I am thrilled that my new article – “Above board? Interlocking directorates and corporate contagion in 1980s Australia” – has been published in the Australian Economic History Review (see here for the publishers version, which is open access). The piece comes from the final stage of my MQRF project on interlocking directorates in Australia, looking at the impact of director networks for business practice and corporate governance.
I start with a central question: what separates helpful interlocks from harmful ones? There were always interlocking directorates in Australia – they operated across top companies at a fairly consistent level throughout the twentieth and early twenty-first centuries. And yet, instances of collusion, corruption, resource capture, poor monitoring and so on have been rare. The image we have of interlocking directorates as this scary, malicious thing doesn’t really match up with the long-run story of interlocks. In previous work I argue that interlocks have been comprised primarily of boring professionals rather than the imagery of a ruling corporate elite. That’s not to say that their role was unimportant, but that they were concerned with the long run maintenance of managerial capitalism in Australia rather than attempting to extract a quick buck. They were far more invested in the system continuing uninterrupted.
That brings us to the 1980s, the exception that proves the rule. In another paper I have noted that the 1980s were distinct for its unusually high level of interlocking, with the increase brought about by greater presence of ties based on cross ownership and business groups. In this paper I examine this decade in detail, looking at the relationship between business groups and interlocks. There are lots of folks who study one form of business connection or the other, but they are rarely considered together as complementary methods of control. We also know the 1980s was wild (Frank Bongiorno’s book was particularly useful, as was Trevor Sykes’ work), and we have generally heaped all of the excitement, drama and intrigue of this decade onto the shoulders of the infamous ‘corporate raiders’. What is less known is the role of the interlocked executives who supported the work of raiders – the ‘lieutenants’ as folks in the media would refer to them – within large diversified business groups.
Righto, so here’s how it worked. The 1980s in many ways was the decade of diversified business groups. Leading firms would acquire minority but controlling interest in a range of companies (more than 15% but less than 50%). It seemed like a good idea at the time, and various changes to Company Law, accounting norms and the banking system allowed these massively overleveraged takeover bids to occur. I look at 5 diversified business groups – AdSteam, Bell Group, Bond Corp, Elders-IXL and Industrial Equity – and found that interlocks often followed the movement of money. The corporate raider often sat on the boards of other firms in the group, but so too did a range of other executives.
Governance issues were encouraged by a new type of company director: the professional interlocked executive (PIEs). Rather than the charisma, masculinity and ostentatious wealth that we usually associate with corporate raiders, I argue that professional knowledge and skills were central to the creation and operation of business groups. Professional training facilitated business groups, with takeover targets based on similar criteria that followed de jeur management education of the time. Professionalism was also crucial for takeovers, with public communication invoking expertise and co-ordination to convince shareholders to sell to a degree necessary for the takeover bid. There is a whole thing in there about the imagery of chess (as in the cartoon of Robert Holmes à Court, above).
The presence of PIEs made it easier for business groups to violate corporate governance principles. PIEs were considered ‘independent’ when on the boards of associated firms, crowding out genuinely independent non-executive directors. They then used their critical mass of board votes to facilitate conflicts of interest. Once takeovers were completed the promised strategic benefits were ignored or forgotten, with associated firms used as speculative investment fodder for the benefit of lead companies. Bond ended up going to the Big House for a particularly egregious case, but low key they all did it. By the second half of the decade, most of the groups’ profits were derived from equity accounting and speculative investments of associated firms rather than any sort of operational improvements.
This was the source of their downfall: crowding out of board independence, ignoring operational improvements, overleveraging for the purpose of speculative takeovers, and hubris induced by the public image of professional co-ordination and expertise. What happened next has been well-documented elsewhere, but basically a stock market crash tightened credit (bad news), which led to a collapse in asset values. Cross-dividends and investment income – once the source of extraordinary profit – was soon responsible for the downward spiral of their balance sheet. Breaking the spell of the raiders’ symbolic authority then meant business groups lost the support of bankers and auditors, creating further challenges for accessing credit.
So what can we learn? First, is the importance of genuine board independence for corporate governance, and the way that interlocks, combined with cross-ownership, can create blurred lines between internal and external entities that can be really bad. Second, is the way professional expertise has been weaponised within managerial capitalism to encourage trust in risky and exploitative corporate structures. An extraordinary amount of the heavy lifting of business groups was done through this collective delusion about expertise and professionalism. Beyond a certain point there was very little strategy involved, and yet a free pass to do whatever they liked. This was the source of each groups’ downfall, including the largest corporate collapse in Australia’s business history.
The 80s was wild, man.
