21/10/2010 - 00:00

Tough choices in business of government

21/10/2010 - 00:00

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How would the performance of our political leaders rate if Australia was a business?

IMAGINE if Australia was a company and its corporate leadership faced the outlook that politicians do today.

In a properly functioning corporate environment, the rise of the resources sector would be treated as a major opportunity at which all necessary people and capital would be thrown.

It is akin to having a once-small part of the business grow to become a dominant feature.

While managers of older, stagnating parts of the business might bemoan the loss of influence, that is natural course of business.

A good example of that is a conglomerate like Wesfarmers and its investment in Bunnings. The hardware business was a minor operation in the early 1990s, taken over as part of the acquisition of the timber and forestry assets of once-independent Bunnings.

Wesfarmers recognised the opportunity and invested heavily in the concept, learning enough about the strength of retail to confidently purchase the ailing Coles supermarket business.

Bunnings now dominates the hardware landscape, and it is estimated the Coles’ major rival, Woolworths, will take close to two decades to catch up, if it ever can.

Importantly, Bunnings is still growing. Did Wesfarmers saddle that division with extra charges or tell it that there’s no more capital for growth? No, of course not. Instead, it has kept on harnessing that growth and will do so until it stops, at which point it will reap the rewards through a higher level of earnings or an asset sale.

When Bunnings really started growing as a result of its expansion on the east coast, Wesfarmers even moved the division’s headquarters there to be closer to consumer markets where the major development was taking place.

In Australia, the clear opportunity is the resources sector, most notably in WA. The economic outlook is so strong that sometimes it is difficult to grasp the scale of it.

This is not a new revelation, nor has it been kept a secret, yet most of Australia’s population – its shareholders – seem to resent this success and fear the opportunity that confronts them.

They don’t see that every extra tonne of iron ore earns more royalties for the states; that 30 cents in every additional dollar of profit goes in the national coffers; or that rising resources sector wages push those workers into higher tax brackets, exponentially increasing how much they pay to the federal government.

Instead they view the mining sector’s success from a distinct prism which reflects negative images such as the impact on regional of status, a net loss of people and rising costs due to internal competition for resources.

They’d seemingly prefer Australia returned to the old days when farming was most important or when manufacturing was in its heyday.

That is akin to Wesfarmers shareholders pining for the days when it was a freshly listed company still focused on agriculture, as it had been when it was a cooperative. In its early corporate days, Wesfarmers actually did have board members opposed to expansion outside of agriculture. Thankfully they lost that fight. In today’s governance, they might have been acting against their fiduciary duty.

Regrettably, instead of trying to take advantage of our good fortune and helping make the resources division of Australia the dominant global force in the sector, the management of Australia has acted in a manner contrary to that expected of a company’s leadership.

Most notably, Australia’s leadership has attempted to saddle the industry with extra costs in the form of taxes, which it then wanted to redistribute to other poorly performing divisions whose management has no plan for improvement.

Can you imagine the leadership of a well-run company doing this? Sitting around the board table and deciding to transfer some costs to the strongest performing unit that shows the best, perhaps only, signs of growth?

They are not just wishing to subsidise badly performing business units; Australia’s management also wants to spend heavily on research and development in new areas where the company has no expertise or, indeed, understanding that there is a clear opportunity worth the investment risk. Worse, they want the R&D to take place in the most unlikely areas first, before investing in places where it might actually have some hope of paying off.

Some companies do actually make these mistakes. Mostly they go broke as a result.

If you view Australia as a company instead of a nation, you’d be bewildered by the reaction to the upheaval in the rest of the business. Instead of understanding the pain that comes with growth, it is as if we’d rather not have that development at all.

Managers of other, poorly performing divisions keep complaining that their best employees wish to work in the resources branch because it’s sexier and pays better.

In a real company, those managers would be told to lift their game. It would make sense, after all, for people to leave poorly performing business unit and transfer to strongly growing ones. The advantage of this internal transfer is corporate culture is retained, so the growth is even more efficiently harnessed.

In Wesfarmers every division must run consistently at a certain rate of return on capital or be put up for sale.

Of course, countries are different to companies because the public votes on local issues, so their self interest is limited to proximity rather than the overall health of the company, as shareholders typically do.

Usually, the income generating capacity of a nation is so broadly based that one region or sector won’t cause such upheaval. Furthermore, in the labour-intensive past, productive industries and regions tended to have the most people, so economic opportunity and votes went hand in hand.

Right now, things are different.

There is a massive opportunity for Australia to pitch in and prioritise the development of WA’s north-west while this unique moment exists.

If we get it right, $220 billion in near-term investment will result in a higher level of steady income for the nation and quality jobs for its future graduates long into the future. This is the kind of long-term economic income generation that companies seek as a cash-flow base from which to build further businesses. But you have to invest first.

No-one is suggesting we abandon every other economic pursuit. Like any business we have nurture some operations through transitional times and ensure we have diversity, but we do need to focus our attention on the opportunity, not the just cost.

The people in Australia’s boardroom need to take some lessons from our best business leaders before it’s too late.

• mark.pownall@wabn.com.au

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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