The real cause of poor behaviour in banks

AustralianActuary Business

Here is the text of a letter of mine to the editor that the Australian Financial Review published last week.

 

Karen Maley writes that Commissioner Kenneth Hayne has posed the question, “Is incentive remuneration necessary?” in relation to banking. Maley describes this question as radical. I would describe it as a very good question.

Will Commissioner Hayne, having another few months to complete his report, pose two more questions that strike at the core of the cultural problems in Australian banking? They are: 1) Is the Reserve Bank necessary? 2) Is the four pillars banking policy necessary? These questions would render his first one redundant. It is time to have the discussion. A sound banking, monetary and payments system needs neither the RBA nor the four pillars policy. In removing them the potential benefits for the real economy, rather than the financial economy, are material. However, given the timidity of parliamentarians, I do not underestimate the difficulty Hayne would face in putting those questions in his final report.

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Fairfax

AustralianActuary Business

Assuming that the intended acquisition of Fairfax by Nine Entertainment proceeds, will it mean a reduction in the diversity of media views, a reduction in independent journalism? Much chatter since the announcement has clearly anticipated such an outcome. But how likely is it? Nine doesn’t currently compete in broadsheet print journalism and neither neither does Fairfax, having opted out of that in recent times. The assets in the Fairfax portfolio that would be attractive to Nine are more in on-line commercial content and streaming, for example, Stan and Domain. It is possible that the print journalists will be retrenched and no more papers printed since those divisions are underperforming, but that prospect was already real for the Fairfax journalists under current ownership.

The ownership of an asset portfolio is changing, but that of itself has no implications for print media and journalism diversity or independence.

Slow and Steady

AustralianActuary Life

A few weeks ago I had the pleasure of attending the Melbourne launch of John De Ravin’s new book called “Slow and Steady”.

The book is a collection of 100 strategies for building wealth. Strategies are there for all stages of life. Each one is presented succinctly and with clear explanation as to whom it applies and why it works.

The practicality and readability of this book is perhaps best exemplified by noting that my children are interested in it and I see them reading about the topics that are directly relevant to them. They are interested in John’s strategies on car expenses, education debts and property investment. John’s work will be very helpful for many people. It’s available at this link.

Understanding why Diversity & Inclusion is equivalent to Conformity or Exclusion

AustralianActuary Business

Most, if not all, institutions now have Inclusion & Diversity policies. It’s fashionable to do so. These policies are entrenched in corporations, government agencies, peak sporting bodies etc. But what does an I&D policy mean and what do they achieve?

I&D policies may as well be called Conformity or Exclusion policies – they are conceptually equivalent and they achieve the same outcome.

To argue for inclusion requires the explicit assumption that exclusion is currently in force: an individual or a group or class is excluded, hence the need to change behaviour to include them. Logically, this requires that the entity or group or influence from which some are excluded can be identified. If it can be identified, then by definition it must exclude someone and has a test to be passed before membership is attained or retained. The consequence of an I&D policy initiative is therefore to change the rules of entry, change the definition of the group and exclude those who no longer meet the amended membership test. I&D is conceptually no different from Conformity or Exclusion. No barriers are broken down – they are just moved into a different position.

Back to analogue

AustralianActuary Life

Is it just me? Or have others noticed it? Is analogue making a comeback?

Some time ago, going digital was hip. It first came to my attention in the early 1980s when CDs emerged. The vinyl record, already suffering quite a deal from the convenience of the cassette tape, appeared doomed. I was all for it. Then came email in the early 1990s. The internet. Digital photography. The MP3 and ipod followed. Brilliant! Somewhere in there was the e-book reader, the kindle and its brethren. Skype phone calls. The iPhone, iOS, Android. All of these developments were fantastic, at the time. Onward and upward.

Or so it seemed to me. Continue reading →

What is the opposite of advocacy?

AustralianActuary Economics

The intent and the outcome often differ, especially when it comes to legislation aimed at correcting perceived injustices. Today’s example comes via the Chief Executive of the Women in Super group in Australia. According to Investment Magazine, Sandra Buckley  believes increasing the Superannuation Guarantee minimum contribution rate, possibly to 19% of earnings, is essential for women to catch up on their super after time out of the workforce for raising families.

Would that be in the interests of women? The short answer is no. It would disadvantage the very group that Sandra wants to help.

To understand why, Sandra should ask herself where would the extra money come from to make those higher contributions? It does not come from the taxpayer, nor from the employer. It comes from the individual herself. It is a forced wage deferral. There is nothing stopping women, or anyone for that matter, from voluntarily increasing their contributions now. They can do so and defer their income, the result of which would be a larger retirement savings pot. If they can do so now but don’t, that must mean they value take-home pay more highly than an increased superannuation contribution. There are plenty of reasons why that could be the case.

Why does the Women in Super CEO argue that such choice should be removed from women?

Helping Australians build adequate retirement savings is an important objective for policy makers, advocates and practitioners. Attempting to do so by calling for higher compulsory contributions is a lazy option, devoid of imagination and ultimately counterproductive.

Longevity risk and an abhorrence of annuities

AustralianActuary Economics

“Certainly not; but if you observe, people always live for ever when there is an annuity to be paid them; and she is very stout and healthy, and hardly forty. An annuity is a very serious business; it comes over and over every year, and there is no getting rid of it. […] I have known a great deal of the trouble of annuities; for my mother was clogged with the payment of three to old superannuated servants by my father’s will, and it is amazing how disagreeable she found it. […] My mother was quite sick of it. Her income was not her own, she said, with such perpetual claims on it; and it was the more unkind in my father, because, otherwise, the money would have been entirely at my mother’s disposal, without any restriction whatever. It has given me such an abhorrence of annuities, that I am sure I would not pin myself down to the payment of one for all the world.”

From Sense and Sensibility, by Jane Austen (1775-1817)

When is it right for government imposed contraints on pay?

AustralianActuary Business

I want to gather my savings, invest the capital to open a corner shop business, and pay myself a salary while i’m running the business. Should the Government determine my pay? I don’t think so.

Say my corner shop does even better than I had hoped. This year’s profit was terrific. I think I deserve a bonus and pay myself a handsome sum. Should the Government limit my bonus? I don’t think so.

Now I want to expand my shops and open two new shops in the next suburbs. I ask the bank to lend me money to finance the expansion. The bank agrees. Does the bank care what I pay myself? Not much, as long as its loan is repaid. Should the Government care? I don’t think so.

Years later, my business was doing very well and I wanted to release some of my capital back to me and my family. We wanted to have luxurious holidays and drive fast cars. A stockbroker finds investors who want to invest equity in the business as part ownership. We agree and the business now has independent stockholders. Are the stockholders interested in my pay? Yes, they are. They devise a means by which I must report to them what I am to be paid for the next year and they have the voting power to refuse (or sack me). Should the Government care about what the stockholders and I agree to? I don’t think so.

I am now paid in mega dollars. The business has suffered a little in recent years as probably, I am paid more than I am worth elsewhere. Do the stockholders care? Yes. They decide to change my remuneration. In future, there will be a small(ish) base but a big performance bonus if the business turns around. Should the Government interfere and limit my possible bonus? I don’t think so.

The Government has no right to interfere. Not ever. Not for a sole proprietor corner shop and not for a publicly owned institution. It is never acceptable to pander to petty jealousy and try to call it socially responsible policy making. If the shareholders of Company XYZ want to pay their CEO an excessive sum, that is no business of mine, unless I am a shareholder. And therefore, it is no business of Government, unless Government is a shareholder.

Inconsequential

AustralianActuary Business

Another week, another apology. This week saw the CEO of Facebook apologising. The CEO of the Australian bank the Commonwealth Bank apologised. A spokesman for the telco Optus apologised for an inappropriate job advertisement.  Jon Faine apologised for an ‘insensitive’ interview he conducted on ABC radio. Meanwhile, political figures are being ‘forced to apologise’ for things they said 20+ years ago. John Alexander’s joke in a pub in 1986 springs to mind. Apologies abound. Not a week goes by without some public business figure being ‘forced to apologise’.

The apologies all carry a similar plot – mea culpa, mea sorry, mea must do better and it won’t happen again. The internet, bless it, gives access to any number of pages on ‘how to deliver a sincere apology’ complete with a template document on what to say as you top and tail the details. Sincerity is so useful. And so cheap and easy to obtain. But of course, the apologies are meaningless; meaning, the supposedly bad behaviour that we are meant to see less of, will continue.

Why do these business leaders apologise and to whom? Apologies are actually a personal sentiment between two individuals. The CEO of one of the world’s biggest businesses in making an apology in a public forum to the world in general is simply mouthing a few words that are meaningless and insincere. They are worthless. Why do they do it?
They do it because they know that in doing so, they get out of their current predicament and allow them back to their business with the current scandal over. They act rationally. It is the media that should do better in exposing bad corporate behaviour. (Forget the regulators – business regulators everywhere are worse than useless; they actually entrench bad behaviour by enforcing oligopolies wherever they go with barriers to entry such that competition is strangled.) Where is the public exposure via the media?
Seemingly too many investigative journalists’ work output today relies on following the latest ‘twitterstorm’ and baying at the perceived miscreant until that person is humiliated and apologises. At that point, the story is over. Until it repeats with a new twitterstorm over some new bad behaviour and a new apology will be extracted. Nothing actually changes.
The twittersphere, shorthand label for social media generally, is filled with primary school students that have never grown up. Their early training in the playground has carried through into adulthood. At a perceived slight in the playground, tears erupt and the teacher rushes over to demand the offender apologise to our precious offendee. The tears dry up and they move on. That behaviour is now commonplace in adults. Apologies have become meaningless.
The best regulation against bad business behaviour is a strong moral fibre and an ethical framework that has, at its heart, do no harm to others. This, together with consequences, is the best way to minimise harmful behaviour. There are still individuals with morals and ethics. What is disappearing are the consequences. True criminal activity will sometimes be detected with real consequences but the legal system itself has problems, is excessively expensive and can only deal with the most egregious cases. There is much bad behaviour going on that will never be brought to court, nor should it – our society could no longer function if we relied solely on the legal system to enforce ‘good’ behaviour.
I don’t expect much to change in the life of the CEOs who apologised last week. They know that there are no consequences. Real consequences would result in losses not profits. Real consequences would see customers turn away and use alternatives. Real consequences would see job losses. This is where the regulation and regulators fail us. Governments do not want firms to fail because they fear the political damage. That is why large businesses are bailed out by taxpayers all the time. They are bailed out with direct subsidies, tariffs or constraints on competitors, interest free loans, grants, elaborate barriers to entry for new competition, stifled innovation, enforced public ownership, cronyism and corruption. Despite this menu of techniques, if some firm does happen to fail, then public money is used to pay compensation to the unfortunate employees out of work. There are no consequences anymore. The media in the main, does not investigate and report on this because too many are looking for the next twitterstorm. CEOs of small firms generally lobby for less regulation. CEOs of large firms lobby for more regulation. It’s easy to see why.
We witness the gradual outsourcing of responsibility for our own lives. With that comes the natural blame game. The political class has taken over the decision-making responsibility for individuals and the arbitration of grievances.  Consequences have become disconnected from behaviour. No wonder the CEOs apologise and carry on business as usual – that’s the way of the world.