Change the Conversation

The last thing companies should be doing right now is paying dividends

The economic heart attack induced by COVID-19 has revealed an ugly truth – many very large companies have too little cash to ride out sharp downturns. Cash flow variability, and the inability to retain earnings to buffer that variability, is one of the most common reasons small businesses fail. Because large companies have raised large amounts of cash through public offers, and take in large amounts of cash in their ordinary operations, they ought to be more resilient. Yet even though the pandemic-inspired shutdowns are mere weeks old, many big companies such as Virgin Australia and listed childcare providers are already pleading for or receiving public guarantees and bailouts. Other companies such as Flight Centre and Cochlear are rushing to raise extra funds though discounted share placements. Bond and debt markets are experiencing severe problems, making it difficult for these companies to borrow. Why are big companies so vulnerable? Catastrophic declines in cash flow are only half the story. The other half is the three-decade focus on maximising shareholder returns. Companies have used four strategies to keep their share prices high and push them higher. First, they have paid out profits to shareholders in the form of dividends, leaving them with less to build cash buffers, pay higher wages and reinvest in the business. Reserve Bank research shows that over the past three decades dividend payouts have trended up over time to more than 80 cents of every dollar of corporate profits. In some companies dividends payouts exceed 100% of profits. Second, the same Reserve Bank research points to the increased use of share buy-backs and dividend reinvestment plans. The former boosts share prices by shrinking the stock of shares. The latter boosts demand for that stock. Third, to lock in these historically high dividend payout ratios, shareholders, including institutional shareholders such as superannuation funds, have demanded boards agree to dividend guarantees. […]

How do economic crises end?

The Issue We are now in the acute economic phase of a crisis that is unprecedented in modern times — a health crisis from the coronavirus pandemic that has sparked a follow-on economic crisis. The virus represents both a supply shock (as people are forced not to work and supply chains are disrupted by the need for social distancing) and a demand shock (as incomes plunge, people are unable to go out, and economic uncertainty surges). Moreover, these shocks have put severe strains on the financial system. Against this backdrop, the economic outlook has darkened considerably since the pandemic burst into public view, and many macro forecasters now expect a deep and painful recession as economic activity is abruptly curtailed. While much remains unknown about the spread and severity of the coronavirus crisis, and even though there are clear differences from the current situation, we can look at two past economic crises — the Financial Crisis and the Great Depression — to draw lessons. History suggests that two ingredients are needed to stanch the acute phase of an economic crisis; a transparent resolution of the underlying cause of the crisis and a dramatic economic policy response that both mitigates the economic damage and causes a shift in business and consumer sentiment. History suggests two ingredients are needed to stanch the acute phase of an economic crisis; a resolution of the underlying cause and a dramatic economic policy response that mitigates the economic damage and causes a shift in sentiment. The Facts: The Great Depression began with a financial panic that was ignited by the stock market collapse in October 1929. That panic quickly led to a run on banks and many bank failures. Indeed, the number of banks operating in the United States at the end of 1933 was down by almost half from its […]

The World: A Brief Introduction

An invaluable primer from Richard Haass, president of the US Council on Foreign Relations, that will help anyone, expert and non-expert alike, navigate a time in which many of our biggest challenges come from the world beyond our borders. Like it or not, we live in a global era, in which what happens thousands of miles away has the ability to affect our lives. This time, it is a Coronavirus known as Covid-19, which originated in a Chinese city many had never heard of but has spread to the corners of the earth. Next time it could well be another infectious disease from somewhere else. Twenty years ago it was a group of terrorists trained in Afghanistan and armed with box-cutters who commandeered four airplanes and flew them into buildings (and in one case a field) and claimed nearly three thousand lives. Next time it could be terrorists who use a truck bomb or gain access to a weapon of mass destruction. In 2016 hackers in a nondescript office building in Russia traveled virtually in cyberspace to manipulate America’s elections. Now they have burrowed into our political life. In recent years, severe hurricanes and large fires linked to climate change have ravaged parts of the earth; in the future we can anticipate even more serious natural disasters. In 2008, it was a global financial crisis caused by mortgage-backed securities in America, but one day it could well be a financial contagion originating in Europe, Asia, or Africa. This is the new normal of the 21st century. The World is designed to provide readers of any age and experience with the essential background and building blocks they need to make sense of this complicated and interconnected world. It will empower them to manage the flood of daily news. Readers will become more […]

If more of us work from home after coronavirus we’ll need to rethink city planning

We have seen an unprecedented rise in the number of people working from home as directed by governments and employers around the world to help stop the spread of COVID-19. If, as some expect, people are likely to work from home more often after the pandemic, what will this mean for infrastructure planning? Will cities still need all the multibillion-dollar road, public transport, telecommunications and energy projects, including some already in the pipeline? World’s largest work-from-home experiment Remote working was steadily on the rise well before COVID-19. But the pandemic suddenly escalated the trend into the “world’s largest work-from-home experiment”. Many people who have had to embrace remote working during the pandemic might not want to return to the office every day once restrictions are lifted. They might have found some work tasks are actually easier to do at home. Or they (and their employers) might have discovered things that weren’t thought possible to do from home are possible. They might then question why they had to go into the workplace so often in the first place. But what impact will this have on our cities? After all, many aspects of our cities were designed with commuting, not working from home, in mind. Stress test for NBN and energy networks From a telecommunications perspective, the huge increase in people working from home challenges the ways in which our existing networks were designed. Data from Aussie Broadband show evening peak broadband use has increased 25% during the shutdown. Additional daytime increases are expected due to home schooling with term 2 starting. Research by the then federal Department of Communications in 2018 estimated the average Australian household would need a maximum download speed of 49Mbps during peak-use times by 2026. If more people work from home after COVID-19, the size and times of peak use might need to be recalculated. […]

Australia’s COVID-19 opportunity

COVID-19’s impact on the Australian labour market has been dramatic and multifaceted. Some sectors of the economy have been almost completely shut down by government order. The demand in many industries has collapsed, while a few others have seen an increase. As many as one million jobs are under threat. Such estimates came before the government’s extraordinary JobKeeper scheme, which will undoubtedly reduce this figure considerably. Despite that, many who will keep their jobs may not actually have much to do at work. The economy will be in “hibernation” or on “life-support” for some time to come. We’ve gained about 1 billion hours of time If the economy has shed the equivalent of one million jobs, then we’ve gained about one billion hours of available time, and that’s just over the next six months. The full impact of the crisis could be even larger. What should we do with this time? Many of us are spending more time with children who are no longer physically at school. Some of us are doing tasks which our older relatives previously did. Netflix is also a compelling option. From a human capital perspective, the crisis presents a unique economic opportunity to re-train and up-skill Australia’s labour force. The Australian government jumped on board on Sunday, announcing funding that would cut the price of new six-month, remotely delivered diplomas and graduate certificates in nursing, teaching, health, information technology and science provided by universities and private tertiary institutions. Economists have long observed that investment in human capital (education, skills) tends to increase during recessions, because there aren’t as many well-paying alternatives. We can use it to get ahead of the curve In the current recession, the opportunities for training are greater. Even those of us who will remain employed but have little to do can use the time to invest in training. Our […]

Business leaders: the shift to stakeholder capitalism is up to us

Mireia GinéAssociate Professor, IESE Business School Silvio DulinskyHead of Business Engagement, Latin America; Member of the Executive Committee, World Economic Forum Stakeholders’ demands are forcing executives and decision-makers to rethink their organisations’ goals. Corporate governance is key to define the role of stakeholders within a corporation and to give a concrete meaning to “stakeholder capitalism”. The adoption of collaborative models will require new corporate governance approaches. Business leaders have a unique opportunity to transform their companies for the future. The concept of stakeholder capitalism has been gaining traction against the prevailing shareholder-primacy model of profit maximisation. As the World Economic Forum’s founder, Klaus Schwab, asked in a recent editorial: “What kind of capitalism do we want”? Profits are not the sole purpose of a business. Let us remind ourselves that corporations exist to solve problems and provide services. If they are successful at doing this, shareholder long-term returns can increase, as society in general is better served. The debate regarding the role of stakeholders within a firm is, primarily, a governance debate. As in most challenges that require robust leadership to change the way we live, work and interact, transformation starts from the top. Corporate governance sits at the heart of this – and for this reason, the World Economic Forum has recently published a framework structured around seven pillars: 1. Defining corporate purpose 2. Governance mechanisms 3. Corporate risk management 4. Regulation and corporate adaptation 5. Governing disruption 6. Long-term vision, short-term needs 7. Cultivating trust Establishing corporate purpose is not an abstract exercise. A strong purpose guides the complex process of establishing priorities, since all major corporate decisions involve necessary trade-offs. Purpose must not only be explicitly defined, it must also be implemented. Shareholders must understand the organisation’s purpose and be able to identify the metrics related to delivering on it. One […]

Did Tolkien write The Lord of the Rings because he was avoiding his academic work?

By John M. Bowers Umberto Eco has examined our ongoing fascination with the Middle Ages and listed ten different versions including the “shaggy medievalism” of works like Beowulf. Much of J.R.R. Tolkien’s success as a ﬁction writer derives from assimilating several of these fantasies of the past including the decadent Middle Ages described by Faramir at Minas Tirith. Strangely missing from Eco’s literary types was the jolly, earthy, boisterous Middle Ages of the Decameron in his Italian tradition and the Canterbury Tales in ours. This Chaucerian legacy, so clearly embodied in Tolkien’s hobbits, is easy enough to miss because it has been so thoroughly normalized in English literature that it no longer seems “medieval” at all, especially in Oxford where Chaucer had been a steady literary presence for more than ﬁve centuries. Some listeners inside Merton Hall in 1959 might nonetheless have been surprised that Tolkien, best known for his work on Old English poetry, devoted a section of his “Valedictory Address” to recruiting Chaucer to the cause of Language against Literature in a debate still very much alive in the retiring professor’s mind: His merits as a major poet are too obvious to be obscured; though it was in fact Language, or Philology, that demonstrated, as only Language could, two things of ﬁrst-rate literary importance: that he was not a fumbling beginner, but a master of metrical technique; and that he was an inheritor, a middle point, and not a ‘father’. Not to mention the labours of Language in rescuing much of his vocabulary and idiom from ignorance or misunderstanding. Repeating views about Chaucer from his letter to John Maseﬁeld in 1938, this encomium would have sounded surprising only because nobody knew about Tolkien’s efforts at rescuing 14th-century vocabulary and idiom during his own long labors on Selections from Chaucer’s Poetry and Prose.HTMLPreview Like almost all medievalists […]

Mature Man Working On Community Allotment

How access to land plus a participation income could change the world

Samuel Alexander, University of Melbourne and Alex Baumann, University of Western Sydney | 27 February 2020 We’ve spent enough time criticising our broken system characterised by overconsumption and inequality so here’s a solution that should appeal to both sides of the political divide. Our civilisation is facing an alarming barrage of overlapping crises, together presenting an existential threat to life as we know it. Climate breakdown is intensifying; we are decimating wildlife populations; and more generally the life-support system called Earth is trembling under the weight of overconsumption. Just as concerning are the social consequences. The global economic system has produced deep, socially corrosive inequalities; poverty around the world is extreme; and worst of all, perhaps, is that even those who are “winning the rat race” so often find that the promises of consumer lifestyles are unfulfilling. Too much ink has been spilt already criticising this broken system. What about solutions and creative responses? In words often attributed to Albert Einstein, we cannot solve our problems with the same kinds of thinking that caused them. In this article we’d like to offer some new thinking: a policy proposal that we feel has the potential to be transformative. At its simplest, our proposal involves providing self-selecting unemployed public housing residents with a basic, living wage. With housing and other basic needs secured, the goal would be to enable these public residents to participate voluntarily in the creation of “simple living” communities and neighbourhoods that are sustainable, resilient, and consistent with human flourishing. If successful, our “wager” or hypothesis is that these initial examples could be scaled up to support the economically “redundant” and attract progressives across the political divide as a viable alternative for a sustainable society. Central to this vision is the recognition that access to land, just as with air and water, is not a market product. It is a human right and should be recognised […]

A new network of leaders changing the system together

For over 20 years, the Schwab Foundation for Social Entrepreneurship has recognised social entrepreneurs as a new breed of leader – values-driven, inclusive, compassionate, entrepreneurial individuals who develop sustainable new models in business, social development and environmental initiatives. They have been at the forefront of R&D for society and civilization, accelerating how we solve problems and imagining new futures through experimentation, iteration and practice. In these two decades, we have curated and gathered over 350 leading social entrepreneurs from 70 countries in the Schwab Foundation community and embedded them into the platforms of the World Economic Forum. Together, they have demonstrated significant progress on how we approach environmental sustainability and consumption, health and education, rural development and job training, and finding new ways to advance human rights and equality in different contexts around the world. However, poverty, inequality and climate change are too large and complex for any single social entrepreneur or institution to tackle alone. It should be recognized that many of these issues are interconnected. \The underlying causes also run deep in history, politics and culture, and our best solutions are often constrained by outdated rules and skewed power structures. We are seeing that, in order to create real change, dynamic interactions and multi-stakeholder partnerships across ideological divides are critical to making the radical changes that we know we need. We need social innovation diffused within every sector so we can adopt, adapt, diffuse and scale what this societal R&D has shown to be possible and sustainable – whether it be self-sustaining eco-businesses in the desert, or community-based, tech-enabled healthcare. Those driving the social innovation ecosystem require imagination, compromise, resilience and, above all, committed, courageous innovative people. Therefore, the Schwab Foundation has expanded its remit to recognise and support an ecosystem of pioneering actors who share a common purpose: to accelerate our progress towards the Sustainable […]

What is ‘ecological economics’ and why do we need to talk about it?

Anitra NelsonAssociate Professor, Centre for Urban Research, RMIT University Brian CoffeyVice-Chancellor’s Research Fellow, Centre for Urban Research, RMIT University, RMIT University As environmental crises and the urgency to create ecological sustainability escalate, so does the importance of ecological economics. This applied, solutions-based field of studies is concerned with sustainability and development, rather than efficiency and growth. Also, given that cities account for 70-80% of global economic activity and associated resource use, emissions and waste, they are central to finding solutions to the challenge of sustainability. Ecological economics recognises local to global environmental limits. It ranges from research for short-term policy and local challenges through to long-term visions of sustainable societies. Ecological economists also consider global issues such as carbon emissions, deforestation, overfishing and species extinctions. Core concepts You’re probably familiar with some core concepts of ecological economics. These include “steady-state economies”, “carrying capacity”, “ecological footprints” and “environmental justice”. A steady-state economy is both relatively stable and respects ecological limits. Drawing on the work of mathematician and economist Nicholas Georgescu-Roegen, economist Herman Daly elaborated the model, editing a 1973 anthology, Toward a Steady-State Economy. In 1990, Daly co-founded the International Society of Ecological Economics (ISEE). It had three key principles: the human economy is embedded in nature, and economic processes are actually biological, physical and chemical processes and transformations ecological economics is a meeting place for researchers committed to environmental issues ecological economics requires transdisciplinary work to describe economic processes in relation to physical reality. Joshua Farley, who has worked with Daly, discusses some of these principles in an opening address to the Australia New Zealand Society of Ecological Economics (ANZSEE) conference at RMIT University later this month. In a partnership program of several North American universities, Farley teaches Economics for the Anthropocene postgraduates. They apply ecological economics to “real-world environmental solutions”. Some will talk at the conference about their research. Today overconsumption is measured against Earth’s carrying capacity. William Rees and Mathis Wackernagel developed the […]

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