4. The Pursuit of Profit


Cree money

I was very fortunate to have been trained as a scientist, even though it was not the career I ultimately followed. The training, however, teaches you to be logical and skeptical. Nothing in science can be proven. A theory is not a universal truth, but only the best explanation given the evidence understood thus far. However a theory does require a significant amount of peer reviewed work to be able to be accepted as such. It is not an opinion, or a hypothesis.

Climate change is, without doubt, the most significant issue our civilization faces. More than 97% of scientists involved in this field, recognize that due to human influences, the temperature of the surface of the planet that we recognize as home is increasing far more quickly now, than it was before, and that this increase in temperature will have an impact on how we live. And these impacts are not insignificant, with every 1 degree increase in temperature estimated to result in a 10% decrease in the amount of food being produced. Even 10% less food means a vast number of hungry mouths that are going to have to be fed.   The current aim of those deeply involved, is to keep the temperature decrease below 2 degrees. That will require that we keep approximately 70% of the known coal, gas and oil reserves exactly where they are. If not, we can expect temperature increases to reach 4 degrees or more.  40% less food for 8 billion people… not too hard to see the problem here.

So why, if we do understand this fact (and the very companies in the forefront of the oil and gas industry, BP, Shell, Exxon, Chevron apparently all do, and are apparently actively looking for alternatives), why are we continuing exactly as before? Exploring, drilling, mining continues apace.   Its like people know smoking is bad for them, it will possibly kill them, but they keep doing it. Because change is difficult. Particularly if it takes self-motivation to do so. And in the corporate world, the motivation is entirely focused on making profits. The only way to divert them from this goal is if their shareholders tell them to, or when governments use legislation that forces them to do things differently. Let’s look at the first of these.

So who are the shareholders, and why aren’t they shouting?   Well here is the awful truth. We, that is you and I, make up a significant percentage of that shareholder base. Most significantly through your Super funds, or other saving schemes. These funds invest in these companies and are pushing them to be as profitable as possible for your benefit.   Unfortunately, because we own these shares through an intermediary, we lose some of the benefits of share ownership, namely the right to be heard and vote at shareholders meetings. And those intermediaries, the Trustees of your funds, and the Investment Managers, are supposed to consider factors such as sustainability and company governance. However, given that Investment Managers are often paid on the basis of their success (and paid somewhat handsomely usually on the basis of fund value improvement!), it’s easy to understand why the fundamental profit approach often over-rides long-term sustainability issues. And the majority of Super-owning Australians, with their busy lives, probably won’t even give this a second thought. As long as their Super increases in value, the details of how it has been achieved are not only often hard to pinpoint, lost in the fine-print of six-monthly statements, but the pertinent details are difficult to find.   A diversified portfolio will include investments in a range of funds, each fund investing in a range of companies. How on earth could you be expected to keep track of what each of those companies is doing? Of course you can’t, a fact that those in the industry are well aware of, and are more than happy with. Our ignorance is their next yacht.

So the mechanism to ensure good governance relies on board members who get paid more when their company makes more profit, delighting proxy share owners (Investment Managers) whose bonuses are dependent on high returns from the companies they invest in. It isn’t surprising that the pursuit of profit is the name of the game.

But is this a problem? Well that depends on two things. Firstly, do we consider it right and proper that the financial benefits of those who run the companies and those who have responsibility for the voting rights (thus effective ownership) of those companies are too closely linked.

And secondly (returning to the points above), do we consider that there needs to be other mechanisms in place to ensure that these businesses behave in a way that society dictates is acceptable, and if so, who should take those regulatory roles?  These responsibilities include adhering to Health and Safety Standards, and paying staff an appropriate wage for the work they carry out, all the way through to not polluting the environment, not using bribery to get business, not using suppliers who use child labor, or following a business model that might result in global meltdown (financial or physical).

The history of the fight for workers rights is a long one, and resulted in the union movement and in Australia and the UK in the Labor and Labour party respectively. Over recent times, the importance of the Union movement has diminished as the hard fought for workplace protections have been either enshrined in policy, or more importantly, where some companies have recognized the long-term strategic benefits of looking after your workforce appropriately.

Moreover, in some industries, the union movement has very clearly overstepped their authority, whether through practices like the “closed shop” where they can become too powerful and hence force the businesses they work for to become unprofitable and/or unsustainable.   In the 1970s in the UK, the unions were blamed in large part for many of the economic problems that were experienced during that period. Unproductive work practices, unrealistic and unaffordable wage demands, industrial action and strikes, resulting in electrical black-outs, mountains of refuse on the streets, and the three day week. A significant number of voters are unsurprisingly very skeptical of the motives of trade unions because of this, and thus the Labor party as a significant contributor to party funds and policy determination.

The impact of the past, often in part due to the pursuit of profits, has resulted in large sections of the electorate being bolted on supporters of one political party or the other. This unquestioning loyalty is akin to supporting a sports team, sometimes with hilarious results, particularly when the party supported takes a complete about turn on a particular policy.   For any individual to support all the policies of a particular party (however much they change) shows a complete lack of thought, just an unswerving obedience to a code. Of course politicians, knowing that truth or facts can be safely ignored as the party faithful will agree anyway, exploit this blind allegiance mercilessly. But in politics, as in religion, zealotry is potentially very dangerous indeed.

But clearly the need for regulation is there.  And identifying who is best placed to take on that responsibilities is clearly open to discussion.  But it is a vital one, and we will visit it in the next chapter.

But lets return to the subject of the chapter. Is the pursuit of profit, aka capitalism, a bad thing? Of course not. As an economic system, it has clearly been highly successful. Forgetting all the other benefits that the system brings, wealth brings health. For that simple reason alone, capitalism has been proven to be more effective than any other economic system to date. So good, yes. But perfect, no.

The problem with capitalism is that it is a paradox. It relies on the free market, and competition, to drive productivity higher, and costs and prices lower. But success brings growth, and once a company that perhaps has become successful for all the right reasons, reaches a size where it becomes dominant in that market, it will start to influence the freedom of the market, and unduly impact competition.

Australia has some very clear examples of this, perhaps more so than any capitalist country in the world (which says an awful lot about the quality of its regulation…).   In the retail market, two companies, Wesfarmers/Coles Group and Woolworths, take nearly 80c in every retail dollar spent.   Because whilst many people think these companies only run supermarkets, they may not be fully aware that Wesfarmers/Coles Group includes Coles Supermarkets, Bi-Lo, Pick ‘n Pay Hypermarkets, Coles Express, Coles Central, Coles Select, Coles Hotels, Liquorland, Vintage Cellars, 1st Choice Liquor Superstore, Officeworks, Kmart, Kmart Tyre & Auto Service, Target, Target Country, Target Home, Harris Technology, Bunnings and Kleenheat. And Woolworths owns Woolworths, Caltex, BWS, Dan Murphys, Woolworths Liquor, ALH Group (a hotel and poker machine operator), Big W, Masters Home Improvement. So these two companies have the dominant share of the grocery market, they also have a dominant share of the alcohol retail market, the petrol retail market, the home furnishings/ clothing market, the stationery/office supplies market, and the home improvement/hardware/gardening market.  And with Kleenheat they have moved into gas supply/billing, and also into the insurance market with Coles Insurance.

What does this dominance result in? Well, here are three very clear examples. Firstly, both Coles and Woolworths have been found guilty of exploiting their suppliers. With a very limited number of distribution options, many suppliers have to go through the two majors. The majors, of course, have the upper hand, essentially setting the price that the supplier has to supply at. The supplier has really very little choice, other than to comply. In the wine business, it is cheaper to buy from the chain bottleshops than it is at the cellar door. Because the wine producers have been told in no uncertain terms that if they charge less than the retailers, the retailers will stop stocking their products.

Secondly, does low cost from the supplier result in low cost to the consumer? Well, no. Compare the price of groceries in the UK to Australia, and the difference is marked. And that is clear when you see the specials on offer, where 50% price reductions aren’t uncommon. The problem is, with so few choices available, the big two find it very easy to set prices which suit them both, and maintain a very healthy margin. Buy low and sell high is much simpler when you have substantial control over the market.

And finally, we have the petrol price cycle. Not seen anywhere else in the world, in Australia the price of fuel changes on a periodic basis. Most obvious perhaps in Perth, where fuel is cheaper on Tuesdays and Wednesdays, and most expensive at the weekend (with traditionally it being at the height on payday, or the day after). What causes this cycle? “Price cycles are the result of deliberate pricing policies of petrol retailers, and are not directly related to changes in wholesale costs.” This quote is direct from the website of the ACCC, Australia’s Consumer and Competition regulator. It reveals that they know that for no reason other than that they can, the petrol retailers artificially adjust the price. Why? When the price fluctuation is as much as 10% or more within a week, it is very difficult to know whether prices are increasing or decreasing. It also reveals that all the retailers in that market (of which there are few) are willing to continue this charade because… it is in their financial interests to do so. It also reveals the inability and unwillingness of the regulator to do anything to actually protect the consumer from what is quite clearly a manipulation of the market, and essentially an effective cartel, where the players recognize that there is no need to compete on a daily basis, so essentially collude.

Who loses out? The consumer. The voter.

Compare Australia to the US. Recently Walmart triggered the US monopolies commissions when it got close to 20% share of the retail market. Compare that to the market share of our big two of about 40% each in Australia! Moreover there is no clear indication that any further expansion would trigger any concerns with the bodies whose role is to ensure a fair market!

The other issue with market dominance is that it also gives those businesses undue political influence.   In Australia, corporate power abruptly terminated Kevin Rudd’s prime-ministership. His plan to impose a tax on wealthy mining companies resulted in the Minerals Council, the group representing the miners interests, engaging in a very expensive advertising campaign against the legislation. There were, of course, other issues as well, but the threat of an ongoing campaign against the government was enough for a very hasty change of prime-minister, as well as a complete rewriting of the legislation which was very much to the mining companies favour, particularly in its initial year where miners used their accounting prowess within the details of the legislation to write-down significant losses and avoid the taxes that would have otherwise accrued (and has since been revoked prior to any real tax benefit flowing in).

So businesses make money. Expecting an individual business to independently follow a different model, given the potential loss of power to its competitors if it did so, is unrealistic. And they will try to exert their influence on governments to effect policy. This is their right.  And of course the same could be said for unions. Or for Not-for-Profit organizations.   The concern is how that influence is obtained. By putting forward meaningful arguments? Or perhaps indirectly through their financial support of the organizations that make up our governments; the political parties. And this is where the problem occurs. Vested interests now have too much influence over politics. The politicians will of course deny this, but then why do so many fall foul of Corruption Commission investigations? Indeed this corruption was so widespread that politicians were banned from receiving donations quite specifically from property developers.

So the motives of our politicians are always open to suspicion, a fact well understood, and used by them to them to undermine their opposite numbers. Labor are apparently in thrall to the unions, the Nationals to farmers, the Liberals to businesses, particularly large ones. Given that funding for their political parties significantly comes from these sources, it is hard to deny that their attitudes may not be swayed in some way.

So the pursuit of profit certainly has a political dimension. As a force for innovation, for prosperity, for improvement in our lives, capitalism clearly works very well. But the very concepts on which it works, can also lead to it becoming highly destructive if allowed to evolve to its inevitable outcome; successful companies grow and crowd out the smaller, less successful, but in doing so remove the competition that is necessary to foster innovation and improvement.

The need for quality regulation was never more recognised than by the global financial crisis that began in 2007, where US banks and other financial institutions ignored the risks to focus on profits. The fallout from this debacle had global implications in an economy that increasingly depends on trade with other countries, with many people not even involved in the get-rich-quick behavior impacted by the fallout.

So whilst many on the free market side of politics might disagree, it is clear to those who properly realize the apparent risks of the modern economic market, global capitalism needs to be regulated far more effectively than it has in the past.   And whilst much of this crisis may have been due to individual behavior, it is obvious that without proper regulation the “system” lends itself to generating this type of event.  Whilst internal regulation is often recommended within the industries themselves, there have been too many instances, whether in banking or the media, to name just two, where internal regulators have completed failed to stop abuses of the regulations that their industry members have apparently signed up to.

The role of government in the new age of multinational companies is increasingly complex. Political parties who are more business centric often favour “smaller government”, less “red tape” (and now “green tape”), as they consider that these restrict businesses growing, and business hate such restrictions on their activities. Until, of course, they don’t.

Recently wealthy miner Twiggy Forrest has been encouraging the government to undertake an investigation into the effect of iron-ore production on its market value. Motive? With its higher cost base, Twiggy’s Fortescue Metals is struggling to be profitable compared to the lower cost mining giants BHP Billiton and Rio Tinto. So the free market is good when it suits, but when it doesn’t businesses often expect governments to get involved!

So free enterprise is certainly a very important aspect of modern society. It provides employment, innovation and thus improvements in the quality of our lives, and through our ownership via Super funds and other investments they help provide for our retirement. However the success of the free market depends on certain conditions being maintained. Over-dominance by a small number of players can quickly distort that market, often with less than positive outcomes. And as modern business becomes increasingly complex and multinational, so does the need to be able to prevent this distortion.

Given nobody else is there to do so, governments must take an increasingly vital role in how businesses can operate. Just as governments are responsible for the laws that govern its citizens, they too are responsible for those laws that govern businesses. And as they are responsible for ensuring the “environment” is beneficial for its citizens, they need also ensure it is for business.

However, big business have increasingly become significantly more powerful – some indeed have more than some small countries – and as such we need to be exceptionally mindful of how they can influence governments, and government policy. This is particularly the case in industries such as the media where “influence” is a significant part of what their business offering actually is, and we will be looking at this later too.

 


About Steve Laing

Political observer, free thinker and problem solver, Steve contends that the current democratic processes have neither kept up to date with globalisation nor modern business practices, resulting in increasing dissatisfaction with modern politics. However, new technology could be used to not only reconfigure our system, but give the electorate even greater representation than was previously the case. For more background information on Steve, please check his LinkedIn profile.

Leave a comment

Your email address will not be published. Required fields are marked *