Up for grabs Growth is there for the taking

 

Future-proofing a company is simple. The history of Australian listed companies since the first listing 156 years ago shows you need to be a bank, a very large resources company or a duopoly. For all the talk of killer competition, most large organisations, including Silicon Valley tech companies, are operating in rapidly consolidating industries. And fears that disruption will turn mega corporations into mini ones means disruption has become the new Y2K bug – a convenient distraction from the main game.

Perhaps those Australian companies that take their boards and senior executives on annual pilgrimages to the Valley to learn how to manage disruption should focus on learning how to manage in a monopoly or duopoly from companies such as Alphabet, Amazon, Apple, Microsoft and Uber.

If you’re not running one of those Australian winners, the answer looks simple: grow revenue and drive productivity. But as you know, simple solutions only exist in the minds of cowboys, fools and investment bankers.

It’s become even harder over the past five years because the political environment has changed so dramatically. A revolt against globalisation is leading to growing nationalism. Along with more consolidation, we will see more official and unofficial regulation; governments responding to populism by limiting corporate autonomy; the institutional shareholder becoming the dominant force in corporate governance; more managerialism and even less innovation; an even stronger focus on short-termism; and limited productivity growth.

As Jeff Gramm writes in Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism (HarperCollins, 2016):

The publicly owned corporation has been a remarkable engine for progress and growth because it can place large amounts of capital in the hands of the right people with the right ideas. Without proper oversight, however, public companies can squander unimaginable amounts of money and inflict great harm on everything around them.

The rise of shareholder activism and its often correct focus on management waste of capital has had one critical side effect that works against future-proofing. As the Roosevelt lnstitute’s J.W. Mason points out: 

Before the 1970s, American corporations consistently paid out around 50 per cent of their profits to shareholders, retaining the remainder for reinvestment in the company, and had as their primary objective the survival and growth of the corporation itself.

“However, over the past 30 years, shareholder payouts have averaged 90 per cent of reported profits. In recent years, including 2014, total payouts have been greater than total profits. This is largely due to buybacks – corporations’ purchases of their own shares – which were almost non­existent before the 1980s but now account for almost half of corporations’ payouts to shareholders.

Draining companies of capital by increasing payouts to shareholders at the expense of investment in the business makes it harder to “grow revenue and drive productivity”. It’s no wonder one of Australian analysts’ most common questions about a company is “Where’s the growth coming from?”

Unfortunately, everyone is convinced that only small start-ups can do innovation. However, as Harvard economist Joseph Schumpeter said decades ago, large-scale firms are “the most powerful engine of progress”. One reason is that only large companies can do globalisation. In Australia, they as well as their shareholders, with a few exceptions, have been convinced only non-Australian companies can do globalisation.

Large institutional investors reward their employees for safety and security, not risk. Company boards and management want to please their shareholders by fitting in. And an illness companies increasingly share is the internal politics generated by avoiding accountability, which produces just another form of bureaucracy.

Finally, our government, like others, is responding to populism by adding more regulation, treating large companies as pariahs rather than “remarkable engines for progress and growth”, and ignoring the reasons the US digital economy has been such a driver of GDP growth compared to Europe’s.

So the real issue in Australia is less about future-proofing than it is about our governments, institutions and companies working hard to prevent their own future.

 
Julie Connolly