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From the Desk of the Executive Director

Ken Phillips is co-founder and Executive Director of Independent Contractors of Australia. He is a published authority on independent contractor issues and directs research on related commercial and trade practices issues. Through his numerous articles in newspapers and think-tank and academic journals, Ken is known for approaching issues from outside normal perspectives and is frequently sought out for media comment.

Toll takeover should come with a TWU warning

Monday, February 23, 2015

The offer by Japan Post to purchase Toll Holdings looks like a smart move by the Japanese as explained by Robert Gottliebsen earlier this week (The Toll takeover exposes our institutions' ignorance, February 18)

Over the last eight years, Toll has built a logistics footprint into Asia that the Japanese clearly value, as is reflected in the significant premium they’re prepared to pay.

But if Asia is the prize, you’d have to wonder if the Japanese are aware of the domestic management situation. To any reasonable observer, Toll Holdings Australia appears as a company not run by its managers but rather an organisation that genuflects to the dictates of the Transport Workers Union.

If the history of other foreign investors caught in the Australian union pincer is anything to go by, such management kowtowing signals struggle street for the company. Take these examples.

The Australian car-manufacturing sector has been union controlled for decades. It only survived because unions leveraged governments for financial subsidies on behalf of the foreign-owned manufacturers. The sector hasn’t been financially viable for years demonstrated by the fact that now subsidies are being removed the sector is fleeing Australia.

The American giant Simplot entered the Australian food-manufacturing sector in 1995 with high hopes. But, as many other foreign owners had discovered, the local Australian manufacturers ceded control of the manufacturing process to union dictates.

Simplot’s 2011 industrial agreement with unions was a shocker, effectively neutering management’s ability to do just about anything. This pushed Simplot to the brink and -- as Robert Gottliebsen (again) explained -- Simplot was not competitive (The turnaround story that should be a model for Australian business, January 28).

However Simplot, recognizing that the problem was not unions but management, did something about it. Simplot is now on a pathway to recovery through reasserting management control by engaging honestly and directly with its workforce, leading to new agreements and investment.

The Toll Australia scenario follows this familiar path, but on my assessment, Toll is in the trouble phase rather than recovery. There’s a startling event that exposes this.

In the middle of last year, Toll admitted in the Royal Commission into union corruption that it had a secret agreement with the TWU to pay the TWU $150,000 a year for the TWU to harass Toll's competitors. This was widely described as a cartel-style agreement. The Australian Consumer and Competition Commission is investigating the matter to see if prosecution is warranted for breach of competition laws.

This might worry some Toll executives. My expectation though is that the ACCC will find technical legal reasons as to why prosecution would not succeed, thus highlighting failings in the competition laws.

Still, the admissions of anti-competitive collusion are damning of Toll's corporate governance and ethical standards. But legally, Toll will probably just receive a gentle warning from the ACCC. We’ll see.

However, for Japan Post there’s an important warning signal about the quality of Toll’s local Australian management.

Toll's business is built on its thousands of truck drivers. I understand that some 80 percent of the drivers are TWU members. In Toll's furious efforts to explain away their collusive agreement with the TWU, Toll have said it was all about safety and other realities.

Those ‘realities’ are really about the fact that Toll management believes the TWU runs its business. It’s like the car industry or what Simplot was. Toll management believes, it appears, that they can’t make operational decisions which the TWU might disapprove of. Hence, management is focused on doing deals with the TWU rather than having an honest and direct relationship with their own people.

That deal making has led them into highly dangerous territory. Deals done in the industrial relations arena have legal sanction. But the TWU uses its industrial relations legal protection to leverage activity and income in the commercial sphere. That is, the TWU offers to companies such as Toll services to harass competitors. It’s a form of competition manipulation that the ACCC or the competition laws appear incapable of, or have not thought of, blocking.

Toll, on the most benign of explanations, perhaps felt that because the TWU controls its operations that they were forced to sign the competitor harassment deal. But to be unkind, this is a bit like a drunk blaming their alcoholism on the manufacturers of alcoholic drinks. It’s a denial management mechanism rather than a confronting of the truth.

What should concern Japan Post is that they are acquiring a domestic business in which the managers don’t have control of the business. Like Simplot, Japan Post will need to fix the management problem if it’s to minimise risk.

 [First published in Business Spectator, February 2015]

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