Tuesday, September 30, 2008

Management Perspectives - most popular posts 2

Continuing my irregular series on the most popular posts on this blog, the most popular posts among the last 100 visitors have been:

The graphic shows from which countries visitors came. The US retains its number one position followed by Australia.

I don't try to write to attract specific country traffic, although I have been wondering if I should.

Just to explain why.

All bloggers like to be read. I am no exception. I have been wondering whether posts looking at links between countries might not be a useful addition to the blog.

I do know in terms of my own work that country inter-connections are becoming of increasing importance in a globalised world.

The fallacy of modern management

When I first began investing on the stock exchange, things were relatively simple. Select a small but balanced portfolio and then hold it for the long term.

So long as your firms were reasonably well managed, then you knew that continuing business improvement and reinvestment would lead to increased profits over time. In turn, this would translate to increased dividends, higher share prices, plus reasonably regular issues of bonus shares. Further, when your firms wanted new capital, you could either buy new shares or, alternatively, sell the rights for cash.

No more I fear. The failure rate among modern corporations is now so high that the only way to capture the compounding effect in a reasonably low risk fashion is by investing so as to follow the index.

Our current problems lie in a fundamental conflict between management styles and the underlying financial maths.

To illustrate, assume that the real economy is growing by 3 per cent per annum. In simple terms, this provides the growth umbrella across the economy as a whole. Now assume that firms as a whole set annual growth targets of 15-20 per cent.

Quite clearly, they cannot all achieve this. The more individual firms get to 15-20 per cent, the more other firms will have have to fall below 3 per cent to accommodate the faster growing firms.

It has always been the case that some firms are more succesful than others. That, after all, is the market. However, when all firms strive for very high growth targets the risk of failure inevitably increases.

Our problem today is that there is very little scope for conservative, rational management in a world dominated by high growth targets on one side, quarterly reporting requirements and the desire for quick profits on the other.

Assume, for the moment, that a firm thinks that 6 per cent real growth is a reasonable target. This is twice projected economic growth, but still within conservative bounds.

Over a ten year period, annual profits will grow from $100 to approximately $180 or by around 80 per cent. If dividends are set at 50 per cent of profits, then the dividend stream will increase from $50 to $90. On a constant PE ratio, share prices will also increase by 80 per cent. So over a ten year period you will get an 80 per cent increase in dividends plus 80 per cent capital appreciation. Plus, of course, the compound return on reinvested dividends. Not bad really.

The problem with modern management approaches is that it turns investment into a gamble on management's ability to achieve ambitious growth targets. The higher the aggregate growth targets, the greater the gamble because of the increase in the number of firms that must fail just on plain maths to deliver.

Monday, September 29, 2008

Australia's Productivity Commission proposes new maternity leave arrangements

Australia's Productivity Commission has released a draft report proposing new maternity leave arrangements.

For the benefit of international readers, the Commission is an independent official economic advisory body funded by the Australian Government.

The Commission's proposals involve a taxpayer-funded parental leave scheme of 18 weeks at the adult minimum wage ($A544 per week) that would benefit around 140,000 mothers and their newborn children each year and yield community-wide gains in the long term. The scheme also provides for two weeks paid leave to over 225,000 eligible fathers.

The Commission suggests that its proposed scheme is designed to integrate with existing workplace practices. Thus, it requires genuine attachment to work as an eligibility requirement and a capped superannuation contribution from employers for most employees. Typically, initial payment of the leave benefit would be by the employer, with early reimbursement by government. Importantly, the scheme covers full time, part time and casual employees, as well as the self-employed and contractors.

The scheme would cost the government budget around an additional $A450 million annually - after offsets from taxing the benefits and reduced social transfers, including removing eligibility for the baby bonus for those who take paid parental leave. Business would put in a net $A74 million a year through superannuation contributions, whilst benefiting from greater retention rates of women employees.

The low cost of the scheme means that it has been generally welcomed by business groups.

The Commission is now seeking responses to its draft findings, including through public hearings before submitting its final report to the Australian Government in late February 2009. Those who are interested can find the draft report here.

Saturday, September 27, 2008

The US financial crisis and the consequent loss of trust

The Balance of Payments, Australia and the sub-prime crisis continues to be one of the most visited posts on this blog. I have now updated the analysis somewhat in in a post on my personal blog, Saturday Morning Musings - longer term impact of the US financial crisis.

From a long term perspective, one of the worst outcomes of the financial crisis is the loss of trust in business and in management. The crisis itself is all about loss of trust between institutions, a loss that has brought the financial system to a halt. However, the crisis has also further eroded community trust not just in the financial sector, but in the broader business sector. We will all pay a price for this.

I have tried to argue in favour of less business regulation because of the way it increases compliance costs. The current crisis makes this hard and will certainly see an expansion in finance sector regulation.

I do not think that anybody could argue, at least it would be very hard to argue, against the need for improved regulation in the US so far as the financial system is concerned. There is little choice when a sector imposes costs on all, threatening to bring down the entire global financial system.

The difficulty that then arises is to find the best way of doing this. I do not think that the US has a good record in this regard because of the way that that US regulation designed for the big imposes compliance costs on all.

Tuesday, September 23, 2008

Welcome Visitor 6,000

Back from China.

Welcome to visitor 6,000 who came from the United States searching on Australia minimum wage. This led him/her to Australia's new minimum wage - July 2008.