Short political, economic memories

Geelong Advertiser, Saturday, 2 June 2007, p. 37

They say a week is a long time in politics, but the events of the last week suggest that inconvenient memories are being forgotten in what used to be called political economy. In business as in life there is always a trade-off between jam today and jam tomorrow. You can either invest money today or consume it. If you invest you hope for a greater return down the track. What follows concentrates on one particular firm which has been in the news for several months, but the issues raised go wider.

According to reports, Qantas directors are planning to return a significant amount of the company’s capital to shareholders. Yet only a couple of years ago they were complaining about the airline’s inability to raise funds to buy new aircraft to compete on international and domestic routes. So it would seem rational that they would be saving every dollar to finance the Airbus and Boeing aircraft they are planning to buy.

It is tempting to assume that the failure of the attempted private equity deal led by the Qantas board indicates that they really have lost the plot. The plan failed but only very narrowly, and involved huge personal gains to be made by members of the board of the company.

Even members of the Federal Liberal government have been saying that payment of directors and executives has got out of control. Incentive schemes linked to share prices encourage short-termism and involve potential conflicts of interest. If there is a long-term gain and a short-term cost versus a short-term gain and a long-term cost then the executives will tend to go for the latter because they stand to make an immediate benefit.

It has taken us some hundreds of years to develop the laws governing business which attempt to strike a balance between the protection of the consumer, the investor and the operators of businesses. These involve a degree of public scrutiny and the provision of information in return for limited liability and various forms of privilege.

Qantas directors can complain that if they had been in charge of a less iconic company no one, apart from a few business analysts, would have complained about what they were doing. They can also respond that this is the way capitalism works. Businesses are set up to generate value for shareholders to the exclusion of all other considerations. Take that away and ask them to become social concerns and you get a slack and inefficient firm and eventually a similar economy.

But there is increasing research which argues that corporate social responsibility is a key element in the long-term health of firms. Increasing awareness of climate change means that longer term planning becomes much more important for not just individual firms but for the national economy. So perhaps we need to look more carefully at ways of ensuring that the rewards to those in charge of these firms and their shareholders are structured in ways which encourage a different type of approach.