Will the Titans of Industry and Politics Save Us From Economic Armageddon? / by Adam Howard

Welcome back to another episode of The Update, where I have spent A LOT of time lately talking about productivity.  

Last Update I specifically discussed the lack of bang for your buck most upper execs seem to provide.

I made the assertion that it's doubtful whether any correlation exists between executive performance and company performance, simply on the basis execs seem to have less direct involvement with either revenue generation or cost control.  

This isn't something I made up though; it is a point made repeatedly by academics over the years.

Here is a piece from Forbes magazine quoting studies that indicate just that:

The More a CEO is paid, the worse their company performs

Overconfidence is apparently the critical factor. Failing to think critically about decisions, question one's own opinions and accept feedback leads to an inability to see that their decisions may not be optimal.

This was made crystal clear over the past few weeks with the announcement that Woolworths was considering pulling the plug on it's ill-fated venture into the home hardware sector, with the sale or total shutdown of the Masters Home Improvement chain.

It's a sector with $16 Billion in annual revenues Australia wide, and in 2011-12 the Head Honchos at Woolworths decided they wanted a piece of a pie absolutely dominated by the Wesfarmers-owned Bunnings Warehouses.

It was a strategy developed and then implemented by now ex-CEO, Grant O'Brien (who fortuitously retired in mid-2015 but has been kept on to help unravel the mess), and now, 63 shops, $3 Billion in spending and somewhere between 7,000 and 10,000 employees later the new Head Honchos at Woolies have decided it was a bad idea to begin with.

Reading the official statements and then some of the customer comments, I would summarise that:

- the stock selection wasn't as good as Bunnings and was marginally more expensive;

- the fit-out wasn't as appropriate as Bunnings and it was hard to find items;

- the staff were uninformed and, in many cases, unfriendly; and

- the margins were non-existent and after 4 years of trading the chain was still posting losses.

One statement I read noted that O'Brien and his team "didn't really understand the sector and the business when they got into it and were learning as they went."

And yet, those clowns got away with dropping a lazy $3 Billion over 4 years....

Oh, and the real reason why O'Brien got to stay on for a number of months was, after decades with Woolies, he would then be able to access his Woolies defined benefit super scheme worth approx $10 Million to him.  That was in addition to the almost $4 Million in salary he was paid in 2015, the final year in his tenure over which he oversaw the erosion of $15 Billion in shareholder value.

Not wasteful.  Not unproductive.....

Now, a caveat.  I don't pretend to know the pressures these guys were under, or the uncertainty facing them when making these decisions.  

But I also want to point out that via the media and our own prejudices we, as spectators, tend to lionize company heads; behave as if they are geniuses whose decisions are based on information we don't have access to and taken with the benefit of insights we could never develop.

But that's not true.  They are just blokes or ladies, who have, through good fortune, intelligence and political maneuvering, made it to the top job.  

We also tend to wait with baited breath to hear their latest ideas or words of wisdom on interest rates, the global economy, competition policy, the price of a litre of milk....

The problem is they fall prey to the same psychological traps that we do.  They don't want to appear as outliers, speaking out against the conventional wisdom, so they tend to revert to the mean and say similar stuff to the other Head Honchos.

Their ideas aren't necessarily original either; just  but borrow those already in circulation.

And they are not reluctant leaders.   Not philosopher kings leading out of a sense of moral and social obligation, as Plato suggested should be the case.

They went all in when their hand came up...and either won or lost.  And when they lost, they weren't happy and in most instances, did NOT behave well.

Think about the war between Qantas and Virgin over capacity that nearly killed both airlines.  That was due to Virgin CEO John Borghetti going for the CEO's job at Qantas, losing out to Alan Joyce, then getting the CEO's job at Virgin and going to war with Qantas, just because of his wounded pride.

Or the recent battle for the top job at ANZ, in light of the looming departure of that pig in a suit, Mike Smith.  Shayne Elliot, CFO, and Andrew Geczy, Head of Institutional, battled it out for the top job, and Elliot won...so Geczy, like a petulant school boy, left about as quick as he could.

Or jolly Joe Hockey, if we want to turn to politics, announcing his retirement from his safe Liberal seat about 30 seconds after old mate Tony Abbott got rolled by Malcolm Turnbull as Prime Minister of our wide brown land.

Not even waiting for the next election.  Just pulling the plug, because he knew he wasn't going to be Treasurer anymore and he didn't want to go to the back bench and continue to serve his constituents.

Just people, with their own agenda's who, quite naturally, rank their agenda more highly than the needs of the faceless crowd.

A bit cynical, I know.  I try to convince myself it is a pragmatic way of thinking rather than cynical....Whatever gets you through the night, right.

So, the bottom line summary is we shouldn't really expect to be "saved" by CEO's of major corporations or our politicians.

But that's what is reported in the media: what are companies and governments doing, or in most cases not doing, to save us.

Save us from unemployment, lose of income, loss of wealth, a lower standard of living than the one to which we have become accustomed, or any other permutation of what could broadly be defined as anything "bad".

CEOs will take action to "maximise shareholder value", as that results in them getting paid more - self interest.

Politicians will take action to appeal to the broadest possible base to ensure re-election - self interest.

So, what do we do?  Because it appears the 20 year gravy train we have been riding in Oz has reached the end of the line.

Unemployment in WA has risen by a full 1% over the past 12 months and appears set to rise further.

The bedrock of our economy; the mining sector; is in free fall, and at the same time the State and Federal Governments are giving their own brand of austerity a crack to see if that works.

Property prices in the Pilbara and Kimberley are, in some instances, 75% lower than they were 12 months ago.

We have already seen from the Greek, Spanish, French and Italian experiences that austerity doesn't work.

So, I repeat; what do we do?

Before I try to answer that I will provide a brief overview of the past 65 years of the labour market in the western world.

1950 to 1980 was the Age of the Job for Life, whether it was Elders, Commonwealth Bank, the Public Sector or GE.  Relentless economic growth and the emergence of the super-corporation ensured that.

The super-corporation, invented by the USA and it's post World War II economic juggernaut, is an enormous bureaucracy run along military lines, with firm policies, processes and chain of command.

Stick around for your whole career and you should continue to slowly rise.  At worst you will have a stable job for life and a nice retirement savings account.

1980 to 2008 was the Age of Competition, pioneered by Jack Welch of GE, where everyone's performance was assessed annually, and it was acceptable and encouraged to slash and burn your way to the top.

Take no prisoners, make no friends and play the game like a Machaivellian pro.  

Think Oliver Stone's Wall Street and the Greed is Good mentality.  Or Michael Lewis' Liars Poker with the fat Italians who invented the multi-billion dollar bond machine.

2008 and onwards is now being dubbed the Age of the Entrepreneur.  These massive bureaucracies, tagged as too big to fail, are now realising they are too big.

Not too big for the overall safety of the wider economy.  Just too big to make money with a degree of certainty.

It's a global phenomenon that large corporations have realised they need to "get lean" and return to focussing on the core function of that bureaucracy.

Shed staff, close offices, contract out or outsource more and more.

And that's now where we find ourselves in Western Australia, and Australia more broadly.  A bit later than the rest of the industrialised world, I'll admit.  Chinese demand for resources and an astronomically high oil price gave us a few more years of the good times than everyone else got.

But now it's here.

Well, I think there's hope, and opportunities.

The Age of the Entrepreneur isn't just referring to the digital sector and the race to see who can come up with the next Facebook or Google.

It's an acknowledgement that a lot of the jobs and tasks currently being discarded by Big Corporate still need to be done by someone.  The question is who?

Who is willing to take the leap and got out on their own and perform those tasks, but as a self employed contractor, rather than as an employee?

The costs of an employee to a company extend a long way beyond wages and annual leave.  Lease costs for office space, insurances, admin staff to manage payroll and HR staff to handle relationships.

But once that person isn't a part of the big machine anymore, surprisingly there IS still enough money to pay for the service.

This is not a new phenomenon, as professional services have been gradually outsourcing roles for decades.  It's just an accelerating process at the moment.

But I appreciate it's a difficult decision.  To get ahead of the curve, see the looming round of redundancies or outsourcing, see that your function is still necessary and take a punt on your actual value in the market place.

I have always framed the decision to move into self-employment in terms of risk.  Remember from past Updates that risk is just uncertainty with a price.

And the price of uncertainty in this case has 2 dimensions:  appetite and capacity.

Do you have the appetite for that risk?  Can you handle the risk of not getting paid every fortnight?  Psychologically are you able to manage the uncertainty of when, and even if, your customers will pay you for services rendered?

Do you have the capacity for that risk?  Have you got some funds put aside that provide a bit of a cushion?  Are you able and willing to increase your home loan a bit to provide that type of cushion?  Are you the sole breadwinner in a family of 5?  Or are you single with no real obligations other than yourself?

Difficult questions.  Questions without absolute answers as all personality traits exist on a continuum from one extreme to the other, with so many varying degrees lying in between.  Only the individual can answer them.

I don't expect a high proportion of people to all of a sudden decide to start their own business.  Certainly not a disproportionately higher percentage than has historically been the case.

But another question that needs to be asked is, in the new economy; one of uncertainty, low growth and cost cutting, where everyone's job is potentially at risk, do you have the appetite and capacity for the risk of being an employee?

Food for thought....