Monday, 27 August 2007

Greed is good as there is no tomorrow

After this wave of spectacular turbulence and corporate collapses, typified by Bond and Skase, there was a quieter phase, with recessions hitting the majority of businesses and tycoons consolidating. In the US, good times continued with abundant foreign capitals flowing in from all over the world. Businesses got a fright from the 1987 stock market crash, which formed the background of the American movie “Wall Street” of the ugly side of the “greed is good” mentality. That scene was soon forgotten and nicely ignored during a decade long growth and boom. Australian businesses seemed to have suffered from over-reactions to previous excess and corporate scandals and thus failed in a comparison with the American successes. It is until the time of bubble burst and Enron-style scandals that the worthiness of Australian practice of prudence and caution, hard lessons learned from the previous chapter of business history, are proved.

Amidst this relative calm, the demise of HIH stood out as a timely shock to investors and the community as a whole, for the scales of its impact and financial losses. HIH Insurance Limited, as the second largest general insurer in Australia, went into liquidation in 2001 under the weight of 5.3 billion AUD debt and dragged thousands of policyholders and shareholders down with it. Due to the nature of insurance companies, this collapse incurred financial troubles to businesses of a much wider range, since they all need proper insurance policies as work covers. My next door neighbours in Hawthorn were affected by this collapse as well, because their renovating company was insured with HIH. If the company did not get another insurer while losing the policy from HIH, they would carry the risk of paying full penalties and compensation if any accident happened during the renovation.

The HIH is described as the largest corporate failure in Australia, in monetary terms. Even the daring Bond and Skase could not match the scale of losses, and there has been no bigger failure after this incident. Its record severity forced the federal government to step in, responding to the crisis by setting up a Royal Commission to investigate and providing various rescue schemes to those affected. The impact went beyond a single company close-down.

A more significant aspect is the exposure of routine malpractices by business corporations and a lack of proper regulatory mechanisms. The likelihood of a market failure is shown clearly in this case after years of deregulation, refuting the proposition from those who only envisioned government failures and hindrance in the economy. The founder of HIH received court sentences of four and half years of jail term, for falsified company accounts and blatant mismanagement. These are perhaps the right penalties imposed on the company executives concerned; for the demise of a multi-billion dollar company, these are small prices to pay. The issue of wide implications is corporate governance under market conditions. One major cause to troubles is the decisions made by top executives to over-extend, to make unrealistically ambitious deals on acquisitions, and to spend on excesses. These conducts usually break no clear legal restraints, but would lead to unforeseen consequences as executives lose their head and attempt to realise fantasies. The route to failure and self-destruction is more or less the same, in Australia or in the US, in this sensational HIH incident and in the horrendous corporate scandals of Enron and others in the early 21st century. These finally succeeded in drawing people’s attention to root problems in corporate governance in a free wheeling market economy.

In a post-Enron era, when people have deeper suspicion of business strategies and governance, Macquarie Bank of Australia poses a challenge to this wariness. This is an odd phenomenon in the Australian business world, in a sector away from the traditional resources, manufacturing, or retail giants and even from big banks of Australia. The bank is now the largest investment bank in Australia, and its ambitious desire is clearly to become the Morgan Stanley of Australia. It seems that someone in that circle are determined to play the same games those international heavyweights, mostly Americans, have been playing. Macquarie’s pace of international acquisitions is stunningly quick, and money figures involved in takeover bids are jaw-dropping. The bank even lodged a bid for the London Stock Exchange and got rejected for undervaluing. The question is how this company of super bidding, floating and financial leverage can be sufficiently and securely supported by those pedestrian infrastructure holdings under its arms, such as toll roads and energies. That is a risky game of high margins and high returns, absorbing more assets and pushing for faster cash circulation, in order to generate revenues. At this stage, the bank remains positive and confident in all expansion and acquisition plans, and has regularly reported profits and dividends to happy investors. By market capitalisation, the bank is ranked among the top 25 of Australian companies, close to what Enron once obtained, at the seventh in the US. A minor unfavaroable fact relating to this bank in its Hong Kong branch is that the short name of the bank in Chinese sounds very close to "prostitution", and it is on daily in newspapers' finance sections.

The Australian corporate world has retained its distinctive trait of integrity in business doing and treaded the path carefully in a traditional, prudent fashion. Economic failures in this market setting of Australia are not new, though not on a scale equivalent to the spectacular ones in the US. Before the shocking American and European scandals and collapses, Australians viewed their own failings and frauds as extremely unbearable, embarrassed of a betrayal of their treasured practices by those fallen tycoons and incompetent bureaucrats. Those occurrences seemed to be unusual in the developed world. They felt some great relief when scandals involving giant overseas corporations such as Enron surfaced, which give them needed confidence on their own records much better now than previously thought.

It is interesting to note that Enron Australia, set up by the US parent but managed by local Australian personnel, in fact worked. This branch operated differently from its US headquarters, established a different corporate culture, and made deals in a different fashion. The branch actually earned money, returning 17 cents a dollar to investors. It had to close down after the Enron collapse, but liquidators found money on accounts of Enron Australia and a well run company.

Australians are slow followers of American business and management practices, but many have recently caught up with the trends in international markets. This proves a double-edged sword for the learner. Efficiency and productivity level were raised, with new technology and enterprise management, and Australian businesses found ways to venture out. In an economy of easy money and reduced regulatory pressures, frauds and scandals emerged more widely, producing examples of aggressive business chiefs and spectacular collapses with massive losses. Learning the practice also creates potential bubbles in the economy, in inflated figures and an urgency to satisfy investors. With or without dreaded lessons of Enron and others, these fallacies indicate an inherent vulnerability in corporate governance and a powerful tendency towards taking risky approaches in the market. Scandals and collapses of the past serve to remind Australian businesses, even those well run businesses, of their extensive exposure to unpredictable market forces and to temptation of expanding.

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