14/10/2010 - 00:00

Long-term vision lacking expression

14/10/2010 - 00:00

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Unrealistic expectations plague our society, from the market to the political realm.

SHORT-TERMISM in the stock market is often blamed on the structure of investment funding and the incentives provided to

management.

But is there a deeper problem?

Last week I attended the last part of a conference put on by local think tank Mannkal, entitled The Sun Rises in the West.

One of the last speakers was WA Attorney-General Christian Porter, who provided a very thoughtful insight into one of the dilemmas of modern politics – something he called ‘liberal democratic utopianism’.

To cut a long story short, Mr Porter outlined a view that modern politicians are offering the seductive promise of a utopia that is just around the corner, which will be delivered by technology and small tweaks to our governance settings.

Mr Porter believed that real improvements were much slower than the answers politicians were selling, and often change had unforeseen consequences that was less than utopian.

It is easy to see this thinking in Australia’s modern politics, where political leaders willing to promise anything just to win power wheel out ‘solutions’ to intractable problems.

Voters accept these messages and then find themselves disappointed and angry when they fail.

Look at the backlash against former prime minister Kevin Rudd, who swept to power in 2007 on the back of promises to fix climate change. Within two and half years he was unelectable.

Mr Rudd also promised a more humanitarian approach to treating refugees arriving by boat, at the same time as promising to remain tough on this form of migration. This was a utopian vision; some might say it is having your cake and eating it too.

Of course, opposition leader Tony Abbott’s promise to stop the boats was equally short term but didn’t quite get enough voters to believe him.

Instead, voters and a couple of independent members were sold the idea that spending billions on a National Broadband Network will propel Australia to world-leading status as an IT superpower, solving many problems, such as the delivery of healthcare and education.

This is a utopian vision – within a few years we can spend our way to IT leadership, with a fibre network that can unleash the previously untapped brainpower of Australia’s next generation.

Health, exponentially rising as a cost to the community, will be delivered cheaply down a wire.

This is all meant to happen in a little more than the current term of government.

What a load of bollocks.

But this type of thinking is not isolated within the hyperbolic world of politics.

Those in the share market ought to consider this phenomenon when making investment decisions.

Few places in the world have stock market penetration to match that of Australia. It is a well-documented democratisation.

It would, therefore, be safe to assume that the same mistakes made by voters would be made by investors.

There are plenty of complaints from management that investors think too short term. But is it the managers themselves creating this problem, as much as the investors?

Don’t we see the same cycle in investment as we do in politics? Big promises backed by the populace who then tear them down when they fall short, all within a brief period of time.

Management often sells the vision in just the same way as politicians technology leaps will take the entity to a new future; company making strategic acquisitions take the corporation to a new level; the new CEO heralds a new paradigm in thinking.

To investors these all sound like utopia.

Do they ever turn out as the market expected?

The market is littered with

failures.

Dollar dramas

SPEAKING of utopia, the battle over currency valuations is heading into that territory with many commentators believing Australia needs to devalue the dollar to maintain its export competitiveness.

While there is no doubt that the high dollar is damaging to industries such as mining and agriculture, it is short-term thinking to start trying to manipulate the currency either through spending reserves or lowering interest rates.

The idea that we can somehow massage the Aussie dollar to reach some perfect price is daft.

The high dollar reflects the strength of our economy. It is also being pushed higher by manipulation of other currencies in a tit-for-tat game of high stakes. Those interfering in the markets will pay a high price for that at some stage.

It would be best for us to stick to a long-term approach that has served us well – a floating dollar largely free from government intervention and interest rates determined by an independent Reserve Bank of Australia.

It is not utopia, but has served us well in recent times.

Don’t argue

CONTINUING on the theme of short termism, former BHP Billiton chairman, Don Argus, railed against short-term thinking in the stock market at the spring dinner of the WA chapter of the Australian Institute of Company Directors.

Mr Argus took the traditional view that it was the investment managers that were prompting listed companies to pursue short-term share price gains rather than long-term value for all shareholders.

“It is also apparent to me that some management teams are being seduced by enterprising investment bankers to introduce capital management strategies around the needs of the short-term players rather than long-term investors,” Mr Argus said.

He also flagged big executive pay packages that were out of sync with long-term investors’ needs.

However, Mr Argus’ answer to this problem seemed in conflict with his long-term view.

He wanted to see directors put up for re-election annually, so that there was no way for them to hide behind three-year terms of office, which seemed to protect many ineffective board members.

Mr Argus said he had voluntarily put himself up for annual re-election in some of his major board roles.

It is intriguing that such a major player in the governance space, with a strong belief in focusing on the long-term needs of investors, also wants to see directors put up for re-election more often.

To me that would seem counter-intuitive.

• mark.pownall@wabn.com.au

 

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