Government and Civil Society: Which is Virtuous?

Senate Occasional Lecture, Parliament House,
Canberra, 23 August 2002

"What happens to an idea when it becomes a reality?" This question, posed in a recent novel, "The Faculty of Useless Knowledge" ⁽¹⁾ serves as a useful introduction to our lecture on government and civil society.  I contend that the faculties of useless knowledge have been working overtime of late to convince the electorate, which elects members to this Parliament, that truth, justice and democracy lies in civil society and not in the corridors of Parliament House.  I beg to differ.

In a liberal representative democracy a major virtue of government, and the parliament from which it is derived, is the enfranchisement of the unorganised, it gives them a voice and limits the claims that the many organised interests make against the commons.  Civil society, whether church, corporations, trade unions or NGOs, provides citizens with vehicles to exercise private initiative.  In a liberal democracy they are, thankfully, free to pursue their aims.  Indeed, democracy may be enhanced by an energetic civil society.  When civil society organisations, however, organise in pursuit of public purposes they compete with government and the unorganised.  If successful in that competition, they become in effect, civil society regulators. ⁽²⁾  The aims of this paper are first, to report progress on the new breed of civil society regulators - advocacy NGOs - and the implications of their activities for representative democracy.  Second, to suggest to legislators a tool for establishing a proper relationship between government and those would-be civil society regulators.

Here are some examples of the recent activity of advocacy NGOs, including their relations with national governments, international organisations, and business:

• The Australian Conservation Foundation announces, "by 2050 Australia will be a civil society.  There will be a high level of community engagement in decision-making processes, a higher level of trust with their decision-making institutions."
• The Sydney Organising Committee for the Olympic Games allows Greenpeace to judge the environmental performance of the 2000 Sydney Olympics.
• The Federal Court of Australia gives standing to a lawyer and a civil liberties group that have no instructions from, or prior contact with, the potential asylum seekers on the vessel MV Tampa.
• The United Nations announces that it will use Amnesty International to monitor human rights in China.
• BP announces that henceforth it is withdrawing support for political parties and funding NGOs exclusively.
• An NGO consortium lobbies the Senate to impose reporting obligations for non-financial considerations in investment products as the price of passing the Financial Services Reform Act.

These events suggest that civil society is taking a role in regulating the behaviour of all other actors, whether government, corporations or individuals.  They are doing so through the courts, by monitoring and even delivering government programmes, by influencing legislation, and by working directly with other centres of power, for example business and international organisations.

These activities suggest a civil society acting in a new mode.  Where, in the past, civil society has acted in opposition to government, it has helped to secure guarantees of formal legal, political and civil equality.  It has helped to secure the law and institutions that safeguard the liberty to conduct ones business based on "a kind of trust among non-intimates". ⁽³⁾  In other words, it has helped to secure a "civil" society.  And civil society continues in an apolitical mode, when it identifies problems, such as the amelioration of the plight of the sick and the poor, and produces its own solutions.  In this mode, it is self-directed and voluntary, and makes few collective moral or resource claims on other citizens.  In other words, it exists apart from government and the state.

The dominant mode in which civil society now operates is essentially communitarian.  The examples above suggest multiple agendas.  It appears to want to further democratise ⁽⁴⁾ liberal democracy.  It seeks a democratic community and collective solutions, it makes increasing claims on the community in an increasing number of guises and ways.  For example, it is a vehicle for the idea of citizenship ⁽⁵⁾ which becomes the basis and the source of welfare claims we have against each other.  It is used as an ethical or normative idea, a vision and prescription for the good life. ⁽⁶⁾  It seeks distributive or social justice ⁽⁷⁾ in an increasing number of areas, including the economy.  Civil society in the communitarian mode has been taken up and pressed into service as a tool to criticise liberal democracy, in particular by those who think that the state has been decimated by "neo-liberals".  It is used as a political slogan to advance the cause of the democratic community and as a weapon to mediate the effects of the ideology of individualism and self-interest.

It may be that liberalism is excessively individualistic and insufficiently democratic.  Whether democratising the community can solve these problems, however, is problematic.  Communitarians insist on the need to override the wishes of the individual in the name of the greater good. ⁽⁸⁾  Democratic communitarians assume or require that participation in politics is the norm, whereas, in fact, it is the exception.  The work of democracy always comes down to activists, so the question is -- which activists and what recourse to their activity do the citizens have?  NGOs expand the range of voices but, in doing so, do they expand the participation of the community or the ranks of a political elite?  A cardinal tenet of liberalism is to keep democracy in its place, to regard it as an activity of limited application.  By contrast, the democratic way of life encompasses more than the periodic business of government and elections.  It is to be applied to most institutions, democracy in the courts (individualised justice, liberal rules of standing) the home (feminism), the workplace (industrial democracy), the corporation (corporate social responsibility), the economy (market socialism).  Democracy may work in some of these without destroying the purpose of the institution, but where it does not, there are costs attached.  The application of democratic processes to all walks of life should be contingent on its utility, not on its "morality".

As for social justice agendas, these attempt to justify the transfer of funds from one group of people to another.  "Justice turns into the problem of how to distribute goods and losses without any very direct relation to law and order or even constitutionality.  To mark its new role, the term "justice" is commonly partnered by "social", and social justice is what happens when all basic goods, which may notionally include individual talents and skills, are centrally distributed in accordance with a rational scheme." ⁽⁹⁾  The welfare state continues to grow, seeking ever more elaborate justification.  "The core of the citizenship theory of the welfare state is community membership.  From our membership in our community flow the welfare rights we can assert and the duties we owe to contribute to the support of our fellows." ⁽¹⁰⁾  Often it is the second part of citizenship which is left out.  Moreover, what happens when insufficient people believe in the theory?

CHALLENGES TO THE VIRTUES OF GOVERNMENT

The new mode of civil society has become more prominent because the earlier work -- the establishment of liberal democratic institutions and the welfare and regulatory state -- has been largely achieved.  This communitarian civil society stems also from the massive growth of professional activist groups and the pressure they bring to bear on government (see Box 1).  It has resulted in an explosion of the channels by which political business is conducted.  The new civil society demands new relations between government and civil society.

Communitarian civil society is growing because liberal democracy's ability to voice citizen disquiet is unprecedented.  It makes the present democratic institutions appear inadequate, less trusted.  This position is one that cashed-up NGOs and international agencies favour, and business has to live with.  The irony is that the critics of liberal democracy -- indigenous, feminist, gay, environmentalist, civil libertarian, socialist -- have all had their greatest successes in liberal democracies.  They are not doing so well in crony capitalist, Islamic, or communist states, even less well in tribal polities.  In fact, where they threaten to do particularly well is at a supra-national level -- EU and UN -- where electorates have no direct control over them.  Having been granted many of their wishes, these movements challenge the legitimacy of important elements of the system that sustains them -- the electorate's veto over policy-makers, the distribution of the economic surplus, the commitment to evidence as the basis for policy, and the rule of law -- hallmarks of the liberal democracies.  Each of these is being challenged, in part by prominent NGOs, in part by other players within and outside government.  The result may herald the rise of a dictatorship of the articulate, the aptly named Culture of Complaint. ⁽¹¹⁾

Box 1:  Dimensions of a New Civil Society

Size Oxfam has an annual income of $862 million and 2 million supporters in 14 countries.  WWF has an annual income of $720 million, 3,300 staff and 5 million supporters across 96 countries.  Amnesty International has an annual income of £19 million, 320 staff worldwide and one million supporters in 162 countries. Number There were 213 international NGOs in 1909, presently there are over 50,000. (12)  In 1998 about 9,500 international meetings were organised worldwide in 184 different countries (17% took place in Asia and Australasia), up from 8,800 and 170 respectively in 1993. (13) Reach There are more than 5,000 transnational NGOs, NGOs based in one country that regularly carry out activities in others. (14)  The number of country-to-international NGO links increased from 24,136 in 1960 to 126,655 in 1994. (15) Australia There are 37,000 Income Exempt Charities and 15,000 organisations that have Deductible Gift Recipient status, which indicates the very large number of organisations that have significant access to the Commonwealth Government. (16)

The work of the state is as much to counter the tyranny of the minorities, including individuals, as well as to counter the tyranny of the majority.  The task is to limit the claims on the commons, to depoliticise much of life, to make it less amenable to public dispute.  In the most prosperous of times, in the most prosperous of nations, there is the invention of permanent poverty. ⁽¹⁷⁾  In the most benign of modern production regimes, there is the invention of a permanent litany of environmental disaster. ⁽¹⁸⁾  In the most egalitarian and peaceful of nations, there is the invention of a permanent litany of human rights abuses. ⁽¹⁹⁾  The application of these civil society agendas to the liberal democracies shows a lack of objectivity and loss of sense of perspective and of magnitude on the part of the advocates.

In what ways is communitarian civil society beginning to stretch representative democracy's capacity to cope?  In what ways is civil society gaining influence over the political and economic realm?  The major difficulties arise from its two major alleged virtues -- democracy and social justice.  The inappropriate application of democratic processes and the inappropriate claim to justice will undermine the legitimacy of liberal representative democracy.  The result may be an electorate less likely to trust government, less likely to favour equality, and more individualistic, less likely to believe in common action.

To a large extent, political activism has been contracted out.  In the early phase of the establishment of the major political parties there was certainly a strand of, or at least pretensions to mass (class) involvement in politics, although in fact the numbers were never large.  At present, the parties are brand names run by professionals, paid for by the state to do the work of politics. ⁽²⁰⁾  This is not a criticism.  On the contrary, the criticism is of those who believe that civil society activists are more democratic.  Civil society activists, as represented by NGOs are brand names -- WWF, Greenpeace, Amnesty International -- run by professionals.  They are less constrained by their membership than say business and union interest groups, and totally unconstrained by the need to run candidates for public office.  They are good at voicing opinion, not at resolving the myriad claims that present to government.  They have a different part to play in the great democratic panoply, but they are no more democratic.

COMMUNITARIAN CIVIL SOCIETY IN ACTION

To some extent our communitarian civil society is, a straw man.  We have loaded it with a great many dubious virtues.  Nevertheless, the fact is that civil society has been used as a vehicle for these very virtues and it is legitimate to gather them for scrutiny.  The following case studies illustrate sources of challenge to government in a representative democracy.  To the extent that the challenges succeed, they damage the virtues of liberal democracy.  The ways are many, among them are, the misuse of evidence in physical science, the use of social science techniques in an attempt to impose minority views on the electorate, governments handing responsibility to NGOs, courts straying into the legislative domain, legislation that invites a wide ambit for civil regulation, and bogus measures of corporate reputation.

CASE STUDY 1:  WWF AND THE GREAT BARRIER REEF ⁽²¹⁾

The World Wide Fund for Nature (WWF) mounted a campaign that lead to both the Commonwealth and Queensland Governments recommending urgent and significant changes to land management practices in catchments that drain onto the Great Barrier Reef.  WWF alleged that there was evidence for localized deterioration on nearshore reefs from agricultural run-off.  In June 2001, WWF published a Great Barrier Reef Pollution Report Card, which concluded that the Great Barrier Reef was being threatened by land-based pollution.  While the report made many allegations of reef impact from agriculture, it did not substantiate any of the claims.

The Queensland Government responded to pressure from the WWF campaign by establishing a Reef Protection Taskforce.  At its establishment, representatives on the Taskforce asked that the current level of scientific understanding on impacts of terrestrial run-off on the Reef be provided.  A science statement was developed for the Taskforce to provide a "consolidated view of our current understanding of the impacts of terrestrial run-off on the Great Barrier Reef World Heritage Area".  Further, "the statement seeks to allay concerns that there are conflicting views in the scientific community".  This document discussed threats to the Reef, but provided no reference to actual damage to the Reef.

Several Taskforce members noted this fact, with the following comments being made by members:  "So the widespread impact [of terrestrial run-off] is not substantiated."  "But the scientists have tried very hard to prove there is an impact."  "Let's not get hung up on the science."  And this from the WWF member, "Let's go forward on the basis of the precautionary principle."  At the insistence of several Taskforce members, the science adviser agreed to redraft the science statement.  A revised science statement was issued with the comment to the Chairman of the Taskforce that "We wish to clearly point out that whilst there is no evidence of widespread deterioration, there is documented evidence of localized deterioration on individual nearshore reefs".

This was the first statement from reputable scientists clearly alleging an impact from land-based run-off on the Reef.  Unfortunately for the proponents, the scientific papers on which this conclusion was drawn provided no evidence that agriculture or other land-based sources of run-off were having an adverse impact on the Reef.

The Reef Campaign came at the price of undermining scientific integrity.  According to Professor Carter of the Marine Geophysical Laboratory, James Cook University, "one of the relatively new problems that faces us is that governments are increasingly basing their actions on advice provided by unnamed consultants, or on unrefereed reports from government agencies ... This is a recipe for disaster.  Good science operates on a consensus basis, using material that has been subjected to rigorous peer review and published in journals of international standing.  It is therefore at their own peril that democratic governments attempt to 'control' the scientific process for political ends."  It is a dereliction of duty for governments to devise standards for water quality and run-off regimes without direct studies of impact.  That some scientists would play along with them suggests that politics and science are no strangers.  The issues could have been resolved if governments had been prepared to scrutinize the evidence in the published scientific literature.

CASE STUDY 2:  DELIBERATIVE POLLING

Deliberative polling ⁽²²⁾ is a technique which combines deliberation in small group discussions with random sampling to provide public consultation for public policy and for electoral issues.  The technique assumes that citizens are often uninformed about many public issues, especially where they have little reason to confront trade-offs or invest time and effort in acquiring information.  At its core is the belief that if citizens were better informed they would come to the "right" conclusion.  It stems from the romantic notion of participatory democracy, ⁽²³⁾ a part of the communitarian philosophy.  In fact, what the poll does is to gather unsuspecting citizens and subject them to an intensive brow-beating by the consensus of intellectual fashion at a particular point in time.  It is tantamount to suggesting that the intellectual elite should rule, indeed that they would get it "right" but for the ignorance of voters.  Representative democracy works on a quite different assumption -- although the elite govern, their policies are constrained by the electorate, in the light of the electorate's assessment of events.

Two national Deliberative Polls® have been conducted in Australia, the first before the November 1999 referendum on the Republic, and the second in February 2001, on Reconciliation with Aborigines.  When participants had the opportunity to discuss intensely the referendum on the Republic in a deliberative poll, "opinion shifted dramatically".  There was a 20 percentage point increase in "yes" voters, from 53 to 73 per cent and support for the direct election of the President collapsed, from 50 to 19 per cent.  Unfortunately for the Deliberative Pollsters, the Referendum failed miserably.  One of the reasons it failed miserably was because of a very large sentiment among the public for a directly elected President!

The second Poll was again an exercise in impressing the electorate with the intellectual orthodoxy, in this case in Aboriginal Reconciliation.  The proof of the success of this poll was that "opinion shifted dramatically" as a consequence of the experience.  The perception of Reconciliation as an important issue facing the nation rose dramatically from 31 per cent prior to deliberations to 63 per cent following deliberations.  With changes in perceptions of the importance of the issue and increases in levels of political knowledge (my emphasis), levels of support for a range of national initiatives rose.  Support for formal acknowledgement that Australia was occupied without the consent of indigenous Australians rose from 68 per cent to 82 per cent and, an apology to the "stolen generation" rose from 46 per cent to 70 per cent.

Unfortunately for the Pollsters, support for the political agenda ⁽²⁴⁾ behind the Reconciliation initiatives remained relatively unchanged after deliberations.  Those who did not support a treaty or set of agreements between indigenous and non-indigenous Australians rose from 46 per cent to 50 per cent.  Those opposed to the allocation of special seats in parliament for indigenous Australians declined from 57 per cent to 55 per cent. ⁽²⁵⁾  Like the Referendum, the Deliberative Poll was an exercise in elite frustration with the electorate.  Civil society leaders showed impatience with the political leaders and their masters, the voters.  Voters changed their sentiment on the parts that did not affect them, they "learned their lines" but they did not change their views on the parts they thought may affect them.

CASE STUDY 3:  GREENPEACE AND THE SYDNEY OLYMPICS

Environmental NGOs played a key role in the development and delivery of the environmental agenda of the Sydney Olympics.  Greenpeace mounted a significant Olympics campaign over 7 years leading up to the Bid and the Games, and there was a close working relationship with the Games organisers.  Greenpeace International and its office in Sydney, Greenpeace Australia, actively participated in the 1993 bid to host the Games, joining with government and industry in drafting the "Environmental Guidelines", Sydney's plans for an environmentally-friendly Games.

Greenpeace adopted a "watch-dog" role which included monitoring the performance of organisers, offering advice and criticism and reporting on the performance of Games organisers.  SOCOG dealt with Greenpeace in a number of ways.  "SOCOG treated Greenpeace as an organisation with a legitimate interest in the Games and involved them as much as possible.  This reflected their role in the Bid, their expertise in the environment, their ability to tap a global network of knowledge and their ability to become involved whether we wanted them or not (my emphasis)." ⁽²⁶⁾

The Greens helped to establish the standards in all key performance areas, energy conservation, water conservation, waste minimisation, pollution avoidance and the protection of the natural environment.  A consortium of Greens lead by the ACF were paid $160,000 for their work by the NSW and Commonwealth governments to keep an eye on the organisers;  Greenpeace, true to their view on independence, did not accept government funds.  The Greens were on the stage at the launch of various environment initiates with SOCOG, for example, the CEO of Greenpeace launched the waste strategies initiative with the Minister for the Olympics.

Essentially the strategy of SOCOG was to invite the Greens into the tent, to minimise their potential to damage to the Olympic brand.  It was part of the "engagement strategy" now common in the corporate sector.  It used the language of "stakeholder", which implies equal standing among competing interests.  Essentially, a stakeholder is "anyone who can do you damage."  It is the damage that a Green group can do to a company's image that allows it to gain status with the real stakeholders, those who have a contractual relationship with the organisation, whether taxpayers, investors, employees or suppliers and customers.

It was also a "beyond compliance" strategy, doing more than the law required.  The Olympic Games showcased the best of the best, so everything associated with the Games has to be the best of the best.  Greenpeace used the Games like any other business, to use the badge of the Olympics to push their product.  In this case, however, they paid nothing and they delivered nothing, except the threat of bad publicity.  The strategy of engagement delivered power over programmes and the judgement of outcomes to those who threatened blackmail.  There was a time when such behaviour was considered bad form.  Greenpeace stole a moral march on the IOC and the governments -- and the IOC, the fans and the taxpayers paid for it.

A proper acquittal of government funds would ensure that public servants and technically competent people were in the decision-making positions, albeit with advice from lobbies.  The Sydney Olympics pushed well beyond the proprietaries to indulge in an exercise of damage control and used funds for experiments in environmental management that had insufficient scientific scrutiny.

CASE STUDY 4:  JUDICIALISATION OF POLITICS

It may be the ultimate form of individual political involvement to take a matter to court, but the effect of many people litigating many issues, means the transfer of decision-making rights from the legislature to the courts. ⁽²⁷⁾  The trend to settle a wider ambit of issues in the courts has multiple origins.  It stems from the trend in law, both judge-made and statutory, towards a preference for individualised, discretionary solutions as against the principled application of general laws. ⁽²⁸⁾  It stems from the explosion of legislation and the tendency for Parliaments to pass law with general standards rather than specific rules, ⁽²⁹⁾ the widening of the law of standing ⁽³⁰⁾ and the tendency for the judges to confuse compensatory justice for distributive justice, as with the current crisis in tort law. ⁽³¹⁾

It is now easier for collectives not directly involved in issues to intervene in more legal matters.  In Truth About Motorways Pty Ltd v Macquarie Infrastructure Management Ltd (2000) the High Court of Australia has widened the capacity of NGOs to take legal action against business.  The consensus of the High Court in TAM v MIM was that the Parliament had the power to legislate to allow "any person" or "a person", or the like, to have standing under Commonwealth statutes.  The Court stated that the Parliament may "allow any person to represent the public interest and, thus, institute legal proceedings with respect to a public wrong."  It further observed that a number of laws had been enacted in recent years, which allowed proceedings to be brought, by any "interested person" (for example, in certain laws relating to the environment, industrial relations and financial markets) or "person affected" (for example, in certain companies and securities, investment and environmental laws). ⁽³²⁾  This widening of the law of standing could prove fertile ground for lawyers and NGOs to press their agendas through the Courts in environmental, industrial relations, companies and securities and anti-discrimination, as well as privacy, and finance and investment arenas.

Consider the controversial litigation last year concerning the Tampa. ⁽³³⁾  The proceedings were instituted by a lawyer and a civil liberties group that had no instructions from, or prior contact with, the potential asylum seekers.  Both were given standing by the Court on the assumption that they were acting in the "public interest" to protect a vulnerable group against government excess.  History has now conclusively disproved that untested assumption, at least in so far as 131 people given asylum and permanent residence in New Zealand are concerned.  Had the Tampa plaintiffs won their case, they would have succeeded in having most of those on the boat detained at Woomera, Curtin or Port Hedland for the last 10 months, eventually to see their asylum application rejected, with the result that they must return to a war-ravaged Afghanistan.  Those who instead chose to go to New Zealand under the Government-sponsored plan have, with a few exceptions, been given asylum and permanent residence in that country.  With hindsight, it seems clear that for many on the Tampa the Government initiatives delivered them a more favourable outcome than the "public interest" litigation.

Judicial activism is seen by some as an expression of the rule of law in safe-guarding individual rights and civil liberties against executive abuse.  It is also claimed, though not often explained, "that judicial activism forms part of a new democratic settlement between the government and the community.  If judicial method is as capable or better than legislative or executive method for distilling enduring community values, that needs to be demonstrated." ⁽³⁴⁾

CASE STUDY 5:  THE FINANCIAL SERVICES REFORM ACT ⁽³⁵⁾

The Financial Services Reform Act of 2001 is a legislative step into the brave new world of corporate citizenship.  It seeks to place open-ended moral restraints on private investment decisions.  If they were applied to individuals, there would be an outrage.  The Act includes disclosure provisions in the offer of financial products designed to give prospective investors sufficient financial information to decide whether or not to invest.

The provision applies particular disclosure requirements to all superannuation, life insurance and managed investment products.  The requirement is that the financial institution concerned disclose for every product the extent to which it has taken into account labour standards and environmental, social and ethical considerations.  The requirement is thus imposed on approximately $650 billion of Australian savings, including the principal form of government-enforced savings -- superannuation.

Disclosure requires the institution to formulate and express its attitudes and practices to matters that range from difficult to impossible to define.  It is open to businesses to state that they do not take these matters into account in their investment decisions.  No institution will state that it does not take such matters into account, in part because if they did, NGOs and the media would label them as unethical or anti-social.  Silence would be treated as guilt.  More importantly, businesses in reality almost always "take into account" these issues to some degree, so a nil return would in most cases be untruthful.  The normal investment selection processes involve winnowing out fraudulent (that is unethical) propositions or those with high risk exposures arising from their corporate practices.  NGOs would exert pressure for highly detailed disclosure statements under each of the headings and would seek to supervise the behaviour of the institutions concerned against those written statements in ways favoured by those groups.

In the end, this is no less than an attempt, by indirect and stealthy means, to impose new and poorly defined community service obligations and prescribed behaviours on business.  By means of legislation and mandatory guidelines, the corporate sector is obliged to undertake actions (and report on them) that may adversely affect its profitability ⁽³⁶⁾ and that it would not necessarily undertake voluntarily.  The Act will encourage significant distortion of investment decisions and management effort to placate hostile groups, which have little financial stake in the institutions or businesses affected.

These provisions dilute the influence of shareholders and the responsibility of corporate management to its shareholders.  It could provide an excuse for company boards and management for poor financial performance.  In the extreme it might be used as an excuse for business failure on the grounds that the company had focused, perhaps very successfully, on the four non-financial criteria and had thus failed to make a profit.  Failure to control labour costs might be equated with high labour standards.  Zealous environmental performance might translate into closure of operations huge expenditure to avoid trivial environmental injury and so on.

The expansion of these "bottom line" concepts is accompanied by the phenomenon of a growing list of interest groups which elect themselves as "stakeholders".  A stakeholder is traditionally a person who has a stake, that is, someone who has put up something of value to promote the enterprise in question and risks losing it.  This delicate trade-off of risk and reward traditionally included shareholders and lenders.  It is this trend towards giving everyone a say in everyone else's business that lies beneath much of the pressure for the FSRA provision.  It is a perversion of the idea of democracy, a new form of corporatism.

CASE STUDY 6:  REPUTATION INDEX ⁽³⁷⁾

Corporate reputations are a valuable commodity, a poor one can lead to a loss of income for investors and employees.  This is precisely why some NGOs seek to advance their agendas by trying to capture corporate reputations.  A prime example is The Sydney Morning Herald and The Age newspapers' list of Australia's "best" 100 corporations.  Each is rated on a number of factors, which are combined to form the "Good Reputation Index".  The Index purports to measure corporate performance on employee management, environmental performance, social impact, ethics, financial performance, and market position.  The judging is undertaken by "influential" organisations, such as the Ethnic Communities Council, Greenpeace, Amnesty International, the St. James Ethics Centre, the Institute of Chartered Accountants, and the Public Relations Institute of Australia.

An analysis of the data ⁽³⁸⁾ shows that, according to the Index and therefore the CSR regulators:

• Financial performance and social responsibility are inversely related.  Only one of the top ten most socially responsible corporations is ranked among the top 20 firms in terms of financial performance.  Conversely, just three of the top ten financial performers were ranked in the top 20 in terms of social responsibility.
• Government protection and direction is good and market competition is bad.  Five of the top 10 most socially responsible corporations are government-controlled.  Two, Australia Post (ranked 1st) and Queensland Rail (ranked 5th), are government-owned monopolies.  Telstra is partially government-owned and heavily regulated.  Holden and Ford are sustained by taxpayer subsidies.  None of the top ten financial corporations are government-owned or subsidised and all face vigorously competitive markets.
• Funding social activists is a key to social responsibility.  Each of the highly ranked socially responsible corporations donates heavily to corporate social responsibility groups (including many of the organisations who acted as judges for the Index).  Westpac (ranked 2nd), Alcoa (ranked 6th) and ING (ranked 10th) are not simply generous financial contributors, but are also strong promoters of the triple bottom line.  Westpac has taken the lead in promoting ethical investment in Australia and ING has taken a similar approach around the world.  One must at least suspect that their high ranking is a reward for their contribution to the cause.

The Index gathered the opinions of those who have an interest in gaining some leverage over the activities of corporations, but who have no direct interest in their operations.  It has precious little to do with actual performance of tasks that corporations need to undertake in order to fulfil their obligations to their customers, shareholders, and their workforce and to society through their legal obligations.  The tussle between corporations and NGOs over corporate reputation has reached new heights.  It is now a game of cat and mouse, with shareholders having to pay to bribe the civil society regulators.

THE PROTOCOL ⁽³⁹⁾

An essential task for democratic government is to maintain a balance between the organised and the unorganised interests in society and to counteract the tendency for state power to be used to satisfy organised interests.  The principle means to achieve this balance are already in place:  a conservative constitution devoid of a Bill of Rights and a House of Representatives based on single member constituencies.  A further one is to resist the tendency to allow more power to rest in the hands of international institutions where electorates have no direct veto.  In addition, in the domestic context, there should be disclosure on the part of all those who have access to the resources of the government.  The protocol is the instrument proposed.  This is designed to reassert the primacy of the formal democratic institutions, to limit the impact of communitarianism by corralling it through the Parliament, where it is constrained by the electorate.

The Australian Tax Office submission to the Inquiry into Charities noted the lack of information provided by non-profits that enjoy tax concessions.  There have been concerns about accountability to donors, possible erosion of confidence in the sector, the lack of data for policy development, and so on:

The Commission is concerned that accountability to donors and the general public is inadequate in terms of the availability of easily understood information and the transparency of operations.  This may reduce donor confidence and ultimately public support for the sector. ⁽⁴⁰⁾

In some overseas jurisdictions, legislation gives public access to various information about concessionally taxed non-profits, including administrator's decisions, constituent documents and financial data.  For example, in the USA:

Registered charities must file (annually) form T3010 that requires detailed information on their revenues and expenditures, assets and liabilities, remuneration paid to senior staff, and more general information about their charitable purposes and activities.  All of this information is available to the public. ⁽⁴¹⁾

Consistent with these views, where an NGO wants access to a government, it should be granted on the condition that the NGO is competent in the areas relevant to the particular task required.  Each of these competencies requires proof.  Specifically, an NGO should provide data about their source of funds, their expertise, their membership and the means of electing their office-holders.  Specifically, where a government grants standing to an NGO the following information should be gathered and made available to the public:

Legal status:  sufficiently detailed to prove the status of the organisation and to identify office holders, along with the structure of responsibilities and appropriate systems to ensure accountability.

Operating status:  Proof that the organisation is voluntary, non-profit and nongovernment.

Membership:  There must be a verifiable list of the membership, one that distinguishes members -- people with voting rights -- from supporters.  List should not be made public, although there should be evidence that new membership is encouraged.

Elections:  Document the election process and processes by which members are able to be involved in the policy-formation, including the ability of members and supporter to access all decisions of the governing body.

International affiliation:  provide information on off-shore affiliates, associated parties;  on the degree of non-resident input in terms of board membership and general membership, and extent of offshore funding.

Financial statement:  The financial position should be prepared in accordance with accepted accounting principles and include:  significant categories of contributions and other income, expenses of major programmes and activities, and all fund-raising and administrative costs.

Use of funds:  Money should used in a manner specified by the NGO when it asks donors (and those funds are tax-assisted) for donations.  Information should be provided which shows the percentage of total income from all sources applied to programmes and activities.

Fund-raising:  Solicitations and informational materials must be accurate, truthful, and not misleading.  Solicitations shall include a clear description of the programmes and activities for which funds are requested.

Claims to expertise:  other than membership interest.  The qualifications, whether formal or by way of publications, of those who will speak or act on behalf of the organisation in its representations to the provider, research undertaken, and whether research has been assessed by independent peer review.

CONCLUSION

NGOs that seek access to government resources should be the subject of scrutiny, and the results of that scrutiny should be made available to the public.  The acceptance of an NGO as a body with standing should lead to the publication of the data on a publicly accessible register.  This simple procedure would reassert the dominance of the relationship between governments and their citizens, a dominance that has tended to be displaced by the all-too-ready willingness of providers to accept NGO "stakeholders without responsibility" rhetoric.  NGO activity is not going to fade, in many regards it is to be welcomed, but it should be put in perspective.  Citizens need to know about the NGOs that seek access to their resources.  The simple device of a protocol should help put the citizens back in charge.  It may help to modify the tendency evident in civil society to pursue the agendas of the articulate with the resources of the inarticulate, or those too busy to play politics.

Liberal democracy has the virtue of securing a degree of liberty consistent with the views of the majority and the protection of the rights of minorities.  It is predicated on a limited politics, where civil society and the economy make their own contributions to society.  A civil society that promotes such an outcome shares the same virtues.  On the other hand, a communitarian civil society where citizens lay claims on fellow citizens in increasing ways and for an increasing number of reasons could create a less liberal society.  Its virtues may not be approved by the majority.  The only defence against such insurgency is better information about those who make the claims and organise the voices.

Government in a liberal representative democracy has the legitimacy to arbitrate and conciliate, incorporate and resolve the claims on the commons.  Mere assertion of the public interest does not make it so.  This is difficult in a liberal society where all voices must be heard, all due weight given to opinion, whoever expresses it.  The present difficulty arises because the ability to voice opinion is outstripping the ability to resolve the claims voiced.  The strengths of liberal democracy are being used against it.  The trick is to retain the strengths and manage the challenges.

---

ENDNOTES

1.  Dombrovsky, Y. 1996.  The Faculty of Useless Knowledge.  London:  Harvill.

2.  See Johns, G. 2002.  "Corporate Social Responsibility or Civil Society Regulation?" Harold Clough Lecture, Perth 16 August, Institute of Public Affairs.

3.  Krygier, M. 1996, "The Sources of Civil Society", Quadrant, October and November:  12-22 and 26- 33.

4.  Cohen, J. and A. Arato, 1992.  Civil Society and Political Theory.  Mass.:  MIT Press, 26.

5.  Harris, D. 1987.  Justifying State Welfare.  Oxford:  Basil Blackwell.

6.  Seligman, A. 1992.  The Idea of Civil Society.  Princeton N.J.:  Princeton University Press, 201.

7.  Minogue, K. 1993.  "Ideal Communities and the Problem of Moral Identity", in J. Chapman and I. Shapiro eds.  Democratic Community.

8.  Berry, C. 1993.  "Shared Understanding and the Democratic Way of Life."  In Chapman, J. and I. Shapiro eds.  Democratic Community NOMOS XXXV New York:  New York University Press, 67.

9.  Minogue, 1993, 42.

10.  Harris, 1987, 145.

11.  Hughes, R. 1993.  Culture of Complaint:  The Fraying of America.  New York:  Oxford University Press.

12.  Union of International Associations 1999.  Yearbook of International Organisations 1909-1999.

13.  de Coninck, G. 1993.  Statistics on International Meetings in 1993.  Union of International Associations.  de Coninck, G. 1998.  Statistics on International Meetings in 1998.  Union of International Associations

14.  Carothers, T.  2000.  "Think Again:  Civil Society."  Foreign Policy Magazine.  Winter 1999-2000 edition.

15.  Judge, A.  1994.  "NGOs and Civil Society:  Some Realities and Distortions:  The Challenge of “Necessary-to-Governance Organisations” (NGOs)", Union of International Associations.

16.  ATO submission to The Inquiry into Charities and Related Organizations, January 2001, 26.

17.  Dennis, N.  1997.  The Invention of Permanent Poverty.  The Institute of Economic Affairs.  Cox, J.  2002.  "The Poverty Line Revisited."  Agenda 9(2):  99-111.

18.  Lomborg, B.  2001.  The Skeptical Environmentalist:  Measuring the Real State of the World.  Cambridge University Press.

19.  Karatnycky, A. and A. Puddington, 2002.  "The Human Rights Lobby Meets Terrorism."  Review 54(1):  6-10.  Also Robertson, J.  2002.  "Take the Candle to the Darkest Dark First."  Review 54(2):  7-8.

20.  See Johns, G.  2001.  "Desirability of Regulating Political Parties", Agenda 8(4):  291-302.

21.  See Wood, R.J., 2002.  "WWF Says Jump:  Governments Ask, How High?"

22.  Developed by James Fishkin of Texas University, The Center for Deliberative Polling.

23.  There are many forms of deliberative democracy.  For example, "Democratization is largely (though not exclusively) a matter of the progressive recognition and inclusion of different groups (my emphasis) in the political life of society."  Dryzeck, J.  2000.  Deliberative Democracy and Beyond.  Oxford:  Oxford University Press, 113.  These sentiments assume that the group is more important than the individual in terms of participation.

24.  Points put to the assembly in Old Parliament by the author and two other speakers, Dr Ron Brunton and Dr Keith Windschuttle.

25.  Issues Deliberation Australia, 2001.  Australia Deliberates:  Reconciliation -- Where From Here? Report tabled in the Federal Parliament of Australia, September 25, pp 59-60.

26.  Otteson, P.  2001.  "Greenpeace and the Sydney 2000 Games:  What Are The Lessons?" Paper delivered at 4th IOC World Conference on Sport and Environment, Nagano, Japan 33-4 November.  Also interview with Peter Otteson, 26 June 2002.

27.  See Vallinder, T.  1994.  "The Judicialization of Politics:  A World-Wide Phenomenon."  International Political Science Review 15(2):  91-9.

28.  Gleeson, A.M.  1995 "Individualised Justice:  the Holy Grail."  Australian Law Journal 69:  421-33.

29.  McHugh, M.  (1995) "The Growth of Legislation and Litigation", Australian Law Journal, 69(1):  37- 48.

30.  Truth About Motorways Pty Ltd v Macquarie Infrastructure Management Ltd (2000) HCA 11 (9 March 2000).

31.  Atiyah, P.  1996.  "Personal Injuries in the 21st Century:  Thinking the Unthinkable."  In P. Birks ed.  Wrongs and Remedies in the 21st Century.  Oxford:  Clarendon Press.

32.  Australian Chamber of Commerce and Industry, 2000.  "High Court Empowers Social Action Groups".

33.  See McMillan J.  2002.  "Immigration Law and the Courts."  Address to the Samuel Griffith Society, Sydney, 15 June.

34.  McMillan, 2002, 7.

35.  See Wood, R.J.  2002.  The Financial Services Reform Act -- A Costly Exercise in Regulating Corporate Morals.  Monograph.

36.  See Ali, P. and M. Gold, 2002.  "An Appraisal of Socially Responsible Investments and Implications for Trustees and other Investment Fiduciaries."  Centre for Corporate Law and Securities Regulation.  University of Melbourne.

37.  See Johns, G.  2000.  "Corporate Reputations:  Whose Measure?" Review 52(4):  3-5.

38.  "The Good Reputation Index 2001", Sydney Morning Herald, October 22, 2001.

39.  See Johns, G.  2001.  "Protocols with NGOs:  The Need To Know."  Backgrounder 13(1).

40.  Quoted in submission by Australian Taxation Office to Inquiry into Charities and Related Organisations, January 2001, 20.

41.  Quoted in submission by Australian Taxation Office to Inquiry into Charities and Related Organisations, January 2001, 20.

We Can Eat Our Cake Too

Rio Tinto CEO Leigh Clifford has provided a stunning demonstration of the huge benefits available from labour market deregulation and more flexible work practices.

A demonstration that therefore makes even more depressing the knee-jerk -- needless to say, negative -- reaction to the Commonwealth Bank's announcement of further job cuts.

And on a broader front, also the dangerous and potentially extremely damaging "reforms" of the Financial Services Reform Act -- neatly, if again depressingly, dissected by myself.

The benefits shown by Clifford are captured in the two graphs.  They relate what has happened at Rio's Hamersley iron ore business since it was finally able to move its staff to contracts in the early 1990s.

The improvements are just mind-boggling.  Industrial disputes have vanished and productivity of the workforce has -- even this word seems inadequate -- leapt.

Output per employee is now double that of the early 1990s, and triple that of the mid-1980s, when Rio Tinto in its previous form as CRA started -- tried to start -- to get serious about reforming its industrial relations and work practices.

Under the old IR "system" that prevailed through the 1970s and 1980s, productivity improvements were hard-won.  Rio/ CRA would have thought itself doing well, extracting marginal increases from year to year.

The sharp acceleration in the 1990s did not come at the expense of safety, with the accident rate also falling sharply, or employee wages.  Profits and real wages have risen.

The cost has been in employee numbers.  But that's exactly the -- good news -- point.  Enter the CBA and further job cuts.

Obviously for the individuals it can be devastating.

But doing more with less workers is exactly the process which has taken us from the 10th century to the 21st.

Bank workers losing their jobs today are no different to farm workers that lost theirs to mechanisation in the 18th century.  Except that the individual consequences today are far less unpleasant.

It's a process which has made everyone in every succeeding generation better off.  And not just financially.

It's the fundamental part of the mosaic that gives us healthier, longer, more meaningful lives than our predecessors.

Would anyone, Bob Brown & Co aside, really want to go back to the world of the 18th century?

To 30-year life-spans (if you survived infancy), which you spent in literally back-breaking labour just to get barely enough food?

Or indeed for that matter, Phillip Adams & Co aside, even just back to the 1950s?

When life -- but only in the "white" world -- might not have been as nasty, but was arguably more brutish and certainly shorter.

"Reforms" such as those in the Financial Services Act, promise, depressingly, to start us back to exactly that sort of future.

On the surface, the new Act simply imposes disclosure obligations on financial institutions such as superannuation, life and managed funds.

And who -- and this writer in particular -- could say no to that?

Except that, as I point out in my backgrounder (The Financial Services Reform Act:  A Costly Exercise in Regulating Corporate Morals), the disclosure obligation will force the financial institutions to cross-examine the corporate sector.

And not about matters relevant to its financial and investment performance, but a range of "feel-good" issues like environmental, social and ethical standards and practices.

The seemingly innocuous disclosure/ inquiry process will then work to pressure the underlying companies to adopt those feel-good non-rigorous "values".

Even then, who could say no to that?  Surely, we want our companies to be "ethical", to "look after" the environment, to contribute to "society"?

But as the duo argue, this will work to the detriment of financial return.

Also though:  "The values to be applied are vague and not of a kind that can or should be enforced by government in a liberal society", they add.

Indeed, "The Act will provide a means for intrusion by numerous political and anti-business groups into the already heavily regulated operations of Australian companies".

On paper, businesses -- and then on the next level, the financial institutions -- could state they did not take the "feel-good" matters into account -- and so avoid scrutiny and the paper chase that requires.

Apart from the fact, that in practice no institution could say that and get away with it;  it would almost certainly be untrue.  Every business takes at least some account of those matters.

The duo call for the bits imposing these reporting obligations to be repealed.

Unfortunately, in their dreams.  The bird has flown;  there is no way that's going to happen.

Business big and especially small, has been saddled with another huge burden of red tape.  But even worse, red tape that will directly damage their ability to create business and jobs.

Indeed, the requirements are specifically intended to do exactly that.  To deter investment in such "anti-social" etc. activities

Obviously, not intended by the Government which hadn't a clue what it was allowing into law.  But most definitely by the special interest groups that pushed the "innocuous" "feel-good" obligations.

The Rio Tinto experience shows precisely how we can build a high-growth high-wealth future, precisely by doing more with less workers.

And in the process, crucially, creating more, better-paid, and safer jobs than would otherwise have been the case.

The financial services "reforms" equally show precisely one way of throwing all that away.  And we won't even "feel good" in our less than genteel poverty.

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Local Government's Democratic Deficit

The recent council rate increases show that all is not well in Victoria's local government.

While, as result of mandatory voting, most ratepayers vote in local government elections in Victoria, few ratepayers closely follow the decisions of local councils.  Importantly most people assume that the State government oversees the councils.  But State governments, with exception of the Kennett Government, have not done so.  They do not scrutinised local government budgets.  They do not enforce efficiency measures.  They only step in when a crisis happens.  As result, local governments are open to capture by narrow interest groups pursuing tax-and-spend policies.

Kennett put in place a range of efficiency and oversight measures including amalgamations, rate caps (removed in 1999), and compulsory tendering.  The Bracks Government replaced these with its Better Value Victoria policy.  This policy shifted the focus from state oversight to "better democracy".  While it will force local governments to provide more information and to communicate with the "community", it is unlikely to solve the democratic deficit.  Few rate payers will troll through councils' often useless and misleading material and the consultation process will remain dominated by the views of interested parties.

Experience bares this out.  Local governments recently increased their rates on average by 6.4 per cent or twice the rate of inflation.  Some councils put in place massive rate increases, such as Glen Eira (up by 16 per cent) and Boroondara (up by 15 per cent).  The justification given was the need to fund cut-backs in Commonwealth and State grants and a "$400 million infrastructure deficit" supposedly identified by a 1999 Department of Infrastructure (DOI) Report and a recent Auditor General Report.

The facts, however, paint a starkly different picture.

There have been no cut-backs in Commonwealth or State grants to local governments.  Indeed both types of grants have increased as planned and are above the rate of inflation.

While the DOI Report did find that many councils have infrastructure backlogs, most -- 76 out of 78 councils -- needed only minor (10 per cent or less) increases in capital spending to rectify this.  The Report argued that the backlogs could be met in most cases from greater efficiencies and planning rather than rate rises.  It also found that some council, such as Boroondara, had no infrastructure backlog and that other councils, such as, Glena Eira, only had a minor backlog.

The Auditor General was concerned, not so much with the infrastructure backlog, but rather with the local governments sector's inadequate knowledge of its infrastructure assets and requirements.

In short, the recent rate increases, contrary to the council public utterances, have not generally been required to meet a claimed infrastructure backlog.  And the State Government has done nothing, but falsely blame the Commonwealth.

The solution to spending excesses however lies not in going back to Kennett's top down approach, but rather in move further in the direction taken by the Bracks Government.  The way to solve the democratic deficits is more direct democracy that is giving ratepayers veto power over rate increases through a referendum process.

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Union War is Reaching its Climax

Australian managers should be careful not to mistake the burst of union militancy over the last year or so as unusual or localised incidences.  The repeated shut down of the car industry, the destruction of the clothing manufacturing industry, the emerging militancy in the call centre sector and trouble in the building industry are profile examples of wide and co-ordinated strategies aimed at saving the union movement.

It's necessary to recognise that new industrial games are in play in which the capacity of managers to do quiet deals with union officials is limited!

The core understanding is that union membership is less than 18 per cent of the private sector workforce and ACTU worst-case scenarios a few years ago predicted union disappearance by 2012.  To save their business unions undertook a strategic re-think in 1994 and under the ACTU established a unit called Organising Works.  The unit creates long-term strategies and trains and assists union operatives on implementation at grass roots.  The tactics are sophisticated, multi-disciplined, have long time-frames and draw on lessons learned from activists' community-style alliances.

The central focus of the strategies can be gleaned by looking at the published language of the ACTU which now talks of working to defeat "the dictatorship of the market", how to "beat our bosses", "protect ourselves against labour market changes" and "employer neutrality is the aim".

Now that trained union-activists are operational through Organising Works the full force of the new strategies are being felt.  In essence selective guerrilla industrial warfare has broken out targeted at key points in vulnerable industry supply chains.  The aim is to maximise commercial terror while using minimal union resources in any one attack.  Once these "softening-up" campaigns are completed friendlier union faces emerge offering seductive solutions to cowering managers.

The problem is that this business terror campaign is chasing investment away from Australia in critically impacted areas and is likely to worsen.  This is now recognised by experienced state governments and cooler headed but worried union officials.  Although the "employer war" approach is the official union campaigning strategy it is not universally agreed to within the labor movement.  Vitriolic disagreement exists within unions and between unions and along with concerned labor governments frantic attempts are being made to discipline the processes.  An era of unpredictability has dawned!

One of Australia's most important institutions, the labor movement is grappling with the horns of its own dilemma.  The business chums approach of the 1980s to 1990s, Kelty Accord period produced a collapse in union membership.  War with bosses may and will send targeted industries off shore.  What to unions do?

But as importantly what do businesses and managers do?  First it is essential to understand but not become involved in the swirl of union and labor politics.  Becoming a willing or unwitting player will only lead to commercial complications and even disaster.  Second, do only what any business person can do and maintain a fanatical focus and insistence on achieving the operational outcomes necessary for business survival.

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Anatomy of the Screw

Submission to the Cole Royal Commission

A description of the system of rorting and collusion operating in the Australian commercial construction sector

We contend that, in the commercial construction sector of the building industry, the industrial relations system works to institutionalise an anti-competitive environment which benefits "inside" players.  By comparison, the housing sector appears to be a model of competition.

We submit that the Cole Royal Commission should make recommendations that would break up the institutional anti-competitiveness regime in commercial construction and instead institutionalise competition in that sector.

1. BACKGROUND:  A SYSTEM OF CASCADING CONTRACTS

The Australian building industry operates under contractual arrangements that are common to any industry in a market-based economy -- namely, a system of cascading contracts.

In the commercial construction sector, the cascading contracts are typified by the following structures:

1. Someone wants a building built (the developer/client).
2. The client contracts a specialist builder to organise the construction.  (The head contractor.)
3. The head contractor is a specialist at organising others to undertake the work and is, in essence, a contract manager directly employing only those staff needed to manage the contracts.  The head contractor usually undertakes little direct physical construction.
4. The head contractor contracts the physical work to businesses (the subcontractors) who specialise in particular aspects of the physical work and employ the people who do the work.  (For example, crane companies, electrical contractors, plumbing contractors, etc.)

There are deviations from this typical structure.  In some instances:

• One entity alone undertakes all activity -- from financier, developer, builder, employer of construction personnel and manager/agent to the selling/letting of the finished product.  (For instance, Meriton Apartments.)
• Sometimes, the head contractor will undertake direct employment of most of the on-site workers and undertakes the construction as well as the management of contracts with specialist sub-contractors.  (For example, Grocon.)

A useful comparison can be made with the domestic housing industry, which generally conforms to the typical structure but with an additional layer of contracting where

• The physical work is done by people who are themselves sub-contractors.  (For instance, individual trade electricians, plumbers, carpenters, etc.)

2. THE ESSENTIAL DISTINGUISHING FEATURES OF CONTRACTUAL ARRANGEMENTS

What distinguishes the contractual arrangements through the cascading contract chain is that the contracts are commercial contracts described under common law as "contracts for services".  It is this form of contract that is the key legal underpinning in a market economy, because the "contract for services" has the essential legal and economic features that enable a free market to function.  Some of these features are:

• The contract can only be entered into by parties who freely offer and freely accept the contract.
• The contract cannot be entered into under duress.  Coercion or duress to enter a "contract for services", or coercion to agree to clauses within it, can lead to the contract being declared unconscionable or being nullified.
• Exit from the contract is at the discretion of each party, subject only to sanctions freely agreed to under the contract at the time at which it was entered.
• The terms of the contract must be clear and understandable.
• Each party exercises equal rights to control the terms of the contract.
• It is illegal for parties seeking to enter into contracts to collude to fix prices between different contracts within a contract chain.
• It is illegal for parties to collude to limit the capacity of other entities to enter into the contract chain.

These essential contractual features, along with others, enable competitive market activity to take place.  Where parties seek to collude or otherwise to subvert the integrity of the "contract for services", both the common law and statute law have mechanisms for applying sanctions against such law-breakers.

Where the integrity of the contract for services is maintained, free markets have the greatest opportunity to deliver well being to individuals and the community.  A primary function of government is to provide a policing function to ensure that the integrity of "contract for services" is maintained.  There are always individuals who, when engaged in commercial activity, want, desire and work towards maximising personal return by breaching that integrity.  The difficult policing task is to identify collusion, because collusion can often be masked by arrangements which appear to be legitimate.

3. THE RORTING OF THE CONSTRUCTION INDUSTRY

We submit that the Australian commercial construction industry is one where breach of the integrity of the "contract for services" is rampant in certain sectors.  In these sectors, a form of collusive price-fixing and anti-competitive activity has become institutionalised and is effectively sanctioned under Australian law.  The principal area of such anti-competitive activity is the commercial building sector, particularly concentrated in the metropolitan CBDs, but also active in metropolitan areas outside the CBDs and in some large regional centres.  It is limited in regional country areas and nearly non-existent as a system in the traditional housing industry.

4. WHY INSTITUTIONALISED RORTING IS POSSIBLE

Collusion and anti-competitive practices are institutionalised in industrial relations law through two vehicles:  mandatory wage-fixing and the prescription of management and operational practices.  By comparison, the Trade Practices Act seeks to prevent and quarantine collusion and anti-competitiveness from other areas of commerce.  But grey areas are created when employment law and commercial law cross paths.  Faced with this general uncertainty, government and policy-makers are unsure about how to fulfill their obligations to police anti-competitive and price-fixing behaviour.  The blurring between the two forms of contract (the commercial "contract for services" and the employment "contract of service") creates opportunities for collusion even if, on the face of it, the contracting business are in active competition.

In summary, there is an unhealthy crossover of industrial relations law into trades practices domains in a way that neuters the anti-competitive measures within the Trade Practice Act and enables (or perhaps in some cases, forces) players to use the anti-competitive and price-fixing powers of industrial relations law to rort commercial law.

5. EXPLANATION

5.1 EMPLOYMENT LAW:  Employment law is, by its contractual nature, the very opposite of commercial law.  The employment contract is known as a "contract of service" and, since the Second World War, has developed the following economic and legal features:

• Parties enter the employment contract of their own free will.
• Only one party can exit the contract of their own free will (the employee).
• The other party (the employer) cannot exit the contract freely unless in strict compliance with procedures established under statute.  Ultimately, the power of the employer to exit the contract (other than through business closure) resides with third-party tribunals.
• One party (the employer) has a theoretical right to exclusive control of the terms of the contract, but this right has been removed from the employer and delivered to third-party tribunals who predetermine many, and in some cases most, of those terms.
• The post-World War II employment contract is a contract in which price-fixing (through wage-setting) is a primary institutional function of third-parties.  Through this, the contracting parties (employees and employers) are impeded from competing on price.  That is to say, wages have a floor which, in the commercial building sector, mostly replaces the market rate and constitutes the "paid rate".  Hence, employers cannot compete with one another on labour price and, likewise, employees are also severely constrained from competing with one another by offering superior quality of service.  In these situations, labour typically constitutes about 80 per cent of the costs involved in commercial building and, through the formal elimination of this part of competition, a so-called "level playing field" is created between otherwise competing businesses. ⁽¹⁾
• Further, the nature of tribunal regulation is such that most operational or management functions of labour are also ultimately controlled by tribunals, thus limiting the way in which labour functions.

This institutionalised price-fixing, anti-competitive dynamic is formally constrained to transactions under employment contracts within firms.  In transactions between firms, prices cannot be fixed because the contracts are commercial "contracts for services".  The "level playing field" created on labour prices and practices, however, underpins the cost base of commercial contracts, thereby restricting the competition possible under commercial contracts.  With prices and practices suppressed as points of competitive difference between firms, the major remaining competitive difference between them is their ability to curry favour with unions.  When seen though this perspective, the real "power" of unions in the commercial building sector is not their capacity to damage firms, but the perception of their capacity to grant favours to firms.

5.2 CONSTRAINING THE TRADE PRACTICES ACT:  The institutional process that aids the limitation of competition to non-labour issues is set in legislation under the Trade Practices Act where the policing powers of the ACCC are restricted to the commercial contract.  The ACCC cannot investigate or interfere in any price-fixing or other anti-competitive activity that occurs under employment contracts.

Part 1 Section 4 [Interpretations] of the Trade Practices Act defines the contracts involving "services" over which the Act has powers.  The clause embraces a wide range of contract types but excludes contracts relating to "... rights or benefits being the supply of goods or the performance of work under a contract of service". [employment contracts].  This exclusion clause specifically prevents the ACCC from having authority over anti-competitive or collusive conduct occurring under an employment contract.

This significant exclusion has wide ramifications for the way in which business is done in Australia.  In the Australian commercial building sector, highly developed anti-competitive, collusive, cost-raising dynamics have emerged that exploit this limitation of the powers of the Trade Practices Act.

5.3 THE ISSUE OF THOSE WHO CONTROL CONTRACTS BUT WHO ARE NOT PARTIES TO CONTRACTS.  The collusive system pivots around unions who are not party to any contracts, either contracts for services or contracts of service, yet who exert critical control over them nonetheless.  Unions play an overarching role in the creation of employment contracts and, in the commercial building sector, apply duress to parties whereby they force parties to agree to terms in commercial contracts.  The terms of commercial contract allegedly relate to employment issues, but they commonly embrace commercial issues under the guise of employment.  (For example, service fee issues).  Normally, duress in a commercial contract nullifies the contract, but unions can claim immunity from the Trade Practice Act under the pretext of "employment or industrial activity".  The ACCC is reduced to the status of a bystander.  If unions were not able to claim this "employment" jurisdictional protection, the full force of the Trade Practices Act could (and perhaps, would) be brought to bear, thus protecting those who are subject to such duress.

Unions, however, do not act alone in this matter.  Unions could not exert duress unless it was to the commercial advantage of specific players in the building industry.  Particular head contractors (and sometimes sub-contractors) find the duress exerted by unions to be to their commercial advantage, because it facilitates the winning and retention of construction jobs.  Although head contractors and sub-contractors may often complain publicly about union activity, this is frequently nothing more than a mask for the willing and collusive involvement of some head contractors and some sub-contractors in reinforcing, supporting and applying duress against competitors or would-be competitors.

The system operates like this.  ["Top draw" or "get out of jail free card"]

1. When a tender is announced for a building project, the developer/client must ensure that they award the tender to a head contractor who can guarantee that the building will actually be built.
2. Head contractors have relationships with unions through which, early in the tender process, the head contractors and unions will informally discuss the tender and reach "handshake" agreement on the broad parameters of the labour issues that would apply on site.  Frequently, the handshake is semi-formalised through the "top draw", where the contractor (sometimes also some sub-contractors) and the unions draw up an agreement that is placed in the "top draw".  Unions sometimes refer to these agreements as "Get out of jail free cards".
3. With these union/head contractor informal agreements in place, the head contractor can proceed with the tender.
4. Only bidders who have secured an informal agreement with the union can seriously tender, because any developer with any experience in the industry will know which head contractors have union approval and which do not.

This process is central to the mutually supportive relationship between unions, head contractors and sometimes some sub-contractors.  By cooperating with unions, head contractors are delivered a system that limits the number of entities that can contemplate bidding.  Potential new bidders are excluded and the players in the market are limited to those who sustain union relationships.

The second phase of the system begins after tenders have been awarded to head contractors.  It involves an elaborate public and institutional process of endorsement of the "top draw" agreements.  Most senior players in the process are aware of the "top draw" outcome that must eventuate -- and everyone plays along.

1. Sub-contractors apply to head contractors to undertake the specialised tasks required for construction.  Head contractors make it clear to sub-contractors that part of the terms of the commercial contracts stipulate that the sub-contractors must ensure industrial relations peace during the construction phase.  It is common for the insertion of financial penalty clauses in the contracts so that head contractors can recover "losses" from sub-contractors as a result of industrial activity relating to a sub-contractor.
2. Unions will present sub-contractors with EBA ambit claims built around the "top draw" agreements, but with other items included to give room for the appearance of "negotiations".
3. Sub-contractors are forced to agree to union-approved employment agreements, because of the masked collusive actions of unions and head contractors.  The formal union negotiations are either done indirectly through an employer industry association or directly with the union.  This elaborate process which sanctions predetermined "top draw" deals works, although the process is not always perfect.  However, the typical outcome is the industrial relations system's legalisation of commercially collusive deals.  Industry awards were once the preferred mechanism for the unions, but these have been replaced with pattern enterprise bargaining agreements.  (That is, de facto industry awards.)
4. There are simple mechanisms of duress applied against sub-contractors to enforce the system:
• If a union is unhappy with the negotiations with a sub-contractor or industry association, the union will make a lot of public noise about their displeasure and raise the spectre of industrial action.  This is usually enough to intimidate most sub-contractors.
• If this does not work, the next common step is for the union to unofficially contact the head contractor who, in turn, unofficially contacts the sub-contractor, reminding the sub-contractor of the requirement for industrial peace under the pain of financial sanctions.  Most of the time, this means a phone call which includes the threat, "if you don't fix this matter, you won't get any more jobs".
• If this fails, and industrial action occurs, the head contractor will impose financial sanctions against the sub-contractor by withholding regular payments (in part or in full).
• The ultimate sanction is imposed when a sub-contractor is put out of business by all head contractors refusing to use the sub-contractor because of a "poor history of industrial relations".

This exercise in duress is facilitated by unions, but is ultimately enforced by the community of head contractors.  Sometimes this works to the perceived advantage of some sub-contractors, because the "level playing field" means that it is extremely difficult for any one sub-contractor to gain a competitive advantage over another sub-contractor, and new entrants are largely excluded from the market.  Sometimes, sub-contractors willing comply with the "game", because it keeps competitors out of their market.  (In some instances, the market is so heavily organised that sub-contractors "know" the geographic regions in which they can tender and the areas where they should not tender.)

5.4 FINANCIAL LEVERAGE. One issue of emerging importance is the developing dominance of industry superannuation and redundancy funds as financiers of commercial building projects.  Due to direct controlling cross-linkages between the funds and unions, the funds stand to become additional sources of collusive pressure.  The situation is developing where the collusion is such that only projects financed through the industry funds will be capable of being built on time or within budget.  If the existing system of collusion is not dealt with firmly, a dominant and pivotal position over financing of commercial CBD construction sites could well emerge.

6. WHY THE COLLUSION OCCURS

This process of collusion, duress, market control and anti-competitive activity provides many benefits for some of the key players.  It is a complex process motivated by rent-seeking where:

• The number of head contractors is tightly controlled.
• The number of sub-contractors is well-controlled.
• Unions maintain their dominant control of sites and secure forced membership.  Membership revenue, however, is insufficient for union needs and other forms of payment to unions are therefore organised, including sub-contractors employing union officials who only do union work, industry superannuation and redundancy funds paying for "training" and other services that are not delivered, sub-contractors and head contractors making direct payments to unions for "peace", and cash payments to union officials.

7. WHO PAYS?

The disadvantages of the system include:

1. Clients and end-consumers (tenants and purchasers) tend to pay more for the price of buildings because productivity is artificially kept below that which could be attained.  Buildings cost more than they should.
2. Remuneration for workers is restricted to the productivity-constraining parameters of the "big picture" deals orchestrated by unions and head contractors.
3. After a number of iterations and experience with the system, contractors tend to earn "normal" profits.  Unrealised potential profit is never quantified or exposed.
4. Head contractors and sub-contractors must be mindful of inter-union politics to ensure that they cut deals with those union officials in factional control.  This can be problematic, and can lead to commercial loss if losing factions are backed.

8. KEY FEATURES THAT ALLOW OR DISALLOW THE COLLUSION

CBD sites lend themselves to the collusive, pressure tactics because:

1. Large sums of money are at stake on single sites.
2. Physical entry and exit points to sites are small in number and easily blocked.
3. Control of large cranes enables quick blocking of materials flow on sites.
4. Workers on sites are forced to be employees.
5. Entities in the contract chain (notably, head contractors) structure contracts to avoid losses to themsleves.

Non-CBD sites are less subject to collusive, pressure tactics because:

1. Projects are usually of smaller size, involving smaller amounts of money, and are built more quickly than CBD sites.
2. Portable cranes can be used, with a wide choice of small companies willing to provide and operate cranes.
3. Developer/clients tend to be the future occupiers and exert strong control over the construction tender and process.  Losses are directly felt and the causes of losses are quickly identified by the developer/occupier.
4. There is a greater capacity to use independent contractors for specialised tasks.

There is no evidence, on the other hand, that the housing industry suffers from any collusive, pressure tactics because:

1. Construction projects are small (individual houses) and cost blow-outs are directly felt and identified by the developer.  (That is, by the housing development company or future occupier).
2. If cranes are required, they are small and only required for short periods (usually just for one day).
3. If industrial activity hits one site, trades persons can leave that site and immediately continue work on another site in progress.  Economic loss against a particular target cannot be sustained.
4. No entity in the contract chain structures to avoid loss for delays and other problems.
5. The industry is structured almost entirely around independent trade contractors who willingly compete for business on price and quality.  Independent contractors quickly adopt and invent innovative labour practices that improve their service delivery and profit.  The small-business mentality of independent contractors usually leads them to reject union bullying or intimidation.

It needs to be noted that, in some areas, there is a significant cross-over between the domestic housing industry and non-CBD construction.  This occurs because entities that can construct houses can easily transfer their skills to low-rise, multi-storey development and medium-sized commercial work.  In general, housing industry players find themselves subject to attempts at collusive intimidation when they enter the commercial arenas.  Both unions and the major CBD contractors have common self-interests in ensuring that the highly competitive housing industry does not gain entry to the closed CBD domain.  Further, unions seek to gain leverage in the housing territory by controlling factories that mass-produce key components, such as windows and doors.

9. THE ROLE OF THE INDUSTRIAL RELATIONS COMMISSIONS AND TRIBUNALS

The commissions and tribunals are largely unwitting players in the intimidatory cost-enhancing processes and, although not directly involved, they have the effect of legalising the collusion and intimidation.  Their involvement is an outcome of the legislative parameters within which they are required to operate.

10. WHAT CAN BE DONE TO CHANGE THE SYSTEM?

Our submission discusses the general processes by which the collusive, intimidatory contract control system in the construction sector operates.  The Cole Royal Commission is gathering large amounts of evidence on specific instances of "inappropriate behaviour" and persons/entities who have allegedly engaged in inappropriate behaviour.  We hope that the Cole Royal Commission will not simply focus on these specific persons, entities and instances, but look through the specifics to find the nature of the market distortions to which we have pointed, and turn its mind to recommendations that can change the system to one which supports that free market "rivalry" which is the key to efficient operation.

To this end, we suggest that

1. A key focus should be on the "grey" area where industrial relations employment law intrudes into commercial law and either neuters the ACCC or intimidates the ACCC from investigating and condemning collusive practices.  The line between commercial law and employment law should be drawn distinctly and applied with firmness.  If anything, in relation to the building industry, the application of the law should err on the side of strengthening the Trade Practices Act and other pro-competition legislation, rather than the current situation which leans towards the acceptance of collusive and anti-competitive behaviour under industrial relations law.
2. The problem caused by entities that are not party to any contracts being able to apply duress without contract or other sanctions, particularly commercial sanctions, should be carefully considered.  This obviously includes unions, but within the context of public policy, should not be union-specific.  The solution is unlikely to be found by amending industrial relations legislation, because the object of industrial relations legislation is to give players who are not party to contracts, privileges to interfere in, and control, employment contracts.  Answers are more likely to be found through commercial contract law.
3. Points at which duress can be exerted on building sites should be specifically investigated -- the obvious candidate is cranes.  Specific commercial solutions to these particular issues need to be found.
4. The right of persons to contract their labour under whichever form of contract they choose should be policed.  The effective ban on the use of independent contractors on CBD and other building sites inhibits the rights of workers and prevents the competitive advantages achievable by workers in the housing industry from being delivered across the entire building industry.
5. The greatest legacy that the Cole Royal Commission could bestow on the Australian community would be the ultimate delivery of competitive market practices to those sections of the building industry where competition is currently rorted.  We suggest that the housing sector provides a sound model of an effective, free-market system in the building industry.  We recommend that the Cole Royal Commission would achieve great benefit by studying the housing sector closely for the competitive models, practices and policies that encourage competition.

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ENDNOTE

1.  Note:  The formal industrial relations system works to achieve this end but, across the economy, people do compete on labour price by, (a) flouting the IR system (b) working outside the IR system by not being "employed" (independent contractors/small business, etc).  In addition, some attempts have been made to create price competitiveness within the IR system through enterprise bargaining and individual employment agreements.

Bush Loosens up on Protection

The Bush Administration has produced a circuit-breaker for world trade reform at a critical time for global markets.  Securing congressional approval for negotiating trade agreements, together with the US offer of massive cuts in farm subsidies, has stopped the rot that appeared to be hurtling the US into a new protectionist era.  President Bush's authority to negotiate trade agreements covers both bilateral negotiations like those with Australia and the WTO multilateral Doha Round.  The Administration has shifted the focus back onto agricultural protectionism and away from measures like "fair trade" and environmental add-ons that would constrain trade.  More importantly, it has propelled the debate towards finding means of overcoming rather than excusing the wealth-sapping policy of farm subsidies.

The years since World War II have seen a remarkable freeing up of trade among nations.  Trade restraint measures accumulated in almost every country over the century to 1945, have been dismantled over the past fifty years.  With the important stand-out of agriculture, all but a handful of countries have reduced their trade barriers on goods to the equivalent of just a few percentage points.

The outcome has been massive benefits to consumers and widening growth opportunities to the Third World.

On top of the obvious advantages of cheaper goods displacing higher cost suppliers, lower trade barriers have brought on-going gains.  Global competition and specialisation has brought to the world the economic stimulus of rival suppliers, each being forced on a global basis continuously to examine costs and hone their offerings to shifting customer needs.

With manufactures increasingly free of trade barriers, ensuring open markets for services has been a major agenda in more recent trade negotiations.  And the signs are that services will also enjoy a relative lack of trade barriers.

Agriculture has been the main deviation from the trade liberalisation trend.

The European Union's Common Agricultural Policy is almost the EU's defining feature, and is certainly its most important cost.  Indeed, the Europeans are making a virtue out of their agricultural morbidity:  they are rejecting new technology like GM crops, and are toying with the idea of farmer subsidies to convert agricultural lands into environmental museums.

Japan has even greater problems with agricultural efficiency and also faces policy paralysis that prevents agricultural trade liberalisation.

These bulwarks to progress have long threatened to derail the trade liberalisation process.  But it was US backsliding that was most menacing to progress, largely because the US has been philosophically, and not just pragmatically, a vocal supporter of free trade.

Because of this, the introduction of protectionist measures by the US over recent years has threatened to take us forward into the pre-1945 past.  US measures have included a steady increase in anti-dumping actions, invariably a thinly veiled means of taxing low cost imports.  US anti-dumping actions have risen from 40 per year during the 1980s to 300 per year.

Fuel to this apparent trend had been added by the Clinton-Gore flirtation with the anti-globalisation movement.

America's recent temporary protection measures on steel provided another indicator of the nation's backsliding.  But it was the 67 per cent increase in most US crop subsidies built into the recent $200 billion farm bill that did most to knock the US off its high moral ground pedestal.

The offer to dismantle half of the subsidies is a major initiative through which Bush can yet prove his free trade credentials.  Like Reagan before him, Bush campaigned as a free trader but introduced trade restraints early in his period of office (in Reagan's case the restraints were on Japanese cars).  Like that of Reagan before him, Bush's inauspicious start can be reversed.

For Australia the stakes are high.  ABARE estimates that halving world agricultural protection levels would bring a net $360 million a year bonus to our GDP.

Alongside our like-minded allies in the Cairns Group, Australia's challenge is to maintain agricultural reform high on the agenda and not let the Europeans (or the Americans for that matter) return the genie to the bottle.  Dismantling our own crude protectionist measures that use quarantine as the excuse to keep out bananas, salmon and pork is one essential step necessary if we are to achieve the ethical consistency to fight our corner.

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Hours of Work Unlikely to Change

The decision this week by the Australian Industrial Relations Commission to give employees the right to refuse "unreasonable" hours of work will not have major impact most Victorian workplaces.

While many awards do give employers the legal right to require employees to work overtime, no one takes that legal technicality seriously.  In the real world the length of the working week is already decided by workers.

Moreover, working hours are unlikely to go back to previous levels due to changes in the composition of work, work arrangements and the preference of workers.

Occupations with the longest working hours are often the occupations of choice in today's economy.  Farming, not surprisingly, dominates the list of occupations with the longest working week. [1]  While traditional dry land farming is in decline, new forms of farming are growing.  Other occupations with long hours of work include small business owners, mangers, real estate professionals, medical consultants, legal professionals, financial advisors, couriers and truck drivers and engineers.  Virtually all the fastest growing occupations in terms of employment are in the top 50 occupations in terms of hour worked.  Most of these occupations are made-up of the self-employed, independent contractors or equity holders.  While once in these occupations people may have little real choice but to work long hours, they enter in the full knowledge that this will be the case and that they will be rewarded for their effort.

Over the last decade there has also been a trend towards more intensive work-holiday patterns which workers are unlikely to abandon.  Miners, for example, which are high on the working hour's list, now characteristically work 12 hours shifts.  They adopted the longer work-day in exchange for longer weekends and holidays.  Teachers and university lectures also have increased their workload during school time in exchange for extended holidays.  The same trend can be found in engineering, IT, nursing and other high paying professions.  The hard work/ hard play preferences of generation-X indicate that these arrangements will only become more common.  Since the data on hours worked is based on surveys of people at work during a given week and does not factor in holiday time, it trends to overstate hours worked over the year for many occupations.

While many workers may want to work fewer hours but they will resist any attempt by employers to reduce paid over-time or the bonuses that come with long hours.  These monies have been built into budgets of many household and into many enterprise agreements.  Even the construction unions which led the "working hour's campaign" do not plan to push for a reduction in working hours in up-coming wage negotiations.  They plan to keep the six day working-week but push for extended weekends and more hours paid at overtime rates.  In short they want a 36 hour working week not to reduce the hours worked but to get paid on overtime rates.

Many Australian's are working longer hours, but they are doing so out of choice and in the pursuit of higher incomes.  The AIRC did the right thing by ensuring that workers have the power to change the trend if the wish, but in reality they already do.

1.  (See Herald-Sun, 24 July 2002).

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When Saving the World Gets in the Way

Shareholders should be petrified by the suggestion that the trustees of superannuation funds appoint themselves as corporate-governance regulators (AFR, Opinion, July 22).  Shareholders should be petrified by the suggestion that the trustees of superannuation funds appoint themselves as corporate-governance regulators (AFR, Opinion, July 22).

They have neither the mandate nor the skills to do so.  More importantly this would inevitably allow them to pursue other agendas under the guise of corporate governance and to squander the hard-earned savings of workers.

Of course, superannuation funds should be concerned about the governance standards of the firms in which they invest.  It is a completely different matter however for funds to invest in companies so as to affect a change in corporate governance.

Under the Superannuation Act, trustees have a clear and straightforward mandate, which is to maximise returns to unit holders.  Under the "prudential investor rule" that underlies the act, trustees are not allowed to act on behalf of anyone but the unit holders and they are not allowed to pursue objectives that compromise this maximisation of returns.  They are not allowed, for good reason, to save the world.

The nebulous meaning of "corporate governance" provides huge scope for pursing non-commercial objectives.  Specifically, it gives the ACTU the excuse for which it has been looking to use its influence over industry super funds for industrial action.

The Californian Public Employees' Retirement System (CalPERS) has been cited as an example of an investor taking an interest in corporate governance.  But it is the perfect illustration of the dangers of mixing activism with investment.

CalPERS is a huge union-dominated public-sector super fund.  It has a long history of working in tandem with unions and pursuing an activist agenda.  It also follows a policy of being the champion of good corporate governance.  It has also had a very poor investment track record, in recent time losing around $US20 billion ($37.2 billion) or 12 per cent of its asset base in the first two years of this decade.

Its self-appointed role as corporate-governance watchdog has not advanced the interest of its unit holders or the cause of corporate governance.  It was one of the largest investors in, and losers from, both Enron and WorldCom.  Indeed it was a major investor in Enron's most egregious and illegal off-balance sheet transaction.

CalPERS also has a reputation for using corporate-governance activism as a front to help its union mates.  As the scholar Jarol Manheim states in The Death of a Thousand Cuts, "each year the fund [CalPERS] lists approximately 10 companies that it regards as underperforming in their respective industries because of poor management, and it targets these companies with corporate-governance resolutions".  Manheim observes that usually, the companies selected were "also the target of union corporate campaigns".

Earlier this year, CalPERS, again at the instigation of its union trustees, pulled all its investment from Malaysia, Thailand, and Indonesia in preference for Argentina among other countries.  Since this decision was made, Asian share markets have done well -- Thailand has increased by around 40 per cent -- while the Argentinian market has collapsed.

CalPERS shows the dual dangers of allowing activists to hijack super funds and the mantel of corporate governance.

Trustees have a vital and difficult job.  They do not need the additional task of a corporate watchdog.

They have neither the mandate nor the skills to do so.  More importantly this would inevitably allow them to pursue other agendas under the guise of corporate governance and to squander the hard-earned savings of workers.

Of course, superannuation funds should be concerned about the governance standards of the firms in which they invest.  It is a completely different matter however for funds to invest in companies so as to affect a change in corporate governance.

Under the Superannuation Act, trustees have a clear and straightforward mandate, which is to maximise returns to unit holders.  Under the "prudential investor rule" that underlies the act, trustees are not allowed to act on behalf of anyone but the unit holders and they are not allowed to pursue objectives that compromise this maximisation of returns.  They are not allowed, for good reason, to save the world.

The nebulous meaning of "corporate governance" provides huge scope for pursing non-commercial objectives.  Specifically, it gives the ACTU the excuse for which it has been looking to use its influence over industry super funds for industrial action.

The Californian Public Employees' Retirement System (CalPERS) has been cited as an example of an investor taking an interest in corporate governance.  But it is the perfect illustration of the dangers of mixing activism with investment.

CalPERS is a huge union-dominated public-sector super fund.  It has a long history of working in tandem with unions and pursuing an activist agenda.  It also follows a policy of being the champion of good corporate governance.  It has also had a very poor investment track record, in recent time losing around $US20 billion ($37.2 billion) or 12 per cent of its asset base in the first two years of this decade.

Its self-appointed role as corporate-governance watchdog has not advanced the interest of its unit holders or the cause of corporate governance.  It was one of the largest investors in, and losers from, both Enron and WorldCom.  Indeed it was a major investor in Enron's most egregious and illegal off-balance sheet transaction.

CalPERS also has a reputation for using corporate-governance activism as a front to help its union mates.  As the scholar Jarol Manheim states in The Death of a Thousand Cuts, "each year the fund [CalPERS] lists approximately 10 companies that it regards as underperforming in their respective industries because of poor management, and it targets these companies with corporate-governance resolutions".  Manheim observes that usually, the companies selected were "also the target of union corporate campaigns".

Earlier this year, CalPERS, again at the instigation of its union trustees, pulled all its investment from Malaysia, Thailand, and Indonesia in preference for Argentina among other countries.  Since this decision was made, Asian share markets have done well -- Thailand has increased by around 40 per cent -- while the Argentinian market has collapsed.

CalPERS shows the dual dangers of allowing activists to hijack super funds and the mantel of corporate governance.

Trustees have a vital and difficult job.  They do not need the additional task of a corporate watchdog.

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Much Hard Work Ahead for Labour Movement

Yesterday's "reasonable hours" decision is only the end of the beginning of what should prove to be an exhaustive process by the labor movement to introduce European style working hour restrictions to Australia.

The European model caps the number of hours a person is legally allowed to work for employers in a belief that if everyone works fewer hours more people will have jobs thus reducing unemployment.  Unfortunately European countries with greatest adherence to this model seem to suffer from comparatively high unemployment.  Somewhere theory and practice has not married.

This first ACTU application was a tentative step seeking to walk Australians in this regulated direction.  Rather than apply to cap hours the ACTU sought to significantly increase costs by requiring additional paid leave when employees worked more than 60 hours a week over given periods.  It was a convoluted attempt to create two tiers of overtime rates for full time employees and has been rejected by the AIRC.  Given the effort put into the case the ACTU may be disappointed.

For more than 3 years the labor movement has been conducting atmospheric campaigns to convince Australians that we are exploitatively overworked.  Using union sponsored academic research, high quality media campaigns have impressed on Australians how their families and lives have been damaged by working too hard and too long.  This media managed softener was supposed to lay the political and community ground for the AIRC application.

The AIRC accepted that full time employees are working about 2 hours longer each week than ten years ago but made the point that "the interaction between work and personal and family circumstances of employees is already recognised in a significant way in the award safety net".  The AIRC thinks that the existing regulation is family orientated.

The AIRC decision however modifies a legal technicality.  The old wage slave model of employment is alive in the award system where employers have a legal right to require employees to work overtime.  But this is largely unenforceable because the capacity to discipline or sack an employee for not working overtime is highly restricted.  In fact industrial disputes often erupt when employers attempt to reduce employee overtime.

The AIRC decision inserts an award clause giving employees the legal right to refuse "unreasonable" overtime on the basis of safety, family and other issues.  This reduces the legalities of wage slavery and probably causes the award system to more closely match the reasonable behaviours of reasonable people that dominate requests by both employers and employees for overtime.

However this issue will not vanish because the labor movement desperately needs to have the award system perceived as a significant determiner of the social fabric of Australia.  Where once award regulation banned work on Sunday in support of church, footy and the Sunday roast, the labor movement is trying to create award relevance for a caffe latte society.  Their task is difficult but more media massaging and further award and EBA attempts to regulate maxim work hours should be expected.

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Health Check on the Australian Food Industry

An Address to Beyond Commodities:  The Food Tech Revolution
35th Annual AIFST Convention
Sydney, 23 July 2002

THE AUSTRALIAN FOOD-MANUFACTURING INDUSTRY IS IN TROUBLE

The Australian Food Processing Industry has been the great hope of the Australian manufacturing sector for decades and the subject of innumerable strategies.

And for good reason, as it plays a vital role in the economy

While there are a number of extremely positive trends in the industry, it still faces some major challenges particularly of a tough cultural kind and while the National Food Industry Strategy released last month is generally a step in it has some glaring omissions.

IMPORTANCE OF THE INDUSTRY

Food processing industry plays a vital role in the nation's economy.  It is easily Australia's largest manufacturing sector -- three times the size of the automotive industry.  It employs 168,000 people and 67,000 in rural and regional areas.

Trade in processed food is increasingly becoming a necessary means for exporting agricultural products and thereby sustaining the agricultural industry.  Processed food now makes up 75 per cent of total global agricultural trade, compared to 50 per cent in 1985.  Value-adding not only assists in circumventing the many protective barriers that inhibit commodity trade but creates new markets and products as well.

On paper, the food-processing industry has most of the essential fundamentals in place -- something that cannot be said for many areas of manufacturing.

• It enjoys a relatively large and affluent domestic market -- one of the largest in the Asian region
• It enjoys a diverse range of low-priced, high-quality food inputs.
• As a country, Australia has an excellent reputation around the world as food producer.
• We sit on the edge of the fastest-growing market for processed food in the world -- Asia.
• The Australian industry already includes most of the world's major food multinationals.
• Australia is a far more attractive place to live for European and US expatriates than almost any country
• Australia has had excellent economic fundamentals for the better part of a decade including in recent years a super-competitive exchange rate.

Despite its importance and potential, the food-manufacturing industry has struggled as a whole to live up to expectations.

EXPORT PERFORMANCE

The Food processing sector does make a substantial contribution to Australia balance of payment.  Indeed it is the only manufacturing industry other than metal products to export more than it imports.

In reality this is not saying much, given that 85 per cent of these exports are made up of simply transformed agricultural including meat, dairy and sugar as well as wine all of which have virtually zero imports.

During the mid-to-late 1990s, Australia exports of processed food did relatively poorly.

While world trade in processed food was growing in excess of 10 per cent per year, Australia's exports grew by a mere 1.8 per cent per annum.  Australia's performance was poor, not only relative to its own potential but also relative to other high-cost, mature economies such as the US, Germany and France.

Process food exports have improved significantly since 1998 with the recovery in Asia.

As a result over the 1995-2000 period, total export grew a average rate of 9.5 per cent driven by the traditional goods:  meat (up 8.8% per year), dairy (up 17.6 % per years) and wine (up 48% per year).  Sugar exports however declined during the period.

Elaborately transformed manufacture of processed food also did well over the last five years.  Indeed the growth rates have been on paper fabulous for a decade and half.  However, it started from a small base and elaborately transformed products still account for a small share of exports having increased from 5% in 1990 to 9% in 2000.

Despite the high growth rates, Australia's share of world processed food exports has changed little over the last decade, while some competitors have been steadily increasing their global market share.  In short Australia food exports have done well but buoyant market were many did well.

DECLINING INVESTMENT AND LOST OPPORTUNITIES

The 1990s should have been a decade of growth for the Australian food-manufacturing sector.  Globalisation of the industry offered the potential for Australia to attract the new generation of plants focused on supplying the Asia-Pacific region.

Traditionally the world food-manufacturing industry has been structured to satisfy national markets with a large number of relatively small plants producing a plethora of local brands.  Most food manufacturers have owned and operated their own plants.  Over the last 15 years this has begun to change.  In response to global forces, multinational firms have secured a greater share of the world processed-food markets.  Generally, their global strategies are to cut the number of brands they manage, and to focus on building and strengthening this smaller number of global brands.  They are also closing ageing plants and replacing them with large, state-of-the-art plants which focus on regional rather than national markets.  There has also been a trend towards contracting-out the manufacture of niche.  These -- as with most global forces -- present both an opportunity and a threat to Australia.  The opportunity, which on academic analysis looks very prospective, is that Australia stands a chance to attract new investment, particularly targeting the Asia-Pacific region.  The risk is that if we fail to attract the new investment, we could lose existing national plants as they reach the end of their technological lives.

There are a number of examples where world-class food firms have invested in, Australia for the regional markets, particularly in the early-to-mid-1990s.  For example, Campbell's bought Arnott's in the early 1990s specifically to develop biscuit markets and to export to Asia.  Nestlé expanded its operations in Australia for the local and Asian markets.  Indeed, quite a number of local manufacturers expanded capacity with an eye on the export market.  While there are success stories, these are also many tales of disappointment.

In Victoria -- which accounts for 32 per cent of the national food industry -- 15 significant food-processing plants have closed over the 14 months from April 2000 to August 2001, with a loss of over 2,000 jobs. Victoria is merely the starkest example of a national trend.  Some of the closed operations are simply shifting to other Australian locations, such as the Qantas Food Centre and part of the Heinz operations.  Some of the changes are the outcome of productivity improvements that will enhance competitiveness.  Nonetheless, many of the closures represent firms leaving or reducing production capacity in Australia.

There is also evidence that the investment made in the 1990s, to take advantage of growth in export markets, has met with disappointment.  A recent survey of food manufacturers found that capacity utilisation in the local industry was low, significantly below 60 per cent.  Although there were several reasons given for the excess capacity, a common reply was "misjudgements about the likely rapidity of growth of domestic and export markets".

There is also evidence that we may have missed the window of opportunity that existed in the 1990s, and that the worst, in terms of disinvestments, is coming.  As the CEO of a major listed Australian manufacturer stated:

I'm very worried about the future of our firm, say in two to three years' time.  The Asia meltdown weakened Asia, but the rebound is already starting and that's what I'm worried about.  For example, new equipment will be installed in Asia.  If we don't act fast, we will miss the opportunity.  The multinationals who have invested in Asia are 40-70 per cent cheaper than us.  I worry about how we are going to compete.

POOR STOCK MARKET RESULTS

The overall stock market performance of many Australian food manufacturers has been dismal.  Of the 15 large food manufacturers listed on the Australian Stock Exchange (excluding fish and grain processors and wine companies), only four did better than the all ordinaries index over the last two years.  Indeed, only four stocks achieved an improvement in value.  Most experienced large double-digit declines in share value.  Indeed, the market index for the food-processing sector has declined by around 25 per cent in absolute terms and by nearly 50 per cent against the overall market (the All Ordinaries).

The listed firms that have achieved growth in market value have done so to a great extent by way of mergers and acquisitions rather than through organic growth.

These problems cannot be put down to a slow domestic market, as the Australian economy exhibited solid overall growth as well as good growth in food sales over this period.  The reasons for the poor performance are clear:  namely, in Australia there is little competitiveness in value adding.  As reported in a recent study:  During interviews with very senior and experienced managers in large companies, they said that in Australia, value-adding ... was unlikely to confer competitiveness and often diminished it.

LOW LEVELS OF PRODUCTIVITY

The underlying reason for the failure to live up to expectations -- whether in terms of export, investment or profits -- is low levels of productivity.

Arguably, McKinsey & Company undertook the best study under contract to the Australian Manufacturing Council -- a tripartite body that has now been disbanded.  It found that Australian food-processing plants were, on average, just 68 per cent as productive as similar plants in the US, and some 39 per cent behind their competitors in Denmark.

What is driving the poor productivity?

The key factors identified by McKinsey for Australia's weak performance were low capital investment, the small size of most Australian plants, weak commitment to innovation and poor labour relations.  Other reports have confirmed these findings and, importantly, have found little change in the subsequent six years.  Although the studies tend to focus on solutions aimed at other factors -- most commonly investment and innovations -- labour relations is clearly a key issue.

As McKinsey stated "poor labour relations [in the industry] ... retarded rationalisation, investment, and process modernisation".  In other words, poor workplace relations have undermined competitiveness directly, as well as indirectly, by inhibiting capital investment, plant rationalisation and innovations.

To understand the impact of workplace relation, one must look beyond the macro data to the shop floor and to the particular.

I would present three case studies of how our poor workplace relation culture stops investors from coming in the first place and force investors staying.

JOB GROWTH AND OUTPUT

The good news is that the food processing sector has created 10,000 jobs in regional Australia since 1996.

This is positive not only because of the need for rural based jobs, but those rural and regional operations tend to have better workplace and competitive cultures.

The bad news is that during this period there has been a reduction 5,000 jobs in the industry as a whole.

BARRY CALLEBAUT

Barry Callebaut is one of the world's largest and most successful chocolate manufacturing and marketing companies with sales of $3 billion and network of 24 state-of-the art production plants around the world.

Like other global food manufacturers, Barry Callebaut seeks to position itself to service the emerging Asia-Pacific markets.  In 1995, the company undertook an extensive due diligence exercise in siting its first Asia-Pacific plant in Australia.

Australia was not chosen;  instead a plant was built in comparatively high-cost Singapore.  The $80 million high tech Singapore plant employs about 45 well-paid people.  Many of the raw ingredients are sourced in Australia, processed, valued-added and sold back to Australia and to other Asia-Pacific markets.

A key factor in not choosing Australia was the problem of poor and seemingly insoluble labour issues.  Their conclusion in 1995 was that because of persistent, negative labour issues, a plant could not confidently be built within the budget or timeframes required, or operated at the levels of productivity necessary to warrant the investment.

Barry Callebaut stays abreast of the Australian scene, and believes that little has changed according Australia is not on the short list for the next Asia-Pacific plant.

The implications of the Barry Callebaut story are not just the direct loss of investment, jobs, cost of imports and loss of export revenue, but also of Australia's reputation as an investment option.  As a world leader in the global food chain, Barry Callebaut has contacts with other major food producers, particularly in Europe, and with global fund managers.  The "word of mouth" message for potential investors that the Barry Callebaut story delivers is that Australia is not a viable option in the food-manufacturing sector.  The message is as clear for Australian investors as it is for global ones.

Barry Callebaut message will not be masked by pretty advertising campaigns or hand outs for R&D.  It will require actions to address the real problem -- workplace culture.

SAIZERIYA

Saizeriya is one of Japan's modern success stories.  Go to any major Japanese city and you are bound to find one of Saizeriya's authentic Italian restaurants, with imported Italian chianti and pasta, a true Italian atmosphere and prices that are way below those of their rivals.  It is this combination that created a profitable food giant with an ambition to have 800 outlets by 2010.

A key to Saizeriya's success is the supply-chain possibilities offered by the new global economy.  Fresh produce is sourced in Italy and washed, chopped and diced before being flown direct to Japan.  The extensive food preparation abroad avoids the high labour costs involved in traditional Japanese restaurants and delivers higher quality control.

Australia was to be a beneficiary of this.  Saizeriya decided to set up a food processing facility in the City of Melton, in outer Melbourne.  All the elements existed for success.  High-quality, fresh produce is being grown in the city surrounds and could easily expand.  The road-air link infrastructure is of world-class standard.  Melbourne is a city of significant Italian heritage and has extensive local expertise in Italian cuisine.  An educated, eager workforce is at hand, and the Victorian government keenly supported the project with free land.  Saizeriya took the big step and committed to constructing the first phase of what should have been a $A400 million investment.  However, someone forgot to factor in the unwritten rules of the Australian approach to controlling work.

In doing its operational planning, Saizeriya cast around to construct an enterprise agreement to cover labour issues.  They entered discussions with the National Union of Workers (NUW) and reached an agreement that was signed off in the Industrial Relations Commission.  Then the turf war broke out.  The Australian Metals Workers Union (AMWU) claimed rights to operational coverage of the plant.  In pursuit of its claim, the AMWU banned the delivery of building materials to the construction site to try and blackmail Saizeriya into giving the AMWU operational coverage.

Currently, the plant is 12 months behind schedule.  Saizeriya is building its second plant in New Zealand rather than Australia.  And Australia will not get subsequent plants unless there are dramatic.  The Victoria Government has been unable to do anything constructive.

This tragic case reflects the uniquely Australian approach to regulating work, where nothing is ever what it seems.  The formal rules are irrelevant to the true game that only becomes apparent when exposed.  The controllers of this mafia/union game use the banner of workers' rights to mask their own self-interest.  That Australian workers will never know these lost jobs is not of concern to the AMWU.  The only job the AMWU will accept is an AMWU job.

ARNOTTS

Arnott's is one of food processing industries success stories, with more than 3,000 local staff and some of Australia's most recognised the brands.

The giant Campbell's Soup Company of Canada purchased Arnott's during the 1990s for its "powerful brand potential in the pacific markets".  The purchase was a key part of Campbell's global strategy.

In 2001, Arnott's announced the closure of its principal manufacturing plant in the Melbourne residential suburb of Burwood, and the relocation of the Australian manufacturing and warehousing facilities to Queensland.  550 jobs are to be eliminated.  The reaction from the unions at Burwood and from the Victorian Government was one of wild condemnation and threats.

Campbell's has said little about the reasons for the closure of the Burwood plant.  Ageing equipment and proximity to residential dwellings have been offered as two factors;  however, a study of the labour situation reveals a pervasive problem.  The Burwood plant has not suffered from excessive strike action, but rather low profile and persistent labour management problems.

This is best comprehended by its the site-specific Enterprise Agreement.  The key feature of the Agreement is the requirement for a "Joint Improvement Committee" which was "charged with the responsibility for the implementation of the contents of the agreement ..."  The Committee has 15 members with only six appointed by management.  The Committee meet every two weeks with a formal agenda circulated beforehand.  Before the Committee can make operational recommendations, matters have to be referred to the Single Bargaining Unit of the more than four unions on site.

The matters over which the Committee has authority include, but are not limited to:

• Quality control processes.
• Human resource management.
• Employee payments and timekeeping.
• Employee attendance levels
• Management of absent employees
• Shift times.
• Production and delivery rosters.
• Career paths and training.
• Engagement casual and/or contract employees.
• Insurance broker.
• The provision of mobile phones.

In effect, Arnott's had signed an Agreement that undermines the ability of the Burwood site managers to manage, and where control of the plant was assigned to the employee collective under the authority of the Committee and the Bargaining Unit.

The outcome was a management system that was highly formal, bureaucratic, slow and ineffectual.  To have any impact on how the site was to operate, "managers" had to be deft at the manipulation of employee and union site politics.  This management system clearly could not have delivered the levels of continuous productivity improvement that Campbell's apply as a benchmark to their global operations.  Closing the site fixes the management problem.  The shift of the manufacturing facilities to Queensland does not guarantee that Arnott's production will remain in Australia.  To remain viable, the Queensland plant will need to prove that it can meet the continuous, productivity improvements in line with Campbell's global standards.

The message from the case studies t workplace culture needs priority attention.  After all, policies that focus on the easier, less contentious issues, such as investment and innovation and market promotion, are likely to yield little value if they are undermined -- as McKinsey found -- by poor labour relations

THE NATIONAL FOOD STRATEGY

The National Food Strategy which was released last month is the latest effort by the industry and government to "identify the actions and tasks that need to be taken to release its (the industry's) full potential"

It provides a more balanced and more comprehensive assessment of the industries challenges and potential than previous strategies and strategies put our by the states.

It gives a good overview of the global and regional trends and correctly emphasises the need for greater focus on R&D, market access, food standards, environmental sustainability.

However, it says little about workplace relations and the little it says is in carefully coded terms.

The most that is said is:

"There is an important role for policy setting to promote industry growth, which covers removing distortions in input and labour markets..."

Significant labour productivity improvements have occurred in Australian industry over the last decade.  In the 1990s, productivity growth averaged over two per cent, well ahead of most other high-income countries.  However, in an increasingly competitive market, the boundaries of business competitiveness continue to shift.  As a result, Australia cannot rest on its laurels."  This statement is true, Australia has produce world lead productive growth over the 1990s.  However, there is no evidence that this has been achieved in the food industry aside from the retail and wholesale side.  Indeed manufacture as a whole has experienced modest productivity growth during the 1990s.

The Strategy also says that the industry will:  "Encourage its members to pursue productivity improvements supported by the current workplace relations framework".  This is hardly a commitment to the status quo.

Indeed the strategy focuses much more on telecommunication and tax reform and than workplace reform.

When it comes to money the Strategy appears to be quite generous allocating $102.4 million over five years.  None was specifically allocated to address labour issues.

Some funding for workplace relation reform maybe including the $14.7 million allocated to establish and operate the new Council and to fund other tasks to support work, but that is not clear.

Clearly once again the workplace reform issue has been put in the too hard basket.

The problem is in the end cannot be ignored as it goes to the heart of the industries competitiveness.  If we do not address it the major section of the industry particularly those involved in the elaborately transformed good will decline.  And more taxpayer funds will have been wasted.

We can have the best science in the world, no trade barriers, good food standards but these will count for nothing unless manufacturing process is competitive and innovative.

Cautionary Tale: How Franchisees Took Control

The profit downgrade and near halving of the Mayne Group share price is a case study in how poor people management can rapidly dislocate a firm from it's market.  Critical lessons can be learnt concerning business structures and management.

The Mayne hospitals suffered when their feeder doctors sent patients to opposition hospitals causing a collapse in revenue.  The surprise is that the management of Mayne come from a tradition of structuring companies (Shell and Colonial Bank) where the opposing management paradigms of centralised coordination and decentralised market focus were successfully combined to create sustained profit.  The management concept is simple but the practice an art form.

Both Shell and Colonial Bank meshed two structures.  Close to their customers, they collapsed the command/ control structure and franchised their shopfronts;  Shell with petrol stations and Colonial Bank, in its pre-Commonwealth bank days, with suburban branches.  Under franchising, shop fronts take on the best elements of small business with the local franchisees frantic to look after their customers.  This institutionalises a dynamic "feel" for a market that no monolithic, central organisation can replicate.  It also largely eliminates the industrial relations restrictions that beset monoliths.

Overlaying the franchise structure, Shell and Colonial Bank interfaced the advantages that centralised organisations can deliver.  This includes mass marketing, branding, bulk buying, production and application of finances.  In this model the centralised organisation must service the needs of franchisees but franchisees must accept disciplines from the centre.

The dual structure creates a form of internal markets where relationships in the firm reflect those of buyers and sellers rather than command and control.  What follows are natural human tensions from competing egos and perceptions of opposing financial interests.  Franchisees actually think they have a right to demand results from the centre!  Managing the tension of these potentially conflicting structures is the art form that makes the model work and determines success or failure.

The dual structure succeeded at Shell and Colonial Bank but went horribly wrong in Mayne's private hospitals.  The alleged improved centralised structures created at Mayne failed to service the needs of Mayne's natural franchisees, the doctors who simply directed the market (patients) away from Mayne.  It should have been predicted that doctors would prove prickly franchisees being highly educated, comparatively wealthy, business savvy and could shift the market without damaging their wallets.  And this reality should have signaled the "art form" required to run Mayne.

Instead Mayne failed to satisfy their franchisees, the doctors and it was this poor servicing of their internal, franchisee market which then caused dislocation from their ultimate market, patients.  The Mayne lesson applies to all large businesses.

Markets are too fickle and disparate for big command and control structures.  Companies can succeed by creating internal markets to maximise focus on end customers.  But in following this structure, astute management of internal markets is critical to success.

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ALP Reform: Does it Matter?

Simon Crean's pursuit of ALP reform will have little direct bearing on the outcome of the next election.  It may help stamp his authority on the party, which may assist his leadership, which in turn may improve his prospects at the polls, but it will not determine the next Labor Cabinet or its policies.  Nevertheless, Simon Crean is right to pursue reform.

The ALP and the other major parties can no longer rely on the blind loyalty of members, "rusted on" by class and ideology.  For the foreseeable future the market in mainstream ideology is dead.  Regulated capitalism won hands down.  Furthermore, workers are either happy with their lot, unhappy with their lot and want to move out of the working class, or are too busy to worry about it.  Any way you cut it there is little market in a mainstream party for policy activism based on ideology.  In an undifferentiated market policy work is a grinding business.  It's a job that will not attract many takers.  Therefore, under any set of rules or structure, small party memberships are the way of the future.

Nevertheless, for the sake of political stability, the majors have to field candidates for public office in order to win office.  The system works for ordinary voters because politicians want to be in power.  They get paid to tailor policy for a majority constituency.  That is a difficult task.  In some ways it does not matter two bob who parties select, as long a they do the job.  Nevertheless, in as much as parties need to win votes, a party with too narrow a base may fail to attract a sufficiently wide audience.  But the proof is in the pudding, who the voters support, not in some preconceived notion of the correct mix of identities - women, working class, ethnics and so on.  Only those with the right skills and tenacity need apply.  So, is there a fair competition in the ALP for these jobs?

The accusation to which ALP reform is apparently responding, is the dominance in the parliamentary wing by trade union, party and electoral officials.  At present a couple of big wigs run the show in each state.  It is not a very attractive system for new recruits.  The dominance is real, and the parliamentary wing were almost all elected with factional support.  And the factions are based on the bloc vote of affiliated unions.  Changing the proportion of the vote assigned to branch members and unions will probably not change the control over preselection exercised by unions.  Only the abolition of the bloc vote, the ability of a trade union leader to carry all of the votes of his union delegates, will change control.  A proportional representative ballot by union members for party delegates will loosen the grip of union leaders.  Anything less will be window dressing.

What else to do?  Government has a significant ownership in political parties.  More than a third of their income comes from the taxpayer.  These monies are well accounted for at the end of each election, but there is an argument that the parties should be open to all those who wish to join and adhere to their rules, and that the competition for jobs is fair.  In effect, parties are now part of the electoral system provided by the state.  Public scrutiny of the parties can occur through the courts and an increasing number of party disputes are ending in court.  But as many have found, a win in court does not mean a win in the party.  As part of the price of taxpayer support for the new, small and professional parties, the parties should make their rules available for public scrutiny.

Parties have been managing these subtle and intimate aspects of political recruiting for a long time.  They are experienced at it and as private associations should continue to do so.  The one addition, as a condition of registration for public funds, is to make their rules available for public scrutiny.  This may assist new leaders who want to open their parties to new recruits.

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