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.