Inside Enterprise Issue 2: "Moral Hazards"

Issue 02 | August 2014

Enterprise Inside

Inform and Inspire

MORAL HAZARDs When corporate shotguns blur the lines

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EDITORS' MESSAGE Editors-in-Chief Howell Sze Nicholas Fahy Publisher Matthew Green Branch Director Geoffrey Li General Editor Marina Yang Editors Aaren Cristini Kevin Gatdula Vanessa Cartwright IT Director Andrew Huynh Designers Jenny Huang Marketing Director Christine Ma Treasurer Scott Liu Recruitment Director James Pyo Sponsorship Directors Yianna Zafiriou Sarah Liu Board of Advisors Beau Chase Claudine Moutou Daniel Petrie Heather Robson Hugh Simpson Mark Chan Max Soyref Michael Allan

This second issue of Inside Enterprise could not have been possible without the dedication, passion and creativity of an incredible group of individuals. With improved processes and several new faces on the team, we have injected considerable momentum into our push to become Australia’s premier student-run business publication. Our first issue has had an incredible reception across New South Wales, and in issue two our founding vision – to become a platform for students which bridges the world of theory and business application – is well and truly being taken to new heights.

Igniting debate over those contentious, often abstruse concerns that plague the business world, in this issue we focus on the realm of ‘Moral Hazards’. With more lessons on real-estate investing and student organisations, issue two also branches into investigations of insider trading and the Federal Budget’s proposed Medicare fee. There are interviews with members of parliament, inspirational young women and even a military veteran, within which lie crucial insights into a world that is very much still being discovered by students.

The business landscape continues to be affected by the actions of those before us, with the social condemnation of immoral business behaviour still young in its momentum.

And it is approaching this new world with breakneck speed, redefining the blurred boundaries and questioning the motivations and impulses which govern current business. Firms can no longer remain stagnant in their social responsibilities and the trend which is emerging is one in which firms either willingly innovate to become competitive but environmentally and ethically sustainable firms, or risk obsolescence.

While we consider a number of highly relevant and contemporary ideas within the domain of business ethics, it is important to remember that such moral hazards generally force reactions within the community. In order to revise the landscape of the modern business environment to one of sustainability and ethical integrity, we must first understand these moral concerns before we can proactively shape effective strategies which remedy them. To this end, the Inside Enterprise website (www.insideenterprise. org) contains many more articles and interviews that dually elucidate and explore these ethical issues, laying the foundations for future examination and change.

Finally, we would like to sincerely thank our Board of Advisors and our corporate sponsors for recognising the value that this publication brings to students across New South Wales universities. To the entire editorial team and executive committee, the journey is simply beginning. We cannot help but be inspired by your continued hard work and incredible passion for this publication. For now, we hope that you, our devoted readers, wholeheartedly enjoy this issue and find the ideas within thought-provoking, challenging and inspiring.

Howell Sze & Nicholas Fahy Editors-in-Chief

For corporate sponsorship opportunities, please contact editor@insideenterprise.org COPYRIGHT AND DISCLAIMER © 2013 Inside Enterprise. All rights reserved.

The views expressed in Inside Enterprise are those of its contributors alone. Neither Inside Enterprise nor its Board of Advisors take responsibility for any material published. All pictures remain the properties of their respective copyright owners.

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C ONT E NT S REGUL A RS Around the World Jessica Kan

Ideas The ANZAC dollar, The Gold myth, The 3D House, China's WMPs

I NT ERVI EWS

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NIcholas Fahy

How to Expedite investing in real estate Ehren Heilman

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Sarah Elsmore

Sun-Yong Kim

Student Story James Goswell on the business of champions

Co-Creating the Customer Experience An interview with MercerBell CEO Nick Mercer

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Parliamentary Business An interview with Matt Kean on leveraging a business degree in the world of politics Matthew Green

From the Military to Business An interview with ex-military entrepreneur Hugh Simpson on the lessons of leadership and crisis management

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Howell Sze

Digital Aid An interview with NSW Young Woman of the Year Lakshmi Logathassan

F EATURES

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Clara Wong

The Devil Wears (Made in China) Prada China's consumption of counterfeit luxuries

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Irene Xu

Cheap Thrills The insider trading epidemic

Stu dent R o om

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Striking Chords The battle over music piracy Marni Lysaght

AIESEC

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B.Inspiring

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Student Entrepreneur

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Stephan Yan

Umme Romman

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Minh Thuy Thai

Dan Christopher

INTER EST S Business in the Face of War Turmoil in the Congo

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Timothy Le

Why the Medicare Co-Payment Could Cost You Less Game theory at the Doctor's

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For many more articles and to contribute your own, visit

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St ay conne c te d

Geordie Costello

The Re-emergence of the Rising Sun Japan’s place in the Asian Century Sun-Yong Kim

Puppets on a String Behavioural finance in government policy

ONL I NE

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www.facebook.com/insideenterprisejournal

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Tweet @IE_online

Levi Romanov

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Around the World #yesallwomen #yesallwomen is the newest Twitter phenomenon, a reaction to twenty-two year old Elliot Rodgers’ shooting spree near the University of California Santa Barbara which killed six people. His accompanying YouTube video exposing misogynistic attitudes spurred #Yesallwomen, which now allows women to voice their experiences of violence, fear and rape. This hashtag has also brought to light the power of hashtag activisim, reflecting the power of social media to raise awareness.

Google Self Driving Car Google has revealed its self-driving car prototype and plans to build over 100 in the US this summer. The car will not have any steering wheel, brake or accelerator pedals, implying that the car will be completely autonomous. It will rely on sensors and Google software to ensure safe navigation.

Facebook – shopping around Facebook has been busy in the first half of 2014 as they have continued to increase their acquisitions. The company made an enormous $19bn bid in February for Whatsapp with $12bn in Facebook shares and $4bn in cash. The remainder will be $3bn in restricted stock units. Facebook also bought up Oculus, the virtual reality gaming software, for $2bn in March. They also sought to snatch up Snapchat for $3bn in 2013 but no deal was struck.

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Jessica Kan

Yellen as Fed Reserve Chairman Janet Yellen took over as the first female Federal Reserve Chairman, replacing Benjamin Bernanke in January. Now she faces the task of defusing asset bubbles without damaging the economy, something that her predecessors were unable to accomplish.

2014 Venezuelan Protests On Venezuela’s National Youth Day in February, tens of thousands of students took matters into their own hands and protested angrily against the Venezuelan government's illformed economic policies, including strict price controls, and its failure to control inflation and crime. Many student pacifist protestors objecting to the lack of opportunities for the country’s young were subsequently read ‘arrested, injured and killed.

The Black Market for Pesos The Argentinean peso was devalued by 12.7% in January as the country’s government attempted to stop the decline in foreign reserves and reduce the gap created by the black market for the US dollar. With inflation peaking at 25%, Argentines sought to convert their pesos, leading to the creation of the black market for foreign currencies.

This occurred as the government has increased policies to prevent capital outflow by blocking purchases of foreign currencies, resulting in people turning to the back rooms of jewellery shops and money houses to buy dollars in a bid to protect their savings against the steady depreciation of the peso.

Spanish Unemployment Spain continues to struggle with its unemployment as it reached 26% at the beginning of 2014. Despite the government’s continuous praise for the improving economy, Spain’s unemployment issue continues with over 1,832,300 households containing jobless people. However, there now appears to be a silver lining to Spain's years of economic turmoil: while young women in Spain face a staggering 54.7% chance of being unemployed, a new wave of entrepreneurship has resulted in a record 800,000 businesses being set up by women in the past five years. Where Spanish women previously lagged behind in entrepreneurship, creating less than 20% of businesses before the GFC, this figure has now doubled to almost 40%. This occurs alongside a move to provide millions of Euros in funding and scale back red tape in an effort to make Spain more conducive to the creation and financing of businesses and the fostering of entrepreneurial talent.

Alibaba IPO Speculation continues over the Alibaba IPO on the New York Stock Exchange and the NASDAQ. Alibaba, headed by Jack Ma, is one of China’s largest e-commerce platforms dominating 80% of China’s online commerce. The company handled over 1.5 trillion yuan in 2013. Its upcoming IPO is expected to raise $150-200b on the market. A bulk of the funding will go to Yahoo Inc. which owns 22.6% of Alibaba; the firm will sell a third of that holding during the IPO. Alibaba currently has a market valuation between $150-$200bn.

Depreciating Lira Between May 2013 and January 2014, the Turkish Lira depreciated by approximately 26% against the dollar primarily due to the government raising the special consumption tax. This has led to rising inflation and a downgrade in the country’s credit rating, increasing their funding costs. Prominent issues in Turkey have continued to fuel the depreciation. Rising oil prices sparked by the Iraq conflict are also threatening government efforts to narrow the trade deficit. As a net oil importer, Turkey has been struggling to narrow its current-account deficit, which in March became the highest among 11 emerging markets in eastern Europe and Africa.

Japanese/Philippine Cooperation In June, trade officials from Japan and the Philippines began a series of dialogues to enhance economic cooperation between the two countries, seeking to make the Philippines the preferred manufacturing hub of Japanese firms in the ASEAN. Recently, Japanese convenience store giant Lawson Inc. set its sights on the Philippines as it plans to partner with local Philippine firms to set up as much as 2,000 convenience stores in order to target the growing high-consumption Philippine middle class population.

Fears of Chinese Credit Default ‘Shadow banking has become an increasingly risky component of China’s exponential credit growth, growing by 13.6% in 2013. On the 31st of January, the China Credit Trust Co. warned investors that they may not be repaid when one of its wealth management products, worth $3bn Chinese yuan, matures. The Chinese government was adamant about not providing a bailout but eventually an unknown third party stepped forward to buy the equity stake in the trust and prevented the default. However, this raises questions regarding the reliability of Chinese trust companies as they continue to manage over $10 trillion yuan ($1.8m) in assets.

Australian interest rates Australian interest rates continue to remain flat at 250 basis points even though the Australian dollar remains above 90 cents. This reflects the RBA’s changing stance as home prices rise and inflation increases. However, the likelihood of a rate hike is still minimal.

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Ideas

Sun-Yong Kim

deterioration in commodity prices, the fact that the terms of trade in Australia and New Zealand are highly correlated should ensure that domestic income in New Zealand is stabilised by fixing the New Zealand Dollar to Australia and vice versa. Such an advantage is unique to the situation presented to Australia and New Zealand as the correlation in terms of currency movements, terms of trade and business cycles is so high.

The Myth of Gold as a Store of Value Does gold really represent the safest investment vehicle through which to store value and wealth in times of economic turmoil?

The ANZAC Dollar: The Case for Economic and Monetary Union Across the Tasman Australia and New Zealand have developed a harmonious single market across the Tasman that is the envy of Europe

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he suggestion that Australia and New Zealand should form an economic and monetary union has been the subject of heated public discourse since it was first suggested by New Zealand economist Arthur Grimes in 1998. The inherent homogeneity between Australian and New Zealand business cycles, monetary policy frameworks as well as industry microstructure has long underpinned the fundamental economic case for an ‘ANZAC Dollar’. While the current European experiment has somewhat tempered enthusiasm for the ANZAC Dollar, there is a growing realisation that the contextual differences underpinning the Eurozone experience ensures that Europe is in no way indicative of how a monetary union between Australia and New Zealand would eventuate.

Primary to the case for the ANZAC Dollar is the inherent homogeneity that

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exists between the Australian and New Zealand business cycles. In stark contrast to the Eurozone, where the incongruity in inflation, employment and growth figures across the 18 member economies makes a regional monetary policy impossible, Australia and New Zealand, through decades of bilateral economic relations, have developed a rather harmonious single market across the Tasman that is the envy of Europe. This is because Australia and New Zealand are highly engaged in trade with one another, have identical business cycles due to their similar industry compositions as commodity based economies, and possess monetary policy directives which aim at similar inflation targets. This means that both their official interest rates and currencies tend to move in similar directions, ensuring that a regional monetary policy could operate smoothly across the Tasman.

Moreover, a single currency across the Tasman has the potential to establish significantly lower interest rates because the currency risk premium between Australia and New Zealand would dissipate as yields converge with economic and monetary union. This would undoubtedly benefit New Zealand more as the New Zealand bond yields have generally been several percentage points higher than Australian ones. But even for Australia, currency union with New Zealand would effectively put a ceiling on bond yields, eliminating much interest rate uncertainty.

In addition to these arguments, Arthur Grimes has also argued that a single currency would help stabilise domestic income in both countries in cases of large terms of trade shocks. As the Australian Dollar tends to depreciate when growth in industrial countries falls, leading to a

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ince the days of the Great Depression, a common myth has emerged that gold represents the safest investment vehicle through which to store value and wealth in times of economic turmoil and decline. This myth seems to stem from the experience of gold investors in the 1930s who were able to shield losses during the Great Depression by converting cash into gold.

However, the past historical performance of gold has hidden the true underlying weakness and instability that in fact underpins gold prices. The myth of strong gold movements is generally supported by the use of a nominal USD measure which fails to consider inflation and exchange rate differences between nations, differences that may reduce the attractive of gold investments in economically unstable nations.

In countries with high inflation, the terminal decline of the domestic currency makes gold look like a good inflationary hedge instrument. The Indian Rupee represents perhaps the greatest example

of this as the Rupee has gone from parity with the US dollar in 1947 to more than 60 rupees to a dollar today. As a result of these factors, assets priced in foreign currencies, such as gold, have thus held their value, and delivered big returns in local currency terms.

Beyond this, it may further be startling to know that even Fiat currency, which is any currency that can be printed in unlimited supply by the domestic central bank, displays lower volatility than gold investment.

Though this empirical outcome may seem at odds with contemporary notions of gold, it is not entirely without reason.

While fiat currencies such as the USD are actively controlled by a central bank, gold is not. This leads gold to display erratic and unstable price movements which may well be to the detriment of gold holders.

In 2011 for example, gold’s price dropped by 25% in a matter of two weeks. Such a rapid decline in a relatively short period of time cannot be attractive to the average investor who may see his entire net worth

of savings dissipate over a matter of days or weeks depending on the erratic mood of gold price movements.

In addition to this, one must remember that, as a metal, the price of gold is heavily influenced by its use in the production process. As an essential input in the production of jewellery and other luxury items, it is an economic reality that gold investments also depend on price elastic luxury industries characterised by cyclical, not structural, demand. In real terms the demand for gold jewellery has declined since even pre-GFC days but the decline has certainly been accelerated over the last 3 years, suggesting tough times ahead for those with significant gold holdings.

All of these quiet truths should draw a rational investor to the conclusion that the notion of gold as a sensible store of wealth and value is considerably more myth than reality. If an investor truly desires wealth stability, one should no longer cling to the outdated nostalgia for a gold vault. www.insideenterprise.org | 9

The 3D House: A New Approach to 3D Printing

opportunity costs. In addition to these advantages, Dr. Khoshnevis believes the system could quickly provide housing for victims of natural disasters as well as for the billion people who currently live in sub-standard housing worldwide. Eventually it could become complex enough to construct apartment buildings, high-end custom homes and even potentially moon dwellings.

A particularly interesting extension of 3D housing construction is the very real possibility of printing habitats on the moon and Mars. To this end, Dr Khoshnevis has generated a proposal for laser sintering moondust which would allow the formation of a landing station for future spacecraft without the need for the water necessary to extrude concrete.

Yet the potential for 3D construction even transcends printing habitats on the moon. It could also be extended to other building materials such as plastic, wood,

glass and steel. Using 3D printing in this manner could conceivably help print designs for miniscule models of race cars and cathedrals. So long as the appropriate computer plans are laid out for Contour Crafting to follow, 3D printers could help design all of these potential landscapes with a peculiar example being Israeli designer Neri Oxman’s use of 3D printing to create beautifully impossible sculptures.

The interesting possibilities presented by 3D construction deserve further attention even if they do still seem farfetched in this modern age. Considering how far 3D printing has evolved over the last decade, particularly through its prevalence in soft materials, a further technological extension of the concept may not seem so implausible in the near future.

WMPs: China’s Answer to CDOs Chinese Wealth Management Products

A unique robotic approach to housing construction

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ith 3D printing revolutionising the nature of modern manufacturing, it is unsurprising that such technology has come to reshape the construction industry in the same way.

The University of Southern California's Professor Behrokh Khoshnevis has designed a giant robot that replaces construction workers. The robot possesses a nozzle on a gantry which squirts out concrete and can quickly build a home according to a written computer pattern.

This technology is inspired by Professor Khoshnevis’ previous research experience in rapid prototyping technologies. Dr Khoshnevis’ initial research created robotic machines that were capable of building small clay structures using a robotic nozzle, a trowel to smooth surfaces and a computer-aided design (CAD) program dictating the design itself. It quickly became evident that using robots to build three-dimensional (3D) structures was not simply limited to clay, but that these robots could also be used with construction materials, like concrete.

Extending this very idea into concrete housing, Khoshnevis designed technology known as Contour Crafting, a robotic 10 | www.insideenterprise.org

system that automates age-old tools which are traditionally used by hand. These are wielded by a robotic gantry that then builds a 3D object. In essence, construction workers would lay down two rails for the robot to operate on. From there, the Contour Crafting system would glide along the rails, laying down cement. Once that part of the process is finished, humans would then complete the rest of the indispensable tasks such as hinging doors and installing windows.

Strong walls are built up layer by layer using concrete with automatic reinforcement, while plumbing and electrics would also be added by the system during the building process. Using this automative assistance, it is estimated that Contour Crafting could build a 232 square-metre home layer by layer in a single day.

Such a unique approach to housing construction lends itself to many benefits, not least of which is cost related.

Replacing onsite construction workers with a single machine greatly reduces labour costs and the risk of accidents. The dramatically shorter and more consistent building period reduces financing costs, such as risk-related interest on loans and

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n a world that is still recovering from the effects of the subprime mortgage crisis, it would seem inconceivable that any banker, any hedge fund manager or any institutional investor would even consider a return back to the excessive risk taking derivative model that led to the collapse of some of the world’s most revered financial institutions. After all, many jobs were lost, life savings were obliterated and taxpayer money was exhausted by savings institutions that were more interested in paying executive bonuses than instituting good financial management practices. Well, think again.

The Chinese seem to have unloaded onto the global economy a monstrosity

that promises to rival and even best some of the catastrophes that were unleashed on the world only seven short years ago. Known as WMPs, Chinese Wealth Management Products are financial products issued by banks that basically pool together the bad debts owed by local governments and real estate developers which are not on the bank balance sheets and are not collateralised against.

Generally, the banks extend WMPs to trust companies that are not allowed to accept deposits or formally loan out money, but are only allowed to manage it. The trust companies create investment products like WMPs which banks market in return for a commission. The trust

then invests the money gathered through a WMP in a given company while the WMPs are then sold to investors, promising exorbitant returns. Given the 3% interest ceilings on savings in place by the Chinese government, the promise of significant, near-limitless returns is very attractive to local investors in particular The potential for these bad debts to go sour is dangerously high given that most of the local government debt packaged in WMPs is backed by the property market.

This means that Beijing’s current attempts to ‘cool the market’ could lead to a widespread bankruptcy of local government and real estate debt that has the capacity to turn WMPs into the centre of a new global financial crisis originating in China. Such alarms have already been rung in the aftermath of the 2013 annual report of the Chinese National Audit Office which stated that local government debt levels had reached $3 trillion USD in just the last 3 years.

The added concern is the virtual absence of regulation of Chinese WMPs given they are a product of the shadow banking system.

Most WMPs are created not by a bank but by a financing vehicle such as a trust company, underground lenders and off balance sheet bank undertakings. Since WMPs are conducted off balance sheet, they are not subject to the Reserve Requirement Ratio (RRR), which dictates the minimum percentage of deposits that financial institutions must entrust to the central bank instead of lending out. As a result, WMPs allow for the rapid creation of new WMPs that pose risks to the Chinese financial system. In fact, over the last 3 years Chinese credit growth has amounted to at least 35% of GDP, with some, like Michael Pettis, arguing that it is in reality closer to 50%, figures that have never before been seen in modern economic history.

While Chinese regulators seem to have finally realised the importance of addressing the issue of WMPs, the widespread practice of WMPs has become so entrenched in the internal structures of the Chinese economy that targeting its development may in fact harm economic growth, a risk the central government has never shown a willingness to bear. That is an unfortunate reality that may prove disastrous not only for China, but for the world.

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student story

JAMES

GOSWELL ON THE BUSINESS OF CHAMPIONS Nicholas Fahy James Goswell, a University of Sydney Business School graduate, national rower and Ironman Triathlon World Championship athlete, reflects on the skills necessary to become a leader within the dynamic realm of university life, sport and the world at large.

“My personal mantra has been: With belief and desire, anything is possible. In my experience, it’s usually the first one that is missing.”

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t is often said that the only place where success comes before work is in the our colleges, racing against one expresanother dictionary.

The implication of this in a feat of sweat and pride.

Men’s sion may seem generic, but in the context eight James Goswell is on one of of onerowing. of the Australian fashion industry’s these teams, having raced with many of most successful young talents, it has certhe others in the past.

He knows how good tainly held true. they are.

Too good.

And though his team Margaret Zhang, 20, currently runs her is enthusiastic, doubts plague his mind as own fashion blog – Shine

By Three – and to the quality of their rowing.

They seem regularly travels around the world for almost to be in a different league.in“Icities have photo shoots and fashion weeks to admit” he says, sincere yet with a sly such as New York, London and Paris. She smile, “I didn’t believe that to weHarpers could win.” also works as a contributor A quarter of the race remaining and the Bazaar Australia, does her own freelance favourites, a crew going for their ninth writing and photography, and works as a straight were only marginally inthat creative title, consultant for corporations front.

“You’re not meant to look of the are seeking branding, creative andout marketboat.

You’re meant to remain focused. ing direction in the age of digital mediaI remember They should further and online thinking, social platforms.

But be that in front.

All of a sudden I started to believe isn’t all. Late last year, Margaret finished that we could win.”

James yelled at the her first TV hosting job for the program coxswain, the team member in charge of ‘Fashion Asia’ – a show following fashion, steering, encouraging him to rally belief design and art trends throughout dozens throughout theAsia crew.

“Tell them of cities across – which airedwe oncan the win!” he yelled over the roar of the boat Australia Network in December. Margaret as it sliced through speeding is also in her fourththe yearwater, of a combined towards the finish line.

And as cox commerce and law degree at thethe University

“Perseverance is the hard work you do after you get academic studies. Yet this crossroads afrelayed James’ message, the entire team forded you him the opportunitydid.” to reflect on cametired togetherof in the realisation that they doing the hard work already how his co-curricular involvements have did possess a chance, a very solid chance indeed, and dug deep throughout the final helped shape him into a confident and employable hisappealun500 metres to narrowly defeat the reignapproached leader. in orderThroughout to present an of Sydney. dergraduate years he was a member of the ingWhen champions.

For James, “The difference asked to describe how this incred- ing business pitch. All of this achieved at Australian Men’s eight for the Under-23 that belief can make to a team in pursuible journey began, she replied simply: an age before she could even legally drive a Rowing Championships, an Ironance of their goal is just incredible”, and it World “I was bored.” car by herself. man Triathlon World is this belief, alongside insatiable passion, Margaret explained that it was around Since that first trip, Championship Margaret has at-athlete, taught for the University of and Sydney that leads to success. the age of 16 when she started to develop tended numerous fashion weeks Business School, and was a fundraiser, A university degree, just like a career, is an interest in fashion, imagery, editorials engaged with other major sponsors volunteerNokia, and the founder of a charity not And James’ reflect and linear. magazines, but herexperiences friends didn’t really aincluding Harpers Bazaar, Milk ocean swim team. that.

University is a dynamic, unpredictshare the same enthusiasm. Her response?

Studios, major airlines and dozens of fashexpounding able and diverse period in one’s life. Yet ionWholeheartedly brands. In establishing eachthe of these She started a blog. importance of volunteer work, relates, within this flux, the sense of belief, compartnerships, Margaret learned he how to “I started my blog, Shine By Three, as with pride, his role as the founder of influmunity cognisance and endurance neceseffectively leverage her skills and her a way to connect with others online who Babewatch. the period between his sary to similar excel within one’s personal and ence with a During large online audience in order shared passions and could provide national rowing pursuits and his triathlon professional life is ever constant, and it is to craft an assertive personal brand. direction to more of the same material.” endeavours, James found that heMargaret had a theSoon development and maturation of these Prior to beginning university, after, Margaret made her first lot of “spare time” on the weekends crucial perspectives which leads to effective explains that she had always wanted over to significant leap into the fashion world by the summer break.and “I would participate in leadership and success. become a lawyer, achieving the ATAR deciding to attend the New York Fashion the ocean swim events that take place on James completed his undergraduate cut-off seemed to confirm those aspiraWeek. Half of the cost of the trip she Sydney’s I don’t whatwas it is double in Commerce and Law tions. Upbeaches. until that point,know the blog funded degree by herself.

The other half came at the end of 2013 at the University of about ocean swimming, but I loved it.” just a hobby. However, as she began her from a sponsorship deal with smartphone Sydney, formally drawing to a close had his Yet despite this love, he degree, soon realised combined commerce/law studies→ maker Blackberry, whom Margaret www.insideenterprise.org | 13

“I once woke up at 3:30AM to run from my house in the suburbs all the way to the beach.

It was longer than a marathon!”

that ocean swimming is not at all a young person’s sport regardless of the fact that “the beach is so typically Aussie!” Determined to remedy this fallacy, he recruited several of his colleagues from the boat club and began Babewatch, announcing the founding of their team by arriving at the beach in nothing short of bright pink swimmers. “We knew that as a bunch of larrikins cavorting around on the beach we might not be well received by our fellow swimmers. So we decided to be a charity team, swimming to raise money for breast cancer.”

From this simple idea the team rapidly grew to a regular eighty members, comprised of both men and women of all ages, and has since gone on to raise more than $36,000 for cancer charities. Sponsors have also joined in on the community goodwill, with Zoggs donating goggles to every team member and Moo Gourmet Burgers throwing celebration parties for the team. “When I started the team I set two goals,” James explains, “to increase the number of young people taking part in ocean swimming, and to increase the number of young people taking part in community fundraising”, objectives well and truly met through James’ perseverance and community understanding.

In addition to Babewatch, James also contributed as a mentor with the Australian Indigenous Mentoring Experience (AIME) program. Established at Sydney University, AIME partners university students with those from Indigenous high schools in a one-on-one setting for a series 14 | www.insideenterprise.org

of sixteen week workshops. The objective is to promote the notion that education is a right entitled to all Australians and to afford these students the opportunity to realise the possibilities presented by secondary education in order to become leaders themselves.

James began mentoring in 2010 and described the anxiety and nervousness he felt at the responsibilities requisite for his role as a mentor. “Before I knew it I was face to face with a fifteen year old Indigenous high school student who I had never met, who came from a very different background to me, and we basically had to establish a friendship.” James went on to be a mentor for the next four years, but upon reflection realised that it was those first few meetings in 2010 that really challenged him and forced him to adapt to these new and unchartered demands. Being blunt he confessed, “You can’t fake anything in front of a year nine student – because they will see right through you.” The ability to inspire by relating to his own experiences and challenges, and the ability to convey this clearly and succinctly, were prime learning capabilities James was fortunate enough to develop and hone during his tenure with AIME. James’ grounding in his commitment to community involvement reflects his reaction to greater societal concerns and a mature understanding of their importance.

However, this perception and consideration also aided him in his sporting commitments, enabling him to perceive the limitations placed by others upon his

With his sporting career as a rower steadily declining, James decided to instead pursue his dream “of travelling to Kona [Hawaii] to race on the lava fields.”

own dreams and ambitions, and leverage this understanding to instead achieve his dreams to the best of his ability. James rowed as a member of the Australian men’s eight for the Under-23 World Rowing Championships from 2007 to 2009, winning a bronze medal in 2007 and what is affectionately known as ‘the potato’ with a fourth place in 2009. As he explains, “Rowers in a rowing eight are numbered from the front of the boat, the bow, to the back of the boat, the stern. During

my time rowing for Sydney University and Australia, I started in the stroke seat – that’s the person right up the back who leads the others in rhythm and timing, the premier position.”

However, by the time of his last race rowing for Sydney University, James was in the bow. He had dropped progressively from position six, to four and finally to position three. “In my own mind at least, I thought I was getting a pretty clear message from the coaches: I was on the way out. It was then that I decided to swap to triathlon.” Despite appearances, this was not a rash decision on any account. With his sporting career as a rower steadily declining, James decided to leverage his current national athleticism to instead pursue his dream “of travelling to Kona [Hawaii] to race on the lava fields.” It was a dream and, as with all good dreams, it would not in any way come easily.

An Ironman Triathlon, as James clearly explains, “is the combination of a 3.8

kilometre swim, a 180 kilometre bike ride and a full 42.2 kilometre marathon.” The physical and psychological demands are intense. And to compound this, entry into local heats within Australia is a minimum of $850 and generally held in remote localities. For James, this meant competing in the Port Macquarie heat, where “there was only one qualifying spot on offer – so I had to win. No second chances.”

Knowing that the very nature of his dream afforded him one attempt at its realisation, James went to every length to achieve this: he took a year off from university; he lost ten kilograms; and he trained relentlessly every day. He even tells, with a note that betrays his own self-astonishment, that “I once woke up at 3:30AM to run from my house in the suburbs all the way to the beach. It was longer than a marathon!” It is this ceaseless desire and drive, the will to want to wake up that early that is invaluable for success and yet can only ever be self-acquired.

Reflective of an amalgam of his belief in himself and his unerring perseverance in the pursuit of his passions, James achieved the near-impossible and qualified for the Ironman Triathlon World Championships in 2012. He completed the Hawaiian event in October of that year, in a wellearned ten hours; a remarkable conclusion to his journey. Though we cannot all follow the same path as James, we can all foster our own perspectives on how to most effectively deal with and leverage the dynamic and unrelenting flux typical of university life. For it is those students who challenge themselves, seek out new insights and understandings, and endure the nearunendurable, that position themselves best for sustained and future success.

“My personal mantra has been: With belief and desire, anything is possible,” James finally discloses. “In my experience, it’s usually the first one that is missing.” ■

www.insideenterprise.org | 15

The Devil Wears (Made in China) prada

Mario

Moreno

Irene Xu China is one of the world’s biggest consumers of foreign luxury goods – and their counterfeits. Irene Xu explores this economy of staggering contrasts and the cultural underpinnings which have forged this unique consumer empire.

T

he Seasons Place, located at the heart of Beijing’s Xicheng District, is an upscale shopping centre about the size of nine Sydney Opera Houses. It epitomises the ultimate retailing experience: every polished floor is lined with luxury stores, their names printed glossy and bold: Louis Vuitton, Dior, Versace, Gucci, Miu Miu and Givenchy. They are the opulent Chinese embassies of internationally renowned fashioned houses. A gown at the Seasons Place could cost as much as AUD$10,000. On the lower end, a Paul Smith shirt could easily cost AUD$400.

Less than 8 kilometres away in the Chaoyang District, the Silk Street Market

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can offer the same Paul Smith shirt for twenty bucks. It is Beijing’s other renowned shopping centre, a place defined by crowds of natives and tourists alike, bargaining over items that shopkeepers pile high on tables and hang from towering racks. It is a market for the counterfeits produced in China.

Just as the Seasons Place is notable for its high-end brands, the Silk Street Market is synonymous with cheap, counterfeit luxury goods. In 2010, China captured 30% of the global luxury market share – but almost triple that, at a staggering 87%, in the counterfeit goods industry. With low manufacturing

costs and minimal barriers to entry, the Chinese counterfeiting industry generates approximately US$16 billion in revenue each year at the global cost of a US$200 billion annual loss in taxes, employment and sales revenue for foreign luxury companies. There is enormous consumer demand for both genuine and counterfeit products – but why the dichotomy in this country?

The Largest Foreign Luxury Market Since the early 2000’s, the Chinese luxury market has demonstrated a trending uptick. Bloomberg reported in 2013 that www.insideenterprise.org | 17

Infosys co-founder Narayana

total luxury sales in China increased by 2% to US$19 billion. Even during the Global Financial Crisis, when consumer spending was at an all-time low, China overwhelmingly outperformed its European and North American counterparts with a 16% growth in luxury sales. Former World Bank president, James Wolfensohn, has predicted that two-thirds of people in the world’s middle class will be Chinese by 2030, contributing to China’s development into the world’s largest foreign luxury market. It is no surprise that foreign luxury companies have identified the country as

In 2010, China captured 30% of the global luxury market share – but a staggering 87% in the counterfeit goods industry a desirable target for increased profitability and business opportunity. Brands like Coach and Michael Kors have implemented popular Chinese social networking apps like WeChat as part of their strategy for 18 | www.insideenterprise.org

eliciting more Chinese consumers.

Luxury Goods for Guanxi This surging demand for foreign luxury goods can be underpinned by one crucial factor prevalent within China: ‘guanxi’.

Literally translated as ‘relationships’, guanxi is a network of social connections ranging from family members to classmates, friends and acquaintances, based on mutual trust and benefit. Essentially, the guanxi paradigm as a manifestation of Chinese culture operates as a competitive advantage in both cultural and business arenas. This is why approximately 50% of luxury consumption in China is not intended for personal use. Rather, luxury goods are purchased for the purpose of business gift-giving to partners, clients and Chinese bureaucrats to substantiate one’s bargaining power.

Cheng Yong, the CEO and owner of a successful Chinese construction company, is a businessman who never passes up an opportunity to shop for luxury goods when he is in Sydney. He recently purchased over nine Ermenegildo Zegna shirts from Pitt Street Westfield – and kept none of them. “I give them all to my clients”, he

explains. “It helps keep me in favour.”

Indeed, Chinese businessmen believe that luxury leather goods make them more recognisable in the business world. Luxury is a status symbol implying wealth and business success; armed with it, businessmen command respect. Through imitating the lifestyle choices of those on higher social echelons, the owning, purchasing and gifting of foreign luxury goods is a display of professional decency within the Chinese business context, undertaken to reinforce guanxi. The practice is distinctly gendered as 83% of Chinese business people are male, and their high consumption of luxury goods has singled China out as the only luxury market worldwide that is driven more by men than women.

Chinese men purchase more designer fragrances and accessories than women, and brands like Salvatore Ferragamo have responded to this unique demographic by opening mens-only stores in China.

A Contradictory Consumer Experience In China, the ability to purchase foreign luxury goods to either propagate one’s social prestige or for the purposes of busi-

Murthy being brought back

as Executive Chairman Photo:

ness gift-giving is limited to those who have the monetary capacity to afford it. From the disempowerment of income inequality springs China’s contradictory consumer experience. In 2012, China recorded a Gini Coefficient (an index measure of social equality) of 0.474, a figure which is slightly above the United Nations benchmark of 0.4. Yet even the poorest households in China, households who live on less than US$1 a day, spent approximately 30% of their disposable income on gift-giving, twice the amount spent by similarly impoverished Indians. Determined to match the wealthy business class in appearance at least, the Chinese who cannot afford genuine luxury goods purchase counterfeits to promote their social status and business image. The combination of these social factors which underpin the desire to conform and emulate success, means that China is also one of the world’s biggest consumers and manufacturers of counterfeit luxury goods.

Counterfeits and Mianzi: The Lowest Level of Luxury As counterfeited goods represent an aspiration for prestige almost rivalling the au-

thentic items they replicate, it is interpreted as the lowest level of luxury. Individuals can earn social acceptance, and save themselves from the potential loss of ‘mianzi’, their face and reputation, within business contexts. Mianzi represents one’s reputation in the context of their workplace, society and family. The concept of saving face and protecting one’s reputation is extremely important, especially given that Chinese culture is unforgiving to those who fail.

One needs only look to the rise of ‘tigerstyle’ parenting to note the lack of tolerance for failure which exists, particularly within the competitive business and entrepreneurial landscape. For that reason, mianzi is intertwined with commercial success, represented through symbols of wealth.

Model Ma Nuo summed up this phenomenon, when she declared on a popular Chinese dating show that she “would rather cry in a BMW than smile on a bicycle”.

Her response provided insight into China’s growing emphasis on measuring a person’s worth by standards of material wealth and success, rather than on the basis of their intrinsic virtues. Purchasing a counterfeited item is therefore a means of shaping one’s reputation. Ultimately, this nexus between

purchasing foreign luxury goods and its counterfeits illustrates how, for Chinese consumers, conspicuous consumption is

ineffective monitoring and legal loopholes in its copyright and IP legislation have facilitated the continuance of counterfeiting activities not based on personal preferences, but rather is undertaken as a commercial and social response to the expectations of their peers.

How the Law Supports China’s Counterfeiting Industry China’s counterfeiting industry of luxury goods endures not only due to the underlying consequences it presents for mianzi, but also because it is supported by China’s legal and regulatory framework. Upon entering into the World Trade Organisation in 2001, China was required to develop intellectual property (IP) laws which conwww.insideenterprise.org | 19

Therein lies the paradox: those attempting to satisfy the cultural imperative to be successful – or at least to look it – have negated the prestige of foreign luxury goods as status symbols. formed to the TRIPS Agreement. However, instead of ensuring the efficiency of IP administration and enforcement, ineffective monitoring and legal loopholes in its copyright and IP legislation have facilitated the continuance of counterfeiting activities.

There is also the issue of a lack of serious enforceable penalties being applied consistently across all government levels to challenge this problem. The Silk Street Market certainly remains a hub for the sale of counterfeit goods as there has been little government effort to stop these purchases.

The culmination of this inefficiency has meant that there have been substantial increases in IP infringement cases brought about by foreign companies over the last few years. However, given that the counterfeiting industry contributes substantially to the Chinese economy, it is unlikely that the Chinese government will adopt any restric-

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tive measures in the near future.

Burberry’s Underperformance An implication of easily available counterfeit goods is that it also makes some foreign luxury brands become too ubiquitous. As more luxury brands enter into the Chinese market, consumers are now also refining their tastes by eschewing products that feature prominent logos. The irony is that foreign luxury goods are now not only used to differentiate between classes but also from each other. Burberry, a brand previously characterised by its distinctive tartan pattern, has set about reworking its signature look in the wake of sales underperformance in China after brand weariness grew from the proliferation of its counterfeit replicas.

What was once projected as exclusive and upscale became an image of cheap accessibility. Therein lies the paradox: those attempting to satisfy the cultural impera-

tive to be successful – or at least to look it – have negated the prestige of foreign luxury goods as status symbols.

The Perpetuating Dichotomy China’s ever-growing love for foreign luxury goods has seen more luxury brands entering and expanding into the market.

In 2005, Hermès only had five flagship stores in China – today it has 20. However, an increase in demand for luxury goods will also result in a reciprocal increase for counterfeits. Therefore, an understanding of how this cycle and Chinese consumer preferences continue to evolve will be essential for businesses looking to gain a foothold into the Chinese market. At the same time, it will also be critical for those luxury businesses desperately trying to retain their competitive relevance in the Chinese market. ■

Cheap Thrills

The Insider Trading Epidemic Umme Romman

In a world where money is the prime motivation, have corporate shotguns finally blurred the lines too much? The emergence of the data information era has endowed companies with the opportunity to covertly acquire private information and close extremely profitable deals on financial products, with this information asymmetry and power difference leading to the gradual erosion of investor confidence and the destabilisation of capital markets.

The Consequences of Insider Trading Insider trading distorts and victimises the market and calls for tougher regulatory and internal frameworks, at times hindering effective business operations.

Big players subtly corner unbeatable deals while smaller shareholders and the investing public remain reliant on false market interpretations and oblivious to the laws regulating such malpractice. As the dominoes tip over, Australian companies suffer from divestment and a loss of international competition and reputation.

When companies start leaking money, 22 | www.insideenterprise.org

securities inventory builds up and brokers come under pressure, enlarging the bid-ask spread and jeopardising their financial solvency as they fail to attract investment.

When market inefficiency and share prices plummet, shareholders lose money but it also destroys the level playing field for financial investment and defrauds the entire community. Insider trading, as Sara Wenzel from the Seven Pillars Institute puts it, “violates the social contract of modern finance.”

Loopholes in the Current System In recent years, the number of insider

number of fraudulent cases, the reality is that larger players can easily settle disputes through a monetary sum or are acquitted based on a lack of supporting evidence.

This is evidenced by ASIC’s failure to take action after David Jones directors bought the retailer’s shares mere days before a sales uptick and a day after Myer’s secret takeover approach. Georgia Wilkins from the Sydney Morning Herald, investigating the issue, noted charges against former Gunns chairman John Gay were dropped after he sold $3.09m of his shares before a profit downgrade. He was fined a relatively paltry $50,000. This sparked widespread outcry, with the Australian Shareholders Association calling the penalty “too slight” and demanding imprisonment. Are we simply fuelling a system that automatically favours financial powerhouses?

While insider trading is inherently difficult to detect, the CEO of research house Intelligent Investor, John Addis, argues that “under current legislation, insider trading and breaching director’s duties can be a highly profitable activity, with little risk of getting caught.” After all, John Gay’s penalty of $50,000 came as a consequence to him stealing $750,000 from shareholders. A tidy profit of $700,000 from an entirely illegal and immoral conduct simply because courts perceived him to be of “good character.”

Contrast this to the legal ramifications for insider trading in effect in the United States, where Australian financial analyst

Trent Martin faces up to twenty-five years in jail for pocketing USD$7,900 in an insider trading scheme when he bought shares in SPSS Inc. on the basis of IBM’s unannounced acquisition back in 2009.

The distinction between the American and Australia systems is a blunt signal of Australia’s lack of stringency in enforcing corporate penalties proportionate to the wrongs committed.

Furthermore, ASIC currently struggles to keep abreast of insider trading occurrences. In 2012, former deputy chairman

Insider trading... “violates the social contract of modern finance.”

Belinda Gibson aimed to employ $47 million in government funding to enhance market surveillance. These efforts proved largely futile, with 200 alerts per day of suspicious insider trading activities reaching ASIC’s ears. Phone tapping and the Flexible Advanced Surveillance Technologies (FAST) system are expected to enable greater real-time observation of financial markets, thereby enhancing the likelihood of detection. However, until this technology improves and increased government funding is allocated to the protection of financial markets, ASIC cannot thoroughly investigate the 200 alerts it daily receives.

Indeed, of ASIC’s thirty-two alleged

charges of insider trading since 2009, only twenty-three have resulted in prosecution thus far. Smaller companies have been the primary targets, solely because it is markedly more expensive to prosecute larger companies: the James Hardie case cost ASIC $35 million, while the Storm Financial case reached $50 million. As Sydney solicitor Tamanna Islam aptly commented, “ASIC is not well resourced enough to pursue all cases of insider trading, so enforcement remains a bit haphazard.”

Juliette Overland, a Corporate Law lecturer at the University of Sydney, points to legislation as the key problem, with its four primary dimensions being notoriously subjective and increasingly difficult to prove in practice. These four dimensions entail: if the person had insider information; if they knew or ought to have known that this information was not available externally; if they knew that the information was price sensitive; and if the person traded in shares or other financial products to which the information was related. The high legal standard of proof threshold is tough to prove, relying on absolute evidence or admission of guilt.

On a more positive note, academic Dr Afroza Begum, stated in 2013 that the “judiciary has progressively broadened the scope of information evident from cases like ‘ASIC v Citigroup’, where it was disputed whether an instruction for Citigroup to stop buying Patrick Corporation’s shares constituted ‘information’ under

a ured meas- life

trading cases in the media and regulatory limelight has exploded. The High Court clarified in the 2012 case of ‘Mansfield & Anor v The Queen’ that the scope of information under Australian law includes “entirely or partially false” information, regardless of whether the person “conveying it knows or believes it is true or false.” This broad application leaves room for significant creativity and manipulation and showcases the obscure, complex and confusing nature of current financial protection laws.

While widening the definition of information was designed to capture a greater www.insideenterprise.org | 23

‘David Jones chairman Peter Mason following insider trading controversy.

Source: Andrew Quilty Australia Insider Trading law.” For her, the current laws “enable market efficiency and fairness.” She conceded, however, that “this unduly puts pressures on shareholders and management to ensure its companies are free from insider trading and a long-list of objects could fall within the broad definition of ‘information’.”

In the determination of insider trading, the applicable criteria itself does need further refinement or more guidelines, for this will simply lead to a wider floodgate

under current legislation, insider trading and breaching director’s duties can be a highly profitable activity, with little risk of getting caught of accusations. Consequently, management may become dis-incentivised or fear persecution for the slightest of activities and resort to keeping a low risk profile, reducing attempts to enhance their company returns and ultimately failing their shareholder duty. Former Western Australia Premier Brian Burke and stockbroker David Massey were recently acquitted of 12 charges of insider trading, with Burke calling the string of failed Corruption and Crime Commission prosecutions a “witch hunt’’ driven by misleading evidence. If 24 | www.insideenterprise.org

this is this case, are regulatory bodies wasting their resources in pursuing the wrong cases?

Tamanna Islam suggests that ultimately defences to insider trading create escape routes. She claims that “the defence of equal information is obviously open to manipulation – if the two parties to the transaction have the same information, they are not disadvantaged, but the rest of the market remains uninformed.”

The Way Forward Stronger legal and internal frameworks are necessary in tackling insider trading and the damage it inflicts. Professor Ian Ramsay of the University of Melbourne Law School has called for “reviews to seek clarity in the law”, suggesting the government should enact all 38 recommendations handed down over ten years ago by himself and fellow members of the Corporations and Markets Advisory Committee. Some of these include strengthening the reporting requirements for directors, broadening defences, repealing the exemption for external administrators and strengthening sanctions.

Others stress internal controls such as educating on window policies, clarifying regulations and the consequences of non-disclosures across all business units, restricting access to files containing sensitive information and requesting that employees sign confidentiality agreements.

Companies could parallel the Securities and Exchange Commission’s ‘Rule 10b5-1’ in their policies, a rule in which executives submit trading plans which limit their liability as their trades have been planned well in advance of any news or financial event. Standardisation of the brokering firm for major corporations would further strengthen the effectiveness of this policy.

More funding to fuel ASIC and a shifting of their focus towards the larger market players is also crucial for moving forward. In terms of detecting suspicious activity, ASIC’s Market Analysis Intelligence system is expected to improve the speed and flexibility of market surveillance, with a new capability to oversee and tag individual investors. According to Deloitte, such database tools and online resources help deter insider trading through identifying anomalies in price and volume before the material transactions actually occur.

With uncharacteristic increases in insider trading in recent decades and the constrained number and capacity of current technological, financial and legal mechanisms to combat its risk, insider trading has become endemic to capital markets. While this leaves investors and shareholders more sceptical than ever before, stronger legal and internal control mechanisms will in time help uncover the corporate veil and restore fairness to the financial system. ■

Striking The Battle over Music Piracy

Marni Lysaght

Chords

The onset of technological advancement has prompted significant change in the music industry, supplying both opportunities and disruptions to its players. The heightened ubiquitousness of streaming services such as Spotify, coupled with the ongoing prevalence of music piracy, has warranted varying responses by the industry. These developments benefit some participants, yet in some instances their exploitation is detrimental.

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I

n a highly interactive digital age, consumers are increasingly tuning in to listen to their favourite artists and seeking new tunes, typically free of charge, via online streaming services. Figures published by the International Federation of the Phonographic Industry (IFPI) confirmed revenues from music subscription services grew to a staggering 51.3% in 2013. However, it must be conceded that music distribution mediums have differed and evolved over time. Currently, streaming services and subscription products have assumed prevalence, and are considered affordable relative to Apple’s iTunes alternative. Complementing this change is the obsolescence of Hi-Fi systems and other music-playing technologies, reflected in the ongoing closure of music retail outlets such as Sanity. This is consistent with the IFPI’s findings that the share of the total global industry income by physical format sales was down 9% on its 2011 level to 51% in 2012.

While record labels and recording artists have responded to this change by distributing their music in streaming format, some have scrutinised streaming services’ royalty payment per stream, considered inadequate relative to the royalties yielded from physical or online purchases. 2014 first quarter data from Nielsen concludes that average royalty rates per stream are US$0.005, up 33.3% for the prior period. These royalties are distributed first to the recording label before the artist and manager’s residual claim upon the remainder.

Nick O’Byrne, General Manager for the Australian Independent Record Labels Association (AIR), a not-for-profit representative of Australian record labels and independent

While it has been argued that streaming services are harmful to some artists, it is also a logical industry response to illegal downloading recording artists, confirms the necessity to distinguish between CDs and traditional MP3 downloads. CDs involve a single outlay in royalties towards the interested parties, in comparison to online streaming services which are characterised by simultaneously occurring streams between many users.

Consequently, streaming earnings are of a cumulative nature and do not necessarily inhibit earnings for the label and artist. This is assuming a high volume of streams occur over a long time period if the track or album 26 | www.insideenterprise.org

is popular, possessing the potential to surpass the total royalties which would be realised from older formats.

O’Byrne explains that further change in the business model for record labels may be prompted from the onset of streaming services. “In the CD era, consumers underwent a one-off outlay to purchase a CD, and the royalties from these sales distributed to the record company and artist for each sale. As a result, a label would see a return on their investment relatively quickly and they would be free to invest again on new projects.” This contrasts to the subscription service model whereby revenue is received perpetually, yet in meagre amounts. He adds, “What this means is that a label’s return on investment for any given release may take many years and their cash-flow and ability to re-invest is stifled.”

However, it appears to be a two-way concern regarding the impact of streaming services on record labels and artists, as some benefit and others struggle. O’Byrne has observed that major labels typically benefit from streaming services given that they own quantifiable amounts of catalogue subject to plentiful streaming. While the barriers to entry for lesser-known artists are lowered via streaming services as they can easily gain exposure through the technology, O’Byrne asserts the difficulty in revenue genera-

tion for this segment. The smaller independent and emerging participants are at a loss as their catalogues are much smaller and are not as frequently accessed. He comments that “income from streaming sites would be negligible for small independent artists, so much that I doubt they’d even bother to factor in those micropayments into potential earnings.”

Sydney live music singer, Brontë Horder, also a current student at the University of Sydney, acknowledges the current difficulty for recording artists to earn a living from their craft, yet asserts that this has led to greater opportunities to engage in live performances, a unique product for listeners. “It is a shame that artists are losing revenue for their recorded music but, on the other hand, it has caused a shift in the industry, placing emphasis on live music, which has been fantastic,” says Horder.

While live music appears to be an experience which is difficult for technology to replicate, there has been a rise in live streaming of concerts and music festivals via the internet, providing those not physically present at the events with opportunities to listen to the live acts from the comfort of their own homes. However, this is not necessarily a major threat to ticket sales, and it is reiterated that physically attending live events represents a distinguished experience

for the fan. “There’s value in scarcity. And you can’t pirate an actual experience”, Art vs. Science front-man Daniel McNamee explains.

“Seeing a band live isn’t just hearing the band play the songs. It’s the volume, it’s being in a large crowd all focused on the same thing, it’s the drinks and the sweat and it’s a social activity…I won’t say ‘never’ but I hope that that experience won’t ever be replaced by a laptop and speakers.”

Copyright infringement and music piracy is also another element that has served as an ongoing battle since the online evolution, providing significant possibilities for illegally downloading music. While it has been argued that streaming services are harmful to some artists, it is also a logical industry response to illegal downloading, as it is a relatively superior means, in terms of credibility, of accessing music. This is consistent with digital consumer preferences, as artists and record companies do not have their intellectual property thieved and receive income and recognition. “Artists have no control over the decline of physical/digital sales and it’s been happening for a long time now so I wouldn’t say anyone’s worried. The fact is people can get it for free – so they will. It’s up to artists and the industry to adapt to the new digital landscape and to come up with innovative ideas, such as Spotify,” Horder asserts.

However, while providing legal music

distribution, Spotify has had to contend with infringement accusations. Recently, dance music brand Ministry of Sound filed

History has proven that piracy facilitators are eventually exposed and that media frenzy inevitably ensues a lawsuit against Spotify claiming that track ordering on Spotify playlists were a duplicate of some Ministry of Sound compilations despite individual tracks possessing copyright approval and licensing clearance. Ministry of Sound’s core competence and intellectual property is its selection and ordering of tracks, which provides distinguished listening experiences. Streaming services must now proceed with caution regarding track order, with increased awareness of the potential infringements from replicating compilation brands’ products.

The current availability of illegally downloaded files through websites, file sharing platforms and non-licensed streaming services is prevalent, providing users with the opportunity to illegally download music files, typically at no monetary cost. The 2013 Digital Music Nation Report by the British Phonographic Industry (BPI) posits that

59% of total online downloads in the first half of 2012 were through BitTorrent, a claim suggestive that obtaining music illegally is now the dominant mode. The legal means of music access have needed to compete head-on with piracy and artists have suffered substantial earnings losses and become victims of theft. A report published by the Institute for Policy Innovation from the United States in 2007 confirmed that global music piracy costs $12.5 billion in economic losses yearly, despite government and industry-wide efforts to scour it.

There have been notable efforts to find a solution to curbing piracy, with illegal sharing platforms having been shutdown in the past, such as Napster and Limewire, and more recently, file-hosting platform Megaupload, whose founder has also been sued for copyright infringement. Additionally, there has been a shift in focus from targeting individual file sharers to piracy sites, and many major players have approached search engines to remove links to copyright infringement webpages. Over 7 million takedown requests have been sent by BPI to Google, and the Recording Industry Association of America (RIAA) has submitted over 8.5 million themselves.

Enterprise and innovation also play a role in this battle, with anti-piracy product Muso, recently receiving a government grant for developing technology that transforms attempts at illegal downloads to an emotive and educational message about music piracy, as well as redirecting them to another webpage to legally acquire the track.

With regards to the issue of piracy, it seems that those participants providing illegal downloads may temporarily reap financial benefits. On the other end of the spectrum, artists and record companies are not always compensated for their contribution. History has proven that piracy facilitators are eventually exposed and that media frenzy inevitably ensues, reminding consumers that this venture and its associated risk is unsustainable and dishonourable.

The move to streaming music is forecast to persist and further develop, with the BPI’s outlook position suggesting further infiltration of streaming to passenger vehicles, connected televisions and new mobile technologies. Live streaming of performances also remains relatively untapped and is set to crescendo. Technologies come and go, but creativity is forever. Music will adapt to the technologies that meet changing consumer needs, and some participants will flourish while others struggle. Artists and labels will continue to be subjected to significant challenges, particularly the ongoing threat of music piracy, which will require an evolving stream of solutions to effectively conquer it. ■ www.insideenterprise.org | 27

Timothy Le

Business in the Face of War In war, the choices made by businesses can govern the fate of hundreds of thousands of soldiers and civilians. This is no more so than in the turmoil rife in the Congo, where for the past sixteen years businesses have been indirectly funding rebel militia operations and exploiting the shattered lives of the destitute.

The Civil War in the Congo Since 1998, continual conflict between government forces, Rwandan rebel groups and armed Congolese militia factions have left 5.4 million people dead, 2.75 million displaced, rapid escalation in the rates of malnutrition and a state of near dystopia in the Democratic Republic of Congo (DRC). Yet ironically, at the heart of the staggering humanitarian crisis is what most would consider an economic gift: precious metals and ores buried deep beneath the surface of this landlocked African nation.

The use of forced labour, abduction and child soldiers in the fight for these resources has precipitated enormous bloodshed and societal chaos. Many of these minerals are purchased by the tonne by large overseas electronics companies that produce devices such as smart-phones and laptops, devices that millions around the world use every day. The crippling war in the DRC, it is alleged, has been prolonged not only by government corruption and powerhungry warlords, but by the business leaders who purportedly finance the conflict in the name of company profits. The choices of Western businesses have a monumental impact on the situation in the DRC and there has been active debate over how firms should best respond to this crisis.

28 | www.insideenterprise.org

The Response from Businesses For years, electronics firms have claimed that the complexity of the supply chain and its opaqueness has meant that it was logistically impossible to determine whether their products have been contributing to the civil war. In 2010, after years of mounting media attention linking Western business to the crisis in the DRC, Barack Obama signed the Dodd-Frank Wall St. Reform which required companies to fully disclose and report their usage of the

The use of forced labour, abduction and child soldiers in the fight for these resources has precipitated enormous bloodshed and societal chaos notorious conflict minerals tantalum (coltan), tin, tungsten and gold. The reform came into full effect as of May 2014 yet surveys from April 2013 state that only 7.5% of manufacturers were prepared to comply with the new regulations. Companies such as Toshiba, Canon and Panasonic have been criticised for

not doing enough to achieve conflict-free supply chains and, recently, the National Association of Manufacturers along with the U.S Chamber of Commerce – both powerful business bodies – sued to try and stop the Dodd-Frank Act. However, there are an increasing number of firms who are taking active measures in response to growing consumer awareness and moral concern over the gadgets they purchase. Apple has recently announced audits for its downstream suppliers by publishing a list of smelters and ethical sourcing regulations, while Motorola has similarly begun implementing a program to trace minerals in its products and forced its suppliers to verify conflict-free sourcing. While the pushes by Apple and Motorola to ensure a conflictfree supply chain are providing early case studies for other companies to follow suit, many commentators are nevertheless predicting a widespread withdrawal from DRC trade by firms who see compliance with legislation such as the Dodd-Frank Act as simply too costly. At the crux of action, businesses must decide whether to stay and accept the costly action required to regulate the supply chain or to boycott the entire crisis and evade moral accountability.

sanctions impact those already most vulnerable by restricting the utility of resources, depriving artisan miners of their livelihoods and exacerbating the detrimental cycle of poverty and hunger already endemic.

Regulating the Supply Chain The leading approach to avoid a boycott alternative is to improve the regulation of the DRC’s mining industry through cooperation with both local and Western governments. A focus must be to enhance the stability of the ore market in the DRC and to develop a system of certification and transparent auditing. Long-term, fixed price contracts from upstream purchasers could mitigate fluctuations in an already cyclical industry and facilitate better income security for workers.

However, few companies are willing to enter into long-term contracted business in a nation where corruption is rife and laws and regulations are frequently nontransparent. Incentives for compliance to standards critical to economic rehabilitation as well as incentives for electronics companies must have an agenda to contribute to community and conservation projects, create value and jobs for what is a much struggling economy, and educate consumers and pressure groups. Commenting on the DRC situation in 2002, Simon Hicks wrote “we need to move the strategy from doing business despite war to doing business instead of war”, suggesting the need for firms to forgo short-term profits in order to achieve long-lasting

social change. Unfortunately, in the face of precepts such as profit margins and shareholder value, few businesses are ready to make any significant sacrifice without adequate compensation.

Boycotting Exploitation Alternatively, given the irrefutable link between the exploitation of Congolese minerals and the ongoing civil war, a boycott of products originating in areas under conflict zones may appear to be a reasonably logical solution. A ban would guarantee that businesses are not funding activities run by armed militias while assuaging burgeoning consumer concern over the source of purchased electronic devices. However, a boycott on Congolese minerals could have a devastating grassroots impact on the people and economy of the DRC. Far from stemming funding of the war, sanctions impact those already most vulnerable by restricting the utility of resources, depriving artisan miners of their livelihoods and exacerbating the detrimental cycle of poverty and hunger already endemic. Several NGO reports spotlight how an economic boycott could pressure armed rebel military groups to be even more parasitic toward the innocent and

vulnerable and fuel further destitution.

Businesses must decide whether avoiding involvement and retracting Congolese trade in order to placate financial stakeholders is ultimately an ethical move itself.

While a boycott would ensure that there is no indirect funding from these companies exacerbating the bloodshed in the DRC, for many, walking away from a situation and avoiding the problem altogether represents a relinquishment of corporate social responsibility.

Facing the Dilemma Businesses are more than just profitcreating entities. Alongside governments and NGOs, they can play a critical role in alleviating the DRC crisis by challenging their supply chains to adopt a regulatory framework: one that endorses socioeconomic stability and investment through the provision of employment, skills, training and livelihoods. Distancing business operations from conflict under the banner of a boycott and disengaging from the problem altogether could in fact be disastrous to the fate of hundreds of thousands of those already vulnerable and suffering at the hands of the rebel militia. ■

www.insideenterprise.org | 29

Geordie Costello

Why the Medicare Co-Payment

Could Cost You Less With the introduction of a new $7 doctor’s fee announced as part of the 2014 Federal Budget, effectively ending the reign of free healthcare in Australia, Geordie Costello explains the logic behind the move and how it could cost you significantly less in the long-run.

I

am sitting in the waiting room of my local doctor’s office. What am I doing?

Waiting of course, what else does one do in a doctor’s office? Having forced myself through all the celebrity magazines, there is nothing left but to sit back and gaze around the unadorned room. Or is there?

I decide to play a game, maybe not a tasteful game, but one that will help kill the time. It is called ‘pick the ailment’. Some patients are easier to pick than others. A boy sitting two seats to my left has plaster around his arm, the obvious conclusion that he has fractured it. The woman directly across from me sits hunched over a bucket and looks to have a terrible virus.

Other patients prove more of a challenge, probably carrying illnesses with less obvious symptoms. I start to wonder if there is someone in the waiting room who does not really need any medical attention?

After finally being called in to see the doctor, who prescribes me a ‘good night’s sleep’ for my case of the ‘sniffles’, I realise that person is me. Not to worry, the whole doctor thing is free right?

Wrong. There is an old saying, ‘there ain’t no such thing as a free lunch’. If you are not paying for a good or service, it just means someone else is. As taxpayers, we all incur the costs of healthcare, albeit some more than others, and that cost is 30 | www.insideenterprise.org

currently rising at an alarming rate. The Australian Institute of Health and Welfare has released the latest statistics on primary healthcare funding, of which general practitioner (GP) billing comprises a large percentage. Controlling for inflation, Australian government expenditure has increased from $669 to $1,005 per person over the last 10 years, an increase of 50%, or an average annual growth rate of 4.2%.

Unless we are willing to pay considerably higher taxes, redirect funds away from other vital areas, or let the government

as a common good, healthcare leaves itself vulnerable to exploitation. This problem is known as the ‘Tragedy of the Commons’ budget collapse into long-term decline, these rising costs need to be addressed.

Part of the reason for these increased costs is that, as a common good, healthcare leaves itself vulnerable to exploitation.

This problem is known as the ‘Tragedy of the Commons’. The term stems back to 1830’s England, where herders were al-

lowed to let their sheep graze on common land. If overgrazing occurred, only the herders overgrazing would reap the benefits of fatter sheep, yet all would share in the costs of the damaged land. To understand the likely outcome in this situation, we can use a little ‘game theory’, and ask ourselves what is the best response of the herder, given the responses of all other herders?

If you are a herder and none of the other herders are overgrazing, your best response is to overgraze and reap all the benefits. But what if half the herders are overgrazing? The benefits of overgrazing are smaller, but the cost to the commons occurs regardless, so you might as well overgraze. Then again, what if all the herders are overgrazing? In this case, you are incurring a huge cost to the commons, so even the smallest benefit of overgrazing may mitigate this loss.

Given that overgrazing is always your best response, and hence, are the best responses of all other herders, we arrive at the Nash Equilibrium, a point where everyone overgrazes and the commons is destroyed. This concept is called ‘free riding’ and is currently occurring in our medical system such that we are all likely to have overgrazed once or twice in our lives.

The extra benefit I received from seeing

the doctor was minimal but, ignoring the opportunity cost of my time, the personal cost of my doctor’s visit was zero. I was free riding on the collective, given the true cost of my visit is assumed by the taxpayer. This ‘true’ cost is based on the Medicare Benefit Schedule (MBS), which details a list of items that the government will cover, and the amounts they cover for.

With the MBS data provided by Medicare, we may be able to estimate the current prevalence of free riding behaviour.

The MBS lists a number of items. The most common is called ‘Item 23 (Level B)’. It relates to a GP consultation lasting between 0-20 minutes that involves only one of the following: taking patient history, conducting a clinical exam, arranging an investigation, implementing a management plan or providing preventative healthcare. This is your standard GP consultation and it costs you about $36.30.

There also exists ‘Item 3 (Level A)’ which refers to “professional attendance for an obvious problem characterised by the straightforward nature of the task.” This item costs $16.60. Given level A people do not truly require medical assistance, it seems conceivable that free riders like myself are ubiquitous in this group.

The MBS data illustrates a sobering picture. In 2013, 12 visits for every 100 people in Australia were committed by free riders, and the problem appears to be worsening. Since 2003, the average annual growth rate per capita has been 7.6%. This is a conservative estimate, given that a GP

is incentivised to charge a Level B to a free rider, as the criteria can be easily met and they would receive more than double the benefit from the government.

So, I hear you ask, how does charging a $7 fee solve this problem? Well, it may not eliminate free riding altogether, but it is certainly a step in the right direction.

By charging a small fee, the government introduces a ‘user pay’ element into the Medicare system. This is not too dissimilar

less bulk billing is a fallacy. Bulk billing rates of GP’s reached their highest point ever in the 2013 December quarter to our government subsidised rail network.

According to Infrastructure NSW, each train trip costs the taxpayer on average $9.45, while the average on-peak fare is about $4.70.

Like the rail system, a Medicare fee reduces free riding behaviour as everyone must now face an explicit cost. Even though it is a reasonably small cost, it would be enough to convince me to just wait out my sniffles or head up to the Chemist to buy some Sudafed. In other words, with a $7 fee the personal cost of going to the doctor now exceeds the benefit.

Of course, all systems have their draw-

backs. Most people’s first impression would be that a fee will unfairly penalise the lowest income earners and the sickest people, those already burdened by the increasing exemption of GP Bulk Billing.

Firstly, less bulk billing is a fallacy. Bulk billing rates of GP’s reached their highest point ever in the 2013 December quarter, at 81.9% Australia wide and 86.7% in NSW. There is simply no such thing as the ‘good old Bulk Billing days’. Those days are now.

Despite this, the flat fee announced in the Federal Government’s 2014 Budget may cause sick, low-income earners to avoid the GP or instead seek out emergency rooms. The government has partly mitigated this concern by providing a ten visit safety-net for pensioners, concession cardholders and children, and by suggesting to the states and territories that higher fees should be charged for emergency room use. Yet by far the most effective and fairest policy would be to means-test the fee. This would reduce the burden on low income earners and further eliminate free riding behaviour, given that high income earners would face an explicit cost that better reflects their ability to pay.

Nevertheless, next time you leave the doctor’s office, remember that the annoying $7 fee you just paid has prevented countless free riders from unnecessarily going to the GP, saving you, the taxpayer, $36.30 for each one. And that is why the Medicare co-payment could cost you less. ■ www.insideenterprise.org | 31

Sun-Yong Kim

The Re-emergence

of the Rising Sun Japan’s place in the Asian Century The decline of the traditional Japanese technology giants the likes of Sony and Panasonic signals a restructuring of the traditional narrative of Japanese economic sovereignty in order to safeguard the country’s role within the burgeoning Asian Century.

The Illusion of Japanese Decline In an age where Asia is emerging as the world’s economic engine, it is often common to exclude Japan from the Asian Century narrative. Its increasing debt and declining industrial prowess are enough cause for many to anticipate Japan’s terminal decline from economic super-power to an economic middle-power, scraping the barrel of economic significance.

But while contextual circumstances may support this dire assessment, they merely serve as a rather useful distraction from the actual reality that despite decades of economic stagnation, Japan still possesses the unique underlying characteristics that were instrumental in its economic rise almost a generation ago. In a world where those unique Japanese traits are more of a national asset than ever before, Japan has the potential to place itself as one of the central players in the coming Asian Century.

Culture: Japan’s Secret Ingredient to Economic Success The central ingredient to Japan’s economic strength has always been its close integration of culture and economics. In particular, the influence that Shintoism has played in shaping its craftsmanship tradition, otherwise known as ‘Monozukuri’, has underpinned the high quality, world class nature of modern Japanese advanced 32 | www.insideenterprise.org

manufacturing.

The connection lies in the Shinto belief that an equilibrium balance exists between people, things and the external environment. Professor Takahiro Fujimoto of the Manufacturing Management Centre notes that Shintoism “Provides for a fundamental appreciation of the importance of every creature and item in creation.” Any displacement of inanimate objects from nature creates a disequilibrium that must be corrected. Monozukuri addresses this disequilibrium by creating a craftsmanship style that balances the interests of production, objects and society. Fujimoto further argues that unlike Western craftsmanship, Monozukuri de-emphasises the craftsman and emphasises the “thing being made”, imparting upon the Japanese producer the need to take responsibility for removing ‘things’ from their natural environment.

Japanese ‘Perfectionist’ Craftsmanship This heavy burden placed on Japanese producers to ensure that inanimate objects are not sacrificed in vain has culturally ingrained the necessity for a ‘perfectionist’ craftsmanship style that yields outcomes that can economically justify such cultural sacrifices. For this reason, Japanese producers have stored significant value in the concept of ‘Kaizen’, a key management principle that stresses continuous improve-

ments in management processes in order to achieve the ‘perfect’ craft such that the equilibrium between people, things and the external environment is maintained.

This uniquely Japanese emphasis on perfectionism has been popularised through Kaizen practices implemented by Toyota – now known as the ‘Toyota way’.

Industrial Components: Japanese Comparative Advantage Japan’s cultural inclination towards ‘perfectionist’ craftsmanship may help explain why the country possesses an almost unrivalled comparative advantage in the global industrial components sector. Given that industrial components such as semiconductors and fibre optics are crucial to the operation of technology products, tech giants rely heavily on industrial suppliers who can guarantee world-class industrial components that display exceptional product quality standards.

Developing such high quality components requires a devotion to constantly improving product quality processes that only a Japanese manufacturer operating in the spirit of Kaizen and Monozukuri can deliver. This explains why Japanese companies currently control 70% of the world market with respect to at least 30 niche technology sectors worth more than $1 billion a piece. These medium enterprises, known as Chuken Kigyo, have been gain-

ing market share exactly at a time when Japanese high-end product manufacturers have been losing market share to South Korean and Taiwanese competitors.

In this way, Japanese comparative advantage in industrial components can explain the relative decline of the Japanese tech giants Sony and Panasonic in the high-end market. With the art of specialisation finally hitting Japanese shores after 30 years of resistance, letting go of the traditional high-end technology market has become the natural consequence of Japan reaping the benefits of focusing resources in the industrial components sector, the vanguard of Japanese comparative advantage.

Seen in this light, the decline of Japanese heavy electronics should not be seen as the dramatic fall of a once dominant industrial empire, but rather as a transformation of an already existing one.

The New and Improved Keiretsu Japanese integration of culture and economics has not only shaped its manufacturing processes but has also shaped how the Japanese organisation functions.

Whilst Monozukuri de-emphasises the role of craftsman, it by no means devalues the skill, care and dedication that a human craftsman must devote to perfect Monozukuri. In this respect, Japanese producers place equal importance on Monozukuri’s twin brother: ‘Hitozukuri’. Hitozukuri

conceptualises craftsmanship as a life-long process of human development where technical and problem solving skills are built in an atmosphere of mutual trust.

Through this, Hitozukuri allows for the development of customized craft forms, informed by the knowledge and experience of each craftsman gained through Hitozukuri.

It is this uniqueness of craft that allows Japanese manufacturers to thrive as it is ultimately the gathering of decades of

the Japanese economic miracle is far from over and a significant transformation is well underway integrated production and manufacturing knowledge through Hitozukuri that has established its pre-eminent industry position. Consequently, Japanese corporations have developed organisational structures that accommodate Hitozukuri by ensuring that the entire supply chain is devoted to the task of perfectionist craftsmanship. In particular, the traditional ‘Keiretsu’ business culture that emphasises close-knit horizontal business relationships with suppliers based on goodwill and trust has proven particularly significant.

In recent years, a consensus has emerged that the Keiretsu business structure provides the best organisational framework through which product quality and innovation are dually maximised. For example, Nissan, having moved toward Western style supplier relationships, returned to the Keiretsu model of stable supplier relations, recognising it as the only way to ensure quality at all steps of the global supply chain. Moreover, Toyota’s experience suggests that the stable supplier relationships of the Keiretsu model also encourage innovation on the supply side, with improvements in seat systems and anti-lock brakes coming to define the Toyota brand.

The Sun Re-emerges It is essential that narratives of Japanese decline are tempered with an appreciation of the underlying cultural dynamics that define Japan’s economic advantage and strength. For individuals seeking to work overseas, the complexity of Japanese business operations is a timely reminder of the need to prepare and understand the culture that they are about to work within.

Ultimately, in light of these considerations, one can quite easily conclude that the Japanese economic miracle is far from over and that a significant transformation is well underway. ■ www.insideenterprise.org | 33

Levi Romanov

Test Your Rationality

Puppets on a String An exploration of the role of behavioural finance within our everyday lives and how a recognition of cognitive biases is being leveraged by government to inform future economic policy.

F

inance is perceived to be a rational industry, where professionals make calculated decisions using evidence and precise mathematical modelling. So why do financial markets crash? Why do professional investors lose money? And most of all, how are your behavioural biases being taken advantage of? Read at your own peril and remember, behaviour is everything.

A cognitive bias is a reasoning flaw, an anomaly in a normal rational and logical thought process. Do you remember that one time that you bought something completely unnecessary, defective or significantly out of your budget? Do you also remember how after you bought it you tried to rationalise that you really did need a V6 engine for that five minute drive to work, or that those $500 noise-cancelling headphones will make the sound quality of your music on the bus to university that much better? That there is a post-purchase rationalisation bias in action, also known as ‘Buyer’s Stockholm Syndrome’. With this bias we try to justify that the money we spent really was worth it, and if we cannot convince ourselves then we become lost in a state of cognitive dissonance and a sense of loss plagues us. Nobody wants to feel loss, and so, we carry on.

Which one are you?

1. The beginner Noise is a phenomena where decisions are made at least in part on sentiment. An example of noise would be your buddies discussing an attractive looking investment 34 | www.insideenterprise.org

and you later on making a ecision to acquire it. Perhaps you conducted your own calculations which led to the same conclusion, but it is most likely that your decision was at least partly influenced by what you overheard. Noise is dangerous.

Noise has a tendency to accumulate for investors rally sentiment off each other, boosting their own confidence or lack thereof with regards to certain stocks. As a result, rapid price increases or drops occur which no conventional financial risk model can account for. An investment you just short-sold has doubled in price, leaving you at a loss and your confidence shattered.

A real life example of the perils of noise trader risk was the ‘Dot-com’ bubble during the years 1997-2000. Investors rushed to invest in the ‘future’, specifically in technology and internet companies, however, the market overlooked the lack of revenue avenues available to these firms. The price of these stocks became inflated beyond belief and eventually came tumbling down.

Amazon.com for example, the American electronic commerce giant, crashed from $107 per share to $7 – a tumble straight off the precipice of 93% – devastating investors.

2 The Pro Professional investors are often successful investors who believe that they have skills which can lead them to outperform the market and others like them. However, these ‘professionals’ are not free from the weight of their own biases.

Over-confidence plagues the very best of

us. We often perceive our abilities to surpass what they are in reality. An example is Govorun and Alicke's ‘better-than-average heuristic’ where out of a given sample approximately 75% of participants believed their intelligence level was above average, when in fact it is only possible for this to be true for 50% of people. In the experiment, a substantial number of individuals overvalued the strength of their skills and in a real financial scenario could have made serious irrational investment decisions and borne considerable losses, as many do every day.

Overconfidence can be observed in practice in any major financial crisis. Consider the recent GFC, where an unparalleled proportion of mortgages and mortgagebacked securities defaulted. Evidence of this ‘property bubble’ was present and accessible by investors, particularly professional fund managers. However, unjustified overconfidence in the market prevented any action until it was all too late.

3. The CEO Our knowledge of the finance industry says that no matter how good we are, large companies, banks and conglomerate firms will always have the upper-hand.

In most cases this is of course true, but it must be remembered both by the individual and the corporation that the people who work at Goldman Sachs are also subject to the same biases the beginner and the pro suffer from. Including, and sometimes especially, the executive officers.

It is crucial for corporations to recognise that behaviour plays a key role in the profit-

behavioural economic principles have the potential to substantially influence both economic and regulatory policy

ability of a company, and then address it directly. The sum of many small decisions imbued with cognitive biases can amount to ultimately fatal mistakes, even of a nature where this sum causes the collapse of an entire financial market.

For example, analysts and managers in finance companies quite often reach mutual conclusions, or at the very least conclusions that do not directly contradict each other.

Such an effect is normally fuelled by the ‘confirmation’ bias, where the individual is unlikely to deviate from an accepted school of thought, or a present viewpoint. This bias explains how in a world of financial giants, market crashes occur, and why few see them coming.

Behaviour in Practice Although largely applied to individuals and corporations, governments are the single largest implementers of behavioural economic principles. Behavioural economic principles are simply tools which incorporate knowledge of the aforementioned cognitive biases in order to indirectly stimulate economic growth and prosperity.

Consider the hypothetical scenario below and give yourself an honest answer.

1.

You are planning on going to the cinema today. You are about to purchase a $10 ticket but realise you have lost $10 on your way to the theatre. Would you still buy a ticket?

2.

You are planning on going to the cinema today. You have already purchased a $10 ticket but on your way into the theatre you realise that you have lost it! Would you go back and purchase another ticket?

The above example illustrates the effect of sunk costs in action through the process of mental accounting. It is most likely that for question one you were more inclined to purchase another ticket, but not as likely to do so in question two. We unintentionally create ‘mental accounts’ and attribute certain gains and losses specifically to those accounts. In question one, as you had not lost $10 on the account ‘movie ticket’, you were more likely to pay for one, as it was not a sunk-cost associated with your movie-watching investment. Conversely, in question two you had created a ‘movie ticket’ account and allocated $10 to it. If you bought another ticket the mental account would increase to -$20, which you might deem too much for one movie experience. In both cases your position would be -$20 if you follow through with the transaction, yet as a ‘rational investor’ you feel differently about each. This is the power of behavioural finance in action.

So next time you go to the cinema or to a fast-food outlet, consider whether you have already subconsciously created your own ‘mental account’ and, if so, have you already charged your planned expense? If so, you might think twice about whether to get fries with that.

Richard Thaler, a distinguished academic at the University of Chicago, and his fellow colleague Cass Sunstein, embraced behavioural economics and the powerful steering effect which can guide individuals toward preferred decisions, by releasing a book proposing a multitude of behavioural policies for implementation. By combining different types of cognitive functions and any relevant cultural or unique inclinations, it is possible to ‘frame’ ideas and suggestions in an optimal way, to encourage a specific trend without directly making the underlying motivations clear. In this way, government reliance on regulation is being actively supplemented by initiatives to influence social change, specifically in retirement saving.

Such has been the realisation of the need to formally recognise the role of behaviour in financial decisions that the United Kingdom has created a specialist department, the Behavioural Insights Team, which is responsible for implementing behavioural economics techniques in order to inform public policy. Similarly, the White House has recently convened a similar body of behavioural economists to advise on issues as

varied as unemployment, traffic decongestion, retirement planning, and increasing the number of organ donors on register.

In fact, Australia too has jumped on the band wagon, for in 2007 the Australian government convened a roundtable proceedings on the topic of ‘Behavioural Economics and Public Policy’. Participants included senior government officials, academics, consultants, journalists and representatives from consumer groups. Those who attended the round table discussion unanimously agreed that behavioural economic principles have the potential to substantially influence both economic and regulatory policy. Although it is improbable that a policy will ever explicitly state that it intends to have a ‘behavioural effect’, as this would be in essence self-defeating, it is clear that future government policies will now involve greater consideration of the economic and motivational benefits that can be gained through the application of behavioural economics, legitimising the value of behavioural knowledge within the realm of consumer decision-making. ■

www.insideenterprise.org | 35

Stephanie Chan

BELINDA The emergence of the digital world has driven an exponential growth in both the quantity and quality of consumer data possible, leading to a shift from customer response models of marketing to customer experience models. Sarah Elsmore sat down with Nick Mercer, the CEO of MercerBell, to discuss the challenges this new consumer landscape presents for businesses and whether richer, more mutually-satisfying firmconsumer relationships are indeed a reality.

HUTCHINSON

36 | www.insideenterprise.org

T

NICK

An interview by Sarah Elsmore

Mercer

Co-Creating the Customer Experience

he rise of the internet and the proliferation of technology has both empowered and endangered consumers. While consumers have more knowledge and are more connected than ever before, organisations have gained immense access to consumer data, igniting a fierce debate over issues of privacy. The result of these developments is a marketing evolution that is transitioning the industry from a ‘customer response’ to ‘customer experience’ model. The organisations that will succeed in this evolution will be those who have the ability to profitably balance their commercial objectives with the protection of their consumers.

At the forefront of this customer experience evolution is businessman Nick Mercer, one of two founding members and the current CEO of MercerBell, one of Australia’s leading independent Customer Experience Agencies (CEA). With over two decades of experience in the direct marketing industry, he helped establish JWT Direct before moving to M&C Saatchi Direct as general manager. He was the principal figure in MercerBell’s progression to become one of the first CEAs

The way firms approach their consumer have digressed from the cut-throat nature of the Mad Men era...“the world is becoming a defined set of small universes, large network databases.”

in Australia.

Nick begins by emphasizing that marketing as we know and understand it has fundamentally changed. The way firms approach their consumer have digressed from the cut-throat nature of the Mad Men era, the relentless “advertising and marketing, [that] in the old days was all about manipulation and selling.

Twenty-five years ago, clients spoke about marketing as a form of warfare but that language no longer works.” In today’s modern environment, technology and the internet are connecting consumers and firms on an entirely new level. As Nick illustrates, “the world is becoming a defined set of small universes, large network databases.” The average consumer is constantly generating a vast amount of data across the internet, social media and smart-phone technology, which, as he is quick to point out, “essentially are databases,” giving marketers increased access to customer information.

The rise of data has hit consumers with a double-edged sword – they are both empowered and endangered. Forrester Research noted that we have entered “The Age of the Consumer”, where, as Nick identifies, consumers are profoundly empowered. The customer “has more knowledge, and can access more information before they even get to a potential client or service they are about to interact with,” and, in return, firms can use customer data to tailor their products and services towards enhancing the consumer experience.

On the other hand, the abuse of this information can be extremely harmful, for as Nick asserts one of the key ethical threats “is the abuse of privacy, the abuse of data and the invasion of people’s space. This is something which the industry needs to have a good look at.” We are constantly hearing of breaches of data and privacy through the media, from Edward Snowden’s exposure of PRISM, a mass electronic surveillance data mining program launched by the National Security

Agency (NSA) in the United States in 2013, to the discovery by a Google employee of the Heartbleed bug, a bug that has the potential to expose private information entered into sites such as webservers, applications, instant messages and webmail.

While threats to consumers exist, Nick is adamant that marketers can embrace the opportunities data offers to benefit, rather than exploit, consumers. By employing data to develop integrated data-driven marketing strategies, organisations can engage customers in experiences that enhance their everyday lives. He explains that in order to succeed in the long term, “we have to balance the commercial objectives of organisations with protecting consumer rights.” This is especially crucial as the Financial Times estimates that 25% of organisations using consumer data will face reputation damage due to a lack of data privacy literacy by 2016.

As one of the first CEAs in Australia, Nick sees MercerBell’s role as that of a leader in the data literacy space. However, he contends that protecting consumers has to be two-sided, uniting government regulation with selfregulation by organisations. “Unless organisations self-regulate, the government will impose much stricter regulations around data usage.

But I don’t think it can be just self-regulated...I think there has got to be a balance between the two, and getting agreements on those two sides of the story is going to be crucial.”

Privacy regulations are being reviewed globally and Australia is no exception to the demand for reforms. On March 12, 2014, the Australian government introduced the Privacy Amendment Act, an update to the Australian Privacy Principles, a set of regulations which apply to businesses with a turnover of more than $3 million as well as government agencies. It is the largest reform to policy law in ten years and will drastically affect how businesses employ consumer data. The most significant change in policy is a renewed definition of www.insideenterprise.org | 37

Customer experience brings to life the idea that building personal connections with consumers will result in the greatest value for brands. The organisations that will thrive will be those who listen to consumers. They will understand that consumers are empowered, yet that problems will inevitably arise as organisations gain increasing access to personal information.

personal information that has the potential to capture more data than previous regulations have ever permitted. Not only does it include data where individuals are identified by name, but it also takes into account when a single person can be identified, such as through cookie information.

In response to these regulations, MercerBell has taken a proactive approach.

The agency became the first to complete ADMA’s Data Pass accreditation in April 2014, an industry training program developed to assist businesses in Australia with remaining current in their data literacy. By positioning MercerBell as a role model enterprise, Nick hopes to set the example that the use of this information can have a positive effect on consumerfirm relationships.

Using this significantly more immersive customer data to enhance the value of the relationship for both the firm and the consumer, done so within the confines of a strong legal and ethical framework, is the core of the customer experience evolution. It is a two-way relationship that simultaneously delivers greater value to the customer and greater profitability to the brand. It involves placing the consumer at the heart of all marketing and business decisions, while combining data, technology, strategy and creativity to deliver relevant experiences.

For example, a brand can collect data 38 | www.insideenterprise.org

on a consumer, such as browsing history and online purchases, and then serve up recommendations based on this information, thus increasing customer satisfaction and driving repeat purchases.

It is a circular relationship, where the balance continues to re-shift as both consumers and organisations gain more knowledge about each other. Customers now expect to be engaged in meaningful experiences that amplify their purchase decisions. As Nick observes, we are witnessing the “move from manipulative selling to choice-based buying.” In response to this transformed dynamic, he emphasises the need for organisations to “approach customers in a different way. We must present all of the facts and the reasons why they should choose us in a better way.” Organisations need to embrace the opportunity to communicate with customers and facilitate trust through increased transparency. This approach is producing new marketing methods, such as co-creation marketing, a concept Nick explains is “the realisation that there is no reason for which consumers or a prospective buyer can’t collaborate or co-create a situation where they get the right product from a company.”

But what does this evolution mean for marketers of the future? According to Nick, “marketers need a greater level of skills,” which he sees as crucial to main-

taining pace with the digital world and the changing nature of communication.

One of the biggest needs for MercerBell’s clients is “that they have to be able to use consumer data and analytics. They have to be able to understand how to use technology in terms of CRM [Customer Relationship Management], databases, social media websites, and with that comes a different level of creativity and strategy.” Nick is certain that by expanding MercerBell’s skillset in these areas, they will be able to embrace the evolution into customer experience and excel within the realm of this new customer landscape.

Customer experience brings to life the idea that building personal connections with consumers will result in the greatest value for brands. The organisations that will thrive will be those who listen to consumers. They will understand that consumers are empowered, yet that problems will inevitably arise as organisations gain increasing access to personal information. To combat data and privacy concerns, they will understand how to profitably balance their commercial objectives while safeguarding consumer rights.

Most importantly, these organisations will understand that the benefits of possessing a greater knowledge of their consumer concurrently demand a greater responsibility to protect them. ■

Matt Kean: Parliamentary Business

By Matthew Green Ever wondered how far an accounting degree would get you in the world of politics? If so, you need look no further than Matt Kean, one of the youngest MPs in the NSW Parliament and a man who has proven the value of possessing business skills in a political context.

Source: Nicholas Fahy www.insideenterprise.org | 39

“If you had asked me when I was starting out ‘What’s the best way to get into politics?’ I certainly wouldn’t have known that, for me, it would be as a chartered accountant.”

At the age of 29 Matt found himself elected to parliament as the member for Hornsby...“I have a remarkable job where I get to speak about issues and people listen to me. I don’t want to waste this opportunity to make a difference.”

Source: Nicholas Fahy

M

att has been a member of the NSW Legislative Assembly since 2011, representing Hornsby for the Liberal Party. He is currently a parliamentary secretary, a position recognised as one that provides talented MPs with executive experience while they assist a current minister. Prior to taking this position in May 2014, Matt was the Chair of the Joint Standing Committee on the Office of the Valuer-General, a role that gave him oversight of the independent statutory officer in charge of land valuation in NSW. For any fans of the Australian film classic The Castle, you may remember the Valuer-General as the authority in charge of determining compensation for land compulsorily acquired by the government.

Matt’s path to his current career as a politician was relatively unique compared to those of many of his contemporaries, due mainly to his progression through an accounting firm before joining politics full time. His studies began at St. Ignatius College, Riverview, and then continued at the University of Technology Sydney (UTS), where he obtained a Bachelor’s degree in Business with majors in accounting and marketing. Straight out of school, Matt took a position as an accounting cadet at PricewaterhouseCoopers (PwC), a move which lead him to study part time at university for his first three years and full time in his final year.

40 | www.insideenterprise.org

Although this resulted in many afterhours university classes, Matt maintained a passion for the social side of university life, and he took every opportunity he could to get involved.

“During O-Week I saw so many possibilities. At one stall I joined the ski society, and at the next one I joined the chess club. I tried to immerse myself in uni life as much as possible.”

It was at university that Matt started to foster his interest for politics. He had joined the Young Liberal Party through the university and, in his second year, he ran a successful campaign for election to the Student Representative Council (SRC). In the following year, he became the first Liberal to become the President of the SRC in close to 30 years. His political involvement at university extended well outside the walls of UTS, however.

During the 2003 state election campaign, Matt worked as an advisor to John Brogden, the then Opposition Leader, and in 2005 he worked as an advisor to Catherine Cusack while she was Shadow Minister for Juvenile Justice and Women.

Reflecting on this time, Matt said that “if there was an opportunity to do more politics at uni, I would’ve taken it. I just loved it.”

After completing his studies, Matt took a graduate role at PwC and immediately set off down the path of a full time accountant. After a number of years in this

capacity, he decided to take his professional education a step further and in 2008 completed his Graduate Diploma of Chartered Accounting with the Institute of Chartered Accountants. This in itself is no small feat, but in the same year Matt was also elected Vice-President of the NSW Young Liberal Movement. “This next chapter in my life was a steep learning curve for me: it required lots of focus, lots of discipline, lots of hard work.”

Matt expressed that, throughout his entire time at PwC, the firm was incredibly supportive of his interest in politics, and encouraged him to stay involved with this aspect of his life while seeking to further his professional education. In his final year at PwC, Matt undertook the role of business development manager for the group he was involved in. In this role, he was exposed to more client-facing work that involved going out, bringing in clients, communicating and pitching. In describing the role, Matt told us that “this experience later proved to be invaluable training for the kind of collaborative and communication-based work that I now do as a politician.”

Reflecting on his time at the firm, Matt emphasised the benefits for all aspiring business students in high school and university of a cadetship or early internship at a big firm. “A large firm is a wonderful place for a young person to start their career: there are lots of young people

with you at a big firm, you’re able to start building a sizeable network early, and you aren’t thrown in the deep end by people who haven’t themselves already been there and done that.”

After leaving the accounting world in 2010, and following an arduous political campaign, it was at the age of 29 that Matt found himself elected to parliament as the member for Hornsby. At this time, the then Premier, Barry O’Farrell, asked him to chair the Committee on the Office of Valuer-General, and it was in that position that Matt served until May of this year, when he took up the role of Parliamentary Secretary for Communities. In his role as chair of a committee so heavily involved with valuation and real estate, Matt was able to leverage many of the skills he had acquired at university and in his professional career, an ability which gave him a sense of assurance in the role. “I am the only chartered accountant in the NSW Parliament, and this gives me a sense of confidence in the recommendations I make. I find that it’s helpful because I have experience in understanding how finances work and how a business operates. I can pick up a set of financials and immediately understand how the business is running: what’s working, what isn’t.”

“For business students at university with experience reading financial statements, you would be surprised by how valuable this skill is in so many professions down the track.”

An issue of particular importance to Matt, however, is that of mental health and suicide. Matt used his inaugural parliamentary speech in 2011 to express his concern on the topic, and requested the government spend as much money on mental health campaigns as it does on road safety awareness. “I have a remarkable job where I get to speak about issues and people listen to me. I don’t want to waste this opportunity to make a difference.”

It is well known that many jobs which stem from a business degree – whether they are in banking, accounting, consulting or politics – often involve long work hours, short deadlines and incredibly stressful seasons throughout the financial year. Yet the issues of anxiety and depression in the workplace still require more attention. Matt’s view was that while you certainly have to work hard if you expect to be successful in your job, this should not come at the expense of living a balanced life. “We need to de-stigmatise mental illness, and the best way we can do that is by talking about it.”

Matt spoke about his own experiences with witnessing the harmful effects of untreated mental illness. Growing up, his mother suffered from a mental illness, as did a young friend of his who helped with his political campaign in 2011. In very sad circumstances, his friend committed suicide at 18 years of age.

Matt’s message on what has rapidly become a critical issue for our generation

is quite clear: “If you haven’t suffered from mental illness in your lifetime, it is likely to be affecting someone that you know.”

“1 in 4 adult Australians will suffer from a mental illness at some stage during their life, and 6 Australians will die every day from suicide. If 6 Australians died every day at our beaches there would be a national outcry. So why aren’t we doing more on this issue?”

What became very evident from our discussion is that Matt Kean is a fresh voice of youth, bringing new ideas and professional experience to the NSW Parliament. He is the embodiment of the diverse opportunities available to those with a background in business. “If you had asked me when I was starting out ‘What’s the best way to get into politics?’ I certainly wouldn’t have known that, for me, it would be as a chartered accountant.”

And his key message to university students?

“When I was an accounting recruiter, we’d get thousands of applications and they’re all just one distinction average after the next. What would set applicants apart from my point of view were the hobbies and interests that were different and interesting. So find the time to pursue some passions outside of your studies, and you’ll find that the experience you gain from these things is so much more valuable in the long run.” ■ www.insideenterprise.org | 41

Hugh Simpson

In business, the importance of a flexible but strong leader is understated, whereas we are taught that from day one in the military.

MBA Business Leader scholar. Strategy and crisis management consultant. Successful entrepreneur. Hugh Simpson is the perfect example of the modern day businessman.

Yet he comes from a different walk of life from most, entering the business world with 11 years of experience in the Royal Australian Navy. Having successfully leveraged his prior military experience to transition into a career in business, Hugh provides I.E. with a unique insight into how the world of business continues to transform and how it rewards diversity.

From the Military to Business Howell Sze

Source: Nicholas Fahy

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You come to the business world having served for eleven years in the Royal Australian Navy. How has your time in the military prepared you for your subsequent transition into business?

What might surprise students is that defence is just like any other workplace in the sense that you have to motivate people and get everyone working in a team. In business, the importance of a flexible but strong leader is understated, whereas we are taught that from day one in the military. The military recruits on natural leadership skills and aims to shape individuals so that they are capable of doing any job after their training.

In business, things are different.

Recruiters tend to look at technical skills and assume that leadership skills follow.

That is a big misconception. I know many examples of ex-military defence that have been given the chance to prove their merits and have been extremely successful. They bring the ability to problem-solve, to think outside the box, but also the discipline and professional attitude that can go missing in challenging situations.

In my career, I’ve had the chance to complete peacekeeping in the Solomon Islands, counter-piracy patrol in the Gulf of Aden and spend eight months in Baghdad and Southern Iraq. And with that comes perspective. Perspective to acknowledge the problem for what it is. And perspective to come at the problem with a clear mind, break it down and work on one piece at a time.

Now, temperament may not be a skill that graduate recruiters talk about but it certainly is important. It comes from having gone through a broad range of experiences and that is why if I am ever

presented with two candidates with the exact same credentials but one has overseas experience, I would take that person every time because they have had the opportunity to think about problems in a different manner. Think about what you can bring to the team. If it is replaceable, then work on having an ace up your sleeve that nobody else can replicate.

What elements of your military training would you say have been the most useful and how can businesses look to replicate those elements within their own training procedures?

The one thing you learn in defence very quickly is that you need to trust your people. As a leader, if you are looking to micromanage on a consistent basis, you will run yourself ragged. That is extremely applicable in a business sense. Relying on others is one of the most underrated challenges that high-achieving individuals face, but the faster you can get comfortable with it, the less of a stress-ball you will become. What’s the best way to ensure that the quality of work produced by others is to your own standard? Set expectations.

Now this does not involve one person ordering the rest of the team to complete task X, Y and Z before reporting back, nor does it mean establishing key performance indicators. Rather, the most effective setting of expectations occurs in a collaborative manner, whereby all stakeholders are involved in setting the standards to be reached and goals we are aiming for. If the team member fails to meet expectations then it’s a lot easier to confront them on why they have failed to meet these expectations. And it is not just team members failing to meet expectations but also team leaders failing to meet theirs. Leaders need to set standards because if they appear to

be unaccountable for their actions, this can be both disillusioning and demoralising for team members. Finally, explain to them that if they do not meet their expectations, you cannot meet yours.

Think about what you can bring to the team. If it is replaceable, then work on having an ace up your sleeve that nobody else can replicate.

What advice can you give to students who may experience a time of crisis in their future careers?

Well I think my best advice for students who ever are unfortunate enough to be in that situation is to make a decision and take responsibility for their actions later on. Be prepared to guide a team and utilise the PEAR methodology during a crisis.

Pear not for pear-shaped but for people, environment, assets and reputation. If they put people first, the outcome will usually be positive. For example, we were consulting for the C-suite of a firm based in Boston during the Boston bombings and by making sure that any employees there were safely evacuated, their assets and reputation remained robust. Another example was when a mining firm we were consulting had one of their mines experience a strata roof fall. At the time, it was difficult to ascertain whether they had a couple of guys trapped but, once again, this firm had strong contingency planning and firm leadership. Those two pieces were critical in ensuring a positive outcome.

Nobody was trapped and everybody was later accounted for.

Hugh, you have had the opportunity to recently transition from one career to another. In a continually evolving business landscape, how can students best prepare themselves for the inevitable transitions they too will face in the workforce?

Change is inevitable. How you adapt to it will determine your place in the business world. For students, it’s important to continue thinking about change and getting ahead of the change that is about to happen. We hear a lot about processes ‘having always been done this way’ and that is a naive understanding of the world of business. In terms of successfully transitioning, the most important component is having a plan. If your goal is to move into something you are passionate about, break down that role into the smaller elements. For myself, it has always been about working in groups of people, managing stakeholders and solving problems.

Let these smaller elements of what you are passionate about guide your decision.

In order to smoothly carry out this plan, set timelines and goals along that path.

When you are ready, make sure that all the networks and skills you have developed are there for you. Those networks will be the catalyst to a successful transition. Leveraging off mentors to bounce ideas regarding career choices, planning out decision trees and making sure the first step made is in the right direction by knowing the tenth step have been the critical lessons I have learnt from my military transition.

Co-creation and collaboration is one of the greatest products of the 21st century and the sooner you are leveraging off this, the better off your career will be. ■ www.insideenterprise.org | 43

Clara Wong

Digital Aid an interview with

Lakshmi Logathassan

Clara Wong interviews Lakshmi Logathassan, the recently announced NSW Young Woman of the Year and founder of The Laptop Project, an aid initiative that globally connects disadvantaged students with reusable secondary school laptops.

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n 2008, Prime Minister Kevin Rudd officially launched the ‘Digital Education Revolution’. The desired outcome?

To “create a world-class education system for Australia.” With $1.9 billion dollars injected into the initiative, the projected results were quite different to the ones that actually ensued. For many, the chunky red laptops given to Year 9 students served more as a deadweight in their heavy schoolbags than the learning tools they were initially intended as. Furthermore, security measures installed to prevent use of the laptops for non-educational purposes were circumvented and students soon honed their gaming skills in class. PostHSC, those same students turned to affordable alternatives, purchasing Macbooks and other devices for their studies instead of holding onto their school laptops. Kevin 44 | www.insideenterprise.org

Rudd’s vision of lecture theatres filled with university students tapping away at their government-funded computers simply did not transpire. However, in 2012 another digital education revolution began to take place.

The same laptops were used, but this time they went to students who would put them to better use. Recently announced NSW Young Woman of the Year for 2014, Lakshmi Logathassan launched ‘The Laptop Project’, collecting laptops from graduating high schoolers and delivering them overseas as a form of educational foreign aid. While juggling ongoing community and charity work, as well as a fulltime combined Law degree at UWS, she endeavours to send the laptops to students in greater need of the technology.

“People always ask me how I came up

with it,” she says. “The actual idea to do it and how to do it came after I became school captain. The Laptop Project was a line of work I’ve always wanted to do – to give from people with stuff to those who really need it and would do amazingly with it. Laptops are just one example of a resource that can be reused, should be reused and are being reused. I just thought if someone in Sri Lanka or Kenya or Cambodia knew that my laptop was just sitting around, they would want it.”

Lakshmi began her community work by personally setting up an English Fundamentals workshop for the students in rural and remote Sri Lanka in the months between Year 12 and the beginning of her university studies. While many of her friends were on schoolies, she taught English in a room rebuilt by AusAID at one of

the major government-funded schools in the war-affected region of Kilnochchi.

“The one thing out of the whole experience of teaching at that school was just how enthusiastic and attentive they were.

It’s something I’ll never forget. When I get tired and when I study now, it’s something I always think about. Their thirst for knowledge was so clear. They were students with no opportunities and so laptops and the internet were a massive deal for them. To give these students something that can make something out of their lives, to give them the internet just blows things out of proportion for them. It’s suddenly not their little impoverished village or their town, they can do anything. They can access the world now.”

What started as a small operation, or in Lakshmi’s own humble words as a “simple train of thought, an easy gesture” to ship these laptops to developing countries, has now seen more than 250 laptops eagerly used by foreign students. “It’s the responsibility of countries like Australia to help out with the humanitarian needs of other countries, especially countries in our region,” she says.

Unfortunately, the major changes proposed to merge AusAID with the Department of Foreign Affairs and Trade could mean that the objective of aid is diverted towards more diplomatic and trade-based motives. “AusAID has been delivering an

aid program that eradicates poverty in the world’s poorest communities,” Archie Law, the Executive Director of anti-poverty

It’s really hard for young people to look up to leaders in their community, whether it be in the corporate world or the government, when there is a lack of a right approach being taken. group ActionAid pointed out in an interview with SBS World News Australia. “But DFAT’s objectives are to promote and protect Australia’s national economic and political interests.”

The proposed $7.6 billion worth of cuts to the aid programs over the next five years has exacerbated the situation. World Vision Australia Chief Executive, Reverend Tim Costello, accused the government of balancing books on the backs of the poor.

“Of the $36 billion government budget savings, aid cuts contribute to 20 percent when aid is only 1.3 percent of total budget,” he said. Jeffrey Sachs, the United Nation’s special adviser on the Millennium Development Goals (MDGs), shared Costello’s disappointment. He told the

Australian Associated Press in Canberra that he found the cuts to be “completely unacceptable and outside the spirit of the values of this country.”

For Lakshmi, as the child of Sri Lankan migrants, she is particularly sensitive to the vast contrast between the standard of life in Australia and that of the countries she aids through The Laptop Project. “Even in a supposed budget crisis, we’re in a much better position than other countries – even developed countries,” she says. The goal, Lakshmi believes, is not to operate solely on a short-sighted national basis but instead as active global citizens.

“Having an ethical mentality should be a basic mindset for any individual. It’s really hard for young people to look up to leaders in their community, whether it be in the corporate world or the government, when there is a lack of a right approach being taken.”

Now in her third year of running The Laptop Project initiative, Lakshmi is looking to first expand her project to the South-East Asia region and then to a more comprehensive international level. Her drive is testament to her intention to continue assisting less fortunate students overseas. She smiles when asked about what keeps her going. “A mentality to do the right thing in the right way is something that should always propel our actions.” ■ www.insideenterprise.org | 45

How to: expedite investing in real estate

"the foundations of a fruitful property portfolio can be built much earlier than most imagine."

In the previous issue of Inside Enterprise, I addressed the fundamental considerations associated with making an investment in real estate. Whilst it is extremely difficult to acquire the finance to buy a property as a university student with little savings and insufficient income, many strategies exist which can expedite the process of building a property portfolio.

Ehren Heilman

For you, as the savvy property entrepreneur, although this is $30,000 higher than the property’s worth, you’ve now got an opportunity to add massive value to the property.

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trategies that characterise ‘active property investment’ are a much more rapid approach compared to the general 'passive' conception in which one buys their first property, waits for the value to increase, then accesses the equity generated from this property to buy a second or third property for their portfolio.

Active Property Investment Rather than invest in a property and wait for the market to prompt the necessary capital growth so that you can acquire further properties, you apply specialised knowledge and dedicate time and a whole lot of legwork to implement active strategies in order to profit from real estate without you necessarily owning the property. That is to say, instead of receiving title to the property so as to make you the owner, you can profit from merely controlling real estate. This is possible by acquiring what is called, an option over a

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property. An option is a legally enforceable agreement with the owner of the property which gives you the sole right, but not the obligation to buy the property within a specified period of time. For example, you approach Tom who owns a four-bedroom house in Chatswood and tell Tom that you don’t want to buy the property today, but you are interested in taking an option over the property which will entitle you to buy it for a price and within a time frame that you two will both agree on. Tom agrees to option his property to you on the terms that the price you will pay for his house is $650,000 and that the option period lasts 18 months. Now that might seem simple enough but obvious questions arise from a situation like this: Why would Tom even consider entering into an option with me? Where is the profit in this? What happens if the market collapses? If I can’t afford the property today, how am I going to be in a position to buy it 18 months down the track?

What is an Option?

Firstly, options are certainly not for every seller. For a home owner who is selling their house in order to move into another property they have already purchased, or has intentions to direct the proceeds from the sale into other uses, or who is looking to sell their house as soon as possible, an option is just not appropriate for their situation. However, there are a variety of situations where a seller’s more flexible position means they are more receptive to an option, for example, if they are not in a rush to sell their property today. Aside from specific seller characteristics, the primary seller incentive attached to an offer for an option is that you will agree to a price above-market value. Following from the above example, although Tom’s house has a market value of $650,000, you might tell Tom that you will instead agree on an ‘option price’ of $680,000, which is $30,000 more than the market.

How to Profit From an Option You see, because you now have the right over Tom’s property for 18 months, you can implement one or a combination of active strategies during this option period to increase the property’s value, which will later serve to generate your profit.

Although not an exhaustive list, these strategies could include renovations, subdivision, strata titling or, on a larger and riskier scale, property development. As long as the property owner is happy for you to implement your specific strategy, which you would have described to them during early negotiations, you are entitled to do it, by virtue of your option over the property.

Let’s assume you do a renovation and put in a new kitchen, change the fixtures, modernise the bathroom and give the property an overall facelift. Once your value-adding renovation strategy is complete, which has finished at a total cost of $15,000, Tom’s property is now worth $710,000. Importantly, during the 18 month option period the title of the property has stayed in the owner’s name.

Now, because you don’t own the property, only the right to buy it, you can’t sell something you don’t own. However, what you can do is sell your option, in other words, sell to someone your right to buy the house. This is possible because options are assignable, they can be assigned

to anyone at any time. Here is how the numbers might work. Frank comes along and loves the house but you are the one who has the exclusive right to buy it. You sell the option to Frank for $30,000, which is the difference between the $710,000 the house is now worth and the $680,000 he will pay to Tom when he chooses to exercise the option. By the end, Frank will have paid the current $710,000 market value for the house, Tom receives the $680,000 stipulated in the option and you have yielded a profit of $15,000 after subtracting renovation costs from your option sale.

A rather nice little day out indeed.

How Can I Improve the Property Without Owning It? As mentioned, there are several active strategies you could implement to add value to the property in order to make your option more valuable to prospective home buyers.

These include: • Subdivision – This is where you divide a large parcel of land into two or more smaller blocks each with their own title, selling your option over each block.

• Strata Titling – This strategy is similar to subdivision in that it involves splitting up a property into separate titles to add value. However, whereas subdivision is cutting up large vacant land into smaller blocks, with strata titling, we take an existing block of units where all the units are under one title and get council permission to put each unit under its own sellable title.

• Property Development – A more advanced active strategy is to develop the block of land by extending the property, adding a granny flat, demolishing the existing house and building a duplex or triplex, or, on a larger scale, constructing several townhouses.

Key Risks Despite the allure these active property strategies hold in seemingly offering a solution to the university student’s dilemma of being unable to enter the property market

with minimal capital, it goes without saying that regardless of which strategy is implemented, there are unavoidable risks and difficulties one might experience. Firstly, each of these strategies is unique and demands their own set of specific knowledge and research. With regard to the renovation strategy for example, research into what local homebuyers are demanding, costsaving tactics and an avid understanding of how to manage renovation projects is essential. Furthermore, I can attest from my own experience with property options that finding sellers open to these strategies requires an investment of significant time and energy. Building a rapport with sellers, handling their objections and articulating the technicalities of how options work are fundamental communication skills necessary in order to achieve success. And, as with any investment, uncertainty leads to risk that must be managed. The potential for market reversals, legal complications, council delays, cost-overruns and an inability to find a buyer for the option after strategy implementation, are but a few factors among many others which might undermine possible returns, evidencing that active real estate investment strategies are not at all for the faint-hearted.

Summary The general conception of real estate investment stems from a passive approach to building a property portfolio – but an active approach can markedly hasten the realisation of property investment, particularly for capital poor university students.

Carrying out these strategies involves a steep learning curve whereby the student pursuing them will achieve greater clarity as to how the strategies work, how to make them work, and how to profit from them working – a highly rewarding entrepreneurial experience. For the eager university student unwilling to wait until they secure a job to buy a property, the foundations of a fruitful property portfolio can be built much earlier than most imagine. ■ www.insideenterprise.org | 47

Student Room AIESEC: CREATING GLOBAL LEADERS

in the journey to sustainable growth for the national and global community, something students are frequently not reminded of enough. This change in perspective, one marked with subtle wisdom and maturity, was one of the greatest changes Jennifer underwent during her time working overseas and was a change that has shaped her entire worldview and future career aspirations.

Today, Jennifer, having returned to Sydney with her partner, is a manager at Standards Australia and a Masters student at

Macquarie University. Her piece of invaluable advice? She stresses enormously how challenging herself to work overseas has delivered invaluable experience and fostered the leadership skills demanded by the real world. Jennifer continues to be an active alumnus of AIESEC, firmly believing that today’s young people are facing unprecedented challenges to enter the Australian labour market and that it is for this reason students need to take initiative before graduation day in order to secure a meaningful career.

How the world’s largest, youth-run student organisation is actively responding to the increased labour market demand for broadly experienced graduates.

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ennifer Harwood, alumni of the University of Technology Sydney (UTS), is a textbook example of a student who has bridged the challenge of acquiring both theoretical and practical business knowledge through her worldwide involvement with AIESEC. The increase in applicants with degrees, the rising youth unemployment rate and the growing skills gap in the economy have resulted in an extremely competitive job environment for young people. Within this landscape, the youth leadership organisation AIESEC is at the fore of equipping students with the critical thinking aptitudes and leadership skills highly sought after by recruiters. For over fifty-five years students have turned to AIESEC, the world’s largest, youth-run, non-profit organisation to help develop these leadership skills through their global exchange programs. These programs offer over 24,000 volunteer and work internships annually around the world, and provide access to a global network of over 100,000 young, global leaders.

Jennifer, in particular, began her studies at UTS in 1998 and, while studying, made the decision to join the UTS chapter of AIESEC. Such are the possibilities that accompany involvement with AIESEC that soon after graduating she became the National President of AIESEC Australia, holding her tenure from 2001 to 2002, during which she was charged with managing the effective running of the collective of AIESEC chapters from all around Australia.

The next phase in Jennifer’s AIESEC progression was her move to Egypt at the beginning of 2003. Moving to a new country is one challenge, but to undergo a change as diverse as surrendering the beaches of Bondi to bear witness to the extreme wealth gaps of Cairo was a new experience altogether.

With the tragedies of the September 11 terrorist bombings in 2001 still fresh in minds the world over, there was an increased spotlight on US-Arab relations. It was here that AIESEC Egypt took a solution-orientated step towards bridging the perceived gap between the Arab nations and the Western world. During her term as President of AIESEC Egypt, Jennifer managed the Salam Program, a US-Arab exchange program, which resulted in 34 exchanges in its first year, a program designed specifically to cultivate greater cultural awareness while concurrently fostering invaluable 48 | www.insideenterprise.org

leadership skills within the fortunate participants. As with all of AIESEC’s exchange programs, the opportunities given to the exchange participants ranged from global community development projects to global internship positions.

When her term with AIESEC Egypt ended in 2004, she began what was initially a one-year role as the Middle East and North Africa Director at AIESEC United States. As part of her role she continued to promote the Salam program and managed to grow this exchange program to cater to more than 150 students. Working for AIESEC in the US gave her the ability to acquire US government funding in order to expand AIESEC’s operations to other countries in the Middle East.

Jennifer secured over $1.6 million in grants from the US Department of State which enabled her to expand AIESEC into Bahrain, Qatar and Oman with an additional $600,000 secured for the management of operations and staffing.

Having played a large role in shaping both AIESEC’s presence in the Middle East and in North Africa as well as US-Arab relations on a youth level, in 2007 Jennifer decided to move on from both her role and from AIESEC. With this new sense of purpose and motivation, Jennifer moved from one not-for-profit to another, working from 2007 to 2011 at City Year in New York City as a Program Director taking university graduates to high risk schools around the Bronx area.

When pressed about her motivations for pursuing her numerous AIESEC roles, Jennifer noted that she had undergone a change in what she perceived the notion of ‘success’ to entail. Originally, as an undergraduate, she fell into a category of individuals whose concept of success involved a graduate job in a multi-national corporation, a dream in which one day their family name would be etched onto the walls they walk past every morning. However, as her motivations for staying with AIESEC evolved, she chose to walk down a different and equally admirable path. Success became the feeling of accomplishment and satisfaction that accompanied having shared her expertise knowledge, resources and experiences with the wider community. For her, success was not mere monetary or career gain, it was a measure of progression, not in oneself, but rather

B.Inspiring Inc. Minh Thuy Thai

B.Inspiring Incorporated is a not for profit organisation run entirely by university aged volunteers who stage conferences each year involving three days of interactive workshops designed to teach senior high school students practical business and leadership skills.

“To inspire and empower the youth of Sydney to use their skills and talents to create and sustain positive change in their communities”

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his has been B.Inspiring Inc’s mission statement since JeanMarie Voon, as a second year university student, created the B.Inspiring Business & Leadership Conferences as a project under the Sydney University Enactus (formerly known as Students in Free Enterprise) in 2011. The founding idea was to hold three fun-filled yet educational days for high school students from lower socio-economic areas which would inspire them to pursue a future in business. Attendees were taught basic concepts of finance, accounting and economics, they listened to success stories from entrepreneurs, learnt about leadership and communication skills, interacted with university students, and were ultimately given the chance to pitch an idea addressing a social issue. Jean wanted to pass on to students the skills she realised were important to successfully making a transition from high school to university – but the scope of impact that this project has had on over 270 high school students from all over Sydney thus far has truly surpassed

its humble beginnings.

In 2013, after 3 annual conferences, B.Inspiring became a non-profit organisation, introduced a Law & Leadership arm, and expanded its scope to include students from all over Sydney. An important lesson known to all who have worked as B.Inspiring mentors and conferences leaders is that it is never too early to begin making an impact on the lives of others that is real and lasting – and the conferences do just this. For the students, learning is made fun through games and interactive presentations that distil such second year subjects as "Criminal Law" into something year 10 to 12 students can engage with. Most importantly, students are taught to step out of their comfort zones and learn to think freely and laterally, build the courage to commit to their idea and articulate it with passion and creativity. The key message of the conference remains consistent and effective year after year: “Be courageous. Be inspiring.” www.insideenterprise.org | 49

Interestingly, the program has had a similar impact on the university students who volunteer to mentor high school participants throughout the three days. Laura Armenian remarks that "seeing our mentees grow in confidence and knowledge over 3 short days is the most rewarding thing". Mentors often stay on for many years as they are continually moved by their own abilities to instil self-confidence in their mentees. Social change simply comes from

this – an individual’s belief that they can.

Achieving your dreams is one thing, but enabling others to also achieve theirs is a different and wholeheartedly rewarding feeling.

B.Inspiring Inc. continues to exist on the belief that creating widespread social change is best done by empowering and inspiring others to make their own ideas happen.

Student Entrepreneur: Global perspective

University Cycling Dan Christopher

lending it out three times. We designed our pricing scheme so that customers were incentivised to loan for a term at a time, instead of per week, as this greatly reduced the hassle on our part.

We also make a big profit margin from the add-on services that we sell, such as helmets and locks. We rent the package for 10 pounds extra, which is just over what we pay to purchase them.

Dan Christopher is a 2nd year student studying a Bachelor of Economics at the University College London. While living in London, at the age of 19 he decided to combine his passion for entrepreneurial endeavours and his fondness for cycling to launch his own bicycle rental company, ‘University Cycling’, as a way to make additional money while getting a taste for running a business. Now established as a successful rental firm, University Cycling rents hybrid road bikes to university students and staff across London and Cambridge.

What is your business model?

Our business model is fairly simple: we compete on price and we certainly mean what we advertise when we avow the ‘guaranteed lowest price’. The reason we can be cost competitive compared to our competitors is that we manage to source our bikes at a very low price – about 40% that of the market price. Part of the initial challenge was searching for and attaining a reliable supplier who would be willing to give us a good deal, given that we had no reputation and my partner and I were both only students and couldn't afford to purchase a huge inventory.

We began with only five bikes, and charged £50 per term for hiring. This meant that we made the cost of the bike back from 50 | www.insideenterprise.org

What are some challenges you have faced?

Although our supplier is cost-effective, a lot of the time the bikes we requested would not be available for up to several weeks. This delay did cause us to lose a few customers, as when someone comes to rent a bike generally they want it immediately.

There is also the need to protect your assets. As is standard, we make all customers sign a contract covering what occurs in the case of loss or damage. Many companies offer an insurance scheme which insures a customer from paying the full cost of the bike if it does happen to be lost. However, I've always thought that this induced a moral hazard problem as it essentially gives the customer a blank cheque to lose the bikes, given that they won't be liable to pay.

The initial funding was not a problem. Starting up, we had no overheads: We kept the bikes in my room and my business partner’s college in Cambridge. We bootstrapped a little to buy the bikes, have a professional website designed and begin marketing around campuses. My personal belief is that money disappears if you don't do anything with it. By buying a few less drinks every weekend, I could save enough money to buy an extra bike which could be rented out indefinitely.

Given that we had no office, we tried to maintain a professional image by leveraging certain locations, like the University of London Union, as the official collecting point to make a transaction.

Where to now?

I began this business not just as a means of making money, but because I really believe in the health and environmental benefits that biking can bring. The profitability of my business is very much dependent upon the bike culture of the city. For example, students in London are just not as predisposed to cycling, given the abundant availability of public transport, whereas in Cambridge demand is very high. For that reason we’re scaling back our London operations and expanding into Oxford later this year. www.insideenterprise.org | 51

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