment community. I say that calculatedly because I and others sat down in front of the CEOs and argued with their fund managers that they should not pour hundreds of millions of dollars of other people's money into this company, and they did it anyway. And despite repeated massive losses they just kept pouring money in. It was just crazy.
The fund managers to which Marr refers could no doubt defend their decisions by saying that it is impossible to predict the future with total certainty. They would have a point — it is easy to highlight failure after the fact. But Marr is drawing attention to a vexed issue in Australia's financial structures. The workers literally own much of Australia's industry base. Trouble is, they have next to no say in how that ownership is applied.
A glance at figures from the Australian Prudential Regulatory Authority exemplifies the point. Australia's richest person, and for a time the world's richest woman, Gina Rinehart, is the only individual whose personal wealth can compete with the superannuation funds. Rinehart's wealth is somewhere between $20–30 billion, depending on the iron ore price. The top three superannuation funds control well over $100 billion. The other billionaires in Australia, whose individual net wealth is less than half Rinehart's, are minnows by comparison.
Management writer Peter Drucker described this phenomenon as 'pension fund socialism', and it does have a slightly Marxist flavour: the workers owning the means of production, as it were. Australia is well down this quasi-socialist path; it has the third largest pool of superannuation capital in the world.
According to the research firm International Financial Services, pension funds globally manage more than $US25 trillion, which puts Australia's superannuation fund pool at about 5 per cent of the global total. Australia's superannuation is about one third of the size of the world's sovereign wealth funds.
The problem, as Marr implied, is that the true owners — the workers who contribute a portion of their wages each week into superannuation — have little power over what happens to their money. Unless, that is, they establish their own self managed super fund.
The result is often perverse. Ownership, and therefore wealth, may be distributed widely, but it has tended to lead to the creation of an unaccountable elite: senior managers and boards of public companies and fund managers in superannuation funds, whose activities remain largely hidden. This, too, has a slightly Marxist flavour, an elite that professes to be accountable to a community of owners, yet which acts mostly for itself.
The conundrum is known in management circles as the agency problem. How can structures be created to make the agents (managers) accountable to the owners (shareholders)? Adam Smith famously described it in The Wealth of Nations:
The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own ... Negligence and profusion ... must always prevail, more or less, in the management of the affairs of such a company.
Smith was gloriously incorrect about the joint stock company; it became the cornerstone of capitalism. But his observation that those who watch over other people's money tend to be less vigilant than they are with their own money remains perspicacious.
It is an intractable problem that cannot be solved with financial trickery, such as giving executives bonuses (which are designed to make them owners as well as agents). The recklessness of senior management in the lead up to the global financial crisis was clear enough evidence that such innovation with incentives easily creates the exact opposite result to that intended.
In the final analysis it is a question of character. How much consideration do those who administer money or companies that they do not own, have for those who entrust them (wittingly or unwittingly) with their money?
No amount of tampering with executive reward systems can substitute for simple prudence and responsibility. Not least because incentive trickery (bonuses and the like) makes the gloomy assumption that managers and directors will only ever act in their own selfish interest, so it is necessary to exploit such selfishness to get a good result for the owners.
In 2008, an ashen faced Alan Greenspan, former head of the US Federal Reserve, acknowledged to Congress that the GFC demonstrated that the 'self-interest-as-greater-good' model was hopelessly flawed. All it produced was, well, selfishness. Something better is required, especially when it involves other people's money.
As the Gunns saga has demonstrated, finding better ways to hold financiers to account is an imperative in the Australian financial system.
David James has been a business journalist for 25 years and is the author of Managing for the Twenty First Century and The Business Devil's Dictionary. He has a PhD in English Literature from Monash University.