Michael Sherris

The two latest house price surveys show a continuing decline in Australian real estate prices.

The recent international credit crisis has shown the vulnerability to major market collapses in residential property prices of both individuals and financial institutions such as banks who lend to finance residential property. Australia is not immune to global events, and many people may be more exposed than they expect.

Australian house prices are falling at an accelerating rate according to data from RP Data-Rismark, with Sydney’s dwelling values down 0.2% in December.

A similar finding from the ABS this morning says the weighted price average of eight capital cities Is down 4.8% over the year, with Sydney falling 4.8%.

Residential property is a major component of individual savings in many countries including Australia. Home ownership is high however property values are not as observable as share prices and other financial assets where individuals save. That’s why we need to assess where and by how much there has been a fall and not just rely on market wide indices.

The December decline in house prices came just a month after house prices rose for the first time in a year in November. That gain was supported by two interest rate cuts by the Reserve Bank of Australia, and occurred ahead of the removal of a tax exemption for certain purchases.

It is however still possible to make a profit from housing in Sydney. Figures show the highest returns were realised in Sydney’s Central Business District and along the harbour area. If treated as an asset, houses there have an average annual return of over ten percent, beating many other investments – such as shares. However, even though there may be half the volatility that you get with shares, it is still a risk. Many people think there’s no volatility at all, however if you put a large proportion of your money into one particular investment – such as your house – it is a risky position, particularly if you’re also heavily leveraged with a large mortgage.

Baby boomers and other retirees who may be considering unlocking the equity in their house should take the risks as well as the potential returns into account in assessing products such as reverse mortgages.

Michael Sherris is a Professor of Actuarial Studies at Australian School of Business.

Tim Harcourt

With Australia Day with us again, the great Aussie annual introspection starts. We ask questions about who we are as a nation, how does our history stack up, where are we heading and what our values are. We even have debates about whether we should have Australia Day at all.

Of course, having a bit of a national conversation with ourselves isn’t a bad thing. It’s healthy to ask questions. And there can be some spinoffs. A bit of navel gazing by Australians lead to Dr Karl Kruszelnicki‘s mini-thesis and why belly button fluff is always blue (true blue that is, or is it green, Karl?).

But as healthy as questioning is, it is important to know to have a good amount of evidence on side to really get a handle on things. In these days of 24 hour news cycles, and instant opinion making, having a loud megaphone and the capacity to put the boot into someone or some group seems to carry more weight than a considered opinion based on research or a fair minded assessment of a complex issue affecting the nation. Whether it’s a shock jock at home or a celebrated expat touching down on an airport tarmac to launch a diatribe on the national character, some of the louder voices of public opinion drown out the voices of other Australian citizens.

But as we approach January 26^th, we should clear the air by disposing a few great Aussie myths, which will fill the air waves this week. By doing that, we’ll have a better informed dialogue about the future of the nation. If New Zealanders are once were warriors, Australians are once were worriers. As a result of our mass worrying several myths are created as fact, and distort the debate. So if we can dispose the myth, then we will literally have no worries. Let’s take few myths that you always hear around this time of year.

Myth one is one we always hear that ‘Immigrants take our jobs.’ This has come to the fore recently in the form of Liberal MP Theresa Gamboro’s ‘scientific’ observation that immigrants don’t know how to queue of use deodorant. Putting the great Rexona question aside, in the labour market the evidence shows that immigrants make a positive contribution to the labour market. Immigrants make good exporters. According to Sensis research, 50 per cent of all exporters are born overseas. They bring skills, networks, language culture and a bit of entrepreneurial flair and enrich us as an economy and a society. Think Westfield, TNT, Myer, Bing Lee, Crazy Johns all started by migrants. Think of the Australian business hall of fame. Names like Lowy Abeles Parbo come to mind. Immigrants make good employers and good workers. Exporting businesses (many started by immigrants) pay 60 per cent higher wages than other companies, and provide job security and higher occupational health and safety (O H & S) standards. As employees, immigrants are often highly skilled and work ready. According to the Australian Bureau of Statistics (ABS) shows that while immigrants account for less than 30% of the labour force, they have claimed more than half the jobs created since the start of 2010. Immigrants are both employable and self-employable.

Myth two is that ‘we’re experiencing a brain drain’. Apparently all our best and brightest are leaving and this is harming our economy. Well. It is true that there are 1 million Aussies overseas, according to the seminal work on this subject by the Lowy Institute, but it is more ‘brain gain’ than ‘brain drain’. Many Australians work and study abroad – especially in their younger years – get experience and like a boomerang, they come back, especially when wanting to raise a family. But it’s not a bad thing for Australians to have overseas experience, and if some stay on and become Vice Chancellor of Oxford University, editor of The Times, or hold down key positions in Shanghai, Seattle or Sao Paulo, that just opens up strong networks for the rest of us. Also with the global financial jitters affecting northern hemisphere financial markets, more expat Aussies will be coming home than we thought.

Myth three is ‘Australian workers are bludgers’. When Jeff Kennett was Premier of Victoria and attacking public holidays, annual leave and penalty rates, labour market research showed that Australia was mid-table in terms of public holidays and most countries paid annual leave loading, annual leave and leave bonuses. On international comparisons, Australians are relatively hard working; they focus more on practical productive outcomes (than clocking up hours at the office or other workplace) and have a moderate amount of public holidays. We’ll be taking Australia Day off, but Chinese New Year holidays and celebrations last 2 weeks and other countries have similar festivals. According to international brand surveys, Australians are perceived to ‘work hard and play hard’ and their easy going nature should not be confused with sloth or laziness.

Myth four is ‘We’re just China’s quarry and Japan’s beach.’ This pops up from time to time along with the comments that we are not clever, innovative or ‘high tech’ enough. Australia’s chief scientist (along with the head of Hewlett Packard) said 10 years ago that Australia needed to forget commodities (he said this just before our record terms of trade boom) and build a strong technology sector like Taiwan of the Australian dollar ‘would be 30 cents US by 2010’.The comment ignores the fact that innovation comes from many industries including Australia’s traditional areas of comparative advantage in mining and agriculture. Everywhere I go in the world, I meet small Perth companies that sell technology to the Siberian or Brazilian mining sectors, McLaren Vale winemakers selling marketing software and services to Argentina and France, and everyone knows about the innovation in Australian surf wear, surfboard and sports innovation. Check out how many Billabong boardies you next see in Bordeaux, Bali or on the surf coast of Brazil, Peru, Chile or South Africa. Innovation comes from many places, not just the computer industry.

And finally, there is a myth that ‘We are too far away to matter.’ Well that may have been so in 1788 when we were a convict colony waiting for ships to come from England. The brilliant and eminent Australian historian wrote eloquently about this in his famous treatise The Tyranny of Distance. Now in the 21^st century, Australia finds itself at the right place at the right time in the Asian time zone, and supplying what China, India, ASEAN and the rest of the emerging world need. With euro-gloom and American blues economically, the rise of Asia may well see Australians talking less about ‘the Tyranny of Distance’ and more about ‘the Power of Proximity’ in years to come.

Happy Australia Day!

Tim Harcourt is the JW Nevile Fellow in Economics, Australian School of Business, UNSW and author of The Airport Economist: www.timharcourt.com

Dr Carol Royal

Superannuation is an industrial relations issue, and it should not be separated from wage negotiations. 

Many people regard what is paid into super as being deferred remuneration, and so they – not unreasonably – want to use this as a negotiation tool within Industrial Relations.

The federal government has announced that the Productivity Commission will begin a review next month of default super funds in awards. The Financial Services Council would like to separate IR negotiations and discussion of employee’s super. It says it is a financial services issue, rather than how it is viewed at present; as an industrial one.

Superannuation has become ever more complex and it is important not to confuse employment matters with the provision of financial products. The overall remuneration package has many elements, and superannuation is a very specialised area within it. While it is still part of IR negotiations, its complexity requires financial information and advisory support systems  so that parties to the negotiation process have the knowledge and expertise to facilitate outcomes that are sustainable and are geared to managing risk as best as can be during periods of change and volatility.

Separately, the Financial Services Council argues that unions and employer groups should not be restricted to selecting only the default funds that are specified in an award.

I agree that unions and employer groups which select the default superannuation option need to scrutinise the funds in which they invest much more closely. It is far too restrictive to just select the default option. Employer and employee organisations that are party to awards really need to dig down into how well a fund is performing, and ask many more in-depth questions of super funds, to ensure they are acting in the best interests of members.

The understanding of investment strategies and asset allocation by most people in the workforce, along with expectations about what super can deliver over the long term, goes back to its historical roots when the concept of mandatory super was introduced some 25 years ago, and many people misunderstand the nature of risk with super. 

Workers need to be strategic in the superannuation process, and that requires an understanding that strategies for deferred remuneration are much more complicated than just designing strategies for smooth sailing environments. Super needs to be designed with all weather conditions in mind.

However, while unions and employer groups must ask more questions about the appropriateness of funds’ asset allocation strategies and what might happen to returns, they might not understand the answer. Hence, the parties need to be given better advice when selecting funds.

Dr Carol Royal is the Director of the Masters of Technology and Innovation Management program.

Tim Harcourt

The World Bank has warned that the world risks a deeper recession than the GFC in 2008-09, and economic forecasts for the whole world have been downgraded.

A threat of recession from Europe is unnecessarily affecting Australia’s global prospects.

We need to ensure that fear of a double dip recession doesn’t become a self-fulfilling prophecy. Europe has its debt problems, but Australia’s economic fundamentals are sound and much of our trade ties to China, India, ASEAN and the emerging economies are based on energy, food, and major industrial and infrastructure needs. The long term demand fundamental will out swamp the short term jitters in financial markets.

I have just returned from China and India en route to Brazil, and in these countries it is clear there is a real danger in a spill-over from Europe’s debt problems and slowdowns in key countries such as India that threaten growth.

The World Bank slashed India’s forecasts from 8.5 per cent to 6.4 per cent, yet India’s trade exposure to Europe is less than China’s. In addition, both China and India now have large affluent domestic consumer markets that will help stem the European tide. Even before the collapse of Lehman Brothers, global economists knew that America had ‘too many shoppers and not enough shippers’, whilst China had ‘too many shippers and not enough shoppers’.

The US-based World Bank says that after six months of slowing economic activity, growth in the global economy is likely to be 2.5 per cent in 2012 and 3.1 per cent in 2013. It warns that Asian growth nations fuelling Australia’s prosperity could be dragged into the mire, in a move that would have severe ramifications for the domestic economy.

As these global structural imbalances are addressed, and China moves its economy from export dependence to domestic consumption and investment, we’ll see a natural movement to the emerging economies away from the northern hemisphere. For Australia that will be good news as the countries in our region will do more of the heavy lifting in terms of global growth and the famous ‘tyranny of distance’ will be replaced by the ‘power of proximity’.

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

Dale Boccabella

There is currently a review of the way discretionary trusts have become all pervasive in Australia. And yet it is clear they will grow in number.

Discretionary trusts are a category of trusts. A trust involves a relationship whereby a trustee holds property or conducts a business for the benefit of beneficiaries. They are an alternate business or investment vehicle to the company, partnership or fixed trust.

In addition to discretionary trusts being set up by living persons (principals), it has become common practice for many assets passing on death to be housed within a discretionary trust (testamentary trusts/discretionary will trusts). And, wealth that will pass to future generations in Australia over the next 20-years or so will be unprecedented.

So what makes discretionary trusts popular? To answer this we need some understanding of this “entity”. It is a trust. But unlike many other trusts (e.g. listed property trusts, listed share trusts), the potential beneficiaries do not have fixed entitlements to capital or income. Whether a beneficiary gets a distribution of capital or income is at the discretion of the trustee (legal owner of trust property) and/or those behind the trust. Accordingly, a beneficiary does not legally own anything until the trustee decides to make them a distribution.

The trustee is the legal owner of trust property, but trust property does not belong [beneficially] to the trustee. The trustee is often a “$2 company”. A $2 company means that the share capital subscribed by shareholders for shares is only $2. Often, trust property will have been transferred to the trust for no money by the people behind the trust (usually Mum and Dad). These people are likely to be potential beneficiaries along with the children, and a family company.

As well as being the only shareholders in the $2 trustee company, Mum and Dad may also be the appointers of the trust. Appointers have power to remove a trustee if they are not satisfied with the way the trustee is exercising his/her/its discretion.

What flows from all this?

First, assets held within a discretionary trust are generally beyond the reach of creditors of the beneficiaries, and creditors of the principals who set up and transferred assets to the discretionary trust. This also means the trustee in bankruptcy of a beneficiary or the principals usually cannot access those discretionary trust assets. Further, the principle that creditors of a trust (e.g. suppliers of goods to trust) can, in certain circumstances, access the assets of beneficiaries of the trust, does not apply to a discretionary trust.

In terms of “divisible property” for the purpose of a family law proceeding (relationship breakdown), the Family Court can take into account assets held in a discretionary trust, but this is less likely where the discretionary trust assets existed before the failed relationship commenced.

Secondly, the discretionary trust allows the trustee flexibility to make income (and capital) allocations to beneficiaries based on their differing needs and capacities. For example, one of the children might currently be unemployed or sick and therefore a greater income allocation can be made to him/her for the current year. The discretionary trust also allows the trustee to defer or stagger a particular child’s entitlement because there is concern about the child’s big spending habits (spendthrift). It should be said though that it is rare that the flexibility of the discretionary trust is sought to deal with the differing capacities and needs of beneficiaries. Other less sophisticated legal arrangements can more than adequately deal with the differing needs and capacities scenario.

Thirdly, and this is usually the most important advantage sought, the discretionary trust allows for tax minimization; substantial minimisation. The flexibility that has a genuine non-tax basis to it (see above) also provides the means to minimize tax by, for example, allocating a given taxable income across a number of taxpaying units (simple income splitting). In addition, the DT allows income allocations across tax years to take account of beneficiaries’ other tax profile that can change over years. There is also the advantage of streaming different income types to beneficiaries who can make best use of certain items of income, a technique the government has recently re-endorsed.

There are many other tax advantages from a discretionary trust including allowing income allocations to children under 18-years of age to be taxed at the adult tax rate schedule where the discretionary trust arose under a will (testamentary trust). Normally, under-18s are taxed at a penalty rate of tax.

The advantages of discretionary trusts are quite substantial. No other entity comes close to offering all the advantages of the discretionary trust; some offer one or two advantages of the discretionary trust. And of course, one person’s advantage is another person’s disadvantage. For example, suppliers to discretionary trusts may have trouble getting payment for debts, and minimized tax through discretionary trusts, must be made up by other taxpayers or government services must be reduced.

Are there any disadvantages to those using a discretionary trust? The main one is the danger of a “rogue trustee”. That is, the trustee might exercise their discretion in a way contrary to the wishes of the principals who set up the discretionary trust. With careful legal drafting, including wise selection of appointers, safeguards against this can be provided.

It is one of life’s twists that discretionary trust can also breed suspicion and “distrust” amongst “beneficiaries” who would otherwise (in a fixed trust) expect an entitlement. The reason is that entitlements under a discretionary trust are contingent on the trustee’s discretion so that a beneficiary may be at the whim of the trustee, and those controlling the trustee.

The cost of financial planners, tax advisors, lawyers, etc, in setting up a discretionary trust and properly maintaining it can also become expensive as an effective discretionary trust must be kept-up-to date with changes in the circumstances of relevant parties. Indeed, these professionals are doing, and will continue to do, a solid trade in discretionary trusts.

By and large though, the disadvantages to those who can avail themselves of a discretionary trust are not significant and are overwhelmed by the advantages. And, no other entity (e.g. fixed trust, company) comes close to offering the same or similar tax and non-tax advantages.

As far as tax goes, various government inquiries have endorsed the current tax treatment of discretionary trusts. Indeed, the Assistant Treasurer, the Hon Bill Shorten MP told a Tax Institute conference last year: “We don’t believe trusts are any form of tax avoidance. We see trusts as a legitimate feature of how Australians conduct their financial affairs.” The tax advisors listening must have had a quiet chuckle; they need to be quiet because a loud chuckle may prompt the Assistant Treasurer to actually check the basis for that ridiculous statement.

Equally, important are the non-tax advantages. To my knowledge, there has not been a systematic and comprehensive inquiry on the asset protection aspects (code for not paying debts), property division aspects, etc, of discretionary trusts. However, there has been isolated reform in various areas that has reduced the abusive use of the discretionary trust (e.g. pensioners cannot house assets in a discretionary trust and avoid having those assets counted for asset and income testing purposes).

The pervasive use of the discretionary trusts has snuck up on society. The time for a comprehensive review of the advantages and disadvantages of discretionary trust has come. At the moment, many Australians are gorging themselves on the advantages of trusts, and similar advantages are not available to others.

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

Tim Harcourt

WHEN Australian skipper Michael Clarke raised his bat to celebrate his historic triple century at the SCG it showed a man becoming aware of his stature in the game.

Instead of pointing to a bat sponsor – a deal which can be valued at hundreds of thousands of dollars – he gestured towards the McGrath Foundation sticker placed there earlier that day.

Clarke’s manager James Erskine later explained the skipper had split with Slazenger and he is still mid-negotiation with two or three companies to sign a final deal.

I’d imagine his classic innings has given him invaluable leverage in striking a favourable new deal.
But to me there would be a greater value in abandoning sponsorship all together.

Clarke is already a wealthy man and to make a statement – “I’m not going for the dollars” – would speak volumes.

Don’t get me wrong – if you are a struggling bloke in the Queensland seconds on the fringe of the 2020, I would get my bat sponsored and get what I can. But Michael Clarke is the captain of Australia and he is subtley engaged in changing what he is all about.

His brand is now be about getting away from selling underpants and all that Lara Bingle stuff and sending out a message of `I am a serious guy’.

He has already gone taken steps in that direction. Take his decision to declare despite having the record books at his mercy. If he had decided “bugger it – I’m going to knock off Bradman and Taylor’s scores and then go after Hayden’s and maybe get 400”, we would have thought differently.

But he declared at 329 – short of the records as he wanted to put Australia in the best position possible to win. Putting the team first is another sign of a maturity.

There was also something else about his call. I was watching the game at the SCG and the sentiment around the ground was that “he is showing respect for the game” (instead of personal glory).

Passing prime sport real estate to charity is not unprecedented.The prime example is Barcelona FC, one of the world’s wealthiest soccer clubs, which puts UNICEF across their shirts. Barcelona is a club aware of its larger role in the world.

Under the heel of the dictator Franco from the 1930s until the late 1970s, Barca was the Catalonian republican team while Real Madrid were Franco’s team.

Barca has always wanted to say `We are republicans. We want to distance ourselves from Franco. We care about the world and we care about the world’s poor.’They are carrying on that traditions with their UNICEF sponsorship.

For Barcelona – and for Clarke – it is all about a traditional long term-short term trade off. Clarke would be eschewing short term gain but building his brand so well it would be worth it. Former skipper Steve Waugh – through his work helping orphanages in India – is another example.

There was once a time when senior Australian players were afraid to tour India and would talk of keeping their mouth shut in the shower avoid getting sick. We used to ask them “where the Bolly hell are you.”

But the Generation X players _ Waugh, Gilchrist and Hayden _ came on the scene and realised what an amazing place the sub-continent is. When I interviewed Gilly in Mumbai he said going to India “wasn’t just a tour, it was a life changing experience.” Steve Waugh famously said “Its gets in your pores, it makes you use all your senses.”

As a result, these players are now worshipped in India not only for their prowess as players about also for how they have engaged the country. The world knows one thing about we Aussies – that we take our sport very, very seriously. But to show that we can engage the world in a mature way is invaluable.

Which is why when the captain walks out on in future tests I would love to see that same old clean skinned bat – perhaps with a nod to his charity of choice.

The man they called ‘Pup’ is becoming wise and worthy of being Australian captain – often described by Prime Ministers as ‘the most important job in Australia.’

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

Associate Professor John Evans

There is a vast array of superannuation products on the market nowadays. However I’m not convinced that the large numbers of new products really helps to add value for the majority of investors.

The bulk of members really couldn’t care less about the plethora of peripheral products.

Disengaged members typically make up the vast bulk of industry fund members, and it is estimated nearly 70 percent of not-for-profit fund members have their super invested in the default option.

Indeed, fewer than one in three people are making the effort to choose how they want their super invested.

New investor options are targeted at a small but asset rich minority of members, and not the larger investor base. Directors and fund executives are entangled in the bigger is better race to amass more funds under management.

But does this help the average common-or-garden investor?

No. Not a jot.

Industry funds should go back to the root of their business, and provide low-cost, simple products for members, because as investment choice rises, so do costs. Investors who want the full range of investment products could transfer to DIY funds, where there more flexibility, although I do have to warn that a lot more hands-on involvement could be time consuming.

Industry super funds argue that without an entrepreneurial approach, super funds mandate to grow and protect Australian’s retirement funds would be at risk. OK, fair enough, however although some people like the new options, many members don’t want extra facilities such as cash deposits or direct property investment. They just want to save for old age. Investors just want simple, low cost easily understood investments that do not fluctuate in value too much.

John Evans is an Associate Professor and Head of Risk & Actuarial Studies at the Australian School of Business.

Tim Harcourt

I’ve been thinking about my post last week about immigration.

Now it has been in quite a lot of newspapers: Liberal MP Theresa Gamboro’s claim that immigrants don’t know how to queue and don’t use deodorant. However this ignores the evidence that that the modern Australian economy was built on immigration.

I just have to think of my own family and their experience in Australia. My great-grandparents were immigrants from Transylvania (good bloodlines for an economist!) and Poland. My grandfather who was as an orthodox Jew called Kopel Harkowitz, tried to join the Bondi surf club but when knocked back, changed his name to Ken Harcourt (or in own words “I went from the Goldbergs to the Icebergs!”) and ended up being a successful small businessman providing employment and trade links with his family’s ties to Europe. He ended up making a pretty good life saver too!

What does this story show? A few things.

Firstly, immigrants make good exporters. If you look at the Sensis data on small businesses, you find that 50 per cent of all small and medium sized enterprises that export are run by an overseas proprietor. You just have to take a roll call of great Australian business leaders who have were born overseas. The names Abeles, Lowy and Parbo come to mind. Many of these business leaders came to Australia from war torn Europe with no assets (and often with no English) but with a range of business contacts in their home market. Much of Australia’s success as an exporting nation in the late twentieth century was due to the efforts of the post-war immigrant business leaders. It is always important to replenish your stock of entrepreneurial human capital and immigration is part of that process. The influx of migrants also changes consumer tastes in the new country (like new Thai restaurants replacing ‘meat and two veg’ places) and ultimately increases demand for both exports and imports.

Immigration has been good for Australia’s trade ties overall. There are clear links between immigration and trade. New migrants are likely to have strong links to business communities back home, in terms of friends, family and business contacts. There are no language barriers, nor any cultural adjustments to make. And as more ‘home’ countries embrace the market economy (such as former communist countries like China, Vietnam and Eastern Europe) there will be many more opportunities.

There is also economic evidence about the links between cultural diversity and exports. Overall growth in trading partners may be exploited faster as a result of the rapid growth of ethnic groups in Australia. The main effect of cultural diversity is to reduce transaction costs in trade – because of the tacit knowledge held by migrant workers. The attitude to exporting of Australian businesses could be enhanced by the presence of cultural diversity in senior management.

Secondly, immigrants make good employers. According to UNSW research, immigrants typically start exporting businesses and exporters pay 60% higher wages than non-exporters, on average, and provide better occupational health and safety standards, job security. In short, immigration is good for jobs, good for exports and good for the economy; immigrants make great exporters and employers. One in two Australian exporting companies are run by people born overseas. And exporters pay 60% higher wages. It’s win-win.

Thirdly, immigrants make good workers. Immigration numbers from the Bureau of Statistics shows that while immigrants account for less than 30% of the labour force, they have claimed more than half the jobs created since the start of 2010. Immigrants are both employable and self-employable.

Nowadays, I take my Chinese born daughter Yun Shi to Bondi Beach with my Italian-American born wife (We have an Australia-USA-China free trade agreement in our family!) and she loves Bondi just like my Transylvanian grandfather. And by the way, Ms Gamboro, my grandfather did queue at the Bondi Icebergs, and he always used Rexona after a surf!

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

Peter Shergold | CSI blog

In a previous blog I talked about the importance of qualitative attempts by nations to measure the good life.  It was courageous, I thought, to write about statistics.  Today I’m going to address the issue of integrated reporting.  Braver still, I suspect.  I risk becoming the boring bloke who stands between you and the drinks fridge at a party.

I do so because the issue is fundamental to how companies measure, and report upon, their ability to create and sustain value – not just economic and financial but social, environmental and governance factors.  It’s an idea whose time has come.  Below the radar, the reporting framework for companies is set to change.

I sit on the board of a publicly-listed company.  I know, having to read every page, how long, detailed and complex the Annual Report has become.  Much of its arcane nature is driven by regulatory requirements.  Presentation of strategy tends to get lost behind dense technical jargon.

It’s hard to tell our story in an engaging and informative manner to our shareholders, policyholders and stakeholders.  The narrative gets buried in the voluminous financial statements and their detailed explanatory notes.  Like many companies we end up employing workarounds, providing an alternate measure of ‘underlying profit’ that we believe is a better measure of our corporate performance over time.  The financial reporting predominantly looks backwards:  non-executive directors like myself are only too well aware that discussing future prospects gives rise to potential legal liabilities.

Company reporting, then, tends to be extensive but partial.  It is commonplace that documents on corporate citizenship, social responsibility or sustainability are issued separately from the Annual Report.  The measures of performance are then selected from a widening array of reporting vehicles – from the Global Reporting Initiative framework to the London Benchmarking Group.  This gives rise to three problems.

First, it perpetuates the belief that the reporting measures of societal or environmental value may be chosen to present a company’s performance in the best light.

Second, it suggests that community benefit or sustainability initiatives are simply well-meaning (or self-serving) bolt-ons to the real business of the business presented in the Annual Report.

Third, as Helen Brand, the President of the Association of Chartered Certified Accountants has blogged, “Presenting the information separately, in silos, makes it difficult to build up an overall picture of a business’ long-term value …  We need an integrated approach to reporting.”

Thankfully, a move is underway to do just that:  to streamline company reporting, reduce its costs and – most importantly – provide a clearer picture of organisational performance.  The International Integrated Reporting Committee (IIRC) was set up in 2010 by a large group of distinguished corporate, regulatory, academic and civil society leaders to design a more comprehensive but flexible reporting framework.

The IIRC’s mission is to find ways to better communicate the total value that companies create.  To do so it is necessary to make transparent the six ‘capitals’ on which a company depends (financial, manufactured, human, intellectual, natural and social) and to explain how they are assessed and deployed in a strategic manner.  Among the guiding principles of integrated reporting are the connectivity of information, its future orientation, stakeholder inclusiveness and commitment to conciseness, reliability and materiality.

According to Goran Tidstrom, President of the International Federation of Accountants (and a member of the IIRC), “Financial information is not sufficient.  We have to provide information on sustainability, on social issues and environment, and it has to be done in an integrated way with a financial report.”  Here’s how.

Social capital reporting is meant to recognise a company’s social licence to operate, including the corporate values and behaviours that prevail;  how relationships are conducted with customers, suppliers and business partners;  and the extent to which the business enhances individual and collective wellbeing.

Natural capital reporting is intended to exhibit how a company’s activities impact, positively or negatively, on the ecosystem – water, land, minerals, forests and biodiversity. 

Human capital reporting is designed to capture the alignment of a company’s ethical values and governance framework including, for example, how human rights are recognised.

The IIRC has now issued a comprehensive Discussion Paper on its ambitions.  It’s a good read.

The good news is that some Australian innovators are not waiting.  The new cooperative bank, bankmecu, has already announced that it is to work with the Net Balance Foundation to develop an integrated reporting framework for its 2011-12 Annual Report.  At the bigger end of town NAB’s Annual Report for 2011 already includes a significant section on corporate responsibility as an integral part of its business strategy.

Accounting and applied statistics can seem to be dull disciplines.  The truth is that unless we can measure and report upon the value of social and environmental good created by companies effectively, the momentum for them to create ‘shared’ economic and societal value is likely to slow.  That, at least, is my perspective.  I’d welcome your views.

Peter Shergold is the Macquarie Group Foundation Professor at the Centre for Social Impact (CSI) at UNSW. This blog post first appeared on the CSI blog.

Tim Harcourt

There’s no doubt that the modern Australian economy was built on immigration. And this has been good for Australia’s trade ties as well. There are clear links between immigration and trade. New migrants are likely to have strong links to business communities back home, in terms of friends, family and business contacts. There are no language barriers, nor any cultural adjustments to make. And as more ‘home’ countries embrace the market economy (such as former communist countries like China, Vietnam and Eastern Europe) there will be many more opportunities.

As part of the mission to grow the exporter community, my former employer Austrade has developed the ‘new exporter development program’ (NEDP) focused on new exporters – mainly small and medium-sized businesses – who need encouragement and assistance to get overseas. Austrade has put a lot of emphasis on export training in this program – as many businesses have the ‘right stuff’ to be an exporter (productivity, skills, product etc.) but don’t quite know how to go about it.

Why target ethnic communities to look for exporters? According to new research by Austrade and Sensis, 50 per cent of all small and medium sized enterprises that export are run by an overseas proprietor. You just have to take a roll call of great Australian business leaders who have were born overseas. The names Abeles, Lowy and Parbo come to mind. Many of these business leaders came to Australia from war torn Europe with no assets (and often with no English) but with a range of business contacts in their home market. Much of Australia’s success as an exporting nation in the late twentieth century was due to the efforts of the post-war immigrant business leaders. It is always important to replenish your stock of entrepreneurial human capital and immigration is part of that process. The influx of migrants also changes consumer tastes in the new country (like new Thai restaurants replacing ‘meat and two veg’ places) and ultimately increases demand for both exports and imports.

There is also economic evidence about the links between cultural diversity and exports. According to a recent study, whilst overall growth in trading partners was the most important determinant of export growth export opportunities may be exploited faster as a result of the rapid growth of ethnic groups in Australia for these countries. The study found that the main effect of cultural diversity was to reduce transaction costs in trade (through the tacit knowledge held by migrant workers). It was also found that the attitude to exporting of Australian businesses could be enhanced by the presence of cultural diversity in senior management.

This is not surprising as most of all export success is about networks. New research shows that 50 per cent of all new exporters are ‘accidental’, that is they get a sale by an accidental or random act. Therefore spreading networks internationally is very important to increasing the opportunities that may come to potential new exporters. Accordingly, Austrade works very closely with Australia’s diverse ethnic communities to seek out trade opportunities and entrepreneurial talent.

So throw another shrimp, satay stick, dim sim or kebab on the barbie and celebrate the benefits that immigration brings to our society and indeed to our balance of payments!

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