While Grant Robertson has no financial or economic background, I thought he was doing a reasonable job as minister of finance. There may, however, be an element of comparison with some of the true dullards in the current cabinet that helped forge that opinion. He is certainly no Bill English, or Steven Joyce, but then again, he is not a disaster either. He may have had no economic knowledge before taking on the finance role, but it seemed to me that he had worked hard to get on top of his portfolio and deserved credit for the effort that he had put into it.
Well, maybe not.
Finance Minister Grant Robertson is urging big businesses to “rethink” layoffs and consider what small businesses are doing, as COVID-19 weighs heavily on the economy.
“We’re seeing particularly from small businesses the owners of them dipping into their own pockets, their own private savings, to keep their staff on board,” Robertson told Newshub.
“I think a lot of New Zealanders will look at some of the bigger parties who aren’t doing that and say, ‘Well, hang on, we are all in this together, could you rethink those plans?'”
So our Minister of Finance does not understand the difference between small private companies and publicly listed companies. Read on, Grant, and let me explain it to you.
Most private companies are operated by a small number of people (often family members) who are both the owners and managers of the business. In fact, there may be only one business owner. They own the business outright and make all the decisions. They may employ people to take on various roles within the company, but the employees generally have no influence over important decisions for the business.
When a small business owner ‘dips into his own pocket’ to support the business, the family home is often on the line. Banks do not generally give small business anything like the facilities that are granted to large businesses, as small businesses are viewed as a higher risk. Thus, the banks will often require a security over the shareholder’s own home to grant any facilities. If a small business fails, the shareholders may well lose the family home as well.
Publicly listed companies are completely different. They have a board of directors and a large number of shareholders, who have invested in the company for its good performance and good returns. These parties are mostly unrelated. If the company performs badly, the share price will fall, making the company less attractive to investors. The shareholders are the owners of the business, and the directors may not actually own any company shares. Directors can be external directors who do not work in the business itself, or they may work in the business on a full-time basis. Most publicly listed companies have a mixture of both on the board.
The board of directors makes all the business decisions, and the board is responsible to shareholders. The shareholders can force the resignation of directors that do not perform. They can also veto decisions made by the board. The shareholders have the ultimate power, but only if they can get a majority to force a decision.
The only way a large company can ‘dip into its own pocket’ is by raising capital. The process here is asking existing and potential shareholders to buy more shares. Usually, this is done when a company wishes to fund a new venture. The listed company Augusta Property Ltd did this in May this year, saying it wanted to pay down debt, which sent a shiver around the markets, which assumed that the company had fallen outside its banking covenants. The share price tumbled and has remained low. Infratil has just done a similar thing. Its share price fell from $5.25 to $4.97. Neither move has done anything to improve market confidence in either company. The idea of raising capital just to keep on excess employees in an economic downturn is unheard of, mainly because it would equate to fiscal suicide for the company involved.
The right thing for a business to do in hard economic times is to make the cuts necessary for it to survive. Yes, this may mean staff have to be laid off, or that stores have to close, but the company must do everything it can to weather the storm. Since writing yesterday’s article, I have heard of two Michael Hill stores closing in the Wellington region and layoffs at the Todd Corporation and Placemakers. Raising capital to pay for workers who have nothing to do was not an option in these cases, in spite of the devastation to the lives of their employees. Carrying on with unsustainable levels of cost may have resulted in the eventual demise of the entire company in each case. I am struggling to see how that could possibly be a good outcome for anyone.
Both Jacinda and now Grant Robertson are acting as if they have done enough to save the economy from serious damage, but clearly they really do not understand these issues. We now have deficits in the region of $13 billion, but this is still only the start. The economic carnage is only just getting going. A bit of wage subsidy here, a few extra DoC workers there and they think they are economic wizards. Robertson himself admitted at the outset that the government could not save every job. Now, it seems, he is beginning to understand what ‘not saving every job’ will look like. I heard a prediction today that 25% of NZ workers will lose their jobs. Robertson said he would never accept that, but he may not have a choice. This is what happens when you lock down your economy almost completely for the best part of 3 months. Clearly neither of them had a clue as to the consequences of their actions, but maybe they do now. One thing is for sure. Things are not going to get better anytime soon. They can be as angry as they like, but there it is.
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