Trust in the business community has been lost: Gottliebsen

The Rio Tinto-Chinalco 600 page agreement morass is just another illustration of how trust in the business community is rapidly evaporating.

Over time, lack of trust in business executives and organisations will emerge as one of the biggest problems in the world, with repercussions that go way beyond the immediate difficulties we are now facing.

Who could have thought the chief executives of banking/insurance organisations like Citibank, Merrill Lynch, Bank of America, AIG, Lehman, Royal Bank of Scotland and many others would be so stupid as to be involved in loaning billions to people who had no hope of servicing the debt; gambling that big US companies would go broke; lending to eastern European residents in Swiss francs, and many more such crazy schemes.

And many banking and insurance executives responded by arrogantly paying themselves multi-billion dollar bonuses for their “good work” in sending or almost sending their organisations to the wall.

These are people who we looked up to, and who betrayed our faith. Trust has been lost.

In Australia we saw property trusts go on massive borrowing binges even though their stock holders were retirees who wanted income, not high risk. Again, trust has been lost.

Banks gave lines of credit and loans and are now pulling the rug from under their customers. Trust has been lost.

We believed the ratings that the rating agencies gave us. They were next to useless. Trust has been lost.

Directors signed contracts with CEOs that involved big exit payments even if the CEO failed. Trust has been lost.

The accounting bodies set up accounting standards that produced results that were not suitable for stock analysts, so the institutions and companies set up their own, albeit imperfect, standards. That is now being fixed, but once again trust has been lost.

I could go on and on, but in a society where big corporations have lost the trust of the community there are going to be big reductions in executive salaries globally. The publication of executive salaries that originally started a bidding auction will work the other way, as companies say: “Our rivals have cut their CEO salary – we should do the same.”

In the absence of trust, there will be much stricter regulations and, as always, we will go too far. In Australia, we are going to greatly reduce productivity with a set of industrial relations laws that go back a quarter of a century. The workers say the executives have been feathering their nests – “and now it’s our turn”. Unemployment will go through the roof, but too bad. Trust has been lost.

There’s plenty more to be said on this topic, but back to Rio Tinto. With the benefit of hindsight the company paid too much for Alcan and, worse still, did not raise sufficient equity at the time and/or did not work fast enough to sell assets to reduce borrowing so that they were selling and/or raising capital at the same price level as the Alcan purchase. They should also have at least talked with BHP. Trust has been lost.

My experience is that once trust is lost, particularly if there are large losses, then the group who created the problem rarely have the talents to get out of it. Executive and board ranks usually must be changed. And so America and Britain need to flush out all the executives who made the bad decisions and replace them with lower paid people who can do the job.

The 600 page Rio Tinto agreement morass is a series of agreements that are often included in joint ventures. They have been strung together without any understanding of the total control effect of the combination of all the transactions and agreements.

A person like Leigh Clifford (former Rio chief) who had total trust might have been able to convince people that all was well. Conversely he may never have gone down such a path.

The Alcan and BHP errors that are on the slate of Clifford’s successors means that trust in Rio Tinto has been lost. That’s why we will look very suspiciously at what it being proposed – and what we see looks very different from what the parties say is there.

This article first appeared on Business Spectator