The Financial Services Reform Act is not a riveting read. It is not likely to supplant discussion of politics at the dinner table. This is a pity because the Act regulates our personal savings, which are far more important.
The Act contains a sleeper that could well affect the management of our savings in ways we will not like. The sleeper provision was inserted as a last-gasp concession to certain interest groups just before the 2001 federal election. It obliges fund managers to disclose the extent to which they take account of "labour standards or environmental, social or ethical considerations" in their investment decisions.
Sounds innocent enough -- until you examine what it implies and to whom it opens the door. What is implied is that fund managers must account for their behaviour and the behaviour of the corporations in which they invest under the four criteria above.
Fund managers take care of much of our savings, including all of our super. They are often the most influential shareholder voice in the boardroom.
Some fund managers believe they will get away with generalised statements about their environmental, labour, social and ethical standards. Companies seem barely aware of this new threat coming via the institutions. They have not been listening either to the sponsors of the provision or to the host of "stakeholders" who are rubbing their hands in anticipation of all the new monitoring and auditing in which they will be involved.
This army of self-appointed "stakeholders" includes social activists, environmentalists, churches, trade unions, academics, consulting ethicists, anti-globalisers and virtually anyone who assumes the right to dictate to the corporate sector.
There are two prime features of these "stakeholders". First, they do not generally have a stake, so they do not suffer any consequences if their policies are damaging. Second, their agendas are vague and often conflicting but generally range from indifferent to hostile to the free market and profit.
Environmental, social and ethical viewpoints vary with religion, culture and personal opinion. What labour standards are to be applied beyond the existing detailed law? No wonder the officials of Treasury and the Australian Securities and Investments Commission are studiously avoiding the publication of detailed rules. But that does not let managers off the hook.
The Federal Government has effectively given a multitude of disparate groups the green light to monitor and harass the corporate sector. They are preparing to do just that. The provision is ostensibly voluntary and purports only to enforce disclosure. In practice, no fund manager will be allowed to give a nil or vague return and the obligation will go beyond disclosure into enforcement of the agendas of the interest groups.
This is a poor piece of legislation when seen in the context of recent corporate scandals. The unedifying spectacle of American CEOs swearing to do what they ought anyway to be doing indicates the futility of over-generalised obligations.
Corporate integrity will be improved only by effective enforcement of corporate accountability and by shareholder vigilance. Dilution of this focus by application of abstract new criteria will only generate bureaucratic activity. It will also provide incompetent executives with unlimited excuses for poor performance.
There is a worrying long-term trend of government and third-party interference in all of this. In the past two decades, we have seen federal governments impose taxes on super contributions and earnings, make super compulsory, restrict access to it and impose a progressive levy. Government takes more than $5 billion annually from our super funds. They have increasingly tied up and raided our savings.
Not content with interfering and taxing on their own account, the government has now opened the door to an army of self-appointed groups to influence the investment of our savings in ways which suit them but not necessarily us.
This is the top of a slippery slope. John Howard has promised tighter regulation if the corporate sector does not behave. In Britain, where a similar disclosure provision was enacted, there is pressure to toughen the rules to ensure closer observance of the wishes of the interest groups.
It is time for government to back off. It is already hard enough for institutions to earn the long-term return our ageing population will require to lead a decent life in retirement. Saddling them with vague forms of accountability to strident special interests will add substantially to costs and will reduce their scope to invest profitably on behalf of their real stakeholders: those who put their savings at risk.
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