Steer clear of these IR victims

The revelations of bad construction union practices are currently confined to the industrial relations writers. But, in fact, they are the tip of an enormous iceberg that will extend into the activities of Lend Lease, Leighton, and then move onto the food industry led by Coca Cola’s SPC operation, and the motor industry including the parts makers and many other areas.

We are likely to see change on an enormous magnitude. Most share investors are currently focusing on the effects of the US Federal Reserve Bank’s tapering of economic stimulus efforts, changes in China, local interest rates and so on. But in terms of Australia, the industrial relations developments rank with all those issues. It is not an area where you can give simple advice, because a great deal of what is really happening is buried within the board rooms of companies and they don’t talk to shareholders about it. But that too will change.

I have written before about the dangers facing shareholders in Lend Lease and Leighton (see Deconstructing Leighton’s problems), because in their construction operations they have agreements with the building unions that mean that they cannot easily tender for government contracts in Victoria, New South Wales and Queensland. Soon they will be the subject of a nationwide ban via the revamping of the Australian Building and Construction Commission.

Here we have state and federal governments intervening to change the management practices of our large builders, to stop them signing agreements with the unions that give the unions large amounts of power on building sites including over who can be subcontractors.

In fact, the big builders’ enterprise agreements mean that building sites are co-managed with the unions, which really hits productivity and boosts tender prices. Of course, it can also be very profitable because competitors find it tough to break in.

Now we have the revelation that the powers given to the unions in these agreements have been used to benefit people other than the workers, and the governments and the community are going to come down on Lend Lease and Leighton and the other big builders with tonnes of bricks. And these companies will be blamed for setting up the environment that has enabled bad practices to take place.

Challenges for management

I don’t know whether Leighton and Lend Lease have the management to adjust to this new situation. If they do have the management talent to adapt, then they will recover and they have a lot of forward orders. What is required is a totally different approach to the way you manage your workforce and a much lower cost base – that’s a tall order.

Therefore I wouldn’t hold shares in either of these companies, because I have severe doubts to the calibre of their management, although I do emphasise that there is no way management is involved in the corrupt union practices that are currently being revealed.

Click to enlarge

Click to enlarge

You will remember Lend Lease signed an agreement with its workforce in breach of the Victorian government’s requirements and were very arrogant about it. That shows there is a cultural problem.

The new ways of managing will need to spread from builders into their suppliers and they too will need to look at just what sort of agreements they are signing with unions and what power has been given to the unions as a result.

We are going to see a lot of industrial turmoil, but the good news is that the extent of the industrial turmoil will be muted by any inquiry into the building unions. When you are under the sort of pressure about to face Leighton and Lend Lease, it is much more difficult to run your business.

Ending bad union agreements

In time I think we are going to see new building companies emerge that will not have the shackles of the old labour agreements, and they will take a lot of work from Leighton and Lend Lease. But this affair does not end there. SPC and the motor industry want government help. Quite rightly, the government is saying to the motor industry we may help you, but you must end your bad union agreements. SPC tried to get aid before fixing its agreements – and it had Coca-Cola as its shareholder.

The food and motor agreements are not all that different to those in the building industry; it is just the unions involved don’t take the same liberties with the power they have been awarded. Most of the agreements stop subcontracting, control shift times, and basically mean that the unions have a very big say in the management of the operation.

The government is going to require not just Toyota, but all the parts makers who supply Toyota, to change their agreements before there is any government help. That’s a very big change. Had Coca-Cola been publicly prepared to completely change the work practices at SPC it might have got its money, although the parent profit was always a problem. In addition, I think Coca Cola has some of the bad work practices themselves.

Click to enlarge

Indeed, it might make more sense for SPC to be closed and the brand sold to the farmers who would be encouraged to set up a co-operative with a new plant, new products and proper work practices. I can smell some big losses on SPC for Coke. It’s a great company, but I am nervous and I would prefer other stocks.

To have these sort of events in food, automotive and building means that we are looking at a very big change in our work situation. This is good news, because it is about making Australia competitive. It actually doesn’t mean lower wages, but management must be able to manage the business and not have to constantly go to unions to get approval for small decisions.

This process will eventually spread to the resources industry and will make us far more efficient, although the miners are investing in labour-saving equipment to make themselves less vulnerable to unions.

For Western Australia, the most famous project for bad management practices was Gorgon, which paid dearly for allowing the WA Chamber of Commerce to set up its industrial relations agreement. BHP and Rio Tinto, in the boom, signed bad agreements which need to be reversed. In time our mining industry will develop new projects, but it has to go through its revolution first.

Recognising those on the front line

In terms of investors, because we are at such an early stage of this change, it is really hard to pick out listed companies other than Lend Lease, Leighton and Coca-Cola that are on the front line. But, in the coming interim report season when you see a chief executive or chairman complaining about the industrial relations act, understand that it may be a euphemism for saying that “I have signed bad agreements and don’t know how to get out of them. Please governments, help me.”

The federal government can’t help on a wide-scale basis because of what was promised at the last election. Out of this, Australia is going to become a far more efficient place to operate and if, as I think likely, the Australian dollar falls we will see a resurgence in Australian employment because it will be made lower-cost without necessarily reducing wages.

We are already seeing in retail very big differences in the performances of different companies. Some can manage the current situation far better than others. Exactly the same thing will happen over a wider arena.

The companies that get it right are going to perform extremely well. I am not in the business of predicting which ones get it right, but it will certainly be something to keep a watch on very closely.