Romantics and utopians — a dream team to ignore

Craig Mellor has stood aside as AMP chief executive as has chairman Catherine Brenner.

There is nothing like a good crisis to bring out two kinds of people: first, the nostalgia buffs who hanker after the good old days, ­lamenting the crass materialism of today’s philistines; and second, those who dream of a new, as yet undiscovered corporate utopia. Classic examples of both types have emerged in recent days following revelations of wicked ­behaviour at AMP.

One nostalgia lover opined last week that if only AMP had been preserved in aspic in its 1997 ­mutual state, this nasty behaviour would not have happened. Melina Morrison was speaking to Radio National’s Fran Kelly — of course. Morrison is not only a nostalgia buff; she’s also a vested interest, as boss of the Business Council of ­Co-operatives and Mutuals. Good on her for representing her industry. But her claim that the demutualisation of AMP 20 years ago is a likely case of “I told you so” is nonsense. It would be just as silly to claim that everything about modern corporations is good, and that everything about mutual societies and co-ops is bad. As Oscar Wilde said, the truth is never pure, and rarely simple.

As any admirer of Edmund Burke will tell you, caution is ­appropriate when challenging longstanding traditions that have served us well. Mutuals served a time and a place, but it’s a cute bit of nostalgia for Morrison to claim that “when AMP demutualised, the customers went from being the purpose of the company to the profit-centre, and that systematically seems to be contributing to the current malaise”.

Today, for all the weaknesses of corporate life — the perverse ­incentives and often obscene ­remuneration paid to executives, to name a few — capitalism and the profit motive have given us a standard of living that our forebears could not have imagined.

The limited liability company has enabled modern business to marshal capital and apply it to new technology in a way mutual societies and co-ops never could. At the risk of oversimplifying, ­mutuals and co-ops usually offer one vote per member irrespective of the amount of the member’s ­investment, and they share profits by ­reference to business done with the co-op, not the size of a member’s investment. So they can’t ­reward shareholders who are ­prepared to invest large sums on risky ventures in the hope of large ­rewards. Want to punt large sums on speculative mineral exploration? Or invest big money in new but untried technology that produces, say, the iPhone? Or even raise money to take over ­another business? Don’t even think about it if you are a mutual or a co-op.

Even Morrison conceded as much when she mentioned that the systemic disadvantages in the mutual sector all come down to capital — they can’t raise money from the sharemarket. Which is why demutualisation happened in the 1980s and 90s when deregulation freed up the banking market, increasing competition and forcing banks and insurance companies to be more efficient. AMP demutualised so it could compete with the financial flexibility of the listed corporations.

In fact, it’s no exaggeration to say the invention of the limited liability company is right up there with the steam engine, electricity and the internet in delivering modern prosperity. The corporate model doesn’t just provide access to capital, it also im­poses greater discipline on man­agement.

The threat of more AMP shareholders taking the exit ­option is driving change there — witness the appointment of David Murray this week — along with ­institutional investors who are more vigilant than ever in monitoring corporate performance.

But the nostalgia buffs can’t get past their rose-coloured view of history to see this. In their mind, Telstra should still be owned by the government and IAG should still be the NRMA. Have they forgotten the days when it took six weeks to have a phone installed and you could have any colour phone you liked provided it was black? And that while the old NRMA was loved by many, IAG is a world-class insurer that can, and does, compete vigorously with the giant German Allianz, with Suncorp (itself derived in part from a demutualisation and privatisation) and QBE.

Alas, the “noble savage myth”, that our pre-industrial state was indeed a Garden of Eden bathed in love, happiness and good health, flourishes in all the usual places. The Greens want to get rid of modern industry (at least if it’s anywhere near Glebe or Carlton) and modern agriculture, relying as it does on clearing trees. Oh dear.

And crises bring these antediluvian yearnings for an allegedly sweeter, simpler life out in force, no matter how bogus they are. Who can forget Kevin Rudd’s 2009 article in The Monthly claiming the global financial crisis proved that modern capitalism had to give way to more democratic socialism? Fortunately, Rudd was gone within a year or two, and capitalism sailed on to create more jobs and better lives for Australians.

The second group of people who use the never-waste-a-crisis trick are the dreamers of a new utopian corporate world. Proposed new guidelines released last week by the ASX Corporate Governance Council may have been drafted before the banking royal commission but watch them piggyback on recent anti-corporate sentiments to cement vague social values into the ASX corporate governance standards.

The new proposal is to recognise “a fundamental importance of a listed entity’s social licence to ­operate and the need for it to act lawfully, ethically and in a socially responsible manner in order to preserve that licence”. The proposed new principle says “a listed entity should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner”.

The push to woolly thinking is an error even the estimable Simon Longstaff flirted with recently. The executive director of The Ethics Centre said the focus on increasing shareholder wealth has meant subordinating all other considerations, such as the treatment of customers. Then he dabbled with restricting the limited liability of companies in some ­unspecified way and revamping directors’ ­duties. There was no clear conclusion but plenty of ­romanticising Utopia.

Deriding shareholder primacy may feel good but it’s a poor substitute for understanding the legal role of directors. Directors govern a company on behalf of the shareholders of the company. The Corporations Act 2001 states in s 198A (1): “The business of a company is to be managed by or under the direction of the directors.” Maximising shareholder returns neces­sarily means looking out for customers and other stakeholders.

Which brings us back to ­another bit of sepia-coloured ­romanticism from Morrison. Her claim that if customers desert a mutual, it’s the end of a mutual, ­applies equally to corporations. Without customers, there is no profit, and no profit means shareholders desert a company.

Dreaming up wishy-washy regulation won’t protect cus­tomers and other stakeholders. It will create the perfect storm of ­ambiguity for directors to escape liability.

Before we throw out the company structure or overhaul directors’ duties with “social values”, it’s worth considering an alternative theory to the present crisis in Australian banking: perhaps there are too many mediocre board members (of both sexes) who have not taken their duties as directors seriously. And just maybe that failure has been compounded by a corporate regulator that hasn’t done enough to enforce the law.

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