Friday, July 31

Executive compensation

On the July 28th I noticed that the U.S.House Financial Services Committee approved legislation which gives the SEC power to ban excessive incentive pay at banks and will require shareholders to vote on bonuses. This legislation ensures the SEC can bar a company’s compensation packages when it is considered likely to result in “inappropriate risks.” It remains for the House and Senate to pass the bill before the president signs it into law- perhaps as early as today.

The proposed legislature is in response to widespread community dismay and outrage over the size of salary packages including severance pay provsions to senior executives at the expense of shareholders, employees and the community. However there are two opposing views; those who think governments should not interfere with the market and others in favour of sensible provisions and limits. All republicans voted against the bill. Those opposing any regulation warn of stiffled innovation but I think any healthy growth in a democracy depends more upon a decentralized, widely dispersed innovative core and is largely unrelated to any perceived need for high levels of executive remuneration.Certainly I would argue this viewpoint room my own experience in business.

When I first left school in the country, my first position was with the State Government Lands Department in Sydney and I subsequently paid for all of my own education by studying part time for 7 years before obtaining formal qualifications and a more senior position within the private sector. It was an arduous period in my life as I was both studying of an evening and working during the day combined for many months with daily visitations to the Repatriation Hospital at Concord where my father received treatment for cancer before eventually returning to the country where he passed away. Even though at the time it felt as if I was carrying a heavy burden it did turn out to be a blessing since the combination of concurrent learning with practical experience provided me with such a solid foundation I was able to adapt much more readily to early increased responsibilities than otherwise would have been the case.I recall vividly my first executive position at only 25 years of age and the salary benefits then which seemed to be generous enough - about $ 9,000 PA in a sizeable company with overseas subsidiaries where the MD to whom I reported earned $18,000. By comparison a skilled Toolmaker in the same company could easily earn about $7,500 and the process workers (inclusive of regular guaranteed overtime) earnt between $3,500 to $5,000 PA. There was not the wide spread enormous disparity that exists today but I don’t think there was any lack of innovation or effort either or that generally anyone felt unduly thwarted by a lack of monetary incentive.
At the time I recall a lot of effort went into research and development with new processes and markets developed as the old gave way to new opportunities. Certainly it was also true Australia at the time was experiencing a post war growth fuelled by migration and the baby boom which meant that unemployment levels by todays standards were much lower.

Fast forward 20 years I found the ratios were already off the planet. I recall being employed at the time in the largest service organization (excepting Telstra)in Australia and reported to the MD whose salary package with bonuses was up to 20 times mine and almost 100 times the majority of workers. Australia,like most other western nations was fast becoming part of the global village as recruitment agencies suggested talent was costly but imperative to remain competitive. CEO’s promoted from within the company saw the huge salaries overseas and demanded parity, to compound globalised greediness. It was not uncommon to see salary packages doubling or even tripling overnight with the added provision of overly generous share schemes with no risk to the incumbent. Rather than promote innovation I saw trends in the opposite direction, towards financial engineering and the provision of dubious creative accounting reliant on leveraged increased debt and overly risky practices. Since then the trend has not improved.

Economics also has became tied to the hand that feeds it (how many truly independent econonists are there ? )with less reliance on independent research as it threw off the previous shackles of Keynesian thought presupposing the need to generate government budget surpluses to be only used only during unfavorable trade cycles and ignored the implications of reliance on continued debt creation. In fact the volatile nature of the economic cycles over the past 2 decades from booms to bust is unavoidable given the regimentation towards a free market fundamentalism to ensconce corporate greed and excess in the financial sector. This is the most extreme form of capitalism possible to naively assume markets are self-regulating; governments must never interfere with markets and a governments main purpose is assigned only to be involved in the security at home and abroad.

False accounting for productivity improvements provided the beacon of light seized upon by leading economists that all was well. Overseas divestment in manufacturing were erroneously counted as lower inputs from incoming imported componetary as if these cost reductions were actually achieved by a labour force within the host country.

It is hoped these latest moves will begin a more substantial groundswell trend of attitunal change to make executive remuneration more reasonable and revive an interst in sensible economics but I will not be holding my breath.

Already there are claims the global financial crisis is over, but that may well prove to be premature. Australia faces increased unemployment continuing for most of the next year and the enormous budget deficits now applicable in the USA and UK will involve many more decades of restraint and more responsible governance should those respective countries wish to return to a more sustainable future. The USA budget deficit is now 13% of GDP and is financed by selling more bonds – mostly acquired by central banks and governments who now represent 30% of the total government debt and the USA Governments itself which now holds more than 40%,which in turn it holds in trust for Social security and Medicare. Already debtor nations are expressing disquiet about the mounting debt and the whether the curency can reamain strong. There is no magic pudding to share the risk around.

Hard work and innovation is not injurious to health, but nor was it ever dependant on paying huge salaries to executives.

Thursday, July 16

Happiness is the warm heart of Africa

Advertising slogans can’t resist the 'happy' word so that jingles begin with Happiness is ………, If you want to be happy just ……., happiness is rewarding yourself with ……. be happy and don’t forget to ………. It seems happiness must be our natural state of mind as we are encouraged to tough out life’s trials and tribulations by grinning and bearing it – smile please! - after all life wasn’t meant to be easy!!

Children’s smiling faces remind us they are happy but inevitably once they realize they can't always have what they want you may have a unhappy child, or even tantrums.
Learning how to deal with our inevitable disappointments is probably one of the best life skills we can acquire.

Health also plays a pivotal role as our first pains will certanly not be our last. Chronic pain can make even the most robust unhappy.

Social researchers have concluded our happiness or otherwise is influenced heavily by by our individual and societal expectations. Continued rapid changes create a pressure cooker environment conducive to many people feeling powerless to achieve their basic needs or accomplish predetermined goals which can lead to widespread unhappiness.Adding to these frustrations are the societal expectations about continued assured growth and expected satisfaction which can be unrealistic. This is not to say goals and aspirations are unhealthy or to blame but rather our expectations need to be tempered by the realization the journey will not always turn out as we intended or hoped. How we handle these disappointments might be more important than anything else.

When I recently visited Malawi it was interesting to observe the happiness of its people in the various communities both in the city and the outlying village areas. According to those who have spent many years in the field this was not surprising since their country is known deservedly as the warm heart of Africa.Considering the country is one of the poorest in the world with an annual average per capita income of only $250 combined with a low life expectancy I think it demonstrates the nexus been material wealth and happiness is erroneous.I didn’t encounter a single rude Malawian and the outpouring of joy over simple events was extraordinary.
It seems too me this is an example of ‘being in the present ‘so that the worries of the future are transcended. Whilst there, I continually listened the stories of the locals. One such inspirational story was of a grandmother who was cement contractor delivering cement to one of the catholic schools.

Her story was typical of many about their community life, grandchildren and so forth but it wasn’t until later on I learnt her husband had died the previous year from HIV AIDS. She was also infected, yet was able to continue in her joyful (whilst acknowledging her past sorrow) life’s existence.It seems to me she has traversed the physical for the spiritual and so doing transcended past sorrow for the present joy. Whilst we may feel some anger at her plight and of the very many,including a large number of orphans, who through no fault of their own have to carry such a heavy burden, it also is true it is testament of how the spirit of some can never be broken.

Happiness is the warm heart of Africa.

Sunday, July 5

Goodness knows

Good is one of the most common words used in the English language. Goodness in moral philosophy is not easily defined; all you can say is goodness comes in many different ways and involves a value judgment in determining what action is good or otherwise. Even so I have found in 40 years in business a sophisticated moral compass is rarely needed since good action is usually apparent and reinforced from known facts and the underlying reasons for intended actions. On the other hand corruption and corrupt regimes rely on forceful means, coercion, or excessive secrecy to suppress debate to corrupt fair and equitable outcomes.

The question of goodness is rarely debated; since it seems remote and superfluous to the daily grind of living. But such a question goes to the root of our capitalist system which until fairly recently was considered (despite its obvious weaknesses) to be a relatively good system or at least preferred over other ideologies. The current demise to negative growth and widespread unemployment in the world’s economies is undoubtedly the worst since the great depression and suggests serious fundamental flaws in the system. Confidence has been eroded to deliver long term stability and better living standards. New rules to improve both regulation and transparency are to be commended but the system remains largely intact so that it seems loopholes in the new regulations are likely to give us repeat of past and present misery unless we make much more fundamental changes. Risk is an inherent feature of investing and failed corporations are part of an open market capitalist system but what has occurred is an accumulated increase in the power structure of corporations over the post war period which has made us much more vulnerable.

Anyone who thinks power lies in politics is going to be very sorely disappointed as the business as usual signs go up soon after a change in government. That is not to say there has not been or will be in the future very worthwhile changes but rather current disproportionate power base rests largely in large corporations and will continue to be so for the foreseeable future – unless action is taken to readdress the power imbalance. Some would say …. The tail is wagging the dog!

The power shift has moved steadily towards top management and directors in large corporations and to the equally burgeoning Institutions who now manage the huge increased superannuation’s and retirement savings generated in western and Asian economies. The trend towards short term results over the past two decades has accelerated under the influence of the large Fund Managers and an army of overpaid analysts.The Fund Mangers and many Directors either have no equity themselves in the organizations they control or alternatively by virtue of options have no personal risk. Put simply the system is geared for those in power to take on vey large risks(bet the entire capital base of the company through the use of leverage) since they are not exposed to any personal risk on the downside – ‘ hurt money'. The temptation was too great for many as we have witnessed unparalleled greed and recklessness. Many, having presided over a prior period of appalling management decisions walked away with large severance payments.

Retirement and Superannuation Institutions have also added to their fee income by lending the shares they own on behalf of Investors with the Fund (without their authority or knowledge) to Hedge Funds so that can short sell (place sell orders for those shares to create a fall in price) or use the loan shares to vote at meetings aimed at improving returns for the Hedge Funds. All of theses activities are carried out under a cloak of veiled secrecy. Shareholders as such who originally invested in these companies with their hard earned savings or through Retirement funds have neither the power or virtually no power (because of the smaller holdings compared to the large Institutions with large parcels)at all to elect Directors, agree or vote down compensation packages or effectively vote on future acquisitions or company amalgamations.

It is really a question of too much power in the hand of the few who have insufficient equity or incentive to invest in the long term future of the enterprises in which they control. What are needed are measures which will reverse this trend and restore a long term market focus for public companies.

Creation of “A and “B” Shareholders

What I propose for all public companies is the creation of “A" and “B” shares for all of their publically traded stock. The “A” shares are voting shares and would be attractive to long term shareholders whilst the “B” shares are non voting and would be targeted towards short term traders. The immediate advantage and effect of such a scheme would be to create a market for both long term shares and traders which would allow companies to communicate more effectively with those who have a long term objective. The voting "A" shares could also be subject to some time restrictions on their disposal – this might prove to be very worthwhile but could also be impractical.
But the creation of the two classes of shares would also allow the public investing in Superannuation and Retirement funds to demand Funds have portfolios available for them for their savings which are made up of “A’ shares or “B” shares – whatever is their product of choice. I would hazard a guess the overwhelming number of members would opt for the “A” shares. Directors of most corporations ( except those only interested in short term trading of shares) would be required to hold only “A” shares and I would propose that a substantial base must be maintained whilst serving in office and any shares allotted under a scheme cannot be disposed of other than over a 3 year period after cessation as a Director. It seems sensible to restrict the right of Directors to hold “B” shares. Any lending of those shares to others ought to be prohibited.

Directors Benefits and salary packaging- voting at Annual General Meetings

I propose the salary packaging of the top management and Directors should continue to be subject to shareholder approval and share options and bonuses are tied to the long term real levels of performance above inlationary expectations.

I think salary caps are a matter of regulation – but it seems sensible to me that shareholders ought to also think about sensible limits on what just one person can be paid having regard for the size of the company and industry. A good start within this contentious issue is to ensure the actual owners of the businesses - the shareholders, have their say with a view to voting on the matter given reasonable input from the company.

It seems likely with more affinity established with long term shareholders that companies will wish to ensure they have the approval of shareholders before even in engaging on major new amalgamations or new acquisitions.


The current taxation laws that operate in some countries such as the USA discriminate against companies paying Dividends to shareholders since these dividends are taxed in the hands of the recipient shareholders at the full personal marginal rate despite the fact they may have already been taxed at the company level. This is a form of double taxation. If legislation was introduced to give a credit for the tax rate already paid at the company level to the recipient shareholder it would have the effect of encouraging investing in companies with the ability to pay sustained dividends and further enhance a long term focus.


In economics, large public companies play a dominant role and, in my view, the market structure in which they operate requires radical surgery. That change does not necessarily involve more regulation but rather a change in the system to ensure the focus is from the short term to the longer term. There are many more aspects, with a little imagination that can give effect to this much needed change in the way business is conducted. Shareholders, are not in my opinion unreasonable in their objective to earn a fair and equitable return on their investments. But the tide has turned to give too much power to the Retirement Funds Industry and the directors of those large companies. What I think is needed is to change the way shares are structured in the market to give power back to those who actually write out the cheques- (the owners -eg the shareholders of the businesses who purchased the shares or the investors in the Retirement plans who gave their money to the funds to buy shares ) and restore more confidence in the overall system.
Goodness knows.