May 9, 2022 | Governance, rant
Following is the full version of the edited remarks published in Australian Manufacturing on April 29. I did the editing, as the following was way too long for the publication.
What is blindingly absent from this election campaign, and politics in this country is any recognition that an economy is a system. No part of the economy acts alone, each part depends in some way on every other part. They are interdependent. The entire system is the sum of the interdependent parts and depends on all the parts playing their individual role.
An economy is like a car, which we sadly no longer produce in this country. No part of a car can move you from point A to point B. It is only when all the parts are fitted together, acting in concert, that it has the ability to move. One part fails, and the rest underperforms at best, fails completely at worst.
We seem to think that we can add a dash of pork here, and a bit of pepper over there in an effort to buy votes, and bingo, all will be well. Utter nonsense.
What we are seeing currently is a confected tactical battle of hollow words backed by the opportunity to spend public money chasing the largess of incumbent government. What we need is a strategic conversation, where a wide range of very tough questions are asked, followed by even tougher choices. We need to have an informed and rational national conversation about those questions, and the resulting choices that must be made.
Nobel winner Daniel Kahneman coined the term ‘prospect theory’ which describes the way people value the prospect of gains and losses very differently. The pain felt by an immediate loss compared to the benefits that come from a long-term gain is multiplied many times. The reverse side of the coin is loss aversion, a remarkably powerful psychological impulse. We value the loss of something we already have far more highly than the value of something we may have in the future.
Both political sides use these twin drivers ruthlessly in an attempt to shape behaviour at the ballot box. It is a reasonable thing to do, when coupled with integrity and transparency, both notable only by their omission.
What we are seeing is the expenditure of the financial and intellectual capital of the nation, investment decisions left in the hands of institutions that we no longer trust based on the behaviour over the last 30 years.
What we need is for our leaders to build the political capital to be able to make bold decisions that change the economic and social landscape of the country.
The last time there was a genuine investment of political capital that could later be recovered, was when Howard risked his position when went to the 1998 election with the GST as part of his program.
Following are a few of what I believe to be the key factors which face the nation, but about which we will hear little, or nothing during this pork led competition for our votes.
Income Vs Expenditure. Our expenditure exceeds our income. This is not a blip in the graph, it is a long-term structural weakness. If Australia was a business, it would be broke. The analogy to the household budget is not an accurate one as the government has control of the money supply, but nevertheless, the piper must be paid. There is no sign of any acknowledgement of the debt, despite the current government using deficits as a stick to beat the labour party for as long as I can remember. In addition, there are none of the preparations necessary to build the productive capacity of the economy to repay this debt, beyond wishful thinking and modelling that uses questionable assumptions.
Education. We need to consider education in the broadest terms, not just the stuff you need to know to pass an exam, but the understanding to break a situation down into is component parts. First principals if you like, define, and understand the problem, generate possible solutions, test and learn, then implement and review continuously. Education is a multigenerational undertaking, not just something you throw money at and hope.
You do not need a degree to be smart. Some of the smartest people I know do not have degrees, and several others with multiple degrees are failing as baristas.
Our system has been bastardised over the years to accommodate fiscal and ideological demands. The result is a distortion in the allocation of resources and the increasing polarisation of opportunity for Australian kids. This is in addition to the conversion of education into a privatised profit centre. Now we have qualifications for sale, and an education system dependent on those sales for survival.
If we are to genuinely address the opportunities of the future, the State/Federal squabbles have to be sorted, and resources allocated to deliver that equality of opportunity.
The largely discarded for political reasons Gonski report, now 11 years old, provided a least a starting point for the school system. A similar exercise needs to be done for the tertiary sector, recognising that technical and academic education combined will deliver the manufacturing and operational skills needed for future productivity improvement throughout the economy.
There also has to be the political will to implement, without which, we will continue to stagnate.
Climate change. The science has been in for 30 years, it is a generational challenge, and should not be a political football tied to short term politics in a few seats. Despite the scathing third report by the IPCC (International Panel on Climate Change) released the week prior to the election being called, the silence has been deafening. This is despite increased recognition of the impact of Climate change by the voters. Meanwhile, there are a cohort of independents threatening mainly formerly safe Liberal seats whose priority is climate change, along with integrity in public life.
We need to be thinking differently about the term ‘climate change’. It is too narrow a term, implying we just need to be concerned about the impact of CO2 on weather, and the human and capital impacts of those changes. Instead, we need to be thinking about the challenge more holistically. We humans are just a small part of the ecosystem of the planet. For millennia we had no appreciable impact in the balance between what we took out, and what nature was able to put back. Suddenly, that changed, and we now take out of the planets ecosystem far more than the capacity of the system to replace it.
There is nothing we do that does not come from nature. The oxygen we breathe the water we drink, the food we eat, the materials we use, all come from nature. We are part of the planets ecosystem, whether we like it or not, and we are consuming the resources of the ecosystem at an unsustainable rate. Think of it as you would a balance sheet. On one side you have assets, on the other liabilities and equity. When your assets grow faster than your liabilities, you add to the store of equity. When it is the reverse, you deplete equity. The tipping point is when your equity is gone, and you can no longer sustain the difference between the rate in increase of liabilities over the production of assets. At that point you are bankrupt. We humans have been depleting the assets of the planet unsustainably since the beginning of the industrial revolution, and the rate at which the depletion is happening is increasing. At some point in time, the music will stop, and subsequent generations will inherit an unwinnable challenge.
Apolitical Policy advice. The politicisation of the public service is a problem. The government does not get frank and detailed policy advice anymore. Instead, they are paying consultants, who are in effect paid to tell the government what it wants to hear in relation to policy, while the public service has been relegated to the role of implementers.
Expenditure Productivity. Fiscal debate, such as it is, has been reduced to how much has been spent, with no reference to the return for that spending. We need to increase productivity of public revenues radically or the reduced number of taxpayers in future will be unable to shoulder the burden of an ageing population. The increased demands for the government to look after people down to the minor details which should list as ‘personal responsibility’ will become overwhelming. Promising no more taxes is not sustainable unless coupled with explanations of how the productivity of the current expenditure will be radically increased.
Governance. The parties cannot rule themselves, how on earth can we, the electors believe that they can deliver for the country. Besides, to use Paul Keatings immortal phrase, they are ‘unrepresentative swill’. Both major parties have about 60k members. Such small and skewed numbers are hardly a representative sample from which the political leadership of the place should be drawn. Instead of having people in parliament who genuinely wish to contribute, who have proven themselves worthy elsewhere in the economy, we now have politics as a career. Smart youngsters with degrees, mostly law, getting jobs as political staffers of various types, and progressing by proving only that they are effective political mechanics to the point where they are endorsed as candidates, and they keep trying until they land a spot. Alternatively, they can be shovelled into a range of highly paid roles that are appointed by political fiat. No experience beyond politics required.
As a director of companies, I am subject to the Corporations Act 2001. The act amongst other things, outlines the obligations of directors to exercise their duties in good faith, and in the best interests of the shareholders. In other words, do not tell lies, deliberately mislead, or act in a way that is not in the shareholders best interests. Both sides of the house fail on all counts. If they were also subject to the provisions of the Corporations act, half of them would be holidaying at Long Bay.
A further pressure on the governance performance of current institutions that has long term impacts on the economy is in the management of R&D expenditure. Our federated and short-term driven system works against the focus necessary to deliver strategic outcomes. Billions of dollars are thrown at the wall of grant programs, most of which do not deliver outcomes that add to any sort of ‘vision’ for the Australia we would like to hand to our grandchildren.
CSIRO used to be a relatively apolitical and deep reservoir of scientific capability that was able to collaborate and co-ordinate across sectors and around the nation. That was before it was progressively gutted and politicised over the last 30 years.
The Labour party has just announced as part of their election platform a new defence research agency similar to the successful American DARPA model. It would make more sense to re-fund and expand the remit of CSIRO, rather than starting again and risking duplication and turf wars.
Institutional integrity. We should not need an integrity commission, but sadly we do, desperately. It would appear to the casual observer that the adage that power corrupts, and absolute power corrupts absolutely is at work. It needs to stop, so the public can have some level of confidence that the taxes they pay are not being wasted, and worse, diverted.
Democracies only work when there is trust in the institutions that run them, and by inference, the people in those institutions are trustworthy. The fact that trust is so low is an alarming indicator, something the government should be addressing, both by its own behaviour, and by increasing the level of transparency and accountability. Unfortunately, the perception of the behaviour of governments is very low, and the refusal of the government to sensibly address the question of an integrity commission with teeth makes us assume the worst. Remember the 26 times the current government voted against a royal commission into the banking industry? When dragged kicking and screaming to hold it, the depth of the avaricious and morally bankrupt behaviour revealed was breathtaking.
The end of cheap money. The inflation figures released on April 27th put the annualised inflation rate at 5.1%, up from 3.5% at the end of the December quarter last year. While it may bounce around given the volatility of fuel and food prices, the trend is very clear, and the current election driven lucky dip of spending promises will not help.
No matter the rhetoric, and short-term giveaways that come with an election campaign, Australia is in for a rocky ride, and it will not matter who wins on May 21, the impact will be felt in every corner of the economy, and by every Australian. Most currently in parliament, and those who realistically aspire to be there after May 21 have not been in a management role in an inflationary surge. That is a very dangerous situation, it is easy to make the wrong call through inexperience.
Inflation led cost cutting
When you are in the red, as we are, the temptation is always to cut the discretionary spending. In a corporation that leads to reduced advertising, not replacing employees who leave, sell and lease back assets, in other words, cashing in on the things that will generate the cash in the future. Governments struggle with this as so much of their spending is baked in, and subject to the swings of the economic cycle. Nevertheless, we should be increasing what we spend on education, R&D, and those future cash generators, and aggressively look to reduce institutionalised waste to fund the increases. Unfortunately, this leads to the difficult choice of accepting short term pain in the expectation of long-term gain, not usually a politically palatable choice.
Cyclic mismatch. Election cycles do not match with those that run the rest of our lives. Generations come and go, scientific discovery to product commercialisation usually takes 20 years or more, the constitution has had only 8 amendments since federation in 1901, the last successful one in 1977 relating to the relatively benign question of the retirement age of judges. The world has changed a bit since 1977, and our strategic framework is almost unchanged after 121 years. We must wonder if the constitution is still fit for purpose. There is not much any government can do about this beyond acknowledging the reality and being prepared to invest in the long-term health of the economy by building intellectual, social, and educational resilience. However, we should be able to have an informed debate about the nature and limitations of our ‘institutional guardrail” the constitution, and be prepared to make changes as necessary to meet the challenges of the 21st century
Header cartoon credit: gapingvoid.com
May 8, 2022 | Governance, Personal Rant
Last Tuesday’s prime rate increase has been positioned as a disaster level cyclone by the opposition, and an inevitable but minor storm in a well-managed teacup by the Government.
Which is it?
Anyone who has been using their brain over the last months recognised there would be a rate rise, soon.
House prices have surged, supply chains are broken, energy and telco prices are ramping up, there is a not so little war going on in Europe. China is locking down millions in response to Covid outbreaks, and we, along with the rest of the developed world have been printing money like Darcy Duggan on day leave.
If ever there was a recipe for an inflationary breakout, this is it.
Unfortunately, or fortunately, depending on your point of view, we are in an election campaign characterised by ever more expansive promises to spend more in pursuit of a few votes.
Who now cares about the rhetoric that previously dominated the political agenda: Debt and deficit? Seemingly the current government has had some sort of shape-changing conversion on the road to Kooyong that makes all that former fiscal rectitude irrelevant.
Meanwhile, the opposition, while squarely blaming the government for the inflation rate is determined not to be outspent in the vote buying contest.
All this is happening while teachers in NSW strike for better pay for the vital job they are doing, Nursing home staff are as rare as non-drinkers on Anzac Day, and hospital staff are exhausted after two years of intense pressure on them while listening to politicians tell everyone not to worry, everything was under control.
There has been a wholesale replacement of fact by opinion and belief.
A fact is repeatable, its veracity can be tested, and the impact of changing input variables measured. A belief by contrast cannot be put to the test, but for some it becomes an absolute truth that is beyond dispute, and any disagreement is treated as some form of advanced blasphemy.
At some point, the piper will have to be paid, and ignoring that simple fact only makes the day of reckoning more painful.
Whichever party wins on May 21, they will inherit a generational mess of its own making. Trouble is, we, the voters, will be paying for it while politicians and by then former politicians will be running for the publicly funded sinecures provided
Header cartoon credit: the great Leunig
May 6, 2022 | Customers, Governance
The Financial service industry is the last bastion of the defence of the 20th century business model where the seller had control over the vital product information.
In those old days, you went to your bank branch where the manager knew you, your kids, your financial position, and was someone to be trusted.
When did that change?
Now you cannot get to see anyone in a bank who either knows your situation, cares, or can make any sort of decision.
This personal relationship has proven time and again to be one of the most important in the lives of most people.
After the Royal Commission into ‘Misconduct in the banking, Superannuation and Financial Services Industry’ which reported in February 2019, most thought that the shenanigans of banks would be cleaned up.
Not as such, as Monty Python would say.
Banks are not required by regulation to take steps that are in the best interests of their clients.
This means that they can, and do, sell you products when they know absolutely that there is a better deal, or one that better fits your circumstances readily available elsewhere.
By contrast, when you deal with a broker, they have a legally enforceable fiduciary duty to ensure they are always acting in their clients best interests. This means they are prohibited by law from behaving the way banks routinely behave.
If there was ever a good reason to go to a broker to find finance rather than directly to a bank, this is it!
You know that a good broker has found the best deal possible, having scoured the landscape for the best deals, because they will be prosecuted when it is found they have not.
Pity the banks cannot follow the same rules, although if they did, and they still had their clients best interests at heart, there would be no need for a broker.
The information, or at least the understanding of the information is skewed away from the consumer of financial services.
Finance is one of the last markets where it is difficult for the average consumer to do a realistic assessment of their best option. In every market I can think of, except financial services, the net has democratised information. No longer do the sellers of a product have all the information needed to make informed decisions, and dole it out as it suits them, to best serve their own ends. The web changed all that, forever.
The regulations applying to financial services have become so complex, the options so wide, and the nuances of options so difficult to understand, that most still need a specialist to navigate the potholes.
Many of the broker groups are owned or at least controlled by banks. Where is the responsibility for doing the best deal possible for the client lie in that situation?
Not with the bank controlled ‘pretendy’ brokers.
No, the best deal is to find an independent broker you trust, one who takes the time to understand your situation, then allocates the time and resources to scour the landscape for the best deal possible for you.
Not the best deal easily available, but the best possible.
It seems the obvious scepticism of Royal Commissioner Hayne, obvious to all when refusing to shake the Treasurers hand when formally handing the Commission report to the government in February 2019 has been confirmed.
Apr 20, 2022 | Governance, Leadership
People want to do what they are good at, and it makes sense to let them do that. However, doing well on an individual basis is not enough to succeed. You need to do well at the micro, as well as ensuring that your bit is making a positive contribution to the macro, the efforts of others.
Alignment in the jargon, but it is more than that.
Success in business requires that everyone understands the impact on the business of the decisions they take every day, like taking a ‘sickie. Taking a ‘sickie’ impacts on those around who are relying on the output you would normally deliver. To cover the shortfall entails the added cost of standby capacity, or ‘shorting’ a customer. Therefore, the more everyone understands about the numbers that reflect the performance of the business, the better.
This is not to make everyone accountants, which is the conclusion many jump to, it is just about understanding.
We often use sporting analogies in business, they are easy to see.
This is because business shares four common characteristics with sport.
- There is a goal, in its simplest terms, to win.
- There are rules.
- There is a scoreboard, which in business is normally kept hidden, sometimes deliberately, but most often by default,
- There are rewards for winning.
In our sporting team, every member of the team ‘owns’ part of the result. If we extend the analogy, for a business to be successful, we need the stakeholders to think and act like owners, they have a stake in the overall success of the business.
This goes way past picking up the pay check on a Friday. The things an employee typically wants from an employer, in addition to the pay check to keep the kids fed and housed, are job security, time off, promotion prospects, the opportunity to learn, to be appreciated, and to be able to see the job as way more than a daily grind. They worry about these things.
By contrast, owners and senior management while having all those same worries, are also concerned with all the things that deliver to all stakeholders: satisfied customers, revenue growth, cash, cost control, growth, ROI, which are all necessary if the employees are to be rewarded.
Their goals are the same, it is the language and context that are different.
However, we do have a common language, easy to learn to a sufficient level of understanding to be useful.
That language is the income statement, balance sheet and cash flow statement.
I hear groans: understandable.
Accountants have made these three simple ideas incomprehensible to most people. In unwitting collaboration with the regulators, they have complicated the simple ideas to suit their own purposes.
Broken down to the simplest form, these three reports provide the rules of the game, and the critical numbers that enable everyone to understand the score, while they provide the means to ensure everyone in the game understands their role and stake in the outcome.
To answer the question in the header: to build a successful culture you need to ensure everyone in the game understands the rules, and the way they apply in a volatile environment.
Header cartoon: Courtesy Hugh MacLeod at Gapingvoid.com
Apr 18, 2022 | Governance, Leadership
Words are important, crucial to the effective communication and intent of an idea being articulated. Without the right words, well delivered, the idea will not have any oxygen, so be still-born.
This notion is applicable to every type of situation, from the casual conversation at a social gathering, to the articulation of major strategic choices.
There is a sequence that seems to be successful when making everything from a cold call to a full-blown strategic proposal. I have observed this sequence being successful over many years in many situations.
- Identify the big change that creates the opportunity you are intending to address.
- Demonstrate how the change will create winners and losers. Nobody wants to be on the losing side
- Envision the promised outcome post the project implementation
- Introduce the positive features of the idea as the catalyst to overcome the obstacles and deliver on the promise
- Present the hypothesis/evidence that delivery on the promise will follow naturally from effective implementation.
In addition, there are two ‘secrets’ to the delivery that while obvious, most seem to miss.
The first is in the manner of the delivery.
A flat, wooden delivery and the words will carry limited weight, will not elicit any emotion in the listener. By contrast, words delivered with passion, and obvious commitment to the outcome will be met with a more emotional response, which will either engage or turn off the listener.
The second is in the choice of words.
There are always many ways to articulate a message. Therefore, choosing the right words, the ones that build the attention and emotional response in the audience is fundamental.
Read the words of the great speeches, without conjuring up the mental image of the original speaker, and some of the power is lost. Churchill’s ‘we will never surrender’ speech, Martin Luther kings ‘I have a dream’ speech are great examples. Now read them again with the image in your mind, and the power returns.
One further thing that can make magic, is the power of the moment.
Churchill, newly installed as Britain’s PM as France surrendered, facing a catastrophic defeat, and King in front of 250,000 people on the steps of the Lincoln memorial in 1963. In the moment, King changed the text he had written adding the immortal words: “I have a dream’ to the list of changes he wished to see for his fellow Americans. Both used the moment to conjure emotional magic from the ether with words and passion.
Compare those to Albo’s 5-point plans, and Scomo’s blizzard of pithy sound bites, and know why we are so desperate for some genuine leadership.
Header credit: Courtesy ‘First dog on the moon’ cartoon frame.
Apr 11, 2022 | Governance, Personal Rant, rant
On Sunday as the 2022 election was being called, I was sitting in a café in one of those affluent strips observing life, and gathering my thoughts.
It occurred to me that the blather we are all now about to face will avoid any reference to the key question that should be addressed: the growing distance between the ‘haves’ and ‘have-nots’, and how to redress the balance.
This is not about the cost of living, price of petrol, or availability of some subsidised form of income. It is about the national income, and the way governments of both persuasions over the last 50 years have let the money required for schools, hospitals, aged care facilities and all the rest slip through their fingers, while ensuring some sticks to selected fingers on the way through.
A brief economic history lesson, recognising I am neither an economist nor historian.
Towards the end of WW11, recognising the coming challenges of post war reconstruction, the allies set about removing the danger of the wild ride that had been the relative value of currencies up to that time. The result was an agreement amongst the allies in the little New Hampshire town of Bretton Woods. That agreement laid out the mechanism by which post war currencies would be tied to the price of gold, pegged at $US35 an ounce. The US dollar became the ‘reserve currency’, a guarantee to exchange an ounce of gold for $US35. At the time, the US was about the only solvent nation, and held most the world’s gold in Fort Knox (Remember ‘Goldfinger’). The International Monetary Fund was created as a part of the agreement as a release valve to address short term fluctuations.
The laws of supply and demand being what they are, the value of gold outside the official control of central governments soared, leading to an active unofficial gold market where it was traded for multiples of $35. Trouble is, you had to move the stuff, and it is heavy. (Goldfinger again)
Over time the core problem of a fixed currency regime became obvious. Money is international, it can be moved and exchanged globally, while the regulatory control of any one country ends at their borders. The obvious example of this disconnect is the so called ‘pirate’ radio stations positioned in the North Sea just outside the international boundary of the UK. These popped up because the BBC which controlled all the UK radio stations refused to play the emerging ‘Pop’ music of the 60’s and early 70’s. Being outside the border, the BBC could not close them down, but those who wanted the music could listen as easily as they could to any other radio station, just move the dial a bit.
Analogous to the pirate radio stations, the gnomes in Switzerland who were sitting on huge and very private sums of hidden wealth that could not be easily used by the owners created their own pirate system: bearer bonds. These enabled those hidden fortunes to be put to work, not only earning interest on the loans, but increasing the capital value of the investments, previously impossible.
By the late 1960’s the Bretton Woods system was clearly broken, and the US terminated the convertibility of US dollars to gold at the fixed $35 in 1971, followed closely by the pound sterling, and other major currencies. In effect we then had floating exchange rates, in an environment where countries still had regulations that stop at their borders, while money is globally mobile. It did not take long for countries to recognise the value of attracting this previously inaccessible capital by a range of means around low tax rates, banking secrecy, and personal anonymity. The lawyers and accountants since then have made this disjoint between the mobility of money and the static nature of sovereign borders a financial bonanza for those individuals and organisations with the money and will to hide their assets and ensure they do not pay tax. Hundreds of billions have been looted from the system by these ‘legal’ means, leaving those with insufficient income to fund the legal complexities to hide their income to pay for the schools, hospitals, and aged care facilities we are all demanding.
This is, to my mind, the core challenge of this election that will not be spoken about.
Labor policy is to collect tax from multinationals by denying deductions for royalties to related parties. This makes sense, but will be hard to enforce, and does not address the inequities in other huge areas of tax minimisation and avoidance. Besides, when sovereign rules change, the tax arrangements of corporations and individuals change as well, moving to a more accommodating regulatory environment. On top of that, those who make the rules are also the ones who benefit, so while there might be some ineffective fiddling at the edges for a press release, real change which requires global collaboration and endorsement currently is just a pipe dream.
However, the first step in solving any problem is to recognise that we have a problem.
Unfortunately, this conversation will not be started by either party in this coming election. For the long-term health of Australia, and Australians, as well as every other person on the planet, apart from the tiny minority of looters, it is a conversation that needs to be started, and followed through.
I need another coffee after all that.
