Tag Archives: shareholders

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.

05.14.14
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Expanding how we ‘profit’ from oil and gas extraction

Western Australian Premier Colin Barnett sent a shot across the bow of the oil and gas companies that operate off the Western Australian coast at a recent industry conference in Perth by challenging their notion of social licence.

Financial journalists and politicians looking for a hook to hang him on immediately started to quibble about some of the factual detail around ownership of leases and completely missed the opportunity to debate the broader point, on which Mr Barnett was right. That is, companies do need to seriously look beyond their own bottom line at how they treat the Governments and communities in which they operate and provide more of a legacy than local libraries and playgrounds.

The fraught issue of who profits from oil and gas extraction and how they profit must be seen from a multilayered perspective and how we see it is clouded by an increasingly outdated notion of stakeholder theory.

Stakeholder theory is the basis of how many businesses engage with various ‘stakeholders’ and their interests. For example, groups get divided into ‘shareholders’, ‘customers’, ‘government’, ‘activist groups’ and ‘local community’. Then they are usually separated and ranked according the importance to the senior management. For large listed entities, the very top of the tree is usually shareholders (to which I mean large institutional investment groups who manage money on behalf of others), and meeting the demands of this prioritized group(s) can be the greatest influence on decision-making.

What stakeholder theory overlooks is that most stakeholders belong to more than one group, who may ‘profit’ or lose in more than one way, and who the stakeholder really is may be obscured at first glance. For example, oil and gas resources in Australia, including coal seam gas, are owned by the relevant State or Territory government or Federal Government (depending on whether it is onshore or offshore) on behalf of their citizens. The relevant government then grants licences to companies to explore and extract these resources and ‘profit’ on behalf of their citizens through the collection of royalties.

So the owners of the assets are the citizens of the relevant State, Territory of Australia or Australia itself and they profit through: the collection of royalties; the access to the resource they own (domestic gas supply); and community economic development through job creation. This same group may also ‘lose’ if the extraction of resources unnecessarily damages their environment or the opportunity cost of losing other industries, such as agriculture, fishing or tourism is seen as too great.

While the oil and gas extraction companies will say their fiduciary duty to place shareholders first, they may not recognise that the capital provided to institutional shareholders to whom the oil and gas companies are trying to deliver a profit are some of the very same citizens who own the resources they extract. The capital flow comes through savings such as superannuation funds and other retirement savings.

For example, the coal seam gas enterprise Arrow Energy is a joint venture owned by Royal Dutch Shell plc and PetroChina Company Ltd. As a 14 February this year, Shell stated in its 2013 Annual Report that major investment houses such as Blackrock and The Capital Group owned more than 6% and 3% respectively. In turn, Blackrock on its website states in runs $US4.3 trillion in investments around the globe on behalf of ‘governments, companies, foundations, and millions of individuals saving for retirement, their children’s’ educations and a better life’, including Australian citizens. In this scenario the citizens ‘profit’ through the increase in share price and payment of dividends.

The offshore oil and gas activities in the north west of Western Australia are dominated by majors such as Shell, Chevron and Woodside all of whom are large listed companies with institutional shareholders, who would manage the millions of dollars of individual savers. These are the companies at which Mr Barnett was taking aim, particularly after the decision to develop an offshore floating processing plant, rather than base it onshore in Western Australia and create opportunity for the local communities.

Oil and gas companies need to consider how to balance all of these streams of ‘profit’ more evenly and consider opinions beyond the institutional shareholders who manage citizens’ money, often without reference to their views. They may also need to learn to find value in the competing view that their citizen stakeholders’ don’t necessarily wish to ‘profit’ from the extraction of resources but would rather use the land and sea for other means, such as agriculture, or even to leave the environment untouched.

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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