Trust me


Until the 1960s, the majority of financial assets were owned directly by private individuals and wealthy households.

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, managing the portfolios on behalf of their customers.

A mostly unremarked-upon feature of this change has been the rise of the trustee as a distinct social role.

Along with direct owners of property, and their managerial agents, trustees now hold rights of control (i.e. disposition) over a huge volume of claims to wealth (i.e. they have both legitimate authority and residual power to decide what to do with an asset where this is not specified contractually).

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.

What has this meant for the beneficial owners, and trustees themselves?

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 recognized 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.

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 his or her retirement. The justification for this policy comes from neoclassical economics: a larger pool of savings will increase investment.

But, as Minsky showed, money-manager capitalism doesn’t fund employment-generating investment — quite the opposite.

Constrained by the single-minded focus of fund managers on ‘shareholder value’, large firms are reluctant to undertake fixed investment in new plant and equipment. The focus of managers settles on balance-sheet restructuring (buying and selling financial assets, issuing liabilities then buying them back) and payment of dividends.

Thus 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, productivity 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.

So 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.

The livelihoods and the social existence of trustees is bound up with the fate of the rentier class, with whom their interests, too, are aligned. The inclusion on pension-fund boards of union bureaucrats has been crucial in establishing this link and commonality of interest with the capitalist elite.

Off course, 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.

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 ‘democratization’ 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.

Trusteeships allow other social layers to enter this inner citadel of privilege. 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 has been broadened.

Many of these union figures have  recently served as board members of AustralianSuper, one of the largest pension funds.

They bring irresistibly to mind Zinoviev’s characterization 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.

Trustees, of course, are not entitled to the full panoply of bourgeois rights.

Private property entitles the owner (or his agents) to various exclusive rights: use, inheritance, residual claimancy, transfer (buying and selling), etc.

The trust, on the other hand, is a hybrid form that ‘un-bundles‘ various rights and assigns them to various parties. Trustees have control rights but don’t receive ownership income, and may not dispose of the property. They owe a fiduciary duty to beneficiaries of the trust: officially, 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.

Trusts, moreover, often are formed in situations where state-owned property has been converted to a private asset, and consequently they may demand of the trustee some residual form of ‘social responsibility’.

Alongside prudential care of the beneficiary’s interest (as just described), in these circumstances the trustee may also 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.

Communal land recognized under native title, for example, is compulsorily vested in bodies corporate: Indigenous Land Councils and trusts. Council and trust directors are conferred with rights of management, administration and negotiation over land use and development. In wielding these powers they are legally obliged to act with regard for ‘community interest’.

Yet there are obvious principal-agent difficulties (conflicts of interest + asymmetric information) involved in both cases.

In the case of pension funds, 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 unobserved collusion with these external parties exists.

The same is true for the Indigenous directors of the prescribed bodies corporate that hold communal title.

Generally, when trustees exercise power on behalf of beneficiaries, their effort and degree of competence aren’t directly observable, and their good-faith performance of duties can’t reliably be inferred from outcomes (e.g. from the level of royalty or other payments to native title holders made under the terms of land use agreements made with mining companies, or from the performance of superannuation funds invested in financial securities).

The terms of the relationship, being non-verifiable, aren’t legally enforceable by a third party (e.g. courts). If poor results occur, then the agent (negotiator, portfolio manager) can always plausibly claim that he or she did the best possible under the circumstances.

Given that the trustee can’t credibly commit to suppress his own interest and carry out the terms of the exchange, and the beneficiary can’t enforce such behaviour, then the beneficiary wouldn’t voluntarily engage in the transaction.

Indeed, as we’ve seen, native title holders delegate management functions to land trusts, and employers entrust their savings to superannuation funds, only because they are obliged to do so by government legislation.

For such arrangements to be politically sustainable (i.e. for them not to seem like arbitrary coercion), then the very weak accountability of agents to principals, and the former’s opportunity to gain at the latter’s expense, must be downplayed.

The appearance of a commonality of interest, and a general affinity between the parties, must be advertised.

In the case of land trusts and superannuation funds, this confluence of interests is supposed to derive from shared ethnicity and party allegiance.

The use of trust directorships for career advancement tells us a different story. The current and ex-union officials shown above, and the likes of Patrick Dodson, have leveraged their positions as trustees to establish contacts and gain entry to federal and state parliaments, advisory panels, corporate boards of directors, consultancies, etc.

Of course, the social role of trust director is not equivalent to that of  corporate director or senior manager. These latter groups, thanks to the scale of executive remuneration (and increasingly the use of stock options in salary packages) have merged 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 ‘depersonalization’ 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 organizing 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 depersonalization makes the task of identifying the political character of a given social group, or private individual, somewhat more difficult. As property rights evolve, novel roles and social relations are created.

This, perhaps, accounts for the illusions retained by some in the ‘progressive potential’ of certain groups.


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16 Responses to “Trust me”

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