Published in the Australian Financial Review, 27 September 1994, p. 18.
In the past few years there has been increasing speculation in Australia as to whether large corporate mutual, typically in the insurance and superannuation fields, should consider demutualising.
The NRMA is now vigorously pursuing this option.
The recent bid by Colonial Mutual to purchase the State Bank of NSW has led to suggestions that this might be a means of listing the whole joint entity upon absorption of the bank. There has also been speculation about the AMP and National Mutual and their ultimate structures and the alleged benefits of demutualising those entities.
Demutualisation, however, should not be regarded as the only or the best option or an option at all in every situation. Is it a worthy option for the NRMA?
The NRMA appears to be a well-run, efficient organisation with a dominant share of the insurance market in NSW and significant presence in home and related fields of insurance. Its motor vehicle service business is very strong with 70 per cent of private motorists in NSW electing to become road service members – the highest market presence of any comparable organisation in the world. In addition, the organisation is cash rich.
So why change?
There are three decisive reasons why change is appropriate.
First, the NRMA’s strengths in the NSW market are enormous. But unless the organisation expands out of that market it may undergo atrophy. Listing is the best way to organise that expansion.
Second, other organisations pose medium to long-term strategic threats. For example, the GIO and other insurers are expanding their car and related business in other States. Diversifying risk and penetrating fresh markets must be part of the NRMA’s survival and growth strategy.
Third, the listing of the NRMA will enable the organisation to ultimately expand its ownership base outside of NSW – for example, Victoria and Queensland. Thus listing would complement the NRMA’s expansion in other States.
There is another issue at the heart of the debate within the organisation about its future. That is the corporate governance issues.
Currently NRMA directors are elected by ballot of all members. In recent years there has been fierce competition at election time.
In practice the organisation is prey to populism. Its board now includes famous sporting stars and other media identities who are well known and therefore electable. The danger is that the skills required to manage the NRMA businesses are not commensurate with the factors that enhance the electability of directors. The large NRMA membership do not strongly participate at election time: less than 5 per cent vote.
One of the big lessons of the 1980s is the danger of directors not having the skills to effectively monitor management. In addition, the various and persistent leaks by dissident directors complicate the governance issues.
In my view those problems are compelling reasons to change the NRMA’s ownership structure – away from mutuality to a listed company.
What are the arguments against the NRMA float?
Three principal objections are: whether due process has been followed and whether the tax issues are well-handled and whether the road service business will become more expensive in the future.
Some dissident directors are arguing that the “no case” should be pumped out into the public arena and funded by the board. Just because there might be a contrary argument, however, should not lead to the assumption that it must be strong and compelling.
As for the tax issues, a bit of fuss has been made of the “loss” by the NRMA of certain franking credits. As a mutual, however, such franking credits were not previously able to be placed in the hands of members due to the mutual structure – so it is hard to claim they have been lost. The Federal government had to consider whether capital gains tax would be payable on the value of shares to members. The government agreed with the NRMA for a trade-off of certain tax credits of the NRMA in exchange for favourable treatment of the share issues. When shares are sold, the tax payable on the listed price will be less than 12 per cent of the total value. ACOSS was commissioned to assess the impact on pensioners, so far as they impact on retirees, and found very few people would be affected.
Also, it is worth remembering that it is possible for NRMA members to choose the shares and, through the dividends – including franked dividends – fully pay for their future NRMA road service membership.
As for the road service component of the NRMA’s businesses, the Articles of Association of the new company enshrine this as a major component of the future activities. In any event, given that the road service has been crucial in building the NRMA’s commercial credibility in the insurance market, it makes no sense to abandon or diminish effectiveness in this field.
Postscript (2006)
The NRMA Insurance Board and the National Roads and Motorists Association (NRMA) consumed a lot of my time, particularly from 1993 to 1996.
In late 1992 Tony Berg, the then head of Macquarie Bank, who I came to know well through both of us serving on the board of the NSW State Rail Authority, asked me to consider getting involved. Although the NRMA Group were then substantial shareholders in Macquarie and their CEO was a Macquarie Bank Director, something Tony acknowledged, his motivation was to protect a business and culture he believed worth saving.
He said that John Lamble (1930- ), who had just prematurely retired, was one of Australia’s great businessmen, having systematically built up the insurance and motoring businesses from 1968, when he joined the company.
Tony said that I should meet him, and said something like: “I think you’ll find John is one of the most conservative people you’ll meet, though he really doesn’t understand politics. He is a brilliant manager. It would be a tragedy to see the NRMA he created destroyed.”
What had gone wrong is that the NRMA produced television and other commercials attacking the Hawke government at the July 1987 Federal election and the Unsworth government at the the March 1988 NSW election. The advertisements criticised the respective Labor governments for not doing enough for road funding.
Berg blamed Jim Millner (1919-2007), NRMA President 1984-1991, for the mistake of getting too much involved in partisan politics and he said what was done was too crude.
Hornets nests are best approached with caution.
The NRMA’s anti-Labor campaign galvanised Richard Talbot, a surveyor with the Roads and Traffic Authority and ALP member, among others to campaign against the NRMA establishment. Talbot was elected to the Board in 1990 (and continued to be re-elected to 2006). In 1990 he was joined by cricketer Geoff Lawson and publicist Jane Singleton, who ran on Talbot’s Motorists Action Group (MAG) ticket. In that year they collectively won 3 of the 6 positions up for election, with 91,000 members voting out of the 1.7 million eligible.
Talbot sought support from unions to counter what he described the anti-Labor, reactionary perspective of the NRMA old guard. He spoke at several Labor Council meetings. I thought his larrikin style appealing up to a point.
In the 1991 NRMA elections the 5 MAG candidates were the famous Australian pop singer Normie Rowe, former Olympic swimmer Dawn Fraser, Cessnock Mayor Maree Callaghan, former NRMA director and dissident David Parker, as well as Labor Council Vice President John Whelan. In the end, Fraser and Callaghan (who soon fell out with Talbot) were elected along with three “old guard” directors, former Wallaby captain Nick Farr-Jones, Prospect Electricity’s General Manager, Gordon Douglass, and experienced company director Lynn Ralph.
At the 1992 elections MAG enlisted 5 “star” name-recognition candidates, the Olympian Rob de Castella; former rugby league coach Roy Masters; environmentalist and yachtsman Ian Kiernan; the Mayor of Bathurst, Anne Ash; and town planner and former NSW independent MP Robyn Read. The existing leadership’s 5 were NRMA president Don Mackay, a senior partner in law firm Sly and Weigall; Dame Leonie Kramer, Chancellor and Emeritus Professor at the University of Sydney; Peter Jack, chief executive of the Illawarra Mutual Building Society; Professor Ron Werner from Sydney’s University of Technology; and merchant banker (and Paul Keating admirer) Mark Burrows. All 5 MAG candidates were defeated and the “official ticket” returned in that poll.
Mackay effectively campaigned on the argument that the board needed to be in the hands of competent business people. The NRMA, as the largest non-life insurer in the country, with 50% of the car insurance business in NSW and the ACT, needed suitably experienced people to run it. This was a turning point.
In 1993, the full slate of the “official ticket” was again elected, including Anna Booth, about whom more later. After several years of agitation from the Motorists Action Group, some 100,000 votes were cast out of around 2,000,000 eligible voters, a participation rate of 5 per cent. With relatively small numbers bothering to vote, victory belonged to those who could maximise voter turnout. Name recognition might matter more than expertise.
I formed the view that Talbot was a bit mad, an obsessive crank who might have a positive influence in checking any unnecessary anti-Labor proclivities of the NRMA leadership, but no person to lead the business.
Talbot became notorious for leaking from the Board. All sorts of steps were taken in numbering board papers and stamping them so that if they appeared in the media, the source would be known. Management began to think twice about canvassing ideas and options, including premium adjustments, as well as on strategies before contested court cases, as well as performance bonuses, at Board meetings in case their ideas, strategy, and preliminary thinking found its way into the media, to the delight of insurance and other rivals.
When regional airline Compass went to the receivers in 1992, Talbot called for the NRMA to put its balance sheet to the rescue.
Berg introduced me to Don Mackay (1931-2004) an astute corporate lawyer, who seemed highly political (in a small “p” way), and business focused. At this point he was NRMA Chairman and desperate to save the organisation.
Mackay asked that I become a candidate for the 1993 elections. (At the time, the Board elections were staggered over every 3 years, with casual vacancies filled by the Board in between time. I proposed, instead, that Anna Booth, National Secretary of the Textile Clothing and Footwear Union (TCFU), a sensible lefty, who had migrated to a more moderate political perspective, run. And I helped in urging her to successfully do so on the Mackay ticket.)
I got on with Mackay and as it turns out his father, Kim Mackay (1902-1960), was a notable Australian Labor intellectual (contributor of articles to the Australian Quarterly and other publications) who emigrated to England in 1934 and became a UK Labour MP from 1945-1951.
I am sure Don was a Liberal voter, but fair-minded, and I came to believe that it would be a tragedy to see the NRMA taken over by Talbot’s amateurs rather than reformed from within.
I had a high regard for the CEO Ray Willing, who in 1992 had replaced Lamble (and had been one of his protégés).
We all came to the reluctant conclusion that the NRMA Group, road services, insurance, and related businesses, should be demutualised. Members would receive shares in the new combined entity and expectations were that for many ordinary members, their dividends would pay for their yearly NRMA road service fees.
The directors were exhausted by the constant warfare within and felt for many reasons that the best talent would not be attracted to a board tearing itself apart. The time commitments were becoming draining for all. Plus, advice was received about capital management and expansion becoming easier under a usual corporate structure. But for me, the governance risks were the most important issue.
But that required information to members, a corporate and legal strategy, the development of an information memorandum, the impartial conveying of arguments pro- and con-, a postal ballot of members.
Mackay, Booth, and I had countless meetings with lawyers, QCs and other legal strategists both before and then after the demutualisation derailment.
What happened was that in October 1994, with postal voting by members underway, Justice Gummow of the Federal Court found the prospectus misleading and invalid.
In the aftermath, it was impressive but exhausting meeting the likes of S.E.K. Hulme QC, Dyson Heydon QC, and other silks, as well as Paul Mazoudier and Bob Austin, partners of Minter Ellison law firm.
The latter made a pitch offering a critique of the demutual implementation attempt engineered by another law firm (Allens), and suggesting there were better ways, which would avoid the Gummow reasoning. The pitch was successful, and they took on the role of NRMA’s principal corporate lawyers.
His Honour Justice Gummow identified three areas in which the NRMA was “misleading or deceptive”. Namely, its claim that the shares were “free”; its failure to adequately deal with the question of the NRMA’s culture across the two organisations; and the suggestion that the interest of NRMA members and NRMA Insurance policy-holders were the same. The heart of the problem was the attempt to encompass in a single document and process the vastly different issues involved in gaining members agreement to convert to a listed company and in offering shares to the members/owners of the company. Yet I and others had signed off on the prospectus and thought what we were putting to members, based on searching professional, including extensive legal advice, was fair and reasonable.
Various legal proceedings then followed, including the major parties suing each other for recovery of expenses and costs. The proverbial “lawyers’ picnic” suddenly had new meaning.
We were torn between appealing the Gummow decision, amending the prospectus and going again, considering a scheme of arrangement, or going quiet, head down, and recontesting the issues on another day. I remember preparing a paper on the options, suggesting there could be a demutualisation as proposed consistent with the extinguishing of certain rights. This paper, I no longer have, though it was mentioned in the NSW Court of Appeal decision, Heydon v NRMA Ltd & Ors; Bateman & v NRMA Ltd & Ors; Morgan & Ors v NRMA Ltd & Ors [2000] NSWCA 374 (21 December 2000). Separately Justice Giles observed of the discussions at the Board meetings leading to demutualisation that: “Mr Easson was clearly of a questioning mind and would have wanted to explore the opinions…”, NRMA Ltd & Ors v Morgan & Ors [1999] NSWSC 407.
In the latter judgement I am quoted from one of the NRMA transcripts of a Board meeting wherein I ask if opposing views had been properly considered. I am quoted as saying: “I don’t accept logically that for every good argument there is an equally bad argument. The members of the board have been sent variations from the original proposal on 17 March. There are various classes of persons entitled. We’ve canvassed views of members and we’ve addressed questions such as tax. Some directors like to think that the proposition was already decided but it actually was up in the air more than the directors are suggesting. Everything was dependent on the proper response from regulatory authorities. I am personally convinced that what we’re doing is the right thing. It was not a clear cut thing that the proposal would go through. I feel I would be morally compromised if I hadn’t canvassed all issues to the members, but to give to the members a totally fallacious argument which could be the no case would be a breach of my duty. I feel that a genuine attempt has been made to answer all the points raised.” I meant that the “no” argument should not in itself be misleading.
Three interesting things I learnt during the legal proceedings (where I went unrepresented) were that i) a call was made to switch Judges before the hearing on whether the prospectus on demutualisation, and the presentation of the pro- and anti- case was misleading or defective in some way; instead of going to the commercially less sophisticated Justice Marcus Einfeld, the NRMA legal team arranged for the matter to come to his colleague, Justice William Gummow. Too clever by half; Einfeld, whatever the merits of the case, might have been less confident than the commercially astute Gummow to stop the NRMA train from leaving the station; ii) every one of the NRMA Board meetings were transcribed in shorthand by a stenographer present. This was so but for the penultimate joint NRMA & NRMA Insurance Boards’ meeting where the stenographer’s notes had gone missing. I wondered if this was deliberately lost. At the joint meeting a week before, the stenographer’s notes refer to my asking if the presentation of yes and no cases had been adequate, if certain points raised by Jane Singleton, a NRMA Director (on the “no” side), had been addressed, what was the legal advice, etc.; iii) the Gummow decision was unexpected and strongly contested thereafter by leading silks.
After the NRMA demutualisation debacle in 1994/95, the very real threat of a takeover by the lunatics at the 1995 board elections loomed large.
Willing seemed to have suffered a collapse in confidence and the company leadership was completely demoralised. He resigned in early March 1995. Peter Corrigan (1956-2002) was appointed Acting CEO of the NRMA Group. He privately asked me to become CEO of the NRMA. I did not think him serious, but I might have gone there if pressed. For now, the challenge was to retrieve the burning log before any more damage. (Bruised by the NRMA experience, Corrigan went on to leadership roles in GIO Australia and AMP General Insurance before joining Deloitte in 2001. He died tragically young, unexpectedly of a heart attack.)
Throughout all the strategising about what should be the legal and commercial options, I found Mackay considered, calm, and resolute. Privately and publicly he stuck to the line that the members should decide.
Anna Booth and I thought long and hard about how we could help. She served on the NRMA Board from 1993-1995. We thought of the need to approach some big names with corporate/business expertise who might appeal to Labor supporters, thereby thwarting the potential onslaught of the MAG campaign. We knew this was urgent and important, as we knew some of the big unions like the NSW Teachers Federation and the Amalgamated Metal Workers Union planned to mail out supportive literature to their members supporting the MAG slate. With too few members voting, with the NRMA in an untidy mess, the stakes were high.
Anna and I came up with Nicholas Whitlam, former CEO of the State Bank of New South Wales and past founder of the investment bank Whitlam Turnbull & Co., and Ann Keating, then general manager Australia, United Airlines. A son and sister of iconic Labor prime ministers sounded like the right formula for the moment. We asked Don if it was okay to approach them. He was enthusiastic, he immediately saw the appeal of the idea, splitting the “progressive vote” though he had mixed feelings about Whitlam. He wondered, naturally enough if he would lose control. Given that the regularly-voting part of the NRMA constituency were largely conservative voters, he wondered about the dynamics, whether everything would seem too opportunistic, and if it could blow-up. He thought credibility would be enhanced by a slate of candidates, including Keating and Whitlam, but also including people not obviously associated with Labor.
Anna approached Ann and I, Nick.
Don promised me that no matter what, he would install independent directors, a third to half of the Board members of NRMA Insurance. He said he would canvass this with Whitlam (which, if he did, was done half-heartedly).
In November 1995 the vote splintered between the two main poles, with 3 MAG directors elected – Bronwyn Gould, Arthur Llewellyn, and Genevieve Rankin. The Whitlam ticket won 5 positions, Whitlam, Keating, Maree Callaghan, and two new-comers – Dominique Collins, Chief Executive, Weldon Information Enterprises (and wife of the Liberal Leader of the Opposition in the New South Wales Legislative Assembly), and Stewart Geeson, President of the NRMA Country Service Association. With the Mackay forces most of the other half of the board, there were a majority, more or less, of competent Directors. But it was still a highly political environment. Before the elections, Dawn Fraser a MAG supporter disillusioned by Talbot, decided not to re-contest.
With the new NRMA Board, who appointed the insurance board directors, Don did a deal to keep the directors in-house. I declined re-nomination to the NRMA Insurance board in 1996. Ivor Ries wrote a column in the AFR explaining my thinking:
NRMA Board Needs Outsiders
Ivor Ries, Chanticleer Column, Australian Financial Review, 7 March 1996.
Michael Easson’s decision not to renew his directorship of NRMA Insurance Ltd has once again thrown the spotlight on the NRMA group’s continuing corporate governance problems.
Easson, a former secretary of the NSW Labor Council, was appointed two years ago and was the only outside director on the board of NRMA Insurance. All other board appointees to the nation’s largest general insurance company are made from the board of the NRMA, the motorists’ organisation that exercises de facto control of NRMA Insurance.
The former Labor leader turned company director declined the invitation to stay on the board because he was disappointed that NRMA insurance had not appointed more outside directors with broad commercial experience.
In a quiet way, Easson had been lobbying the NRMA for the appointment of more external directors on the board of NRMA Insurance.
Late last year Easson asked the NRMA chairman, Don Mackay, and its then acting chief executive, Peter Corrigan, for the adoption of a policy appointing at least a third of NRMA Insurance directors from outside the group.
Easson felt that the $4.4 billion insurance giant needed more commercial and financial expertise on its board in order to preserve its reputation with the investing public. He also suggested that he would not stay on the board unless there was change.
But in the recent round of NRMA group board appointments, which were overseen by Mackay, the group adhered to its traditional practice of appointing directors only from the main NRMA board.
Mackay actually agreed with Easson on the external directors issue. But he felt that it was necessary to obtain a degree of consensus from the new Insurance board – which met for the first time last December – before bringing in outsiders.
That left Easson with a choice between biding his time and declining to renew his board seat. With pressing commitments elsewhere, he chose the latter.
The main NRMA board is now split into three factions and has a number of directors with little commercial experience. The three factions are the traditionalists, which back the chairman, the Whitlam faction, headed by corporate adviser Nick Whitlam, and the Motorists’ Action Group faction, headed by Richard Talbot.
While few directors vote along factional lines on all occasions, the solidarity among the groupings is sufficient to make board functioning cumbersome.
Before the most recent NRMA board elections, the association’s board was taking steps to […] Insurance, NRMA Life and NRMA Finance. Easson was appointed to Insurance, and Peter Robson was appointed to the board of Life.
The bitterly contested 1995 NRMA board election saw the arrival of the Whitlam grouping and more MAG representatives. Mackay’s desire to smooth tensions, by giving each group a place on the subsidiary boards, took priority over appointing outsiders. The Insurance board now consists of three MAG members, three Whitlam group members, and three of the old-guard directors.
While the apportionment of seats may go some way to easing tensions, it leaves the NRMA group with a governance problem.
The biggest concern is that the interests of members of the NRMA (the mutual motorists’ association) and NRMA Insurance (a mutual insurance company owned by its members) are not the one and the same.
Many NRMA members have no stake in NRMA Insurance. NRMA Insurance members must be members of the motoring association, but almost 500,000 NRMA members have no interest in the assets of the insurance company.
While NRMA and NRMA Insurance operate almost as one, and the NRMA has the right to appoint all the directors to the NRMA Insurance board, there is still a fundamental and irreconcilable conflict of interest between the two memberships.
The failure to adequately address that conflict of interest was one of the main reasons why Justice Gummow of the NSW Supreme Court decided to abort the planned 1993 public float of the NRMA group. Gummow ruled that the 1993 prospectus was misleading and deceptive or likely to mislead or deceive.
One way to handle the conflict of interest question would be to appoint several external directors to the board of NRMA Insurance. Those directors would have no obligation to the NRMA itself.
If and when the main board of the NRMA were to make another attempt at demutualisation and a stock exchange listing, the conflict of interests between those of NRMA members and those of NRMA Insurance members would again become crucial. But there are now no external directors left to represent NRMA Insurance members.
In 1995 the time given to NRMA matters outweighed all my other work commitments combined.
I ended my formal association with the NRMA from early 1996, although various legal cases were ongoing past my departure. (Typically, in such cases, law firms take all the relevant documents in your possession and pay a nominal sum of, say $10.00 in those days, as surety. You are supposed to get your papers back. I am still waiting.)
In my capacity as Adjunct Professor at the Centre for Corporate Change at the Australian Graduate School of Management, in 1995/6 I supervised several MBA students who wrote about demutualisation.
Whitlam and Keating, I feared, might not get on as famously with each other as first hoped. And that very much proved to be the case in the years that followed.
Mary, my wife, was asked by Whitlam to consider running on his ticket for the 1997 NRMA Board elections. (She had been defeated as the Member for Lowe in the previous year and had a high community profile) but then was told that a unity ticket with Talbot had been agreed in principle, and not to bother.
When we were holidaying in Vancouver, however, Mary got an urgent call from Nick asking that she nominate. The Talbot deal had fallen over. She faxed her nomination over, ran for election, won. Another Easson sucked into the vortex of the NRMA! Mary eventually retired from the board as Deputy President in 2002.
By then NRMA Insurance Group Limited changed its name to Insurance Australia Group Limited on 15 January 2002, commonly known as IAG and floated under that name, whereas the NRMA remained a mutual. A long story, all that.
Years later, after he retired from the NSW Supreme Court, I reached out to The Hon. Dr Robert Austin, who kindly wrote back saying that when I was there, he felt that there might be progress.
I am not happy how everything ended up. But at least the worst was avoided.
