Australia's major banks have signalled their intention to stop financing businesses that they, the banks, see as problematic for climate change. These are resources businesses in projects related to fossil fuels such as coal, oil and gas. During proceedings in a Parliamentary Committee hearing last week, the committee heard evidence that such businesses were increasingly turning to private equity and foreign sources of finance. I think this trend will accelerate. Public companies, particularly the big retail banks in Australia, have seen their shareholder registers evolve over recent decades. The number of shareholders has increased, the average age of shareholders has reduced and the average shareownership value has reduced. Further, Australian superannuation funds have vast numbers of members that are willing to look through the investment portfolios of their fund to see where the investments are actually being made. Shareholders have become more diverse and, inevitably, many have organised themselves into shareholder activist groups. They put pressure on boards via various means to abandon fossil fuel investments. Most of the directors and senior executives of public companies and the superannuation funds appear to be frightened of shareholder activist groups. It is hard think of any other reason for those entities to denounce fossil fuel projects as a class of investment. Investment decisions ought to be made on a case by case basis. To impose a ban on financing a certain class of investment is not operating case by case. It is operating according to a bias. I have no sympathies for corporate leaders who are scared of the prospect of a twitter storm or other noisy attention. The need to appear virtuous has superseded all other investment objectives if whole classes of projects are simply put off limits. That is weak, and possibly in breach of their duties. When you see a corporate entity claiming sustainability virtue points by selling off their coal investments, you see duplicity in action: selling a coal investment to another party is simply taking all future profits now in one net present value lump sum. If those companies genuinely believed the coal project in question should not exist, then it should be shut, dismantled and cleaned up. It should not be sold as a going concern. Meanwhile, private equity executives do not need to even consider the issue of shareholder activists. They don't exist in the business model. They can make financing decisions based on a project's merits. In some respects, that is closer to how publicly listed banks used to finance business before the revolution in the shareholder base. I anticipate the on-going evolution of financing options. To be sure, the objectives of private equity are different from those of the high street banks but the end result will be the same: worthwhile projects will get their finances arranged. The projects will continue. While the public banks will withdraw, other financiers will step in. The activists will eventually realise that the game moved on while they thought they were winning.
Business
Business issues and decision making.
I’m feeling more positive
I think the atrocious Andrews government in Victoria, Australia is on its last legs and I think Trump will be re-elected POTUS. What’s not to like?
I am their leader; I must follow them
In an episode of Yes, Minister, Jim Hacker, in a discussion of a serious political issue says to Sir Humphrey that "It is the people's will. I am their leader; I must follow them." There are signs all around the world of Jim Hacker right now among political leaders fumbling for a way out of this COVID-19 mess. They are looking for guidance from the people. The severe lockdown restrictions imposed in most, but not all, countries to contain the spread of COVID-19 were a response made in large part through political fear. No political leader wants to be accused of doing nothing. The decision tree is asymmetric - do nothing and if things turn out to be really bad, you are shamed into the political wilderness. Do nothing and things turn out not very bad at all, you are criticised as being reckless and lucky. Whereas, take action and things turn out bad, you are justified. Take action and things are not bad, you claim that your actions saved your country. So severe lockdown measures were imposed, in the main. Now, a month or so into the lockdowns, it is readily apparent that the initial predictions of hundreds of thousands of deaths in each country, and millions in the more populous, were wildly wrong. Those predictions were used as the basis for scaring people into accepting the lockdowns. Now the bind tightens - continue the lockdown or ease? Continuing the lockdown is decimating economies. Easing the restrictions risks a second wave of virus infections. Governments are clearly unsure what to do. The messages coming out are mixed and incoherent. In some cases, we hear that the shutdown will continue for at least 6 months. In other cases, we hear the governments are working on plans for phasing out restrictions in the next few weeks. There are obviously some individuals in government who have begun worrying that the cure is worse than the disease. They are flying kites signalling possible future courses of action to see which ones get shot down by public opinion. The asymmetric decision tree that got the political leaders into the shutdown mode is now showing its asymmetry again, but this time they can't win. They can take one of two courses of action: ease or maintain the shutdown. The outcomes will be either continued reduction in infections as the virus disappears or a second wave of exponential growth and rapid rise in deaths. Now, whichever course of action is followed, the government cannot win - they will be either pilloried or criticised as reckless and lucky, depending on the outcome. It is little wonder that they are behaving like Jim Hacker and looking for their people to lead him out of this mess.
Oil prices and the corona virus
The oil price used to spike upwards at the first sign of global fear. But times have changed. As a commodity, oil remains essential to modern life and economic welfare. However, its production is now more geographically dispersed than ever before. The US is a net exporter of oil. No longer is the middle east, and the Persian Gulf in particular, the most important part of a world that relies on oil for energy.
Never ending impeachment
What just happened in Washington, DC? The Democrat controlled House of Representatives passed articles of impeachment against President Trump and then failed to deliver the articles to the Senate. Why not? The US constitution specifies the process to impeach a President. Up until last week, the Democrats were arguing that impeachment was an urgent necessity, the security of the country was as stake. Why the delay?
I can make no sense of this. The Democrats are now making themselves look silly. Now that the Congress is in recess over Christmas, some legal opinions say that the impeachment articles will lapse. Has the President been impeached or not?
The only possible reason that I can come up with for this delaying tactic is that the Democrats know the Senate would acquit the President and the impeachment process would go out through the same exit that the Russian Collusion and Mueller report went. If the impeachment articles are never delivered to the Senate, then the threat and distraction of impeachment remains and perhaps the public will become more supportive of the move. But in case, as it appears, that the bulk of the American public either do not care about the virtual impeachment, or in fact are more likely to support Trump as a result of this blatant partisan attempt to overturn the democratic process, an exit strategy is needed. That strategy is to make the case that the Senate obstructed the impeachment by not playing by the rules. Can anyone else explain this bizarre behaviour?
Climate Change – business must act
It seems that every Government regulator fears missing the bus. The bus with the giant mantra painted on the side that says ‘Business must address climate change!’ ASIC is the latest. It is reported in today’s press that ASIC will target companies that fail to disclose climate change risks to their shareholders.
I agree with ASIC’s conclusion: business should address climate change risks. Not because I believe that the earth is on a catastrophic path to being uninhabitable (it isn’t) but because of the policies and regulations that I fear weak-kneed right-of-centre governments will introduce. The difference between right-of-centre governments and those of the left is measured in time, not policy. The policies of the left are eventually implemented by the right.
Continue readingIn search of 5% pa
Are investment returns becoming more elusive? In nominal terms, yes. But in real terms, maybe not so much. Possibly the single largest consequence of the Australian grand social experiment that is compulsory superannuation is that nearly everyone now has to decide how to invest financial assets over a very long term. What was previously the domain of a few is now a national occupation. In the current investment environment, it is an occupation that has lost a lot of its charm.
Continue readingBanking governance; or maybe not
I’m an unhappy shareholder of Westpac. There will be a lot of shareholder wealth destroyed before this sorry tale is over.
By way of background, Westpac stands accused by the relevant regulator of failing in its obligations to identify and report suspicious transactions that could indicate money laundering or terrorism financing. In this case, it is alleged that millions of dollars and transactions have been made through the use of Westpac accounts and payments systems to launder money ultimately used to facilitate child exploitation. Further, it is alleged that Westpac has known of these transactions for several years and has not acted.
Continue readingIncome tax cuts in Australia
There has been a lot of chatter in Australia this week about the cuts to income tax rates passed by Parliament. The cuts are phased in with immediate effect for lower income levels and deferred a number of years for the higher income levels.
While I’m in favour of income tax cuts, like anyone else who pays income tax, we ought to remember that the true tax burden is not represented by the rate of income tax, or any other tax, for that matter. The true tax burden is determined by the level of Government expenditure. The tax regime, the rates, the thresholds, the mix between consumption tax, income tax, royalties, stamp duties, corporate tax etc is the outcome of a political process that determines who will pay for the expenditure and in what time period they will pay. Cutting tax without cutting expenditure simply means someone else can pay for it, at some other time.
We are collectively better off when Government expenditure is cut first, and tax reductions can then follow. None of this is to deny the truism of the Laffer Curve.
Gender quotas and corporate performance
I think quotas of any sort are inherently wrong and likely to be bad for corporate performance. In recent times, many of those in favour of quotas have shifted their claims from “quotas are necessary to treat under-represented groups fairly”, to “quotas are good for business performance.” It is not easy to prove or disprove such claims.
Conceptually, the skills needed to perform well in business are not held in exclusively in the domain of any particular group of people. Those skills are held by all different sorts of people. And plenty of people do not have the necessary skills. Consequently, the best corporate performance will emerge from the companies with the best collection of people with those skills, regardless of who they are or where they came from.
Adding a degree of empirical research to the debate, the authors of a study conducted in Norway and published last month (accessible here), considered corporate performance controlling for gender composition of the board. Among the conclusions was this:
“Analyzing the causal effects of the Norwegian gender-balancing quota, we find the quota significantly increases the share of women directors on the boards of treated firms. Further, we find the quota significantly adversely affects the performance of treated firms and firm risk is significantly reduced.”
That is, if the law imposes quotas on gender balance, gender balance will improve. (No surprises there.) Also, firm risk reduces. Finally, corporate performance is significantly adversely affected.
Corporate performance changes as a result of gender quotas. Lower performance and lower risk is not the same as improved performance with no increase in risk.
