The lobbying power of super funds
“The working class can kiss my arse / I got the foreman’s job at last.” So went a parody of the socialist anthem “The Red Flag”, popularised in the 1960s.
It spoke to the reality of the time. There were bosses and workers, and people belonged to one side or the other – capital or labour. And changing sides involved a betrayal.
Then along came Bill Kelty and the Australian Council of Trade Unions (ACTU), Paul Keating and the Hawke Labor government and Australia’s system of compulsory superannuation, and things started to become much less binary.
Now senior corporate executives, directors and chairs of Australia’s biggest companies regularly front up to explain themselves before the Australian Council of Superannuation Investors (ACSI), which represents several dozen not-for-profit industry superannuation funds.
It all comes back to the power of money.
Thirty-nine Australian and international investors and asset owners make up ACSI. Collectively, they manage more than $2.2 trillion in assets and own 10 per cent of every ASX 200 company, on average. The Australian members range in size from the behemoth AustralianSuper, which now has $155 billion in funds under management and is tracking towards $300 billion by 2024, down to relative tiddlers, with assets “only” in single-digit billions.
And that has changed the power dynamic.
“Now we can say, ‘We’re the fiduciary owners of these shares. You’re the managers of these shares. We’re the boss, representing owners of the shares,’ ” says Gerard Noonan, former ACSI president and current council member and, interestingly, a former editor of the favoured journal of business, The Australian Financial Review.
ACSI’s function is – to quote from its website – “to provide a strong, collective voice on environmental, social and governance (ESG) issues on behalf of our members”.
Which is to say, it assesses the sustainability and ethical impact of the companies in which its members invest. The rationale is that ESG is not just a good thing in itself, but also helps determine the future financial performance of those investments. And this is particularly important to super funds, which tend to hold very long-term investments.
But the prospect of industry super funds exercising such judgements makes some nervous, if not hostile.
Writing in the AFR in March, the executive director of the right-wing Institute of Public Affairs, John Roskam, said it could be argued that through the power of superannuation, “unions have an even more dominant role in the Australian economy than they did in the late 1940s when trade union membership peaked at 65 per cent of the workforce”.
Roskam noted the original intent of compulsory super was to invest in the best interests of workers and so provide for their retirement, but suggested that what amounted to best interests was “in the eye of the beholder”. He warned that industry super funds could use their financial clout to wage “class warfare”.
The flaw in the argument, though, lies in the fact the purpose of industry funds is to provide for retired workers, rather than to advance the industrial cause of those still working. And that brings a certain tension, for the interests of the funds in getting the best possible returns for their members do not always align with those still in the workforce.
Back in January, the Maritime Union of Australia (MUA) was furious with BHP and Bluescope Steel over the replacement of almost 80 Australian seafarers with “$2 an hour exploited foreign labour on the Australian coast”.
The MUA enlisted the aid of the ACTU, whose president, Michele O’Neil, wrote to the industry super funds urging they use their power as shareholders to prevail on BHP to reverse the decision. O’Neil also suggested the funds should campaign on workers’ wages and conditions.
The issue was seized on by the government, to accuse the super funds of misusing their power over companies. Heather Ridout, a former member of the Reserve Bank board, who sits on the AustralianSuper board with O’Neil, insisted AustralianSuper would not get involved in industrial relations policy.
The chairman of the Australian Prudential Regulation Authority (APRA), Wayne Byres, wrote in response to the government’s expressed concerns: “APRA expects that trustees will carry out their role and meet their responsibilities free from the influence of sponsoring organisations or any other external parties.”
It was a clear message to the industry super funds that they should not give priority to anything other than maximising retirement incomes.
And the decision to replace the MUA members stood.
All of which raises quite a different prospect from that suggested by Roskam and the government – that super fund members may be contributing to their own oppression during their working lives, in the hope of a better retirement.
The reality falls somewhere in between, as a more civilised form of capitalist endeavour. It’s a tricky balancing act, as Chris Newton acknowledges.
Newton is the executive director of responsible investment at IFM Investors, which manages assets for 27 industry funds in Australia, as well as others around the world. He also sits on the council of ACSI.
“Our focus is on our investment returns. But we do believe in being on the right side of the equation [and] integrating into our model contribution to society, working people, environment,” he says.
In the long run, Newton says, applying ESG principles produces better outcomes all round.
The obvious example is climate change. In recent years, numerous super funds have divested wholly or in part of shares in coal companies. Not only because of environmental concerns, but also to be financially prudent, given the time frames over which the super funds invest. In 10 or 20 years, the assets of coal companies will likely be stranded.
“But considerations go beyond that. Climate change is a systemic risk for us. I can’t think of an asset it won’t affect in some way,” says Newton.
Thus IFM, the largest infrastructure investor in the country, will shortly commit publicly to emissions reduction targets for its entire portfolio.
“That’s a big thing,” says Newton. “It says to Brisbane Airport, Melbourne Airport, New South Wales Ports, et cetera, ‘What are you going to do to reduce your emissions?’
“A lot of them were thinking about targets, but it’s a powerful thing to have a shareholder come in and say, ‘Don’t just think about it. Write something down, publicly release it, establish a pathway to get there.’
“Some assets don’t have a lot of emissions themselves, but we’re encouraging them to look at their supply chains, [by] making the shift from trucks to trains, for example, or entering power purchasing agreements for your tenants from renewable sources,” says Newton.
The fiduciary duty of the funds to account for the climate emergency is abundantly clear, of course. It is less so in other areas.
Take, for example, the relationship between Australia’s big supermarkets and the agricultural sector. Why should it be of concern to super funds, intent on maximising benefits for retirees, whether Coles and Woolworths are misusing their market power against farmers, who in turn exploit migrant workers?
But ACSI has leaned very heavily on the supermarket giants. Or, as Newton puts it, “actively engaged”.
“We say, ‘We know you don’t employ the fruit pickers, we know they’re contractors to the farm, but you have a responsibility to ensure fair working conditions down the supply chain.’”
As for the fiduciary justification?
“Because if the government decides to regulate or take people’s visas, it might affect their bottom line.”
Newton’s broader point is that through the application of ESG principles and moral suasion, positives can be achieved and justified as being to the benefit of super fund members.
In 2013, after a fire in one garment factory in Bangladesh and the collapse of another factory building shortly afterwards killed more than 1200 people, mostly women and children, ACSI brought pressure to bear on various Australian fashion brands to take greater responsibility for their supply chains.
Similarly, after the disastrous collapse of a tailings dam at an iron ore mine in Brazil, the council grilled BHP about similar tailings dams in this country and elsewhere. Clearly, the possibility of legal liability for deaths and damage is a legitimate consideration for investors.
“Of course,” says Newton, “we will always own BHP, but we want them to be a sustainable business. If concerns are raised by any third-party stakeholder, we’ll hold BHP to account.”
The voting power of the super funds at shareholder meetings is obviously considerable. But so is their research power – they regularly compile reports on all of the ASX 200 companies – and the power to remind companies of their obligations under international agreements.
In the past month, we are told, the ACTU and MUA have continued to pursue the issue of BHP’s use of foreign seafarers in Australian ships. The focus has been on international agreements about labour standards, human rights on “flag of convenience” ships it charters, and its obligations under the Modern Slavery Act.
Perhaps the matter is not over, after all.
And it highlights, again, the difficulty of defining the limits of legitimate activism by industry super funds.
Another example: what about investments in companies that avoid paying tax?
Those companies may be more profitable as a result, and that would seem to benefit shareholders. But those shareholders need more than personal income for a good life. They and their families might also reasonably expect good roads, good healthcare, excellent schools and universities. The list goes on.
There is growing debate within the ranks about how to deal with this. Already some super funds are divesting their shares in private equity companies that use tax havens. They can’t afford to do that, though, with tax-dodging tech giants such as Google or Amazon, or even profit-shifters such as BHP.
Still, their financial power grows every year. The agents of the workers might yet civilise capitalism.
This article was first published in the print edition of The Saturday Paper on Jun 22, 2019 as "Super powers". Subscribe here.