Fat profits from empty calories

Is a rapid rise in obesity levels in poor countries an acceptable side effect of multi-national companies and their investors pushing hard into these markets to create new profits?

In June this year, the World Health Organisation (WHO) said the increasing number of people in low and middle income countries being overweight and obese was creating major long-term public health problems. WHO identified that more than 75% of the world’s overweight children lived in those countries that also suffered issues associated with under-nutrition.

One of the key problems was the rising availability of cheap, highly calorific, or energy dense, foods and drinks that had little nutritional value. Driving this increase of consumption was intensive marketing, by multinational food and drink companies, particularly to children, according to another WHO study. Marketing about unprocessed foods in these countries did not exist.

There is so much money to be made in these low and middle income countries from selling soft drinks and the junk food that companies are targeting these markets as their future. Indeed, Coca Cola was very excited about the profit-making potential of the poor. In a presentation to a Barclays Capital conference in September this year, Coca Cola’s  senior executive Ahmet Bozer talked about ‘seizing the moment’ in sub-Saharan Africa with their ‘sparkling drinks’ (read the calorific Coke and the like) leading their charge into the market.

Bozer identified that there was a target consumer base of 6.1 billion people in Coca Cola’s International business and 37% of these were under 21. A core strategy was to drive sales growth through the flagship ‘sparkling’ market. Coca Cola was in the market for young drinkers to become loyal buyers of their product throughout their life, not as an occasional treat drink but as an everyday choice.

Some of the biggest American institutional investors in the world have major stake in Coca Cola. As at 30 June 2013, Berkshire Hathaway held 9% of the company, followed by Vanguard at 4.8%, State Street at 3.8%, Fidelity at 3.4% and BlackRock at 2.6%. Vanguard, State Street and BlackRock also have large stakes in PepsiCo.

Imagine if these institutional giants, who manage the money of the citizens of the US and others, actually told Coca Cola to revise their strategy.

What would happen if these investors told Coca Cola they would not sell their stock if Coca Cola took responsibility for the impact of their products on the health of their consumers (many of them without the benefit of the same level of health education as those of us in high income countries)? What would happen if Coca Cola focused on pushing their bottled water and healthier choice drinks into these markets instead? What impact would that have on this impending major health issue?

It doesn’t mean Coca Cola can’t make money, but rather make money out of products that don’t leave a trail of long-term health issues for its customers, the very people that will keep the company in business.

It doesn’t mean that investors can’t make returns on their investment in Coca Cola, but if nothing changes, what it does mean is that we, as the people that ultimately provide the money for institutional investors, value wealth over our health and the health of others less fortunate than us.

Who owns what is as clear as mud

One of the great transparency furphies in the corporate world is that you can find out who are the top shareholders by looking in their annual reports. The problem is a flick through the annual reports of most of Australia’s largest companies you may think you are reading the same list over and over again.

Most of the names on the list are nominee companies. The biggest ones in Australia are HSBC Custody Nominees (Australia) Ltd, JP Morgan Nominees Australia Ltd and National Nominees Ltd.

Nominee companies are custodian services that allow investments from a number of investors to be aggregated into one entity. According to the Australian Securities and Investments Commission (ASIC) they typically hold securities, arrange the banking of dividends and some form of consolidated reporting. They don’t engage with senior management or boards about how companies are run on behalf of their clients.

In fact, large listed companies raised the use of nominee companies as a key barrier to engaging  institutional investors in submissions to the 2008 Parliamentary Joint Committee on Corporations and Financial Services inquiry into barriers to the effective engagement of shareholders on corporate governance. The companies said the use of nominee entities also made finding the ultimate owners of shares difficult. This makes it very hard to align the long-term investment goals of superannuation funds and the short-term remuneration and performance goals of senior management and professional investors.

The parliamentary committee also found that institutional investors, such as superannuation funds, made decisions about whether to engage with companies’ management and boards based primarily on the economic cost to them. Some found engagement to be a distraction from their stated primary role of generating investment returns. The use of nominee companies would provide a useful way of distancing themselves from the companies and, therefore, actual engagement.

So it appears institutional investors not only don’t canvas the opinions of the people that provide them the money to invest, they are not that interested in engaging with the companies they invest in either. If they do, they certainly don’t share it with their clients.

Will savers have a say in Kay’s Investor Forum?

In July last year, John Kay released his Review of the UK Equity Markets and Long-Term Decision Making which examined the impact of recent behaviour in the UK equity market on investment performance and corporate governance.

One of the key recommendations was the creation of an Investor Forum, a place where a collective group of institutional investors could discuss issues affecting the companies in which they invest, collectively act on issues and advocate on behalf of savers (the people like you and me who entrust their money to institutional investors).

This recommendation was silent, however, on how these institutional investors may collect and reflect the views and values of these savers so they can advocate on their behalf effectively. It was also silent on how this advocacy and collective action be communicated back to the savers so they can see what the investors are doing and participate in an ongoing conversation about that activity.

Then in June, nearly a year after the release of the Kay Review, a number of these institutional investors, including Schroders, Legal & General, Baillie Gifford and The Wellcome Trust announced that it was setting up a working group to look at the concept of an Investor Forum. The three big industry bodies*, who represent the asset management and institutional investment groups, all back the initiative.

But will this working group consider collating the views and values of those savers or will it be a closed shop for investment professionals? How will they rank the issues on which they act collectively and on which they advocate? What safeguards will be in place to ensure they do what they promise to do and act upon the long-term interest of savers, not just as savers but as citizens, employees, consumers and community members?

A report is due out in November.

*The Investment Management Association (IMA), the National Association of Pension Funds (NAPF) and the Association of British Insurers (ABI).

Drowning in profit but banks won’t pay for their life buoy

The Commonwealth Bank yesterday reported a record net profit of $7.67 billion, adding to the $23.5 billion in net profits it made in the previous four years.  Yet it remains opposed to the Government’s proposed 0.05% bank levy.  The proceeds of a levy would be saved and used to fish financial institutions out of deep water in the future, rather than relying on taxpayers.

Together the four big banks’ net profits for the past four years have been in excess of $92 billion. So, you would think they would be able to afford to fund the levy without passing it on.

The industry’s lobby group, the Australian Banking Association (ABA), says the levy is unnecessary and the costs associated with it would most likely be passed onto its customers, you and me, rather than let it impact their bottom line.

Hang on, in order to keep the shareholders happy, they are going to sting their customers instead?  But their customers ARE their shareholders.

When the banks’ senior managements say shareholder they mean ‘institutional investor’, conveniently forgetting that institutional investors only manage our money, they don’t own it. They invest on our behalf, but we are the ultimate owners. We are also the taxpayers that would have to bail out a failing bank.

If you have a superannuation fund, you are very likely to have some ownership in bank shares. The S&P/ASX 200 index is a list of the 200 largest companies in Australia by market capitalisation (ie. the number of shares multiplied by the share price). As at 28 June 2013, the big four banks made up four of the top five largest companies, which means most superannuation funds would have some shareholding in one, if not all, of the banks. Many international asset managers are also likely to be invested in these large Australian companies too.

So, given the shareholders, customers and taxpayers are the same people, perhaps there is another way to look at this.

The levy would be an insurance policy against the collapse of a financial pillar of the Australian economy. Surely the banks should fund the levy without punishing the customers, given the money raised by the levy might save them in the event of a crisis. The institutional investors should not punish the banks through selling down their stock if they have a period of flat profit growth due to absorbing the levy, because their clients are the banks’ customers. Also, creating this pool of ‘insurance’ is in the long-term interest of the shareholders because a collapsed bank is worth nothing.

Will more transparency in super funds mean we have more say?

From July next year, superannuation funds are required to tell their members what investments are held in the fund. The question is, along with letting us know what they have bought on our behalf, will the funds also let us know whether they are discussing issues with management and, if so, what they discussed? Will they ask us what we think?

History does not bode well.

In 2008, a Parliamentary Committee found that institutional investors, such as superannuation funds, made decisions about whether to engage with companies based primarily on the economic cost to them. Some found engagement to be a distraction from generating investment returns. These conclusions followed earlier research in 1998  that showed active participation in company decision-making was not high on the agenda of most institutional investors. It found voting decisions made by these institutions were not transparent or prioritised.

So when we get access to all this information, what will it actually mean? Will we have any idea how long shares in companies have been held? Whether there has been any engagement with the management and whether they are engaging on issues that matter to their members.
If you had the chance to influence the senior managements of Australia’s biggest banks, Telstra or the big supermarkets, what would be most important issues to you?

We own the companies

Did you know that every person with a superannuation fund is part of the largest group of owners of Australia’s equity market and bond (debt) market? Probably not. Most people don’t.

Around 40% of the Australian equity market and 30% of the bond market are owned by institutional investors, who manage our money in superannuation funds and other pooled funds.  With more than 70% of adult Australians having some form of superannuation savings, we are a formidable ownership group that is growing all the time.

The same is true of other Western economies. Some  44.9% of the UK’s equity market is owned by pooled accounts, such as UK pension funds, and mutual funds own 24% of the US stock market.

So why is it, that we are becoming  more concerned about corporate behaviour but feel less able to influence decision making?

Well, we outsource the management of our money to institutional investors. Institutional investors include the superannuation funds, pension funds and professional asset managers who are sub-contracted to manage our money. Once we invest in funds, it is hard to get information about what they invest in and how active they are on our behalf.

Perhaps it is time we get involved and start asking questions. Making a profit is not a bad thing, but it is important we start weighing up what is the cost of prioritising endless profit growth.

Collectively, we could be more powerful than we think. We could use our power to get companies to manage for our long-term economic and social future again and not for the short-term gains of the stock market.

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