By Michael Rafferty
Recessions have always had a direct and obvious impact on the working class, and the current downturn is no exception. Mass unemployment, wage cuts and an intensification of work are all features of this recession. Recessions are also a crisis for capital. One of the more novel aspects of the current recession is the extent to which financial instability is being transmitted to the highest reaches of corporate boardrooms. The recession has heightened tensions within the capitalist class about the forms and nature of corporate management.
There is an unusual degree of instability in corporate boardrooms in many capitalist countries. In the United States, some are calling it a fundamental shift in the balance of corporate power. In an article in Fortune magazine (January 11), for example, Thomas Stewart describes how the heads of some of the largest and most famous US companies — General Motors, IBM, Westinghouse, American Express, Goodyear, Time-Warner — have gone over the past half year.
The article noted: "Carnage on this scale does not occur just because of a long, painful recession or a noisy controversy about executive pay, though these have played a part. What's manifest here is large, basic and historic."
There is a similarly changing local face of corporate boardrooms. The most obvious change is that the "four on the floor" entrepreneurs of the 1980s are on their way out — the entrepreneurs like Bond, Skase and Connell.
A changing of the guard has also been obvious in companies that are suffering from excess borrowing or severe profitability crises. In companies such as Westpac, TNT, Channel 10 and Elders, prominent entrepreneurs or executives have "elected to take early retirement".
John Elliott was forced to stand down from Fosters Brewing in September. Westpac has had three managing directors in as many years, and its boardroom still has a revolving door on it.
TNT management moved against its once bullet-proof chairman, Sir Peter Abeles. TNT is saddled with massive borrowings used to fund Abeles' wildly optimistic international expansion plans. He has been pushed aside from the financially troubled company, and his role at Ansett now seems limited to trying to find a buyer for much of his and Rupert Murdoch's equity stake.
Changes like this are occurring in other boardrooms across Australia regardless of short-term profit results.
What most of the boardroom dramas have in common is a new role
being played by large financial institutions. They are seeking direct representation and influence on company boards, and most company heads now depend heavily on the support of financial institutions for their continued rule.
The preconditions of this new role for banks and superannuation funds can be found in developments occurring over the past decade.
A growing proportion of corporate finance now comes from external sources. In Australia in the late 1960s, for example, companies would typically fund almost two-thirds of new investment from retained earnings (internal sources). During the 1980s, most new funds came from external sources (borrowings and share issues).
Financial institutions are now playing a role on both sides of company balance sheets. External funding, from both debt and equity, has increasingly come from the same sources — financial institutions. Banks and life offices are not just the major sources of loan funds, but are also now major holders of shares on stock exchanges around the world. In most major Western economies, financial institutions hold more than half the stock of all public companies.
This has meant that production decisions are increasingly subject to the scrutiny of those who supply the investment funds — the domestic and international institutional investors. Often, this scrutiny is extended to ongoing and active supervision.
The 1980s explosion of borrowings transformed the financial structure of companies in Australia. When the profits of many over-geared companies went south of the border, major lenders found themselves in the saddle. Banks have already been running television stations, breweries and newspapers — on top, of course, of holding lots of vacant office space.
Institutional shareholders have generally played only a passive role in the management of companies, one limited to selling out of underperforming companies and buying into those that are performing better.
But banks and pension funds now hold so much capital equity on the stock market that it is difficult for any large fund to outperform the market in this way. As Fortune noted, the paradoxical result of competition between large passive institutional investors is a trend toward active owning.
In order to improve investment earnings, many institutions are finding that they can't simply sell underperforming companies and find bright new stocks. They must now often turn around underperforming companies. If that means forcing out a managing director or even a board, so be it.
Behind the recent nationalist furore over the Campbell Soups takeover bid for Arnotts, the crucial role of financial
institutions has attracted little serious attention. The dilemma facing AMP, for instance (which remains the largest Australian-based investor in Arnotts), was between selling some of its stock at the offer price, or using its stock holding to exert even more direct influence.
In the early 1980s, selling would have been the only option for an institution like AMP. In the 1990s, the second option has already come into play on a number of occasions. AMP has used its equity in Westpac to exert direct influence, participating in the reorganisation of the bank and repulsing Kerry Packer's takeover bid. The hesitation over the Arnotts sale suggests active investment won't be limited to other financial companies for much longer.
The potential for the exercise of greater power by financial institutions has existed for a decade or more, as the proportion of external funding of companies has grown. Nearly 10 years ago, an Economic Planning Advisory Council report concluded that "The actions and reactions of these institutions ... have assumed an increased influence over the direction and risk profile of investment in the corporate sector".
During the 1980s the institutions relied on the entrepreneurs, through takeover plays, to dig out the buried value of underperforming companies. In the 1990s, institutions are now assembling the capacity to take on a more active management role themselves. That tendency is heightened by the world recession, which has transmitted instability throughout the financial system.
The irony is that, as banks and financial institutions take on the appearance of strength and power, the international economy is stumbling through the biggest period of instability since the 1930s depression.