Andrew Leigh

DIAMONDS, DYNAMITE AND DISTRUST: HOW TRANSPARENCY CAN HELP REBUILD PUBLIC CONFIDENCE

KPMG, THE GROUP 100 & WOLTERS KLUWER CONFERENCE: ‘WITHOUT TRANSPARENCY, THERE IS NO TRUST’

MELBOURNE

TUESDAY, 16 APRIL 2019

I acknowledge the Wurundjeri people of the Kulin nation, on whose lands we gather today and pay my respect to their elders. Thanks to Andrew Porter and Stephen Woodhill for bringing together this conversation and to KPMG Chairman Alison Kitchen and the team at KPMG for their hospitality. It’s great to be in Melbourne. I started my day running around the Tan this morning, and at one point realised that there were four people around me, all clad head-to-toe in black. A very Melbourne moment.

You’ve asked me to speak today on trust and transparency, so my focus will be not only on the choice ahead for Australia on May 18, but also on the long-term challenge for business and government of boosting the strength of our civic society.

Capital is a familiar concept to economists: it’s an asset that produces a valuable return. A return to capital is why governments look to encourage physical capital investment, it’s why Labor is going into the election with an Australian Investment Guarantee and an ambitious infrastructure plan. Human capital is another kind of asset that produces a return. It's why Labor is advocating stronger investment in early childhood, in schools, in apprenticeships and in universities. 

A third kind capital is social capital. This is the notion that the ties that bind us together have an inherent value - that there is as a an economic return from those networks of trust and reciprocity. This is self-evidently true in our own lives. Each of us know that a life lived together is a better life. But it's also true in markets. One of my favourite examples is the diamond markets, which demonstrate the two polar extremes of trust.

Many of the world's diamonds are mined in South Africa, where most workers are not trusted by their employers. Workers have been known to secrete stones in their shoes, to swallow them, to tuck them into their socks. Aas a result their employers respond with a whole lot of low trust measures - the uniforms the diamond miners in South Africa wear have no cuffs and no pockets. Workers are subject to being x-ray scanned.

Then the diamond travels to New York. Half the diamonds in the world are processed by the New York Diamond Dealers Club on 47th Street in New York. The margins there are very low, somewhere in the order of 1 or 2 per cent, but the diamonds need to pass through many hands. So it's very easy to see how just one or two swindlers could swiftly wipe out all of the profit that's being made in 47th Street. So there is an extraordinarily high degree of trust among the New York Diamond Dealers Club. People 's word is taken as their bond and it is very difficult to become a member of the New York Diamond Dealers Club. Most of the members are from the Orthodox Jewish community and they engage with one another not just professionally but also socially. This stigma to ripping off your fellow diamond dealers isn't just that you lose your job - it's that you could lose your friends and your community. Social capital is extraordinarily low where the diamonds are being mined, but it's extraordinarily high where the diamonds are being valued and processed. 

That economic return to social capital is one that we see in well functioning economies. When social capital is strong, you don't need to write contracts that specify every little thing that can go wrong. You're more able to do business based on a smile and a handshake in a high trust economy than in a low trust economy. Social capital naturally matters for health. We know that the correlation between having more friends and being healthier is very strong. Indeed, one study suggests that having no friends is as bad for your health as smoking 15 cigarettes a day. 

Alas, we're seeing a real crisis in social capital. In 2010, I wrote Disconnected, an Australian version of Robert Putnam’s 2000 book, Bowling Alone. Putnam documented a decline in American civic community from the 1960s through to 2000. Sadly, when I looked at the Australian data I observed much the same. In the postwar period, we’ve seen the share of Australians who attend a religious service halve. Since the early 1980s we've seen the share of Australians who are members of a union halve. There has been collapse in the share of young people who are members of organisations like the Scouts or the Guides, a decline in business organisations such as Rotary and Lions. We've seen a fall in the share of Australians who are members of the RSL. 

Political parties haven't been immune from this trend. In the 1950s, each major political party could boast about 1 per cent of the adult population as their members. Now we're down to about a third of that. We know the rate of voter turnout since 1924, when we made compulsory voting compulsory in Australia, and the share of Australians turning out for elections was at an all time low in the last election, 2016. We have surveys which ask ‘do you believe most people in government can be trusted?’ According to the Australian Election Study in 1993, that figure was 34 per cent. In 2016, it was down to 26 per cent. Even two decades ago, most Australians didn’t trust people in government, but the problem has grown worse. Since 2008, the Australian National University has been tracking the share of people who believe that Australia is on the wrong track. That was just 1 in 5 when they started doing the surveys, but in 2017 it rose as high as one in two. More than half of the survey respondents in mid-2017 thought that Australia was on the wrong track. In their most recent survey, two-fifths of the nation think that we're on the wrong track.

I did a survey for Disconnected in which I went back and replicated a study that had been done in the mid 1980s, asking Australians how many friends they had -  specifically, ‘How many people around here are there who you could talk with frankly, without having to watch what you say?’. The survey had been fielded in the mid-1980s. We've got a survey company to do it again in the mid 2000s and then again just last year. In the mid-1980s, the typical Australian had nine close friends. By 2005 they had seven close friends. Last year they had five close friends. So the typical Australian has gone from having nine close friends to five close friends. We've shed almost half our friendships just over the course of a single generation.

In 2016 I was appointed by Bill Shorten as the Shadow Minister for Charities and Not-for-Profits, in addition to my current responsibilities for as Shadow Assistant Treasurer and Shadow Minister for Competition. It gave me an opportunity to delve into this issue of civic engagement. In this role, I didn't simply want to smooth the pillow on a patient whose social health was continuing to wane. I was interested in engaging with a range of organisations about how to rebuild trust, how to rebuild civic engagement. So we just designed what we called the Reconnected Project. Across Australia, we set about bringing together charity sector leaders, everywhere from Hobart to Darwin, Perth to Brisbane. We asked charity sector leaders to tell us what they were doing that they thought others could learn from, recognising that rebuilding social capital is all of our problem. 

The Reconnected Project unearthed a plethora of ideas. A group in Newcastle that puts together kayaking tours of their local waterways in which they clean up the waterways, so you can get fit and have an environmental benefit at the same time. An organisation called Kids in Philanthropy is trying to build a greater culture of giving among young generations. We engaged with Atlassian, who discovered that their workplace giving program had a very low sign up rate. So they took away choice from their employers - rather than say you can sign up to any charity you wanted, they said there was one workplace charity and you could sign up in seven seconds. Their workplace giving rate soared.

There’s a lot of organisations thinking too about their volunteering programmes, about how they can ensure that when they're giving employees a day a year to volunteer you're not taking a bunch of expert professionals and sending them off to paint fences while community organisations are crying out for the very skills that those bodies have. Far better to try and take your time, engage through some of their terrific online platforms and organisations like Volunteering Australia to ensure that an organisation that needs help with its books is able to get volunteer support from accountancy professionals. So better volunteer matching is I think very exciting exciting development. 

We've also been interested in looking at how to better manage technology so it enhances social capital rather than detracting from it. I've been informed by looking at how Silicon Valley professionals raise their own kids and worry about technology in their own lives. Wired founder Chris Anderson says if you think about smartphones as somewhere on a continuum between candy and crack cocaine, he'd put them more towards crack cocaine. A lot of Silicon Valley executives don't allow their kids to have devices at young ages. They're thinking about digital detox opportunities, Facebook holidays, ways of ensuring that employees aren't constantly deluged by email and that their employees don't describe their jobs to their friend as ‘I’m a professional email answerer’. The more we can do that, the better we're able to build a society where we engage with one another and where technology is an enabler rather than detractor from civic life. 

It’s also vital that we build trust in the corporate sector. In 2017, when she took over as KPMG’s national chairman, Alison Kitchen talked about the importance of building corporate trust. That's vital for large accounting firms, but it's also critical in an age in which the Hayne Royal Commission has eroded trust in the banking sector. It's vital at a time in which we're seeing Roy Morgan surveys of trust in professionals depicting a long term decline since the 1970s. Just as Australians are less likely to trust politicians and religious leaders, so too they're less likely to trust leaders of large corporates than beforehand. That's again a job for all of us.

Transparency plays an important role. I know that G100 has been thinking hard about how to ensure that transparency doesn't simply lead to ‘gotcha’ moments, but ensures that the public is more inclined to trust business The last Labor Government put improved tax transparency by mandating that the tax office reported total income, taxable income, and tax paid for large listed corporates with a turnover over $100 million. It was controversial at the time, but I don't think many people now would argue for winding it back. Indeed the debate we're having is whether the threshold for private firms should be changed so that it matches the threshold for public firms.

There's more of an appetite for reporting gender pay gaps and reporting pay gaps between the median employee and the best paid employee. We're taking policies on both of those areas to the next election because we do think it's appropriate to have greater public transparency around the firms that are performing best in improving gender equity in their workplaces.

We're committed to ensuring that Australians have better oversight of operations in tax havens. I think there's growing concern about the extent to which tax havens - which now account for two dollars in every five multinational profits - are eroding the capacity of developed and developing countries to pay for services. So we've said that if you've got operations in tax havens, that will need to be disclosed to the sharemarket as a material tax risk. At the same time we're keen to work with superannuation funds to develop guidelines for responsible tax haven investment. A Labor Government would ensure that firms tendering for large government contracts disclose their country of tax domicile. It goes back to that Louis Brandeis principle of sunlight as the best disinfectant. Transparency can lead to a race to the top rather than into a race to the bottom. 

To conclude. In 1888, the brother of Alfred Nobel - the inventor of dynamite - died unexpectedly. A newspaper got confused and prematurely published the obituary that they'd written for Alfred Nobel. The obituary said ‘the Merchant of Death is dead’. Nobel, then in the final decade of his life, he decided to do something significant. In 1895, he created the Nobel Prize. He died the following year. The obituaries did not describe him as a Merchant of Death. They described him as the creator of the Nobel Prize. 

As we think about the legacy that we leave, we need to recognise that that legacy isn't simply measured in dollars. It's measured in well-being, in trust, in the strength of the civic society and the community. Thanks very much to G100 for bringing together this important conversation. I look forward to your questions.

ENDS

Authorised by Noah Carroll ALP Canberra.