Mar 14, 2022 | Governance, Leadership
Integrity is something we all say we strive for. Most statements of company values plastered on the reception wall seem to have it included.
The dictionary definition is something like: ‘the quality of being honest, having strong and unchanging principles‘
Trust and integrity seem to me to be a continuum? At one end, is integrity, the personal determination to do the right things. At the other is trust, the belief of others that you will do the right thing.
Trust is something that must be continually renewed by performance to be retained. In most cases, there will be an automatic quotient of ‘trust’ given at a first meeting. The more similar two parties are, the greater will be that ‘auto-allocation’ of trust.
After that, it is retained and earned by the behaviour displayed over an extended period. Trust is easy to lose, very hard to earn back.
You build trust by always meeting commitments, or, when there is a commitment that will not or cannot be met, there is a clear acknowledgement of that outcome, and responsibility is taken.
What is to be done, by whom, and by when is clear, unambiguous, and fair.
When you meet all your commitments, by the due date, or alternatively when they are unable to be met, that fact is clearly communicated beforehand, and responsibility accepted, integrity will be built.
This is a vital component of leadership, and of the ‘Cultural glue’ that makes up a successful institution. Others need to be able to trust that to be cliched, ‘your word is your bond’.
It also has significant implications for those that are being led. The casual relatively thoughtless acceptance of some sort of task and/or deadline that you know you cannot or are unwilling to meet is no longer acceptable.
When you accept a task and deadline, you must meet that acceptance with completion.
Many times, I have seen people in a meeting accept tasks that everyone knows will not be adequately addressed by the deadline. This is both bowing to authority and making your short-term life in the meeting better at the expanse of the longer term, and your own integrity.
The same process applies to institutions. We tend to want to trust them, and the people running them. However, when the people fail the integrity test, we tend to lose faith not only in the people, but in the institution as well.
I wonder, do those in Canberra who seek to lead us, understand the idea and its foundations?
Header cartoon credit: Scott Adams and Dilbert, again, have my thanks for a cartoon that makes my point.
PS. to the cartoon. Integrity may not buy you a boat today, but it certainly will tomorrow.
Feb 23, 2022 | Analytics, Governance
The old adage that you can find data to support any proposition, almost no matter how wild, has never been as prevalent as it is today.
We have the sight of politicians on the one hand telling us the science is wrong as it reflects the looming catastrophe of climate change, while at the same time lauding science in the way the world has responded to the covid pandemic with new vaccines in record time.
The contradiction is extreme, however, there is always data to ‘prove’ whatever point is required.
Following are some of the common ways data is manipulated to mislead, misinform, and bamboozle the unwary.
- Confusing correlation with causation. This is very common, and I have written about it on several occasions. Just because the graphs of ice cream sales and shark attacks mirror each other, does not mean one caused the other.
- The Cobra effect. This refers to the unintentional negative consequences that arise from an incentive designed to deliver a benefit. The name comes from an effort by the British Raj to reduce the number of cobras, and associated deaths that occurred in Delhi, by offering a bounty on each dead cobra. Entrepreneurial Indians started to breed them for the bounty. The identical situation applied when the French wanted to reduce the rat population of the French Indochina. They stuck a bounty on rats’ tails, which resulted in enterprising Vietnamese catching the rats for their tails and then releasing them to breed further.
- Cherry Picking. Finding results, no matter how obscure, that support your position, and excluding any data that might point out the error. This is the favourite political ploy, having a great run currently.
- Sampling bias. Relying on data that is drawn from an unrepresentative sample from which to draw conclusions. It is often challenging to select a sample that delivers reliable conclusions, and often much too easy to select one which delivers a predetermined outcome. Again, a favoured political strategy.
- Misunderstanding probability. Often called the gamblers fallacy, this leads you to conclude that after a run of five heads in a two-up game, the next throw must be tails. Each throw is a discreet 50/50 probability, no matter what the previous throws have been. Poker machine venues rely on the players increasing belief that the ‘next one’ will be the ‘jackpot’ after a run a ‘bad ones’ for their profits.
- The Hawthorne effect. The name comes from a series of experiments in the 1920’s in the Hawthorne Works factory in the US producing electrical relays. Lighting levels were altered minimally to observe the impact on worker productivity, and concluded that they improved when lighting was increased, but later dropped. The effect of the lighting was later disproved, when psychologists recognised that people’s behaviour changes when they are, or believe they are, being observed. This can be a nasty trap for the inexperienced researcher conducting qualitative research.
- Gerrymandering. Normally this refers to the alteration of geographic boundaries, usually in the context of electoral boundaries. It can equally be used to describe the boundaries set around which source data can be included in any sample. ‘Fitting’ the data to deliver the desired outcome. The term originated from the manipulation of electoral boundaries in Boston in 1812 when the then Governor Elbridge Gerry signed a bill that created a highly partisan district in Boston that resembled the mythical salamander. The national party held government in QLD for 32 years until 1989 as a result of a massive gerrymander in their favour, perhaps better remembered as a ‘Bjelkemander’
- Publication bias. Interesting or somehow sensational research is more likely to be published and shared than more mundane studies. In this day of social media, this becomes compounded by the ‘echo chamber’ of social platforms.
- Simpson’s paradox. This describes the situation where a trend evident in several data sets is eliminated or reversed when the data is combined. An example might be the current debate about university admissions favouring males over females. If you take subsets of the data for different faculties, this may be true, but combine the faculties, and the numbers will be virtually even, perhaps even favouring females. This was demonstrated in a study of admissions to UC Berkely in 1973 and is a regular feature of misleading political commentary.
- McNamara Fallacy. This comes about when reliance is placed on data only in extraordinarily complex situations, ignoring the ‘big picture’, and assuming rationality will prevail. The name comes from reference to Robert McNamara, US Secretary of Defence under Presidents Kennedy and Johnson who used data to unintentionally lead the US into the disaster that was Vietnam, later acknowledging his mistake.
Using data to is an essential ingredient in making your case, as they convey rationality and truth. When listening to a case being made to you, be very careful as numbers have the uncanny ability to lie. To protect yourself, ask at least some of these eleven questions.
Header illustration credit: Smithsonian. The drawing is of the electoral district created by Massachusetts Governor Elbridge Gerry in 1812 to ‘steal’ an election.
Feb 21, 2022 | Governance, Management
Not all accountants are created equal, and not all do the same job.
All businesses have two types of information required, for which they need three types of accounting functionality.
There is the regulatory and compliance accounting, which can be a simple as the quarterly GST return for a small enterprise, to hugely complex set of statutory accounts for a public company, particularly when it operates in several jurisdictions.
Then there is the management accounting, the numbers used to manage the business on a daily, monthly, and annual basis. These are entirely different tasks, although use common data sources, the ledgers that record activity, and various devices and processes to collect the data for recording.
After making that distinction between compliance and management accounting, assembly of the range of skills necessary to deliver the outcomes is often overlooked.
Data assembly.
You need people to assemble and reconcile the data. These can be less qualified and experienced people, and the processes of collection and initial recording are increasingly being automated. Nevertheless, the processes that track and capture the numbers are vitally important to be proactively created, maintained, and improved. The rigor of the collection and ‘cleaning’ of data will determine the confidence that later processes can have in their numbers.
Accounting compliance.
Failure to follow the rules can result in legally enforceable penalties. Therefore, compliance is of critical importance for external stakeholders, but is largely irrelevant to the management of the business, for which an entirely different suite of skills is needed.
Analysis and presentation.
This is where accounting meets marketing. Either of the two by themselves will tell only a small part of the story. List the numbers and people will ignore them, or be asleep, no matter how important the words. Just use story and metaphor without the foundation of numbers, and you will be dismissed as a typical marketing person, fluffy and unreliable. It is a case of one plus one equals three. If you do not get this combination right, there will be suboptimal outcomes as the wrong decisions will be taken, opportunities missed, and resources misallocated. This third skill requires both the numeracy of the accountant, and future telling ability of the seer. An unusual and often derided individual.
In my case, my friends who are accountants run for the hills when I remind them, that I am in fact, one of them. Meanwhile, many marketers, particularly those under forty, think I am some sort of marketing troglodyte because I do not believe everything in marketing begins and ends with a digital solution.
As Peter Drucker pointed out all those years ago, “the purpose of a business is to create a customer“. The reason you do that is obvious: to generate revenue, from which you make a profit assuming the business is well managed.
Understanding and leveraging the means by which all the marketing jargon is converted into cash, is the core of a successful marketing function in any business. There are thousands of things every business can do without, and still function, the one thing no business on earth can function without is cash.
Therefore, marketing is about cash generation, short, medium, and long term, future tense. Accounting is about counting how much cash there is, where it came from, and where it went, past tense.
One without the other is suboptimal. When you find both in one person, do not let them go.
Feb 7, 2022 | Governance, Management
Successful people will tell you to concentrate on the things you can control, be aware of, and prepared for those you cannot. Stressing about those you cannot control adds no value, the best you can do is anticipate the impact they may have, and shape your response in advance.
Managing a business is the primary example of an environment where managers sometimes obsess about things out of their control. Meanwhile, they often ignore or undermanage those they can control, and that deliver sustainable returns.
There are many components to a successful business, the only one that is common to all is cash. It is like oxygen to people, we cannot survive without it.
Therefore, it makes sense to ensure that in every decision you take, part of the consideration is the impact on cash.
Too often I see decisions made, that on the surface make some sense, but when deeper investigation occurs, are counterproductive. The most common is the almost instinctive urge to drop price to meet some competitive pressure, usually accompanied by reassurances that volumes will be increased as a result. 4 times in 5, it results in less cash, and less profitability. Management is way too often surprised at this outcome.
There are 7 things you can control, broken up into two buckets represented by the income statement and balance sheet, that have a direct impact on your cash position.
Price
Volume
Margins
Overheads.
Accounts receivable
Inventory, or in a service business, Work in progress
Accounts payable.
The first 4 are recorded in the income statement or profit and Loss, which records the revenues coming in, and costs going out that are directly influenced by trading activity.
The last three are recorded in the balance sheet, reflecting the cash value of the business and are again directly influenced by management decisions.
Each of these 7 components are linked in a macabre commercial dance, every action on one can and often does, influence most if not all of the others to varying degrees.
It is the responsibility of management to manage these levers to deliver the maximum return to the business, and ensure that decisions made are in line with the strategic priorities.
No business can survive without cash, so it is incumbent on every employee, even if just in their own self-interest, to look after the cash of the business as if it were their own.
Feb 2, 2022 | Governance, Leadership, Management
The Reserve Bank released the latest inflation figures a week or so ago. The year-end number was 3.5%, significantly influenced by a few highly volatile items like petrol. Stripping those out, the underlaying rate was 2.6%. These numbers do not bode well for the RBA target rate of 2-3 percent average over time.
It would appear that despite the denials, the reserve will be forced into increasing the official rate well before their earlier undertaking not to do so until 2024.
From the graph in the header, should we sneak back to official rates above 6%, last seen in the late 80’s, we will have a cohort of managers making strategic decision in an environment they have never experienced.
That is not a good omen.
I well remember paying 17.5% rate on my first mortgage around 1983, an experience that will never be forgotten. The little equity I had built up in the previous 2 years since borrowing the money to buy that first house, was swallowed up while my very young family ate a lot of potatoes and sausage.
Managing a business in a period of inflation puts a lot of pressure on things the cohort of younger senior managers have not ever had to worry much about to still deliver acceptable returns. Now they will be faced with some nasty choices:
- Increase prices, annoying customers, and risking volume loss, and the associated relative increase in overheads.
- Annoying stakeholders by holding prices resulting in decreasing margins as inflation driven costs increase.
- Cutting costs which in a crisis normally means cutting ‘heads’, which rarely makes you popular in the lunchroom.
- Reducing investment in everything from advertising to R&D and new product introductions, which has the compounding impact of making tomorrow’s cash flow and profitability that much harder to generate.
The most usual course for the inexperienced is to generate lots of words, but take no or only ‘fence-sitting’ action until their options have closed in. They then stir into action with emphasis on the last two options, leaving it to the following leadership to pick up the pieces.
The much harder work of refining product portfolios, brand development, generating operational ‘flow’, ensuring strategic alignment, building resilient supply chains, process flow optimisation, business model innovation, and all the rest, should not be activities stimulated by some sort of crisis. They are the responsibility of managers always, but often lost, obscured in the better times when getting a bit fatter is the most common characteristic.
Header Image credit:. Source World bank.
Jan 26, 2022 | Change, Governance, Leadership
I am sitting here on January 26, 2022, contemplating another year gone, with the new one coming at us, wondering if anyone in power has ever heard Henry Ford’s quote: “If you always do what you have always done, you’ll get what you’ve always got’
Such was 2021, except we seem to have doubled down on the stuff that generated a negative outcome in the past, mistakenly betting on a better outcome this time. I looked back to the Australia Day post for 2021, and almost all of the issues aired remain valid.
Little has changed, apart from the date, and the conga line of politicians has evolved a bit. There have been a few political scalps have been taken, and a few resurrections in the national party that surely rival any spoken of in the good book!
New South Wales’s god-fearing Premier who took over in unusual circumstances in October 2021, said at the time: ‘I will take NSW to the next level‘ has been proved correct, at least in relation to Covid cases. He has put all our eggs in the almighty’s basket, and the almighty seems to be on holiday, or is perhaps isolated, as infection levels skyrocket.
Clearly the only way to reduce the reported cases is to reduce testing, while playing with the definitions of what constitutes a ‘contact’.
Monty Python would be proud!
In November, the report of the review into the parliamentary workplaces landed on the federal governments desk. This is in contrast to the yet to be seen report commissioned by the PM to be conducted by the head of his department on the specifics surrounding the alleged rape in the office of the defence minister in February. Clearly the stench coming from the big house is not what anyone should expect in the place that is supposed to be governing the rest of us, making laws about how we will behave, and the penalties for not doing so.
As we go into an election campaign, we will see a lot of the PM in high vis. being the daggy bloke from next door, telling outrageous porkies while looking everyone directly in the eye. Must be a learned skill, honed with extensive practice, as few are as good. Meanwhile, the opposition leader, despite a bit of cosmetic work with the glasses, hides from just about everyone. Probably a good strategy.
I can smell the baking pork from the coming election BBQ from here!
The trading relationship with China still resembles a pygmy kicking a giant in the foot trying to get his attention. The reality is that we have affronted the Chinese leadership, they have reacted, will not forget, and we can do nothing about it, beyond swallow the medicine and stop being stupid. A big ask, especially for some of the conservatives in the government who, perhaps rightly based on its sad history, believe there are votes in being belligerent. The narrative that Australia must ‘pick a side’ between the US and China assumes a binary world, when it is in fact way more nuanced and complex than that. It seems crazy to me that this is not obvious to those who find themselves in positions of political power.
I guess it is lucky we might have a few nuclear subs to use as a deterrent in about 30 years. Pity they require very deep oceans to operate effectively, and our area is surrounded by largely shallow ones. Sadly, they also require deep and practical nuclear engineering expertise to keep them operational, which we do not have, and are unlikely to ever develop to the level required. This is before we consider either the time before these mirages emerge from the deep, and there is any consideration of the anti-submarine technology that might emerge over those 30 years, making our subs very expensive coffins. Knowing a few very senior navy officers over the years, I am sure they pointed out these obvious facts to the politicians, who seemed not to be listening. Ah well, it must have seemed like a good press release at the time.
Climate change. What can you say about the triumph that was Glasgow?
Our dear leader speaking to a packed house at midnight, explained the ‘Australian way’ of tackling this global problem. It amounts to subsidising fossil fuel emissions and funding research into technology that has as much potential to capture meaningful CO2 emissions, as medieval alchemy had of turning copper into gold. Never mind: our supporters want, and are paying for the effort via party donations, just don’t let on to the taxpayers, which does not include the aforementioned political donors.
Some of this nonsense might be excised if there was a version of a federal ICAC. Clearly nobody in the big house wants such a body to examine the entrails of their shenanigans, it might be embarrassing. The first effort by the then Attorney general, later to be pushed towards the exit kicking and screaming after a nasty scandal involving, wait for it, a woman now deceased, was laughed out of the place. The simple fact that it was so obviously a piece of window dressing was made clear by the fact that the opposition was laughing at it as well. This is despite knowing they might have to live with the consequences of a beefed-up version, if they ever regained power.
The two-laned economy we are building where the benefits go to those in a position to charge economic rent, is continuing to significantly distort the choices made in the allocation of resources. As the gap continues to widen between the ‘Haves’ and ‘have nots’, as it will if nothing changes, it will at some point become toxic, as it did on January 6 last year in Washington.
As an illustration of our challenge as a competitive economy that will serve Australians more equally, we should consider the asymmetrical picture painted by the ASX top 10 in Australia compared to the S&P top 10 In the US. Our top 10 are all traditional hard asset companies, all from mining or financial services, with the single exception of CSL. By contrast, the US top 10 are all, with the single exception of Berkshire Hathaway, ‘soft’ asset, technology-based companies.
The rate of capital growth of soft assets is far greater than those of hard assets. Will 2022 be the year that it hits home that Australian industry is dominated by yesterday’s businesses, and we start to adjust? Fortescue (number 10 on the list) has just started to make those adjustments into areas that rely more on intellectual rather than financial capital.
Making any effort to bridge that gap between ‘New’ and ‘Old’ industries enormously more challenging, is the simple fact that Australian public spending on R&D has over an extended period been dropping. The total spend is being propped up by spending by business in specific areas of digital engineering, almost compensating for the drop in public spending. The total spending amounts to 1.8% of GDP, a number way below some of our international competitors. The OECD average is 3.4% of GDP. Our spending on education, the economy’s investment in the future, in the 2019/20 fiscal was 114 billion, around 1.8% of GDP, before the positive impact of $20 billion of ‘export’ sales to now excluded overseas students is removed. At the same time, the ‘quality’ of education has been dropping consistently. From the gutting of trade and technical education over the last 30 years, to the removal of teaching resources from universities as they are mandated to turn a short-term profit. The latest nonsense is to penalise the humanities, and favour STEM. While we do desperately need greater STEM education resources, it is insane to fund them by reducing our creative and behavioural education that enables the STEM output to be leveraged. While it is not just the amount of money we spend that is important, quality does count, when both are going in the wrong direction, there is unlikely to be a soft landing.
I cannot finish without acknowledging the continuing impact of the Covid pandemic. 2022 will no more be the end of it than was December 2021, and worse, we seem to have given up. Omicron is of less mortal concern than Delta, so we seem to assume that the next variant, emerging from the unvaccinated half of the world’s population will be less virulent again. Let’s hope it is so. However, if we look at very recent history, Aids, Ebola, Mers, Sars, none of them evolved to be less severe at each outbreak, they evolved to avoid the barriers we built.
Covid has been a catalyst for many other seemingly unconnected things happening.
For example, the disruption of our supply chains, firstly the international ones, and more recently the domestic ones. A month ago, a shortage of AdBlue looked like it was going to be a game stopper, and it still may be. However, more of a long-term threat is the closing of a number of (that I know of) significant regional transport companies. These companies, long established in places like Bathurst, Dubbo, and Tamworth, employ hundreds of people in support roles as well as their drivers, and service providers. They contribute significantly to local economies. The drivers are mostly blokes older than 50, who have never done anything else, but now will be lost to the industry. Difficult jobs like moving cattle, machinery, smaller multi-stop loads, will not be taken by the giants in the industry, who are just interested in moving pallets in bulk from point A to point B. In NSW the RMS has a lot to answer for. Dyslectic drivers who have difficulty filling in a totally unnecessary logbook, as trucks now all have GPS locators, without spelling mistakes cop a fine of $400 a time. This stupidity is just driving them out of the industry. In terms of supply chain disruption, we ain’t seen nothing yet!
In order to address the challenges of Covid and Climate change, politics has privatised the development and distribution of vaccines, and kicked responsibility for acting on climate change down the road. Stick the means to fight the problems in the hands of a few billionaires, and magically, the problem will be resolved. Meanwhile, half the worlds population remains unvaccinated, so the new variants have plenty of opportunity to find the weaknesses in our defences. The polarisation of the populations continues. Politics encourages this polarisation as it suits the coming election in this country, as it has in other developed countries. Politicians tell bigger and bigger porkies, each trying to outdo the other. Sadly, it seems the bigger the lie, the more likely there will be a vocal minority that believes and goes on to proselytise it, compounding the divisions, and compounding the erosion of trust and the concept of mutual benefit and accountability. Two weeks ago, a big bloke in a supermarket shopping centre lift very aggressively abused me for being stupid, brainwashed, and ignorant of facts because I was wearing a mask. Had I been a 70-year-old woman instead of a relatively large and fit 70-year-old man, it would have been terrifying.
I really need to finish and get the Barbie lit.
However, before I go, have you seen the photos of the former, as of today, Australian of the year Grace Tame giving the eye to the PM yesterday? I sense that she does not think highly of our dear leader. I suspect that photo, along with the one in which the PM displayed a lump of coal in the parliament, will get a lot of coverage over the next couple of months.
Have a great Australia Day, however you choose to see and celebrate it.
