Competition and concentration issues in Australian investment markets

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It has been denounced as “political theater” and as “a solution to the search for a problem”, but in our opinion, the House of Representatives Standing Committee on Economics is currently dealing with important issues. The task at hand is to “investigate and report on the implications of common ownership and concentration of capital in Australia”. This is driven in large part by the significant growth of the burgeoning $ 3.3 trillion pension industry, which is expected to eclipse the national stock market for decades to come.

The terms of reference also call for a consideration of “the shifting influence between individual investors and smaller funds, relative to larger funds”. Concern over proxy advisory firms persists; and there are reservations about concerted or “organized” action. “This survey will ensure that we empower citizens, not organized capital… [as] common property risks bypassing democracy, ”said committee chairman Tim Wilson.

Hopefully the Committee will provide a thoughtful “comparison and contrast” of participatory capitalism versus, say, participatory justice or participatory politics. Members of juries and voters in federal elections do not need any qualifications, documentation (yet) and no reason to vote. There is no limit to membership in a “party organization”. You are allowed to advise people on how to vote. And acting in concert is encouraged, with suspended juries and parliaments seen as a failure.

Agency issues and misaligned incentives

Governance and agency risks also require careful consideration. If progressive, college-educated super-fund leaders vote for a social conscience agenda that’s aligned with urban worker-shareholders-shareholders, well, that’s not an “agency risk,” it is. is a “commendable alignment.”

But what if the management of a conservative, cigar-smoking company agrees with conservative, cigarette-smoking worker-member-shareholders, perhaps in the logging industries or coal mines ? What if super fund executives usurp these preferences by managing portfolios and voting, in accordance with their own personal predilections (say, anti-tobacco or anti-logging)?

To Wilson’s concern that “a handful of ‘mega-funds’ make all the decisions, and ordinary investors are stuck and higher costs are paid by Australians”, we would have thought that, rather than trying to Restricting “mega-funds” from fulfilling their responsibilities, the Committee would be better placed to encourage, if not compel, “ordinary investors” to fulfill theirs.

It is analogous to compulsory jury duty and compulsory political voting. No one is “stuck”. It’s quite the opposite. “Ordinary investors” have the right to vote as they see fit. Likewise, ordinary members of the super fund have the right to exercise the choice of fund; and it turns out that many do not.

It may also be useful for the Committee to examine the guarantees for the conduct of company elections. As Joseph Stalin would have said: “Those who vote decide nothing. Those who count the votes decide everything ”.

Tensions between scale and competition

Moving from process to outcome, Australia’s relatively small and affluent population of 25.6 million is, on its face, prone to over-concentration and oligopolistic behavior. An article by Sasan Bakhtiari (2019) from the Australian Department of Industry reveals that concentration is increasing, especially for industries that are already highly concentrated.

By far the worst examples are the utility industries, given economies of scale and tight price regulation. In other Australian-focused research, a study published by Gallagher, Ignatieva and McCulloch (2015) found that dominant firms 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 the interests of stakeholders

The hinterland, where microeconomics rub shoulders with macroeconomics, is a lawless and turbulent border. When an undifferentiated commodity like nickel sharply triples in price, it’s not because enterprising Kimberley fossickers texted their counterparts in Sulawesi and Norilsk, as part of a collusive ploy that channels their internal OPEC. It is because the world economy is at the end of its rope.

Even if one were to assume that business owners and managers possess more than an illusion of control, and even if their power and focus does indeed increase, they are still beholden to the rule of law. It will be up to the committee to determine whether the rules of the corporate game are adequate and whether the referees have sufficient resources.

ACCC Presidents, present and past, have recently had a vigorous debate on this issue. It should also not be forgotten that powerful vested interests have been undermining start-ups since Tiberius destroyed the flexible glass formula. It is not illegal to invent an innovation and then not use it.

Working in tandem with the rule of law, to keep the power of corporations and super funds in check, is the law of the jungle. Innovation, consumer whim, technological change, complacency and pride all work tirelessly to undermine the most muscular of corporate behemoths. Because of these forces, the concentration of industry is very much like a lava lamp – an endless cycle of mergers, acquisitions, splits, breakups and oblivion.

Finally, it is well known that economists love paradoxes, and we highlight three of them in the Committee.

First, the committee will have to decide whether the problem is too bad an intention – “collusion,” in the words of the chair; or too few good intentions – “blunt incentives,” in the words of the vice president.

Second, it’s hard to blame super funds for asset growth when they are fueled by government-mandated super contributions; or to increase concentration when the government regulator, APRA, presses the funds to merge.

Third, you cannot fault the ACCC for allowing a situation where ‘higher costs are paid by Australians’, while it is the government that legislates exorbitant fees for privatized services, in its attempts to maximize the enterprise value that it extracts from other companies, private equity and super funds.

David R. Gallagher and Graham Harman are with the RoZetta Institute – a business organization owned by a university focused on solving industry problems.

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