Tag Archives: asset management

04.18.16
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Questioning our values more use than a banking royal commission

The criticism of the behaviour of Australia’s financial services industry hit fever pitch in the past weeks with the Federal Opposition calling for a royal commission  into the sector and even the Prime Minister Malcolm Turnbull criticising the big four banks for damaging public trust.

A royal commission might give us all a chance to be outraged at the banks’ naughty behaviour but it would not reveal anything we didn’t already know, nor is it likely to examine the underlying societal value that is the root of the problematic culture.

Two recent forays by financial service regulators into considering the impact of culture on recurrent problems failed to do it, so why would a royal commission be different? That is, a dominant value demonstrated in Western capitalist cultures is the belief that, profit in business has value above all things. And maximizing the profit of a business is more important than the interests of any other stakeholders, including its customers. It is essentially alright to milk your customers for outrageous fees, unsuitable investment products and insurance products that are impossible to claim on, if you are adding to the bottom line for another ‘record profit year’ to report to the market.

Earlier this month, the banking regulator the Australian Prudential Regulatory Authority (APRA) warned that it had some concerns about the level of household debt in Australia and the Australian banks’ exposure to the mortgage market.  ABC’s 730 Report showed a revealing piece of footage of APRA chairman Wayne Byers testifying at last year’s Senate Estimates Committee that the regulator was “a bit surprised by how much the competitive pressures in the industry and the competitive dynamic in the industry had led people to do things that were, you know, really, in our view, lacking in common sense.”

The issue of lending money to secure market share, beyond a point that is a suitable risk for the lender and the borrower, is directly linked to the value of making a sales target to bolster the company’s profits. In a running bull market, the banks allowed their retail mortgage divisions to be focused on market share, and remuneration packages for sales employees will be geared to sales targets. Time and again, insufficient risk assessment of what that exposure is doing to the whole business is ignored or downplayed and the customers are allowed to borrow their way into a disaster.

Meanwhile, the funds management regulator, the Australian Securities and Investments Commission (ASIC) was also pondering the role of culture in driving conduct and conflicts of interests in fund management companies that both create and manage funds and sell them through financial advisory arms that they own. In ASIC’s Report 474: Culture, conduct, conflicts of interest in vertically integrated businesses in the fund management industry, released this March, ASIC pointed out that where a financial services company manufactured an investment product and owned the distribution chain through financial advisory services, there was a strong chance that sales representatives were pressured to sell the ‘own brand’ products, whether they were the most suitable for the customer or not. This feathers the nests of the sales representatives through salary incentives aligned with the organisation’s own profit maximisation strategy. The needs of the people paying for the service, the customers, are secondary. This is a mis-selling scandal waiting to happen.

By failing to consider the values that underpin our culture, we condemn ourselves to making the same mistakes over and over again. These mistakes erode our faith in the financial services sector that is crucial to a healthy economy.

Making a profit is a cornerstone of a healthy business sector, but endlessly pursuing record profits is a short road to poor ethical choices because it turns the focus away from the customers’ requirements and prioritizing a business’s own desires. Rather than just driving up the share prices of companies that make bumper profits, perhaps we should spend more time considering how the profits are made and punish the share price of companies that put their own interests above all others to get their pot of gold.

02.21.15
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The sleight of hand that separates the owners of money and those who manage it

An article I wrote with Christine Daymon has been published in the Journal of Public Relations Research.

http://www.tandfonline.com/eprint/MRx7cwJEyA4WU8a7WwRz/full

Our study investigates how the definition of ‘shareholders’ are constructed and engaged with through public relations in the Australian financial sector. We found that there is a hierarchy within the stakeholder group known as shareholders which is perpetuated by and through a public relations approach which constructs a discourse of ‘ownership’ that excludes citizens as legitimate stakeholders and prevents their influence in ensuring a more responsible sector.

In responding to the challenges of greater public scrutiny many companies have focused on developing communication strategies that espouse a commitment, through policy and practice, to involving stakeholders in a positive manner in organisation activities. At the core of such strategies is the notion of stakeholder engagement which, ideally, involves processes of consultation, dialogue and exchange with the intention of enabling cooperation and increasing understanding and allows stakeholders such as shareholders, consumers, and employees to exert an influence on corporate governance. In practice, and from economic and legal perspectives, the foremost accountability relationship of managers is deemed to be with shareholders. This relationship is supported by conventional stakeholder thinking whereby shareholders are considered to be a core stakeholder group with a formal claim on a company because their support is necessary for that company to exist. The nature of the relationship between an organization’s management and its shareholders has been explained through agency theory. Shareholders, as the principals or owners of companies, are the primary constituents who delegate their decision-making rights to an agent. Whether or not one agrees with the view that the economic obligation of business supersedes its social obligation, there is a problem with agency theory in that it relies on a definition of the shareholder as one who makes a direct investment in a company (such as an institutional fund, or someone who buys shares through a stockbroker). That notion has become less applicable, and even out-dated, in the modern economy. In capitalist economies today, a substantial portion of the capital that fuels the daily activities and growth of major national and international listed companies is provided by indirect investors (i.e. citizen investors) through pooled or institutional funds, such as superannuation and pension funds, which invest and manage monies on behalf of others. For example, in Australia in 2010, the nation’s central bank, the Reserve Bank of Australia estimated that around 40 per cent of the country’s equity market and 30 per cent of the bond market were owned by Australian-based institutional shareholders, predominantly superannuation funds.

The insertion of an intermediary (i.e. an institutional fund) between the real owners of capital (citizen investors) and the management of the listed companies in which they invest presents a complication for the traditional investment relationship which previously was based on a delegation of responsibility from direct shareholders to management.

The consequences of the discrimination that is perpetuated through public relations’ engagement strategies are that citizen investors are not educated about their role and rights as legitimate shareholders. Nor are they informed of the possibility to influence ethical, corporate decision-making and hold companies accountable for unacceptable actions. This is paradoxical when the same citizens who are passive as shareholders simultaneously may be engaging in public protest against the activities of the very same companies in which they hold investments. We have argued that if the engagement strategies of the Australian financial sector were equitable and responsible, then citizen investors might be motivated to actively contribute to corporate decision-making. The need then for public protest against corporate recklessness might be mitigated somewhat.

Engagement has a moral dimension and suggest that our application of the concept of engagement has been enriched by including consideration of responsibility and irresponsibility and public relations practitioners can contribute to a shift in how citizen investors and the broader community understand the meanings of ‘shareholder’ and ‘ownership’ with their subsequent rights and responsibilities, and potential for influence.

09.18.14
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The house of cards versus building economies – the shift to trading from investing

I recently finished reading What Happened to Goldman Sachs: An Insider’s story of organisational drift and its unintended consequences, Steven Mandis’s study of how the priorities of one of Wall Street’s most respected investment banks changed from providing trusted advice about long-term growth of businesses to short-term profit production for its employees and shareholders.

As a former Sachs employee, Mandis was curious about how the Goldman Sachs he joined in the 1990s, which was renowned for its customer-centric ethics and social code, turned into the one of the morally questionable actors of the global financial crisis. It tracks the drift in values since the 1970s and covers a period of rapid growth for the company and the financial services industry.

Mandis noted (pg 98) that the rapid growth in Goldman’s business meant thousands small decisions, made quickly and by many, accumulated into a significant tidal wave of change, and everyone was too busy to notice. Changes included the rise of a culture of undisciplined risk taking driven by the rising prominence of profit-making trading over advice and the dilution in the strength of its cultural norms as the business expanded quickly around the world.

More importantly it highlights the shift from banking to trading (pg 143) and how, as trading produced greater profits for the bank (rather than the clients), the culture shifted from ‘value-added vision and tilt more to making money first’ and asked the question ‘if making money is your vision, to what lengths will you not go?’.

Mandis examined what pressures existed to meet organizational goals generally caused by ‘unintended and unnoticed slow process of change in practices and the implementation of them, which in those cases led to major failures.’ This can be expanded out to the whole investment industry which, when inundated with the retirement savings of ordinary citizens into their mutual funds, suddenly had more sway with the companies than ever before.

Fund managers, wielding the investment power of the accumulation of many citizens’ funds, held more sway with company management. The power for decision-making, and the shaping of global business, resides with a small group of senior managers who make decisions with reference only to a small group of professional investors, i.e. decisions are made by those who manage the money, rather than those who provide and ultimately own the money. It is the beliefs and values of the professional investors that are represented, not those whose capital offers the companies the opportunity to continue business and the superannuation funds a chance to have a business.

Indeed, it is telling when the chief executive of the world’s largest miner BHP Billiton describes spinning off a basket of its lesser performing assets into another company as a way of ‘financial markets’ being happy. No mention is made of the values and views of the citizens’ that provide the capital to the financial markets.

It is also interesting to note that an independent senator in Australia’s parliament, Nick Xenophon, chooses to focus on the decision of the nation’s flag carrier Qantas to only consult with its largest institutional investors about controversial management decisions, rather than include the large number of smaller shareholders. He would perhaps, have been well served to question why the big institutional shareholders made no effort to listen to the views of the thousands of citizens who provide the capital to invest in Qantas. These are the citizens who may also work for Qantas, or are a supplier or contractor to the airline, or even are a frequent flyer.

It is time that large asset management houses created genuine engagement programs with their members to discovery what their investment values really are, in the context of the whole society, not just how much money they want to retire on, and base some of their decisions on that ethical compass, rather than the one that points only to the god of Mammon.

08.28.13
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Who pays for Woolworths’ bigger piece of pie?

Woolworths reported another increase in its net profit after tax today and shareholders will receive an increased dividend. This is great news for short-term investors, but with Woolworths casting a bigger and bigger shadow over our retail sector, it is also important to look at how the pursuit of these numbers impacts our society.

For instance, despite consumer price deflation, Woolworths has managed to increase its profit margin on its continuing operations to 26.94%, its fifth straight rise and an increase of more than one per cent on five years ago. So the question is, if prices are dropping but profit margins are rising, who is being squeezed?

The Federal Government’s FOODMap report, released in July 2012, analysed the Australian food supply chain. According to the report, Woolworths and Coles account for 68% of all food and liquor sales in Australia in 2010/2011. The report found that increased pressure from these food retailers for cost savings and larger scale has led to further rationalisation in food production. That means more people going out of business and fewer people producing more at lower margins. Further pressure is placed on these producers from cheaper imports being substituted for local product.

Both Woolworths and the Wesfarmers-owned Coles are pushing hard into the ‘own label’ space in their supermarkets and this has given them enormous, and uneven levels of power in the supply chain. Smaller, local producers have no bargaining power and those that want to stay in business must agree to the retail giant’s terms. This doesn’t just affect food producers, but all of the suppliers to the business.

So while the stock markets may revel in the results of this retail giant today, surely as ultimate investors in the company, we have to ask what other costs are we prepared to pay for Woolworths to generate these profits.

We, as members of superannuation funds and other investment vehicles, provide the capital to the likes of Woolworths, and we can use our collective power to get them to be more transparent about their activities. We just have to get the institutional investors who manage our money on our behalf to be more active.

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08.20.13
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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).

08.09.13
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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?
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08.08.13
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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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