Tag Archives: Business

11.27.13
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Only a reassessment of our values will avert another crisis

Most financial service professionals believe tighter regulation of financial markets will not stop another financial crisis, according to a recent survey.

Perhaps a reminder of what happens when greed overtakes reason might help. Today the ratings agency Standard and Poor’s said it estimates that the biggest US banks may still have to pay out more than $US100 billion to settle legal issues surrounding the rush for sub-prime mortgage products that started the global financial crisis in the first place. Not a great long-term return for the banks’ investors.

Or maybe a reality check about what their rampaging greed has meant for the rest of the citizens of the world. The Organisation for Economic Co-operation and Development (OECD) is warning that the fallout of the financial crisis, is starting to affect the elderly with lower and delayed pension payments and the gap between the highest and lowest income households in developed countries widened in the three years since the crisis.

Sadly, the only way to affect real change in behaviour is to change the values of those in power, because it is those in power that set the agenda. Kinetic Partners, the same group that conducted the survey mentioned above also did research that found that most believed it was the culture set by the CEO that influenced whether good decisions were made and another financial crisis could be averted. This is backed by a whole swathe of academic research pointing to the powerful elite prioritising the values of our society.

So what are the most prominent values? Academics Bruno Dyck and David Schroeder suggest materialism and individualism are the twin hallmarks of the moral point of view that underpins management thought. The Protestant focus on work and individual struggle for salvation and emphasis on material success has become normalised in western management and is the ‘incontestable, objective, morally neutral reality’ adopted as the natural facts of life, rather than the moral facts of life. This translates into modern management’s focus on efficiency, productivity, profitability relative to other comparable companies and the expectations of the market.

The central criterion for managerial rhetoric is concerned with economic growth, organisational survival, profit and productivity. In academic texts on corporate finance this belief is reinforced.  According to the Principles of Corporate Finance, ‘the goal of maximising shareholder value is widely accepted in both theory and practice’ because, the authors argue that shareholders want three things, the first of which is ‘to be as rich as possible’. Another perspective on this is offered by Jill McMillan who argues that companies are held captive by ‘the tyranny of the bottom line’ and profits are for the benefit of the ‘privileged class of organisational shareholders who possess the dominant right to maximise return on their investment and the commitment of management to pursue that goal.’

But if much of the money is invested with ‘organisational shareholders’ (meaning institutional investors) comes from citizens investing for their retirement, then it should be us that guides which values dominate investment, and given a chance to have a say, I believe many people would have not ‘profit at all cost’ as their number one value.

Below is a simplified version of my suggested model for a two-way communication system with their members.Model for engagement

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10.02.13
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Greed unfettered by conscience reigns again

Five years ago, the US government and regulators allowed investment bank Lehman Brothers to collapse.  The bank was to be the example to the industry of what happens when greed and the pursuit of profit at all costs prevails.

Sadly, it appears they didn’t learn a thing. Greed unfettered by conscience remains the order of the day.

Investment banks exist to grease the wheels of the economic machine, bringing investors and businesses together. These servants of company development and economic growth, however, appear to have transformed themselves into the masters of the corporate universe.

Investment banks’ role is to arrange companies’ borrowing, issues of shares and conduct a lot of the share trading and broker merger and takeover activity. They put people with money together with people who want that money to invest in their business. This means they have a vested interest in promoting lots of activity, which is what generates their revenue. So it doesn’t matter whether a deal creates long-term social and economic problems or not, their only interest is deals being created. How else will they hit the targets that pay their gigantic bonuses?

Now the UK Chancellor of the Exchequer is going into bat for the financial services sector to protect their ‘right’ to receive uncapped bonuses. There is grave concern that the bonus cap may led to an increase in base pay and that top ‘talent’ may go to non-European competitors who don’t have to comply with the cap. To be clear, the bonus cap will only apply to those who earn more than €500,000 (~$AUD720,000) a year….so they are hardly on struggle street. But a pay packet of this size is not about being paid what someone is worth, it is a way of gaining status through a comparison with peers.

Perhaps a walk along struggle street might help the investment bankers reassess their views about the reward they need to carry on their work. It may also give them some perspective about the devastating impact of their sector’s behaviour and how long it takes to recover. Right now, More than 46 million Americans are living in poverty and the median household slipped, all thanks the hangover created by the global financial crisis. While job growth may by recovering in the richest country in the world, the jobs are in low paying sectors of retail and restaurants. Meanwhile, the stock markets are recovering and the bankers are getting their bonuses again.

Earlier this year, the investment banking industry was asked to explain why they charge institutional investors for access to the chief executives of their client companies, often without the companies even knowing. The investment banks don’t provide the money for anything, institutional investors on our behalf do. Institutional investors need to exercise their financial muscles to wrestle the investment bankers back into their role as servants.

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09.11.13
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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.

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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