Wearing just Y-fronts, socks and pink dress shirt, and with Bob Seger’s “Old Time Rock and Roll” blaring, Tom Cruise slides and grooves to fame in the 1983 teen-com-drama Risky Business.
Problems begin for high-school senior Joel Goodson (Cruise) when his wealthy parents leave Chicago for the weekend and trust their son with the mansion, his mother’s rare Orrefors crystal egg, his father’s irreplaceable Porsche 928, and money. It’s risky business, with Joel’s school friend, Miles (Curtis Armstrong), urging him to break out: “Opportunity makes your future, Joel.” He hits the Chivas Regal, the stereo, and slides into a dance routine that rivals Michael Jackson at his best.
Daring more, Joel phones a call girl. It’s all downhill from there, with Joel risking all to cover his disasters, making vast profits, before losing it all in restoring his parents’ house to order two minutes before they stumble in the front door.
Everything in the script conspires to reward short-term risk and discourage long-term prudent behaviour. The trust that Joel’s parents have shown is betrayed repeatedly, but in true Hollywood style the damage is repaired and papered over, with no apparent long-term consequences.
Segué to last week as I was re-watching Cruise tearing it up on screen and reading Australian Prudential Regulation Authority (APRA) general manager David Lewis’s musings on the size of executive remuneration. “Despite all the public angst about the size of bank executive pay packets,” he told a KPMG forum early this month, “we’re ambivalent about that.”
APRA is looking not at the ‘how much’ of bank executive pay packets, but the ‘why’, Lewis said. And, by extension, this is a veiled comment on any suits and suit-ettes entrusted with money from the public or shareholders or super fund members.
The prudential regulator is – quite rightly – concerned to ensure that remuneration practices “adopted by regulated financial institutions . do not imbed ‘risk time bombs’ . which could undermine future viability”, Lewis added.
“Do the performance indicators used to reward executives promote short-term profits at the expense of the firm’s long-term sustainability? Is too much emphasis being placed on revenue growth today and insufficient regard being paid to the quality of assets being brought onto the firm’s balance sheet?”
APRA is turning its gaze to risky business that may beggar investors: to short-term incentives and dividends; to opaque platforms; to complex hedge funds.
Fund managers’ remuneration details are more closely guarded than the Crown Jewels, but there’s now a groundswell growing for these salaries and perks to be revealed. As well, super funds’ trustee boards are now on notice for disclosure on board members’ remuneration.
Australians have been compelled to contribute to super, and many had global financial crisis (GFC)-induced losses foisted on them by the very experts who assured the ordinary punters that they (the experts) knew what they were doing. Alas, the GFC showed the flaws in these assurances and Australians are now – quite rightly – demanding disclosure of the rewards for short-term risk that sent so many Aussies’ super into the red, and the Aussies themselves back to packing shelves at Woolies. APRA would have given Joel way more than a verbal reprimand if he’d submitted his business to the regulatory boffins – and rightly so. He did everything APRA is sounding alarm bells on: he bet everything on a major illiquid asset (his father’s Porsche); he gambled the funds of his investors (his parents) on the overnight money market; and he incentivised his subordinates to Ponzi-in more investors.
Joel stumbled into a lot of risky business that fluked a return on his investment, with the worst outcome being a verbal slap on the wrist because his mother’s Orrefors egg was cracked. It happens like that in Hollywood’s reel life precisely because it does not happen that way in real life.
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Please email the editor, Philippa Yelland, at philippa.yelland@morningstar.com.
