The best way for businesses to make a positive contribution to society

Businesses have a social obligation? Laurence D. Fink is wrong about that. Mr Fink, head of investment firm Blackrock, has drafted a letter to business CEOs due to be delivered this week, according to widespread business press reporting. Strangely, Mr Fink has shared his draft with the media in advance – that is genuinely a puzzle partly because it makes public a fundamental misunderstanding. If the reporting is correct, then Mr Fink plans to tell the CEOs of businesses that Blackrock may invest in that their firms need to contribute to society: “To prosper overtime, every company must not only deliver financial performance but also show how it makes a positive contribution to society.”

What does he mean by a positive contribution to society? There is clearly an implication that he thinks businesses that deliver financial performance are not necessarily making a positive contribution to society. Who does he think should decide what represents a positive contribution? By what means should such judgement be put into practice? Therein lies the obvious inconsistency in this tired old mantra. As an aside, this mantra is old and tired. It is nearly 50 years ago that Milton Friedman published a piece on this very topic. Mr Fink may think he is delivering a new message, but he’s not.

Put simply, businesses make a positive contribution to society, as judged by society, when they make profits. It is only when making profits that businesses are making effective use of scarce resources. By making a profit, a business is adding value to the mix of inputs of raw materials, land , labour and capital and the output is valued more highly by consumers. If a business is making a loss, then the output is not valued by consumers to the same extent as some alternative purposes to which the inputs could be employed. Nothing further than a profit is needed to demonstrate a positive contribution to society.

Now, if someone argues that “their” view of what constitutes a positive contribution to society differs in some way, then the obvious questions are a) what makes your view any better or worse than anyone else’s view? b) in what way should business activity change to satisfy your view? and c) who will pay for that different activity? Enforcing any action upon business activity owing to a perceived will to better society is inherently an attack on personal freedom. It is simply another means of gaining and exploiting political power: controlling or inhibiting the behaviour of some people and taking their economic resources away in doing so, typically by enforcing higher consumer prices or lower shareholder returns.

Businesses are not moral entities. They do not have obligations. Contrary to what some people believe, the don’t even pay tax. Only people pay tax and only people have moral obligations. We have political institutions that are formed, more or less, along democratic grounds, that make laws that constrain the behaviour of people. Company managers, agents as they are of the shareholders, who believe that they must contribute to society by doing anything other than make profits, are attempting to exert political power. In doing so, they are acting in breach of their obligations to their shareholders and almost certainly, making a negative, not positive, contribution to society.

 

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The failure of financial services regulation

As we get into 2018, the financial services regulations continue to grow. Government, and by extension the agencies of government, intervene in the day to day running of financial services firms like never before. The core driving principle behind the relentless command and control approach is the desire of all governments, of all political colours, to assume power over all individuals and remove their self-reliance. This drive is endemic across all areas of government – the nanny state is a useful descriptor. It is not unique to Australia but happening throughout the western world.

The history of regulation of financial services in Australia has followed broad themes over the years since the second world war and the unsuccessful attempt by the Chifley led Labor Government to nationalise the banking sector. Since then, the broad themes have been solvency management, consumer disclosure, management scrutiny and consumer needs assessment. Continue reading

To fix bad bank behaviour, the banks must be deregulated. Royal commissions are pointless.

The Royal Commission inquiry into the banks and other financial institutions of Australia was described by the Prime Minister, as he announced his decision to instigate it, as “regrettable”. He said it had become “inevitable”. He also said that Government policy remained policy “until it is changed.” Only the Government can initiate a Royal Commission. So how was it inevitable? If it is regrettable, then why hold it? Continue reading

Relief for the lower paid requires relaxing the Superannuation Guarantee rules, not tightening them

Jane Hume, writing in the June 2017 edition of the Investment Magazine, an Australian publication aimed at institutional investors, argued for the removal of the $450 per month minimum income threshold that governs Superannuation Guarantee (SG) obligations. Her arguments were unconvincing to me. After nearly 30 years of my career in superannuation, as a consultant, actuary and for 12 of those years a trustee director, it is very clear to me that the $450 threshold should be increased, not reduced. Jane would like to see it reduced to zero. I would like to see it increased to $1,500.

Continue reading

Diversity and inclusion – how to kill the concept

It is quite puzzling.

Look at this piece:

Yassmin

 

 

An assertion, without any proof or suggestion of how it may be proved, that the oil well cap blew off the well at the bottom of the Mexican Gulf because of a lack of diversity and inclusion in the executive ranks of the oil industry seems an odd way to promote D&I. What is much more likely is that such a statement will be ridiculed publicly and the concept of D&I will be damaged, probably irreparably.

 

Compulsory superannuation is driving this mad idea

The Treasurer has been keen, reportedly, on letting younger Australians use some of their superannuation to help fund a purchase of their first home. Goodness knows why the Treasurer thinks this will make housing more affordable, but then again, economic literacy is not strictly a prerequisite for the job.  ScoMo reminds us of this law of the land almost daily.

The only, repeat, only reason that this pops up as a possible policy is due to the compulsory superannuation guarantee law. If the young did not have part of their wages compulsorily diverted by law into a ‘do not touch before age 60’ fund, then they could choose what to do with their money. They could spend it, invest it, buy education, buy property, or whatever they deem fit. I believe that people spending their own money make better decisions than Australian Treasurers dictating to them how to spend their money. Call me old-fashioned.

If the Treasurer thinks more carefully, he would prefer to abolish the SG than let people swap a superannuation asset into a real property asset.

Using superannuation savings to help buy a first home?

Stupid idea. Ridiculous. Mind-bogglingly bad.

The Treasurer was contemplating, according to media reports, allowing those who have not yet entered the residential property market a relaxation of the superannuation preservation rules. They would be allowed to withdraw an amount from superannuation to help fund a first home purchase.

The unaffordable house prices in Australian capital cities are not caused by a lack of demand. They are caused by a lack of supply. Throwing more money at the existing supply will increase the house prices, not reduce them.

At the same time, the embryonic retirement savings of the young will be set backwards.

And this man is Treasurer.

Apartments in Melbourne

I’ve been contemplating the apartment market in Melbourne, with a view towards possible investment. Are apartments overpriced now and so should I defer? Are they fairly priced? Anyone with inside knowledge is invited to pontificate in the comments.

Palpable incredulity in the cockpit pulpit

The Chairman of Qantas Ltd, Mr Leigh Clifford, wrote a letter to the Australian newspaper in response to criticism from a minister of the cloth that he, Mr Clifford, and other business leaders were publicly advocating changing the definition of marriage. The existence of such criticism seemed to surprise him. Mr Clifford’s incredulity was palpable. He said “Apparently, companies have no business expressing a view on social issues” and “By this logic, should companies scrap all of their corporate social responsibility programs?” (An image of Rik Mayall in The Young Ones delivering those lines with exaggerated irony just floated across my mind.) It probably was an attempt by Mr Clifford to use irony to dismiss his critics, although I doubt it worked. Continue reading