Companies benefit from paying tax far more than it burdens them

The Australian Government is celebrating after getting its signature policy of company tax cuts through the Senate. The core of their argument is that a lower tax regime will attract more international business investment and create more jobs.

The argument conveniently ignores the reality that companies are one of the major beneficiaries from a robust tax regime that directs expenditure in a way that develops opportunities for all. Access to a well-educated workforce, high-quality transport infrastructure, reliable power supply and government funds not only removes risk from any business enterprise, it also adds to their bottom line.

The post-war German and Japanese economic ‘miracles’ are testament to decades of government expenditure in developing high-end engineering, technology and other value-added industries to allowed the countries to compete and thrive in the global economy.

Each country ended World War II with their infrastructure destroyed and their intellectual property pillaged by allied governments. The post-war rebuilding of Germany included massive spending on technological research and development and today, Germany continues to spend government funds on scientific research and development, which is exploited by German companies through the publicly underwritten IP transfer Fraunhofer Institutes.  The link between publicly funded scientific research and GDP growth is undisputed, both sides of Australian politics support the recently created National Innovation and Science Agenda (NISA).

Well-funded academic institutions engaged in long-term research is an excellent laboratory of ideas for companies which do not wish to have empirical research on their balance sheet, but certainly want to profit from it.

Companies also benefit from a well-educated workforce, which requires major government investment and expenditure in an education system that can produce literate, numerate people who can go onto technical colleges and universities to develop all of those skills useful to companies.

Sovereign risk remains a key investment decision parameter because trying to develop anything in a country with a poorly educated workforce, poorly developed road infrastructure and intermittent and unreliable energy sources is difficult. Companies operating in countries with robust taxation systems are mostly relieved from the burden of generating power for their operations, building of roads and other infrastructure to get goods in and out of their operations and creating a telecommunications system to be able to operate the IT.

The focus on reducing company tax rates to bolster profits and share price in the short term suits the professional investor community, who invest our retirement and savings money on our behalf.  They are rewarded for investing in companies that have artificially inflated profits now, at the expense of longer-term growth.  The dominant narrative of profits for shareholders is more important than any other driver ignores the broader benefits that taxation provides to businesses and to the investees themselves.

Indeed, many of the ageing baby boomer generation, so in love with the idea of individualism and wealth as a reflection of morality, may wish to consider how beneficial it is to them to live in a country with an extremely good health system. And perhaps ponder the fact that it is money raised through the taxation system that allows us to have well-trained clinical and administrative staff across the health system, from hospitals to GPs to nurses that visit the homes of the elderly and unwell.

It is reasonable for the Australian community to request all businesses to pay a decent amount of tax when they profit enormously from a stable political environment, a workforce that has access to an education regardless of their personal wealth, an infrastructure system that allows them to deliver their products to market and an energy source that doesn’t drop out in every storm.

The value of the tax system to the community goes beyond the profit for a few.

Trump’s Twitter tirade is for his domestic supporters, Australia is irrelevant to him as an ally

We as Australians are wasting our time being offended about US President Donald Trump’s Twitter tirade about the refugee deal with Australia.

We are not the audience he is targeting when he makes those remarks. His audience is his core supporter base who elected him in his domestic market of the United States. The ones that he hopes will prop up his popularity, or ratings if you will, and make him seem like a strong and decisive man putting America First.

This is his main interest, ensuring that HE comes first in everything. How many people showed up to his inauguration, how many people think he is terrific and on and on.

As Australians, let us not waste energy on being outraged about the content of his Twitter remarks or fall for his tactics of shock and awe on social media which are designed to distract and generate chatter.

Let us focus on the fact that his action reveals little respect for us as an ally and no respect for conducting diplomatic relations with courtesy and discretion. President Trump knows we are smaller than the US in population and economic size, and therefore, like many garden variety bullies he likes to pick on the easy target of the smaller kid. That is the quality of the man.

Our geographic position in Asia Pacific and our stable liberal democracy means we are strategically important to the US, and if nothing else, that should command some respect. If, however, the US Commander-in-Chief believes we are not worthy of respect, then perhaps this is the time for us to reflect on how we conduct ourselves in relation to the alliance going forward.

Australia’s future is wedded to the stability and success of the Asia Pacific region, not the success of US.

We must remember that for the next four years, the President of the United States does not believe Australia is worthy of being treated respectfully in the public forum, and that it is a reasonable diplomatic position to attempt to bully us.

We must now tread with caution, be our own counsel and be careful not to thwart our own long-term interests in pursuing our habit of always supporting this particular larger friend. His back is turned to us, he is only interested in performing for his supporters at home.

We miss a powerful opportunity if we believe the story that the wealthiest 1% has power over us

In Yuval Noah Harari’s book Saipens he suggests that one of the reasons that homo sapiens became the dominant human species was because of a Cognitive Revolution about 70,000 years ago that enabled us to imagine.

Not just imagine, but create stories that large groups of people believed because they provided a sense of meaning, belonging and/or order. Like the notion of gods that reward the good and punish the bad.

Or, perhaps more relevant to where we are now, that wealth has some moral value and wealthy people deserve political power whether they have demonstrated an interest in leading for the people rather than themselves.

These stories and ideas allowed people and groups to be bestowed with a belief of great power. And for stories supporting these ideas to go unchallenged. For instance, an often repeated ‘truth’ at the moment is that the wealthiest 1%’s accumulation of assets means they dictate how the world should be run. And this in turn creates a sense of hopelessness among the remaining 99% that nothing can be done.

But it is not really the case. There is another version of this story.

Those of us who live in countries where we are fortunate to be able to save for retirement or have governments which invest to fund pensions own more of the market than you think. Those living in countries with sovereign funds, which represent many countries including some of the poorest, also own a substantial percentage of the market.

Sovereign funds were initially developed by countries that generated revenue from their oil and gas reserves as a way of funding economic and infrastructure development in their country, to ensure intergenerational wealth transfer and to stabilise revenues. These funds buy foreign exchange, bonds and shares in companies, units in mutual funds and private equity and venture capital funds as well as directly investing in infrastructure.

It is quite hard to find information on how much of the market sovereign wealth funds and other public funds, such as government pension funds, own but the Sovereign Wealth Fund Institute, based in the US provides information on more than US$30 trillion under management.

Retirement funds also invest in equities, bonds, venture capital and private equity, and we own a lot of the businesses that make up the economies we live in. Even if it is only a handful of shares it is still an ownership stake and that stake has a voice. In the US market alone, in 2013, households, mutual funds and sovereign funds owned 70% of the market, according the Federal Reserve and Goldman Sachs. That should be more than enough to sway the vote.

In the same way as a democratic vote gives you a voice in politics, being a shareholder should give you a vote about the governance of a company. The word ‘should’ is a very important point in this scenario. Most of ‘votes’ are decided by the professional institutional investors that look after our money. The professional investment market has not shown much interest in representing the views of the ultimate owners of capital and many companies only really listen to the institutional investment community.

This institutional investor community doesn’t make any effort to consider the values of the people it is happy to make exorbitant amounts of money from. They presume that because they are the professionals, their view, and the view of their very similar peers around them, is the ‘right’ view about investment and that the only thing their customers are worried about is profit maximisation. And mostly, we defer to them because the jargon all sounds so complex and watching sport is more fun.

If we want the world to change, to become fairer, then we must start demanding that the institutional investors that manage money on our behalf, invest for the long-term economic benefit of all not short-term profit. And stop believing the story that we don’t have any power.

Dear America, greatness is defined by the good you do, not who you beat

Dear America

Your challenge is not make yourself great again, it is to remain relevant as a world power by the end of the 21st century. If you believe that your brand of liberal democracy should be an influential global voice, then you need to accept that you are no longer in a position of dominance. It is time to stop drinking your self-reverential Kool Aid, no matter how much it soothes you, and participate in building a better world rather than making yourselves great again (whatever that means).

This will be a hard reality to accept for a country which seems to believe it ‘won’ the Cold War and that power is a zero sum game. There isn’t one ‘winner’ and everyone else loses. Greatness is defined by the good you do, not who you beat. The truth is, the world is predominantly not white, it is 50 per cent female and not everyone is a card-carrying Christian. Your preoccupation with telling everyone else what to do has blinded you to some uncomfortable realities. Many people resent you America, for no matter how poor you believe yourselves to be, there are many who live in far worse circumstance. They, along with many others across the economic and cultural spectrum, don’t enjoy being lorded over or lectured by the US, economically, politically or culturally. They dislike your presumption of superiority.

It is not unreasonable for people outside of the US to want to generate jobs in their countries to improve the living standards of their people. It is not unreasonable for women to believe they are equal and deserve to be treated as more than objects for men. It is not unreasonable for people who are not white to believe they should be treated with equal respect and have equal access to the opportunity to create their own destiny. This doesn’t mean you are losing power, it just means others get some too. Power is not about domination, it is about a sense of control of your own destiny without fear of repression. Everyone can have access to that power. We can all rise together, even if we don’t all agree with each other. There can be cultural diversity without one being better than the other.

It is about understanding. Understanding that people who don’t share the same beliefs or lifestyle as you aren’t necessarily threatening you and can be very nice neighbours.

It is about respect. Respecting that I don’t have to look like you or agree with you but we can respect each other’s right to live as we wish without harming each other.

How we debate ideas, how we speak to each other, the accusations we make, the evidence we use to make a point and the names we call each other matter. It sets the tone of civic culture, it can leave deep wounds that make people scared and angry. It is the foundations we create to justify our action. Some things cannot be taken back with leaving scars, some things destroy people’s lives, even though ‘we didn’t mean it, we were just really angry at the time’. This applies to everyone. Those who voted for Trump and those who ridiculed Trump supporters. In that ridicule and the dismissal of their views, a lack of respect and an inability to listen was revealed.

To quote the Dalai Lama: ‘When you talk, you are only repeating what you already know; But when you listen you may learn something new.’ Have we all become so in love with our own voices and so entrenched in our own ‘rightness’ that we cannot listen and really hear other points of view? Is it so important to dominant the argument?

The American media has a great role to play in this. It does need to make itself great again. Engage their critical faculties – that is their most important job. So much of the Trump coverage was about his antics, his attention-seeking activities and how outrageous his behaviour was on any given day. Because it makes good headlines and great vision for broadcast. A lot of time was spent deriding the inconsistency of his comments and the paucity of his policy but not enough time was spent understanding the fear and concerns, real or imagined, of Trump’s voters and asking their candidate about his detailed policies to fix those concerns.

America did not invent democracy but it does have a virulent strain of it that is worth protecting and it should be remembered how easily it can be taken for granted.

The saddest time is likely to be in around 12 months when those people who voted for radical change in the hope to make their lives better realise that this is unlikely to occur under this President. It will be when those looking to reimpose American dominance discover that bombing your enemies to kingdom come can’t achieve that, and those that thought their President was a breath of fresh air is really only full of hot air.

Trump is unlikely to govern for the betterment of the American people, but rather for the glory of himself. We only need to reflect on the rise and falls of previous great empires to understand the result of hubris, self-glorification and such baseless high self-regard.

Fund management CEOs acceptance of stellar bonuses reveal their moral failure

In his article ‘The Bathsheba Syndrome: When a Leader Fails’ , Donelson Forsyth considers the moral failures of those who are powerful.

The failure may be illegal, as in the case of Enron and the like, or it can be a perceived failure of morals where leaders behave to norms that are well outside the wider society’s expectation of moral norms. This problem can be exacerbated when an influential stakeholder group, such as institutional fund managers, behave to the same set of norms as out-of-kilter company leadership.

A recent example of this reported in FTfm, was the news that the chief executives of the world’s largest fund management companies received bonuses that were on average 15 times larger than their salaries last year. This compares poorly even to the traditional accepted home of greed, investment banking, where the chief executives of the five largest US lenders received variable pay that was on average only 10 times larger than their salaries last year.

Now, there may have been a case to be made for such levels of pay if the fund managers had been shooting the lights out in performance and producing spectacular returns to their investors. But they weren’t, with many articles written about active funds underperformance, particularly according to Standard & Poor’s SPIVA report.

So fund management companies, which have investment products that underperform their benchmark indices, allow their chief executives to receive bonuses that were on average 15 times that of their salary. No wonder there is a tacit acceptance of chief executives of major companies receiving bonuses even when the company they run has a downturn in performance, even though studies show that the higher a CEO gets paid the worse the company does over the next three years.

This self-reinforcing belief system between influential fund managers and company chief executives shows just how financial elites suffer from the same moral groupthink. Performance doesn’t seem to matter, the elites still believe they deserve such high levels of remuneration, which is light years away from most performance management conversations for employees further down the food chain.

Hollander and Offerman suggested that the power that is accrued with higher management insulates them from feeling troubled by the harm they inflict on others and they feel that they have earned the right to deviate from their principles.

And if we, as their ultimate owners, say nothing then we accept the behaviour as a norm and nothing will change.

Mind the values gap on the CEO pay issue

Nothing ignites the anger and disgust of average employees and citizens upon discovering that the pay packet of a CEO is vastly inflated compared to the value they are perceived to add to a business. It is even worse if a business has performed poorly and a leader is pushed out the door with a ‘golden goodbye’ windfall payment.

The issue of CEOs’ pay is very often the first example used to demonstrate how out of touch the ‘elite’ classes are with the values of the average person. And studies show that big pay packets don’t necessary equal big performance. Why, we ask, do they need so much more money? Why do they think they deserve it? Why is the job worth that much compared to the average wage?

At the heart of the problem is a fundamental difference in what each party in the debate values.

For CEOs and the institutional investment community, the purchasing power of a salary package and whether it reflects the value of the job being done is irrelevant. A salary package is now about comparative value to peers and not about the dollar amount. And earning more than someone else, means more status and a place higher up the elite social totem pole.

The earners in this stratosphere are so far beyond worrying about providing the basics of life for that to be irrelevant to what has meaning in their lives. If you applied the notion of valuing these roles by the job being done, it would be hard to argue that a CEO of a global company in a particular field is exponentially more valuable than, for example, leaders of governments or a global humanitarian institution. But they are paid exponentially more. Money is the measure of status and social worth in that small, select group. Everyone else can eat cake.

When discussions about average or minimum wage earners are discussed, however, the debate focuses on ‘what is the job worth’ and ‘what can the business afford’, which is an entirely different value measure. People in this arena are worried about the ordinary issues of life like paying the rent or a mortgage, funding their children’s education, making sure they can afford healthcare. Businesses paying employees are worried about containing costs, meeting budgets and making a profit. Social status is secondary in the conversation.

And this is the point at which the disconnection occurs between CEOs, the institutional investors that support them and the rest of the world. The self-generated rhetoric that ‘we are worth it’ continues to widen the values gap as  the general public watches as KPIs are not being meet and company value is destroyed.

It is heartening that institutional investors are starting to question CEO pay packets and reject more outrageous ones but a broader conversation needs to be had about what is a reasonable salary. These CEOs are answerable to their shareholders. The institutional investors may be the named shareholders but they are the intermediary managers of capital owned by you and me, through our retirement savings, regular investments and through sovereign funds held by government in our name.

The values of both the CEOs, the boards and the institutional investors need to be more closely aligned with the values of the real owners of capital, who live back here on the ground, and not in the stratosphere of social entitlement.

Market response to Brexit demonstrates why cheap passive funds aren’t good value for the economy

The volatility and volume of trading in the global market response to the surprise result of the Brexit vote on Friday is an excellent example of why cheap passive funds are not good value for the economy, or the markets.

The crashing market, provoked by the panic of what the vote result might mean, was exacerbated by passive funds scrabbling to meet their investment mandate, which is to replicate particular indices.

Passive investment managers aim to create a portfolio of stocks that replicates the performance of a nominated index, such as the S&P/ASX 200, the FTSE 100 or the S&P 500. Their investment decisions and trading activity only reflect changes to the index, not a considered investment decision by an investment professional. There is no consideration of what each company is doing and the economic value they are creating for shareholders, rather the trading is focused on responding to what other investors are doing.

This trend also reflects the rise of the importance of trading over investing. The desire for the quick return, matched with the short-term quarterly reporting culture rewards the buying and selling of assets rather than investing in companies that will produce longer-term growth.

The funds merely replicate an index, which is just a collection of companies that are acknowledged by size, rather than quality. And trading in and out of them is based on a logarithm that is adjusts to continually reflect the market, which moves based on other people’s decision making. It is not based on an assessment of the future growth of the company, the quality of the management and the value the company adds to the economy.

The rise of the passive fund management industry reflects the belief of quantitative analysis as a ‘cost-effective’ way to invest and not have your returns eaten away by asset management fees.

Indeed one of the great active management houses, Fidelity Investments, has decided to start offering passive funds on third party platforms in response to customer demand.

The Financial Times reported recently that passive funds have risen to have $US6bn, up 230 per cent since 2007 and growing at four times the rate of active fund management, according to Morningstar. The focus of passive investing is on the cost of the investment, rather than the value of the investment. Indeed, the marketing of passive funds has focused on the cheapest of the option to invest in a market, because over the long-term equity markets rise.

Active investors haven’t helped themselves with eye-watering fee structures for often ordinary performance. The ‘long-only’ funds, which are allegedly designed for fund managers to buy and hold equities they believe will grow over the long term, have vast pockets of mediocre performance, sometimes due to mediocre managers, sometimes risk parameters that make it nigh on impossible to produce a decent return and sometimes because the fee structure rewards average performance and robs the end investor.

Hedge fund managers, who market themselves as superior to long-only traders because they also bet against stocks they think will fall, leech about half of pre- fee returns  but very often produce mediocre returns as well.

Passive funds do not participate in corporate governance discussions, they do not add to the public debate about company decisions nor do they invest on the basis of good company management decision making. They may be cheap, but they add no value. Indeed, as the events of the past few days have shown they add to the problem.

Active managers need to be less greedy and prove how they can add the value that company management so desperately needs.