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The Productivity Commission's Jo Smith says directors have emphasised the importance of having the right diversity of thinking, skills and experience at the board table

The Productivity Commission's Jo Smith says directors have emphasised the importance of having the right diversity of thinking, skills and experience at the board table

By Jo Smith*

Covid-19 is leading to a once-in-a-generation shock to Kiwi firms. This makes having the right boards more important than ever.

As part of its inquiry into frontier firms, the Commission conducted in-depth interviews with 22 New Zealand company directors. 

The study, supported by the Institute of Directors, explored the role of boards in firms’ decisions to scale-up, innovate and expand overseas. These characteristics are all associated with higher productivity and are features of frontier firms.

Directors emphasised the importance of having the right diversity of thinking, skills and experience at the board table. Directors with commercial, international, and industry or domain experience are particularly valuable for New Zealand firms, who can struggle to gain a foothold in bigger, more competitive overseas markets.

Entering new markets is a complex undertaking, requiring years of work to lay the groundwork. This includes building relationships on the ground, researching the local market, and tailoring products and systems. Internationally-experienced directors can help Kiwi firms avoid common missteps when expanding overseas, and build local partnerships.

While diversity of thinking is vital for effective decision-making, it is also important that boards are aligned with management in terms of a shared vision and aspirations for the company. In addition, the types of directors needed by a firm evolve through its lifecycle. So boards should be periodically reviewed to ensure a good fit with the firm’s strategy.

Directors pointed to a number of factors constraining firms’ ambitions to innovate and grow.

The composition of boards may be holding back firms’ risk appetites. The traditional approach of weighting a board with people from legal and accounting backgrounds can lead to a focus on preserving value and avoiding failure – “staying off the front page” – rather than growing value.

Directors described a lack of experience and comfort with risk-taking and failure in New Zealand firms. But strategic risk-taking and tolerance of failure are essential aspects of the innovation process. So recruiting directors with the “right DNA” to drive ambition and calculated risk-taking can help support innovation. Taking a long-term view to investments is also important, particularly for fostering the kinds of transformations that can push out the productivity frontier.

A companion report was prepared for the Commission by Professor David Teece and his colleagues at the BRG Institute (an independent, non-profit organisation founded by Berkeley Research Group, LLC). The report looks at how boards with strong “dynamic capabilities” can help firms innovate and prosper. Many firms focus on adopting industry best practices and technologies across their business functions. This is important for improving technical efficiency – “doing things right” – but will not be enough to lift New Zealand’s productivity trajectory towards that of its global peers.

Dynamic capabilities are concerned with forward-looking, strategic decisions about what and why a firm does – “doing the right things”. Boards with dynamic capabilities are outwardly focused – curious and externally engaged; aware of changes in technology, consumer trends and competitors. They can sense changes in their operating environment and identify opportunities. They support management in being entrepreneurial leaders, who can seize these opportunities and get ahead of the curve. Firms with strong dynamic capabilities are more resilient and more productive, allowing them to pay higher wages and support innovative cultures.

The authors observe that, “now, more than ever, boards need to favour the future, tolerate mavericks, support bold investment, and remove complacent managers to help shift lacklustre businesses towards the domestic productivity frontier and catapult the best New Zealand firms toward the global frontier”.

So how can Kiwi firms get the right mix of directors to help them lift and achieve their ambitions?

Firms can re-consider the types of expertise they look for in their directors, and where they look for it. Directors interviewed by the Commission suggested that firms venture outside their usual circles to appoint people, including those who haven’t been directors before.

Directors with international and commercial experience are generally thin on the ground in New Zealand. The Kiwi diaspora is one source that companies look to, particularly as many of these New Zealanders have returned home in recent months. Others remain in-market, and can provide valuable insights and connections for firms.

The current pipeline of CEOs is an important source of future directors, so it’s important to also build the skills and diversity of this pipeline. Directors can do this through mentoring and coaching senior management, as well as “leaning in” to directly support management in times of crisis.

Hiring the CEO is the most important decision a board makes. The corollary of this, is the need to exit the CEO if they are not performing or well-matched to the company and its aspirations. Directors described the need for courage, and the importance of soft skills, for having “difficult conversations” such as this.

The interviews with Directors also explored views on how firms make strategic decisions, the compliance burden faced by boards, and other challenges facing Kiwi firms.

The two studies highlight the important role boards play in lifting the productivity and performance on New Zealand firms. Between them, they offer new perspectives on what the boards of frontier firms look like and how they operate.

Read the reports on the Commission’s website: New Zealand boards and frontier firms and New Zealand frontier firms: A capabilities perspective. A summary of the key findings is also available.

*Jo Smith is Principal Advisor at the Productivity Commission

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Some inspiring catchphrases in our time of need. Fonterra makes a fantastic case study of expansion overseas.

Instead we need people will to operate companies here that really are competitive with other global companies. Yet they leave because the capital markets here are too small.

Making a pro-business environment where government departments and ministries do not harass businesses would be a good start. Inventing problems to justify the existence of a government job hinders our economy.

Digested version:

Scale-up, innovate, frontier firms, expand overseas, higher productivity, diversity, shared vision, aspirations, evolve, lifecycle, innovate and grow, strategic risk-taking, right DNA, transformations, productivity frontier, dynamic capabilities, best practices, business functions, doing things right, forward-looking, outwardly focused, externally engaged, entrepreneurial leaders, get ahead of the curve, innovative cultures, favour the future, bold investment, global frontier, in-market, connections, pipeline, leaning in, soft skills, new perspectives.

Yes, looks like the comms team at the commission had a bigger contribution towards writing this article than their econ team did.

Those who can do and those who can't join productivity commissions. Why not measure the success of NZ's productivity commission? How long have they existed and what % of our GDP is exported? Has it increased since the Productivity Commission has been active? The essense of capitalism is not just eternal innovation churning success to the top but also the rapid demise of the incompetant. So how are these commissions judged and who does the judging?

Risk aversion v risk management. As a qualified and experienced RM specialist, amongst other things, this is a common problem with most managers and leaders in any organisation and business. Because they don't understand it, they actively work to avoid being accountable for bad results, likely to justify bonus's. But business is about risk management, not avoidance.

i once queried a manager about his decision to stop the organisation undertaking a particular program because of risk aversion. I suggested he could have worked through the risks, created mitigations to either prevent them or limit their impact and staged the programme progressively to build the understanding of what they didn't know. His response - too hard and too slow. He condemned the organisation to mediocre results, but was happy with that, because nothing went south on his watch. Got a nice lucrative promotion.

Strangely lacking in foreign examples of diverse boards of directors. Take a hand full of successful international companies - looking around my living room say Samsung, Lego, Hyundai, Vodaphone - what are their boards like? Do they exploit international diaspora, do they have young and old, male and female?
""Entering new markets is a complex undertaking, requiring years of work to lay the groundwork."" - did it really take years of groundwork for Vodaphone to establish a profitable business in NZ; does Lego have a NZ branch?

I think diversity of thought is being confused with gender and ethnic diversity. Companies that fail to grow or adapt usually have senior leaderships with an unwelcoming attitude towards diversity of thought.
As a people, we've always been poor at having difficult conversations and juniors would rather agree with their bosses than put themselves in an uncomfortable position of challenging their seniors. That's where some of our love for status quo and difficulty to adapt to change comes from.

Much of this discussion is about balance: in an ever changing world new risks must be taken but they do need caution.
""Arnold Weinstock, who for 30 years dominated Britain's electrical and electronics industries with his giant General Electric Company, only to be ousted by critics who then virtually bankrupted the company""
""Burns Philp was once a major Australian shipping line and merchant that operated in the South Pacific""
They had board members willing to change the business plan and take a risk - keeping on doing what they were good at would have been far wiser.

the commission is becoming a slogan writer instead of a action.adviser.

for the first time, the number of top 500 Chinese companies on Fortune surpass that of the US.

there must be something that NZ and the world can learn from China.

I rarely agree with you but this time you are right on. Not just China although they would be top of the list but also Singapore, Taiwan, South Korea. Maybe NZ would have more to learn from successful but similar smaller countries but some aspects of how Chinese companies have been successful would be would be more informative than any report from our Productivity Commission.