JOHN MENADUE. ‘Faster economic growth demands better chief executives’. (Repost from 27 September 2016)

Sep 1, 2017

In the AFR today (1/9/2017) under a headline ‘The big end of town has no-one but itself to blame’, Laura Tingle said “Big business preaching against the rising tide of government is undermined by its own failures”. This was theme that I wrote about in September last year on the failures of our chief executives.  This repost follows.  

There was a revealing heading in a recent article by Ross Gittins, the economics editor of the SMH, ‘Faster growth demands better chief executives’. He concluded his article by pointing to the need for business leadership to seize the economic opportunities .‘ Our overpaid and underperforming chief executive officers are getting (it) wrong’.

He says ‘Deloitte Access estimates that if the gap in management quality between Australia and the US were halved today, our productivity would rise to 80% of the US level, up from its present level of 77%. Achieving such an increase today would lead to a 5.3% increase in gross domestic product over its present level. This represents an increase in GDP of about $70 billion, equivalent to about $3,000 a person per year. … Deloitte Access concludes from other research that fast-growing businesses “take an attitude that success is in their hands and nobody else’s.” But so often our business sector keeps running to government for help . The rubric it invariably uses is ‘getting rid of regulation and red tape’.

In this blog I have often remarked that some business people and particularly the Business Council of Australia spend a great deal of time lobbying governments to advance their business interests rather than running their businesses, or ‘sticking to their knitting’.

Most recently the lobbying has been to secure company tax cuts and reduced weekend wage penalties. In each case, it pleaded to tilt the business system more in its favour . The BCA initially called for budget repair, but then that morphed into a call for a cut in company taxation. It has said very little about multi billion tax avoidance by many of its members.. It rails about excessive family welfare but very little about family trusts, or the multi billion annual fossil fuel subsidy to mining companies or the remarkable subsidy proposed for shipbuilding in SA that puts the automobile industry subsidy in the beginner class.

Business people often give lip service to our future in Asia and how we need to respond. But I have yet to meet or hear of a senior executive or board members of any of our ASX 200 companies who can fluently speak any of the languages of our region. Survey after survey reveals how inadequately Australian business is prepared to seize the business opportunities in our region.

9.6% of the Australian community is of Asian origin, yet only 1.9% of Australians of Asian origin are senior executives of our ASX 200 companies. Not surprisingly our business sector is often described as ‘pale, male and stale’. – See links to ‘John Menadue. Pale, male and stale.’ And ‘John Menadue. Bamboo ceiling and the old boys club’.

Asian students have dominated our school results for years, yet few of them make it to the top in our major companies. By paying high fees to private colleges, many parents secure privileged access for their children to business positions. They buy access to the exclusive ‘male, pale and stale’ club. And company executives with limiting social backgrounds and experience appoint people like themselves. These are the real closed shops.

We have seen spectacular capital write-offs in recent years amongst our mining companies, not primarily due to poor trading conditions and lower commodity prices, but to poor management. The write-offs have been on an epic scale. BHP has written off $200 billion in 5 years, a big chunk of it due to bad management in high risk purchases, such as in the US energy market.

2MG Asset Management estimated that ‘Up to the end of 2015, BHP, Rio Tinto and Fortescue had spent $US28 billion on CAPEX, but shredded $US19 billion in annual profits.’ They thought they were playing with monopoly money. Like Treasurer Peter Costello and State Premier Barnett they wasted the mining boom. We are now paying the price.

In June this year, PwC commented ‘While PwC weighted commodity price index declined 25% in year on year 2015,the combined market capitalisation of the top 40 miners plummeted by 37%.’

Woodside Petroleum’s chief executive, Peter Colman, in June this year told us that his industry was ‘out to lunch … taking years to build LNG projects that ran well over budget and only has itself to blame for failing to capture a bigger share of the fossil fuel market. … We didn’t deliver .. ‘

The big players of course in our non-resources sector are the banks and other financial institutions. Yet we know that year after year in the trillion dollar superannuation sector, that industry super funds have consistently and substantially outperformed retail funds which are mainly banking funds.

The new Reserve Bank chief, Philip Lowe has drawn attention to the culture of Australian banks that leads to under-performance. Speaking of the banks, he said only a week or so ago ‘There have been too many examples of poor outcomes, particularly in the wealth management and insurance industries. … I think it comes down to incentives within the organisations and … remunerative structure. And that’s a responsibility of management. … Banking has historically been a profession, a profession of stewardship, custodians, service. … It’s not a marketing or product distribution business..’

In the insurance field, Medicare has administrative costs that are one third of the cost of private health industry funds.

The big new honey pot of course that business and particularly construction companies and financiers want to access, is ‘infrastructure’. Unless we are very careful we will find that their lobbying , as in the past which has resulted in billions of dollars of wasteful road-spending .will continue.

It is surely time for the BCA and other business interests to lift their game and focus on running their businesses – and stop pleading to governments for help. They and the country would be better off if they ‘stuck to their knitting.’

We have a lot of overpaid and underperforming business CEOs that Ross Gittins speaks of.

Unfortunately many economists and business analysts are embedded in the corporate sector and reluctant to expose that under performance.

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