Gunns and the Elites

 

An intriguing discussion was had on the Radio National breakfast program this week about the conclusions to be drawn from the demise of Gunns, Tasmania’s biggest paper and pulp mill. It is, sadly, the kind of debate that only occurs in Australia after the fact. People fear creating ripples in a small pond. Plus Australia’s horrifically suppressive libel laws means that strenuous and legitimate criticism of corporate behaviour is rarely attempted, let alone aired. Pick up an American newspaper or magazine, where there is constitutional protection of free speech and easy libel laws and you will immediately see the difference. The kind of negative commentary that occurs in the United States would simply not be allowed here. Instead, we are served up with a perpetual diet of anodyne dissimulation from corporates. The only question is whether the dishonesty is an outright lie, distortion of the truth, a partial truth or spin and exaggeration.

Thus we have to wait until companies die before people dare to be honest. Alec Marr, general manager of Triabunna Investments, which owns Tasmania’s largest pulp mill was not missing the opportunity. He exposed several issues about Australia’s corporate and financial elites which deserve far greater scrutiny, scrutiny they will almost certainly not get. Marr (former executive director of the Wilderness Society) said:

“It’s a sad day that could easily have been avoided by more sensible leadership earlier … It doesn’t matter how big you are, if you are really determined to go off an offend people all over the world, which was what (chairman) John Gay did — he offended the Japanese customers in the woodchip market, he offended the banking industry, he offended the investment community, he sued the community — I mean, those guys just didn’t think gravity applied to them. As a result they have turned a large company into a very small company and that should be a lesson to everybody who gets carried away with spending other people’s money. You have to remember that the vast bulk of this money came from people’s superannuation funds handed over by imbeciles in the investment community — I say that very 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 hey just kept pouring money in. It was just crazy.”

Apart from saying the kind of thing that he could never have said when the company was still operating and able to sue him, Marr is highlighting some really important issues about the principal-agent problem — how agents of enterprises act on behalf of the owners. In this case there are two agents: the Gunns board, and specifically its chairman, and the fund managers who invest on behalf of superannuants. The latter especially gets insufficient attention, and you may notice that while Marr feels safe to name John Gay, he does not name the CEOs and fund managers in the investment institutions, because they might sue him. As usual, the fund managers get off scott free.

As I have commented before, tongue in cheek, Australia is a Marxist state in the sense that the workers own the means of production. Public companies and many private companies are owned by superannuation funds, which are administering the savings of workers. Ergo, the workers own much of the industry base, including the banks. One might also add that Australia is a Marxist state in that the apparatchiks — boards, senior managers, investment managers and bank managers — really have the power and use it very much at the expense of the ordinary workers they purport to be helping. Anyone who has worked for a period inside a big corporation will have noticed the extraordinary similarities between the absurdities of communist bureaucracies and the absurdities of corporate bureaucracies. Especially in the language. Management jargon is remarkably similar to communist jargon. Meaningless, but with a vicious power dynamic underlying it. The real capitalists are the entrepeneurs and SMEs risking their own money and efforts. Corporations are not capitalist, they are corporatist.

Adam Smith is often quoted as rejecting the joint stock company (the cornerstone of capitalism) 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, therefore, must always prevail, more or less, in the management of the affairs of such a company.”

Smith’s defenders have countered that he was referring to a very different entity and what he was really rejecting was monopoly power. But the basic observation is surely right. Those who watch over other people’s money are usually less vigilant than they would be with their own. There have been many solutions proposed, most notably Michael Jensen’s theory of the firm, which contributed to the use of stock options (although of course the main contributor was executive greed). It was theorised that by making executives owners they would become principals as well as agents.

I would suggest that the principal agent problem is to a large extent intractable, and that it cannot be solved by clever manipulation of incentive structures. Expecting it to disappear is to expect that people will suddenly stop enjoying having power and money. It won’t happen. Instead, what is needed is better limits to power, such as avenues for moral censure. That already exists to some extent with public companies, who are subject to AGMs, public scrutiny andn onw the two strikes rule. But it is not possible with the people who have the money: the superannuation firms and their fund managers. As Marr states caustically, they are the ones who hide their bad decisions behind a wall of confidentiality. If we are to move beyond being a Marxist state, that needs to change.

 

 

 

 

 

Comments

  1. Instead, we are served up with a perpetual diet of anodyne dissimulation from corporates. The only question is whether the dishonesty is an outright lie, distortion of the truth, a partial truth or spin and exaggeration.

    I would suggest that to even broach that “only question”, or to participate in a discussion of it, is to increase the dissimulation.

    If we can agree that something is “dishonest”, then that is enough.

    To enter an inevitably fruitless debate seeking to identify a label for the perceived class of dishonesty, only blurs the issue, and increases the effect the dissimulator sought to achieve in the first place.

    Just call a spade a spade.

    • I was entertained by a book about Bullshit, in which the author pointed out that there is a difference between a bullshitter and a liar. A bullshitter does not know he is pushing an untruth, a liar does know. I quite agree that untruth is untruth, but it is interesting to observe the degree of self deception that comes into play.

      • I guess if you rehearse the same line again and again, you will eventually come to believe your own bullshit. It sounds like some kind of self imposed brainwash.

      • Indeed. That’s my view too. The BSer either knows, or once knew, they were speaking untruths. But through repetition, and practice of tone, body language, and “word craft” in order for their untruths to appear more plausible / credible, they come to believe it themselves.

        The World’s Greatest Treasurer somehow springs to mind.

  2. Jake GittesMEMBER

    “we are served up with a perpetual diet of anodyne dissimulation from corporates.” So very true. Most business media is passive PR because if the media is not ‘positive’ then no one will talk to them.

    The other thing is that business generally believe its the role of media to boost business, not ask questions, let alone be sceptical. Business denies bad news as coming from malcontents and cynics.

    Excellent post SoN.

    • Very true Jack.

      “The other thing is that business generally believe its the role of media to boost business, not ask questions, let alone be sceptical. Business denies bad news as coming from malcontents and cynics”

      And therein you have the GFC and a lot that has transpired in the MSM since. Except that since the GFC, Govt has been also hard at pulling the levers it has access to ( a LOT) world wide to pump up the “green shoots” rhetoric for the poletariat’s consumption.

  3. Re: the principal-agent problem. One very astute, late Australia businessman seemed to have the answer,20 odd years ago. You took risks with his money, and got to keep 10% of the profit; but you also had to chip in 10% of any loss your decisions incurred.

  4. Just like democracy, limited liability corporations are a good idea gone bad.

    Its time to bring back unlimited liability partnerships, especially with financial institutions.

    There must be another method or a framework to encourage risk taking (i.e capitalism), that also rewards such risk takers, but makes them accountable.

    Setting up insurance companies or trusts/funds alongside liable partnerships could be the answer, but outside my area of expertise.

    Great piece SON. The libel/slander laws in this country are amazing – and also work the other way with unintended consequences- i.e base yourself/your internet presence in the US and you can say anything you want about any Australian person or company (or small media business like MA….) and you are completely free to do so…even if you are an Australian living in Australia!

    • The framework/solution might already be at hand. The growth of self-managed super funds is perhaps the saviour of real capitalism. SMSFs are taking real risks by investing in companies and the trustees are automatically accountable to their own money.

      • The reasons being trumpeted by interested parties in attacking the SMSF sector just don’t hold water but the lobbying is intense. Thankfully SPAA and the ASA are on the front foot in challenging each new “reason to clamp down on SMSFs”. Industry funds don’t like losing higher balance members, fund managers don’t like the the outflow to direct shared, ETFs, TDs and Government don’t like people using the system to its full potential as it means lower tax revenue. SMSFs may become a victim of their own success.

    • Great piece SON. The libel/slander laws in this country are amazing – and also work the other way with unintended consequences- i.e base yourself/your internet presence in the US and you can say anything you want about any Australian person or company (or small media business like MA….) and you are completely free to do so…even if you are an Australian living in Australia!

      There is a bit of a fine line here, IMHO. Speech for the purposes of valid criticism and productive debate should always be allowed, but the misrepresentation of opinion as fact, or speech with the objective of harm or disinformation through wilful ignorance or, more seriously, malicious deception, should not go without consequence.

      • Enough already with the masses of rules, regulations and laws. Personal protections are already sufficient. The market can take care of itself if left alone and we have a largely free media in which to communicate the goings on everywhere.

        Consequences? The consequences of even yet more onerous laws are increased losses of freedoms. Enough of this nanny state $h!t.

    • Diogenes the CynicMEMBER

      The limited liability of banks is a huge problem. Especially investment banking and even more so proprietary trading. It used to work that way and amazingly investment banking firms worked with their customers over long periods of time…the partners had skin in the game and had to ensure deals do not go bad, or they lost money and their reputation. Now it is pass the hot potato on and collect your bonus quick as you can.

      Retail banks should be small institutions that live or die by their own efforts no inviso-power back up. No threat to the system of payments either. Instead we have goliaths propped up by the system and a threat to it as well. Vested interests hand in glove…

      Root and branch reform required. Sadly I cannot see it happening until the next leg of the crisis hits and then it will be too late.

    • dumb_non_economist

      I don’t believe your last para re libel to be correct. If you’re based in Australia you are still subject to Australian libel laws if it’s “published” here regardless of where your website/blog etc is hosted.

  5. Tasmaniantimes.com never held back on Gunns. Full history going back for years on that site, nothing you would have heard in the Tasmanian msm.

  6. As usual great post for weekend discussion, but I doubt that something Marxist have emerged from corporate capitalism. Just because we don’t like corporate culture and CEOs’ arrogance, irresponsibility and unaccountability that doesn’t mean they are Marxists. To name them as Marxists and our state as Marxist is pretty offensive and far from the truth.
    We are either not a democracy or we are a democracy and free market economy and everything which happens here and there in Western economies is a phenomenon of global capitalism. Nineteen century capitalism is far in the past and we are living in global capitalism.

    Would it be possible for global capitalism to emerge without corporations? Would it be possible for those huge enterprises which are global corporations, to become global without our superannuation or public money?
    Why every small and medium enterprise want to expand infinitely? Is that all Marxist? I mean was that what Marx had aspired for communism or you mean that it is Marx who predicted the globalization of capitalism and the rising political power of global corporations? It is absolutely unclear what you mean by Marxist.

    • + 1 Lori.

      The article reminds me of somekind of convoluted line of non-humour from The Chasers. Deriving some kind of perverse pleasure at biting off the hand that feeds us.

    • I’d like to see some clarification on that too. At least SoN didn’t write we are a “Communist state”. And it’s pretty clear they (boards, directors, CEOs) are not pure Capitalists either. So what are they? Why Marxist?

      Reminds me of the fight between Gina & Fairfax board. If not for that, I wouldn’t have noticed the board members don’t own much of the company at all. (not that I’m a fan of Gina of course.)

      Great article btw. Thanks.

    • @ Lori

      There is no difference between corporatist capitalism and Marxism. A collective is a collective is a collective. Hannah Arendt, writing in “Thoughts on Politics and Revolution,” was very clear on this point:

      But nobody can tell me that there is such a thing as workers “owning their factories.” Collective ownership is, if you reflect for a second, a constradiction in terms. Property is what belongs to me; ownership relates to what is my own by definition. Other people’s means of production should not, of course, belong to me; they might perhaps be controlled by a third authority, which means they belong to no one. The worst possible owner would be the governemnt… Our problem today is not how to [have the government] expropriae the expropriators [the corporations], but, rather, how to arrange matters so that the masses, disposessed by industrial society in capitalist and socialist systems, can regain property. For this reason alone, the alternative between capitalism and socialism is false—-not only because neither exists anywhere in its pure state anyhow, but because we have here twins, each wearing a different hat.

      The issue of censorship is a somewhat different issue. What SoN is talking about is called state corporatism, which is no less onerous than state socialism, where the long arm of the government reaches out and clobbers anyone who criticizes the managers of the collective. This completely short-circuits any possibility for a society that is not criminal, pathological or dysfunctional. As Elinor Ostrom points out in “Policies That Crowd out Reciprocity and Collective Action”:

      Three important lessons can be derived from…recent theoretical and empirical research based on an assumption of multiple types of players including rational egoists and conditional cooperators who have adopted norms of fairness, reciprocity, and trust. The first lesson is that many individuals are motivated by social norms that affect intrinsic motivation or are at least capable of learning social norms and using them to guide some of these decisions. Second, it is possible for individuals who adopt these norms to survive in repeated situations where they face rational egoists as well as others who share similar norms. So long as they can identify one another, trustworthy fair reciprocators actually achieve higher material rewards over time than rational egoists! In other words, they can flourish. The third lesson is that achieving some reliable information about the trustworthiness of others is crucial to this accomplishment. Consequently, institutions that enhance the level of information that participants obtain about one another is essential to increase the capacity of individuals to solve collective-action problems. Information rules are as important (or more important) in solving collective-action problems than payoff rules, but payoff rules have been the primary focus of a considerable percentage of public policy initiatives.

      http://ompldr.org/vOHU2cA

      • And Arendt said something very similar to Ostrom in “Thoughts on Politics and Revolutuion,” only about 40 years before:

        [C]apitalism has destroyed the estates, the corporations, the guilds, the whole structure of feudal society. It has done away with all the collective groups which were a protection for the individual and for his property, which guaranteed him a certain security, though not, of course, complete safety. In their place it has put the “classes,” essentially just two: the exploiters and the exploited. Now the working class, simply because it was a class and a collective, still provided the individual with a certain protection, and later, when it learned to organize, it fought for and secured considerable rights for itself….

        What then has socialism or communism, taken in its pure form, done? It has destroyed this class, too, its institutions, the unions and the labor parties, and its rights—-collective bargaining, strikes, unemployment insurance, social security. In their stead, these regimes offered the illusion that the factories were the property of the working class… In essence, socialism has simply continued, and driven to its extreme, what capitalism began. Why should it be the remedy?

      • Absolutely agree. That is all right and today the problem is we lack of some unique intellectual power to create a viable and correct picture of today’s capitalism and its prospects. If it looks like socialism (the totalitarian Eastern Europe regime) it is only because the people on the top have been abusing the political and economical power and monopoly that the accumulation of huge wealth has given them. It is well known that any private economic monopoly soon or later strive for and becomes a political monopoly, hence we lose our precious democracy. Which way this loss of democracy emerges (socialism, or corporatist financial capitalism) doesn’t really matter much, because the outcome is the same.

        The greatest problem today is we don’t have any good idea about viable alternative and this is scary.

      • correction: Where I said “A collective is a collective is a collective” I should have said “Collective ownership is collective ownership is collective ownership.”

        Arendt clearly does not equate collective ownership with collective action, and in fact demonstrates they are antithetical to each other.

      • Thanks very much for these glen5875. Your first bolded quotation, “The third lesson is that achieving some reliable information about the trustworthiness of others is crucial to this accomplishment”, reminds me of a key aspect of the decentralised monetary system concept I advocate –

        Your account also has a publicly visible pre-transaction “Honour” rating, automatically linked to and determined by whichever is the greater of your credit/debit balances.

        http://www.macrobusiness.com.au/2012/09/links-24th-sept/#comment-178831

  7. I was very entertained at the thought of Super creating a Marxist like structure. You say it’s tongue in cheek, but it’s a great idea. The interesting thing about it is that whilst this isn’t how the system behaves, and the existing structure of workers, or the proletariat if you will, having equity through their Super is also relatively new, give it time and interesting things could happen.

    Interesting because it’s fundamentally true, it’s not a notional concept or thought experiment, the workers/proletariat literally have substantial equity in the largest companies of Australia.

    But the system doesn’t behave the same way as a Marxist one because fund managers are making the decisions on what to vote for in AGMs etc. But what if the Industry Super funds were run by the Worker’s Union, and they collectively focused their fund to vote for resolutions, lobbied to fire board members etc etc… The workers could then participate in the business with the management as owners and peers, not as employees, indentured to the system..

    it sounds fascinating, and all the more so because as these things go, it has only just begun.

    Also, I find it very disappointing that Australia doesn’t have freedom of speech. That it’s a can of worms is clear, but as you point out, there are large benefits to being able to say what you think without intimidation, but of course there are by definition equally bad consequences on the other side of the fence. Still, I er on the side of freedom, no matter the obvious problems it may bring.

  8. Surely the most effective way to align the interest of the management to that of the shareholders is to pay the senior managers and the board of directors exclusively in the shares of the company. That is how many start ups in Silicon Valley do (they do not have enough capital to pay cash to executives). I heard some nonsense that a company here cannot attract top talents with such remuneration packages. Well, that is a clear sign that the board of directors have little idea of what they are doing.

  9. At almost every level of the capitalist framework as it currently exists, people seem to forget who is taking the risk.

    Corporates rarely acknowledge or behave as though it is predominantly other people’s money funding their operations and profit making activities. Don’t get me started on listed investment trusts.

    Investors of the retail variety, by and large, don’t realise that their savings are funding capitalist/entrepreneurial activity.

    And these days, we have a governing authorities unwilling to allow risk takers to bear that risk. Moral hazard abounds in both debt and equity markets.

    There is something very wrong with the ‘system’. Unfortunately in the retail space this makes the average punter blame the institution of superannuation. It’s not the structure’s fault, it’s the agents operating within it.

    SoN, I like your reference to the circular and ironic relationship between the workers and the owners (the irony being in many cases they are one and the same, they just don’t know it or don’t/can’t act on it). Corporate profit share of GDP remains at historic highs, and one could argue it is a symptom of a breakdown in the efficacy of capitalism.

    I hope this imbalance is redressed and I hope this coincides with a revival of shareholder accountability.

  10. i would love to see the share registry to see which fund managers or even super funds that had invested in gunns (and other failled corporates). this is so I can avoid all these guess masters

  11. Wonderful piece SON, and highlights an issue that has always disturbed me about this great country, where are the light shiners or hard core satirists?

    Apart from the lonely (loony) guy at ‘Kangaroo court of Australia,’ there is no equivalent of the UKs ‘Private eye’, or Frances ‘Canard en chaine’, which between the schoolboy humour, turn out some important truths.

    Perhaps the Australians are not yet ready for having a torch shone up their arse, perceived criticism isn’t taken lightly here.

    Instead we are fed a diet of the lily livered, asinine, ‘Chaser,’ which seems to have been happily embraced as a safe alternative.

    When the MSM does accidently uncover something (editor asleep?), I’m amazed at how quickly it can be swept away. Will anyone ever do time for for the Mcgurk murder? where is the tape? etc etc.

  12. These words should be inscribed in stone somewhere……..

    ‘Australia is a Marxist state in the sense that the workers own the means of production. Public companies and many private companies are owned by superannuation funds, which are administering the savings of workers. Ergo, the workers own much of the industry base, including the banks. One might also add that Australia is a Marxist state in that the apparatchiks — boards, senior managers, investment managers and bank managers — really have the power and use it very much at the expense of the ordinary workers they purport to be helping. Anyone who has worked for a period inside a big corporation will have noticed the extraordinary similarities between the absurdities of communist bureaucracies and the absurdities of corporate bureaucracies. Especially in the language. Management jargon is remarkably similar to communist jargon. Meaningless, but with a vicious power dynamic underlying it. The real capitalists are the entrepeneurs and SMEs risking their own money and efforts. Corporations are not capitalist, they are corporatist.’

  13. I wonder if Gunns would have done better if they had paid closer attention earlier on to what the social media sentiment was saying.

    Many companies are just coming around to monitoring their social media profiles and the advent of social media monitoring tools/services is now making this a lot easier.

    I have been using Dialogix to analyze market sector and individual company sentiment on the basis that the market moves on sentiment to inform my share portfolio management. While sentiment isn’t everything it does seem to predict market movements.

    Disclaimer: My daughter owns Dialogix. The tool has been available to me since 2008.

  14. Steve Keen suggests shares with a limited lifespan which is an interesting suggestion.

    His blog is debtwatch.

  15. This article has finally made me register here.

    Australia is nothing like a Marxist state, and to equate it as such is quite ludicrous.

    [quote]As I have commented before, tongue in cheek, Australia is a Marxist state in the sense that the workers own the means of production. Public companies and many private companies are owned by superannuation funds, which are administering the savings of workers. Ergo, the workers own much of the industry base, including the banks.[/quote]

    The first problem here is that Superannuation funds are even allowed to invest in assets which may result in losses. However, that is a separate debate.

    While “the workers” may put money into Superannuation funds, they have no direct control over where that money is invested. Therefore, it is only the fund managers which are able to exercise any form of control. This is far from a Marxist State.

    The only real answer is to insist that workers’ superannuation or pension funds are invested in extremely secure assets, which are government backed, resulting in only a very small chance of depreciation. That is of course, unless the government and currency of Australia collapse, at which point there is most likely revolution.

    [quote]Its time to bring back unlimited liability partnerships, especially with financial institutions.[/quote]

    [quote]The limited liability of banks is a huge problem. Especially investment banking and even more so proprietary trading.[/quote]

    These are both excellent points. The only thing I would add is that the Government should not bail out various institutions when they fail. You want free market global capitalism, then pay the price when it all goes wrong. Using public funds to support companies, when they be private or listed on a public exchange, is the antithesis of the free market.

    [quote]Why every small and medium enterprise want to expand infinitely?[/quote]

    Very good question, and the fact is they can’t. Nothing can expand infinitely. Despite what free market economists may think, there is a limit to growth, there is an end point to current free market economics. Nobody quite knows where that is, and bubbles will continue to occur until the system itself collapses due to the weight of debt and lack of resources.

    • +10. Thanks, PhillC, those were my points too.

      Of cause nothing can expand infinitely, but that is why I have asked that question. When every enterprise targets the global market, it expects to grow, and to grow, and to grow…to the sky. With every SME striving the same, e.g. infinite growth, we end up with today’s dinosaurs in banking and other global industries, some of which are global monopolies and show sings of real quality degradation of their products or services. Hence, we have higher stage of capitalism, which most people understandably don’t like and that is why they are dreaming about the capitalism vivacious youth. Maybe we can make a turn back in the history and some how make the dinosaurs disappear, but the new society and SM enterprises still won’t be as before. Here some intellectual leadership must be of use to show how and where to go further. For now, there is nothing like that.