Growing the NZ economy:The contribution of Boards: Growing the NZ economy: The contribution of Boards David Skilling May 2007 www.nzinstitute.org http://www.sheffield.co.nz/news/David-Skilling-Presentation-May07.pdf


AGENDA : AGENDA New Zealand’s economic performance and prospects New Zealand’s current level of international engagement The role of New Zealand Boards Developing Kiwi global champions Creating a competitive New Zealand economy


NEW ZEALAND’S RELATIVE INCOME DECLINE WAS HALTED DURING THE 1990s, BUT LARGE INCOME GAPS REMAIN: NEW ZEALAND’S RELATIVE INCOME DECLINE WAS HALTED DURING THE 1990s, BUT LARGE INCOME GAPS REMAIN Real per capita GDP (OECD average = 100) USA Australia Finland New Zealand Ireland Source: OECD.


NEW ZEALAND’S GDP PER CAPITA IS NOT WITHIN THE TOP HALF OF THE OECD: NEW ZEALAND’S GDP PER CAPITA IS NOT WITHIN THE TOP HALF OF THE OECD Source: OECD. GDP per capita (PPP) indexed to OECD average, 2004 OECD Average High Income Low-Middle Income High-Middle Income


Slide5: Per capita income Labour Productivity Output per hour worked Labour Utilisation Total hours worked x = COMPONENTS OF PER CAPITA INCOME


NEW ZEALANDERS ARE HARD WORKING BUT ARE NOT AS PRODUCTIVE AS WORKERS IN OTHER COUNTRIES: NEW ZEALANDERS ARE HARD WORKING BUT ARE NOT AS PRODUCTIVE AS WORKERS IN OTHER COUNTRIES Hours worked per capita (OECD Average = 100) Source: Groningen Growth and Development Centre and the Conference Board, Total Economy Database, August 2005. Output per hour worked, 2005 (OECD Average = 100) New Zealand Greece Spain Japan Iceland Canada Australia Switzerland USA UK Sweden Finland Italy Denmark Austria Ireland Netherlands Germany Belgium France Luxembourg


INTERNATIONAL ENGAGEMENT IS VITALLY IMPORTANT TO NEW ZEALAND’S FUTURE ECONOMIC PERFORMANCE: INTERNATIONAL ENGAGEMENT IS VITALLY IMPORTANT TO NEW ZEALAND’S FUTURE ECONOMIC PERFORMANCE New Zealand’s economic performance has been strong over the past 15 years, but a substantial economic challenge lies ahead The main driver of New Zealand’s stronger economic growth over the past 15 years – labour force growth – cannot be sustained at these levels over the next 15 years For a small country like New Zealand, achieving higher rates of productivity growth will necessarily involve increased international economic activity Exporting of goods, services and ideas, and outward FDI by New Zealand firms New Zealand’s ability to compete successfully in the global economy will have a defining influence on our future economic performance


NEW ZEALAND’S EXPORTS HAVE GONE SIDEWAYS AS A SHARE OF THE ECONOMY OVER THE PAST 20 YEARS: NEW ZEALAND’S EXPORTS HAVE GONE SIDEWAYS AS A SHARE OF THE ECONOMY OVER THE PAST 20 YEARS Source: World Development Indicators (1971-1987), Statistics NZ (1988-2005). Exports as a % of GDP


NEW ZEALAND HAS NOT KEPT PACE WITH WORLD EXPORT GROWTH: NEW ZEALAND HAS NOT KEPT PACE WITH WORLD EXPORT GROWTH World OECD New Zealand Value of Goods and Services exports, indexed to 1971 19% Gap 66% Gap Note: 1971 = 100. Source: World Development Indicators.


NEW ZEALAND EXPORTS LESS THAN MOST DEVELOPED COUNTRIES: NEW ZEALAND EXPORTS LESS THAN MOST DEVELOPED COUNTRIES Note: OECD average for 1990 and 2003. Source: OECD; National government statistics for Chile, China, and Singapore. 142 168 Exports as a % of GDP, 1990 and 2005


Slide11: NEW ZEALAND’S OUTWARD FDI REDUCED THROUGH THE 1990s, PARTICULARLY RELATIVE TO OTHER DEVELOPED COUNTRIES Outward FDI as a % of GDP Source: UNCTAD. New Zealand Developed Countries


Slide12: NEW ZEALAND IS DISTINCTIVE IN HAVING A LOW AND REDUCING OUTWARD FDI STOCK Source: UNCTAD. 1980 1990 2005 Outward FDI as a % of GDP


Slide13: THE EXTENT OF NEW ZEALAND’S INTERNATIONAL ECONOMIC INTEGRATION HAS REDUCED SINCE 1990 Note: Internationalisation Index = FDI/GDP + Exports/GDP. Source: UNCTAD; OECD; National government statistics for Malaysia and Singapore. Internationalisation Index, 2004 Exports/GDP FDI/GDP ## Index change since 1990 99 268


Slide14: Forbes 2000 companies (Column) Per Million population (Line) Sources: Forbes Magazine. NEW ZEALAND HAS NOT GROWN LARGE COMPANIES IN THE WAY THAT OTHER COUNTRIES HAVE 711 326


Slide15: Forbes 2000 Companies (Column) Olympic Medals (Line) Note: Olympic medals from 1996, 2000, and 2004 per million population and Forbes 2000 companies per million population. Sources: Forbes Magazine; The New Zealand Institute calculations. NEW ZEALAND’S INTERNATIONAL PERFORMANCE SEEMS BETTER IN SPORTS THAN IN BUSINESS


THE CONTRIBUTION THAT BOARDS CAN PLAY IN MOVING NEW ZEALAND FORWARD: THE CONTRIBUTION THAT BOARDS CAN PLAY IN MOVING NEW ZEALAND FORWARD New Zealand has some very significant economic challenges ahead New Zealand’s current course and speed is not sufficient to achieve New Zealand’s economic goals There are two related roles for Boards in being part of the solution to this challenge Creating Kiwi global champions: growing many more New Zealand companies into international markets Strengthening the competitive position of the New Zealand economy by contributing to the public debate


RESEARCH SUGGESTS FOUR GUIDING PRINCIPLES FOR INTERNATIONAL SUCCESS BY NEW ZEALAND FIRMS: RESEARCH SUGGESTS FOUR GUIDING PRINCIPLES FOR INTERNATIONAL SUCCESS BY NEW ZEALAND FIRMS Focus on competitive advantage Explicit decision on how to compete Allocation of scarce resources to match decision New market choices based on fit with competitive advantage Experienced insiders in global markets ‘On the ground’ learning in new markets before major investment Rotation of executives between markets International growth in steps Increasingly bold steps into new markets Formal processes to learn from each step Commitment to international success Recognition of imperative Bold aspirations


SOME NEW ZEALAND FIRMS HAVE FAILED TO FOLLOW THESE GUIDING PRINCIPLES: Commitment to international success Comfort with domestic status due to perceived security of domestic position, or capital market scepticism Focus on competitive advantage Replication of NZ model, with insufficient regard for new competitive environment Bias towards choosing Australia as first offshore market Experienced insiders in global markets Major investment based largely on outside-in analysis NZ executives with little international experience leading offshore operations International growth in steps Risky ‘bet the company’ moves SOME NEW ZEALAND FIRMS HAVE FAILED TO FOLLOW THESE GUIDING PRINCIPLES


THE ROLE OF BOARDS IN CREATING KIWI GLOBAL CHAMPIONS: THE ROLE OF BOARDS IN CREATING KIWI GLOBAL CHAMPIONS Governments don’t grow economies, companies and people do. For the New Zealand economy to grow, there is a need for ambition and disciplined execution at the firm level Boards should have an important responsibility in setting the aspiration for the company, pushing on international engagement They need to signal to management that they welcome proposals for investment and growth, even if they do not sign off on all of them Boards need to take responsibility for supporting, championing, and encouraging growth, rather than on managing risk If cut down on the risk, also reduce the likely return to the firm - and to New Zealand


ARE BOARDS CURRENTLY PERFORMING THIS ROLE?: ARE BOARDS CURRENTLY PERFORMING THIS ROLE? Boards spend a lot of time on issues that are related to compliance, with a consequent focus on risk management rather than on the major strategic issues Surveys reveal that there is a belief that the focus has shifted towards managing downside risk rather than looking to seize the upside potential Anecdotally, many New Zealand companies seem to operate in a risk averse manner A 2006 McKinsey & Company survey of directors in Australia, New Zealand, and Canada, found that directors have concerns about the growing regulatory compliance burden Only 20% of respondents believe that they are currently a strategic asset Boards have a key responsibility for improving the way in which they work and becoming more effective Ensure right Board composition: the need to have people with business experience, knowledge of international markets, comfort with decision-making under uncertainty Create culture of partnership between Board and management Focus the Board’s agenda on the issues that really matter


EXERCISING PUBLIC LEADERSHIP: EXERCISING PUBLIC LEADERSHIP It is important for New Zealand that business is engaged constructively on the issues that matter, and make a contribution to the public debate Not healthy to leave the debate up to the politicians and officials There is a strong business presence in public debates in countries like Australia, the US, and the UK, which leads to a richer debate – there is a sense of civic responsibility This is good for New Zealand, but there is also some enlightened self-interest at work here: Ensure that there is a supportive public environment in which to operate and that business is regarded as a contributor to important issues Also helps business to develop a deeper view as to the issues that will impact on business that they may otherwise miss


CONCLUDING REMARKS: CONCLUDING REMARKS The New Zealand economy has great potential, but also faces some very significant challenges Meeting these challenges is partly about developing better policy settings, but more significantly it is about leadership and vision and a willingness to take some risks There is a need to develop a stronger growth mentality in the private sector and to become better at and more comfortable with taking risks Business leadership in New Zealand has a vitally important role in moving the New Zealand economy forward, in terms of both the ways in which they exercise leadership within their firms as well as in their contributions to the national conversation


Growing the NZ economy:The contribution of Boards: Growing the NZ economy: The contribution of Boards David Skilling May 2007 www.nzinstitute.org