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Sovereign risk and social responsibility

By Russell Schneider - posted Monday, 8 January 2018

Many years ago, when I headed the private health insurance lobby, two of my member funds discovered a “rip off” taking place in a Victorian bush nursing hospital. Like many country towns there were no aged care facilities in the district and so the hospital had taken on the task of providing a number of older men with lodging---and billing the Funds for the cost. This so enraged my two members that they decided to cease paying benefits on the grounds they were not receiving “professional attention” as required by the National Health Act.

Shortly after that decision they contacted me, having heard that the Minister had signed a regulation requiring all health insurers to pay benefits for every day a member occupied a hospital bed, regardless of whether a doctor was treating them or not. I should, they insisted, press the Opposition to disallow the regulation in the Senate.  Reluctantly I called one of my Senate Opposition contacts and passed on their request. “If you think I’m going to suggest we vote to allow a health fund to kick old men out of hospital you’ve got another think coming,” he replied. I passed this back to both Fund managers, each of whom responded “but the Government can’t change the rules like that.”

Yes, it can.  Sovereign risk is a major problem for the health insurance industry, perhaps because Governments continually change the rules of the game which makes long term planning difficult if not impossible. As a result most health Fund managers have become experts at change management. But when one analyses the changes that have been made over the last 30 years most have been a government reaction to the actions, or inactions, of insurers. From time to time I flirt with creating an annotated health insurance Act noting the names of which insurer was responsible for each irksome regulation.


One of the reasons sovereign risk mitigates against long term planning in health financing is that health is regarded by all sides of politics as a basic human right, and as health funds play a significant part in paying for health care it is in the interests of politicians to create rules that minimise public unrest, even if that means, as happened with Medicare, nationalising much of the business.  Most other industries consider themselves less exposed, working on the basis that Governments are aware of the dangers to investment if they make capricious decisions which change the rules of the game.

But that is changing.  Banks, superannuation funds, and energy companies are now beginning to experience the same uncertainty that for decades has pervaded health funding. And, like too many of my former constituents, don’t realise that much of their problems are self-induced. Sovereign risk, once thought to be a problem confined to banana republics, is, or should be, increasingly becoming a board room concern.

Most boards, CEOs and senior management have grown up in an  environment of “triple bottom line” where “social responsibility” is regarded as an important part of their operations: not as important as shareholder profits, of course, but important nevertheless.

Some of this comes from their marketing departments, some from the social conscience of directors, some from a genuine belief that corporations have as much of a responsibility for creating a better world as governments or (not so much these days) churches. But all too often there is a confusion between social responsibility and responding to, or being involved in, social issues. The two aren’t the same.

This is compounded by social media, where “activists” can create the impression of wide spread community concern about an issue and threaten the corporation with loss of reputation, and therefore customers, if it doesn’t bow to their demands.

As a result Boards often seem to believe their social responsibility means making statements on social questions, whether it be saving the planet by eschewing investments in fossil fuels or committing to the latest social media fad. It’s what Paul Keating once described to me as the “warm inner glow of the ignorant or impotent.”  And while these very same directors would never consider making public statements at election time in favour of one side of politics or the other (on the grounds their customers are likely to be split between both sides and therefore support for one will alienate the other) quite happily embark on commitments on issues where their consumers are far from unanimous in their beliefs.


Of course, their marketing departments help. Determined to align their brand with the noisiest users of Facebook or Twitter (even though in many cases and on many issues those same users are too young to buy their product, or wouldn’t want to) they warn that unless the organisation is seen to be taking a stand it will go broke. Organisations which would not tolerate bullying within their workplace allow themselves and their senior managers to be electronically bullied into taking sides on issues which have nothing to do with the company or its stakeholders, and which, on occasions, can actually be contrary to their interests.

Now certainly boards do have responsibilities to avoid discrimination and ensure safety in the workplace and apply themselves to many other similar issues, most of which, in any event, involve compliance with the law, not to mention ensuring their company remains solvent. But pursuing “social responsibility” does not mean responding to the latest Tweet or Facebook “likes”, most of which are fleeting and superficial. It means understanding and, when appropriate responding, to the genuine needs and concerns of their stakeholders, particularly their customers. And when the company is in a near monopoly or oligopolistic industry that responsibility is even more vital, unless, of course, the company wishes to expose itself to very real sovereign risk.

The banks should by now have discovered this, to their anguish and pain, in recent years as what appeared to customers to be a culture of the pursuit of profit regardless took over. An emphasis on sales rather than service, a culture which focussed on publicly promoting profits rather than products, has led to the slow burn which allows Governments to impose taxes (on shareholders and depositors) with very little objection from the bulk of consumers  and, more importantly, very little adverse reaction in the electorate. Bank bashing became a populist sport….but many would say the banks asked or it. Shareholders can only be looked after if customers are satisfied.

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About the Author

Russell Schneider GAICD was CEO of the Australian Health Insurance Association from 1983 to 2006. Before that he was Canberra Bureau Chief and Political Correspondent for The Australian. He was a director of a major health insurer from 2006 until 2017.

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