Insights Volume 11 April 2012

insights Melbourne business and Economics volume 11 april 2012

Optimal inequality for economic growth, stability, and shared prosperity: the economics behind the Wall Street Occupiers Protest

By Richard B. Freeman

The sustainability of the audit profession: a practitioner’s perspective

By Annette Kimmitt and Adam Wood Just a knowledge worker? Academics, universities and industrial relations

By Margaret Gardner Natural resources, manufacturing and trade: a long-run perspective

By Ronald Findlay

Disadvantage and life-satisfaction

By Ian M. McDonald Occasional addresses

Peter Nash Philip Brass Paul Carter

Insights: Melbourne Business and Economics ISSN:1834-6154 Editor: Associate-Professor Geoff Burrows Associate Editor: Ms Brooke Young Sub-editor: Ms Rebecca Gleeson

Advisory Board: Professor Kevin Davis Professor Bryan Lukas Professor Ian McDonald Design: Ms Sophie Campbell Illustration: Tanya Cooper

insights vol 11 Table of contents 02 Welcome

By Geoff Burrows, Editor

29 Natural resources, manufacturing and trade: a long-run perspective

By Ronald Findlay

05 Optimal inequality for economic growth, stability, and shared prosperity: the economics behind the Wall Street Occupiers Protest

Are abundant natural-resource endowments a ‘blessing’ or a ‘curse’?

By Richard B. Freeman

By Ian M. McDonald

The American ‘experiment’ with unfettered finance and huge inequality has not produced the promised economic nirvana. Rather, the evidence suggests that it has adversely affected the economy in various ways.

In Australia, there is a strong case for providing more help to disadvantaged groups that suffer from substantial losses of lifesatisfaction, especially the mentally ill.

13 The sustainability of the audit profession: a practitioner’s perspective

By Annette Kimmitt and Adam Wood

Given the diminishing importance of auditing within major firms, how might the audit profession evolve for a sustainable future?

35 Disadvantage and life-satisfaction

Occasional Addresses 41 Peter Nash 44 Philip Brass 47 Paul Carter

21 Just a knowledge worker? Academics, universities and industrial relations

By Margaret Gardner

The ‘managerialism’ much maligned in Australian universities is partly a response to their increased complexity, regulation and accountability.

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Welcome Insights publishes condensed and edited versions of important public lectures connected with the Faculty of Business and Economics. Its object is to share these lectures with the wider public, especially Alumni. The issues presented and developed generally relate to research findings on public economic and social policy. Insights also constitutes an archival source of an important part of Faculty life. Suggestions and comments from readers on any feature of the journal are welcome.

Endowed and named lecture series are an important feature of the University’s and the Faculty’s intellectual life. The Miegunyah lectures cover all University disciplines and the Faculty was fortunate in 2011 in having distinguished economist Richard Freeman as Miegunyah Fellow and Lecturer. His lead article presents a bleak analysis of the economic and distributional consequences of rising inequality in the US, albeit tempered by an optimistic conclusion.

The next three articles are all drawn from the Faculty’s annual lecture series. In the 72nd in a series recognised as the University’s longestrunning annual public lecture – the CPA Australia/University of Melbourne Annual Research Lecture – Annette Kimmitt and Adam Wood outline ideas for how the audit profession might evolve for a sustainable future against a background of changing regulatory requirements, turbulent economic and financial-market conditions and market pressures causing declining fees.

The institutional and industrial-relations environments in which academics engage in teaching and research have some distinctive features. The Foenander Lecture provided a forum for Margaret Gardner to examine how academic work is evolving in response to the changing settings in which universities operate.

The impact of the natural-resources boom on the Australian economy is a matter of ongoing debate, particularly whether the nation’s naturalresource endowments are a total ‘blessing’ or at least a partial ‘curse’. This question is examined

by Ronald Findlay in his Corden Lecture.

The inter-disciplinary Social Justice Initiative seminars have been an important source of articles for Insights since their inception in November 2007.

This program ceased in 2011 and in one of the last seminars in the series, Ian McDonald used data from HILDA surveys to analyse policy prescriptions for overcoming various forms of disadvantage using both demand- and supply-side concepts.

Occasional Addresses continue to be a rich forum for luminaries from the private and public sectors, academia and not-for-profit organisations to reflect on their experiences and advise graduands about the transition from ‘gown’ to ‘town’ and career development more generally. In this issue, Peter Nash stresses the importance of lifelong learning and skills development; Philip Brass emphasises the importance of ‘people’ skills, including mentoring; and Paul Carter explains the importance of business ideas to personal development.

Geoff Burrows Editor ghb@unimelb.edu.au

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Article heading here

optimal inequality for economic growth, stability, and shared prosperity: the economics behind the wall street occupiers protest The American ‘experiment’ with unfettered finance and huge inequality has not produced the promised economic nirvana. Rather, the evidence suggests that it has adversely affected the economy in various ways. by richard b. freeman

A condensed version of the Miegunyah Lecture delivered at the University of Melbourne on 24 August 2011.

In autumn 2011, Occupy Wall Street moved into the financial district of New York City to protest income inequality in the US. Dividing the country between the upper 1 per cent whose income had increased massively and the 99 per cent whose income had stagnated in preceding decades, the occupiers claimed to speak for the majority under the slogan ‘We are the 99%’.

In similar protests throughout the US and in countries from Australia to Mongolia, the occupiers accomplished what US academics and unions had failed to do: move inequality from a sub rosa topic that invoked charges of inciting class warfare to the centre of economic discourse.

President Obama, who earlier defended Wall Street’s million-dollar bonuses as the just reward of ‘savvy businessmen’, spoke in October 2011 of ‘broad-based frustration about how our financial system works...[in which] a lot of folks who are not doing the right thing are rewarded’. Republicans who initially denounced the occupiers as a mob ‘engaging in class warfare’, or who castigated them for not being rich, switched gears to make sympathetic comments.

When I gave the Miegunyah lecture ‘Optimal inequality for economic growth, stability, and

shared prosperity’ in August 2011, I had no inkling the occupiers were less than a month away and that their demonstration would open the space for serious discussion of inequality. I have added the subtitle to this paper to reflect their contribution.

My analysis focuses on three questions: – Is there a level of inequality that optimises economic growth, stability, and shared prosperity? My answer is yes. The relation between inequality and economic outcomes follows an inverted-U shape, so that increases in inequality improve economic performance up to the optimum and then reduce it.

– Did inequality in the US exceed the optimum level in the 2000s, as the occupiers believed?

With the highest inequality of any major economy, the US is the best case for addressing the question of whether inequality can go beyond the optimal level in a market democracy.

Arguably, the huge rewards at the top of the US income distribution drove the financial chicanery and excessive risk-taking that led to the implosion of Wall Street and the great recession. Inequality reached levels that harmed growth, stability, and shared prosperity.

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– What danger does excessive inequality present to the future of market democracy?

High inequality creates a society in which wealthy ‘crony capitalists’ dominate corporate and government policies, subvert market competition and corrupt democracy in order to maintain their position atop the income hierarchy. This system differs from the state capitalism found in China, Russia and some developing countries, in that large corporate interests and the barons of wealth rather than central governments control economic policy. I call it economic feudalism.

The relation between inequality and growth, stability, and shared prosperity Economists have greater tolerance for inequality than most people. They stress the importance of the monetary incentives associated with inequality in motivating people to undertake economically valuable behaviour. The communist experiments proved that inequality can be too low for an economy to function well.

But inequality that results from monopoly power, rent-seeking or activities with negative externalities that enrich their owners while lowering societal income (think pollution or crime), adversely affect economic performance. High inequality reinforces corruption by allowing a few ‘crony capitalists’ to lobby politicians or regulators to protect their economic advantages. When national income goes mostly to those at the top, there is little left to motivate people lower down. The 2007 collapse of Wall Street and bailout of banks-too-big-tofail showed that inequality in income and power can threaten economic stability and give the few a stranglehold on the economy.

Stipulating that inequality can be either too low or too high for optimal economic performance implies that output follows an inverse-U shaped curve with respect to inequality. Figure 1 illustrates the relation. When inequality is zero and output is modest, there is no incentive to try harder or invest in risky activities. In this state, increases in inequality raise output. Then, when inequality is extremely high, output is also low. The few people with the skills or background to compete for the 06

Optimal inequality for economic growth, stability, and shared prosperity

top jobs work hard, while everyone else coasts because they have little or no chance of reaching the top. Between these extremes lies the optimal level of inequality (I*).

Figure 1: Inequality-output relation is an inverse-U Increases in inequality raise output if economy is to the left of I*. Decreases in inequality raise output if economy is to the left of I*.

Output

I* Fair

US?

Inequality

The peak output I* does not necessarily reflect the ideal point. Societies may choose to trade-off total output for more-preferable distributions of output, for instance, by preferring inequality at F (because, say, the politically-dominant majority gains more from lower inequality than they lose from lower output). This is Okun’s (1975) famous equity-efficiency trade-off. Or a society may prefer inequality above I* (because, say, a wealthy politically-dominant minority gains more from higher inequality than they lose from lower output).

Society pays for this in the form of lower output.

What is the evidence for the inverse-U shaped curve in figure 1? International comparisons show that countries with higher levels of GDP per capita have lower Gini coefficient measures of inequality.

But this pattern presumably reflects the effect of economic development on inequality more than the effect of inequality on output. Comparisons of growth rates of GDP per capita among areas that differ in their initial level of inequality or whose inequality changed would seem to be a better way to identify the impact of inequality on economic outcomes. The studies that do this report widely different results depending on the data set and country sample, and thus are not particularly helpful.

In a laboratory experiment, Alex Gelber and I (Freeman and Gelber, 2010) organised subjects into groups of six and asked each person to solve a

packet of mazes. We rewarded them for the number of mazes they completed under three incentive systems: a low inequality system in which everyone in the group received the same amount of money regardless of what they produced; a high inequality system that gave a large prize to the person who solved the most mazes and nothing to anyone else; and an intermediate incentive system that gave increasing rewards to persons who ranked higher in the maze competition.

Figure 2 shows that this design produced an inverse-U relation between inequality and output.

The group with no incentives had the lowest output, the group in which only the top person earned a prize had a modestly higher output while the group with the middling level of inequality solved the highest number of mazes.

Figure 2: Reported number of mazes solved in maze experiment at given incentives 19 18.5 18

equal pay all incentives top wins all

17.5 17 16.5 16 15.5 15 14.5

Source: Freeman & Gelber (2010)

Outside the laboratory, evidence suggests that firms that incentivise the bulk of workers do better than firms that give incentives primarily to a few high-paid executives. Presumably as a result, companies in the US and elsewhere have increasingly adopted profit-sharing and gainsharing modes of pay, employee stock ownership schemes, and all-employee stock options.

The rising tide of inequality The main thrust of economic reform in most advanced countries post Reagan-Thatcher has been toward policies that benefit people in the top rungs of the income distribution. Many goals – lowering marginal tax rates on high incomes, deregulating finance and other industries, lowering welfare-state safety nets, privatising state-run

businesses and giving tax breaks to capital income – were not ostensibly to enrich the rich but to create incentives for those at the top to make decisions that would improve resource allocation and raise output. Policy analysts expected that the benefits from increased inequality would eventually trickle-down to all workers and broadly improve economic well-being.

This did not happen in the US. Since the 1970s upper-income earners have gained nearly all of the improved productivity while incomes have stagnated for most workers. In 1970 the upper 1 per cent received 8 per cent of national income; in 2007 they received 18 per cent. Most of this increase went to the upper 0.1 per cent of income recipients. In 1970 this group had 2.7 per cent of national income and incomes 27 times the mean income; in 2007 they had 12.3 per cent of national income and incomes 123 times the mean. If the share of income going to the upper 0.1 per cent had been constant, and the economy performed as it did, the income of all people in the remaining 99.9 per cent, including those in the lower 90 per cent of the upper 1 per cent, would have risen by nearly 10 per cent.

The US is an extremophile in inequality. The CIA’s World Factbook reports that in 2007 the US Gini coefficient was 45. Ranking countries from lowest to highest inequality, the CIA places the US in 93rd position among the 134 countries for which it provides data. If the US was a developing country, it would be in the bottom one-third of the ranking by inequality; if it were in Africa, where inequality is high, its Gini coefficient would rank it 20th of 35 countries.

Who is in the upper 0.1 per cent? In 2005 some 63 per cent of people in the upper 0.1 per cent worked in finance and real estate (Bakija et al., 2010). Much of their income was capital income.

In 2011 the top 0.1 per cent received 38.1 per cent of all US capital income while the top 1 per cent received 56.8 per cent. The IRS reports that in 2007 the 400 persons with the highest adjusted gross incomes earned 10 per cent of all capital gains, and 4 per cent of both interest and dividends. These high income earners benefited from the lower tax rates on capital income than on labour income and from the increased share Insights Melbourne Business and Economics

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of national income going to capital. If they were executives they also benefited from compensation systems linking earnings to capital income through stock options and restricted stock payments.

The concentration of people in finance and real estate at the top of the income distribution reflects in part the repeal of the Glass-Steagall Act, which Congress enacted in 1933 to establish walls between the deposit-taking commercial banks and the riskier investment banks that issue securities in order to limit financial speculation and the risk of financial meltdown. The repeal permitted a massive expansion of finance, created banks-toobig-to-fail and drove huge increases in Wall Street incomes. In 1990 total compensation for security and commodity brokers was 31 per cent of the compensation for federal civilian employees; by 2007 it was 93 per cent. In 2007 finance absorbed 40 per cent of business profits. Wall Street hired some of the country’s brightest university graduates to develop new financial instruments, which it peddled as essentially risk free. Had these new financial instruments reduced risk worldwide, the bankers and financiers would have earned their high pay – instead, they leveraged the new instruments, lowered mortgage standards and increased risk until Wall Street imploded.

In terms of the ratio of the earnings of workers high in the income distribution to workers low in the income distribution, in 2009 the earnings of people in the 90th percentile was 4.98 times that of people in the 10th percentile in the US. This compares to a 3.05 average for advanced OECD countries and 3.33 for Australia. From 2000 to 2009 the ratio in the US increased by 0.49 points, which compares to an average increase of 0.07 points for the advanced countries. As an indicator of the position of low paid Americans, in 2010 the US federal minimum wage was US$7.25 while the Australian federal minimum was AUD15.51.

Using the exchange rate, the minimum wage workers in Australia earned twice as much as minimum wage workers in the US. Part of the increase in upper-bracket earnings took the form of a massive growth in CEO pay.

Estimates by Business Week and the Institute of Policy Studies show a CEO-to-worker pay ratio of 42:1 in 1980, of 107:1 in 1990 and of 325:1 in 08

Optimal inequality for economic growth, stability, and shared prosperity

2010. Much of this high CEO pay took the form of stock options, restricted shares or bonuses. When share prices rise, the owners of options and shares benefit even if price rises reflect factors outside their control. When share prices fall, boards dominated by executives often issue new options at the abnormally low market prices which pay off handsomely when the market recovers. Some firms did this immediately after 9/11, turning a national disaster into a way of lining their own pockets.

Similarly, in December 2008 when the financial sector needed massive government support to survive and the federal government ran a huge deficit to stimulate the economy, Goldman-Sachs issued nearly 60 million options to its executives, who benefited from the taxpayer bail-out and ensuing recovery.

Much of the inequality in US incomes occurs among individuals with nominally similar skills.

The dispersion of pay in the US among workers with similar scores on adult literacy and numeracy tests exceeds inequality in pay among all workers in Germany, the Netherlands, and Sweden.

Similarly, the dispersion of pay among US workers with the same age, gender, ethnicity, years of schooling and so on exceeds dispersions of pay in many advanced countries. Equally surprising, Barth et al. (2010) found huge differences in pay among workers with similar measured skills by the firms in which they work.

If the US had high rates of social mobility, or if the economy had performed exceptionally well in the period of high and rising inequality, one might argue that inequality approximated the optimal level.

The US economy performed well enough pre2007 to convince many analysts that it was the best-performing major capitalist economy, but subsequent events proved this view illusory.

Instead of reducing risk, Wall Street had enveloped the real economy in a highly-leveraged financial house of cards – an estimated $22 of derivatives for every dollar of goods and services produced in 2009. Instead of creating a flexible labour market that could rebound quickly from a major economic shock, the US rapidly laid off workers in the recession but then increased employment slowly. Joblessness grew and many workers left

the workforce because of the lack of demand for labour. Poverty increased and even fully-employed workers came to rely on food stamps to keep their heads above water.

The US experience casts grave doubt on the proposition that more inequality brings more efficient economic performance and that economic reforms should invariably favour corporations and the wealthy on the notion that they are ‘job creators’. But does the experience tell us something more – that the high level of inequality contributed to the financial collapse and weak recovery, and thus exceeded the optimal level?

Even before the crisis, some analysts such as Bebchuk and Fried (2004) showed that executive compensation systems were not working as promised. But most experts were not particularly troubled. It took the financial disaster and recession

to encourage more critical thinking about the payperformance nexus. More and more studies are finding that rewarding only those at the top does not improve economic performance. Bianchi and Freeman (2012) found that firms that incentivise executives with high-powered stock options have slightly worse performance than firms with lesser incentives.

When the financial sector was booming, there was a similar complacency among researchers. Many examined Wall Street through the lens of the efficient market hypothesis, which assumes more or less that whatever the market produces must be right. Alan Greenspan’s 2002 paean to credit default swaps – ‘As the market for credit default swaps expands and deepens, the collective knowledge held by market participants is exactly reflected in the prices of these derivative instruments’ – reflects this Panglossian view of finance.

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Financial crises often uncover widespread crime through which the financial sector makes huge earnings by fraud, insider trading, options backdating, securities scams, financial misreporting or amoral practices bordering on illegality. Even before the Wall Street disaster, FBI Suspicious Activity Reports highlighted a rising trend in mortgage fraud while SEC data showed substantial financial misreporting. Investigators uncovered and successfully prosecuted the top executives of Enron and other firms. In many cases, the firms accused of financial misfeasance agreed to pay large fines as long as they were not forced to admit criminal negligence. I anticipate that ongoing investigations into the behaviour underlying the financial implosion will uncover much venality, chicanery and crime motivated by the chance to make huge sums of money.

Finally, there is the potential link between high levels of inequality and the behaviour of regulators and legislators. Imagine this: you work for the US Securities and Exchange Commission (SEC) and have to judge whether a particular firm has defrauded its customers. You earn $120,000 a year.

The firm regularly hires experts from the SEC at $500,000 a year. You are thinking of leaving the government. The evidence is complicated. How do you decide? The term ‘regulatory capture’ represents what economists think often happens: you decide the evidence supports your potential future employer. If inequality were less and the firm paid experts $150,000 a year, I hypothesise less capture of regulators and more capture of firms/individuals defrauding their customers.

Hazchem: from market capitalism and democracy to economic feudalism The greater the concentration of income in a society, the more the wealthy will act collectively to advance their interests against that of other citizens. ‘Crony capitalism’ describes economic systems where wealthy insiders work in concert with politicians to enrich themselves. Many blame the economic problems of developing countries, such as the late-1990s Asian financial crisis, on this phenomenon. Until the latest financial crisis, most economists viewed the US and other advanced capitalist countries as largely immune to ‘crony capitalism’. ‘Regulatory capture’ – the process by 10

Optimal inequality for economic growth, stability, and shared prosperity

which regulators become so entwined with the group they regulate that they worry more about the interests of that group than the interests of the public – was supposed to be a problem limited to specific industries, regulations and agencies rather than a systemic disease that afflicted the entire economy. The Wall Street crisis and its aftermath changed this view.

The evidence shows the extent of such behaviour in the US. In the mid-2000s nearly 35,000 lobbyists were registered to lobby for Congress alone. Thousands more lobbied other government agencies and the courts. About 43 per cent of Congress who left government to join private life registered to lobby. Between 1998 and 2008, the financial sector – finance, insurance, and real estate – spent US$3.44 billion on lobbying alone and contributed US$1.74 billion to political campaigns for a total investment in rent-seeking of US$5.18 billion. The US Supreme Court decision that individuals and corporations can spend unlimited sums of money in political campaigns has strengthened the ‘crony capitalists’ power to affect the 2012 elections.

In 1961, before inequality had increased to the point in which the wealthy would invest massively in politics and lobbying, President Eisenhower warned the US about the danger of groups that had unwarranted influence and misplaced power – the industrial military complex. Today, I believe he would warn the country about the unwarranted influence and disastrous rise of misplaced power of a different complex – the ‘financial-political complex’. The increase in inequality is intrinsically connected to the rise of this danger to the country, both as a cause of the spread of ‘crony capitalist’ operations and, given the success of these operations, as an effect as well. It has brought the US to a level of inequality far beyond the optimum in figure 1. It risks turning market capitalism into what I call economic feudalism – a social system in which the upper 0.1 per cent, or even fewer, dominate the economy and politics.

Conclusion Can the US reduce inequality toward its optimal level and reverse the movement toward economic feudalism? I believe that the concerted efforts of

concerned citizens can do this; and the activities of the occupiers are a sign of change in society. The increased opposition of conservatives – some in the ‘tea party’ movement – to ‘crony capitalism’ is a sign that the campaign to rein in the excesses of inequality in the economy and polity cut across ideological lines.

Part of the push back will come from individuals and groups using low-cost Internet-based information and communication technology and social media to increase transparency and pressure business and government to reject policies that benefit the few at expense of the many. Internet campaigns forced the Bank of America to drop a planned banking fee on its low income customers and forced Verizon to withdraw a $2 payment fee for customers paying their telephone bills online.

Part of the push back will come from inside the financial-political complex, as more and more people realise that finance has become a huge rentseeking machine instead of a system for allocating capital from investors to its best use in the real economy. And part will come from the economic superiority of firms that distribute the incentives and rewards to a larger proportion of the workforce; and from the innovative activities of entrepreneurs that use the latest science and technology to create new products and processes in the real economy.

to the increase in US earnings dispersion (mimeo), NBER. Bebchuk, LA & Fried, J, 2004, Pay without performance: the unfulfilled promise of executive compensation. Harvard University Press, Cambridge.

Bianch, J & Freeman, R 2012, ‘Are executive stock options effective incentives or effective rent-sharing?’ (in process), NBER. Freeman, RB 2007, America works: critical thoughts on the exceptional US labor market, Russell Sage Foundation, New York.

Freeman, RB & Gelber, A 2010, ‘Prize structure and information in tournaments: experimental evidence’, American Economic Journal: Applied Economics, 2:1, pp. 149–164.

Okun, A 1975, Equality and efficiency: the big trade off, The Brookings Institution, Washington DC.

Richard B. Freeman holds the Herbert Ascherman Chair of Economics at Harvard University, and is Director of the Labor Studies Program at the National Bureau of Economic Research.

References Bakija, J, Cole, A & Heim, BT 2010, ‘Jobs and income growth of top earners and the causes of changing income inequality: evidence from US tax return data’, November http:// web.williams.edu/Economics/wp/Bakija ColeHeimJobsIncomeGrowthTopEarners.pdf Barth, E, Bryson, A, Davis, JC & Freeman, R 2010, The contribution of dispersion across plants Insights Melbourne Business and Economics

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Article heading here

the sustainability of the audit profession: a practitioner’s perspective Given the diminishing importance of auditing within major firms, how might the audit profession evolve for a sustainable future? by annette kimmitt and adam wood

A condensed version of the 72nd Annual CPA Australia/University of Melbourne Annual Research Lecture presented by the first author on 17 October 2011. A recorded version of the lecture can be found at: http://www.youtube.com/watch?v=pzjqG91YGrc&feature=youtu.be

Introduction This address explores the impact of major regulatory changes – combined with turbulent economic and capital-market conditions – in the last decade on Australia’s major professional services firms, particularly the profitability and sustainability of their audit practices. It explores how these developments have impacted on the major firms’ pursuit of sustainable growth, and finally posits ideas for how the audit profession might evolve for a sustainable future.

Whilst the lecture draws on some rudimentary research in support of the ideas posed, it draws heavily on the speaker’s experience as the managing partner of Ernst & Young’s (EY’s) assurance practice (2007 to 2009) and its broader Melbourne office (2009 to present).

The constantly changing landscape During the last decade we have seen: the ‘dot. com’ bubble burst and major corporate collapses throughout 2001/02; the reverberations from the events of 11 September 2001; the introduction of Sarbannes Oxley (SOX) requirements in 2002; the continued expansion by the Australian Securities and Investments Commission (ASIC) of its financial-reporting surveillance program; the introduction in 2004/05 of the Corporate

Law Economic Reform Program (CLERP 9); increased auditor scrutiny by the Public Company Accounting Oversight Board (PCAOB); further corporate collapses in Australia during 2004/06; the transition in 2005 to International Financial Reporting Standards (IFRS); auditing standards becoming legally enforceable in 2006 and being further ‘clarified’ in 2010; the 2008 Global Financial Crisis (GFC) causing financial distress on a scale not seen since the 1930s; a post-GFC debt crisis plaguing the US and the EU; corporate Australia impacted by large-scale natural disasters from 2009 to 2011; and ongoing changes since 2005 to the entire suite of IFRS and related interpretations.

For auditors, these changes have increased the risk and complexity of auditing financial-statements and highlighted the importance of audit quality to market confidence. As the ‘contracted regulators’ of financial reporting, auditors have inevitably increased audit effort in response to these higher risks. One measure of greater risk is the increasing rate of corporate insolvencies, as shown in Table 1.

Table 1: Corporate insolvencies Australia 2006–11 2006/7

2007/8

2008/9

2009/10

2010/11

7,487

7,907

10,005

9,281

9,829

Source: ASIC

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Another measure of risk, related to going-concern judgments, is the proportion of qualified and modified audit opinions issued in Australia, as shown in Table 2.

Table 2: Qualified and modified audit opinions Australia 2005–09 % qualified or modified opinions

% unmodified opinions

2005

15.3

84.7

2006

13.8

86.2

2007

13.7

86.3

2008

22.2

77.8

2009

23.2

76.8

Source: ASIC

In response to this increased post-GFC risk, EY created ‘close monitoring panels’ to oversee the work of audit teams on clients with potentially problematic risk ratings. More generally, the major firms have invested nationally and globally to ensure their resources, policies and operational practices keep pace with regulatory, economic and other changes to deliver quality audits. As a consequence, the firms have incurred increased costs from: – Ensuring global audit methodologies, tools and templates comply with mandated auditing standards; – Dedicating personnel to ongoing ASIC and PCAOB liaisons and inspections; and – Ensuring that documentation and review processes support and defend audit opinions.

Overall, major firms have had to devote more resources to matters unrelated to the substantive issues of audits without any impact on their quality. These views are supported by a study of audit stakeholders by Houghton et al (2009), which found: no evidence that the legal backing of standards has in fact enhanced the credibility of financial statements, the quality of auditing and its role in the capital market or reduced the likelihood of unanticipated corporate collapse ... however ... the changes have given rise to considerable cost – financial and non-financial ... and have ... profoundly 14

The sustainability of the audit profession: a practitioner’s perspective

changed the structure of the work ... [with] considerable continuing consequences for audit firms and their staff.

Nevertheless, the success of the major firms as the ‘contracted regulators’ of financial reporting throughout this turbulent period has been reaffirmed by both ASIC and the Australian Treasury. ASIC’s 2010 audit firm inspection found that Australia’s audit regime compares well internationally.

Similarly, the Australian Treasury (2010) stated ‘that Australia’s financial reporting system and audit regulation is both robust and stable’.

The impact on audit fees and how firms have responded in the pursuit of sustainable growth The increasing risks, complexity and costs of financial-statement audits would suggest substantial increases in audit fees, particularly post-2008. However as Figures 1 to 3 highlight, this has not occurred. Note that these graphs present nominal audit fee data, meaning that audit fees, in real terms, declined during 2008–10.

Figure 1: ASX total audit fees (2007–2010) $’000 500,000

ASX 101-200 total ASX 51-100 total ASX 50 total

450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0

2007

2008

2009

2010

Source: IBIS World Top 200 Companies, September 2011

Figure 2: ASX average audit fees (2007–2010) ASX 50 average ASX 51-100 average ASX 101-200 average

$’000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

2007

2008

2009

2010

Source: IBIS World Top 200 Companies, September 2011

Figure 3: ASX total audit fees and market capitalisation year-on-year growth (2007–2010) ASX 50 total ASX 51-100 total ASX 101-200 total mcap ASX 50 mcap ASX 51-100 mcap ASX 101-200

25% 20% 15% 10% 5% 0 –5% –10% –15% –20%

2007-08

2008-09

2009-10

Source: IBIS World Top 200 Companies, September 2011

Some key points are: – Total nominal audit fees for the ASX200 fell by 12 per cent in 2010; – Total nominal audit fees for the ASX200 grew by 5 per cent for 2007-10, but in 2010 were 11 per cent below the 2008 peak; and – For the ASX50, which accounts for approximately 70 per cent of audit fees, fees declined by 3 per cent in 2009 and 12 per cent in 2010.

The outcome is that declining real audit fees have failed to fully compensate major firms for their increased audit effort. For EY, like its competitors, this has translated into material reductions in the audit practice’s realisation rates.

The phenomenon of declining audit fees has continued into 2011. The Australian Financial Review (29 August 2011) reported that the largest companies had shaved ‘more than $12 million off their audit bill in the past year’, and that ‘half the top 20 listed companies to report in the past 12 months paid less than they did the previous year’.

IBISWorld (2011) predicted that revenue from core services such as auditing is ‘expected to be flat, with clients unwilling to absorb fee increases’, further noting that falling industry revenue in the three years through 2010–11 will largely offset the increases seen through the previous two years, with industry-wide growth expected to average only 1.8 per cent per annum over the five years through 2010–11.

So why are the increased risks, complexity and costs of audit not translating into economic outcomes for auditors? The insight of Houghton et al (2009) is that while auditors believe auditing substantially benefits corporate stakeholders and capital markets (via information quality), audit clients typically regard auditing as a ‘compliance good’ that is not inherently valued.

Chief executive officers (CEOs) and chief financial officers (CFOs) collectively denigrated the value of financial statement audits. In efficient markets ‘compliance goods’ are invariably subject to priceminimisation by purchasers.

So how have the major firms responded to an audit market increasingly under pressure in their pursuit of sustainable growth? The responses can be considered at two organisational levels: the level of the audit practice and the level of the firm.

Response at the audit practice level At this level, the major firms typically responded by pursuing both greater market share and improved practice productivity. The pressure from clients to ‘share their pain’ and reduce fees, particularly since the GFC, has seen firms aggressively competing for market share on price. Although this was regarded as tolerable at the time on the basis that pricing would ultimately ‘rebound’, what was not appreciated was the extent to which purchasers of audit services, particularly the CEOs and CFOs ‘setting the price’, regarded audit as a ‘compliance’ good. Consequently, the expected pricing rebound has emerged instead as lower normalised realisation rates for audit practices.

Predictably, the firms also focused significant efforts on improving auditor productivity. At EY this involved (i) eliminating non-valueadding work, (ii) more effectively developing and deploying technological innovations, and (iii) more innovatively utilising the firm’s human capital. To this end, during 2007 EY implemented an Audit Effectiveness and Efficiency Coaching program across the assurance practice, involving a continuous cycle of team-based coaching, and techniques to provide on-the-job learning to facilitate continuous improvements in audit effectiveness and efficiency. Small teams of coaches perform desk-top assessments Insights Melbourne Business and Economics

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of audit engagements to identify potential improvements around applying the firm’s global audit methodology, audit planning, utilisation of resources and the involvement of other specialists such as IT experts. Action plans are then codeveloped with engagement teams to optimise audit plans, team structures and audit executions.

The program has improved the effectiveness of audits and identified and eliminated non-value adding work.

EY also invested heavily in technology to drive greater effectiveness and efficiencies in the execution of its global audit methodology. It was the first major firm to enable its audit methodology using a real-time web-based technology platform, GAMx, and migrate approximately 60,000 audit professionals in 121 countries to the platform.

The deployment of GAMx has delivered productivity improvements by, for example: – Enabling consistent global application of the firm’s audit methodology to ensure compliance with mandated auditing standards; – Integrating into the technology significant guidance on applying the firm’s audit methodology plus diagnostics that operate as monitoring controls to reduce errors related to documentation and methodology; – Enabling concurrent real-time access to audit work papers for all audit team members, driving greater efficiencies in audit execution, including the review and resolution of problems as they arise; – Providing an enhanced communication environment for audit teams and also providing local audit teams with real-time oversight of the progress of global audits, all of which have improved the coordination of global audit teams and engagements; and – Simplifying many administrative tasks, enabling audit teams to place greater focus on understanding audit issues.

All of the major firms have also driven significant productivity improvements by incorporating the extensive use of data and process analytics and continuous controls monitoring into audit 16

The sustainability of the audit profession: a practitioner’s perspective

engagements. These innovations have, for example, enabled: – Low-cost extraction of large volumes of data from clients’ systems and provided ‘look back’ capacity for reviewing total populations of transactions to test the effectiveness of controls; – Continuous monitoring of key business processes to reduce the extent of manual testing and improve the efficiency with which end-toend processes are monitored; and – Continuous automated monitoring of controls to better target audit efforts to heightened areas of risk.

The globalisation of the major firms and their focus on delivering absolute consistency in the development and quality of their staff, regardless of location, means these firms now have significant high-quality talent pools across developed and emerging economies which can be strategically deployed to reduce audit cost-rates. This does not mean ‘outsourcing’ to low-cost service providers. Rather, the firms leverage lower cost rates in certain regions by having their staff in those regions execute audit tasks sourced from developed nations. Consequently, the firms are able to ‘off-shore’ audit tasks from, for example, Australia to Bangalore or the Philippines without compromising audit quality.

During 2009/10, the Australian arm of EY offshored approximately 8,000 hours at an estimated cost saving of $640,000. That amount rose during 2010/11 to 29,000 hours and an estimated cost saving $2.3 million and is targeted to reach 60,000 hours and an estimated cost saving of $5 million in 2011/12. The nature of audit work being off-shored includes audit preparation and completion work, testing of controls and substantive procedures, and audit administrative and support procedures.

Off-shoring is also enabling the Australian arms of the major firms to better engage their ‘on shore’ staff to focus on complex audit issues and valueadding tasks. This in turn enhances learning and development environments, with flow-on benefits related to staff retention and the identification of high-performing staff in developing nations for potential transfer or secondment to Australia.

Response at the whole-of-firm level At the firm level the major response has been diversification. IBISWorld (2011) reported that, ‘a significant factor in the revenue growth of the larger firms over the past few years was the large variety of services they offered. The big ... firms developed new areas of business not directly related to traditional accounting services.’ Each major firm has rebuilt its advisory and consulting arm, with particular emphasis on organisational performance improvement capability. This has seen waves of acquisitions – for example, Deloitte’s acquisition of Access Economics, and PwC’s acquisition of PRTM. The advisory and consulting arms have delivered significant growth to each of the major firms in recent years. For example, the Australian Financial Review (15 August 2011) reported that: – PwC’s 2010/11 growth rate of 14.7 per cent was driven largely by demand for consulting/ advisory services for which revenue grew 25.3 per cent for the 12 months to 30 June 2011, compared to 2 per cent for the traditional audit practice. Indeed, PwC’s CEO, Mark Johnson, stated that ‘assurance and tax would be smaller parts of our firms in five years’; and

– KPMG’s advisory services generated 44 per cent of overall revenue for the 2010/11 year, with the expectation that by the end of 2011/12, these services would account for half of all revenues.

EY’s 2010/11 growth rate of 14.8 per cent was likewise driven largely by demand for advisory services, which grew 29 per cent. EY also expects that advisory services will soon account for half of its Australian revenues.

Evolving for a sustainable future All these pressures mean that audit practices, as currently focused, are of diminishing importance to the longer-term sustainable growth, branding and reputations of the major firms. One consequence is that the work of auditors is becoming less attractive, especially to generation Y (Houghton et al, 2009). Audit work is also coming under further threat, for example, from the European Commission’s recent green paper Audit Policy: Lessons from the Crisis, which potentially undermines the ability of the major firms to deliver the quality audits the market expects. Some of the more extreme measures anticipated are: banning audit firms in the EU from providing non-audit services to audit clients who are Public Interest Entities; and creating audit-only firms by prohibiting the dominant large firms from providing non-audit Insights Melbourne Business and Economics

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services to any organisation, whether or not that organisation is an audit client.

Accordingly, given the diminishing importance of auditing as a source of sustainable growth within major firms, how might the audit profession evolve itself for a sustainable future?

It is clear that the future of financial-statement auditing is about ensuring the market sees the characteristics it brings and chooses to value, the alternative being the ‘compliance good’ philosophy and continued reductions in costs and fees.

The profession must collaborate with stakeholders in this regard. However, the audit profession forgoes an enormous opportunity if it regards its future as inextricably linked only to financialstatement auditing.

The traditional financial-reporting model focuses on a relatively narrow account of historical financial performance and value-creation. Globalisation and the resulting interdependencies in economies and supply chains, advances in technology, rapid population growth and increasing global consumption have significantly impacted on the quality, availability and price of resources, including water, food and energy. The need for a broader information set is clearly demonstrated by the small percentage of market value now represented by physical and financial assets – down to only 19 per cent in 2009 from 83 per

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The sustainability of the audit profession: a practitioner’s perspective

cent in 1975. The remainder represents intangible factors, some of which are explained in financial statements, but most of which are not. The type of information needed to assess past and current performance and future prospects is much wider than is provided for by the existing financialreporting model.

External reporting is now due for a wave of reforms.

The International Integrated Reporting Council (IIRC) is developing an integrated reporting framework that will guide the development of external reporting over the coming decades. It has issued a discussion paper (IIRC, 2011) and intends to issue an exposure draft in 2012.

According to the IIRC, integrated reporting should bring together material about organisational strategy, governance, performance and prospects in a way that reflects relevant commercial, social and environmental contexts. It will combine elements of information currently disclosed in disconnected reporting strands into a coherent whole to explain how organisations create and sustain value in the short, medium and long terms. The IIRC anticipates that this will become an organisation’s primary report, replacing all existing requirements. South Africa, through the Johannesburg Stock Exchange, has already moved to mandate integrated reporting, with the first iterations due for the 31 March 2012 reporting period.

Irrespective of its outcome, the IIRC’s integrated reporting project merely builds upon existing developments in financial and non-financial reporting, including: – The Global Reporting Initiative’s G3.1 Sustainability Reporting Guidelines; and – The work of many other organisations to develop principles, methodologies, guidelines and standards for the reporting of non-financial information, such as: The Prince’s Accounting for Sustainability project; the Global Reporting Initiative; the World Business Council for Sustainable Development; the World Resources Institute; the World Intellectual Capital Initiative; the Carbon Disclosure Project; the Climate Disclosure Standards Board; the UN Global Compact; the International Corporate Governance Network; and the Australian Water Accounting Standards Board. The latter is set to issue a final water accounting standard in 2012, with legislative backing under the Water Act (2007), which incorporates requirements for all general purpose water accounting reports to be independently assured for compliance with the water accounting standard.

Annette Kimmitt is Melbourne managing partner of Ernst & Young. She was previously a Senior Project Director with the International Accounting Standards Board.

Adam Wood is a senior accountant in Ernst & Young’s Victorian Assurance practice.

References Australian Treasury, March 2010, Audit quality in Australia: A strategic review, Canberra.

Houghton, K, Jubb C, Kend M and Ng J 2009, The future of auditing: Keeping capital markets efficient, ANU Press, Canberra.

IBISWorld, May 2011, Accounting services in Australia: Market research report (ANZSIC L7842).

International Integrated Reporting Council Discussion Paper, 12 September 2011, Towards integrated reporting: Communicating value in the 21st century.

These developments, encompassing external (as opposed to financial) reporting, provide a tremendous opportunity for the audit profession.

The skill sets of audit professionals have traditionally been applied to provide assurance related to financial statements. Those skills are capable of much broader applications in the provision of assurance related to these broader information sets.

Our auditing profession must develop and execute plans for capitalising on these opportunities and ‘owning’ external-reporting assurance in the way it currently ‘owns’ financial-reporting assurance.

The audit profession has a window of opportunity to position itself as a critical element of market confidence as the ‘contracted regulators’ of all external, and not just financial, reporting. In this way the audit profession can rebuild the image of auditing as a stimulating and rewarding career and evolve for a sustainable future.

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Article heading here

just a knowledge worker? academics, universities and industrial relations The ‘managerialism’ much maligned in Australian universities is partly a response to their increased complexity, regulation and accountability by margaret gardner

A condensed version of the 2011 Foenander Lecture given at the University of Melbourne on 18 October 2011.

Introduction Orwell de Foenander, in whose name this lecture is given, devoted his academic life to Australia’s system of conciliation and arbitration, while dreaming of a day when collective bargaining would provide what he believed would be a freer, more-flexible and responsible way to regulate employer-employee relations. In Foenander’s time, the accepted definition of a university was of ‘a corporation of teachers or assemblage of colleges for teaching the higher branches of learning, and having power to confer degrees’ (Masterman, 1952:55). In contrast, the OED definition of a university is ‘a high-level educational institution in which students study for degrees and academic research is done’. In the differences between these two definitions lies the tension in academic work in Australian universities today.

In 1950s Australia, senior academics or professors were accredited as experts by the community for their higher learning, and that expertise guaranteed autonomy in the exercise of that knowledge, including how and what to teach and research. Flexibility was greater than in many other occupations and the traditions developed about teaching and research were given form in the university.

For over 100 years, Australian academics had many of their conditions of employment determined by

their university employers; then, after the middle of the twentieth century, by ad hoc decisions of commissions; and, finally, from 1974 through the federal Academic Salaries Tribunal (O’Brien, 1993).

In the post-World War II years, as Australian universities grew and began to educate their own staff by awarding doctorates, academics did not share in the collective employment regulation of many other employees, including other salaried professionals. Their employment frame of reference was more closely aligned with the doctors and lawyers whom they educated.

Changes in universities from the 1980s O’Brien (2003) argues that the key events shaping the industrial relations and regulation that we see today in Australian universities were: – The 1983 decision of the High Court of Australia that allowed university staff to access the federal industrial relations jurisdiction; – Federal registration of the Federation of Australian University Staff Associations (FAUSA) in December 1986; – The ‘second tier’ wage decision of 1987 and the ‘structural efficiency’ principle introduced in the 1988 decision; and Insights Melbourne Business and Economics

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– The amalgamation of universities with the more-unionised institutes of technology and colleges of advanced education (CAEs) from 1989 in the ‘unified national system’.

The proportion of casual staff in the academic staff population increased from 15 per cent to over 22 per cent of full-time equivalent staff during the 1995–2005 period.

Then came the 1991 decision of the federal industrial relations tribunal that formally introduced enterprise bargaining to the Australian system, followed by the Industrial Relations Reform Act, 1993 which entrenched collective bargaining as the dominant means to regulate wages and employment conditions in Australia.

Figure 2: Higher education – student/staff ratio (SSR)

Related to these changes were a series of major organisational shifts that are captured in part in Figures 1 to 4, which have four data points: 1975, 1985, 1995, and 2005. Figure 1 shows a slowly growing university system and an exploding CAE/ institute of technology system from 1975–85 – where staff growth of over 155 per cent in the college sector can be compared to a mere 5 per cent in universities.

However, during 1995–2005 higher education staff numbers grew by around 4.6 per cent, but full-time and fractional research and teaching staff declined in absolute numbers by 1.3 per cent. Relevantly, research-only staff in universities increased by over 33 per cent between 1995 and 2005.

Between 1975 and 2005, student numbers increased from 274,738 to 703,751, while student/staff ratios increased by around 45 per cent during this time as Figure 2 demonstrates.

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SSR – Higher Education

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SSR – CAE SSR – Universities

15

10

5

0

1975

1985

1995

For many academics in the last 30 years, the number of students for which they were responsible increased hand-in-hand with the number of casual or sessional staff which they had to coordinate. Full-time academics now manage large teams of casual and sessional staff in more than one subject or course.

While figures 2, 3 and 4 suggest major increases in higher education productivity in terms of students taught, doctorates awarded and publications achieved, technological changes in university systems have not materially decreased the effort required for teaching and research. Consequently, such major increases in teaching and research productivity are likely to have changed the way academics see their jobs and universities. Particularly for research-

Figure 1: Higher education – full and part time / casual academic staff

Full-time staff – CAE Full-time staff – University

40,000

Full-time staff – total Part-time staff – CAE

35,000

Part-time staff – University Part-time / casual staff

30,000

Total academic staff

25,000

20,000

15,000

10,000

5,000

0

1975

22

2005

1985

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orientated junior and middle-ranking academics, it is clear that hours worked per week have increased in the attempt to keep the preferred balance between teaching and research.

Figure 3: Higher degree by research (HDR) – load and publications

HDR equivalent full-time student load Thomson Publications

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0

1975

1985

1995

2005

Figure 4: Higher degree by research (HDR) and publications – key ratios 1.2

HDR equivalent full-time student load/Full-time equivalent staff

1.0 0.8

Publications/ Full-time equivalent staff

0.6 0.4 0.2 0

1975

1985

1995

2005

A recent survey of the satisfaction levels of Australian academics with their jobs and universities (Coates et al 2009) found that, on a five-point scale, those at sub-professorial levels scored below 3.5 with only academics in Portugal, the UK and South Africa recording lower scores. In contrast, Australian professors recorded almost 4.0, close to the average for their international counterparts.

Australian academics are also among the least satisfied internationally with management issues, including their level of influence and engagement in their universities. While satisfaction improves with rank it is overall low, particularly in relation to institutional support. However, the survey revealed that Australian salaries are now competitive with their overseas counterparts, although previous evidence (Horsley and Woodburne, 2005) is that, within Australia, academic salaries declined against average weekly earnings from the 1970s, although the rate of decline slowed in the 1990s.

The nature and impact of collective regulation Key traditions of academic work – specifically, autonomy over what is taught and researched, intellectual freedom and collegial governance – are assumed in the construction of academic work and university operations, and have become embedded in Australian legislative or regulatory instruments. Academics operate as largely autonomous professionals in organisational units in which there is limited hierarchy in the way work is organised and monitored.

This template remains the bedrock but collective employment regulation and other policy changes dating from the 1980s have added to it. FAUSA, one of the precursors to the National Tertiary Education Union (NTEU), was an academics-only staff association concerned with education and research policy and practice, but also industrial issues. Its representations prior to the advent of the Academic Salaries Tribunal were principally in relation to individual grievances and disputes by staff with a university.

After the 1983 High Court decision, it was argued that federal registration of FAUSA must be sought to forestall attempted unionisation and fragmentation of academic staff through representation by other registered federal unions.

There were heated discussions inside FAUSA about what employment matters should be subject to collective regulation via a log of claims leading to the creation of an award. The consensus was for a limited log of claims and minimal regulation of the employment conditions of academics.

But hard on the heels of federal registration came, in quick succession, the impact of the restructuring and efficiency principle (or second tier) and then the structural efficiency principle of the federal Commission on academic employment.

The process that began with the second-tier decision of 1987 fundamentally changed the conditions of university staff compared with teaching staff employed in institutes of technology and CAEs. The latter had more public-service type arrangements, involving state tribunals. For the universities this was far-reaching regulation of employment arrangements by an external body.

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The introduction of redundancy and dismissal provisions for academic staff in 1989, accompanied by the introduction of performance-appraisal systems, spelt the end of tenure. Tenure was based on the protection of academics from the vagaries of university or government funding, and from pressure to compromise their autonomy or intellectual freedom. Similar arguments were advanced in Australia about tenure for judges and heads of government departments. Today, only judges retain protection from dismissal for unsatisfactory performance or on the basis of redundancy.

Also introduced at this time was a single unified salary structure for university and CAE academic staff, which was a precursor to the later amalgamation of the sectors and of the unions representing university and CAE staff.

O’Brien (2003) argues that the decisive change in union approaches in universities came with the dissolution of the ‘binary divide’ and the amalgamation of the union of college staff (UACA) with FAUSA and the creation of an industry union for higher education, NTEU. The UACA’s more ‘unionate’ approach to industrial relations and regulations came to dominate the newly formed union. The inclusion of administrative and professional staff in the NTEU also deepened this change in orientation.

At the level of employment regulation, many of the university-CAE amalgamations were facilitated by agreements that codified particular sets of employment conditions from previous employment in the latter. This was followed in the early 1990s by a national code of conditions of employment, which regulated leave, probation and promotion. In an era of industrial relations focused on deregulation and flexibility, academic employment erected its first national set of employment regulations. Further, into this period of major change was injected the principle of enterprise bargaining, intended to provide greater flexibility in responding to the circumstances of particular enterprises, rather than the demands of specific occupations or industries.

Although academics had taken industrial action in the late 1980s in support of salary claims, salaries 24

were set nationally outside universities. Enterprise bargaining introduced adversarial negotiations within universities between unions (representing employees) and senior executives (representing management), with many of the latter being longstanding members of their relevant staff associations. Subsequently, the tactics and rhetoric of adversarial bargaining have become entrenched in the way employment conditions and salaries are discussed in universities.

While the universities were still largely dependent on federal government funding, a national approach and national outcomes from these supposedly enterprise bargains was inevitable.

These enterprise bargains showed limited variation in salary outcomes and core conditions.

Nationally-determined standards expressed in enterprise agreements became part of the fabric of employment regulation. Into these agreements in recent years came a clause to guarantee academic freedom, indicating the extent to which this model of regulation is seen as the way to ‘protect’ the academic’s job.

So pervasive had this national regulation of academic employment conditions become that when the Howard government required universities to offer individually-bargained agreements (AWAs) in 2005, the take-up remained very low (Barneveldt, 2009). Collective negotiation and regulation remained the choice of both employers and unions.

The collectivisation of employment arrangements for academics in Australia has not neglected some core features of academic work. From academic freedom to the requirement that research is a standard expectation of academic employment, there has been little difference between the views of the two parties to the bargain because both are attempting to represent and protect academic work and the nature of the university.

Paradoxically, despite the post-1980s introduction of the symbolic, rhetorical and tactical aspects of collective bargaining, and while union/employer negotiations over collective arrangements and individual disputes remains the norm, university employees are increasingly not members of their union. Australian universities, despite increasing

Just a knowledge worker? Academics, universities and industrial relations

variation in the outcomes and timing of enterprise agreements, and greater dependence on national and international markets for funding, are still relatively uniform nationally.

Tensions and outcomes When the path of collective regulation became evident in the 1980s, Professor David Penington, then Chair of AHEIA and Vice-Chancellor of the University of Melbourne, argued that this new model would create tensions within universities characterised by collegial forms of governance.

Professor Penington was undoubtedly prescient.

Australian universities are now characterised by ‘top-down’ management decisions and complex administrative processes, which are often called ‘managerialism’ (Coates et al 2010b).

The way that employment arrangements are discussed tends almost inevitably to the adversarial – witness the determination of academic workloads.

Where academic autonomy is the norm, workloads are set more or less collegially. Collegiality can mean that the senior academics decide what will be done by whom, or that a group of colleagues meets to decide on teaching allocations.

In Australia there is a requirement in university collective enterprise agreements for a process that secures consultation with all affected staff, for transparency and for processes to deal with grievances. For the unions there are safeguards against exploitation, over-work and inequitable treatments. For managers, there are the benefits of transparency, consistency, guarantees of effective and efficient allocation of work, and safeguards against inequitable treatment.

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When this process is contested it escalates into the relatively rarefied world (from the stance of the average academic) of union–management negotiations. Individual academics frequently perceive these as complex processes imposed by management, the inevitable administrators of this model.

There remain a range of academic policies that in most universities are subject to decisions by boards of academic peers. Decisions about staff selection and promotion rely on peer input. Academics retain representation on the key governing bodies of their institutions, and a significant proportion of university executives and managers are drawn from the ranks of academic staff.

The tension between the two realities described above is clear. In the first, academics fall within Drucker’s (1999) concept of ‘knowledge workers’, largely self-managed professionals who should be treated as ‘assets’ rather than ‘costs’ by their employers. From this perspective, universities will worry about the salaries and conditions of their academic staff to ensure that they are attracted and retained.

In the second reality, the academic is the university, the owner, producer and reproducer of its knowledge and culture. In this frame, the college of scholars would decide how they would be organised and rewarded.

The experience of today lies somewhat uneasily between the two. Some elements of work, organisation and reward remain firmly controlled by academic staff. But the resources used to support universities and their staffs come from a variety of sources, some with considerable external accountabilities. Consequently there are structures and positions that manage these resources and accountabilities on behalf of universities which are not necessarily coterminous with the collective views of academic staff.

In summary, the union has attempted to ensure that the knowledge worker is appropriately rewarded.

It has substituted its collective mechanisms for the collective regulation of the profession.

Academic salaries in Australia have kept pace with international comparators. While de facto tenure 26

no longer exists there are employment security safeguards beyond those available to many other workers, and many conditions exceed those available in the general community. If academics were only knowledge workers these might be the signs of a very good job. However, it is clear from surveys of academic opinion that some of the elements of an academic ‘good’ job are missing or being eroded.

Conclusion The ‘managerialism’ much maligned in Australian universities is partly a response to their increased complexity, regulation and accountability. As is clear from both management and union actions, there is often agreement about some of the tenets of academic autonomy, intellectual freedom and collegiality that should be preserved. Collegial concerns about excellence, particularly in research, find an echo in the management and objectives of universities.

There are tensions, but the regulatory features of the post-1980s world have been intertwined with some of the features of the collegial world that preceded it. While we cannot go back, we should question the accretion of new regulations and processes. Life and work are not improved by adding ever more clauses to enterprise agreements or widening the scope of regulations. Importantly, we must re-examine the work of academics, recognising that lone scholars shuffling between classes and research have been replaced by staff teaching and researching in large teams. Academics working in these teams require multiple skills and now face greater accountability to those outside their immediate group of colleagues.

There are good reasons to preserve the core tenets of our universities and academic work because they embody the hallmarks of ‘good work’ in every sense of the term. There are excellent reasons to ensure that all those who are employed have a voice and that managements engage with and consider staff when making decisions and fulfilling their accountabilities.

However, there will be no good future if we do not reconceptualise the nature of academic work and recognise that our full- and fractional-time

Just a knowledge worker? Academics, universities and industrial relations

academics are actually the managers of their work in a more contemporary sense than was understood when their academic autonomy and control were seen as characteristics of the job. This is our challenge in universities – academics were never just knowledge workers, but today they are definitely knowledge managers!

Professor Margaret Gardner, AO, is ViceChancellor and President of RMIT University.

References Blackford, R 1992, ‘Enterprise bargaining and higher education: A changed role for the AHEIA’, The Australian Universities Review, 35 (1), 13-17.

Brown, T, Goodman, J and Yasukawa, K 2010, ‘Academic casualization in Australia: Class divisions in the university’, The Journal of Industrial Relations, 52 (2), 169-82.

Coates, H, Goedegeburre, L, van der Lee, J and Meek, L 2008, ‘The Australian academic profession in 2007: a first analysis of the survey results’, paper presented at the International Conference on the Changing Academic Profession, Hiroshima, Japan.

Larson, M and Sarfatti 1977, The Rise of Professionalism: A Sociological Analysis, University of California Press, Berkeley.

Masterman, J C 1952, To Teach the Senators Wisdom or an Oxford Guide-Book, Hodder and Stoughton, London.

O’Brien, J 1993, ‘The collective organisation of Australian academic staff, 1949-83’, The Journal of Industrial Relations, 35 (2), 195-220.

O’Brien, J 2003, ‘Becoming ‘unionate’?

From staff association to national unions: the ‘industrialisation’ of university staff 1983-93’, The Journal of Industrial Relations, 45 (1), 35-47.

Slaughter, S and Leslie, L 1997, Academic Capitalism, Politics, Policies and the Entrepreneurial University, The Johns Hopkins University Press, Baltimore.

Smith, G 1992, ‘The regulation of academic employment: the past and the present’, The Australian Universities Review, 35 (1), 8-12.

Van Barneveld, K 2009, ‘Australian Workplace Agreements in universities’, The Journal of Industrial Relations, 51 (1), 59-74.

Coates, H, Dobson, I, Edwards, D, Friedman, T, Goedegebuure, L, Meek, L 2009, The attractiveness of the Australian academic profession: a comparative analysis, Research Briefing, October, L.H. Martin Institute, Melbourne.

Coates, H and Goedegebuure, L 2010a, The Real Academic Revolution, Research Briefing, November, L.H. Martin Institute, Melbourne.

Coates, H, Dobson, I, Goedegeburre, L and Meek, L 2010b, ‘Across the great divide: what do the Australian academics think of university leadership? Advice from the CAP survey’, Journal of Higher Education Policy and Management, 32 (4), 379-387.

Horsley, M and Woodburne, G 2005, Australian Academic Salaries Time Series Project, 19772002, The Australian Centre for Organisational, Vocational and Adult Learning.

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Article heading here

natural resources, manufacturing and trade: a long-run perspective Are abundant natural-resource endowments a ‘blessing’ or a ‘curse’? by ronald findlay

An edited version of the Corden Lecture delivered at the University of Melbourne on 3 August 2011.

Introduction It is a pleasure and an honour to give this lecture in honour of Max Corden. We have known each other for over fifty years, beginning with our contributions to the ‘growth and trade’ discussion of the 1950s that was set off by Hicks’s Inaugural Address on the long-run dollar problem and further shaped by the seminal work of Harry Johnson, an inspiring mentor to both of us. Long before the invention of email we exchanged ‘air letters’ commenting on each other’s work but did not meet until much later, resulting in our joint paper on wage differentials and urban unemployment (Corden-Findlay, 1975). Tonight’s topic is one that has long interested Max, the socalled ‘Dutch Disease’ problem, on which he has written two classic papers (Corden-Neary, 1982 and Corden, 1984). The reason for Max’s interest in this problem is not hard to find since Australia has always had a vast abundance and variety of natural resources, from wool and gold to coal and iron ore, which has contributed greatly to both its foreign trade and economic development. Whether these gifts of nature are a ‘blessing’ or a ‘curse’, if not handled appropriately, is the question that the Dutch Disease literature has been concerned with and that I shall attempt to pursue further here.

Natural resources and economic development Over the long sweep of economic history this fear that natural resources are a curse on development

does not appear to be well-founded. Many now highly-developed countries began their economic ascent as successful primary exporters before diversifying into manufacturing, often by moving up the value-added chain by further processing of their raw material exports. Witness Sweden and Finland, with their timber exports transformed into pulp and paper, or even medieval England, long an exporter of raw wool before converting it into woollen cloth, partly as a consequence of Edward III’s export tax to finance the Hundred Years War in the fourteenth century, incidentally a problem that I analysed in a 1987 Festschrift for Max (Findlay, 1987). The US itself was mainly a primary exporter well into the early twentieth century before rich deposits of coal and iron ore were discovered and exploited so intensively (Wright, 1990).

Transport costs, in particular the relative transport costs of finished products and their raw-materials inputs, is obviously a key aspect of the story. With ‘heavy industry’, such as iron and steel, metallurgy and machine-building, the factories had to be close to the coal and iron ore that fed their furnaces.

In the early days of the Industrial Revolution this was what gave Britain, Belgium, France and Germany the basis of their comparative advantage.

Industrialisation was inconceivable without coal and iron ore deposits within one’s borders or very close to them, so geology, if not geography, was destiny.

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be exported to factories in Europe, as raw cotton had long been, but had to be embodied in finished products, whether for domestic use or export.

The development of bulk carriers, since about the middle of the last century, has changed the situation entirely. Thus Australia in 2011, unlike the US in 1911, can simply ship vast quantities of industrial raw materials cheaply to China, Japan and Korea, without converting them into manufactured products. As a consequence of the precipitous decline in transport costs, this ‘globalisation’ has meant that geography no longer is destiny as far as industrialisation is concerned.

Capital accumulation, both physical and human, and technological progress now determine where this global pool of industrial raw materials will be directed. The East Asian economies, with their huge saving rates and strong commitment to education, are increasingly where global manufacturing production and exports will be concentrated, with countries like Australia, Brazil and Russia providing the necessary primary exports of coal, iron ore and other intermediate resource inputs.

But should these resource-abundant countries continue to simply follow the path of being exporters of industrial raw materials, or rather follow the path of the US 100 years ago, absorbing these materials into manufacturing production and exporting of the final product. One obvious consideration is population size, in other words not just resource-abundance but per capita resource-abundance. I have seen no estimates of this indicator for the three countries, but cannot imagine that Brazil (population about 180 million) and Russia (about 160 million) – however well endowed they are – have nine and eight times the natural resource assets of Australia (population 22 million). This consideration alone suggests that resource-intensive export specialisation would continue to be a better bet for Australia than for Brazil and Russia. It might not necessarily be prudent for Brazil and Russia to simply continue following the current Australian path and avoid making any strong commitment to the alternative strategy of diverting natural resource exports into intermediate inputs for domestic industrialisation 30

Natural resources, manufacturing and trade: a long-run perspective

and manufactured exports. That many aspects of past import-substitution industrialisation strategies were too costly or misguided should not prevent us from reaching this conclusion for Brazil and Russia, or for that matter even Australia itself.

Put this way the problem becomes one of pricing these industrial intermediate inputs within the resource-abundant countries. Should their factories have to pay the world price – that is, whatever China, Japan and Korea are willing to pay for them on the open market – or instead should these countries follow the lead of Edward III and put an export tax on them, simultaneously collecting revenue that could be used for developmental or other public purposes, while cheapening the inputs for domestic manufacturing? As I teased Max when visiting him at Nuffield in 1976, the economic historian Eileen Power had referred in her classic study on the medieval English wool trade to this policy as providing a ‘most effective protection’ for manufacturing woollen cloth in England. To quote her directly: ‘It is not difficult to see at once that this immense margin between the domestic and the foreign prices of wool provided most effective protection (my italics) for an infant industry’ (Power, 1941, p 101). Under this version of the classic ‘optimum tariff’ argument, since export and import taxes are equivalent by the Lerner ‘symmetry theorem’, the domestic relative price of resource products will fall, stimulating domestic final consumption and intermediate use in manufacturing, while reducing exports of the resource product and imports of final manufactures, and possibly even resulting in net exports of the latter, as eventually happened in medieval England.

Modelling the problem At this point one badly needs an explicit model in order to proceed any further, but which model?

Let me propose one that I presented in my Ohlin Lectures (Findlay, 1995), which unsurprisingly builds on an ingenious contribution by Max himself and that other fine Australian economist, Fred Gruen (Gruen and Corden, 1970). Imagine an economy that can produce three goods – X, Y and Z – with production functions that have constant returns to scale and the usual well-

behaved neoclassical properties. Assume that X and Y use capital and labour as inputs, while Z uses labour and a specific natural resource endowment – N – that is fixed in quantity. N is like ‘land’ in a Ricardian model, yielding a continuous flow output of Z, the volume of which depends on the amount of labour allocated to it. Z is therefore not treated as an exhaustible resource input, even though we will think of it as coal and/or iron ore, a loss of realism necessary in the interest of tractability. Each unit of X requires a fixed input of ‘a’ units of Z, so that we have X=aZ, in addition to the capital and labour required. We can think of X and Y as together constituting the ‘manufacturing sector’, in which X is more capital-intensive than Y, in the usual Heckscher-Ohlin-Samuelson sense, in addition to requiring its fixed input of aZ per unit of output. The total labour force is given at L=Lx+Ly+Lz. The capital stock K=Kx+Ky is not given but has to be endogenously determined by a process that will shortly be explained. The model thus has three goods (X, Y, Z) and three factors (K, L, N). Taking X as the numeraire we have five relative prices Py/Px, Pz/Px, w, r and q, where w is the real wage, and r and q are the rentals per unit of capital K and the natural resource N respectively.

We set the nominal price Px equal to unity, and think of X as a composite consumer-cum-capital good as in the Solow growth model, so that r has the dimension of a pure number per unit of time, allowing us to interpret it as the rate of interest.

Consumers have identical and homothetic utility functions with the amounts of X and Y consumed per capita, denoted x and y, as arguments so that we have u=(x, y) as the instantaneous utility function of the representative consumer.

All markets are perfectly competitive. All that remains is to explain how the capital stock K is to be determined endogenously.

Imagine a diagram in which a negatively-sloped curve RR’ shows the relation between the rate of interest r and the steady state per capita utility u(x, y) associated with it, or u=f(r) with f’(r)<0.

The lower the rate of interest the more capital would be demanded in the economy, raising the relative output of the capital-intensive good X, the relative prices Py and Pz of Y and Z, and the real wage w. More K with L and N fixed means

a higher national income and thus a higher u(x, y) as r is lowered, giving us the negative slope of RR’. Imagine now a positively-sloped curve VV’ showing the endogenous rate of time preference v as an increasing function of the instantaneous utility level u, or v=v(u) with v’(u)>0, as argued

by Uzawa (1968). Long-run equilibrium is where these two curves RR’ and VV’ intersect to determine the rate of interest r* and steady state utility level u*, as well as the endogenous capital stock K* at which the demand and supply of capital are equal, as are all other equilibrium prices and quantities. At any u<u* we will have r>v so agents will have an incentive to accumulate more capital, while at any u>u* the fact that v>r would cause them to decumulate capital, so that the long-run equilibrium at (r*, u*) is stable.

Let us now do the simple comparative statics exercise of increasing the natural resource endowment N of the economy, with all else unchanged. This will shift the negativelysloped RR’ curve to the right, resulting in a new equilibrium with a higher r* and a higher u* and, incidentally, a higher endogenously determined K* to provide the manufacturing capacity in the X sector necessary to absorb the greater availability of the natural resource input Z made possible by the greater endowment of N. Thus, in this case the greater natural resource wealth resulting from the exogenous increase in N is augmented by an induced increase in the capital stock K* as well, so that the more resource-rich economy, which we will henceforth call B (say ‘Brazil’), is ‘twice blessed’ by comparison with the original economy, that we will henceforth call A (say ‘Asia’), since the greater abundance of natural resources also induces a greater supply of capital.

To introduce international trade between A and B, suppose that trade is only in the final manufactured goods X and Y, with Z not traded either because of prohibitive transport costs, as before the age of bulk carriers, or because it is simply prohibited by the government of B. The greater cheapness of the non-traded raw material Z in B will give her a comparative advantage in the capital-intensive good X, which she will export to A in return for imports of the labour-intensive good Y. The Insights Melbourne Business and Economics

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relative price Py of Y will rise in A and fall in B to the world price Py*. What will happen to the three factor prices w, r and q in the two countries? Note that we will not have factor price equalisation since there are three factors but only two goods traded.

But Stolper-Samuelson will operate with the real wage rising and the interest rate falling in A, while the opposite happens in B, with the real wage falling and the rate of interest rising. The gains from trade increase the stationary utility level u(x, y) in A, and hence the rate of time preference v by the Uzawa hypothesis, inducing a decumulation of capital there, since r is now less than v; while in B, free trade also raises the stationary utility level but in addition induces a further accumulation of capital, because Stolper-Samuelson has raised the rate of interest there as a consequence of the rise in the relative price of the capital-intensive good 1/Py* (assuming that the rise in the rate of interest exceeds the rise in the rate of time preference). Both countries gain in the long run from free trade since A enjoys extra consumption while running down her capital stock, while B is rewarded for her sacrifice of consumption along the transition path by higher steady state utility in the long run. B, already ‘twice blessed’ in our account under autarky, now appears thrice blessed because of free trade in manufactured goods allowing her to exploit her cheap natural resource inputs that are not themselves tradable. In terms of the steady state comparisons B appears to gain even more from her natural resource abundance, while A appears not to be able to overcome her relative poverty of natural resources by exporting her labour-intensive manufactures.

Finally, let us consider the most relevant contemporary case of free trade in all three goods X, Y and Z, unhindered by transport costs or trade restrictions. With three tradable goods and three factors and the same constant returns to scale technology everywhere we are assured of full factor price equalisation at w*, r* and q* so long as all three goods are produced in both countries. Since both countries have the same Uzawa function v(u) and v’(u)>0, free trade in all three goods must result not only in equalising each of the three factor prices but also the instantaneous utility level, and hence per capita income and wealth, as 32

Natural resources, manufacturing and trade: a long-run perspective

well. Because the interest rate falls in B and the rate of time preference increases because of the gains from trade and the assumption that v’(u)>0, she must now decumulate capital to attain a lower capital stock and a lower steady state per capita utility, while A now does the opposite, with the rise to the common r* inducing accumulation of capital to attain the common level of steady state utility u*(x*, y*) that both countries now enjoy in the full free-trade equilibrium.

What happens to comparative advantage? Note that per capita wealth must be the same in both countries, but B has greater natural resource wealth than A because Nb > Na and the asset price q*/r* is exactly the same because of factor price equalisation. For total per capita wealth to be the same it must be the case that K*a>K*b.

In other words, A must now be more capitalabundant than B since we are assuming that the labour forces are equal. The advantage of a lower Pz that B enjoyed when trade was only in final manufactured goods is now gone since Pz equals Pz* in both countries, levelling the playing field in access to natural resource inputs all around the globe. The conclusion is inescapable that A will now export the capital-intensive good X to B in return for imports of the raw material Z and the labour-intensive manufactured good Y. In other words there has been a reversal of comparative advantage in the manufacturing sector as a result of opening trade in the raw material Z. Thus far we have a stationary model, albeit one with an endogenous capital stock. It would not be too difficult however to introduce an ‘effective’ labour force growing at the rate (n+m) because of population growth and technical progress respectively, as in the Solow growth model. To preserve a steady state, however, we would also have to assume that the stock of natural resources N is also increasing along with labour L and capital K at the same rate (n+m) because of new discoveries and increasing technical efficiency.

Most steady state properties of the model would essentially be preserved, though the Uzawa hypothesis of endogenous time preference would have to be modified.

If natural resource availability does not increase at the same rate (n+m) as effective labour the terms of trade would move secularly in favour of the resource exporters, as envisaged in the Ricardian tradition by many British economists up to the time of Keynes and Beveridge, pending any breakthroughs in ‘green’ energy.

We now turn briefly to economic policy considerations on the basis of the original stationary model. How could B mitigate the impact of free trade in Z? The most obvious answer is the Edward III solution – an optimal export tax on Z. In addition to improving the terms of trade, this would preserve cheaper intermediate inputs for the capital-intensive sector X in B and prevent full factor price equalisation by the divergence in the relative price of the raw material between the trading partners, so that the interest rate will not have to fall to complete equality, thereby reducing the extent of induced capital decumulation and raising steady state per capita utility. The problem of course is that A would have every incentive to retaliate, raising the spectre of a mutually destructive trade war. An alternative approach would be a tax on wealth from ownership of natural resources, thereby inducing more accumulation of manufacturing capital than under the laissez faire solution and shifting comparative advantage back towards the capital-intensive good X. There are clearly a great number of other measures that might be considered.

Conclusion My intention in this lecture was not to make specific policy proposals but to contribute a little towards developing a conceptual framework within which we can discuss these highly-relevant issues regarding resource-intensive exports and economic growth in the rapidly evolving world economy of the twenty-first century. I hope it is clear that whatever clarity or relevance this lecture has been able to provide on these matters is due entirely to our hero Max, who thought so deeply and penetratingly about them long before the world was as aware of their full importance as it is today.

Ronald Findlay is Ragnar Nurske Professor of Economics at Columbia University.

References Corden, WM 1984 ‘Booming sector and Dutch Disease economics: survey and consolidation’, Oxford Economic Papers, 36, p.359-80.

Corden, WM and Findlay, R 1975 ‘Urban unemployment, intersectoral capital mobility and development policy’, Economica, February, p.59-78.

Corden, WM and Neary JP 1982 ‘Booming sector and de-industrialization in a small open economy’, Economic Journal, 92, p.825-48.

Findlay, R 1987 ‘Intermediate goods, export taxation and resource-based industrialization’ in Kierzkowski H (ed) Protection and Competition in International Trade: Essays in Honour of Max Corden, Basil Blackwell, Oxford, p.162-71.

Findlay, R 1995 Factor Proportions, Trade and Growth, MIT Press, Cambridge MA. Gruen, F and Corden WM 1970 ‘A tariff that worsens the terms of trade’ in MacDougall IA and Snape R (eds) Studies in International Economics, North-Holland, Amsterdam.

Power, E 1941 The Medieval English Wool Trade, Oxford.

Uzawa, H 1968 ‘Time preference, the consumption function and optimum asset holdings’ in Wolfe JN (ed) Value, Capital and Growth, Aldine, Chicago.

Wright, G 1990 ‘The origins of American industrial success,’ American Economic Review, 80, p.651-68.

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34

Article heading here

disadvantage and life-satisfaction In Australia, there is a strong case for providing more help to disadvantaged groups that suffer from substantial losses of life satisfaction, especially the mentally ill by ian m. mcdonald i

An edited version of a lecture delivered to the Social Justice Initiative Seminar at the University of Melbourne on 2 August 2011.

Introduction In recent years, measures of life satisfaction or happiness based on self-reports have been of great interest to economists and other social scientists.

These measures are a natural fit with economists’ traditional focus on utility because they can be argued to be a measure of this concept.

Herein the prevalence and intensity of disadvantage are examined using measures of life satisfaction to identify disadvantaged groups and assess their degree of disadvantage. This approach follows earlier researchers, especially Blanchflower and Oswald (2004) and Layard (2005). Inter alia I also consider some policy challenges of improving the outcomes for disadvantaged groups.

Groups which experience low life satisfaction have a prima facie case to be considered worthy of support and help from the rest of society. Such assistance is consistent with the focus in welfare economics on the distribution of utility. Note that the case for using income as the measure of the neediness of a group presumes that income is a measure of utility. Life satisfaction surveys avoid this presumption and so allow us to get closer to the prime focus, that is utility itself.

The nature of utility as an analytical concept has been debated by economists since the latter half of the nineteenth century. One debate is over cardinal versus ordinal measures of utility. Another is the

possibility of making interpersonal comparisons of utility. Herein, measures of life satisfaction are used to make interpersonal comparisons.

The measure of life satisfaction adopted herein is based on responses to a question in the 2009 Household, Income and Labour Dynamics in Australia (HILDA) survey which asked: ‘All things considered, how satisfied are you with your life … pick a number between 0 and 10 to indicate how satisfied you are’.

The disadvantaged groups on which I will focus in this paper are those experiencing low incomes, unemployment, disabilities, mental illness, discrimination, or, in the case of children, disadvantaged environments. The average lifesatisfaction scores of people in these groups are calculated and compared.

Factors influencing life satisfaction Comparing life-satisfaction scores for groups contrasts with the alternative approach of identifying the effect of one characteristic, such as the state of long-term (LT) unemployment, while controlling for all other factors, such as level of education achieved. The approach adopted has the advantage of being more closely related to particular groups of people. Welfare economics focuses on people; and human empathy is directed at people, rather than particular characteristics.

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Figure 1: Life satisfaction, Australia, 2009 all ST unemployed LT unemployed DSP recipients mentally ill

satisfaction scale (0-10 scale)

8.0 7.5 7.0 6.5 6.0 5.5 5.0

0 5 10 income decile (equivalised income)

Source: HILDA

For the population as a whole, Figure 1 shows a positive relation between life satisfaction and income. The difference between the average life satisfactions of individuals in the lowest and highest income deciles is 0.38 points.

Hopefully, overall government redistribution has made the life-satisfaction gradient less steep. (There may be exceptions due to welfare dependency and poverty traps.) Consider the pattern of net taxes minus benefits received for income quintiles shown in Figure 2 for Australia for 2003–04. This measure includes tax paid, income transfers received and government services received. Figure 2 demonstrates considerable redistribution in Australia through government intervention, especially from the top income quintile to the lower three quintiles.

The positive relation between life satisfaction and income decile would presumably be much steeper were it not for this substantial redistribution.

36

Disadvantage and life-satisfaction

$300 $200 $100 0 -$100

-$300

Now consider the life-satisfaction scores for the first of our disadvantaged groups, low-income recipients. The black dashed line in Figure 1 shows the average life satisfaction for each income decile. For example, the left-most point shows for the bottom decile an average life-satisfaction score of 7.7 on the 11-point scale.

8.5

$400

-$200

Low income and unemployment

9.0

Figure 2: Net benefits received, Australia 2003–2004

$ per week

example, the LT unemployed probably have below-average levels of education. By considering the average life-satisfaction score of the LT unemployed, one is thinking of the LT unemployed as individuals with the average characteristics of those in LT unemployment.

-$400 -$500 -$600

1

2

3 quintile

4

5

Source: ABS 6537.0

Now consider the unemployed. Life-satisfaction studies show that unemployment is associated with a loss of life satisfaction. The life satisfaction of the short-term (ST) unemployed – defined as those unemployed for less than one year – in Australia in 2009 is shown as the unbroken black line in Figure 1.

For the ST unemployed, Figure 1 shows the life satisfaction for only the lowest seven income deciles. Not surprisingly, in the top three deciles there were too few people classified as ST unemployed to give meaningful average scores for life satisfaction.

As recorded in Figure 1, the difference between the life satisfaction of the ST unemployed and the population in the same income decile averaged 0.21 points over the seven income deciles for which a meaningful comparison can be made. This difference is labelled the ST unemployment ‘toll’.

The ST unemployment toll represents about half the difference between the life-satisfaction measures of the lowest and highest income deciles.

Now consider the LT unemployed, that is, those unemployed for more than one year. Note that Figure 1 shows an observation only for the lowest income decile for the LT unemployed. Only in this decile were there sufficient numbers of LT unemployed to provide a meaningful score for life satisfaction.

LT unemployment imposes a substantial toll, equal to 0.54 points, which is over twice the ST toll and greater than the difference between the life satisfaction of the lowest and highest income deciles. LT unemployment is shown to

be an unattractive state, a phenomenon which casts doubt on the idea that the LT unemployed are, in a meaningful sense, choosing to be LT unemployed.

But even if LT unemployment imposes large losses of life satisfaction, other evidence suggests that the LT unemployed are often employable. Consider the relation between the aggregate and LT unemployment rates shown in Figure 3 (updated from McDonald, 1993). The data in Figure 3 is monthly data for the period February 1978 to March 2011, with observations for the GFC recession shown in black. The Figure shows that decreases in the aggregate rate of unemployment have been associated with decreases in the LT unemployment rate. This is especially evident for the period following the major recessions in the early 1980s and the early 1990s. For example, the most north-easterly observation of 11.2 per cent for the aggregate unemployment rate and 3.7 per cent for the LT unemployment rate for December 1992 was followed by a contemporaneous decline in aggregate and LT unemployment over the next 16 years, to August 2008. It appears that the expansion in economic activity absorbed the LT unemployed into employment. By August 2008 the LT unemployment rate had fallen to 0.6 per cent.

Figure 3: The relation between the rate of long term unemployment and the aggregate rate of employment, Australia, February 1978 to March 2011 Long term unemployment rate

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0

2

4

6

8

10

12

be reasonable to expect LT unemployment to decrease if aggregate unemployment decreased.

Indeed, were unemployment reduced to 2.5 per cent, then the historical relation suggests that LT unemployment would become negligible.

Figure 3 demonstrates that increases in aggregate unemployment cause increases in LT unemployment with a lag. Consider the two big loops that show the recessions in the early 1980s and early 1990s. As aggregate unemployment rose, LT unemployment initially increased slowly, but eventually, as the unemployed became LT unemployed, the LT unemployment rate increased more rapidly. The same phenomenon is also evident in the current GFC-induced recession.

Aggregate unemployment increased from 4 per cent in February 2008 to 5.8 per cent in May 2009 and LT unemployment followed with a lag.

But can aggregate unemployment be reduced to 2.5 per cent? History suggests it can. Aggregate unemployment averaged less than 2.5 per cent in the 1950s and 1960s. Since then there have been extensive microeconomic reforms and a substantial decline in trade union power. These changes should, according to economic analysis, make low unemployment easier to achieve.

Indeed this belief was part of the case for making the microeconomic reforms. This does raise the question of why, since the 1960s, we are unable to achieve the low unemployment rates of that decade (McDonald, 2007).

Even those economists who, in spite of this puzzle, call the current rate of aggregate unemployment â&#x20AC;&#x2DC;full employmentâ&#x20AC;&#x2122; recognise that policies that prevent increases in unemployment are beneficial for a range of disadvantaged people. It has become clear that financial crises are the major threat to macro-economic stability. Thus financial-market reform indirectly assists the disadvantaged who bear the brunt of increases in unemployment.

Aggregate unemployment rate %

Source: ABS 6291.0; 6202.0

Disability

Currently, LT unemployment is in the upper reaches of the data shown in black. The employability of the LT unemployed, as suggested by the record since 1978, implies that it would

Consider now disability support pensions (DSPs).

There is a concern that too many receive the DSP. In 2009 there were over 750,000 DSP recipients, some 7 per cent of the labour force. This rate is greater than the unemployment rate.

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Figure 1 shows that DSP recipients suffer from low life satisfaction. The DSP toll is 0.71 points.

Notice that these individuals are concentrated in the lower five income deciles. The DSP toll exceeds the LT unemployment toll. Thus these people are on average suffering greater disadvantage.

Welfare dependency has perhaps trapped some people into DSP recipiency. The measure of this would be whether – if they shifted to sustainable employment – they would achieve greater lifesatisfaction.

Cai and Gregory (2004) show that inflows into the DSP are sensitive to the aggregate rate of unemployment, being lower when aggregate unemployment is falling. Cai, Vu and Wilkins (2008) show that there are negligible outflows from DSP recipiency to sustained employment. In consequence, in comparing Figure 4 with Figure 3, the relation between the DSP rate and the aggregate unemployment rate is a marked contrast to the relation between the LT unemployment Figure 4: Disability rate and aggregate unemployment, Australia, 1972–2009 8

Disability rate

6 5 4 3 2 1 0

2

4 6 8 Aggregate unemployment rate %

10

12

Source: FaHSCIA, ABS 6202.0

Figure 5: Disability rates as percentage of labour force, Australia, 1972–2009 8 7 6 5 4

%

A recent survey (OECD, 2010), of the large number of DSP programs offered by member countries of the OECD found that measures to induce shifts from DSP to employment were, in general, not very successful. A few measures such as unpaid work trials and temporary earningssupplements show some success. The OECD concludes that more work should be done to try to develop successful programs. Life-satisfaction data suggests that DSP recipients are deserving of support. It also hints that some DSP recipients at least would be better off if they could find work.

Mental illness Figure 1 shows that mental illness is associated with low life satisfaction. The mental illness toll is 1.39 points, a shortfall that is fairly similar across all income deciles. This very large difference in life satisfaction strongly supports the case for allocating more funds to treating mental illness.

Discrimination and racism

7

3 2 1 0

1972

1984

Source: FaHSCIA, ABS 6202.0

38

rate and the aggregate unemployment rate. The DSP rate does not seem to respond to changes in aggregate unemployment – it simply trends upward. However, as Figure 5 shows, the DSP rate may be approaching a plateau.

Disadvantage and life-satisfaction

1996

2008

Discrimination is deplored on equity grounds because it violates the right to equal treatment.

However, discrimination can also be criticised for lowering life satisfaction and thus should be treated in the same way as the other types of disadvantage considered herein. Indeed, it may be that people support the ‘right’ of equal treatment because they think it leads to greater life satisfaction. In this vein, McDonald and Mitchell (2010) explore the application of the utility approach to the work of the Victorian Equal Opportunity and Human Rights Commission.

The HILDA survey asks people whether they feel they have been discriminated against in their current job. This is only one potential source of discrimination. As reported in volume 6 of the HILDA reports (Wilkins et al., 2011), the average life satisfaction of people who claim to have been discriminated against in their current job is 0.5 points less than the average life satisfaction of all respondents to the HILDA survey. However,

this is not very reliable evidence since some who claim discrimination probably have not suffered the experience, and others who have suffered discrimination probably do not report it. More reliable evidence comes from a US study by Blanchflower and Oswald (2004) who find that being ‘black’ (African-American) in the US causes a substantial life-satisfaction toll.

the children through their subsequent adult lives and found huge benefits in monetary terms. These monetary benefits probably understate the true benefits. For example, the benefit from being able to lead a life that does not run a significant risk of being imprisoned is probably greater than the saving on the costs of running prisons and the additional wage income earned.

The calculations made by Blanchflower and Oswald (2004) are based on multivariate regression analysis and so the differential between the life-satisfaction levels of blacks and whites captures the ‘pure’ effect of skin colour. For two hypothetical individuals in the US who have the same income, marital status, education level etc., and only differ by the colour of their skin, Blanchflower and Oswald find that the person with black skin is substantially worse off than if he had white skin. They calculate a dollar value on this loss of well-being of $US30,000 per year.

This compares with a gain of $US100,000 per year from a lasting marriage. Undoubtedly this comparison, by controlling for all other variables, strikingly demonstrates the ‘pure’ effect of racism. However, the ‘people approach’ of this article suggests that it may not be an estimate of the cost of discrimination as measured against the yardstick of human empathy. If we feel empathy for people, then how they cope overall may be the true object of our concern. For blacks, their shortfalls in other areas such as education and marital stability suggest that the cost of racism is higher than the ‘pure’ effect.

Policy implications

However the cost of racism is calculated, it can be inferred that laws and organisations that reduce discrimination can increase life satisfaction.

Table 1 brings together the tolls for the various disadvantaged groups. We see that mental illness imposes the biggest toll, followed by disability, LT unemployment, low income, and ST unemployment.

The variety of life-satisfaction tolls recorded in Table 1 raises the question: why does social policy fare better in some areas, such as income distribution, than others, especially aiding the mentally ill? To address this question, the economists’ demand- and supply-side concepts are useful. The demand-side is the value of improving outcomes for the disadvantaged. Improving outcomes for the mentally ill would be particularly valuable because mental illness causes such a large loss of life satisfaction. The supply-side recognises our ability to make improvements. Improving mental health is difficult,ii and improving life for many people on disability support pensions through shifts to sustainable employment is not easy, as the OECD (2010) report shows.

Table 1: The life-satisfaction tolls for various groups of disadvantaged people Group

Toll (points)

Mental illness

1.38

Childhood disadvantage

DSP recipient

0.71

Children from disadvantaged environments can suffer from a whole range of disadvantages.

Unemployment, disability and mental illness can all result from disadvantaged childhood backgrounds and will lead to low life satisfaction in adult life.

LT unemployed

0.54

Low income

0.38

ST unemployed

0.21

Some early intervention programs to tackle disadvantaged childhoods have been very successful (see for example, Cunha et al., 2005). Studies of programs from the 1960s and 1970s have followed

Source: HILDA

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the groups that incur high life-satisfaction tolls is more difficult. How can we get aggregate unemployment down to 2.5 per cent? How can the life satisfactions of the disabled and the mentally ill be increased? Indeed the fact that these groups suffer such large life-satisfaction tolls probably reflects the difficulty of improving their situations. Improving the productivity of supplyside programs in these areas requires research, experimentation and program evaluation.

Ian McDonald retired from the post of Professor of Economics, Department of Economics, University of Melbourne, in February 2012 after holding the chair since 1990. i. I thank Bruce Heady for advice on the HILDA data and Roger Wilkins for comments on an earlier draft. ii. Another factor may contribute to the poor record on helping those who are mentally ill. Assessing many types of mental illness necessarily involves reliance on the accuracy of subjective information given by the mentally ill person. Objective measurement is difficult. Because of the subjective nature of mental illness, help for mental illness is open to exploitation by people claiming falsely to be mentally ill. To avoid the risk of being exploited in this way, people may be less generous in their support for the mentally ill.

References Blanchflower, DG and Oswald, A 2004 ‘Wellbeing over time in Britain and the USA’, Journal of Public Economics, 88, pp 1359-86.

Cai, L and Gregory, RG 2004 ‘Labour market conditions, applications and grants of disability support pension (DSP) in Australia’, Australian Journal of Labour Economics, 7, 3, 375-394.

Cai, L, Vu, H and Wilkins, R 2008 ‘The extent and nature of exits from the disability support pension’, Australian Bulletin of Labour, 34, 1, 1-27.

Cunha, F, Heckman, JJ, Lochmer, L and Masterov, DV 2005 ‘Interpreting the Evidence on Life Cycle Skill Formation’, Working Paper No. 111331, National Bureau of Economic Research, Cambridge, Massachusetts.

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Frey, BS and Stutzer, A 2002 ‘What can economists learn from happiness research?’, Journal of Economic Literature, XL, June, 402-35.

Layard, R 2005 Happiness: Lessons from a new science, Penguin: Allen Lane, London.

McDonald, IM 1993 ‘Long-term unemployment and macroeconomic policy’, Australian Economic Review, 2: 31-4 McDonald, IM 2007 ‘Where is full employment?’, Dialogue, 26, 2, 81-92.

McDonald, IM and Mitchell, H 2010 ‘Equality, wellbeing and the work of the Victorian Equal Opportunity and Human Rights Commission’, Insights, 8, November 2010.

OECD (2010) Sickness, disability and work: Breaking the barriers, OECD publishing, www.oecd.org/publishing.

Wilkins, R, Warren, D, Hahn, M and Houng, B 2011 Families, Incomes and Jobs, Volume 6: A Statistical Report on Waves 1 to 8 of the Household, Income and Labour Dynamics in Australia Survey, Melbourne Institute of Applied Economic and Social Research, University of Melbourne.

occasional address

learning never stops The desire and capacity to step outside your comfort zone is critical by peter nash

An edited version of his Occasional Address given at Wilson Hall, the University of Melbourne, on 14 December 2011.

There are a number of key inflection points in life – births, deaths, marriage, new jobs and personal achievements are just a few examples. Graduating from university, which for many and perhaps most, means moving from the formal education part of your life to a full-time career is one such inflection point.

What you do at such inflection points is, of course, up to you. For some they are a time to reflect and plan – to think a little more deeply about what it is that comes next, what you want to achieve and how you want to achieve it. For others, such points can come and go with little recognition or reflection – it’s easy to be carried forward on the tide with momentum doing most of the work.

I think at the time of my graduation I was somewhere between these two options – as I suspect many are. As you sit here today you might ask yourself where on this continuum you are and, more importantly, where is it you want to be. I don’t think there is a right or wrong answer to this, it’s a personal thing.

Now my own planning and investigation at that time were modest and usually took place somewhere between the Clyde and Norton’s. But I’d worked out that despite three years at university

there was, as I think most of you here today would understand, still more to learn. Indeed, as I have progressed through my career one of the enduring guidelines or rules that has served me best is that learning never stops – not for one day. This will be the theme of my address today. Now this may be a life rule as well as a business rule but, as you might readily guess and in fact hope for, I’m really only qualified to talk to the business aspect of this and, hence, that will be the focus of my comments.

After much thinking and many interviews, I joined Peat Marwick Mitchell & Co, one of the predecessor firms of what is now KPMG. Yes, I’ve been with the one firm for almost 28 years now but it’s been a great ride with many twists and turns and many different experiences. As you might expect, between starting as a graduate and ending up as the Chairman, quite a few things have happened along the way. I’ve worked on five different continents, in 35 different countries as diverse as Mozambique, Pakistan and Peru on the one hand to the US and UK on the other. I’ve been two kilometres underground in a Chromium mine in western South Africa. I’ve worked with the world’s largest and most successful mining companies and banks as well as companies that have gone broke through poor management or Insights Melbourne Business and Economics

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business models. I’ve met the CEOs of the most successful companies and I’ve talked with CEOs who tried to defraud their shareholders and creditors. Within KPMG I’ve been both employee and employer. And to my earlier point, even to this very day the learning continues.

So today I thought I might share with you some, not all, of the most important things I’ve learned over the last 28 years in business. Where to start?

The desire and capacity to step outside your comfort zone is critical. It can make all the difference, and the more you do it the easier it becomes. It’s easy to stick with what you’re good at, something you know you can do; but in my experience fortune does indeed favour the brave. To be able to say ‘yes’ instead of ‘no’ when a manager asks you to do something you’re not quite sure you’re ready for will make a difference. I remember wanting to say ‘no’ when I was asked as an assistant manager to lead a training session for a group of partners on complex financial instruments. I’d been involved in the ANZ audit for a number of years and my manager thought I was up to it. I remember wondering whether a two-year secondment to Toronto to hone my banking skills was the right thing to do. After 22 years as a financial services specialist I remember being surprised when the then Chairman of KPMG asked me to be the lead partner on the BHP Billiton audit. In each case, despite some reservations I said ‘yes’. And, although different in magnitude, the learning and development that followed the decision proved to be more important than I would have thought at the time.

What are often poorly labelled as ‘soft’ skills – people and communication skills for example – are at least as important as the hard-core technical skills. Indeed the further you progress the more important they become. As a young accountant I thought the answers to problems were most often to be found in accounting theory and standards. As I became a manager and then a partner I realised this was only half the battle – the real challenge was communicating to clients who didn’t want to know and needed to be convinced. In 2007 as a senior partner leading the 120 partners in our 42

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Audit Division, I learnt that knowing the right destination was only one part of the problem – taking people on the journey with you, so that you all reached the destination intact and at the same time was what took the real skill. So when you get opportunities to develop broader skills sets, make sure you take them.

A guiding set of principles or values form the critical foundation stones of decision-making in business. At KPMG we have a set of clearly articulated values that include, for example, respect for the individual, the delivery of value and insight to our clients and, above all, acting with integrity. We only employ people whose personal values are consistent with these values. Now I’ve heard it said before that these types of stated values are good for key rings and lunchroom walls but that would not be my experience, at all. As you go through your careers you will often be faced with difficult decisions. Pressure to form particular views or act in particular ways will come from a variety of sources. As an auditor and as a business leader at KPMG I always found that referencing a difficult decision back to a set of core values has greatly aided the decision-making process. The business world is littered with examples of poor values – from the Enrons of the world to something as simple as mortgage loans being provided to people who can’t afford to pay them back. You need to learn to connect your decision-making to your core values. I hope you get it right.

Lastly, I’ve learned that a rich and rewarding life and a successful business career are not mutually exclusive concepts. That old saying that one should work to live and not live to work is something I have carried with me pretty much from the very start of my career. I learned early on that it was mostly about the quality of what you did, not the quantity. That doesn’t mean I haven’t worked my share of late nights and weekends over the years (my family would no doubt attest to that), but it’s always been with an eye to what’s really important.

I know some in business might consider this sacrilegious but work is a means to an end not an end in itself. To me this is a fundamental concept for any workplace and one which we strive for at KPMG. Yet I am amazed at the number of

employers that I still come across who don’t quite grasp this.

That’s probably enough for today – I don’t want to get too philosophical. I’ve always approached each day of my career as a learning experience and I hope that you can see the value in doing this.

As that experience accumulates over time so your capacity to take on increasingly challenging tasks and roles increases. The inflection point you have reached, as you are about to graduate, provides you with the ideal opportunity to reflect on what type of career you want and how you are going to go about.

Peter Nash is Chairman of KPMG Australia.

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people are the key No matter how academically proficient you may be, without good people skills you will not maximise your potential by philip brass An edited version of his Occasional Address given at Wilson Hall, the University of Melbourne, on 14 December 2011.

Introduction Having completed my secondary education at a public high school I was fortunate enough to win a Commonwealth Scholarship and gain entry to the Commerce faculty at this University in 1966. It was a great three years in every way: the learning, the passing, the failing, and most of all the freedom.

All the while I had a burning ambition to succeed.

Many enduring friendships were formed in those days. Over this period I worked part time at what was to become my future employer.

My graduation in 1968 with a BCom was the start of a wonderful three-decade journey with the one employer. I joined a medium-sized footwear company which was acquired by Dunlop in 1970.

My promotion and progress was rapid and exciting.

In 1974, aged 26, I became general manager of Grosby Footwear; in 1977 I was appointed CEO of the Dunlop Footwear Group and in 1980 became CEO of the Dunlop Clothing Footwear and Textile Group (now known as Pacific Brands) and a board member of Dunlop Ltd. Shortly thereafter Dunlop went through several name changes: in 1980 it became known as Dunlop Olympic; in 1986, Pacific Dunlop. In 1985 I was appointed General Manager and in 1987 CEO, a position I held until my retirement in 1996.

I learnt a great deal over this exciting journey.

Pacific Dunlop was one of the last conglomerates in Australia; our revenue peaked at around $7 billion a year and we had 55,000 employees. It was made up of seven main groups including what you 44

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know today as Pacific Brands. Bonds, Holeproof, Berlei, Grosby and others were leading brands in Australia and New Zealand. Repco, a distributor of automotive parts and an industrial electricalproducts distribution business, Lawrence & Hanson, were both the largest of their type in the southern hemisphere.

Over this period Ansell became the largest producer of latex products in the world covering consumer products such as household and industrial handprotective gloves, with factories in Malaysia, Sri Lanka and the US, and distribution facilities in most major countries in the world.

The tyre group, known as South Pacific Tyres was the largest producer of tyres in Australia and New Zealand. GNB was the largest manufacturer of automotive and industrial batteries in the world.

In the early 1990s we ventured into food and owned such household names as Edgell BirdsEye, Peterâ&#x20AC;&#x2122;s ice-cream, Yoplait yoghurt, Latina and Leggoâ&#x20AC;&#x2122;s pasta and sauces. Finally there was a medical group that owned the famous Cochlear bionic ear.

This was an exciting group and from the early 1980s until the mid 1990s was seen as a preferred place to work by many ambitious young executives looking for rewarding careers.

Themes There were many aspects of my work that are as relevant today as they were then to the success

of any business. The first of these was the vision to globalise the group. My career coincided with a world that was rapidly moving to free trade through the removal or reduction of tariffs, quotas and other less visible trade-protection barriers.

From the early 1970s and throughout the Cultural Revolution most parts of Pacific Dunlop moved labour-intensive manufacturing to China. From my regular visits, I developed many long-term friendships or what the Chinese refer to as quan xi. By the early 1990s over half of our workforce and 40 per cent of our sales were outside Australia.

China was the cornerstone of our strategy over this period.

I was appointed by the Mayor of Shanghai to IBLAC, the International Business Leaders Advisory Council, and I became Chairman of this Council in 1990 and continue to attend meetings each year as one of the longest-serving councillors.

The globalisation of Pacific Dunlop enabled me to establish a vast international network of relationships and friendships.

People, people, people When buying a house, location, location, location is the key. In business and generally in life, it is all about people, people, people. No matter how academically proficient you may be, without good people skills you will not maximise your potential.

I encouraged and nurtured many young graduates to work with us. They enjoyed working in a thriving and dynamic environment and I relished the challenge of harnessing the collective spirit and know-how of the group. Each morning I awoke excited and exhilarated about the challenges of the day ahead in an internationally-competitive environment that would test our ingenuity and competitive spirit. We made it fun.

to succeed. To motivate, communicate and manipulate, is both a challenge and an absolute necessity. However, leadership requires humility.

I believe that the quality of the people around me made me a better leader. This is illustrated by the fact that I chose to reward some outstanding executives with higher salaries than I received, based on their outstanding performance. I used to say to my most trusted confidante that his job was to make me look good.

Mentors During my teenage years, my time at university and during my working life, I was always fortunate to have many wonderful mentors. Earlier, some of these were family friends; latterly they were business colleagues. These mentors were all there to challenge, guide and share experiences with.

Most notable amongst them was John Gough who preceded me in most of my roles at Pacific Dunlop.

He always espoused outstanding wisdom and a great respect for those with whom he worked.

The challenging world that you are moving into will require intellectual agility. These challenges include: – Similar to the opportunities that China provided long before others, you will need to identify the new frontiers, whether in India, Vietnam and other parts of Indo-China, or perhaps even some of the new states of Eastern Europe; – Global financial turmoil. The contagion effect is felt not only by the Western world but is a global experience. Every gyration is instantaneous;

I am very proud that all the senior executives with whom I worked in those days have gone on to become very successful in their own right. This gives me a great deal of satisfaction and pleasure.

Their loyalty and friendship endure today.

– World population growth and the demographic changes of an ageing population in most of the western world and China. We have a world populated by over six billion people with increasing numbers living in poverty. This poverty occurs in both developing countries and the developed world. We therefore have the twin challenges of lifting those in the developing countries to higher standards of living while at the same time coping with the social discontent that the ‘have-nots’ feel in developed countries; and

No-one goes to work to fail no matter what their position in life might be – they are there

– The creative destruction of industry as we know it, with new technologies removing large Insights Melbourne Business and Economics

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parts of our workforce. Mobile phones have replaced fixed-line phones; voice-over internet is replacing mobile phones; the internet is replacing letters; the postal service is becoming a carrier of parcels rather than mail because of internet shopping; finally, internet shopping is replacing traditional retailing. All this is resulting in a reduction in both the workforce and the values of many commercial properties.

Conclusion We are all very fortunate to have been exposed to the teachings provided by this University. Many of you are embarking on exciting journeys that will encompass new challenges and friendships. Your challenge will be to realise the potential in others and motivate them to become winners.

During this journey you must decide how you are going to give back to your community. In the case of my family our major effort has been to develop a young achieverâ&#x20AC;&#x2122;s program. This is conducted by Big Brothers and Big Sisters and provides young, dynamic, highly motivated and ambitious young people with the opportunity to have a mentor, access to workshops and a small financial bursary.

My motivation to develop this program came out of the experiences I described to you earlier this evening.

Finally I wish you well, be passionate in your endeavours and have lots of fun along the way.

Philip Brass was managing director of Pacific Dunlop during 1988â&#x20AC;&#x201C;96. More recently he has held a number of board appointments in the corporate and charity sectors.

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we are all students of business Many important business ideas have application beyond your career and may prove equally helpful in laying the foundations for a successful life by paul carter An edited version of his Occasional Address given at Wilson Hall, the University of Melbourne, on 13 December 2011.

Congratulations on your achievement. You are graduating with an outstanding degree from an outstanding university. I rank my decision to enrol in the Commerce degree at Melbourne as one of the best decisions of my life. It has provided me with knowledge that has served me well throughout my career. Moreover, to this day some of my best friends are fellow Commerce Graduates of the class of 1994/5. Importantly, I met my wife Wendy here – she was most distracting in my Managerial Accounting classes! So I will always feel quite indebted to Commerce at Melbourne and am honoured to join you this evening.

When reflecting on what to say tonight, I did seek the wise counsel of some of those old Commerce friends. One popular idea was to seek inspiration from Steve Jobs’ 2005 address to the graduating class at Stanford. So here is my first suggestion for you – if you are ever asked to do a graduation speech like this, for heaven’s sake, don’t ‘YouTube’ Steve Jobs. Very intimidating! Suffice to say, you will not be hearing tonight from one of history’s greatest innovators. Instead, I want to focus on what we have in common as students of business.

We have all spent time studying theories in economics, finance and management – and all of these commerce disciplines will undoubtedly lay great foundations for whatever vocation you pursue. But it goes much further. I believe that many of these same business ideas may have application beyond your career, and may prove equally helpful in laying the foundations for a successful life.

Let’s first turn to business strategy. One powerful insight from this discipline is that organisations’ strategies are not defined by what they ‘say’ they are going to do, but instead how they allocate their scarce resources across competing priorities.

Needless to say, as a management consultant earlier in my career, many fees were earned diagnosing that companies’ resource decisions were not aligned with their overall objectives.

This business lesson has real relevance to our personal lives. There have been many times in my life where I have felt my own resource-allocation decisions across the competing priorities of family, work, friends and community have become misaligned with my overall objectives. Like many organisations, at times I have felt myself falling into the trap of ‘short-term’ investing which can compromise achievement of long-term objectives.

In a practical sense, this most often meant overinvesting in my work (since that can often provide most immediate payback) and not investing enough in my relationships and communities (which for me provide the most compelling longterm paybacks). I have tried hard over a long period to be explicit about my personal resourceallocation trade-offs and re-align when things are out of whack (invariably this results in more time with Wendy!).

The second business discipline I will borrow from is ‘Innovation School’. A litany of business books and academic articles have been written about how some organisations are able to consistently adapt to changing environments, and develop Insights Melbourne Business and Economics

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new pathways to growth, while others languish, stuck with out-dated business models. One recurring theme about what distinguishes the successful, persistent innovators is how they actively encourage, cultivate and reward their unconventional thinkers. At NAB, one of our top priorities is creating a culture in which people can feel free to speak their mind, challenge conventional wisdom, and experiment with new ideas (‘fail often, fail fast, fail cheap’).

Looking back on my life, the times when I followed my heart rather than an obvious career choice often led to the most rewarding periods of renewal and growth. The decision to step out of the corporate world for a year in the non-profit sector challenged my values in a way that I hope will last with me forever. The decision to take a year out and travel opened my eyes to new cultures and experiences and was enormous fun. The decision to go to business school at the height of the dot com boom when there were millions to be made was often perceived as the slow track. The decision to work overseas for eight years got me outside my Melbourne comfort zone. Now, compared to some, I would be the first to say, none of these decisions on the boldness and risk spectrum are totally radical. Relevantly, Steve Jobs chose to drop out of college and take up calligraphy with no particular end goal in mind, an unconventional step that was the foundation of creating the Mac. But there is something in this and I encourage you to think about how applying the business lessons of innovation could be a real source of personal renewal, growth and a lot of fun!

The third business discipline I want to reference is management and leadership. One of the best known authorities in the field is Jim Collins, author of the best seller Good to Great. In this book, he analyses the type of leadership characteristics common in CEOs who have transformed organisations from good to great. The findings are instructive.

Contrary to popular opinion, the CEOs of these companies were not celebrity, Donald Trumptype larger-than-life characters. Instead, these leaders possessed a paradoxical combination of two qualities: – Professional will – a deep desire to win and succeed; and 48

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– Personal humility – the ability to subsume personal ego for the greater good of the organisation.

In reflecting on the people who have had the greatest impact on me both professionally and personally, the themes of professional will and personal humility really resonate. The bosses that have inspired me the most are the ones for whom it has not been ‘all about them’. They have truly vested in my development and the best interests of our organisation. I have tried to apply this principle in my own life (not always with great success mind you). The irony is that the deepest satisfaction typically comes when I have played a role in building up a fellow colleague for success, been there for a friend in need, or participated in a broader social cause that I believe in. It is exciting to me that practising personal humility can be of real benefit in both our professional and personal lives.

In sum, you and I are privileged to have gone to the best university in the country to study the noble qualification of Commerce. I have no doubt that the frameworks, tools, and theories you have learnt here will stand you in great stead whatever vocation you pursue. But as you start the next exciting chapter of your lives, to quote one of my business school professors, ‘don’t reserve your best business thinking for your career’. In particular: – Think about your personal resource allocation – are your scarce resources being allocated to what is really most important to you? If not, change something; – Second, be courageous in choosing an unconventional path. This can be a wonderful source of renewal and growth; and – Finally, consider your leadership brand. Personal humility may hold the key to going from good to great both in and out of the office.

Congratulations again to the graduating class of 2011. I wish you all great success in both your professional and personal lives.

Paul Carter is Executive General Manager, Business Operations and Strategy, MLC & NAB Wealth.

Mailing Address: The Faculty of Business and Economics The University of Melbourne Victoria 3010 Australia Telephone: +61 3 8344 2166 Email: byoung@unimelb.edu.au Internet: http://insights.unimelb.edu.au Published by the Faculty of Business and Economics, April 2012 Š The University of Melbourne Disclaimer Insights is published by the University of Melbourne for the Faculty of Business and Economics. Opinions published are not necessarily those of the publisher, printers or editors. The University of Melbourne does not accept responsibility for the accuracy of information contained in this journal. No part of this journal may be reproduced without the permission of the editors.