Board leadership is pivotal to lifting productivity growth and prosperity
In today’s complex economic environment, board leadership is crucial for driving the productivity growth that’s pivotal to sustaining business and national prosperity. While mergers and financial engineering have concentrated industries, they haven’t produced the innovation necessary for growth. Boards must recalibrate strategies, focus on problem-solving, and leverage technology to overcome systemic risks and foster a thriving, inclusive economy.
Our global economy waxes and wanes
In the nearly 80 years since the Second World War, the global economy has moved through periods of growth and recession, punctuated by the Oil Crisis and the Global Financial Crisis.
New and better technologies have been pivotal to growth, particularly in the post-war (1945-70) manufacturing period and the digital era unleashed by the internet (1990–) and smart devices (2007–).
Economic philosophies and business practices evolved too
In the immediate post-war period of reconstruction, governments managed economies and invested heavily in new technology, while businesses embraced mass marketing and mass production.
Strong economic growth and the Oil Crisis exposed weaknesses in the economic model, triggering a shift toward market liberalisation, free trade, and greater leverage of debt.
Businesses enjoyed the opportunities that came with privatisation of public assets, with greater emphasis on risk, cost control and efficiency, facilitated over time by outsourcing, both locally and globally.
Prosperity has built upon post-war stability
Long periods of relative peace, coupled with international trade and investment, have delivered unprecedented improvements in living standards to millions of people around the world.
Today, the terms “developed” and “developing” countries are less relevant as the majority of the world’s population now live in countries with middle to high incomes [2].
This growth in debt and prosperity has allowed politicians to avoid many difficult trade-off decisions about where to invest limited taxpayer dollars.
Not everyone has enjoyed the benefits
The benefits of growth, however, have not been evenly distributed. The wealthiest 1.1% of adults hold nearly 46% of total wealth, while over half of the global population controls just 1.2% [3].
Rapid growth of wealth in the Asia-Pacific contrasts with slower growth in the southern hemisphere. As China achieved global dominance in manufacturing (1990-2010) it hollowed out the Western middle class, and arguably eliminated the primary vehicle by which the African continent could lift its people out of poverty [4].
Supply chains have become increasingly concentrated
More recently, business growth has been driven by mergers, acquisitions and financial engineering (including share buybacks) rather than research and development (R&D) and productivity improvements.
Are share buybacks really the highest value use of capital? Can’t business leaders see more productive ways to deploy shareholder capital?
Today, major supply chains and industry sectors (like finance, insurance, shipping, food and technology) are dominated by a handful of global players. This concentration brings benefits of scale and efficiency, but also risks systemic fragility and lack of competition and innovation.
Systemic risks have been accumulating
Indeed, systemic risks have grown [6,7]. Inadequate oversight of the financial system permitted the flourishing of high-risk, globally interconnected financial products. When exposed, it triggered the Global Financial Crisis (2007-09).
Several other systemic risks create global threats that are largely under-appreciated in terms of their significance, imminence, and interconnectedness. The most consequential is runaway climate change.
Easy fortunes are coming to an end
Mergers, efficiency and cost cutting initiatives are not a sustainable route to value creation. Nor does the idolised finance sector produce new value. And ever-increasing demand and low interest rates can’t be relied upon as populations age, trade slows, and industries transform.
Improving supply-side productivity will be critical to genuine economic and societal progress, particularly amid an ongoing war for talent [8,9]. Organisations that are unable to solve problems, innovate and adapt will (and perhaps should) fall by the wayside.
Serving customers isn’t serving citizens
Today, businesses aim to be “customer centric”, focused on what customers want as the route to gaining and retaining their business. But this isn’t enough to guarantee ongoing success.
It’s not hard to find systems in society that are failing to deliver desired outcomes and benefits. Health, housing, and education systems, banking, media, and many others are failing to deliver outcomes that people consider are “good value”. Yet businesses operating in these systems can be highly profitable. So, what’s wrong?
In simple terms, a whole is more than the sum of its parts. It doesn’t necessarily follow that efficient, profitable organisations deliver good industry or sectoral outcomes. Nor does an economy focused on serving customers mean it’s serving citizens well. And an increasingly unhappy citizenry is demanding change.
Think tanks can’t replace good governance
The era of outsourcing, mergers and financialisaton has concentrated governance at an organisational level through a financial lens.
Good governance of the overarching systems within which businesses operate has weakened. The short-term needs of pervasive financial, digital, and trade networks override the medium-term performance, value, and resilience objectives of the wider systems.
Poor outcomes at a system level contribute to citizen frustration, political turmoil, and weak governments that lack the political capital to enact important reforms.
Think tanks have flourished to fill the policy gaps; regrettably, some are driven more by ideology than outcomes. Even when sound solutions are conceived, they’re hard to implement because of diminished organisational and system-wide capability, mis-aligned incentives, and/or political self-interest.
In this context, how do we foster sustainable growth in businesses and the economy?
Reinvigorating the economy and shared prosperity
In short, organisations (public and private alike) need to deliver services and products that provide more than a short-term fix or financial “sugar hit”. Businesses need to create new value in an efficient way that addresses customer and citizen needs with an eye to the future, not the past.
Shareholders and citizens need businesses to formulate plans for sustainable value creation that attract investor capital because, by comparison, they expose the strategic blind-spots and value-creation gaps of their competitors.
Furthermore, to restore a stable, supportive environment for business, we need a sizeable majority of people to feel confident that genuine, sustainable progress is being made, rather than some people winning at the expense of others.
Leading productivity growth from the boardroom down
While the motivation to lead an organisation that creates genuine short and long-term value should exist in the executive suite, it must exist in the boardroom. To this end, boards should:
Recalibrate business strategies. Too many strategies are cast within siloed, short-term perspectives. They ignore extraordinary threats and opportunities, and fail to focus attention on robust measures of sustainable value creation. The incremental tactics that emerge will leave many organisations seriously exposed. At a business level this is serious, but when replicated across sectors, it’s a national dilemma.
Recognise the central role of technology. Technology and engineering has always been at the heart of new products, services and business models that create new value in society. As several foundational technologies are transforming and intersecting at surprising pace, businesses can either tap into the emergent opportunities or be mowed down by them. In this sense, technology sits squarely in a strategic conversation.
Don’t leave results to chance. Most organisations employ incremental tactics hoping they will deliver the desired business outcomes in the end, rather than reverse-engineering tactics to deliver results by design. Innovation initiatives are also misunderstood and poorly conceived and executed. This erodes productivity. When well structured to deliver results by design, substantial value accrues in a repeatable way.
Deploy technology as a tool. Technology can be powerful key to unlock (multi-factor) productivity growth. But such investments (like modernising legacy IT systems) can be large, complex, and high risk. So, technologies (including artificial intelligence) should be used deliberately, strategically, and as an integral part of a change program, otherwise the risks of ongoing value destruction are considerable.
Invest in problem-solving skills. All of the jobs above, including strategy, rely on strong critical thinking and problem-solving skills. Arguably, the current state of play including poor productivity growth and persistent public problems prove these skills are under-developed at all levels, including the boardroom. Enhancing these skills delivers rapid, sustainable returns in (labour) productivity.
Modelling strategic, systemic leadership
When boards take these actions, value will be created on a more sustainable basis. Note, however, that context is critical. The spectrum of change that’s occurring presents escalating threats and opportunities that must be understood, particularly by the boards of medium to large organisations.
Many systems in which businesses operate – financial, physical, digital, and social – are fragile. System failure will cause business failure. But system reforms and resilience cannot be achieved by governments alone. Strategic business collaboration is essential to achieve the optimal deployment of capital and resources in a way that is future-fit, enables growth, and is welcomed by communities.
Our productivity puzzle cannot be solved through a single policy change and is not a problem for governments to solve alone. (CEDA, 12)
Realistically, some people in positions of structural power, which we might call “leaders”, will have little motivation to lead. There will be little immediate, personal benefit to be gained by expanding their strategic lens, challenging prevailing wisdom and questioning current “solutions” (even if they’re not working). Many leaders may still enjoy career and financial success, even as their businesses and sectors become increasingly fragile and unproductive.
It’s therefore all the more important that ambitious leaders, who recognise the systemic challenges Australians face, self-identify and collaborate to reap the upside of disruption.
[1] Vitor Gaspar, Marcos Poplawski-Ribeiro, Jiae Yoo (2023) Global Debt Is Returning to its Rising Trend, International Monetary Fund, 13 September 2023. [2] Hans Rosling et al (2019) Factfulness, Sceptre, London. [3] UBS Global Wealth Report 2023. [4] David Oks, Henry Williams (2022) The long, slow death of global development, American Affairs, Winter 2022, Vol. VI No. 4. [5] The Economist (2023) The world is in the grip of a manufacturing delusion: How to waste trillions of dollars, 13 July 2023. [6] Colon, C. and Hochrainer-Stigler, S. (2023), “Systemic risks in supply chains: a need for system-level governance”, Supply Chain Management, Vol. 28 No. 4, pp. 682-694. [7] World Economic Forum, 2023 Global Risks Report, Geneva. [8] Ed Shann (2024) Productivity hobbles inflation fight, Australian Financial Review, 21 August. [9] Michael Stutchbury (2024) Stalled productivity remains the key dilemma, Australian Financial Review, 5 September. [10] Edelman (2024) 2024 Edelman Trust Barometer – Australia Report, Sydney. [11] Image source: ABC News online, , report by Michael Janda “Wages growth jumps for new hires, Seek figures on advertised wages show”, 29 August 2022 [12] CEDA (2024) Chief Economist’s update: The Federal Budget must help solve our productivity puzzle, 17 April 2024.