Cognitive dissonance triggers in the business news

I know that cognitive dissonance can stress some people so apologies in advance if these stories from today’s business news in Australia give you the jitters. But many people, like me, will find them funny and get a good old-fashioned guffaw out of them. Or at least a smirk.

First, to corporate finance. A senior executive from the RBA, Australia’s central bank, gave a speech yesterday. That in itself is enough to prime most people for a laugh, given that many utterings from RBA senior executives are laughable. He said that Australia risked climate conscious global investors divesting from Australian business for greener opportunities. This is being referred to as a potential capital strike. I understand that he made these comments as a warning to Australian business for not being sufficiently green. But on the same page of the newspaper, a different report quoted the CEO of a major coal mining company saying the company is enjoying massive demand for its coal. That high demand, particularly in conjunction with rising prices, is creating booming revenue. Further, he said that with little increase in production of coal (globally) in recent years, this boom could last many years. In a previous post I mentioned that corporate finance options would evolve as traditional sources of finance were becoming, as the RBA man said, “climate conscious”. Sure enough, the coal executive explained how new sources of overseas capital are opening up, with particular emphasis on the likely long term funding from Asian debt capital markets to invest in and expand production capacity. I think the RBA chap should get out and about more.

Secondly, we turn to the current thorny issue of mandatory COVID vaccines for employees. Two of Australia’s four big banks were reported to have disclosed their policies. Westpac has introduced a compulsory jab policy. This was after it had surveyed its staff and found 91% were already fully or on their way to full vaccination status. According to the bank, the survey proved that the staff were supportive of this new policy which would keep everyone safe. Meanwhile, the ANZ bank also reported that it had surveyed its staff and it too found 91% on their way to full vaccination status. According to the bank, this showed a compulsory jab policy was not needed and it had no intentions of introducing one. So there you have it – how to interpret a survey result of 91% in two totally different ways. 

The continuing evolution of corporate finance

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.

					

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.

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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.

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In 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.

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Banking 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.

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