THE annual profit reporting season is over for another year for most companies, those with June 30 balance dates.
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As noted two weeks ago average profits increased around 7 per cent.
Many companies also raised their dividends and they are likely to have increased even more with shareholders pressuring companies to pay out more of their profits while interest rates on bank deposits are at record lows and alternative sources of income are scarce.
Companies with surplus capital are also lobbied to pay it to shareholders by way of buy-backs and special dividends. The current buy-back by Telstra is a good example. Unfortunately this keen desire for dividends may be retarding our progress and costing us jobs.
Shareholders own companies and elect their directors. If they want more profits paid out it is an easy option for directors to take, far easier than developing a plan to use the money to grow the company and justifying it to shareholders.
Paying extra cash to shareholders is also risk free, whereas implementing business expansion plans involves a great deal of risk, to both the company and the directors’ careers.
Reserve Bank governor Glenn Stevens recently expressed the view that corporate Australia had lost its appetite for risk and we needed more of the bold, entrepreneurial leadership that had previously driven innovation and development, thereby lifting our living standards.
Our businesses have done very well over the last 40 years, making Australians one of the richest people in the world. We have become world leaders at finding and exploiting mineral reserves. We have innovated in many areas from the bionic ear to cervical cancer vaccine.
Recently we have also become one of the world’s most regulated countries. Company directors must consider far more than just business risks in deciding whether to proceed with new projects.
There are occupational health and safety rules, equal opportunity rules, anti-discrimination rules, privacy rules, best practice procedures, continuous disclosure requirements, abuse of market power regulations and many more. All must be backed up with regular audits to ensure compliance.
These are in addition to regular financial reporting demands. If companies are found to have been in serious breach of any of these regulations directors can be held responsible and, in some cases, personally liable.
There are also unions to negotiate with. While most make responsible claims to advance members’ interests a few in monopolistic positions use their power to force companies to accept excessive demands, such as with Western Australian tugboat crews.
This hurts Australia's competitiveness. Several proposed major mining projects have been cancelled due to high labour costs. Other unions have used guerrilla tactics such as striking during concrete pours and black banning companies to make directors’ lives difficult.
Fortunately not all directors are bowing to shareholders' desire for cash or the regulatory challenges.
Myer CEO Bernie Brookes confirmed last week the company would continue with a $160 million plan to update stores and attract customers, despite shareholders lobbying for the money to be paid out.
Gina Rinehart and her management team are pushing full steam ahead to build the $10 billion Roy Hill iron ore mine in WA despite the recent big fall in iron ore prices. Construction is employing 3500 people currently and the mine will create 2000 permanent jobs.
Shareholders should remember that companies need to invest capital to grow themselves and their future income streams, and we all need to realise that innovation and entrepreneurship will not thrive in a world of compliance and bureaucracy such as we have today.