The new era of big government that Australia entered in 2020 will soon be matched by bigger, more dominant corporations and a consolidated investment sector that will wield power in the hundreds of billions.
The implications of the government’s push for superannuation funds to merge — the creation of a new set of super-powerful investment behemoths, led by the government’s most loathed sector, industry super — are beginning to become apparent to people beyond those of us who’ve been pointing them out for a while.
The emergence — at the government’s behest — of mega-super funds controlling investments worth hundreds of billions of dollars, and pursuing their own environmental, social, and corporate governance agendas separate from whatever pro-fossil fuel goals the government has, is surely alarming to the Liberal Party, which includes a number of backbenchers who not merely want to destroy industry super but end compulsory superannuation altogether.
But consolidation was already coming in the investment sector.
Last October, ASIC chair James Shipton identified investor consolidation as a significant issue for the corporate regulator. While recognising the benefits of consolidation, Shipton noted:
Investment funds are consolidating into a smaller number of larger players … we are aware of the potential impacts this may have on capital markets, particularly, the ability of emerging companies to access equity capital. As these larger funds seek a broader range of investment opportunities, we are observing growth in private debt and equity markets.
This is contributing to a global trend of de-equitisation of equity markets and a contraction in the number of companies listed on public markets. This is fast moving in a direction where regulators will need to consider the impact on public markets in the next five or 10 years and their ability to price and allocate risk capital.
Shipton’s concern about the growth of private equity and debt — and thus the lack of transparency afforded by public markets — and access to capital for smaller firms, are just two of the questions created by consolidating large chunks of capital — oftentimes a significant percentage of GDP — under the control of a small number of what become very powerful investment institutions that wield enormous power over who accesses capital, the uses of that capital and who sits on boards.
The questions arise not just about Australia’s biggest industry and retail super funds, which will emerge bigger than ever after the consolidation phase, but investment giants based outside Australia.
A prolonged recession is likely to drive further consolidation in areas like asset management — US analysts are already pointing to the virtues of scale in both surviving the current economy and taking advantage of emerging trends. Investment giants in the north Asian region are looking for opportunities from the pandemic to consolidate Asian financial markets.
This means a future where more and more key investment decisions are made by powerful institutional investors, often operating via private equity and without the need for public markets and the scrutiny that they bring.
The recession will also drive further consolidation of corporations, reducing competition and strengthening the market power of companies able to survive and prosper in a recession.
As Crikey has regularly reported before, consolidation and increasing market dominance were already significant problems, in the United States, Europe and Australia (and separate from the high concentration of the oligopolistic tech sector). The links between greater market concentration and higher profits, lower wages growth and lower investment are well-established.
As the recession claims smaller business and those that lack the scale to operate effectively in a slower economy, larger businesses have prospered. The early months of the pandemic saw some of the world’s biggest companies building up massive warchests of borrowings, using record low interest rates backed by the US Federal Reserve and other central banks.
The warchests were not merely for surviving the oncoming crisis, but enabling large companies to acquire cheaply those who were not as fortunate. That is, the borrowed funds won’t be invested in innovation, but in acquiring the market share of former competitors. The steady rise in market concentration that has characterised much of the last two decades is likely to accelerate.
While on issues like climate change, mega-investors and large corporations may be at odds with Australia’s giant Coalition government, the growth in the size of both investment entities and corporations means that they will have greater capacity to influence the policies of government, exploiting Australia’s weak regulations around donations, lobbying and influence-wielding and their capacity to offer post-public life employment to former politicians and public officials.
Bigger government, bigger investors and bigger corporations means bigger influence than ever before.
The cancerous effects of greed compounded by the secondary tumour of average voter stupidity is what`s killing our society, while there is time for a cure in Australia by excising the conservative political gene with a political lung transplant its now too late for the U.S, like smokers with lung cancer that just keep inhaling deeply from their republican cigars .coughing their tiny hearts out and begging for one more republican hit.
Interesting and concerning, Bernard. Also, not the first time national governments have wrestled with the impact of new concentrations of international wealth on their economies (it has been happening periodically since the Middle Ages)
You didn’t argue it, but I’d be surprised if you disagreed that domestic regulation of private capital can only work if international financial regulation works too. Yet at the international level, private vs. public capital gets murky: consider the state-owned oil companies, the state-owned industries, or the industry-owned states in various parts of the world.
It seems to me that in the face of growing globalisation we may be facing decades of serial domestic and international financial reform to resettle this… and until we do, sovereignty and democratic governance are liable to be constantly undermined by private interests.
Thank you for this big picture report.
Bernard, your prediction of increasingly concentrated investment powerhouses outside the listed markets sounds right. But I’m not convinced that that is all bad and that in the past ‘public markets’ have been necessarily that public or that much safer or transparent than private equity. The Banking Royal Commission showed us how much dodgy stuff can be going on inside publicly listed banks and insurers, who are among the most traded companies with the most detailed annual reporting processes, best attended AGMs etc. Similarly, the US GFC totally exploded the myth that the ratings agencies provide any reliable window on the financial solvency of listed companies and banks. A hundred years ago listed exchanges may have provided the best mechanism for mobilising capital to its most efficient application but they have been increasingly gamed since then. I’m prepared to try a bit of 21st innovation and trust increasingly to one of Australia’s greatest developments – the benevolent ‘profit for members’ super funds, especially the employee/employer-governed industry funds and public sector funds. Sure, power can corrupt and big power can corrupt on a big scale. But on the evidence of the last 30 years I’m prepared to trust the ability of these social enterprises to scrutinise and demand explanations from the private companies they invest in, and to use their heft to shift the objectives of those companies towards better ends like dealing with climate change, ethical supply chains etc.
Bankers “dodgy stuff” – interesting euphemism for crimes ranging from interest rate fixing (ie LIBOR) enabling pedophile rings to fund exploitation of children, fee gouging of super funds and the decriminalisation of bank fraud is much, much more than “dodgy stuff”?
Modern capitalism is nothing like the textbook capitalism I studied 50 years ago at Uni, and this article indicates it’s going to become even less like textbook capitalism. The capitalists used to scoff at socialism with ‘it’s fine in theory, but doesn’t work in practice’. I suggest this criticism applies even more so to capitalism.
If you mean by socialism, some sort of nod to equitable social contract arrangements in power/wealth/property/education/health/labor, i’d say (post ?)-modern capitalism is doing a splendid redistribution job of not allowing that to ever happen..
True Peter, modern capitalism is nothing like what was defined as capitalism 40 and more years ago. Huge corporations are the same the world over, too labyrinthine to be managed centrally, too opaque, too complex. It is no surprise that the rise of these monoliths coincides with the ‘crisis’ of low productivity growth over the past decade across the western world. Big companies are like big dinosaurs, a change in circumstances can see them die in the environments of their making.
In my working life, apart from genuinely small businesses, the best organisations were around the 300 employee mark. Not so big to create problems of scale and nimble enough to take advantage of opportunities. They also work on a human scale. People are not ‘connected’ beyond a few hundred people. This is our biology, and working within systems that defy our biology is unsustainable. Interesting times ahead.
When the irresistible force of the new normal, no more mass mingling for work, pleasure or duty meets the immovable object of capital.
As per Dylan’s “Day of the Locust” – “their heads were exploding, I was praying the pieces wouldn’t fall on me“
Watched a doco on YouTube regarding tax evasion worldwide. Recommend you watch and ponder. Title is “the spider’s web: Britain’s Second Empire”. Reigning in corporations etc is not possible with financial/legal agencies working to keep their profits. Panama Papers mentioned, but that’s old hat. Very depressing.
Yes AF – ” their profits” ( tax free ) parked in tax havens have been calculated between US$11-50tn. So why don’t govts regulate through banning of trusts, which are the main legal /financial vehicles which park/hide those in tax havens ? Welcome to the world of regressive tax systems!