Tag Archives: superannuation

04.05.16
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The Panama Papers reveal the ugliest parts of a bigger transparency problem

The fascinating phrase ‘ultimate beneficial owner’ kept popping up in the coverage after the release of the so-called ‘Panama Papers’ this week. It referred to the masking of the true owners of assets under layers and layers of shell companies and nominee directors.

Tax agencies, legal authorities and fraud investigators have all decried how the web of shell companies camouflaged the ‘ultimate beneficial owners’ making it extremely difficult for these owners to be held accountable for how the assets were acquired, to pay the appropriate tax in the jurisdiction in which their money was earned or to understand their level of influence in the halls of power.

In the outrage at these unidentifiable ‘ultimate beneficial owners’ and the lawyers who help them to set up the structures , the importance of transparency of knowing who owns what, and who has influence was raised again and again.

But before we all get swept up in the outrage of it all, it is worth reflecting that the lack of transparency regarding ‘ultimate beneficial owners’ of any large company is rife throughout the financial system, so much so that it can be argued that it is accepted as the norm.

For example, as part of their commitment to transparency of ownership, Australia’s biggest companies list their top shareholders in their annual reports but a quick flick through these lists shows the laughable nature of this proposition. Most of the names on the list are nominee companies. The biggest ones are HSBC Custody Nominees (Australia) Ltd, JP Morgan Nominees Australia Ltd and National Nominees Ltd.

Australia is not alone; the nominee company system is widespread in the Western financial services sector. 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, in submissions to a 2008 parliamentary committee inquiry on corporate governance, large listed companies raised the use of nominee companies as a key barrier to the effective engagement with its shareholders. 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.

It makes it easier, however, for those investing to lose the connection between how and where their money is invested and the impact that has on the values reflected in our society.

If it is fair and reasonable that people hiding money in offshore companies should come clean about how they earned it, why they should minimise their tax to avoid funding the infrastructure of a civil society such as education, health and transport systems and what influence they wield, then it is also fair and reasonable that those of us who have a retirement fund know where that money is invested and its ultimate use.

The fund management industry’s use of nominee companies makes this incredibly difficult.

Creating barriers between ownership from investing helps us to disassociate ‘making a return on our investment’ from ‘how we are making a return on our investment’ and the impact that has on the values and culture underpinning our society.

Surely greater transparency across the whole of the financial system, not just the ugly, dark corners will benefit us as a society.

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.

09.18.13
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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.

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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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08.15.13
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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.

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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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