More and more Australian companies are embracing the notion of corporate responsibility, and reaping the rewards. Here we examine corporate responsibility and why investors should sit up and take notice.

More and more Australian companies are taking corporate responsibility seriously. Companies such as AMP and Westpac have set up foundations in which donations are made to worthy causes each year. Large accounting and legal firms are establishing programs in which employees head out to lend a helping hand on weekends and social considerations are creeping into decisions, which once, would have been made purely based on profitability. So why are these companies developing a social conscience? Well, it could have something to do with the fact that corporate responsibility can have a positive effect on a company’s bottom line.

The Corporate Responsibility Index
Over recent years, the St James Ethics Centre, in association with Business in the Community has produced the Corporate Responsibility Index of participating Australian and multinational companies that operate in Australia. The index is based on results from a survey completed by participating companies.

Some companies involved in the Corporate Responsibility Index
Some of the companies that participate in the Corporate Responsibility Index include AMP, ANZ Banking, AGL, BHP Billiton, Boral, Caltex Australia, Foster’s Group, Hewlett-Packard Australia, IBM Australia, Lion Nathan, Telstra, Toyota Australia and Westpac.

What criteria are included in the index?
Companies participating in the Corporate Responsibility Index are asked a series of questions relating to:

• corporate strategy
• integration of responsible practice
• management practice
• performance and impact.

Consideration is given to activities such as:

• occupational health and safety
• community investment
• workplace diversity
• product safety
• human rights in the supply chain, and
• environmental issues including the disposal of solid waste and effects on the global warming.

What effect can corporate responsibility have on a company’s bottom line?
According to the Corporate Responsibility Index website www.corporate-responsibility.com.au “The Corporate Responsibility Index provides a useful internal communications tool providing a framework for understanding strengths and weaknesses, allowing companies to take stock of progress and ensure that they are putting effort into the right areas for maximum benefit, and helps to focus where improvements on corporate responsibility can be achieved.”

Corporate responsibility helps attract and retain talented employees. This is illustrated by a survey by Stanford Graduate School of Business which found that “Of more than 800 MBAs from 11 leading North American and European schools, a substantial number were willing to forgo some financial benefits to work for an organisation with a better reputation for corporate social responsibility and ethics.”

Corporate responsibility can enhance a company’s bottom line by helping to build the company’s reputation and brand within the community and to identify opportunities for reducing costs through improved eco-efficiency. It can also provide valuable information to fund managers when looking for investment opportunities, especially for fund managers in the growing sector of socially responsible investing. There is also some evidence that companies which engage in good corporate responsibility practices on average perform better than companies which do not have a good corporate responsibility record. So, perhaps when looking for investment opportunities, the Corporate Responsibility Index may be worth a close look.

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Here we take a short look at the history leading up to the establishment of the Australian Stock Exchange.

The first stock exchange in Australia was founded in Melbourne in 1861. Ten years later, the Sydney Stock Exchange was founded.

During the mining boom, regional stock exchanges sprung up in mining towns such as Ballarat, Charters Towers, Gympie, and Queenstown. These regional exchanges raised capital for the large number of mining companies being established during the mining boom. However, when the mining boom finished, and most of the mining companies ceased operating, most of these regional stock exchanges disappeared also.

In 1882, the Hobart Stock Exchange was founded. Later, the regional stock exchange in Launceston would merge with the Hobart Stock Exchange.

In 1884, the Brisbane Stock Exchange was formed and this was followed by the Stock Exchange of Adelaide in 1887 and the Stock Exchange of Perth in 1889. These stock exchanges operated relatively independently of each other.

Following a number of large company failures in the mid 1890s, annual auditing and presentation of financial results was made compulsory for companies traded on Australian stock exchanges. The controls introduced by the Stock Exchange of Melbourne were considered the strictest in the British Empire at the time.  

In 1901, Australia became a Federation and two years later in 1903, the Melbourne, Brisbane, Sydney and Adelaide stock exchanges held their first combined conference. However, it would be a further 30 years before the stock exchanges would get together to form the Australian Associated Stock Exchanges (AASE). Within a year of formation of the AASE, the first share price index would be published.

In 1942, during the Second World War, the Australian Government introduced regulations to limit increases in the price of a company’s share price. However by 1947, the stock exchanges returned to an open market. Further significant changes were made in 1961 and 1962 when each state passed a uniform Companies Act.

Arguably the most spectacular rise in a company’s share price occurred during the mining boom of the late sixties when the share price of nickel explorer Poseidon rose from 80 cents in July 1969 to $289 by February 1970. Following this incredible rise, the shares subsequently fell in equally incredible fashion, as did the mining boom which had been going strong since the late 50s.

From 1970 to 1976 new rules and regulations were introduced which included the Securities Industry Act, legislation on accounts and audits and the disclosure of substantial shareholdings as well as improvements to the securities industry legislation.

Also in 1976, a national listing of all securities was introduced and the Australian Option Market began trading in call options. This led to the regulation of futures through the Futures Market Act 1976 (NSW).

Between 1976 and 1982 further legislation was introduced to form a closer national approach to share trading in Australia.

In 1980, the Sydney and Melbourne share price indices were replaced by the Australian Stock Exchange national price and accumulation indices. Then in 1984, stock exchange membership was deregulated and fixed scale commission abolished. September 1985 saw the establishment of the Australian Financial Futures Market on the Melbourne Stock Exchange.

This year also saw, surprisingly, the first meeting in 100 years of all members of Australia’s six stock exchanges under the one roof. The meeting considered the future of the Australian Associated Stock Exchanges (AASE) which recommended the merging of all six exchanges into a national exchange. The Australian Stock Exchange was born.

China’s insatiable appetite for Australian resources over the last 12 months or so has fuelled a bull run on the Australian sharemarket and has kept the Australian economy in high gear. But can we rely on the resources boom to continue?

The last few years have seen a bumper run for Australian commodities, which has in turn fuelled the Australian sharemarket, particularly the resources sector. In fact, over the last four years to January 2006:

• copper prices have risen 220 per cent
• aluminium prices are up 80 per cent
• nickel prices are up 150 per cent, and
• gold prices have increased 100 per cent.

It doesn’t appear that China will stop buying our commodities any time soon. In fact, although some economists are predicting a short-term correction within commodities prices soon (some predict copper may fall by up to 50 per cent within the next two years), most managers are still overweight in the resources sector. Longer term outlooks for commodities however remain positive.

Merrill Lynch is one manager with a positive outlook for commodities and the companies that benefit from high commodity prices. During the middle of 2005, Merrill Lynch was 6 per cent overweight in BHP Billiton and 4 per cent overweight in Rio Tinto. After taking some profits at the beginning of 2006, Merrill Lynch moved back to index weighting on BHP Billiton and Rio Tinto . Since then however, they have been buying back in, increasing their weighting.

Another manager who believes the resources boom is not over is AMP Capital Investors. While AMP Capital is still overweight in resources, it’s not to the extent that it was in the past 18 months. AMP’s Chief economist, Dr Shane Oliver believes “they’ve gone up so far it’s logical to expect that they are due a bit of a correction. But for all the talk, maybe we won’t get it and there is more to go before this happens”.

In his regular Oliver’s Insights of 13 February 2006, Dr Shane Oliver provides the following upbeat assessment. “Our assessment is that industrial commodity prices will continue to trend higher over the next decade or so.” Two of the reasons he gives for this assessment include:

• rapid industrialisation in China, India and other emerging markets, and
• the supply of commodities remains relatively constrained due to a decade of weak commodity prices and therefore weak investment.

Is the bubble going to burst?
Commodity prices continue to increase rapidly. In early May 2006, gold went through $720 an ounce, a 26 year high. Copper also surged 12 per cent and zinc 10 per cent. However, while there may be short-term price corrections, many analysts believe that the growth in many developing countries, particularly India and China, will continue to push prices up over the longer term. Many forecasters are in fact now revising up their long term outlook for commodities.

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In the past, many perceived agribusiness investment as simply investing in a timber plantation in order to reduce their tax liability. Agribusiness has come a long way however. Here we look at the current state of the agribusiness sector.

Agribusiness Managed Investment Schemes (MIS) are expected to attract record levels of investment over the next few years. And they have been recording solid growth over the past couple of years also. In 2005, agribusiness investment schemes attracted $1.1 billion, a whopping 300 per cent higher than for 2002.

This rise can partly be attributed to diversification within the agribusiness sector. Whereas several years ago, it seemed all agribusiness investment schemes involved plantation timber, it now includes everything from tropical fruit to farmed seafood. Another likely aspect has been the fervour with which the schemes have been marketing their investments. Now agribusiness schemes are investing in their marketing campaigns all year round where formally they would only market their products leading up to the end of the financial year.

There has also been a lot of consolidation within the industry. The major agribusiness players now include the likes of Timbercorp and Great Southern Plantations.

According to the Australian Agribusiness Group’s Agribusiness MIS Industry Report:

• There were 65 agribusiness investment offerings available in the 2004/2005 financial year.
• There were 56 retail offerings and 9 wholesale offerings.
• Timber products represented 38 per cent of the products on offer but represented 75 per cent of the money invested.
• The average investment per investor was $63,000, representing a substantial rise over the previous financial year’s average investment. Approximately 56 per cent of investors geared their investment.

The tax advantages of investing in agribusiness
One of the main benefits of agribusiness investment is the tax advantages available. This includes the large upfront tax concessions available which can really benefit those in higher tax brackets. In fact, in some cases, up to 100 per cent of the initial investment can be claimed.

What are the risks of investing in agribusiness investments?
The risk/return profile of most well managed agribusiness investments lies somewhere between Australian bonds and listed property trusts. The agribusiness must be sustainable, rather than simply being a convenient way to reduce tax. Some of the factors that can affect the profitability of an agribusiness investment include:

• the weather, drought, fire flooding etc
• the environmental lobby
• legislative changes
• ATO rulings, and
• disease outbreaks.

It is how well these risks are managed that could determine the profitability or otherwise of the agribusiness investment.

Should you recommend agribusiness schemes?
So, given that there are tax benefits to investing in the agribusiness sector, is it a sector you should consider recommending to your clients? While, agribusiness has had a poor reputation in the past, this is changing, especially as ATO product rulings become clearer in regards to the tax benefits available. Agribusiness investments should only be considered if the investment is viable and has the potential to provide a good return. Any tax advantages should only be a secondary consideration. Proper due diligence is required to ensure that the agribusiness has the appropriate product ruling from the ATO with regard to any tax breaks available.

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