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.