There’s support across the globe for increased female participation at leadership levels. In Norway, it’s a legislative requirement that at least 40% of the board members of listed companies are women. Spain, Italy, Belgium and The Netherlands also have mandated quotas. Firms and organisations in other countries, including Australia, are voluntarily adopting gender targets.
Of the many reasons put forward to promote gender diversity in workplaces, a call for general fairness is one of the more effective and is easily understood. But the debate becomes illogical when diversity advocates claim that company performance will automatically lift if there are more women involved in executive-level decisions.
In fact, it does women a disservice to raise such unrealistic expectations. The findings of a range of diversity research projects that I have been involved with, using data from a number of countries and from different periods starting in 1996, make it evident that there is no actual business case for gender targets. Some companies may do better with more women, but others may not.
If it really were clear that simply adding a woman to the board would increase shareholder value by a significant amount, you can be sure that firms would already be doing it. This is business, after all.
Of course, there is a fairly large literature arguing that such a business case exists. In essence, such claims point to a correlation between firm performance and gender diversity on the board. That correlation is always positive if you only look at it as a correlation. But what the literature completely ignores is the question of whether this correlation is causal. As soon as you try to address the causality question, you don’t find this positive relationship anymore.
But the news is not all bad. Our research has revealed benefits that women bring to boards, notably conscientiousness, better corporate governance and performance accountability. Women appear to be tougher monitors of management and the likelihood that the CEO gets fired if performance goes down is higher when you have more women on the board.
Whether a tough board is always a good thing is contestable. If you have a board that’s constantly looking over the CEO’s shoulder and nitpicking, the CEO is less likely to share much information with it and this may be less than ideal for decision-making. In the female participation debate nothing is black and white.
But we do know that women are more likely to turn up to board meetings than men and that men show up for more meetings when there are more women on the board. Also, when it comes to directors’ pay, women are more aligned with shareholders by having a greater portion of equity in their compensation. These are likely positives.
And contrary to their counterparts in the wider population, women on boards are less tradition-bound and less averse to risk than men. It raises the idea that if women were able to implement or to have an effect on boardroom decisions so that their values were reflected, they could facilitate innovation. Another possible positive.
I’m a big advocate of diversity and like working in diverse groups but don’t believe who we work with should be mandated. Some senior managers may decide they are happier working with guys. Perhaps they enjoy going off to football games after board meetings and believe that women wouldn’t enjoy that sort of bonding. Sometimes people just work better with particular types of people and if that means men, and the company is operating well, then that’s a perfectly valid approach, if regrettable from an equal opportunity point of view.
Yes, there are demonstrable effects and arguable benefits in having the participation of more women. But it’s foolish to claim their input will automatically improve company performance, or even that at the very least it won’t make it any worse. It’s simply not true and has the unintended consequence of setting women up for a fall.
Professor Renee Adams is The Commonwealth Bank Chair in Finance at the Australian School of Business. Professor Adams will discuss her research at the Australian Graduate School of Management’s 35th anniversary conference on 11th of September 2012. This article was previously posted on The Conversation.
In April last year I wrote in The Conversation about an innovative financial investment mechanism called Social Impact Bonds, that was designed to address some of society’s wicked problems by engaging government agencies, not-for-profit organisations, private investors and financial institutions.
At that time only one of these SIBs was operating in the United Kingdom. After what seems to have been a long pause, the increasing levels of interest and rhetoric have turned into some tangible products, including here in Australia.
In the last weeks two new SIBs have been launched in the United States – one in New York and the other in Massachusetts. Meanwhile in NSW, three SIB propositions are now under negotiation.
The most interesting aspect of these new initiatives is how the basic SIB concept developed in the UK has been adapted in different jurisdictions.
As I have explained in my previous story, the way a SIB works is by a bond-issuing organisation raising capital from investors, based on a contract with government, to deliver improved social outcomes that generate future government costs savings.
As well as repaying the principal, investors are paid a reward if the agreed outcomes are achieved.
The growing interest in SIBs is driven by a number of factors. Firstly, Governments are developing long-term outcomes focused “payment by results” or “payment for success” mechanisms to replace inefficient and ineffective mechanisms such as contracts, fee-for-service or grant-in-aid mechanisms.
Secondly, not-for-profit organisations are increasingly focused on delivering long-term social impact. However, many not-for-profit organisations are “permanently failing” – with demand for services outstripping supply, they are under-capitalised, use a short term revenue funding model, and rarely use debt finance.
Thirdly, investors of all shapes and sizes are increasingly seeking to achieve an appropriate balance between commercial returns and the social and environmental value created.
There is now a shift from ethical and socially responsible investing – based on screening out investments associated with social and environmental damage – to social impact investing where commercial returns are blended with the creation of social and/or environmental value.
This shift chimes with Professors Michael Porter and Mark Kramer’s vision of creating shared value.
SIBs offer the potential to harness these three drivers and re-engineer the traditional relationships between government agencies, not-for-profit (NFP) organisations and investors to create social benefit
Given this positive analysis it might have been safe to assume that first UK SIB focusing on recidivism would be rapidly replicated in other jurisdictions and across other policy fields.
However, the UK experience showed it takes a long time to develop a SIB proposition and measuring success is not only complex, but absolutely essential in order to find a point where all partners will agree to proceed.
The first UK SIB is reportedly progressing well and is on schedule to deliver the target outcomes.
But it’s most striking attribute is that it is an “all-at-risk” investment; where the failure to achieve the target reduction in recidivism leads not only to investors losing the reward payment for use of their capital, but also losing the principal.
Government has therefore achieved a complete transfer of risk to the private investor – although it has to be acknowledged that it is difficult to assess risk in such an innovative mechanism.
It is therefore unsurprising that all the investors in this innovative mechanism are philanthropic institutions – trusts and foundations – which can rationalise the downside risk as a donation as well as a failed investment.
Trusts and foundations traditionally use the financial returns on their investments to provide grants with the goal of achieving social value. The SIB mechanism offers them a mechanism to also use their corpus to achieve social value. However, if accessing commercial investment capital is a SIB goal, then arguably the UK SIB has failed.
The deal was formulated by a specialist intermediary – Social Finance; they hold the contract with government to deliver the agreed outcomes and are responsible for the ongoing management of the SIB.
Social Finance sub-contract the delivery of the intervention programs to a number of not-for-profit organisations. Finally, the reward payment and repayment of the investors’ capital will come from an innovation fund rather than the mainstream service delivery budgets.
The New York SIB is also in the field of recidivism, but with some significant adaptations to the original UK SIB, particularly around the nature of the risk sharing and the involvement of a commercial investor.
For instance, in the NY SIB, the prime investor is investment bank Goldman Sachs, along with with Bloomberg Philanthropies – the charity of New York major Michael Bloomberg – which is providing a credit guarantee that limits losses to a quarter of the invested capital. A further adaptation is a research centre – the MDRC – is coordinating the delivery of the recidivism program.
In Massachusetts, two “payment-for-success” based initiatives are under development which relate to recidivism and homelessness.
At this stage it is not clear what structures may be used, but it is interesting to note that the process is being driven by government and is following a traditional procurement process.
This is also the case with the Social Benefit Bond (aka Social Impact Bond) trial in NSW.
Three proponents are now involved in a negotiation process and while the full details aren’t known, at least one proposition includes two mainstream financial institutions, another involves a specialist intermediary, and all three have on-board very large not-for-profit organisations.
An overarching conclusion is that in these early stages, social impact bond propositions will need more “trials” to better understand stakeholder behaviour as well as how to optimise incentives.
In these early stages the costs of the measurement and research must also be borne outside of the SIB mechanism, or else transaction costs will undermine their financial viability.
In the UK there are a range of institutions and funding sources, including BIG Lottery, NESTA and Big Society Capital. In the US, President Obama established a fund of US $100 million to develop “payment for success” mechanisms.
But in Australia there are no similar sources of funding to support measurement, research and development. If SIBs are to become more widely used here, this is a significant gap that has to be remedied.
The Indian aviation sector may be in turbulence mode, but that hasn’t shaken the spirits of G.R. Gopinath, the father of low-cost air travel in India. Gopinath, who sold India’s first low-cost airline Air Deccan to Vijay Mallya, the owner of Kingfisher Airlines, is gearing up for action once again. “I have been preparing for a national launch for the past year, and I hope to be ready next year,” an upbeat Gopinath told India Knowledge@Wharton.
The provocation for Gopinath to take to the skies again is simple: Kingfisher is in a financial mess. The airline is running a sharply reduced service, and if it does not manage to raise funds, it could shut down anytime. Gopinath, who sold Air Deccan to Mallya in 2006, sees this as an opportunity for his re-entry into the sector. He points out that when Kingfisher bought out Air Deccan, the two brands together had 36% market share. “I believe that the market is still largely untapped. This is an unfinished story, and I see a huge opportunity still there.”
In the meantime, he has reentered the skies with a different avataar. Gopinath recently launched Deccan Shuttle, a regional airline in the state of Gujarat in Western India. Gopinath points out that apart from the big cities and towns that are connected by the Airbuses and the ATRs, India has around 500 small airstrips which are not well connected. “Gujarat, for instance, has nine airports. While all of them are linked to Mumbai (India’s financial capital in the neighboring state of Maharastra), they are not linked to state capital Ahmedabad, or to each other. My idea is to open up a new market. I am passionate about providing easy access and connectivity.”
Gopinath has launched Deccan Shuttle under the banner of Deccan Charters, an aviation services firm that he set up in 1995. This was his first venture in the aviation sector. It currently has 20 aircraft (helicopters, turboprops and business jets) and operates out of 16 locations. Under Deccan Shuttle, Gopinath will begin by deploying around six 10-to-18-seater aircraft in Gujarat. Over the next three years, he plans to have 25 such small aircraft across five states. Gopinath’s plan is primarily to offer intra-state connectivity. But in routes where there is significant demand due to cultural or trade reasons, he will also look at inter-state connectivity.
Other recent entrants in this space include Air Mantra, a unit of the Religare Group. Air Mantra launched in July, connecting Amritsar and Chandigarh in North India. Spirit Air, which operates in Eastern states like Jharkhand, Bihar and Orissa, is planning to start operations in the Southern states soon. Air Pegasus, from Décor Aviation, an airport ground handling agency, is expected to start operations later this year.
Analysts are watching the space keenly. “There is a lot of potential in the regional airlines business provided the states offer the required infrastructure and policies, and the companies have the appropriate business model by way of routes, pricing strategy, etc.,” says Vishwas Udgrikar, senior director and partner, infrastructure and transport at consulting firm Deloitte. He warns, however, that “given the current environment in the country’s overall aviation sector, players need to be cautious and enter the regional airlines sector with the right preparation.”
Jasdeep Walia, an analyst at Kotak Institutional Equities, suggests that running a regional airline could be tough. “For distances of around 250-300 kilometers, the demand will be limited, especially if the roads are good and people can cover it by car. And for distances of 500 kilometers to 600 kilometers, there is always the risk that as the demand picks up, bigger airlines will [step in].”
Gopinath’s comeback is also evoking interest. Udgirkar points out that any new entrant at the national level, despite prior experience, will find it very challenging. “There are inherent challenges in this sector and formidable competition, too.” Walia adds: “This space is very competitive, and the government policies are not at all conducive. And Gopinath could not sustain his earlier venture. ”
Gopinath’s Air Deccan changed the face of aviation in India, but as a business per se it got grounded. His foray into logistics with Deccan 360 also ran into trouble. Whether or not he can take off this time round remains to be seen.
Charities are in Crisisis the opening statement of a new book Driven by Purpose – Charities that make the difference. The authors Stephen Judd, Anne Robinson and Felicity Errington stress that it is not a crisis of money, professionalism or leadership but a crisis of identity. Judd et al look at the ways in which each charity should revisit its purpose to overcome any identity crisis.
But there is an even bigger issue to grapple with. There is only a limited understanding or recognition of where charities sit within the landscape of Australian society. As a society we cherish the work that they do and we want our charities to succeed but we need to figure out how they should be supported and regulated. Having 178 pieces of Federal, State and Territory legislation and 19 separate agencies determining charitable purpose does not begin to demonstrate the regulatory nightmare that some charities endure. It has become beyond ridiculous. Thankfully a better deal for Charities is about to begin and this reform is broadly supported by the Not-for-profit sector in Australia.
Today, the Government introduced the Australian Charities and Not-for-profits Commission (ACNC) Bill, the Consequential and Transitional Bill, and the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill to Parliament.
The importance of the ACNC as an independent, statutory regulator for the Not-for-profit sector cannot be understated. Without the ACNC we leave this important sector which is estimated to represent over 4% of GDP and 8% of the Australian workforce to an incoherent, costly, uncoordinated, complex regulatory regime in which the ATO has assumed the position of default regulator. It is therefore not surprising that Not-for-profits have been calling for an independent regulator like the ACNC for so long. These calls have been supported by no less than six major inquiries since 1995. All of these inquiries including the significant inquiry undertaken in 2010 by the Productivity Commission, Contribution of the Not-for-profit Sector, have unequivocally called for a ‘one-stop shop’ national regulator for the sector.
It’s not just the Not-for-profit sector that will benefit from the ACNC. While many of us roll our eyes as soon as we hear the words ‘regulatory reform’, we all have an interest in a stronger, more sustainable Not-for-profit sector. There would be very few of us not touched by the work of some 600,000 Not-for-profits that exist in Australia. Whether it is helping to organise meals on wheels, supporting grass roots sport or caring for our natural resources, Not-for-profits are often the glue that holds our communities together. Australians donate around $7 billion in money and $14.6 billion in time each year. The last thing we want is the good works of our charities and the army of volunteers who help them being held back by the current haphazard regulatory environment.
The ACNC Bill follows many months of consultation with Not-for-profits. This consultation resulted in a number of significant changes since the first draft was released in December 2011. This has also led to the Government delaying for 12 months to 1 July 2013, the introduction of the financial reporting and governance standards. A decision welcomed by the sector.
The 2010 National Compact between the Government and Not-for-profits committed both parties to working together on a shared vision to improve Australia’s social, cultural, civic, economic and environmental outcomes. This shared vision was based on an appreciation of the unique contribution that a strong and vibrant Not- for-profit sector makes to Australian society.
The Not-for-profit sector looks forward to continuing our engagement with Government on standards that strike the right balance between accountability and ensuring that we do not stifle the vibrancy and responsiveness of the sector. Australia needs a creative and productive Not-for-profit sector that can serve the Australian community into the future. I am confident the ACNC’s role of ‘light touch’ regulatory oversight combined with education and support will become profoundly important to underpinning civil society in Australia and then we will be in no doubt about the difference charities make.
Apple’s innovation model is being challenged in its patent spat with Samsung, even as its recent stock price climb made it the most valuable company in the U.S. Wharton legal studies and business ethics professor Kevin Werbach says the patent system in software and IT is “broken,” but the maker of the iconic iPhone, iPad and iPod devices has to keep innovating to stay ahead of competitors.
After a three-week trial in the U.S., the Apple-Samsung patent case went to jurors earlier this week, and a verdict is expected in the next few days. Apple has accused Samsung of copying its patented designs and software, and an adverse ruling for Samsung could result in a ban on some of its products in the U.S. In a countersuit, Samsung has also accused Apple of patent infringements. Today, a court in South Korea ruled that both companies violated each other’s patents, and ordered the firms to pay damages in addition to imposing a ban on sales of some of their products.
According to Werbach, the dispute raises bigger questions about innovation, competition and patents. The patent system has become “a competitive weapon rather than a means of fostering innovation,” he says. The devices, services and systems in the Internet ecosystem depend on other parts of the system, and build on established foundations, he adds. “If restrictive licensing and relentless patent warfare become endemic to the Internet economy, growth and innovation are bound to suffer.”
Many core technological innovations — such as the communication protocols that underlie the Internet and the Unix foundation for Apple’s OS X operating system — are available to anyone for free, thanks to the involvement of governments, academic institutions and far-sighted innovators, Werbach points out. “Vast amounts of money have been made on top of the innovations they gave away.”
Apple’s growing rivalry with Samsung seems understandable. Samsung has the largest share of the global smartphone market — 21.6% in this year’s second quarter, compared to 16.3% in the same quarter last year, according to research firm Gartner. Apple’s market share for its iPhone also grew in the same period — from 4.5% to 6.9%, which places it third in the sector, behind Nokia with 19.9% share.
However, Apple made history when its market capitalization crossed $623 billion on Monday. That makes it worth 17 times as much as Ford Motor Company, seven times as much as McDonald’s Corporation and 13 times as valuable as Facebook, according to a Los Angeles Times report. Microsoft had until now held the crown of being the most valuable U.S. company, based on a $621 billion market cap in 1999.
Werbach says he isn’t surprised about Apple’s valuation peak, although its continued dominance isn’t guaranteed. Market cap honors can be transient because they fluctuate based on investor expectations. Ultimately, innovation will remain the key for the company to stay ahead of its competitors. “Apple makes real things that people pay real money for, with consistently strong margins — which requires huge resources to compete against in a growing global market. That’s a good place to be.”
Posted by BT Opinion on Thursday, August 23rd 2012
Professor Peter Swan
The bribery scandal and apparent cover-up revealed in yesterday’s ABC’s 7:30 Report and The Age that is now engulfing the Governor of the Reserve Bank of Australia (RBA), Glenn Stevens, his former deputy, Rick Battellino, now retired, and the RBA Board had its origins in one of Australia’s great technology success stories. This was the invention of plastic (polymer) bank notes in the 1980s. Having successfully protected its property rights despite fears of reverse engineering by overseas note printing interests, the RBA and two offshoots, Note Printing Australia (NPA) and Securency International, involved in polymer note printing and marketing, have been accused of covering up the scandal that involved payment of large bribes (secret commissions) to politicians and officials in a number of Asian countries.
When senior RBA officials were given a detailed memo providing details of the bribery scandal as early as 2007, the matter was not taken to the Australian Federal Police and there seems to have been no public acknowledgement of the problem until press reports raised the issue about two years later.
Although this is the second major bribery scandal involving exports to foreign governments, the kick-backs on the sale of wheat to Saddam Hussein of Iraq by the Australian Wheat Board being the first, this appears to be the first that has sparked a major police investigation and large-scale prosecution of officials involved. Corrupt payment of bribes is illegal in Australia, even to foreign officials and politicians, even though it is an accepted part of doing business in many parts of the world. In fact, many would regard it as a necessary cost of doing business and way to promote Australia’s exports.
As is usually the case, the bribery and corruption pales into insignificance relative to punishment metered out to those who cover-up. Richard Nixon was forced to resign, not for hiring the ‘plumbers’ in the first place but rather for his failed cover-up attempt.
The involvement of the most senior officials of the RBA and possibly the Board in the cover-up, even if they were unaware of large-scale bribery prior to 2007 in the bank-note offshoots, is an exceedingly damaging development for an organisation that until recently has retained a reputation for integrity and exceptionally good monetary policy in recent years.
Join the club!
There is an ongoing investigation into the Bank of England’s oversight of the rigging of the LIBOR interbank rate by Barclays and other British banks at a time when the Bank of England was facing the prospect of further massive public bailouts of the banks. Mr Bob Diamond, Barclay’s CEO who was forced to resign because of the scandal, explained to a senior Bank of England official at the time that “not all banks were providing [LIBOR] quotes at the level that represented real transactions.”
By this he meant that a number of banks including Barclays were deliberately understating their borrowing costs to make it appear they were more solvent than they really were. Lack of response from Bank of England officials, who claim not to have interpreted the conversation in this light, was taken by Barclays as implicit acknowledgement and support by the Bank of England for LIBOR rigging.
In the case of the US Federal Reserve, lax monetary policy and their success in bringing the cash rate down to close to 1% after the bursting of the internet bubble and 9/11 has been blamed for exacerbating the credit crisis that led to the GFC. Certainly, FED oversight over the lead-up to the GFC and the US NINJA loans scandal was weak. It has only recently been revealed that RBA and other Australian regulators were almost equally lax in allowing Australian banks and mortgage providers to push huge numbers of ‘low-doc’ loans on impecunious investors who had little or no prospect of repaying. Banks and mortgage providers seem to have secretly filled out forms to make it appear that borrowers were in a far more financially sound position than they were in reality.
The plastic banknote bribery scandal and cover-up places the largely very distinguished business people making up the RBA Board in an exceedingly difficult position. Did they know of, or should they have known what was going on at the time of the presumably secret 2007 Memo or even earlier?
In the CENTRO case, the court found that non-executive directors cannot uncritically accept advice from either management or auditors. Directors must take ultimate responsibility for company affairs. Of course, unlike CENTRO, the RBA is not a listed company with shareholders. It is the Federal Treasurer and Government that appoints directors to the RBA Board and thus should play an important role in its oversight. The Treasurer also appoints the Governor of the RBA. I should imagine that the Governor is accountable to the Treasurer, the Government, and perhaps ultimately to Parliament.
It is tragic that the scandal and apparent cover-up has damaged the reputation of the Governor, senior officials, board members and the RBA as a whole, despite the high regard for its conduct of monetary policy. The best we can hope for now is a quick end to the cover-up, if there really was one, and a speedy resolution of this very sordid affair. The successful setting of monetary policy is very much dependent on the reputation of the RBA. This needs to be repaired as quickly as possible.
Professor Peter Swan is the Professor of Finance at the Australian School of Business. This article first appeared in the Australian Financial Review.
Shareholder activism has never really taken hold in India. Annual general meetings have been occasions for praising the chairman and the company management, asking for higher dividends, having tea and going home. But ever since an analyst at Kotak Securities started the unraveling of Satyam Computers by questioning why the company was keeping US$550 million in current accounts, equity research firms and foreign investors have begun taking on the role of defenders of the lay investor.
In March of this year, it was U.K.-based The Children’s Investment Fund Management — an investor in Coal India Ltd — which threatened to sue the company’s management for giving in to the Indian government’s demands on coal pricing and, in the process, ignoring the interests of its own shareholders. Then it was the equities research arm of Australian bank Macquarie questioning the accounting policies of HDFC, India’s largest housing finance company and one of the most respected firms in the country. Now, it is a report by Veritas Investment Research of Canada that has created quite a storm.
The latest Veritas target is the Gurgaon-based Indiabulls Group. In a report titled “Bilking India,” dated August 1 but released later, the research firm contended that Indiabulls management had thrown corporate governance to the wind to enrich a select group of shareholders. “We believe that disclosures at Indiabulls Real Estate Ltd (IBREL) and Indiabulls Power Ltd are unreliable and that the sole purpose of IBREL is to bilk institutional and retail investors for the benefit of select insiders,” says the report. “The controlling shareholders are running the organization as a piggybank, while proclaiming propriety and espousing credibility.” The report warns Indian financial institutions that lend to the group to “watch out” and advises investors to “sell all Indiabulls Group stocks.”
In June, Veritas had come out with another report — titled “A House of Cards” — questioning the accounting policies of Reliance Communications (RCom). RCom management responded by saying that the report was “sensational” and reflected Veritas’ complete lack of understanding of RCom’s assets and businesses. “Veritas is systematically working to destroy confidence in Indian capital markets through sensationalist reports,” said RCom.
The Indiabulls management has gone beyond a mere verbal denial. It has issued full-page advertisements in the newspapers giving its side of the picture. It has disputed the numbers and the analysis. “The heavy bias for creating sensationalism for personal profiteering is the reason [for the report],” alleges the company. The firm has filed a police complaint against the Veritas analysts. The police, in turn, have issued summons to the Canada-based analysts for a personal appearance. Indiabulls has produced emails which are claimed to show that Veritas asked for money to delay publication of the report.
Nothing is likely to happen to Veritas, however; the law in India moves very slowly. But Indiabulls Group shares have plunged on the stockmarkets. Indiabulls Financial Services, for instance, is down to Rs. 190 (around US$3.40) from its 52-week high of Rs. 267 (US$4.60). Meanwhile, Morgan Stanley Singapore bought 10.1 million shares of Indiabulls Infrastructure & Power at the height of the controversy. The purchase was made at Rs. 6.17 per share. It is now quoted at Rs. 5
Posted by BT Opinion on Thursday, August 16th 2012
Michael Peters
With the bank reporting season in full swing, perhaps the federal government should recommend legislation that would increase banking competition.
There has not been a greater failure of competition policy than in this sector. Both sides of the political spectrum talk about competition, however both appear to be hesitant to actually take the hard decisions.
It’s a credit to the sector to have such vibrant banks in a world littered with insolvent banks, post-GFC. However the success and the essential role played by the sector should not make it immune from competition policy – for example the recent move to create some portability of home loans and to regulate credit terms have had very little impact.
The Senate inquiry heard submissions that made it clear that Australia should not expect a return to the relatively benign credit environment that prevailed before the crisis.
The success and the essential role played by the sector should not make it immune from competition policy. The ‘too big to fail’ reason should not be the default position of any policy. Supervision of the sector should have a common objective: a viable, efficient and accessible banking sector. The Senate inquiry is an opportunity to tell us more than we know. It is a unique chance to put into place a road map towards competition we can all bank on.
As business owners will readily tell you, the cost and terms of credit are skewed by the structure rather than the dynamics of any market. With the introduction of Basel III, the mutual banking sector will once again be overshadowed by rules and regulation which are increasingly having a less than positive effect on competition within the sector.
Michael Peters is a Lecturer in Business Law and Taxation at the Australian School of Business.
Posted by BT Opinion on Wednesday, August 15th 2012
Professor Fariborz Moshirian
Tensions remain in Europe as details of exactly how the European Central Bank will stabilise the bloc’s bond markets, now there are possible plans for a new wave of bond purchases aimed at helping to calm the euro zone’s turmoil, and optimism the European Central Bank (ECB) will provide more help to euro zone nations under pressure from the markets.
For the euro, the biggest uncertainty is whether the debt-laden governments of Spain and Italy will take up the ECB’s hinted offer that they seek financial aid from European bailout funds as a precondition for the ECB buying their bonds. Such assistance would likely come with strict controls over fiscal and economic policy.
For the euro zone to find its way through this crisis, any intervention in the bond markets needs to be combined with a bolder overhaul of the system itself. However investors are so worried that the slightest sign of a problem means they rush into safe-haven assets. Right now the EU needs a detailed plan to build a banking union and to mutualise some debt.
The markets are however very nervous. There are still many challenges facing Greece and Spain. The ECB has so far not taken enough action to stabilise the bond markets, and details of how it will do this and how effective it will be remain unclear. There are ongoing concerns about the potential for opposition from Germany – the euro zone’s largest country and paymaster – to any large-scale bond-buying program.
Professor Fariborz Moshirian is the Director of the Institute of Global Finance at the Australian School of Business.
Jon Huntsman, Jr., the former candidate for the Republican presidential nomination, says the ongoing European financial crisis is “deeper than we fully realize” and that no solution will work without injecting economic growth into the continent. He made the comments in an interview with Knowledge@Wharton during the recent Wharton Global Alumni Forum in Jakarta. Huntsman also discusses lessons from the Asian financial crisis that might apply to Europe and his concerns about slow economic growth in the global economy. An edited transcript of the interview appears below.
Knowledge@Wharton: How optimistic are you about the European business environment today, as compared to a year ago?
Jon Huntsman, Jr.: I’m not at all optimistic. I think it’s a lot deeper than we fully realize. You’ve got sovereign debt problems that are on top of traditional banking problems, that are on top of serious growth problems. And you’re not going to solve the former two until you figure out how to grow. And growth is not going to occur until such time as governments promulgate some pro-growth policies, which are a ways off.
So I would say this year probably is as bleak as we’ve seen in a very long time. But we’re going to have to figure out how deep the crisis is, and whether it’s Greece, or Greece and Spain, Spain and Italy, the third- and fourth-largest economies of the eurozone — whether or not that impacts France, for example. What, in other words, the metastasis is ultimately. But I think we’re a long way off from being able to make any real sense of it.
Knowledge@Wharton: You mention growth policies. Is that as opposed to the austerity policies that are going on now? How would you change the policies that are largely in effect right now?
Huntsman: I think there has to be a sense of predictability going forward, from a regulatory standpoint, from a tax policy standpoint, and from an over the long-term austerity standpoint. It’s one thing to have a certain out-of-kilter, debt-to-GDP ratio. But beyond that, what is your investment regime going to look like? Is it going to stay consistent and bankable, investable, for more than just a year? I think all these things are going to be terribly important to the investor community going forward. And with the unpredictable nature of where some of the economies are in the Eurozone, getting any of those longer term policies in place that will really give the sense of confidence to the investor community really is almost impossible.
Knowledge@Wharton: So those are longer-term fixes that you think are necessary for a sound, fundamental change. But there’s also a critical short-term problem. Are there any specific policies or changes in policy that you would recommend to help in, let’s say, the next six to 18 months?
Huntsman: How do you stimulate investment? You stimulate investment by creating an economy that is conducive to investment. Capital’s a coward, let’s face it. It’s going to flee wherever it perceives there to be risk in the marketplace and find a safe haven. So how do you make your economy a safe haven? It’s generally done by tax policy, by investment regimes that are improved, either through transparency or trade and investment facilitation measures. So all of those are things that can be looked at and implemented. But again, the market is going to say, “That may be a quick fix, and it may be something that I can’t bank on longer term.” I think that really is the problem in the eurozone right now — how do you promote enough in the way of confidence in your longer-term policy-making so that it isn’t one regime overtaken by another a year or two from now that will come in with completely different policies. That’s the fix that they’re in.
Knowledge@Wharton: Even if you were able to have a strong pro-investment policy, and even if there were confidence that it was going to be there in the medium and long term, would businesses still invest, given the lack of demand on the part of consumers that is the case right now?
Huntsman: That’s another side of the equation, the whole demand side of the economy, and the high levels of unemployment, and the missed opportunities on the human capital side. So it’s a serious, serious set of circumstances right now. I think we’re years away from any kind of settling out or ultimately calming effect that would provide enough in the way of confidence and longer-term policy-making transparency, where investment is going to be attractive in any serious way.
Knowledge@Wharton: What features of the current crisis in Europe concern you the most right now?
Huntsman: I’d have to say the high levels of unemployment and the displacement on the social side. Because that leads to what I would consider to be unpredictable outcomes in terms of social unrest. It’s one thing to deal with the economic side numbers that just aren’t looking good. It’s another to look at the social implications of high unemployment like we’re seeing in Greece and Spain, and the unrest that this could very well trigger.
Knowledge@Wharton: Many people probably don’t realize that in Spain and Greece the unemployment rate is (around) 25% — around the levels that the U.S. saw during the Great Depression, and for youth unemployment, it’s above 50%. If you were in charge, is there anything you would do directly policy-wise to attack those specific problems?
Huntsman: Far be it for me to advocate anything in Europe beyond which they’re already looking at. But clearly, you’ve got to attack debt. You’ve got to figure out how to get your debt-to-GDP into some sort of manageable number that speaks to longer-term confidence. Then you’ve got to attract investment. You’ve got to have seed corn with which to build your economic base and change the fundamentals, and put people back to work. Investment isn’t coming in until there’s a clearer picture of where the economies are going longer term. Again, that gets right back to debt. With a higher debt-to-GDP ratio, the longer-term outlook is very, very bleak. So I think I would attack the debt side first, knowing full well that that could boost a little bit in the way of longer-term confidence, bringing in investment that could ultimately settle out the unemployment problem.
Knowledge@Wharton: Isn’t that what they’ve been doing? Decision-makers in Europe have advocated debt reduction, austerity and reducing budget deficits, which has made unemployment worse. Is there some way to avoid the short-term spikes in unemployment?
Huntsman: I think you’ve got a broader architectural overlay that is altogether problematic that we aren’t talking about. And that is: What about the eurozone? What about the fiscal and monetary union? What about the euro? These are all issues beyond the individual economies that have to do with the regional architecture, that have got to be resolved. And many say today, “Well, it was a failed start.” It’s okay to call it a failed start today, but what do you do about it?
So before you really start drilling down on the individual member states and some of their problems, you’ve got to deal with the problem of Europe and what it means to be managed economically within a common market or a common framework that doesn’t seem to be working out so well. So who do you call? Do you call Brussels? Do you call the nation’s capital that you have queries about? You’ve got the overlay of 27 countries in the EU, to say nothing of the 17-member eurozone, that each has bureaucrats in Brussels that handle the various aspects of economic trade and foreign policy. So it’s a top-heavy system. It’s really difficult to talk about how you bring back to life an individual nation-state when you’ve got this architectural overlay that really is failing the region in a very serious way.
Knowledge@Wharton: One of the solutions that seems to be talked about very broadly is this idea of sharing fiscal responsibility, spreading it out, approaching it as more of a whole rather than in individual parts. What do you think of fiscal union?
Huntsman: Well, to have a successful fiscal union, like the United States has a fiscal union, you have to have labor mobility, just to begin the conversation. I don’t think Europe has anywhere near the labor mobility that you need to make it work. You’ve got to have some recognition that the wealthier states are willing to somehow subsidize the weaker states. We do in the United States without really calling it that. But that’s kind of how our system of subsidies out of Washington, taxation to Washington, and then payments back to the states really works.
Knowledge@Wharton: So in your opinion, for Europe to work, they should be doing that?
Huntsman: Absolutely. And in order for all of this to work, you’ve got to have a stronger political union to back everything up. It’s as if you had a couple going out to be married, not yet finalized, yet you take out a joint checking account and you begin transacting business with all the uncertainty that this then entails. You can only go so far with a fiscal and monetary union without a strong political union to provide the cohesiveness. And that’s where the cart has been put before the horse, so to speak.
And I’m not sure, longer term, that a political union, the kind that would be necessary in terms of the innate inherent cohesiveness, is going to be there to support an economic or a fiscal union longer term.
Knowledge@Wharton: If they don’t have the cooperation to achieve that, does that mean that the alternative is some kind of a two-tier system? You would end up with a two-speed system where largely northern Europe economies and maybe the periphery operate as a separate unit. Does it seem that you either go more towards this fiscal union, towards more cooperation, or you’re going to end up being forced apart?
Huntsman: I think that’s exactly right. And I’m not sure that a 70-year experiment — let’s just take it from post-World War II, from the Bretton Woods period right through to the accords of the early 1990s, the Maastricht Treaty, and then take that through to today — I’m not sure that the leaders of Europe are going to easily dismiss what has been the most important experiment economically and politically in Europe since World War II, and maybe in 100 or 200 years.
I think they will endeavor to make it work so that you don’t end up with a two-tiered system. I think that’s terribly problematic from a currency standpoint and from a trade and investment standpoint. But then they’re going to have to deal with Greece. And in order to deal with Greece, so that they don’t fall out of the eurozone, someone’s going to have to back-stop the numbers. And there’s only one country that can do that — Germany.
And then, in Germany, you have to conclude that what is an economic problem for most others becomes a political problem for Angela Merkel. She can’t very well make the sale on the streets of Berlin when they say, “Well, gee, in 2000, we were the problem economy, and we did what was needed to be done in the interim in terms of austerity, in terms of getting our balances back in working order. And you want us to do what? You want us to subsidize those who aren’t willing to step up and embrace those difficult measures that are needed, as we did?” That becomes politically untenable. And so that’s kind of where we find ourselves today [with] an economic problem that fundamentally becomes a political problem for Germany, and a relative stalemate. The European Central Bank is trying to create a wall, a backstop, to the best of its ability, with certain member states playing a supporting role to insure that, trying to keep contagion from breaking out.
Knowledge@Wharton: Asia suffered a financial meltdown in the late 1990s and took certain measures to recover, relatively speaking, fairly quickly. Are there lesson from the Asian financial crisis that are relevant to Europe’s current economic woes?
Huntsman: Maybe some. The Asian crisis was followed by some serious austerity and getting their balances back in working order — very aggressively, I might add, to the point where, for example, the South Koreans were very angry at the IMF and the United States for the tough medicine that they advocated. But they got through it.
They probably got through it better because, relatively speaking, many affected were smaller economies. They’re also newer economies. They didn’t have as much drag in their systems as you find over in Europe. It’s also a more buoyant region in terms of inter-Asian trade and investment flows. So to some extent, I think you could say they had imbalances. They addressed the imbalances. They took some really tough steps that were advocated by the IMF, the United States and others. And they got back in the game. But there were also some factors that would have made them a different set of circumstances in Europe.
Knowledge@Wharton: Probably the biggest being the fact that they could devalue their currency, which Greece cannot. For example, Thailand, which actually kicked off that crisis and probably suffered some of the worst effects — devalued by about 80% against the dollar. There’s Greece, stuck, unable to do that.
Huntsman: Ramping up exports is a way of getting back on their feet again.
Knowledge@Wharton: China and India both helped to prevent the global financial crisis from becoming much worse. Now both are slowing down. So on top of the crisis in the eurozone, things seem to be going in a negative direction in a lot of regions. What do you see for the next year or so in the global economy, given where the momentum’s heading?
Huntsman: Well, you have to ask yourself the question, “Where are the engines of growth?” The global economy has had, in recent years, some reliable engines of growth to pull those economies that were performing at lesser levels along. But you’re hard pressed to see any engines of growth today. China will remain reasonably strong. They may not put in an 8% number or a 9%, but certainly probably a 7% or 7%-plus number, which is way down historically from where they’ve been over the last 30 years. India’s down probably by a factor of 30% to 40% in terms of their own growth numbers.
So where are the engines of growth? And I think that’s bad news for the global economy. You may get by with 1.5%, maybe 2% [global economic growth] if you’re lucky, waiting for the traditional engines of growth to re-fire themselves and get moving again. But I think the next year or two are going to be very tough for the global economy. I think that a lot of it will depend on how quickly the United States gets back in the game.
Knowledge@Wharton: Not that the folks in Western economies are in a good position to give advice to Asia, but if you were going to suggest some policy changes for Asia, let’s say for China or India, what might they do?
Huntsman: I would say streamline investment regimes, introduce greater transparency into the system, open financial services markets, insurance markets, do a better job protecting intellectual property rights, and quit manipulating your currency to the extent that you do.
These are all probably steps that would enhance the prospects of both countries, China and India, longer- term. They’re hard to do, particularly during periods of uncertainty, when your export markets are less reliant today than they were just a few short months ago, even. You’re going to think inward. And you’re going to resort more to protectionist measures. You’re going to be more inclined to manipulate your currency and to keep closed some of those markets that, even under WTO agreements, you agreed to open at some point. So we’re at an important time in terms of whether or not some of the newer emerging economies are really willing to step up and show their commitment to growth and to reform and to economic openness.
Knowledge@Wharton: So one might expect you can look forward probably to increasing trade frictions as a result of the slowing global economy in general?
Huntsman: That generally follows.
Knowledge@Wharton: And what do you think the odds are that China will try to rebalance its economy somewhat, as many people say is the way for them to get to the next level, to a more consumer-oriented economy, as opposed to export-led?
Huntsman: Well, the evidence is there that they’re in that transition, to some degree. When they announce stimulus measures as they did about three weeks ago to incentivize consumers to buy more in the way of household appliances, televisions, big screens, consumer goods you know they’re taking this transition seriously. And they have to, because the math just doesn’t work for them any other way. You can’t maintain their current trajectory as just an export power and expect to deal with the demographic changes that lie on the horizon.
When you’ve got more people leaving the workforce than you have entering the workforce, your costs are going to increase. And labor rates, indeed, in the southern manufacturing zones around Guangdong and beyond were seeing prices escalate. I think that’s because of the upside-down demographics that China is just on the front end of experiencing. So you’ve got longer-term four grandparents, two parents, one wage earner. You’ve got an upside-down pyramid, essentially. How do you make the numbers work longer term? And how do you deal with health care costs and Social Security costs, and affordable housing costs when you’ve got real estate bubbles every now and again? They want certainty, which is tough to achieve once you’ve started that transition from an export-led economy to more of a consumption economy. But they’ve taken that risk.
Knowledge@Wharton: It sounds as if you see them as having a reasonable amount of flexibility, which maybe wasn’t there a couple of years ago.
Huntsman: Flexibility is driven by necessity, because they can’t go back to their old form of managing the economy and expect to survive longer-term. They’re in uncharted territory right now. But that’s also by necessity.
