Matter of trust not one for closed eyes

WITHIN a month of Graeme Samuel's appointment as chairman of the Australian Competition and Consumer Commission in May 2003, a potential conflict of interest with his family's large stake in Austexx Pty Ltd was raised in Federal Parliament.

Austexx had launched legal action to protect its chain of DFO discount retail stores. It issued a public call for the ACCC to prevent concentration in the industry by stopping a $1.4 billion bid for the AMP Shopping Centre Trust by Westfield Trust.

Samuel told The Australian Financial Review at the time there would be no problem because he had set up a "blind trust" to manage his family's 25 per cent stake in the retail developer.

"I am not a director, I have no knowledge of what Austexx is doing," he told the paper. "Mine is a passive shareholding interest and no member of my family is involved in running that interest."

Samuel had resigned as a director of a dozen companies in the Austexx group in November 2002, three weeks after being appointed deputy chairman of the ACCC.

He also gave up his roles in several family companies, including Lyngrae Pty Ltd, which owns 25 per cent of Austexx.

Since then, Lyngrae's board has comprised outsiders: Geoff Porz (who resigned on July 12), Bill Kelty (who resigned on July 21), Jeff Browne (who left in 2006), Andrew Kroger (who replaced Browne) and Guy Jalland (who replaced Porz).

This arrangement addressed one type of conflict that could foreseeably arise when Samuel was running the powerful business regulator: it prevented Samuel making decisions in his private capacity as a director of Austexx while in possession of confidential information gained in his public role.

But it failed to tackle a different type of conflict. It did not prevent Samuel making decisions in his public role that could affect the fortunes of Austexx.

This reality came home with a powerful thump this week when Samuel stood aside from the commission's consideration of a proposed merger between National Australia Bank and AXA Asia Pacific.

"Mr Samuel advised that he considered this course of action necessary to remove any perception of a conflict of interest arising from current issues concerning his family's investment in the DFO shopping centre chain," the commission said on Wednesday. So it turns out that the "blind trust" set up in 2003 was not so blind after all. It did not prevent Samuel seeing where his tens of millions of dollars were invested.

The "current issues" were not spelt out in the commission's statement but they can be safely assumed to be the round-the-clock discussions between Austexx and its bankers, including NAB, about its solvency.

Samuel did not need to be involved in those discussions to understand that while he was holding significant sway over NAB's $13 billion plans for AXA, the bank was holding significant sway over a multimillion-dollar asset of his extended family.

"This is most distressing, indeed, because it affects the interests of my children and grandchildren as beneficiaries of my estate," Samuel said on Monday.

It is trite to say that there is a community benefit in successful business people becoming involved in public life. Equally, there is no reason why inherited wealth should preclude anyone from holding public office.

But the community's trust can be quickly eroded if a public decision-maker's personal investments are not kept genuinely at arm's length.

An orthodox blind trust is one where the beneficiary has no knowledge of the investments, let alone any involvement in decision-making.

Therese Rein set up such a vehicle three years ago to avoid conflicts of interest after her husband, Kevin Rudd, became opposition leader. At the time, Rein, a successful work-placement entrepreneur, held shares in 19 large Australian companies, some in sectors regulated by the federal government such as banking, resources and media.

In a July 2007 letter to the registrar of parliamentarians' pecuniary interests, Bernard Wright, Rudd said the new trust would be managed by independent trustees, with legal title in the investments vested in the trustees and his wife retaining sole equitable interest.

This meant the trustees could buy and sell shares on Rein's behalf.

"The trust deed contains binding instructions prohibiting the trustees from notifying Ms Rein, as the beneficiary, as to the purchase, holdings or disposal of the specific contents of the trust," Rudd wrote.

"The trustees are authorised to provide only such information to the beneficiary as is required for the proper administration of her taxation affairs, such as for instance the total value of holdings and the value of franking credits."

Rein was able to deposit or withdraw funds whenever she chose. At the same time, she closed her self-managed superannuation fund and rolled it over to a publicly available superannuation fund operated by Commonwealth Bank.

These arrangements meant Rudd could develop policies such as the resource super-profits tax without knowing whether his children and grandchildren would one day be directly affected.

It was a different story with Rein's business, the Ingeus group of companies in Australia, Britain, France and Germany.

The work-placements company held federal government contracts and its fortunes were tied to employment laws. Rein sold the Australian companies in the group and reinvested in overseas operations. (Ingeus has since moved into Sweden, Poland Switzerland and South Korea.)

If Rein had held on to the Australian subsidiaries but handed the management to someone else, it would have achieved little.

Rudd would still have known that his policies in particular areas could affect the finances of his near and dear. That's the position Samuel left himself in by concentrating much of his family's wealth in a single holding. (Asked on Monday if the Austexx stake was his family's most-valuable asset, Samuel said: "There's no question about that.")

Diversification, already one of the golden rules of investing, might also become a staple of codes of conduct for holders of high public office.

In 2003, Samuel was asked about the potential conflict of interest if the ACCC did hold the shopping centre inquiry Austexx wanted.

He said: "'If anything like that comes up before the commission, there are protocols to deal with such issues which involve declarations of interests." But those protocols explicitly refer to members of the commission (of whom there are now eight) stepping aside from an inquiry they are different in the case of the chairman.

The Trade Practices Act gives the chairman power to direct a member of the commission to step aside if "the member has or acquires any pecuniary interest that could conflict with the proper performance of his or her functions in relation to the determination of the matter".

When it comes to the chairman, the act says: "The Chairperson shall give written notice to the Minister of all pecuniary interests that the Chairperson has or acquires in any business carried on in Australia or in any body corporate carrying on any such business."

Naturally, there is nothing in the rules to prevent the chairman from stepping aside voluntarily, as Samuel did on Wednesday. But that only occurred after media reports had highlighted the links between the AXA bid and the Austexx debt crisis. The damage in terms of community perceptions had already been done.

The great irony is that the steps taken in 2002 might have done as much damage to Samuel's investment as they did to those perceptions of the ACCC's impartiality. If Samuel had remained actively involved, the threat to his grandchildren's inheritance might never have arisen.