Tag: state of the world

Shame, Australia, shame!

The article on parental leave in Wikipedia gives the leave entitlement for new mothers (and often fathers) in different countries.

I never knew how generous other countries were! I scanned through the column, gobsmacked. I’m so ashamed that Australia is only one of three countries with ‘zero’ in its column for number of weeks of paid maternity leave. The other two offenders are USA and Papua New Guinea.

Shame, Australia, shame!

I kind of feel sorry for him

From an opinion article in The Age , which observes the tide of public opinion turning against Australia’s Prime Minister, John Howard.

A former Keating government press secretary told a story last week about a recent encounter he had with a Sydney taxi driver. “He was Chinese and I asked him who he would be voting for. He told me that ‘All Chinese people will be voting for Rudd because he has a happy face’.” And, Howard, conversely, has a sad face.

The big WEEE Man

This sculpture was in the Outside Biome of the Eden Project. I really like it. It’s called ‘The WEEE Man‘. WEEE stands for ‘Waste Electrical & Electronic Equipment’, one of the more amusing acronyms in the sustainability field. It comes from the European Union WEEE Directive, which puts the responsibility of collecting and disposing of WEEE on the manufacturers.

The WEEE Man is made up of the amound and types of waste electrical and electronic products that an average UK citizen throws away in his or her lifetime. The sculpture is seven metres tall and quite impressive ‘in person’.

I was pleased with the explantory notes on the car bonnet next to the WEEE man. The writer had correctly identified that the greatest environmental impact in the lifecycle of a car is when it is being driven around. The manufacturing and disposal impacts are relatively minor. If you have an old bomb, you would be doing the environment a favour by getting rid of it and buying a more efficient new car.

This gives rise to the counter-intuitive notion that car manufacturers should design for performance, and limit a car’s durability. We don’t really want to let people drive around a ten or twelve year old car.

Accounting and finance: corporations in society

The first in this series can be found at Accounting and finance: the rationale. This post focuses on how corporations interact with society through the systems of accounting and finance. It considers:

  • Why does a company exist to profit shareholders?
  • What happens when a company fails? Who suffers the most?
  • Should companies be blamed for bad behaviour?
  • Is capitalism the answer? Is there are better way, waiting to be imagined?

Why does a company exist to profit shareholders?

This is actually a simplistic question, and perhaps is the wrong question to address the heart of my concerns.

A company focuses on profits to shareholders because that’s the deal it made. Remember: ‘Give me capital now and in return, you have a claim on my future income.’ Because shareholders have a stake in the prospects of a company, they have the right to influence the company’s strategy, usually by voting at general meetings. In reality, though, small shareholders like me have such diluted decision power (and little interest in voting) that we free-ride off the decisions of big institutional investors, who are hopefully voting to maximise the prospects of the company.

Okay, so the real question that I want to ask is actually ‘Why doesn’t a company look after its employees, the community and the environment at the expense of profits to shareholders?’

The answer is a little surprising: it’s meant to.

Shareholders actually have a claim on the residual earnings of a company. Through laws, the government sets the priorities of claims on a company’s assets — shareholders are meant to have the last of it. The company’s earnings must first be diverted to tax, meeting environmental obligations, employee pensions and leave, public reporting requirements, and all those other expenses of doing business in a country. These are all claims on a company’s income and are paid out of money that would otherwise go to shareholders.

Shareholders therefore take on the residual risk. It is risky, owning shares. If, after all of society’s claims on a company’s assets are made, there is nothing left for the shareholder, then they have lost their investment.

What happens when a company fails? Who suffers the most?

Things do go wrong. Think Enron in the United States, and Ansett in Australia. Companies fail for different reasons but it seemed to me that employees suffered the most from collapses.

Banks appear to do relatively well after corporate collapses. This is because when they grant a loan, they are clever enough to use the company’s tangible assets as collateral. A company that fails loses all the value associated with potential future income but it still has its buildings and equipment. When these are sold, the bank’s claim is prioritised and paid first.

Shareholders basically lose their investment because their willingness to pay for the stock was based on the expectation of future income. They may be able to salvage some of their money, once the company’s assets are sold off and debts are paid.

Employees have no ownership claim on tangible assets. Their livelihoods depended on the company’s income. They may lose their severance packages (usually expressed as some weeks of salary), which is important for them to survive the transition into new jobs. The severance package, however, is a minor amount compared to the promised pension (or superannuation). If employee pensions have been held in another trust, then pensions are protected from the collapse. If, however, the pensions are tied to company stocks (as was the case in Enron), then employees suffer at least as much as the shareholders. It’s the ‘all eggs in one basket’ effect on risk.

I’ve seen the Australian people call for compassion for and protection of employees of bust companies. In those situations, the government decided to step in to fund bail-out measures.

Should companies be blamed for bad behaviour?

In my view, there are two reasons we observe bad corporate behaviour:

  1. The company is breaking the rules of the game.
  2. The rules of the game do not reflect society’s values and need to be changed.

If a company breaks the law, then clearly it needs to be condemned for behaving immorally. The government and courts must enforce the law.

If a company acts within the law, yet we find ourselves disapproving of its actions, then as a society, we should lobby for changes in the law. If the priority of claims on a company’s assets and income is skewed too far in favour of shareholders, then the government should tax the company more, impose stricter environmental regulations, increase company contributions to employee pensions, and so on.

It would be nice if companies did all these things voluntarily but I think it would be naive to rely on corporate social responsibility. There will always be a few who lead the way in CSR but most of the pack will behave as dictated by the rules. The most reliable and consistent way to pull up the laggards is to raise the standards and enforce them.

Of course, setting ambitious regulations for corporate behaviour does not preclude education and discussion about a company’s moral behaviour. Exxon can be condemned for lobbying against renewable energy targets and carbon tax, even if it operates within the law. Telstra can be condemned for reducing telephone services to rural areas.

I believe, though, that in general, governments have been too weak. Failures of the financial system to serve society’s purposes are failures of the government more than of individual corporations. The government sets the rules of the system, and the system shapes the patterns of behaviour. In fact, I believe that the management teams of many corporations would be relieved by stricter regulation because it raises the entire playing field. Management can then justify investment into social and environmental initiatives because their shareholders are no more or less disadvantaged than shareholders in other companies.

Is capitalism the answer? Is there are better way, waiting to be imagined?

One day, capital might not be the limiting factor of productivity. One day, natural and manufactured resources may be plentiful. In this future, then, labour might be king and we, as individual owners of our skills, knowledge and experiences, will be powerful and wealthy. Another option might be to form coalitions of individuals, like unions, who are able to command a price for our labour. Labourism may have its own set of problems.

I suspect that capitalism is a robust system and will last a long time yet. We can spend time and have fun imagining a fundamentally different kind of system. However, in the near future, my own efforts will focus on modifying the system we have now to make sure it works for the benefit of the community.

Accounting and finance: the rationale

I’ll do my best to describe my understanding of finance, based on my accounting and finance classes this term, my discussion with the lecturer last week, and some thoughts I’ve put together since then. This post will be long and specific but some people have asked for it.

I will break up the topic into two posts. A 2000 word essay on accounting might be a bit much to take for readers of what Blogshares calls a humorous blog. This post looks at:

  • What is my function as a shareholder?
  • What does it mean, to own a ‘share’ in a company?
  • It seems like only the initial investors provide the needed capital. Why should subsequent investors get dividends and control of the company too?
  • So why does a company’s share price go up and down so much? Surely its assets don’t fluctuate from day to day?

The next post will be released in a few days and will consider:

  • Why does a company exist to profit shareholders?
  • What happens when a company fails? Who suffers the most?
  • Should companies be blamed for bad behaviour?
  • Is capitalism the answer? Is there are better way, waiting to be imagined?

I have been thinking about whether or not it is fair or desirable for people to live off a passive income from their share holdings. Companies operate to maximise profits to shareholders and in doing so, they may do things that I intuitively think is unfair, like downsize (‘rightsize’) their workforce, pollute the environment, avoid tax (legally), and lobby to keep perverse subsidies. What do shareholders do to justify such unswerving loyalty from the company? Well, I don’t do an awful lot, yet I’m getting money from dividends. And so, I’ve been worried that it is unethical for me to invest on the sharemarket.

What is my function as a shareholder?

Another way to ask this question is ‘How do shareholders contribute to the productivity of society?’ The traditionally held notion is that productivity requires three things: land, labour and capital.

In the past, aristocrats had a monopoly on land, which is the limiting factor in an agrarian society. Land is no longer so important, especially with the rise of knowledge-based services and the mass production of crops.

With the abolishment of slavery, nobody owns labour except their own (and maybe some powerful employee unions). Labour is not an asset; it does not show up on financial statements because a company cannot own its employees. Because you can only control your own labour, you will not get rich by working for a living.

Finally, society’s productive endeavours require capital, some means of obtaining the goods (shovels, computers, buildings) to do something. The function of shareholders is to provide capital. They also take on the residual risk, which I will talk about in the next post.

What does it mean, to own a ‘share’ in a company?

A ‘share’ is a claim on the assets of a company. The assets may be tangible, like property or equipment. They may be intangible, like money owed to the company and patents.

However, when an investor buys shares in a company, they’re not really interested in what the company owns at this moment. Its current assets are insignificant compared to the income that the company will generate over its life in the coming years. People choose to invest based on if they believe that future income will justify their initial outlay of cash and if they think they will do better here than putting their money in the bank, property or other stocks.

It seems like only the initial investors provide the needed capital. Why should subsequent investors get dividends and control of the company too?

When a company wants to raise money, it tries to convince potential investors that they will do better buying its stocks than anyone else’s: ‘Give me capital now and in return, you have a claim on my future income.’ The investor weighs up the risks and chooses to invest.

At some point, though, they decide they don’t want this risk anymore. In their opinion, the company’s fortunes are going down or they find an investment that they believe will give them better returns. So the initial investor says to the market, ‘Who would like to buy off me the risk of owning this company?’ and someone says, ‘Based on my analysis of the company’s prospects, I will buy the risk for this amount.’ If the price is acceptable, the exchange takes place.

So why does a company’s share price go up and down so much? Surely its assets don’t fluctuate from day to day?

Shares are a measure of a company’s value. Some of the value is based on its assets and liabilities (debts and obligations) but the most important things to a company’s prospects cannot be represented on a balance sheet. Things like research investment, many patents, staff experience and skills, brand, relationships with existing clients, company leadership, company strategy, all these aspects cannot be valued financially and/or controlled by the company, so do not show up on the balance sheet.

Their effects, however, do show up on the income statement, which shows how much money the company made over the year. Investors trying to decide what a good price for a company is will look at the income statement and extrapolate it into the future. In doing so, they have to make assumptions about the company’s growth rate, tax obligations, industry and political factors, the time horizon, and so on. All those things depend on the hard-to-value factors like brand and staff.

So, the reason why share prices go up and down so readily is that it relies on people’s different judgements of the company’s prospects and their own value of risk. This is why a stock price might plunge if a company is taken to court or spike if there is a new CEO. These factors are generally more important than how many buildings or bulldozers it owns.


A snapshot into the mess that is Joan’s brain.

The final version (after four major revisions).

For one of my assignments, I chose to look at glass recycling in the UK. The UK has an interesting problem — namely, it exports too much whiskey and imports too much wine! Whiskey comes in clear glass bottles, while wine generally comes in green glass. This means that UK glass recyclers have to deal with mounds of unwanted green glass, while UK industry is clamouring for the clear type.

The imbalance is made worse by mixed recycling systems. Councils in the UK have been putting lots of money into kerbside recycling to help UK meet its EU recycling targets (60% of glass packaging to be recycled by 2008). However, to ratchet up the recycling rate, households want the convenience of not having to sort through different coloured glass or having to provide space for bins for each colour. Colour contamination can muck up a batch of clear recycled glass.

What are the solutions? If you look at the relationships that I’ve drawn in the causal loop diagrams, you might find the right points in the system to poke. These are the options I’ve come up with:

  • Separate colour glass collections;
  • Developing other markets for yucky coloured glass (like crushing the glass up for use in roads);
  • Exporting green and mixed glass to other EU nations for reuse in containers;
  • Persuading importers to use clear glass containers or lightweight coloured glass (to reduce the amount of coloured glass being thrown out);
  • Increasing UK consumer acceptance of coloured glass containers; and
  • Increasing the collection of clear and amber glass (e.g. by encouraging recycling of jars).

I’m using this systems dynamics framework in my MPhil dissertation. It’s an interesting way to analyse cause-and-effect, feedback loops, and stocks and flows. At the moment, the title of my dissertation is, “A systems view of government policies to promote environmentally conscious housing design: comparison of The Netherlands, UK and China”. It’s a little unwieldy, I know. Coming up with a sexy dissertation title is not easy.

CheatNeutral — a funny but limited analogy

My friend, Dan M, sent me a very funny link. CheatNeutral pokes fun at the carbon offset industry by comparing it to people paying to offset their cheating.

I wrote back to Dan. This below is a slightly edited version of what I sent.

This is very funny. I’ve sent it onwards to five of my classmates. We’re working with an architecture firm on the legal/technical/social/economic/environmental management of carbon offset projects for renewables in building projects around the world.

The analogy between carbon offset and cheat offset is a tad questionable, though. Cheat offsetting is clearly a ridiculous concept and it’s meant to highlight the problems with carbon offsetting, namely that relying on offsetting does not provide incentives for reducing the source of the problem. However, some of the ‘outrage’ from cheat offsetting is that cheating is a moral issue. More and more, pollution has become a moral issue (‘It’s evil or irresponsible to pollute at any level’) but the morality of pollution is by no means universally accepted.

There are still large sectors of society that believes that there may be an optimal level of pollution and appropriate compensation for pollution. This is completely different to, say, if a Chief of Police comes out and says that their crime fighting budget has been allocated based on a risk assessment that has determined the optimal number of child molestations. That’s because child molestations (and cheating) are moral issues.

It’s kind of like the difference between the Australian government views drug use (‘Just say no’) and the Netherlands treatment of drug use as a health and social problem. Or the way medical researchers say that the costs of some animal suffering are justified by the benefits from testing on animals, while to animal rights activists, there is no ‘optimal’ amount of animal suffering.

So the key difference between carbon offsetting and cheat offsetting is that carbon offsetting can work. It does suck carbon out of the air. It could help mitigate global warming.

(Note that in Europe and other places, carbon offset projects include replacing fossil fuels with renewables or more efficient appliances. It doesn’t just cover sequestration by growing trees or pumping CO2 into the ground).

Of course, we can’t rely on carbon offsetting because the fundamental problem is that we live in a world that encourages (even mandates) increasing consumption and growth. Even if we were to eliminate CO2 emissions, current CO2 generating activities have other environmental impacts that cause problems, like resource depletion, toxic pollution, habitat destruction and so on. Offsetting can’t address these problems. Even eco-efficiency can’t address these problems (see Jevons Paradox). I have come to believe that cold nuclear fusion (clean limitless energy) will just allow us to destroy the earth even faster.

To me, it would have been more correct to have compared carbon offsetting with, say, a reliance on chemotherapy. Chemotherapy doesn’t generally have a moral dimension. It’s effective in many situations but there are plenty of negative side effects — and surely it is ‘better’ to address cancer triggers.

Of course, that wouldn’t have made as funny a website as CheatNeutral.

Doing a Bradbury

In a dinner conversation a few weeks ago, we got to talking about the amazing feat of Steven Bradury, Australia’s first Winter Olympics gold medal winner. His win five years ago was the result of a jaw-dropping string of coincidences. Wikipedia describes these:

In the quarterfinals, Bradbury thought himself eliminated. He finished third (only the top two advance), but Marc Gagnon was disqualified, thus allowing Bradbury to advance to the semifinals.

In his semifinal, Bradbury was in last place, well off the pace of the medal favourites. However, three of the other competitors in the semifinal crashed into each other, leaving to him the second place and thus allowing him through to the final.

Again well off the pace in the final, once again all four of Bradbury’s competitors … crashed out at the final corner, leaving a shocked Bradbury to take the gold medal, the first for Australia or any Southern Hemisphere country in an Olympic Winter Games event.

You can watch a video of the win. It makes me laugh in disbelief every time.

I love this paragraph from The St Petersburg Times article.

And that’s the beauty of it, the dazzling, wondrous beauty. The race isn’t always to the swift. You hear a lot about Citius and all a lot Altius and a little about Fortius, but sometimes, there is also something to be said for Erectus.

Too right, mate.