Why the CBUS dispute is actually a good thing

David Atkin, CEO of major industry super fund CBUS is probably getting some Christmas cards he doesn’t really want this year, in the form of protest letters from members of Victorian construction unions.

There are both worrying and heartening things about how an industrial dispute has moved into, and is playing out, in the super arena. It raises important issues, and perhaps counter-intuitively, the way it is playing out is actually a good thing.

For those not up on the dispute, here are the main points:

– Victorian construction unions have been in dispute with builder Grocon for much of 2012, although the conflict seen on construction sites earlier in the year has now moved to the courtroom (in the case of the CFMEU).

– CBUS, the biggest super fund covering Australian construction workers, is the default super fund for agreements involving these unions.

– CBUS has a relatively large exposure to real estate, and an active property development program. About half is undertaken by CBUS Property, its internal real estate business, and half by external managers, notably ISPT and AMP Capital. Some projects to which CBUS has either direct or indirect exposure are being undertaken by Grocon, which competes for such projects with other major construction firms. These include the recently completed 1 Bligh Street commercial development in Sydney’s CBD.

Perhaps understandably, the unions are not particularly happy with CBUS giving business to Grocon at the moment, whether directly or indirectly. As some of the sponsors of CBUS (which includes union and employer groups), they are entitled to express a view, and no doubt there have been some frank discussions. This has resulted in the Victorian divisions of the CFMEU and ETU calling for expressions of interest for other super funds to be nominated under fund agreements.

Here’s what’s disheartening about this dispute spilling over into super:

– It’s hard to give much credence to union complaints about CBUS ethical standards. Based on our research of major funds, CBUS is right up there in terms of ESG standards. The unions will be hard pressed to find a new default fund with a significantly better ESG program.

– The CBUS real estate program has delivered good returns, and generates development activity and employment for union members. This requires scale and liquidity. Loss of scale could impact CBUS’s ability to maintain its program at its current pace, while moving to a new (likely smaller) default fund may not add enough scale to compensate, as smaller funds typically have to use pools for their real estate investments. The net result could be a reduction in real estate investment and construction activity, making everyone a loser, especially members.

– It’s an own goal for the industry fund segment, and a gift for the critics, whether on the right of politics or proponents of SMSFs.

Now here’s why it’s actually very heartening:

– That it has spilled out into the public arena. This almost certainly means that behind-the-scenes pressure failed to get CBUS to interpret its governance policies in a way desired by the Victorian unions. That’s hugely encouraging, considering that a quiet backroom deal could have been done. Instead, both the CEO and chairman have been vocal about fiduciary principles and acting in the best interests of members.

So how does this play out? There’s a good chance it fizzles out. CBUS has announced it intends to re-nominate, and the agreements in question don’t expire until 2015 in any case. That’s a fair while for things to calm down.

This issue is also about the maturing of the super system, and part of that maturation is divergence with the desires of some of the system’s foundation sponsors. Large super funds are becoming major financial institutions and have to develop different and stronger governance standards over time. That is the price of success.

The other lesson here is that the super industry needs to be prepared for interest groups mobilising agendas against it. Today it’s construction unions and how CBUS uses construction companies. Tomorrow it’s the Greens on environmental policies, GetUp! on investment policies, or Bob Katter on domestic investment preferences. This emphasizes the importance of transparent, well thought out policies to which a fund can hold confidently when faced with special interest group agendas.