Spheres of influence - Ernst & Young - Global

EY: Can you give us an overview of how Australia got caught up in the global financial crisis, where it is now, and how it can move forward?

Kim Beazley: From the Australian point of view, the issues involved in the global crisis are issues occurring elsewhere. Among the preferred sources for foreign-direct investment in this country and among those who are our global trading partners. So this was, in a sense, other people’s business. I guess it’s been a matter of pride for the Australian government, and to some extent for the Australian people, that the regulatory environment here was such as to ensure relative immunity from the impact of things that occurred elsewhere.

The impact on us has been the product of slow growth elsewhere, not the product of a crushing burden on our institutions here. Having said that, you don’t want to get too prideful or complacent.

One of the things that has struck Australian government leaders, as much as it has struck everyone everywhere else, is that there needs to be a change in both the global regulatory environment and individual countries’ regulatory environments.

I think there’s a multiplicity of lessons. There’s an enormous focus on the right regulatory environment to ensure capital adequacy for the banks. Then there are lessons in relation to transparency: that you need to be able to see what financial institutions are up to and you need to see the impact of what that is likely to be. There are lessons about corporate greed and moral hazard: is it a good thing that globally we have a situation where there are many institutions too big to fail? The lessons are not yet fully teased out, nor the answers to them yet fully put in place. But one of the things you can say now when you look at the agenda of meetings like the G20 is that\the questions are at least being asked.

That leads to the question – do we need more regulation and should it be on a consistent and global basis?

KB: I think that one of the most stunning things to come out of this is a total change in the structure of global financial management and the global political environment. Ever since the end of the Cold War, people have been foreshadowing a phase of multi-polarity – a simultaneous rise of a number of powers, peer powers to the US after a short time of the US enjoying sole superpower status.

What the crisis seems to have done is accelerate what was perceived to be a 20- or 30-year trend and telescope it down to right now, and the G20 reflects this. The downturn has permitted a level of commentary and suggestion and driven purpose into each other’s economies in a way that simply wouldn’t have been tolerated before.

The notion of something remotely approaching a global regulatory environment would have been rejected out of hand two or three years ago. But now it’s seen as essential. If you actually read through the G20 documents they really are very intrusive, they really are quite directional in setting up where countries areexpected to regulate effectively, with the implication that if that effective regulation does not occur, there are going to be consequences.

What are your views on the stimulus package, its impact and what will happen after it’s finished?

KB: The Australian government’s stimulus package is absolutely spot-on. You can go into arguments about the administering and the supervision of particular elements of it. The opposition does do that here – basically in relation to those parts of the package that are delivered by state governments, but a lot of that is nitpicking around the edges. This was a perfectly calibrated stimulus package.

Now having said that, where is credit due for this? Well, it’s obviously due to the government but it’s also due to the Treasury. The package is based on Treasury advice, in the breadth of its content and the way in which immediate stimulation is withdrawn and the focus switches to long-term infrastructure as time goes by. This is not a product, if you like, of Labor Party ideology or social democratic ideology; this represents the best thinking of the Treasury.

Having come into office and being confronted by this crisis, the government was under automatic pressure to do what they really didn’t want to do – i.e., provide short-term stimulus, rather than long-term investment. Rudd was forced to take action that he had been very critical of when [former Liberal-National Coalition Prime Minister John] Howard had done it, but of course that was in very different economic circumstances.

The next tranche of the stimulus package, which looks to long-term infrastructure projects – improving the road, rail and port system, broadband for telecommunications – this is what the Rudd government truly loves. Their heart is in the end of the stimulus package, not the beginning, because the end of the stimulus package – looking at it as a projection over five to ten years – is investment in infrastructure that they said the Howard government should have focused on, but did not.

It seems Australia’s mid-term outlook is good but should we be cautious?

KB: The government, having been hit externally, is once bitten, twice shy. They’re not worried about anything that’s going on inside Australia, they are worried about what’s happening globally.

The big question in the minds of the government and its officials is, is there a second tranche? A second bite to the global financial crisis? Now we tend to report mid-year and northern hemisphere countries tend to report annually in the calendar year so January-February is the time when we all get worried. How much more toxic debt is out there? Are the capital underpinnings of the banks sufficiently sustainable? Is it going to keep the governments in the economies of the northern hemisphere going for longer than might otherwise be the case? Do they have the capacity to stimulate again if there is a second tranche to the crisis?

These are very, very big questions that go to the hearts of the areas where Australia traditionally draws investment and our markets – we’re a nation these days that relies very much more heavily on export. So I would think the people in Treasury and government are confident about our setting and where we’re headed, but pretty even-minded on the question of whether we’re going to get hit again externally.

Do you think that there will be an international push to rein in CEOs?

KB: There absolutely is and there will be a push to rein in CEOs. The CEOs’ remuneration is what attracts public attention, because that is the point at which an ordinary citizen feels the greatest sense of injustice: here are these greedy clowns, making huge sums of money for failure. And here is me, an operative on the shop floor, who’s not had much of a wage rise in the course of the last decade, losing my job as a result of things they’ve done – and I’m not walking away with a liveable redundancy package.

So that gets the focus and governments are trying all sorts of things to contain that, but what really matters is the actual financial structure of the financial institutions, that’s what has to be focused on. What the CEOs are going to have to do is address the new regulatory environment and address it honestly.

It’s almost a question of what shareholders are going to do. Shareholders need to be more demanding of their CEOs and their performance, their transparency and also more skeptical of their packages and what these reward. In so far as the CEOs have an influence over boards and the shareholders about how they ought to be remunerated, the CEOs ought to seek rewards when they create real wealth not when they’re basically risk taking. I suppose those suggestions would have about as much influence on the system as the average Sunday morning preacher’s exhortation to observe moral principles on their congregation.