Lessons Learned?

Monday, October 1, 2007 - 11:08

A board with an eye on the governance ball might have prevented the $300 million scandal that engulfed the AWB, Australia's monopoly wheat marketing company. By Derek Parker

Of all the peculiar aspects of the Australian Wheat Board (AWB) saga, perhaps the strangest came on 23 February 2006. This was the day of the AGM of AWB Limited, and the evidence that massive amounts of money, more than $300 million, had been illegally paid to the former Iraqi regime was clear, and continued to mount. But six of the directors who were on the board during the period of the kickbacks put themselves before the shareholders for re-election; all were re-elected.

Much of the media attention on the AWB scandal focused on the role of those at the elected level of politics, but in the long run the issues of corporate governance may be more important.

According to Stephen Bartos, until recently Professor of Governance at the University of Canberra, Director of Australia's National Institute for Governance*, and author of the book Against the Grain: The AWB Scandal and Why It Happened, the key cause of the scandal was essentially cultural, and a matter of attitude and ideology across the organisation.

"Essentially, the culture was one of doing 'whatever it takes' to sell as much wheat as possible, as quickly as possible," he says. "Yes, there are other parts of the puzzle, such as the weakness of the regulatory body, the Wheat Export Authority. But culture is the biggest single issue."

Interestingly, the AWB had in place a set of ethical guidelines, which mentioned, albeit briefly, the payment of kickbacks and bribes, and prohibited them. There is, however, no sign that anyone in the organisation paid any attention to the guidelines.

Bartos notes that there has been no evidence produced to suggest that the board knew of the kickbacks until the news began to surface through the UN investigation. But this raises a fundamental question: in the period when the kickbacks were being paid, how could the board not know that more than $300 million was being spent illegally?

"If they did not see, it was because they were not looking," says Bartos. "Most of the board at the time was, and still is, composed of people from a wheat-growing background, and they saw themselves as working on behalf of Australian wheat exporters. This is not to say that they did not have the expertise to read financial reports; it is to say that they had no incentive to question their managers, so long as wheat kept being sold."

Single-minded, single desk

The AWB's single-minded focus on wheat sales goes back to the way in which it had been historically structured. It began as the statutory marketing agency - the Australian Wheat Board - and was privatised in 1999 to become AWB Limited, which listed on the Australian Stock Exchange (ASX) in 2001.

As a statutory authority, the Australian Wheat Board acted as the sole acquirer and seller (for the global market) of Australian wheat; an arrangement known as the "single desk". The rationale for the single desk was to prevent buyers from making deals with some Australian growers at the expense of others, thereby driving down overall prices. This statutory monopoly power of the AWB was retained when the organisation was privatised.

An important characteristic of the AWB is its separate share types, which grew out of the privatisation process and the reasons that underlay the privatisation. Class A shareholders, who must be wheat growers, appoint most of the directors from regional constituencies using a preferential voting system. Class B shareholders, who are ordinary investors, elect only two directors, but only this class of shareholders receive dividends, and only this class of shares are traded on the ASX.

The AWB privatisation was not designed to raise revenue for the government; nor was it meant to inject competition into an industry sector. The main aim, rather, was to transfer responsibility from the government to wheat growers.

"Support for the single desk is an article of faith for many wheat growers, especially in the eastern states of Australia , and that fed through to the AWB," notes Bartos. "There is not so much support for the single desk in Western Australia , which, ironically, is where most of the wheat that is exported is grown. One way or another, there is a strong emphasis among wheat growers on short-term sales, and rather less concern with the long-term health, development and reputation of AWB as a company.

"So there is an inherent conflict between the interests of the two groups of shareholders; and the interests of wheat growers dominate. As a result of the scandal, Class B shareholders took a big hit as the share price fell. But that was of no great concern to Class A shareholders, unless they happened to also own ordinary shares. In fact, Class A shareholders have done pretty well this past year, as the world price of wheat has gone up. So, for many, there are no problems with the single-desk concept."

Kickbacks

The payment of kickbacks began in mid-1999, around the same time as the privatisation of the AWB. However, it cannot be said that privatisation caused the culture that underpinned the kickbacks; the timing of events simply does not support such a view.

"Certainly, privatisation did nothing to change these cultural problems, which were not even recognised as problems, before or after public listing," says Bartos. "In fact, the AWB - up to the revelation of the scandal - was widely seen as a very successful organisation. Privatisation was not meant to be an avenue for change.

"But the timing of the float, coming at the same time as the kickbacks were taking place, meant that the board had its attention elsewhere, rather than on governance issues. There was no effective, external due diligence process conducted as part of the privatisation, which might have revealed the kickbacks.

"Would the board have found out about it and acted, or at least started to put risk management measures in place, if not for the privatisation? We don't know. I point out, though, that the Asia Dairy Corporation scandal of some years back is not too different from AWB, aside from the scale of the kickbacks. The Asia Dairy Corporation was, of course, a subsidiary of a government-operated agency."

Lessons learned?

In the end, what lessons of corporate governance can be learned from the AWB scandal? Perhaps first, the most important is the obligation of a board to continually question the executives of the organisation. That the company is travelling profitably, and that there are other issues on the board agenda, are not excuses for a lack of vigilance.

Second, a written set of guidelines means nothing if it is not supported by the implicit signals from the board and the senior management. If there is a clash between a code of conduct and ingrained corporate culture, the latter is nearly certain to prevail.

Third, there is a need for clarity as to who the organisation is to serve. In a way, the AWB cannot be faulted for its desire to reflect its wheat-grower client base; this was effectively its reason for existence. But this meant that the interests of others, and the long-term interests of the organisation, were sacrificed.

Finally, there must be a level of diversity within the board; in background, views, and expertise. No-one wants a board that cannot function due to irreconcilable conflict, but the AWB's unified view and its overly close connection with its clients meant that the board did not, in terms of governance, do very much at all.

"Some good things have come out of the AWB scandal," says Bartos. "For example, the government has made clear that payment of kickbacks in contravention of United Nations's sanctions is a serious crime and will be dealt with accordingly. Likewise, there are signs that support for the single-desk concept are beginning to erode in some government circles, and there is a search for new methods of export marketing.

"On the other hand, you can see organisations where a pattern similar to that of the AWB can be found. Defence and security contractors, which are often very close to the Department of Defence - to the point of exchanging people back and forth - is one area of concern. There are several marketing-based organisations that have a 'whatever it takes', AWB-style culture.

"The AWB has been called a disaster waiting to happen, but I am not sure I agree with that. It was not inevitable. Ongoing attention from the board, some probing questions early on, a willingness to think outside the traditional square, and it might have been avoided. But it was not.

"One can understand the desire to build strong, cohesive policy communities, which perhaps explains why the AWB board members who were there in 1999 are still there. But the other side of that coin is that such policy communities can easily become secretive, collusive clubs that act against the best interests of the country. That's what we saw here."

* Stephen Bartos is now Director, Allens Consulting.