Corporate collapses: Make the rich pay

BY ALISON DELLIT

It has not been a good two months for the “old boys” of the elite Cranbrook School in the affluent Sydney suburb of Point Piper. Following the collapse of insurance giant HIH, 1976 graduate and HIH director Rodney Adler had to surrender $8 million of his estimated $80 million fortune to the Australian Securities and Investment Commission. When One.Tel collapsed, classmate Jodee Rich had his assets frozen by ASIC, allowing him a measly $2500 a week to live on. James Packer (class of 1984) and Lachlan Murdoch (class of 1987), who reportedly lost nearly $1 billion of their fathers' combined wealth of $40 billion in the One.Tel collapse, are reportedly not speaking to Rich.

It has also been a hard two months for Marilyn Reidy, whose husband was totally incapacitated by a brain tumour in 1996. Unable to walk without assistance, and suffering acute mental confusion, he was dependent on his HIH insurance to survive. This income ceased in March.

The Reidys are not alone. HIH payments were the sole source of income for more than 200 disabled people. Six hundred families were building houses with HIH insurance. All up, more than 1 million people in Australia held an average of two insurance policies each with HIH, all of which are now defunct.

On those figures, you can be assured that there was at least a few HIH victims amongst the 1700 One.Tel staff who have suddenly found themselves unemployed with only four weeks' severance pay. With a reputation for paying base level staff poorly and executives highly, it is no surprise that the biggest losers from the collapse are likely to be ground-level staff.

The story of One.Tel and HIH is the story of two different worlds. For those who own and run the companies that collapse, the resulting fall-out is an excruciating period of social embarrassment, of cancelled dinner parties and friendships lost. The overwhelming sums of money that the rich owners have lost in these ventures are more than matched by the vast sums of money that they retain from the mega-profits they have accrued and salted away during the companies' life.

It is the companies' workers that face unemployment and insecurity, especially in the case of HIH's customers, loss of their homes and incomes. Pressure from these victims has forced the federal Coalition government to make a pretence of doing something to compensate the victims of the crashes, and to stop it from happening again.

'Risk'

The May 19 Australian Financial Review published an opinion piece by Tony Harris on the HIH debacle. Harris argued that corporate collapses are a normal feature of a market economy, and rescuing those affected represents a “moral hazard” because it encourages people to believe that they can get the benefits of risks without the pain.

Harris and the AFR are right in identifying corporate collapses as endemic to the capitalist economy. But where Harris goes wrong is in assuming that the victims of the HIH collapse made an informed choice to participate in the “risk” involved.

Neither One.Tel nor HIH existed to benefit the consumer. They were formed in order to make lots of money for those who owned the company. This did not even necessitate making a profit, something neither company has done for a significant amount of time. Instead, both companies have been run in such a way as to drive up their share price.

One.Tel's pricing structure and corporate strategy strongly suggest that it was never intended to be a viable profit-making company. Instead, the four key shareholders — co-founders Rich and Brad Keeling, and backers Lachlan Murdoch and James Packer — appear to have had something like this in mind: One.Tel launches itself to sell spare capacity of the telecommunications network, rented from Optus; ridiculously cheap pricing and aggressive marketing aimed at Telstra and Optus customers win One.Tel a large market share, although the company is still making a loss; this forces the big two to buy out the company at a high share price in order to get their customers back; Rich, Keeling, Packer and Murdoch make a tidy profit, the big companies are happy, and the customers and workers get screwed.

Neither Packer or Murdoch were concerned with the customers or workers when they pulled the plug on the company on May 17. Their only concern was to get out of the company with as much money as possible. While Packer and Murdoch are One.Tel's biggest creditors, they are also One.Tel's biggest debtors and have no intention of paying. Packer owes One.Tel $90 million, more than enough to cover its workers' entitlements.

The amount that Packer owes One.Tel has, interestingly, not yet been mentioned in the Australian or any of Rupert Murdoch's stable of newspapers. Similarly, Brad Keeling — who has supported Packer and Murdoch junior's version of events in which they were “misled” about the status of the company — has avoided the same sort of media scrutiny given to Rich, who is not co-operating.

HIH

The obsession with high share prices has also dominated the dealings of HIH since at least 1998. HIH's merger with Rodney Adler's AFI insurance in 1998 was carried out when both companies were in trouble, but it served its purpose of pushing the share price higher.

Of course, the easiest way to artificially inflate an insurance company's share price is to lower the rate at which income is put into reserve against future claims. This increases the income to expenses ratio, and creates the impression of higher profits. In October last year, as audit company Arthur Anderson signed off on HIH's annual report, its reserves to policy ratio was the lowest in the industry.

But even this it appears was not enough. In July last year, HIH invested $10 million in a fund controlled by Adler (who was incidently also a One.Tel director), which immediately started buying HIH shares which were in a slump. The share purchase pushed the HIH price upwards. ASIC intend to sue over this, and other share purchases, for “breach of good faith”.

But while Adler may have overstepped the line, his strategy of attempting to artificially inflate the company's health in the public eye is standard operating procedure for big company boards. The auditing system, generally believed to be the guarantee of corporate health, is nothing of the sort.

On October 16, HIH's auditors signed off an annual report that claimed more than $960 million in assets. Less than six months later, the company was shown to be insolvent and lacking enough cash reserves to even pay basic claims.

There are two key problems with the system of company auditing. First, auditors are hardly independent. Arthur Anderson, who audited HIH, had more non-audit business with the company than audit business. Appointed by the HIH board, a negative finding was not likely to increase the company's chances of getting the HIH contract next time.

Second, the auditors are also not responsible to the public as a whole, but only to the shareholders. Their job, even when done properly, does not include informing or protecting the rights of customers.

The only body set up specifically to protect consumers is Australian Prudential Regulating Authority. APRA's board is dominated by individuals with connections to other insurance giants.

All of which makes the AFR's claim that HIH's customers were in a position to judge the risk they were taking a little ludicrous.

Make the rich pay

Following an extensive public outcry, Prime Minister John Howard, along with state governments, agreed to compensate individuals suffering after the collapse of HIH. The total cost of the package, to be borne by taxpayers, is likely to be more than $700 million.

It is obscene that working people should be paying for the collapse of HIH, when the likes of Adler are allowed to maintain a lifestyle of excess.

In February, Adler sold all his One.Tel shares, at a considerable profit. He also began a process of shifting his assets into the hands of other members of his family. He has not offered to give back his huge salary or bonuses “earned” from HIH.

One.Tel's Jodee Rich also began to re-organise his life in February. He shifted half his assets to his wife. He separated One.Tel subsidiaries, One.Call and One.Flight, from One.Tel. He resigned from the boards of these companies and was replaced by his sister Nicolet Long.

While both Rich and Keeling have promised to guarantee one months' pay to their workers, they have not offered to return their $10,000 a week salaries, or their profits from the sale of shares six months ago.

Under current laws, Adler, Rich, Keeling, Packer and Murdoch will only be personally liable for compensation if it can be proved that they broke the law. With the public baying for someone to blame, it is obvious that the Packer/Murdoch media duopoly is prepared to throw Rich and Adler to the wolves, allowing some token fines, and possibly even a short prison sentence. Following which, like Alan Bond, they can walk right back into their mansions.

But this is nowhere near enough. The real crime here is not the technical breaches of rules designed to protect shareholders, it's the gross abuse of working people in order to make masses of money for the elite. The public purse, over 80% of which is provided by people working for less than $60,000 a year, should not have to contribute one cent until Packer, Murdoch, Keeling, Adler and Rich have been reduced to the same wages as the rest of us.

I won't hold my breath.