Board to death: Our fat, dumb corporations are clueless on innovation

Our captains of industry are underexposed to entrepreneurship, technology-driven disruption and competitive friction.

“Fat, dumb and happy”, “risk averse”, “inefficient innovator” and “oligopoly-impaired”. These were just a few of the unflattering descriptors of Australian business and cultural complacency discussed at a recent private business luncheon in Sydney.

Hosted by Grant Thornton, the gathering was an uncommonly diverse group of 20 or so leaders from business, finance, entrepreneurship, academia and government. Everyone was either immersed in entrepreneurship, breaking new ground or challenged by the disruption that results.

The discussion began with a presentation by renowned Stanford University Professor George Foster, an Australian who has extensively researched the nature of global entrepreneurship and the ecosystems in which entrepreneurs thrive or fail.

Foster’s expertise includes asset creation and destruction and he reckons that we have far more inhibitors than accelerators for the new breed of tech- and IP-driven entrepreneurs seeking global markets.

Just some include: a dire lack of education and training for the STEM skills (science, technology, engineering, and maths) and careers that are fuelling innovation; policy leadership that’s stuck in old fashioned thinking and short term cycles; a competitive and regulatory framework that’s captured by big, mostly uncompetitive companies and a lack of access to, and incentives for, world-class mentor talent.

The author of this column chaired the post-presentation Q&A. As I was trying to distil the many inhibitors to just one over-arching theme, I kept coming back to this: Australian business and industry is in danger of being, well frankly, “board to death”.

The highest levels of leadership and power in this country are underexposed to entrepreneurship, technology-driven disruption and competitive friction. Instead, too much energy is focused on achieving cosy corporate directorships which reward risk-mitigation governance and outdated management practices.

The result is a chilling effect on the nation’s productivity, our relevance in a high stakes global economy and, ultimately, our much-valued high quality of life.

Meet Australia’s New Power Players; Same as the old ones

Take for example the recent Power Issue published by the Australian Financial Review. The AFR claimed “disruption and diffusion” was a central theme of this year’s issue, where an 11-member review panel assessed some 200 individuals and institutions “for their hold on overt, covert or cultural power.” 

The lead article introducing the list gasped that panel members felt they were “dealing with a power equation in 2014 that is quite extraordinary, unprecedented -- and scary.”

It is scary, but not for the reasons the AFR Power Review Panel may surmise.

“It was so disappointing -- frankly remarkable -- that the 2014 Power Lists did not make room for entrepreneurs and business innovators in Australia. That wouldn’t happen in most progressive markets,” Foster, the Konosuke Matsushita Professor of Management at Stanford University’s Graduate School of Business, said in his presentation.

That omission may have something to do with the fact that none of the 11-member Power Review panel -- like most businesses and institutions in Australia -- are exposed to, or have any deep connection with entrepreneurship. Nor do they seem to understand forms of “disruption” beyond the political kind (the list’s shining example of “disruption” was Clive Palmer and his four PUPS). 

Business “Power Players” included big company stalwarts such as the CEOs of the big four banks, Andrew Forrest, James Packer, Telstra CEO David Thodey, and other non-surprises. An exception, deep into the issue, was the inclusion of technology venture capitalists Daniel Petre and Craig Blair, who have just raised $60 million for their fund, AirTree Ventures.

Catherine Livingstone, president of the Business Council of Australia (BCA) and chairman of Telstra, also made the list for the first time. Livingstone has been a vocal proponent of the need for Australian business to be more innovative and is believed to be heavily influencing Federal Industry Minister Ian MacFarlane.

But the BCA membership is made up of the CEOs of Australia’s top 100 companies, with little connection to the emerging class of technology entrepreneurs and disrupters that typically drive innovation. Without deeper attention to them, the effect on innovation and industry policy will be akin to one-hand clapping.

Innovation complacency is holding us back

According to the AFR, a common query from the Review Panel was: “What kind of power are you talking about?”

It’s a great question, but we should frame it differently: What kind of power should Australian business and policy-leaders value and strive for moving forward? 

The world’s leading economists argue that innovation and entrepreneurship is the foundation for new growth and prosperity. That’s powerful. As one luncheon participant, a top level executive of one of Australia’s biggest retail groups said, “Australian boards have to report on sustainability. Shouldn't we also have to report on innovation?”

Simply put, innovation complacency is holding Australia back. It’s discouraging our youth, middle-management, entrepreneurs and future leaders and forcing much needed new talent offshore.

Yet, business leadership, investment and action, for the most part in Australia, is business as usual.

“One of the bigger issues for Australian business is that we are dominated by oligopolies in too many key sectors. There is little to no competitive friction to force us to stretch for new efficiencies and to innovate,” said Daniel Petre, managing partner of AirTree Ventures.

Australia is a wealthy, educated and inventive nation. We are blessed by rich land and resources, a growing, increasingly diverse population and a quality of life that is the envy of many. But if we really believe we can sustain that quality of life by business as usual – a high wage, low productivity and inward looking economy - we are bordering on the delusional. 

The older we get, the less we innovate

Philip Lowe, the deputy governor of the Reserve Bank, also attended the lunch, just back from a pre G20 meeting in Cairns where “growth” of course was the central topic of discussion. Lowe and Reserve Bank Governor Glenn Stevens have been increasingly vocal about the role innovation and risk-based endeavour play in growth economies.

In a speech to the Sydney Institute in March, Lowe explored issues of changing demographics in Australia and its impact on productivity and innovation.

Lowe addressed two central questions: How has our society’s attitude to risk and innovation evolved over time and what implications are there for productivity growth? And, as the population ages, how might our attitude to risk and innovation continue to change? Both, he argued, have a profound effect on our future living standards.

In his speech, Lowe said “If we are to improve efficiency and advance technology, then innovation is required and innovation requires someone to take a risk… sometimes the effort will not pay off, but just occasionally it will and when it does, we find a better process, a more efficient organisational design or an idea that transforms how we do things.

“If ageing societies become inherently more risk averse and less supportive of innovation -- as I suspect they might -- then we are likely to face a greater challenge to date in generating productivity growth,” added Lowe. “This means there is likely to be more of a premium on getting policies right in some key areas related to innovation.”

Premium on getting policy right

Lowe lists five policy planks: the way we finance innovation, including access to start-up (and scale) capital for new businesses; the incentives for innovation established through the tax system; the way we encourage and support appropriately skilled human capital accumulation and research; our business culture and the way we promote and support entrepreneurship and finally the way we promote competition in our markets, “for it is competition, or the threat of it, that is the driver of innovation,” he said.

The tech and entrepreneurship sector had been waiting a long time for some positive and globally-aware innovation and industry policy from Ian MacFarlane. The May budget delivered some serious hits, effectively slashing an already under-funded system by another $250 million.

But we keep being told that good news is imminent for critical things such as changes to Labor’s punitive treatment of Employee Share Option Schemes (ESOPs).
Since 2009, Australia has taxed ESOPs when they are granted, not when they are realised. This is a huge disincentive for entrepreneurs looking to attract top-quality talent with scant funds to pay them. ESOPs are standard practice in many countries including America, Britain, Singapore amd Israel. But that’s just top of the list. And the tech and entrepreneurship sector is so battered, it’s become a pretty short list.

I am constantly reminded of something that Bill Gates said in an interview I had with him in 1995 – at the birth of the internet era.

“Business and policy leaders have a habit of overestimating the impact of new technologies and processes in the first few years,” said Gates. “And then completely underestimating its impact over ten.”

I thought Gates nailed it at the time. Problem is, in Australia, thanks to a commodity and resources boom, we've been underestimating for 20.

Sandy Plunkett is the founder of Innovation Clearinghouse, a new advocacy entity dedicated to innovation and entrepreneurship in Australia. She is a former journalist and venture capitalist.