Execs corralled into groupthink

If money, careers and future investment in Western Australia were not being jeopardised, it would be amusing to watch some of Australian biggest companies adopt a management policy best described as ‘run and hide’.

BHP Billiton, the world’s biggest resources company, adopted this practice in February when it dumped its most senior man in Perth, Jimmy Wilson, and created what it called a ‘simplified operating model’, which means all top-ranking executives will be based in Melbourne.

Santos, Australia’s second biggest oil company, did the same last Friday when it created a new executive team called Excom, downgrading its WA operations and with all senior positions, including all members of Excom, to Adelaide.

Rio Tinto, Australia’s biggest iron ore miner, appears to be in the process of doing much the same with a rolling series of management changes that will give the business more of a London focus than ever before (with major changes expected in its Perth office).

There is a common thread linking the mining and oil companies – heavy losses caused by tumbling commodity prices, along with poorly executed project developments (cost overruns and completion delays) that have led to punishing asset value write-downs.

In other words, the resource groups have been stung by their own management decisions in what outside consultants see as self-inflicted wounds.

The reaction – and it is so common that it might even be based on advice from the same management consultancy – is to call everyone with significant decision-making power back to head office where they can be plonked in an office close to the chief executive and watched.

The concept is simple, with the kindest interpretation being that, by creating an Excom (in the case of Santos), or a simplified model in the case of BHP, it is hoped that a new team mentality will develop whereby everyone will work for the better of the company and risky projects will be avoided.

In fact all that typically happens in such situations is that a group of (mainly) men will form a circle around the chief executive to protect him from external criticism – in much the same way wild animals form a pack, or bees protect the queen, with all members of the inner circle expected to agree on every policy decision.

It is from this type of management style that a dreadful disease develops called ‘groupthink’, an affliction that destroys originality and ensures everyone agrees with the chief executive, whether he or she is right or wrong.

If you have lived in WA for long you will have seen this happen repeatedly, and always with bad results for the companies involved and the state.

The disturbingly predictable process goes like this:

• there is a commodities boom and big companies (along with banks and stockbroking firms) rush people out of head office to the site of the action, with WA a prime destination because this if where many of the commodities are found;

• for a while all goes well, but when the cycle turns and easy profits dry up there is panic at head office and questions about what’s happening in WA;

• in truth, nothing is happening in WA, except a normal turn of the commodities cycle, which is as predictable as the rising and setting of the sun; and

• alarm bells ring as prices fall, scapegoats are sought, heads roll, the chief executive calls his senior lieutenants back to head office and a period of group think develops.

For anyone unfamiliar with groupthink here’s a useful definition: ‘a psychological phenomenon which involves a group of people seeking conformity with the result often being irrational or dysfunctional decision making’.

Time will tell whether BHP, Santos and other big resource companies are embarking on a fresh bout of groupthink, though it is worth pointing out that if the recall to head office is based on the poor performance of outlying business units, then it is both wrong and too late.

Despite the sluggish recent performance, WA has endured its crash and is now in recovery mode.

Commodity prices have bottomed and are showing signs of turning up. Property prices are also rising after a few bad years, investment is flowing back into the resources sector and the BN30, a measure of 30 WA-focused stocks is outperforming the all-ordinaries index of the ASX.

That doesn’t mean the BN30 is rising. It has actually been flat since January 1. But in this climate flat means outperformance, because the all ordinaries is down 5 per cent.

So the call back to head office, which is a long way from operational assets (where companies actually make or lose money), is a futile exercise that will fail, and then be reversed with decision-making returned to where it belongs – at the coal face.