Do Banks act in a socially responsible manner?

Welsh MPs lead a recent debate in parliament to raise concerns about the impact of rural bank closures; HSBC had announced that three banks in rural Wales would close in March. MP Chris Ruane said banks must “look again at the balance between profit and social responsibility” (BBC News, 2012).

Socially responsible investment (SRI) is “an investment project that integrates social, environmental and ethical considerations into investment decision making” (Renneborg ,2008). It considers both the investor's financial needs and an investment’s impact on society (USSIF, 2012).

The chairman of RBS, Sir Philip Hampton, has been in the news on a regular basis this year. This is mainly because of the bad reaction that occurred after he had offered Stephen Hester a very handsome bonus. Sir Philip defended his decision; his reason for this was that RBS needed to be run “by the best people” on “competitive” pay (BBC News, 2012).

I believe that this is one of the main problems with SRI. The general public believe that companies do not do enough to support society. The companies would argue that their main priorities are to maximise shareholder wealth. Anything after this is usually just seen as a bonus. Some companies would most likely label being socially responsible as very low on their list of priorities. Is it right for companies to act and think in this way?

Ethical investing originally related to religious aspects. Different religions had different views on how money should be invested. These views have changed over the years and people are now more open minded to how money should and could be spent. This could be seen as a positive or negative light. A positive aspect is that there are now more options to how money can be spent and may well still be classed as an SRI. A negative may be that investments can be based on profits only. Some companies may find it perfectly acceptable to invest in cigarettes and alcohol as the return may be good. Some companies would class this as ethically wrong. Banks are known to look out for number one so as long as investments they made produced good returns then they would be fine with this.

Rules of SRI imply nothing about the source of investment fund. Not overly concerned about how people are getting their money. The question should be asked to whether this should be as important as where that money will be getting invested. Some may argue that bank charges may be too high and therefore they should not be entitled to all of those earnings. If banks did not charge the customer as much then they may not be able to offer the attractive bonuses to managers and CEO’s.

There are three main categories that SRI can be split between:

·         Responsible Investment
·         Socially Repsonsible Investment
·         SustainableInvestment
(EUROSIF, 2012)

It may be important to some companies as to what category an investment falls into. This may be the reason as to why the investment is made or not.

EUROSIF define SRI as:

“A generic term covering ethical investments, responsible investments, sustainable investments, and any other investment process that combines investors’ financial objectives with their concerns about environment, social and governance (ESG) issues”

This statement covers everything in terms of morals and ethics. Maybe certain social aspects should be concentrated on ahead of very vague issues. Certain aspects could maybe be agreed on as much more important than others and they are what should be focussed on first and foremost. Distinguishing what is important in society in relation to banks may have .

Philip, Hager and North Investment Management Ltd (2007) suggested that “if SRI is found to produce lower investment returns than SRI will never be more than a niche market”. This sentiment is something that banks would most likely agree with. Banks are aware of this scenario and would argue that if there is not a big benefit gained from an investment then why do it.

No matter how much SRI funds are tweaked they will never beat traditional funds (Schroder, 2004). However, SRI mirrors main index returns and they do become more comparable over time. The graph below supports this statement. If there is no difference between the returns on the two funds over time then may people may begin to choose SRI. To make benefits to society without losing funds can only be a good thing.

(CBS News, 2012)

Providing a good services and products to society under the best circumstances is what can make an average company become a multinational company. It is important for banks to remember that without their customers there would be no business. Just because rural areas do not suit their profit margins does not mean that they should be ignored.

Sources used:

BBC News

CBS News
EUROSIF
Philip, Hager and North Investment Management Ltd
Renneborg
Schroder
USSIF

Will the outcome of Greece cause a domino effect?

A credit crunch is thought of as "a severe shortage of money or credit" (BBC News, 2009).  Once companies begin to struggle financially, others can shortly find themselves in similar predicaments. Many around the world began to suffer when the credit crunch of 2008 occurred. In the UK, lots of banks began to suffer as a result of loaning too much money to companies and to the general public. Northern Rock was bailed out by the government due to their dire circumstances. Banks such as RBS soon followed this trend that occurred. Large companies could no longer rely on loans any more as banks were not able to loan copious amounts of money like before. Once the domino effect begins it is difficult for it to be stopped as it quickly gathers momentum.

A concern for many people now is that Greece is suffering immensely as a nation. Leaders in the Eurozone worry that if Greece were to default, and possibly leave the euro, that this would have a big impact on other suffering nations such as Ireland, Italy and Spain (Wall Street Journal, 2012).

Greece has recently managed to reduce its debt to private creditors by 53.5%; any profits made by Eurozone central banks on their holdings of Greek debt will be returned to Greece (BBC News, 2012). It is not just recently that Greece have begun to suffer as in 2010, the EU, IMF and ECB agreed a bailout worth 110bn euros for Greece (BBC News, 2010). It is a worrying sign that only two years later that Greece have pleaded for more help. Banks across Europe are effectively paying for this bailout which means they are the ones that will lose money.  Many experts believe that this second bailout will still not be enough in order for Greece to cope with the debt that is remaining in the long term. Eurozone monitoring will take place but it is already being questioned as to whether this will make a big difference to a dreadful situation.

 So where did it all go so wrong for Greece?

·         Greece was able to borrow money much easier as a result of joining the euro in 2002.

·         Greece spent too much money on high-profile events such as the 2004 Athens Olympics.

·         The country began to suffer financially and began to spend more money than it received.

·         Interest rates increased on borrowings as the nation continued to suffer.

·         Cuts to public sector pay and pensions were declared by the government along with reduced benefits and increased taxes.

 (BBC News, 2012)

Budgets on projects were regularly not met during this timescale as the spending spree lost control. Rumours occurred that statistics of the country’s financial condition were incorrect. Shortly after this respected government figures were accused of tax evasion. There have been widespread protests and demonstrations in Greece (below) against the government.

The idea is that all the cuts in Greece should improve the competitiveness of the nation and therefore have a positive knock on effect that would improve the current state of their economy. It is easy to understand why people in Greece struggle to comprehend this as this outcome looks so far away at the moment.

(Debt help bureau, 2011)

The graph shows how debt vs nominal GDP shot up. Results from 2010 onwards lead Greece to the problem that they now face. The main problem in the scenario is that Greece has, and STILL is, spending more than they receive. The graph shows how the problem began between 2006 and 2009. Spending from this point onwards spiralled out of control and the gap between revenue and expenditure became bigger.

Barton, Newell & Wilson (2003) suggest that there are five key factors as to how company managers can increase their chances of survival during a financial crisis.

1.            Understand and Maximize the Current Cash position

2.            Identify and Aggressively Minimise Operational Risk

3.            Scenario Planning

4.            Review and Prepare for Divestitures

5.            Maintain Confidence of Key Stakeholders

If managers in Greece had paid attention to such academia it may have been possible for them to avoid the scenario they currently find themselves in.

Wage rises and mortgage debts have increased immensely within the last ten years in a lot of European countries. Countries such as Greece have suffered as a result of this.  If Greece were to fall then what would happen to Ireland? If Ireland were to fall then what would happen in other European countries? This chain of events could severely affect many nations; we hope that the UK would not be one to be affected. The UK is not owed a lot of money from Greece in comparison to other European countries. However, any effects from the problems in Greece could affect Ireland and this could become a problem to the UK; Ireland owe a large amount of debt to the UK and could be effected if they cannot receive this back (Financial Times, 2012).

It is impossible to say for sure how events will eventually unfold in Greece as time will only tell. It does not look too promising at the moment though. It is time for Greece to attempt to stand on their own two feet again. If they are not able to do this in the foreseeable future then it may be unlikely that they have a future in the euro currency.

Sources used:

Barton, Newell & Wilson

BBC News

Debt help bureau

Financial Times

Guardian

Wall Street Journal



Did Virgin act appropriately?

It was recently announced that IAG had been successful in the purchase of BMI and that the purchase itself would not be reviewed by the Office of Fair Trading (BBC News, 2012). IAG, owned by British Airways, has gained fifty six more slots at Heathrow airport as a result of this deal; purchasing BMI from Lufthansa cost IAG a reported £172.5m (BBC News, 2011). Virgin have openly complained about this deal by suggesting that IAG will have too much of a dominance at Heathrow airport. Is the owner of Virgin, Richard Branson, right to complain about this matter or should he have just bit his lip and moved on?

Patterns in mergers and acquisitions (M&A) have occurred in recent decades. Lots of M&A took place in the UK at the back end of the 1980’s and throughout the 90’s. The country’s economic position was healthy at the time as progression was made in many industries. As the UK was in a successful era in the 90’s it meant that the risk of failure was seen as low. Events such as September 11 2011 and resulting wars in countries such as Afghanistan and Iraq lead to a general decrease in M&A.  Countries became more uncertain as to how situations would unveil from events such as these. Many people believe that there is a direct link between M&A and economic risk; these examples would suggest that those people are correct.  

It is possible for some companies to actually benefit from a decline in M&A. Investment prices tend to drop so it is therefore possible to purchase a business at a good price. Events themselves can actually work in the favour of some companies too. Virgin set up ‘Virgin Australia’ on 31 August 2000 with just one route from Brisbane to Sydney, two aircrafts and just 200 members of staff (Virgin Australia, 2012). M&A had slowed down between 2000 and 2002 due to the economic climate at the time. People frowned upon Richard Branson’s move, suggesting that it was the wrong time to be investing. However, in May 2001 leading Australian airline company ‘Qantas’ acquired rival company ‘Impulse’ whilst Australian airline company ‘Ansett’ collapsed later that year in September (Low Cost Airline News, 2012). Virgin effectively benefitted from these events, including the acquisition made by a competitor. Although Qantas became a more dominant force, Virgin Australia became the second largest airline company in Australia. There were fewer competitors in the market and this gave Virgin the opportunity that they needed in order to expand. Mr Branson did not complain about this at the time even though the Qantas purchase was very similar to the recent IAG purchase. He did not complain as he benefitted immensely from the situation. Maybe Mr Branson (pictured below) should think back to times like these and accept that he has been very fortunate in the past.

Mergers and acquisitions are usually thought of in the same way by many people. However, there is a slight difference between the two terms.  An acquisition occurs if a company invests into another and becomes the new owner (Financial Times, 2012). A merger is technically when two firms, of usually the same size, become one new company (Arnold, 2012). Companies such as Virgin have ultimate aims to lead their companies to success and gain market power, rather than sharing their dominance with any other party.

The fundamental principle of financial management is that any action made by a company should be done in order to increase shareholder wealth. If this is not the case then shareholders may begin to panic as they may not comprehend why the action has taken place. As the shareholder price of a company about to be bought in a M&A increases, the parent company lowers as shareholders are aware that there is usually not a lot of short term (Jensen and Ruback, 1983) or long term (Limmack, 2002) gains from these deals. Companies tend to pay over the odds for a merger under these circumstances and do not make the gains that they expected. The idea behind any merger is to create shareholder wealth but this tends not to be the outcome in most circumstances. Shareholders are now aware of this and that is why share prices of the involved companies can change so dramatically in these situations. Richard Branson will be well aware that IAG were attempting to increase their shareholder wealth with this recent purchase. It is unlikely that Mr Branson would have acted in a different manner had he been in charge of IAG.

M&A also takes place in order for a company to gain market power and to improve their current status.  Complaints were made by Virgin because they felt the IAG deal was unfair and that they may become a monopoly within this market. Virgin argues that this is the reason as to why they were unhappy with IAG even bidding for BMI, never mind purchasing. Some believe that Virgin was complaining about the IAG purchase because they knew in advance that they would not successful in their bid. Virgin and IAG were fighting against each other in order to buy BMI from Lufthansa (BBC News, 2011). Virgin was already threatening to complain about IAG before they even knew that they had won the bid.

It could have boiled down to jealousy. Richard Branson was not getting his own way and any form of failure is unusual for him. Some would argue that he has too much market share in some sectors that Virgin is involved in. Taking this into account, some may wonder whether he should continue to enter into different market sectors or not. He has more wealth than a lot of his rivals which gives him an immediate competitive advantage. He would have acted in the same manner if he was in the position of IAG.

I believe that Richard Branson and Virgin acted inappropriately on this occasion. Mr Branson had benefitted from such situations in the past and should be grateful for those occurrences. I can understand his frustrations but he is well known for seeing gaps in the market and filling those gaps to his own personal success. The economy is full of opportunities and I believe that this just happens to be one opportunity that Mr Branson unfortunately missed out on. Being more humble about this may have been the best way forward; therefore saving his energy for more worthwhile causes.

Sources used:

Arnold

BBC News

Financial Times

Jensen and Ruback

Limmack

Low Cost Airline News

Virgin Australia

Why has Wales gone backwards on Inward Investment?

Wales has recently suffered to attract investments from foreign companies, meaning that investment levels have fell behind many parts of the UK (BBC News, 2012). Attracting investment from other countries is important, but is not necessarily easy to achieve. Once investment has been achieved it is then hoped that these investment levels can be maintained and, if at all possible, increased.

(Financial Times, 2012)

International trade has increased dramatically since the 1950’s and countries around the world, including Wales, have become more reliant on these trades. Foreign Direct Investment (FDI) plays a significant role within international trade. FDI is “the purchase of physical assets, such as plant and equipment, in a foreign country, to be managed by the parent corporation (Moffett, Stonehill and Eliteman, 2012).

The amount of companies in Wales being purchased in FDI deals has dropped and this has obviously become a concern.  Many in Wales believe that this is due to poor promotion in recent years. A Welsh government spokesman stated "We need to showcase what we have to offer, the world certainly isn't going to come to us.” (BBC News, 2012). As many companies attempt to be successful in international trade it means that it actually becomes more difficult to achieve company goals. If Wales do not promote themselves in the right manner then it is most likely that a foreign company will invest elsewhere.

Recent trends in FDI activity show that global FDI flows rose to $1.24 trillion in 2010; this was still 15% below the 2007 average (UNCTAD, 2011). Experts suggest that the FDI flow figure will increase again to what it once was before. The main reason for this belief is because of the popularity of FDI. It is popular because it enables a company to become a multinational company or enterprise; by operating subsidiaries in a foreign country (Moffett et al, 2012). If a multinational company continues to grow in stature then then it can lead to large investments being made in the future. The top 10 multinational companies in 2005 possessed roughly $1.7 trillion in foreign assets between them (UNCTAD, 2007). This is a staggering amount of money and shows why these successful models are attempted to be replicated by many upcoming companies. If companies in Wales were able to attract the attention of large multinational companies such as these, through successful promotion, inward investment figures would quickly increase once again.

Developing countries can benefit from FDI as a host country; by receiving investment from foreign countries. Economic growth can certainly occur in developing countries if FDI’s are successful (Chen, 2000). A host country can benefit from employment opportunities and extra tax revenue from profits. It is also important for host countries to be aware that there are lots of possible problems that can occur. A good example of a potential problem is the possibility of corruption and conflict as a result of political issues. Maybe companies in Wales were put off reaching agreements with foreign countries as a result of these potential problems. For FDI to be seen as successful it needs to be beneficial for both parties involved. It is not acceptable for an investor to benefit, for the host to not benefit and vice versa. I believe that the positives of international trade outweigh the negative aspects. If company procedures are correct then the problems occurring become less likely. Problems tend to be more of a concern for host countries in developing countries in areas such as Africa and South America, rather than countries such as Wales.

It is important for companies to remember that it is possible to receive investments or make investments with neighbour countries. Crossing a border is seen as more appealing for some companies solely on the basis that fewer costs may be involved. It is also possible for a direct investment to be as successful this way. Maybe the answer for the short term recovery of inward investment in Wales is to initially receive investments from the UK rather than looking further abroad. A long term goal could be to look for foreign investment further afield, once stability in this sector has occurred.

It is important to put this all into context as Wales is not the only country that is currently suffering. High oil prices have hindered UK manufacturing sector output recently (BBC News, 2012). However the difference between these two scenarios is that England’s output problems were out of their control where as it is possible to blame Wales for their recent poor inward investment results.

I believe that it is possible for Wales to recover from this current predicament, in the short term and the long term. Major emerging areas such as South America have shown that the FDI flow can increase once again. Seeing how production is successful in the thriving UK areas and international companies will enable companies in Wales to understand if their production lines are similar. If they are not similar, then why is this? Money is still available for investment as multinational companies increase their amount of assets. It is vital that Wales promote their businesses with immediate effect. If successful, then the inward investments should arrive imminently.

Sources used:   

BBC News          Chen                                                                                                                                                                     Financial Times

Moffett, Stonehill and Eliteman 

UNCTAD (2007 & 2011)