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Competition and concentration issues in Australian investment markets

It’s been disparaged as 'political theatre' and as 'a solution in search of a problem', but in our view The House of Representatives Standing Committee on Economics is dealing with some meaty issues at present. The task in hand is to “inquire into and report on the implications of common ownership and capital concentration in Australia.” This is motivated in large part due to the burgeoning $3.3 trillion superannuation industry growing significantly, and being forecast to dwarf the domestic equity market in decades to come.

The Terms of Reference also call for an examination of “the changing influence between individual investors and small funds, compared to larger funds.” Disquiet about proxy advisory firms still lingers; and there are reservations about concerted or ‘organised’ action. “This inquiry will ensure that we empower citizens, not organised capital… [as] common ownership risks bypassing democracy”, says Committee Chair Tim Wilson.

Hopefully the Committee will provide a thoughtful ‘compare and contrast’ of participatory capitalism versus, say, participatory justice or participatory politics. Members of juries and voters in Federal elections need no qualifications, no documentation (yet), and no reasons for their votes. There is no cap on membership of a ‘party organisation’. You’re allowed to advise people how to vote. And acting in concert is encouraged, with both hung juries and hung parliaments seen as failure.

Agency problems and misaligned incentives

Governance and agency risks also call for careful consideration. If progressive, university-educated super fund executives vote a social-conscience agenda that’s in tune with urban, pink-collar, worker-member-shareholders, well, that’s not ‘agency risk’, it’s ‘commendable alignment’.

But what if conservative, cigar-smoking company management are of one mind with conservative, cigarette-smoking blue-collar worker-member-shareholders, perhaps in logging or coal-mining industries? What if super fund executives usurp those preferences by managing portfolios, and voting, in line with their own personal (say, anti-tobacco or anti-logging) predilections?

To Wilson’s concern that “a handful of ‘mega-funds’ make all the decisions, and ordinary investors are locked out and higher costs are paid by Australians”, we would have thought that, rather than attempting to restrain the ‘mega-funds’ from fulfilling their responsibilities, the Committee would be better employed in encouraging, if not requiring, the ’ordinary investors‘ to fulfil theirs.

That’s analogous to compulsory jury duty and compulsory political voting. No-one is ‘locked out’. It’s quite the opposite. ‘Ordinary investors’ are entitled to vote as they see fit. Likewise, ordinary super fund members are entitled to exercise choice of fund; and it so happens that many do not.

There may be value, also, in the Committee examining safeguards as to the conduct of company elections. As Joseph Stalin allegedly commented: “Those who cast the votes decide nothing. Those who count the votes decide everything”.

Tensions between scale and competition

Turning from processes to outcomes, Australia’s relatively small, affluent population of 25.6 million is, on the face of it, susceptible to excessive concentration and oligopolistic behaviour. A paper by Sasan Bakhtiari (2019) at the Australian Department of Industry finds concentration is increasing, especially for industries that are already heavily concentrated.

By far the worst examples are in utility-type industries, given economies of scale and high price regulation. In other Australian-focused research, a study published by Gallagher, Ignatieva and McCulloch (2015) found that dominant companies operating in concentrated industries generated significant risk-adjusted excess returns compared to firms in more competitive markets. Interestingly, this experience is the opposite of that found in the United States.

Balancing stakeholder interests

The hinterland, where micro-economics borders macro-economics, is a lawless and turbulent frontier. When an undifferentiated, commodity product such as nickel abruptly triples in price, it’s not because enterprising fossickers in the Kimberley have been texting their counterparts in Sulawesi and Norilsk, in a collusive scheme that channels their inner OPEC. It’s because the global economy has hit its straps.

Even if one were to assume that corporate owners and managers possess more than an illusion of control, and even if their power and concentration is indeed increasing, they are still beholden to the Rule of Law. It will be for the Committee to establish whether the rules of the corporate playing field are adequate, and whether the umpires are adequately resourced.

ACCC Chairs, present and past, have recently been conducting a robust debate on that question. It also needs to be remembered that powerful vested interests have been undermining start-ups ever since Tiberius destroyed the formula for flexible glass. It’s not illegal to invent an innovation, and then not to use it.

Working in tandem with the Rule of Law, to keep corporate and super fund power in check, is the Law of the Jungle. Innovation, consumer caprice, technological change, complacency, and hubris all work tirelessly to undercut the most muscular of corporate behemoths. As a result of these forces, industry concentration is a lot like a lava lamp – an endless cycle of mergers, acquisitions, spin-offs, break-ups and oblivion.

Finally, it’s well-known that economists love paradoxes, and we’d highlight three to the Committee.

First, the Committee will need to decide whether the problem is too much bad intent – “collusion”, in the words of the Chair; or too little good intent – “blunted incentives”, in the words of the Deputy Chair.

Second, it’s hard to blame super funds for asset growth when it’s fuelled by Government-mandated super contributions; or for increasing concentration when the Government regulator, APRA, is pressuring funds to merge.

Third, you can’t criticise the ACCC for allowing a situation where “higher costs are paid by Australians”, when it’s the Government that legislates exorbitant fees for privatised services, in its attempts to maximise the enterprise value it extracts from other companies, private equity and super funds.

 

David R. Gallagher and Graham Harman are with the RoZetta Institute – a university-owned commercial organisation focused on solving industry problems.

 

4 Comments
Ruth
November 14, 2021

Earlier federal public servant pensions are payable from consolidated revenue. The Future Fund is a sovereign wealth fund set up so that those pensions will not be a drain, or will be less of a drain, on future taxpayers. I see nothing wrong with that. Those pensions are taxable. In contrast state pensions had no wealth funds set up and are funded by current state revenues, and are not taxable as they are constitutionally protected funds.

Danny Casagrande
November 14, 2021

I agree that the expanding pool of Superannuation money could be used domestically and profitably to establish and enhance Australian innovative industry and infrastructure. Making us more self sufficient as well as growing industry that can be adopted and sold profitably to other like minded democratic nations.

Ruth
November 14, 2021

That is not the purpose of superannuation.

Trevor
November 13, 2021

YOU SAY :
"The Terms of Reference also call for an examination of “the changing influence between individual investors and small funds, compared to larger funds.” Disquiet about proxy advisory firms still lingers; and there are reservations about concerted or ‘organised’ action. “This inquiry will ensure that we empower citizens, not organised capital… [as] common ownership risks bypassing democracy”, says Committee Chair Tim Wilson."
AND :
"First, the Committee will need to decide whether the problem is too much bad intent – “collusion”, in the words of the Chair; or too little good intent – “blunted incentives”, in the words of the Deputy Chair."
AND:
"To Wilson’s concern that “a handful of ‘mega-funds’ make all the decisions, and ordinary investors are locked out and higher costs are paid by Australians”, we would have thought that, rather than attempting to restrain the ‘mega-funds’ from fulfilling their responsibilities, the Committee would be better employed in encouraging, if not requiring, the ’ordinary investors‘ to fulfil theirs."
THERE is no evidence that "ordinary investors' give a damn about their "Super Funds" or what they do to generate a return ,
as long as it just keeps coming ! Collecting it is SO FAR AWAY in the future , it is seemingly irrelevant to their daily lives !
Occasionally "one or two" 'ordinary investors' point out the HUGE DISPARITY between the "FUTURE FUND'S " HUGE earnings and their less than remarkable , pathetic returns , of THEIR OWN FUNDS , but that soon subsides or is ignored by media !
$248 BILLION socked-away "for the future benefit of Australians" they say !
"In a portfolio update, the Future Fund - set up to cover future superannuation liabilities of public servants - stood at $199 billion at the end of the September quarter, delivering a 10-year return of 10.5 per cent. This compares with a return target of 6.1 per cent." YEAH ! For AUSTRALIANS ! NOT REALLY.....only those employed as "public servants" !
Tim...it seems to me that DEMOCRACY HAS BEEN WELL AND TRULY BYPASSED right there !
AND as for all the "Super Funds" , why not "incentivise them" TO USE THEIR HUGE ACCUMULATION OF FUNDS
to " BUY BACK THE FARM."....re-establish Australian Industries using "Super Funds" in a tangibly beneficial manner......
and ensure "our ability to be independent and self sufficient" and not beholden to LESS DEMOCRATIC REGIMES !!????
How about A RANGE OF ELECTRIC VEHICLES suitable to Australian Conditions , starting with the mining , manufacturing and design and exportation of a SUPERIOR PRODUCT ? And SHIP-BUILDING ? Seems logical for an ISLAND NATION !
And also , commence a NUCLEAR INDUSTRY , from mining all the way through to EXPORTING FUEL RODS and then
recycling and RE-EXPORTING and even our own NUCLEAR REACTORS on our own NUCLEAR POWERED SHIPS !
We have the skills.....but we never seem to have the money ! Why not USE SUPER FUNDS and benefit every AUSTRALIAN?
The INDUSTRIES , once operational , could then be "floated" to individual shareholders if THIS seems more democratic !

 

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