Sean Lloyd






International relations


Sep 2018 - May 2020

By Sean Lloyd

Marginal costs in minimal temperatures

We spent the last module learning about the interplay between business and government in India. This module, we returned to Oxford to underpin that with the fundamentals of economics – microeconomic theory. Fittingly for the subject known as “the dismal science”, Oxford was bitterly cold and grim!

Building on what we learnt in India, economic theory tells us that much of how business relates with government turns on the way a government impacts (or “distorts”) a business’s market. But there are signs that this relationship is changing globally, as businesses begin to respond to consumer sentiment around social licence: the idea that a firm has more responsibility to the society in which it operates than to simply deliver the best value to its shareholders. This concept has, predictably, generated heated debate.

Whatever position you take on that debate, it’s a truism that value can be created in many ways and the time horizon is important. Our week in Oxford was preceded by the news of the tragic collapse of a tailings dam in Brazil, from where a number of our cohort hails (although fortunately not personally impacted). Some years ago now, the collapse of a tailings dam at the Ok Tedi Mine in Papua New Guinea (where I’ve worked) resulted in riverine disposal of tailings and long-running environmental damage that still impacts Papua New Guinea today. The economic and social costs of this saga to the company and the community were enormous, and no doubt it will be similar in Brazil. Events such as these suggest the company may appear to create value in the short-run – building a poorer quality tailings dam to keep costs down – but the damage to value in the long-run can be immense when things go wrong. Similar mistakes of perspective in business decision-making happen on a smaller scale around the world on a daily basis.

Much of the work of government affairs teams in the private sector, and the lobbyist community, is focused on minimising the regulatory impost governments place on firms, to minimise costs and therefore protect shareholder value. Yet, minimal or no regulation is not necessarily the holy grail it seems for most businesses – the right amount of regulation creates a level playing field with the competition and can offer a “prevention better than the cure” approach to value protection. It’s difficult to argue that a slightly larger upfront investment in dam construction in Brazil or PNG wouldn’t have created better long-term economic value for the companies involved – and better value in every way for the residents of the devastated communities.

We live in an era where partisan conflict means taking the extreme opposing position to your competitor, who is often cast as the enemy. I can’t pretend to know how to solve this at a political level. But at the level of government and business interaction, taking a long-term view means taking a more cooperative approach to regulation – to recognising that some regulation is positive, and more effort invested in getting regulation right rather than getting regulation abolished, would protect value. If you ask the residents of Brazil, of Papua New Guinea, or of the Gulf of Mexico after Deepwater Horizon, they’d probably agree. And, arguably, it would protect both the shareholders and the society in which firms operate.

On that topic of value, as I finished writing this blog, Australia concluded a Royal Commission into the financial services sector. The investigation uncovered shocking range of misconduct across the sector, captured by one banking executive admitting they put “profits before people”. Strikingly, in his concluding report, the commissioner, Kenneth Hayne, rejected the premise that shareholder value was determined by overriding pursuit of profit. Indeed, he commented “The longer the period of reference, the more likely it is that the interests of shareholders, customers, employees and all associated with any corporation will be seen as converging on the corporation’s continued long term financial advantage…the best interests of a company cannot be reduced to a binary choice.” Perhaps a sentiment of which we can all take heed?

Author’s note: The views expressed in this blog are my own and not as a representative of the Australian Government.

Snow days at Saïd

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