Canberra’s leadership merry-go-round has lessons for corporate Australia

by

Shaun McCarthy

Kevin Rudd to Julia Gillard, Gillard to Rudd, Rudd to Tony Abbott, Abbott to Malcolm Turnbull and now Turnbull to Scott Morrison.

Not one of these leaders has completed a full term in office as prime minister since 2007, and Australia is on to its sixth prime minister in 11 years.

What people crave from their leaders is stability. Stability creates confidence.

Corporate Australia should take heed of the volatility and short-sightedness on display in Canberra. 

The global financial crisis was an example of the negative impacts of short-termism.
The global financial crisis was an example of the negative impacts of short-termism.

AP

Short-termism has plagued the private and public sectors for some time. With complex social systems (of which an organisation is one), it is almost a given that decisions made to meet short-term objectives will inevitably have longer-term unintended, usually negative, consequences. For example, while prohibition in 1920s America reduced social dependency on alcohol, it gave rise to organised crime and the mafia, which still afflict the country.

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The Global Financial Crisis was another example of the negative impacts of short-termism. Short-term thinking around investment returns, an emphasis on quarterly results and high incentives (million-dollar bonuses) for quick results in the financial services industry all led to market expectations of quick and high returns. This culminated in immensely volatile markets, excessive risk taking and, ultimately, the collapse of the system.

Another observable aspect of short-termism in any organised community is how long the leader stays in the job. If a leader is planning to be in place for only three years, he or she doesn’t don’t care about long-term growth and stability, focusing instead on achieving as much (or as little) as possible in that fleeting time.

In 2017, the average tenure of CEOs in Australia was 5.5 years – just above the global median. While CEO turnover in leading Australian companies has improved (it was 4.2 in 2012, the highest rate in the world at that time), a revolving door of leaders perpetuates a cycle of “new approaches”, leading to a lack of stability and ultimately to volatility in market dynamics – the market does not know what the organisation is and how they should think about the brand.

When leaders only stay for the short term they often don’t experience the consequences of their decisions. A decision made today is not reflected in bottom-line results for at least a year, if not two, so a leader can flit from job to job without knowing the real impact of their strategic thinking.

A revolving door of CEOs perpetuates a cycle of 'new approaches', leading to a lack of stability.
A revolving door of CEOs perpetuates a cycle of ‘new approaches’, leading to a lack of stability.

Louise Douvis

To avoid getting caught in the trap of short-term thinking, boards need to think more carefully about stability at the top of the organisation and they need to make sure their CEO reward systems reinforce long-term performance.

One simple strategy is to provide long-term incentives rather than short-term share options for senior executives, encouraging a focus on performance over the longer term. In my experience, a minimum of three years helps embed long-term strategic thinking, and around five years is ideal.

In terms of stability, this means encouraging longer tenures for CEOs (assuming high performance) by building strong relationships between the chair and CEO, while ensuring that behaviours and norms that promote long-term thinking are transferred to the CEO and the rest of the organisation. Further, the relationship between directors and the CEO should be a partnership rather than something akin to a governor and employee.

Succession plans

Lion planned well for the retirement of long-time CEO Gordon Cairns.
Lion planned well for the retirement of long-time CEO Gordon Cairns.

Rob Homer

Boards should also be developing active succession plans – not only for the CEO but for all members of the C-suite. Planned succession increases the odds of consistent thinking around strategic direction.

One great tactic deployed by food and beverage giant Lion when planning for the retirement of long-time CEO Gordon Cairns was to appoint their preferred candidate, Rob Murray, to the board while he was CEO of Nestle. This provided a smooth and stable transition and a maturation of goals.

Research has shown a strong link between CEO tenure and short-term versus long-term approaches. A 2014 EY Europe study found that companies with longer-serving CEOs were more likely to focus on long-term performance, with higher rates of market valuation growth, greater investment in R & D and overall higher capital investment.

A 2017 McKinsey Global Institute report, from a 2001-2014 study of 615 large and mid-cap US publicly listed companies, found that revenue of firms that took a long-term approach grew on average 47 per cent more than the revenue of other firms, and with less volatility. 

Moreover, these “long-term” companies exhibited stronger equity performance over time. On average, their market capitalisation grew $7 billion more than that of other firms between 2001 and 2014. Their total return to shareholders was also superior. 

The challenge for every organisation, be it government or commercial, is to strive for a balance of stability and change. Change leads to new ideas and innovation, while stability leads to consistency and quality. Perhaps political parties should be building succession plans and creating a pipeline of future leaders, rather than focusing on short-term popularity contests.

Shaun McCarthy is chairman of Human Synergistics.

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