Large group structures lead to corporate collapse

Parent companies of investment conglomerates and financial corporations should create smaller group structures and be made directly responsible for their subsidiaries' actions, according to Justice Owen, the commissioner of the HIH Royal Commission. Speaking at a luncheon of the Australian Institute of Superannuation Trustees, Justice Owen suggested that large group company structures with greater numbers of subsidiary companies had contributed to corporate collapses in the past.

"What did all these [failed corporate companies] have in common? The number of subsidiaries they had. Was it necessary to have group structures as large as that, and did the fact that there were so many companies in some of those groups contribute to their collapse?" he asked.

Those large group structures were inappropriate in the way they have been used in the past decade, he said.

Responding to a question from Money Management, Justice Owen suggested that the parent company in a group structure be made directly responsible for the obligations of its subsidiary companies.

"That does have its problems ... but it's one of the subjects that I think we need to debate," he said.

Justice Owen also said that the larger the group company structure was, the easier it became (innocently or deliberately) to hide the true financial position of a conglomerate.

It was also too easy for a large conglomerate to simply cast aside a troubled subsidiary, or for a company to phoenix into a new corporation with the troublesome company remaining part of the conglomerate, Justice Owen said.

A group structure also caused a "recurring nightmare" of directors making decisions in the interests of the group when they should have been focusing on the interests of the group member, and that created problems, Justice Owen said.

'Outside' directors also made bad investment and lending decisions based on group strength, when the focus of their attention should be on the individual companies' situations, he added.