We have been constantly reminded that one of the main reasons for high executive remuneration is the need to attract and retain world class leadership in our corporations. Consequently we have seen annual remuneration spiralling above $10m per annum in many of our largest corporations. Such packages not only mark significant reward for expertise, they create significant pressure on executives to produce results commensurate with their remuneration. To demonstrate to shareholders (and possibly to themselves) that they are worth such compensation, there is a subtle pressure to make changes in order to improve profitability, increase growth rates and shareholder returns. And quickly. It is quite feasible to recognise the pressure towards short-term thinking for quick improvement in a corporations reported fortunes. With the average rate of turnover less than five years, what benefit is there in working on developments which will have significant long-term benefits? What incentive is there to adopt short- and medium-term pain in order to set up a business for decades to come? The pressure to justify the remuneration creates an environment where it is beneficial to sacrifice long-term creative thinking for short-term creative restructure, and has perhaps encouraged increased risk-taking. It explains why so few companies are ahead of the curve when it comes to carbon emissions. Why it is easier to close an operation in Australia because costs are cheaper overseas. The bottom line in this year's report is more important than the well-being of the workers or the country in which you sell.
The pressures on business executives are immense and worthy of recognition and reward. But have we created extra (counter-productive) pressure by rewarding at the levels which have been evident in recent years?
In the lifetime of most people there has never been the depth of economic instability which is in evidence today. Seismic shifts in economic activity in every sector are apparent as we see the unwinding of an economic boom which has lasted nearly two decades. Governments are working furiously in the hope to prevent this turning into another depression. The Australian government is still operating under the belief that it can stop the recession and prevent the falling in house and other asset prices. When you remember that the ultimate catalyst for this economic downturn (I use the term advisedly) was the collapse of the house of cards which propped up share and house prices in the USA – ill-secured debt. A perfunctory perusal of graphs showing the shift in share prices, house prices and household wealth over the last 60 years shows that we had long abandoned any attachment to the long-term trend line. But… such trend lines cannot be ignored unless there has been a quantum shift in the economy, such as happened during the industrial revolution. Such a shift is not yet evident, although the emergence of environmentally-sensitive technologies might be the basis of one (though not yet).
No Western government whose citizens have experienced this asset bubble will be able to escape its unwinding in this downturn. Long-term relationships are evidence of a deep-seated connection between the price of assets and absolute wealth. This bubble was created by profligate use of debt, which has ultimately been its undoing, and cannot be left behind until the debt has worked its way out of the system, either by repayment (unlikely in many cases) or in declared losses by corporations carrying the debt. No economic stimulus package can escape this reality.
So what are governments to do?
In the best interests of the country, the governments should invest in the next generation of infrastructure. In Australia, the targets are obvious: solar technology, public transport infrastructure, education, and communications are clearly areas of underinvestment which would benefit from government investment, which would not only provide employment in the present, but would also lay out a foundation for a more environmentally friendly and efficient future. We don’t need further tax cuts to be spent on plasma and LCD TVs. We need to move our economy away from dependence upon coal, iron ore exports and uranium to prop up (I use the term loosely) our current account. Let’s get ahead of the game. The country’s budgetary position is better placed than most to auspice such development at the moment.
The next two to three years will be difficult as the economy absorbs the realities being unwound. Now is the time to shift the paradigm. Now is the time to recognise opportunities. While companies are dealing with a shifting economy, let them factor in a serious carbon trading scheme, and let households be encouraged to invest in solar technology and water capture and recycling.
We dare not prop up industries and companies which we would be better off without in the long-term. Our task is not to maintain what is, but to facilitate what will be.
I fear, however, that our governments will squander the opportunity, to the detriment of us all.