Professor Chris Styles

A great deal will be written about leadership this week. But little of it will be about real leadership.  This is a pity given the significant challenges and opportunities Australia faces.

What has gone wrong?

When we talk about leadership and provide examples of great leaders, we often refer to some of history’s great political leaders. Whether they like it or not, politicians are seen as role models in many facets of life, including leadership.

At the moment public perceptions of our political leaders are at a low ebb.   Irrespective of where they stand on policy issues, not many people would describe them as ‘authentic leaders’, a phrase coined by Professor Bill George of Harvard Business School. Being genuine, having a clear set of values which you put into practice, and forming a deep set of enduring relationships, are all part of authenticity.  It leads to trust and confidence.

Unfortunately there is a public perception of our current crop of politicians that they regard being a leader as the end-game in itself, rather than becoming a leader to have real impact on the community. If this is our central belief, then any policy position is seen as self-serving rather than to advance the nation. This makes it hard to bring others along with them, a critical aspect of leadership. 

This is a great lesson for leaders in all walks of life.  Success is more likely to come to those who are seen as wanting to use their leadership to achieve broader goals than just their own; who communicate – good news and bad news – in ways that we can believe; whose actions support the values they espouse; and who can admit when they get it wrong or don’t know the answer.   And who have demonstrable impact.

The media in all its forms surrounds us.  Words, phrases pictures and videos spread like wildfire.  This has many leaders worried, and has resulted in large contingents of minders and public relations machines ‘protecting’ our leaders, whether in politics or business.  While it’s important to ensure the right (and true) message is communicated to stakeholders, this should not get in the way of leaders being – and being perceived to be – genuine. 

We often hear journalists say that a particular politician is nothing like the way they come across in the media.  If nothing else, we should learn from our politicians that the first casualty of spin is authenticity.  And that weakens the ability to lead.  Leading a political party, a country or large corporation is hard enough.

It’s not a bad thing for leaders to remind themselves – and have others remind them – why they are there and how they got to the position they occupy.   They would also do well to make it clear to those doing the messaging that they should be portrayed as they are, rather than as an ideal made for media personality. Employees, customers, shareholders and voters are more likely to believe, follow and forgive the genuine article.

There are also important implications for how we develop, and indeed select, leaders. Whether through coaching, mentoring or more formal development programs, those identified as potential leaders need to be made aware of what counts, and then be rewarded for delivering.   Those in senior leadership positions also have a responsibility need to role model the right behaviour.

Given critical issues in education, productivity and indigenous issues, to name a few, that we face, let’s hope the debate turns to real leadership sooner rather than later.  

Chris Styles is the Deputy Dean and Director of the Australian Graduate School of Management.

Dale Boccabella

A proposed new way of treating tax losses may have unintended consequences, which could have a serious impact on the public purse.

The potential damage to the integrity of the system of income tax, and the damage to the public’s confidence in the tax system are significant. The new proposal to allow “unlimited trafficking in tax losses”, which is in effect permitting the tax-payer to move their tax loss where they like, is the equivalent of allowing people to purchase their way out of a tax liability. This is bad policy, and could give rise to considerable abuse of the system.

I have made a submission to the federal government’s Business Tax Working Group which is currently examining ways of improving the treatment of tax losses.

The Business Tax Working Group was established at the tax forum back in October 2011. The consultation paper issued by the Business Tax Working Group is currently considering a range of options to improve the tax treatment of business losses, including carry-back of losses to previous years so taxpayers obtain a refund of previous taxes, and indexing the amount of losses so that the real value is maintained under the present carry-forward model.

Various options are being considered: the most controversial one is to remove the current limitations on the ability to effectively transfer tax losses housed in trusts and companies to new purchasers of equity. In effect people would be able to move around the tax losses. The loss to public revenue would also be significant, and if implemented it is likely to be abused.

At the moment, the circumstances where the tax law does tolerate trafficking in tax losses are very limited, for instance where a company continues to operate the same business after a change in ownership. The unlimited trafficking option canvassed by the Business Tax Working Group would go well beyond this, and while some companies may welcome it, taxpayers in general certainly would not.

Of course, because of the downsides, the option may not be implemented, at least in the short-term.  On the other hand, many “reforms” find their way into our tax law even though they look bad against a number of tax policy criteria.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business.

Tim Harcourt

When South Africa emerged from the apartheid era in the mid-1990s it was a common plea for the world not to forget Africa simply because the apartheid battle had been seen to be won.

Back then, “not forgetting Africa” had an international aid connotation, strongly associated with events such as Sir Bob Geldof’s Live Aid concerts of 1985.

The inference was that these type of events, and aid programs, were the main way in which the west might interact with the African continent.

Fortunately, this post-colonial and slightly patronizing view is proving completely outmoded.

In 2012, sub-Saharan Africa is rapidly coming of age as an economic region and as an investment destination. The so-called “frontier” markets of today’s Africa will be the emerging markets of tomorrow.

According to the IMF, over the next five years seven economies in Sub-Saharan Africa are expected to be among the top ten economies measured by economic growth. In 2011 the Democratic Republic of the Congo grew by 6.5%, Zambia by 6.8%, Nigeria by 6.8%, Mozambique by 7.5%, Ethiopia by 8.5%, and Ghana by 13.7%.

In Australia, we are already understanding what this means, and the opportunity this presents. Perth is full of mining companies – around 20 or so – which are listed on the Australian Securities Exchange but have the majority of their operations in Africa.

There are around 200 Australian mining companies with operations in Africa, and they’re involved in projects worth in excess of A$45 billion. 

Outside of mining, there are 4000 or more Australian companies exporting to Africa.

There has been an estimated doubling of Australian companies doing business in Africa over the last five years. Australia has a strong presence in infrastructure professional services and education.

Australia’s involvement in Africa even extends to event management: the screens and associated attractions on the Cape Town waterfront during the 2010 FIFA World Cup were managed by an Australian entrepreneur.

As a young ACTU official working for our South African counterpart, COSATU, I remember attending a summit on Indian Ocean economic co-operation back in 1995, just after South Africa was welcomed back into the international fold.

It seemed all very idealistic, but not particularly real back then, to imagine the Indian Ocean as something that could unite, rather than divide, the people and economies of Africa and Australia.

But more than 15 years on, so much has happened and changed. There has been a strong flow of information, people, and money across the Indian Ocean. Its no longer a barrier, it’s a connection. Two-way trade is nudging A$5 million, and has been on an upward trajectory for some years.

At the heart of all this are people, and Australia has a particular affinity with South African people, from all races. As immigrant societies, many South Africans and Australia share family ties and South Africans are becoming an influential immigrant group in Australia. Both countries are small open economies, geographically isolated from major world markets, with large export-oriented resource sectors.

Both also love their sport, and the cricket and rugby rivalry between the two nations is famous, and has created some epic encounters. Less well known, perhaps, are the inroads the Australian Football League – the AFL – is making in Africa. This year, a Sudanese born player, Majak Daw, despite some off field dramas, could potentially make his debut with the North Melbourne.

Meanwhile, on the other side of the continent, the Fremantle Dockers have a fostered a development zone for young players North West of Pretoria. The number of AFL players in South Africa has gone from 2500 in 2006 to around 7000 today.  And it’s a two way street: a number of South African companies have even been Fremantle Docker corporate sponsors.

It all augurs well for the future, both for Africa and Australia. Austrade, the Federal Government’s trade agency, has recently expanded its African network by opening offices in Ghana and Kenya.

Sub-Saharan Africa has a number of key competitive advantages. It is predicted to have the youngest population in the world by 2050, the most arable land, and enjoy the world’s richest mineral and energy deposits. Africa is forecast to emerge as the fastest-growing region in the world over the next twenty years.

Australia’s current prosperity is due largely to its resources boom. By mid-century, that boom may well have extended to Africa, and be driving a huge wave of supplementary development, raising living and education standards throughout the continent.

Far from “forgetting Africa,” the continent will be looming large on the global investment radar in the coming decades. And if we can keep economies open for multi-lateral investment, this presents an opportunity for everyone.

Tim Harcourt is the J.W.Nevile Fellow in Economics at the Australian School of Business, UNSW and author of The Airport Economist.

Professor Fariborz Moshirian

The ongoing financial turmoil in Europe has led the IMF and the World Bank to downgrade the global economic growth outlook for 2012.  The financial market expected a much faster resolution to the sovereign debt crisis in Europe.

The currency crisis of 1992 in Europe led to the breakdown of the European Monetary System. However, when the financial markets sold off weak currencies such as the Italian lire and the French Franc, European leaders decided to come up with a Monetary Union with one single currency and one interest rate as a way of protecting themselves against ongoing currency volatility. While the Euro zone agreed to fiscal discipline with the debt to GDP ratio of 60 and a deficit to GDP of 3 percent, there was no monitoring system in place to enforce the fiscal rules amongst the Euro-zone member countries.

The current sovereign debt crisis provides a unique opportunity for the Euro zone to forge ahead with the process of fiscal union. Given the political nature of the Euro zone, bad news from the market is often an impetus for national leaders to justify actions to their electorate and pursue policies that promote fiscal union.  While the Euro zone has a long way to go, one cannot underestimate the progress made so far in bringing the Euro zone and indeed the European Union closer together.  Given the rise of 800 million middle income consumers in Asia, the European Union could either become more integrated and create a formidable block to compete against the US and Asia or return to a nationally based system that could make it difficult for each of the current member countries of the European Union to compete against Asia, the US and others in the 21st century.

The current European Financial Stability Fund with a lending capacity of up to €440  does not allow them to potentially rescue Italy and Spain, should these countries’ sovereign debt crises intensify.  Therefore, the IMF has decided to increase its financial firepower by $500 billion, as the existence of a global fund with the capacity of one trillion dollars could contribute to the stability of the global banking system. 

Countries such as China and Russia may now contribute more to the IMF’s stability fund, as financial uncertainty and a possible recession in Europe will affect the economic prosperity of emerging countries.

Furthermore, European banks have to increase their capital to asset ratio in order to assure the market that they can withstand the onslaught of the market, should more funds leave the Euro zone and less business activities be undertaken by European banks in US dollars. One of the Strategies adopted by banks to increase their capital to asset ratio is to reduce their lending activities. This in turn could further slow down the economic activity of the Euro zone. In  the meantime, Japanese banks are interested in increasing their ownership of European banks. This may well assist the European banks to improve their balance sheets and address their challenges of meeting the new capital to asset ratio requirements by June 2012.

At the same time, as austerity measures in Europe slow down the economic activities of the Euro zone this will reduce demand for borrowing from European banks.

As a result of the sovereign debt crisis investors an the money market reduced the amount of funds lent to European banks. The European Central Bank ( ECB)  has responded to this major liquidity challenge by allowing banks access to a three-year refinancing operation. This has eased the liquidity challenges within the Euro zone banking system to the extent that it appears that banks are now active in purchasing new bonds issued by Euro zone member countries.

Whether decoupling of the Asian economy from Europe and the US could take place is a matter of wait and see. However, Asian countries, including China, are developing their domestic  market capacity for a large share of demand and less reliance on their export market. This policy, coupled with the massive increase in foreign capital flowing into China and other emerging countries could ensure sustained economic growth in emerging countries in 2012, despite the negative economic outlook predicted by the World Bank and the IMF.  An increase in investors’ interest in buying emerging countries’ bonds and other assets may well increase economic activities in these countries regardless of the ongoing financial turmoil in Europe.

China’s economic growth was less in 2011 compared to 2010. However, this is mainly a deliberate policy to cool off the real estate bubble and contain inflation. With China’s policy for social housing which is designed to create a large number of cheap houses for more than 80 million people in China, the demand for iron ore and other resources from Australia will continue to grow in the medium term. It appears that while the European financial turmoil could have a negative impact on the Australian economy in 2012, as long as China and India’s domestic demand keeps growing, Australia’s economy will be less vulnerable to the financial events in Europe.

Professor Fariborz Moshirian is the Director of the Institute of Global Finance at the Australian School of Business.

This article first appeared in CFO Magazine, February 2012.

Professor Chris Styles

Workplace Relations Minister Bill Shorten’s comments yesterday that managers need to do more to improve employee engagement shines the light on the current productivity debate on the quality of management and leadership in Australia. Is he right and what should be done about it?

Firstly, there is no doubt that Australia’s productivity is not at the level it should be, particularly when compared to other OECD countries.  The 2009 report Management Matters – How productive are we, completed for Department of Innovation, Industry, Science and Research concluded that one of the causes of our lagging productivity was that while some of our organisations stack up well with the best internationally, there are too many that don’t perform well at all, particularly when it comes to managing people. 

Getting people, processes and systems to work productively is a challenge and the responsibility of everyone in an organisation, but in particular those in managerial positions.  Creating, encouraging and reinforcing the right environment within an organisation drives innovation and, in turn, its productivity.  More productive organisations obviously result in a more competitive Australia.

However getting people, processes and systems to work productively is a lot harder than it sounds and while there are some proven principles, there is much to be discovered.    This has profound implications for the way we develop managers.   We not only need to draw on what research tells us works, but also instil a mindset of constantly finding new and better ways.   In the same way we emphasise innovation with respect to products and services, we also need a focus on innovation in business models and management practices.

As part of this, the debate in Australia would do well to go beyond “employers vs. employees”. Indeed the distinction between the two is rather blurred. Is not someone in a managerial position also an “employee”?  Anna Booth from the ACTU has a point when she says the current IR system is entrenching a ‘Unions vs. Management’ mentality.

We also need to think through what forms of organisation are needed now and may emerge in the future to meet customer demands.  Then taking into consideration the changing needs and aspirations of the workforce, we need create and develop the most productive models of management.  There isn’t – and won’t be – just one right answer.  

This leads on to the kinds of skills, attributes and knowledge needed by managers. Acquiring and developing these will be the result of experience, experimentation, coaching and structured learning experiences.  Getting this right will require dialogue between organisations, business schools, unions and government as to how to equip current and future managers with the mindset and tools they need. If ever there was a time for collaboration, it is now.

Chris Styles is the Deputy Dean and Director of the Australian Graduate School of Management.

This article first appeared in the Australian Financial Review, 14 February 2012.

Professor Fariborz Moshirian

It is clear problems in the euro-zone are causing upwards pressure on mortgage rates, and the latest report from the International Monetary Fund (IMF), warns economic growth could slide as a result of satisfying the Basel III banking rules. The current economic turmoil in Europe is causing the costs of borrowing to escalate around the world.

The Greek vote on austerity measures is welcome, and it appears that the Greeks are attempting to get their house in order: I certiainly have sympathy for the Greek people who are facing a number of challenges.

If the situation in Euro zone improves in the next few months – particularly if the European Leaders could contain the financial challenges in Portugal and then implement the Fiscal Compact – then the cost of wholesale funds may well improve later on this year. This will be good news to home buyers, however at the moment all lenders are seeing higher costs as banks become very wary of risk.

On Friday the ANZ and Westpac raised mortgage rates. If the Reserve Bank had cut rates it would certainly have helped matters, and all eyes must be on the next RBA meeting.

The ongoing European financial crisis is blamed in a working paper released by the International Monetary Fund, which indicates that there is currently a lot of pressure on Australian banks’ capital. The IMF says this is likely to tighten lending, and therefore Australia is likely to see a decline in growth, unless the RBA cuts interest rates to allow banks to offset the costs of meeting the stricter capital requirements.

It is import to treat the IMF findings with caution. Financial innovation and fierce international competition are likely to limit the extent to which stricter capital rules are likely to crimp credit growth. The IMF has downgraded growth forecasts for Australia, with the revised IMF estimates predicting 3% growth for the Australian economy. This is now more consistent with the recently revised RBA forecasts of 3.5% annual growth. The IMF recommends that monetary policy should continue to support economic growth, as long as inflation expectations remain anchored and unemployment stays low. However there are many more challenges.

The IMF adds risks to stability have increased but Australian banks were equipped to withstand “sizable shocks” in the mortgage market. However, the paper said a potential global downturn could necessitate more capital, even though the Australian Prudential Regulation Authority (APRA) has already set benchmarks for Australian banks to meet Basel III liquidity standards ahead of the global deadline, and APRA is considered one of the world’s tougher prudential regulators.

We should unfortunately expect more volatile times ahead; both for countries within the eurozone and for countries like Australia, where the stock market rises and falls because of concerns about the global economy. We may think down under we are insulated from the euro’s problems – but we are not.

Professor Fariborz Moshirian is the Director of the Institute of Global Finance at the Australian School of Business.

Tim Harcourt

Valentine’s Day is here again. A day for romance, a day for lovers, a day for husbands and boyfriends rushing to flower shops at the last minute before getting home. And with all great traditions of course, there is a commercial side to it. No doubt, stockers of lingerie, chocolatiers will be in for a big day as well as the almighty florist.

Whilst it is a big day domestically, Australia will be doing well export-wise as well. If we take the big three – flowers, lingerie and chocolates – we can see some interesting trends.

In terms of cut flowers (for bouquets and floral decorations) Australia exported over $13 million last year. Our major markets are The Netherlands (surely not tulips!), Japan, USA, Germany and Switzerland Australia’s unique flora (as well as our fauna) is an important part of the Australian brand.

In terms of lingerie, Australia is having something of an underwear export revolution thanks to the great female lingerie brands and some men’s ones as well. But the exports of women’s lingerie still beats the pants off the men’s category in terms of volumes. Total exports of women’s lingerie were worth around $9.7 million in 2010 with major destinations spreading from New Zealand, UK, Singapore, United Arab Emirates (UAE), Hong Kong and Singapore although we have slipped in terms of our exports to France (oh la la!). Whilst, we all know about the celebrity brands such as Kylie Minogue’s Love Kylie and Elle MacPherson’s intimates – there are a number of other female entrepreneurs stripping down the competition in the lingerie game. Successful lingerie brands such as Pleasure State, Bulb, and Lusty Threads are all run by women such as Kay Cohen (from Pleasure State) and Julie Lantry (from Bulb).

Finally, chocoholics will be pleased to know that Australia exported a large slab of $ 208 million worth in chocolate last year. We all know Haig’s and Darrell Lea, and the many other specialty chocolate exporters that are doing their bit and succeeding at it. Australia’s top export destinations for the good stuff are New Zealand, Japan, Hong Kong, Singapore, The Philippines, China and Thailand along with the UAE.

So enjoy the sweet success of all our exporters and have a happy Valentine’s Day!

Tim Harcourt is the J.W.Nevile Fellow in Economics at the Australian School of Business

Geoff Harcourt is perhaps one of Australia’s most well known economists.

A Cambridge pupil of John Maynard Keynes, he is best known for his role in Cambridge Controversies in the Theory of Capital. This was the theoretical and mathematical debate that raged during the 1960s among economists concerning the role and nature of capital goods (also known as the means of production) and the critique of the dominant vision of aggregate production and distribution (held to be the neoclassical model).

In the half-century since he has developed his own suite of post-Keynesian models, and on the occasion of his 80th birthday a conference in his honour was held looking at “The Future of Capitalism” .

Here, he talks to Julian Lorkin about the academic path that lead him to develop the Cambridge Controversies, his life & career in Economics

So, the Reserve Bank of Australia has decided not to cut interest rates. The RBA has kept its cash rate at 4.25 per cent, defying expectations of a third rate cut in a row. That is a bit of a surprise, and it may cause further falls in the housing market.

the decision was always going to be finely balanced, but on the face of it, it does seem a little unusual, because inflation is declining giving room for a cut, which would also bring down the dollar. Without doubt the RBA do seem to have been overly concerned with inflation right now, and not the high level of the dollar. Indeed, it is surprising that the RBA isn’t worried about the exchange rate. The car industry – and indeed all manufacturers – are finding it difficult to export, even though mining is booming. Other sectors such as retail, tourism and education are also feeling the effects of an inflated exchange rate.

The RBA said that in Australia economic growth was ‘close to trend’ –  indicating that they felt it was performing as they wished –  and that while the unemployment rate increased slightly in the middle of the year, it has been steady over recent months.  The RBA cut the official interest rate, by 25 basis points each time, in both of its last two meetings.

This decision may mean that the housing market further unwinds and price falls increase. Not only will the cost of borrowing not go down, but it is likely to increase the exchange rate, as the dollar goes up against all major currencies. That in turn may have the effect of further squeezing sectors such as manufacturing, retail, tourism and education, putting pressure on jobs, and downward pressure on house prices.

The RBA says CPI inflation has declined as it expected, because the large rises in food prices resulting from the floods a year ago have been unwinding. The RBA has forecast that inflation will fall further over the next quarter or two, and over the coming one to two years the Bank expects inflation to be in the 2–3 per cent range.

However cutting rates and tolerating a higher level of inflation could be the key to helping Australia navigate the turbulence of the global economy. Australian inflation is not high by current international comparisons and does not pose as much of a threat to our economy as record highs for the currency. Given two ‘evils’ – inflation or an appreciating currency – it is clear that our current level of inflation is by far the lesser evil of the two.

Officially amending the inflation target would take the wind out of ongoing expectations of a rate rise and could prompt some easing in the value of the Australian Dollar, down from what are still historically high levels.

Dr Jonathan Reeves is a financial economist at the Australian School of Business.

Dale Boccabella

Thousands of students are preparing to return to University, or start a new degree, as the new undergraduate year begins. However many will be unprepared for new legislation that could result in them receiving a large tax bill, thanks to changes in taxation law. The modification was announced in the 2011 Federal Government budget announcements, however the latest draft legislation has only just been presented in Canberra, before entered a period during which anyone can make submissions.

Many students will certainly want to comment, however at this stage it looks highly likely the tax law will be amended to specifically disallow a tax deduction for self-education expenses against the receipt of government assistance payments. This follows on from a High Court case where a university student took the Australian Taxation Office all the way through the courts and won the right to claim a $900 tax deduction for self education expenses against the receipt of Youth Allowance.

This is likely to have quite an impact on some students, because the ATO definition of self-education expenses was quite broad. It was: costs you incur in undertaking a course of study at university, college, school or recognised place of education. Generally, for an expense to qualify as a self-education work related expense there had to be a connection between a student’s current job and the course they were studying.

From now on students will no longer be able to claim for textbooks, stationery, tuition fees (excluding HECS-HELP debt), travel, home study expenses such as the internet, or depreciation expenses on assets such as computers, laptops, or even furniture. A perception that it may be unfair to some students is largely behind the decision, and while it may be a surprise to some, it has been forecast for some time.  While some students may be hit hard, but if you average it out, the lost tax benefit to each taxpayer because of the government’s decision is minimal: in effect only around AU$150 per year.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business.