Power elites need their wings clipped

In response to Labor’s electoral disaster that was the Cunningham by-election, Mark Latham reflected on ABC’s Late Line (Monday, October 11) and more recently in a speech that perhaps Labor needed to “be a bit more anti-establishment, get back to shaking the tree and rattling the cage on the powerful people that the disenfranchised in society want us to attack and reduce their power.”

This might be seen as a bit of sabre-rattling, but there are some important analytical insights for how Labor approaches some of today’s critical issues – specifically those to do with how to govern the corporate world in light of some recent scandalous corporate failures and abuses.

Many in the business press and legislators have responded with the line that these failures – like Worldcom and Enron in the USA, and One.Tel and HIH here – reflect a technical problem about the failure of corporate governance. And can, therefore be fixed with some legislative and regulatory fine-tuning. The problems associated with the neutrality of the audit function (or lack of it) are a case in point.

To be sure, corporate governance regimes have failed in important respects. Which makes them a key part of the story of why these corporations went belly up. Legislative response was necessary for the simple reason that past regimes demonstrably failed. In this light, the US has responded with a much tougher package of reforms than the Howard Government’s CLEP9 initiatives.

But the underlying reasons for these corporate failures are somewhat different, and need to be delved a little deeper.

Latham’s comments are a bit like a guide – they’ve pointed to a way forward, and perhaps that’s by reviving the concept of a power elite that was used by American sociologist C. Wright Mills to analyse the USA under Eisenhower in the 1950s.

To get to the heart of the corporate failures, it’s important to understand the institutional context in which capitalism in Australia has operated towards the late 1990s, early 2000s. In that time, the idea of ‘shareholder value’ became a management mantra, which created vast opportunities and incentives for managerial enrichment.

The subjugation of ‘good’ corporate governance was the modus operandi – a means to an end, a symptom of broader institutional failures. In reviewing the evidence of the HIH Royal Commission, for example, we see mountains of evidence where corporate governance was suborned, and key trusted governance mechanisms fail.

In Power Elites, C. Wright Mills argues that the (corporate) elites exercised ‘impersonal power’ on the basis of shared social intimacy. Elites were “men of similar origin and education, in so far as their careers and their styles of life are similar, there are psychological and social bases for their unity, resting upon the fact that they are of similar social type and leading to the fact of their easy intermingling”. For Mills, the intimacy of psychological understanding is reinforced by the “structural coincidences of commanding positions and interests”.

Such a story could have easily been told about those charged with running one of the country’s largest insurers, HIH. Senior management, lawyers and auditors all failed. HIH’s key players used money and wealth-inducements to placate the mechanisms that were supposed to keep the organisation honest.

To start with, we have been told at the Royal Commission about the lack of actuarial qualifications among the Arthur Anderson auditing team that ran the ruler over the HIH books. But not much seemed to have been done to remedy this absence.

We’ve heard that even on its death-bed, HIH found $9.6 million for its trusted sons and corporate advisors. In its last 24 hours, HIH paid out $6 million in fees to Deutsche Bank, $1 million to lawyers Blake Dawson Waldron (which they’ve announced will re-pay) and $2 million to the entrepreneur Brad Cooper for introducing HIH to the Packer family. A further $619,000 in "retention bonuses" was paid to senior staff to convince them to stay with the company that was in its death throes. An HIH director, Charles Abbott, was paid $181,000 in consultancy fees.

And what of the social associations?

HIH director George Sturesteps had known HIH boss Ray Williams for more than 30 years. They’d also known fellow company director Michael Payne since the late 1960s. And there’s no doubt that these associations were part-and-parcel of the sublime existences enjoyed by these individuals. Royal Commission evidence showed that Sturesteps was handsomely rewarded for three decades of service and friendship. He and his wife enjoyed around-the-world air travel, platinum Amex cards and owning a couple of company apartments in San Francisco.

To boot, we hear evidence that HIH’s lawyers did not provide any opinion on the legality or probity of the decision by Ray Williams to invest $10 million of HIH money into a trust controlled by Rodney Adler – another HIH director – and which money was used to buy shares in Adler Corporation, despite knowing of the circumstances and transactions. The reason? They weren’t asked to!

And Adler’s relationship and dealing with old school friend, the Monaco-based financier Paul Brown, have come under some scrutiny.

The HIH story is one of power elites, in C. Wright Mills’ terms. The intimacy of old associates and school friends and the use of financial ‘incentives’ kept everyone in line. It created an environment in which a culture of managerial enrichment and recklessness was possible.

In so saying, let’s not forget that the share market at the time had its role to play in driving the behaviour of these individuals. The market was arguably complicit in these failures in the sense that for every bit of questionable behaviour, greedy brokers and investors were needed to suspend disbelief.

According to recent evidence from an Arthur Anderson employee, the HIH board frequently ignored auditors’ estimates on profit figures and instead, reported profits that matched the projections of stockbrokers and analysts. In an alarming insight, he said that "HIH had a particular profit target and that was essentially locked in and it was my belief that that was a driving force behind a lot of these adjustments that we were raising with the audit committee that they were uncomfortable with”.

The market was looking for growth stocks to match the perceived performance of dot-com companies. HIH had to ‘perform’ or be jettisoned as part of the ‘old economy’.

In light of this, and the culture of exuberance of power elites that existed, the lesson is not simply better corporate governance. Labor’s opportunity in terms of “policy message” and “policy substance” – to use Mark Latham’s terms – is to undertake a fundamental re-think about its approach to management incentives and shareholder expectations.

The question, of course, is whether ‘corporate’ Labor is up to the challenge.