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Is cross-ownership a competition problem in Australia?

March 17, 2017 - 01:33 -- Admin

Possibly.

First some context. I raised this issue a couple of years ago in a post here. It was motivated by new research in the US on the impact of cross-ownership by institutional investors on competition in US airlines.

So ask yourself: when those shareholders vote on the composition of boards or the management of the firm, or, importantly how the management of the firm is compensated, are they going to vote for managers who will care only about the profits of the firm they manage or about the profits more broadly? The answer is obvious: they will look to managers who manage in the interest of shareholders and so that means they care about all firm profits and not just the one of their own firm.

In a world where shareholders can get what they want, we won’t have competition in this outcome but, more likely, a collusive outcome. What is more, the firms won’t have to go to all the difficulty of violating antitrust laws to obtain this outcome, they will do it unilaterally. There are no laws against that.

That research was recently updated but has also been extended to banks and also executive compensation consistent with a competition-reducing effect (compensation is based on absolute rather than relative performance).

In an op ed, Shadow Assistant Treasurer and my long-standing co-author, Andrew Leigh, took the US approach and applied it to Australia. He looked at cross-ownership patterns but he made a mistake looking at custodial firms (who don’t have voting or influence rights) rather than the core institutional investors that are the core of the theory. Peter Martin pointed out the error. Who knew that determining ownership could be so complicated?

This of course highlights how difficult it is for politicians to research and make arguments. One little error and it is as if the whole hypothesis doesn’t exist any more. But we academics in the real world don’t operate that way. What I wondered was: do the patterns we see in the US match occur in Australia.

Fortunately, for me, I didn’t have to do much heavy lifting to find out. Here are some summary stats provided on Twitter by Martin Schmalz who is a key player in the US studies. First, let’s check out energy retailing:

martincschmalz_2017-Mar-16 3.jpg

The top three investors are the same across the two biggest competitors in Australia.

Let’s turn to grocery and other retailing:

martincschmalz_2017-Mar-16 2.jpg

Wesfarmers (who owns Coles) and Woolworths have some similarities there.

Or petrol:

martincschmalz_2017-Mar-16.jpg

Or investing itself:

martincschmalz_2017-Mar-16 1.jpg

For banking in general, I took a look and NAB’s top shareholders are (Vanguard 2.03% and BlackRock 1.43% and Capital Research and Management Company, 1.13%); Commonwealth Bank has (Vanguard 2.78%, BlackRock 1.46% and Govt Pension Fund of Norway, 0.88%), while Westpac appears to have little shareholder concentration.

Looking at telecommunications we have Telstra (Capital Research and Management Company, 1.13%; Vanguard 1.62%, BlackRock 0.63%) while Singtel is owned by the Singapore government.

This is, of course, far from a comprehensive concern but the pattern is interesting. The very funds — BlackRock and Vanguard — whose ownership changes were related to competition reductions in the US by research there have the same pattern of ‘diversified’ holdings in Australian oligopoly companies.

Now you might say that even so, the ownership of the largest shareholders is low. That is true. It is not like they themselves command a majority for voting purposes. However, as the largest shareholders they have power and their trading behaviour can impact on the returns of others. The very fact that we see cross-ownership patterns in Australia similar to the US where there are concerns that have been measured suggests that this is something we need to watch.