Trust me

Until the 1960s, the majority of financial assets were owned by private individuals. Over the following decades there developed what Minsky called ‘money-manager capitalism.’ Institutional investors – insurance companies, pension and mutual funds – became the largest holders of stocks and bonds. A mostly-unremarked-upon feature of this change has been the rise of the trustee as a social layer. As employee savings are compulsorily channelled into financial markets, and the demand for funds from commercial and industrial firms slows down, the custodial and administrative power of these “intermediaries” has swelled.

Australian has one of the largest pool of pension assets in the world, behind only the US, UK and Japan. Industry funds constitute around one-fifth of this total, some $226 billion dollars. As a proportion of GDP (now over 100%), the assets of Australian superannuation funds rank with Switzerland and the Netherlands. The market saturation of defined contribution schemes (where risk is shifted to the beneficiary) is unmatched in any other country.

And the governance structure of Australian industry superannuation funds is unique. This feature derives from the peculiar circumstances by which universal superannuation was introduced (part of the 1986 Accord between unions and the Labor government that sought to limit wage growth). Unions are recognised as key “stakeholders” that, together with firms, deserve representation on boards. As a result, union secretaries and officials make up half of the trust directors responsible for prudential oversight and deciding upon, or outsourcing, investment strategies. Board positions are regularly used as stepping-stones to parliamentary careers. Union bureaucrats use them to establish business knowledge, contacts and profiles.

Many of these figures have  recently served as board members of AustralianSuper, one of the largest pension funds. They bring irresistibly to mind Zinoviev’s characterisation of Australian Labor politicians and union bureaucrats as ‘a constant prey of leaders on the make for careers’:

Upon the backs of the laboring masses there arise, one after another, little bands of aristocrats of labor, from the midst of which the future labor ministers spring forth, ready to do loyal service to the bourgeoisie… They act the parts of workers even now. But in reality they are only agents of the financial plutocracy in the camp of the workers. The caste of the “leaders” here appears quite openly as a unique type of job trust.

Superannuation payments are a compulsory deduction from wages, over which the employee surrenders decision-making power, while retaining the risk that the accumulated amount will not prove sufficient to fund her retirement. As Minsky showed, money-manager capitalism does not fund employment-generating investment – quite the opposite. Prompted by the single-minded focus of fund managers on “shareholder value”, large firms engage mostly in balance-sheet restructuring (buying and selling financial assets, issuing liabilities then buying them back) and payment of dividends. The level of retained profits, and thus investment in plant and equipment, is reduced. The record of recent decades shows that economies with the largest batch of pension funds (US, UK, Netherlands, Switzerland, Australia) display a comparatively low rate of capital-stock accumulation. Growth in jobs, wages and living standards has lagged accordingly. The inflow of funds to financial markets serves only to bid up asset prices, before being absorbed as household debt, banker bonuses and luxury consumption.

The interest of employees clearly lies with abolishing state-mandated superannuation. On the other hand, a powerful set of incentives – the salaried position of trustees, their future career prospects, and their proximity to power – ensure that trustees support its continuation. Even if trustees act as responsible stewards for their members, their livelihoods are ultimately derived from the survival of institutionalised theft. Their social existence is consequently bound up with that of the rentier class, with whom their interests, too, are aligned. Together both groups are fundamentally opposed to the interests of pension-fund members and the broader population.

Trustees, of course, are not entitled to the full panoply of bourgeois rights. Private property usually entitles the owner to exclusive rights of use, inheritance, buying and selling, etc. Trustees, on the other hand, do not receive ownership income, and may not dispose of the property. They owe a fiduciary duty to beneficiaries of the trust: nominally, they are the latter’s servants. In the case of pension funds, directors are obliged to pursue high risk-adjusted returns at low cost. They must be seen to act in the interest of members, and not derive personal advantage (self-dealing) from exercise of their power. There nonetheless are principal-agent difficulties (conflicts of interest) to overcome. Directors and their activities are remote from member observation and control. Trust deeds confer on boards the power to engage fund-management companies, to negotiate the latter’s fees for investing in various asset classes, and to appoint day-to-day managers and consultants. The possibility of collusion with these external parties exists. But, even if directors do perform their entrusted tasks duly and in good faith, the basic conflict - rooted in their essential parasitism – remains.

Money-manager capitalism allows, for the first time, most household balance sheets to include some mix of financial assets. Media boosters describe this as a “democratisation” of ownership, henceforth diffused downwards, and now including “mum and dad investors”. In fact, the rise of institutional investment funds brings an unprecedented concentration of income and wealth in the hands of a tiny minority of financial aristocrats. Most economic activities – including compulsory superannuation contributions – are geared towards extraction of the social surplus from the employed population, and its appropriation by the rentier class as property income. Trusteeships allow other social layers to enter this inner citadel of privilege. The inclusion on pension-fund boards of union bureaucrats has been crucial in establishing a link between that layer and the capitalist elite. Union leaders benefit from increased capital income only to a very limited extent – the vast majority of their income derives from wages and salaries. But a portion of their remuneration, and a substantial amount of their social influence, now depends on expanding the pool of assets controlled by pension funds. This allows the development of a broader social alliance or settlement. The material benefits of neoliberalism have been captured almost exclusively by high finance and the ultra-rich, but the adherence of other social strata has been essential to its stability. By extending administrative authority and control over investment strategies to salaried “member representatives” and union bureaucrats, the support base for a drastically unequal social hierarchy is broadened. Especially where the trust director is held to “represent” beneficiaries, a veneer of legitimacy is thus provided.

The trust is a hybrid form that “un-bundles” property rights from direct ownership. It commonly applies in situations where state-owned property is converted to a private asset, and may demand of the trustee some residual form of “social responsibility”. In every case, it requires some prudential care by the trustee of the beneficiary’s interest. In such circumstances, the trustee may appear as a representative or defender of “community interests” against purely commercial, profit-maximizing imperatives. This is especially the case where, as with industry pension funds in Australia, the trustees are linked to “progressive” politics or the union bureaucracy. The essentially parasitic nature of the relationship is consequently underplayed. The remuneration and social status of the trust director is derived from administrative authority over resources that are mandatorily “entrusted” or delegated by ordinary people. Yet, somehow, the trustee is considered the latter’s honest representative. Commonality of interest is supposed to derive from shared ethnicity, party allegiance or legal obligation. Native title, for example, vests communal land in Indigenous Land Councils and trusts. Council and trust directors are conferred with rights of management, administration and negotiation over land use and development. They are legally obliged to act with regard for “community interest.” Yet they, too, make up a parasitic caste, whose fundamental interests conflict with those of the broader (Indigenous and non-Indigenous) population.

The social role of trust director is not equivalent to that of  corporate director or senior manager. The scale of executive remuneration (and increasingly the use of stock options in salary packages) sees that layer merge, essentially, with the class of asset owners. The social role of the trustee nonetheless derives from the same historical process from which managers and the joint-stock company emerged. Both are part of an innate tendency towards the “depersonalisation” of capital ownership, away from a concrete class of wealthy individual capitalists. The pop-cultural image of the heroic entrepreneur (Bill Gates, Richard Branson, John Galt, Tony Stark), who both owns and manages his business, is an archaic holdover. Capitalist firms have developed as a succession of ever-more “abstract” and impersonal juridical entities: from sole proprietorships and family firms, to partnerships, joint-stock companies, mutual funds and state corporations. The tasks of organising and controlling the production process increasingly devolve to paid functionaries. The shareholder – no longer an individual but an institution or fund – accrues capital income from the asset, but has little direct control over the property.  This tendency to depersonalisation makes the task of identifying the political character of a given social group, or private individual, somewhat more difficult. This, perhaps, accounts for the illusions retained by some in the “progressive potential” of certain groups.

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Tags: Aboriginal Australians, Australia, Australian Labor Party, Indigenous Australians, Keynesian economics, Marxism, Native Title, neoliberalism, pension funds, pensions, superannuation, trade unions, trust law