Governance Bites #64: political and economic environment, with Shamubeel Eaqub.

In this episode, Mark Banicevich talks to Shamubeel Eaqub about directors and their knowledge of the political, social and economic environment. He asks why current knowledge of these factors is important, and about examples of when such knowledge has impacted board decisions. They discuss how directors should keep abreast of these factors, and how they can optimise their time keeping up to date. Mark also asks Shamubeel what advice he would give to a new director. 
Shamubeel Eaqub is an independent economist who is not afraid to take a contrarian view. He is a director of Positive Capital and Community Finance, and a former director of the Central Economic Development Agency (CEDA), Simplicity and the Aotearoa Development Cooperative. Shamubeel has lectured at the University of Otago MBA, and has been a regular media commentator with MediaWorks and Fairfax Media. Shamubeel is a Chartered Financial Analyst (CFA) with experience at the New Zealand Institute of Economic Research (NZIER), Goldman Sachs JBWere, ANZ and Statistics NZ. 
#governance, #governancebites, #director, #boardroom, #boardcraft, #economist

Transcript

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My name is Shamubeel Eaqub. I'm an economist. I'm here with Mark today to talk about the economy, its role in governance, business, and the wider setting. Hi, welcome to Governance Bites. I'm Mark Banicevich, and today, once again, I have the pleasure to spend time with my friend Shamubeel Eaqub. Shamubeel, thank you very much again for your time. Pleasure. You're an economist. Quite well known in the New Zealand market, right. You're in the media on occasion. You've worked at NZIER [New Zealand Institute of Economic Research], you've worked at JBWere. You're a CFA [Chartered Financial Analyst]. You're also now on a number of boards, as well, and have been for quite some time, right. So quite an experienced director now, as well as advisor to boards. And as an economist, I expect that a large, well, some of the value that you would bring to a board is a very broad understanding of the political, social, and environmental context around the company. Why is it important for boards of directors to have current knowledge of political and environmental factors? Well, because it's essentially, you know, if the business were fish, that is the water you're swimming in. It's the context, right. It's what's going on around you, and you have to suit yourself, or you have to tool yourself to be able to respond to that. Sometimes it's about understanding the history of where we have come from. Sometimes it's about understanding current risks, and sometimes about trying to identify future risks and opportunities. It's all of those things. Economics is just one lens, but it's a very helpful lens to help us, I think, really understand what's going on. It's about the context. I think that's the right word for it. It's the context of where you're operating your business. I recall you also said last time we caught up, you've got the economy broadly, then you've got the industry that the business sits in, and then you've got the business inside that. And all of those things will have factors that influence the business itself. It doesn't operate in a vacuum, as you say. Absolutely. You, know, I always tell my audiences that just because something's happening in the national economy, doesn't mean that's what's happening in the industry. Nor does it mean that's what's happening in your community. Nor does it mean that's what's happening in your business. So you have to understand all of those things, but you have to be able to make sense of it. In that sense-making is where the value is added. Because that's when you discover where your strengths and weaknesses are. Right, right. We recently changed government. Can you provide an example of where knowledge of the political environment was particularly important in a board decision? Look, I mean, we knew with a change of government, there would be big changes in housing policy, for example. And that meant that those businesses or organisations that were dependent on previous policies had to think really hard about what they would do in the future. Because essentially their environment, their business environment, had shifted radically. And we're still going through that, because when there's a change of government, quite often there will be a pause on old programmes and an invention of new programmes. And there is probably a good 12 to 18 month period when you're just sitting in this kind of vacuum. So, a lot of businesses have to learn how to navigate that period. It's not just housing. It could be in infrastructure, because infrastructure projects are on pause. Or it could be in a whole range of other things. We also know that different governments will respond differently in terms of what they regulate, how they regulate, how much they tax, how much money they spend on different things, how much infrastructure they invest in, or what type of infrastructure. All of those things, right. It's again quite context- specific, but understanding the wider context means that you understand what the runway looks like, because of this external change that's taking place. Right, and you alluded before to understanding the risk factors, and the risk of a change in government. When, you know, policies tend to be announced leading up to an election. That gives you the opportunity as a director of a company to predict what the impact could be on the business, and then adapt to it if the change happens or whatever the case may be. Well, it's a little bit more complicated than that in New Zealand because we have MMP [mixed-member proportional representation]. Yes. As a result of that, we don't get what was announced in the election campaign. There's a lot more uncertainty around the final form of what kind of policies will come through. And so, there's a little bit of, you have to be responsive to what's coming. But what you can do, is you can prepare yourself, and you can know that here is the broad range of ways things might change. You still have to, I think, be quite reactive, - Yes. - because you can't be fully proactive, because you don't know what you don't know. But it's important for you to understand that change in politics can have a really big impact, and knowing that can help you not do silly things, and not over-invest in things that might get turned off, or whatever it might be. Knowledge is power, right. Yes. And as an economist, that's what I hope I can provide to my boards, or to the boards that I sit on, or the boards that I advise. How do you contemplate this shift that's coming? Some of the things that I think happen are not just around a particular shift in government. I have a very strong thesis that we are going to see much more frequent changes of governments over coming decades, here and abroad. Because the voting public are looking for quick solutions to difficult problems. And it's not possible. So what we're likely to see is lots of changes of governments, a lot of flip-flops in policies and policy direction, and that means businesses will be navigating a more uncertain political and policy environment. It's less about the ideology of particular policies and more understanding what happens when there is change, and how do you respond to the change when it happens. Yeah, right. Bring on a four-year term rather than a three-year term. Well, I have mixed feelings about that, because four-year terms of a bad government — that extra year is extremely damaging and scarring. I'm not convinced that an extra year of the Conservative government in the UK[United Kingdom] did the UK much good. Yes, that's a fair comment. Although over there they've got a five-year term, haven't they, in the UK. I think it's five years. And they really did a huge amount of damage, right. I mean, the last government was frankly quite disappointing. We, on the other hand, with a three-year term, people tend to say they've got one year to get their feet under the desk, one year to make change, and then one year to prepare for the next election. That's true, but it just means that our political parties should be much more mature and be ready to go with policies when they are in power. They know that it's three years. This is not a surprise. It has been like this for many decades. Why it still takes them so long to get cracking, I don't know. Arguably, one of the things that we know from working in New Zealand is it's a small country. It doesn't take as long to change the direction of a small ship as it does the direction of a very large ship, so we should be a little bit more agile than some of the larger economies. Well, I think, in many ways, we can be. You saw through COVID, for good or bad, New Zealand was extremely responsive, and we were able to navigate the initial phase of COVID response really well, with relatively broad consensus support, because we're a small country and we were able to do that. We were not able to maintain it, but I think we were able to do that initial response. I think what that shows is that being small gives you that opportunity, but it's not a given. Absolutely. Let's move on then to environmental and social factors. Can you provide any examples of how they impact board decisions? Yeah. The social stuff probably weighs more heavily on me than the environmental stuff. Not because it's not important. It's just where my expertise lies. Equity is a really important part for me, both from a business perspective and from an outcomes perspective. When it comes to equity,

some of the things I ask about are: 8:01

What's our hiring policy like? Are we actually treating our people right? Are we looking after our people? Our people should come first because a business is simply a collection of people. It doesn't matter what industry, or what you do, the reality is every business is simply a collection of people. If those people are happy, your business will do better than the alternative. The second part is around what impact does it have on our customers? And the third thing is what impact does it have on the wider society? The impact on customers is around segmentation, around understanding. Are we doing a good job? Are we doing everything that we can to look after them? But also, the third part, around that external thing, are we unintentionally hurting something, or doing something bad for somebody? That's a much harder question, right. Because you kind of go, "My business is to do that. It's not that." But if our actions are having a negative effect elsewhere, we need to think about it, because that's part of our responsibility. The social stuff weighs on me from that side of things, and there are no easy answers, but these are questions that we need to ask. So then our team always know that, (1) we believe they are important. That they are important, critical members of the team. (2) That we understand our customers really, really well. And if we don't, we should get to know them much better. Segmentation is everything for me. We have to know our customers because otherwise, you're not doing your job well. And the third thing is really around, well, is there social licence? And the wider social impact of our business. If not, why not? Right. So, in terms of the discussion, it was around an outward-facing view of the people in the business and their impact on their customers and society. I know that you're also involved in the conversations around an inward-facing view about how are our customers are changing over time? How is society changing? What impact, or how should our company adapt to those changes. Have you got any thoughts on those sorts of changes? Yeah. I was speaking to one of my clients quite recently, where they have just celebrated their 100-year birthday and they wanted to look forward for the next 100 years. And I said, "What New Zealand looked like 100 years ago, looks nothing like it does today,"and what we look like today will look nothing like what we will look like in 100 years' time." And the rate of change is increasing. It is. And so, you know, that old trope that the only constant is change, but the change is getting faster, right? But the reality is that this business has lasted the distance, over 100 years, not because things haven't changed, but because they have changed with the change. Yes. They have responded to the change, they’ve adapted, and they've remained relevant. And so my advice to them was, "Yes, we can see some things that we can predict,"around demographics, around geography, around how and where people live,"but there are also many things that we won't be able to respond to." What brings you back when you're looking forward a long way is being really clear in your vision and purpose. So, you know, that's the kind of, that's the strategy, right. That's a strategy in a line, right. It's your vision and purpose. If you really understand your vision and your purpose, then the changing context of the economy, whether it's in demographics, technology, geography, whatever, politics, it doesn't matter so much because you know how to respond to it. Yes. And one of those responses might be that this business is no longer relevant, and that's also okay. Yeah, right. Now, with all of these factors of change, it’s your day, your bread and butter to keep on top of all this sort of stuff as an economist. How should directors, broadly, keep on top of these factors? I think with difficulty, because we are overwhelmed with information, but not with insight. So my strategy is to pick individuals that I really trust. Okay. So you can't listen to everyone; you can't consume all the media. So you have to really focus your attention on the people that are able to make you think, that are able to inform you, and that are able to ask or help you ask good questions. So I've tried to narrow my field of vision towards things that really matter. In my professional capacity, it's a little bit easier because it's quite evidence- and data-based, so you can focus on the data, you can focus on the literature that helps you kind of find boundaries. Yes. But if you're simply kind of consuming media, it's like a fire hydrant. It's too much. So you really have to filter, filter, filter. And recommendations are great, right. Because, you know, you have peers, and peers will tell you, "I heard this podcast," or "I talked to this person," or "I read this thing,"and it was excellent." And you go, "Yeah, I will go and check it out," because it came from a personal recommendation. I was just going to ask you that. Are there any sources that you would recommend to a general director audience? Probably not. And probably not because it depends on your interests. So what I get from reading the Financial Times is not necessarily what you will get reading the Financial Times. I find a lot of joy from it, but not many people might. So I don't like to recommend particular things to people because of that. But if I find something that I read and I go, "Oh, Mark's going to really enjoy that," then I will send it to you, right. Because I know that there's a nugget there that's important to you. Yes. And there's an act of generosity there, right. It's you taking the time to think about somebody else who might benefit from this piece of information. And that creates that information content much deeper and richer. So, I won't make a recommendation because of that, because I think it's a little bit horses for courses. But you know what works for you. Yes. So narrow your focus on the things that you really care about. But be open to exploring new things when it comes with strong recommendations from people you trust. Right. And as you say, if you have a particular piece that is targeted, that you think suit a particular individual, passing it on to that individual is a great way to go. I do take your point about the Financial Times. It was a regular source of reading when I was working at the FMA [Financial Markets Authority], and it's a great source of what's going on globally. I find that we lack, in New Zealand media now, a good global lens, and I find that that was a really good source. Yeah. Which actually brings me on to my next question. How important is knowledge of current international events to a local business? Again, it's a little bit context-specific. You know, if you're on a board, you need to have a good grasp of that whole kind of layered approach to the world, right. So you need to have a good understanding of what's happening in global events. You need to have a good sense of what's happening in national events, and local events, and industry events, and all those things. But you can't get overwhelmed by it. I think it's very easy for people to become obsessed with the information flow, and I see that at the moment a lot, because information is so easy to access. We consume too much. And by consuming too much, we don't have time for reflection. And in fact, the biggest value an experienced person or a board director brings is reflection and insight and time to sit with things, letting things settle. I cannot [over-]emphasise the value of that. Spending an hour with a thought is extremely powerful. You'll probably get more done in terms of understanding the issue, having good questions, and coming to a solution by spending the time on reflection than reading five papers over that one-hour period. Right, right. I was thinking about something to follow on from that. In terms of, of course, the international knowledge will be very dependent upon the context of the business that - Sure. - you're working in. If they're an exporter, for example. And we have a luxury in New Zealand that we are at the bottom end of the world, and a lot of the significant global events don't have as material an impact on us as they do on countries, for example, in Europe and Asia. Sort of. They will certainly impact us. It depends on what your business is. Yes, absolutely it does. On your business and on your industry. But, you know, we have got this - We have some distance. - kind of bubble around us that can keep us safe in a lot of events. But Mark, I think that's also the reason why that awareness of global events is really useful because you've got the lead time. You don't need to be too prepared in some ways. By understanding what's going on, it means that you have time to prepare still. More often than not, we're a little bit behind, and that's a good thing from a business risk perspective. Yes. That we don't get hit with the things quite so quickly. No, absolutely. I mean, the reason why I like following international evidence and literature is because more often than not, they've dealt with or thought about issues that we haven't tackled yet. And so it's almost like a fast follower; somebody's already done a lot of the thinking for you. Yes. Nothing's new, right. Nothing in this world is new. So we have this extraordinary luxury of being able to lean on the bright minds from around the world to be able to understand our context. So, there is a small amount of translation that's required, but those global events, the global literature, the global research can quite often be translated into a New Zealand context with a small amount of effort. The other challenge that I find is, quite often we may not be hit by the primary impacts of a global event, but we will often be hit by the secondary impacts. And seeing what those are, predicting those secondary impacts can sometimes be a little bit harder. You know, what are the impacts on shipping? What are the impacts on oil prices? Those sorts of things that then affect us? Sure, I mean, I think, let me give two examples, right. So that political volatility that I talked about. Well, I think that was pretty well predicated or predicted by Trump and Brexit. And since then, what we have seen is this kind of outpouring of violent shifts in politics, right. Whether you look at the UK or France or wherever, there are these big shifts in politics that are taking place. That's a global event, a global trend - Yes. - that's actually really worth watching. And I think we're going to see the same here. Like I said, I don't think we are going to see stable governments, you know, successive terms of government in the same way we have in the past. But also, there are very immediate things that happen, like disruptions to the shipping industry. That really matters for New Zealand, right. Certainly does. Because our trade, - We rely on shipping. - Yeah. So, you know, we import so many goods and so much stuff. And the shipping, whether we have the capacity and the cost, both of those things matter. So in New Zealand, roughly about 5% of our input costs are shipping costs. Right. Wow, that's high. So when it increases by 100%, that's a lot. It certainly is. Right. So it has a big impact. So we do have to be engaged because, yes, it feels like New Zealand is isolated in some ways, but we're extremely connected through trade, capital flows, people flows, information flows. So I think it's that kind of caution, you know, finding that balance between not being overwhelmed by the information. Yes. But being on top of it enough so that you're prepared. And again, the way to do it is not to try and consume everything. It's to consume a trusted source and expanding that source when you need to. Yes, yes. Right. Well, one final question for you then. As a director, what advice would you give to somebody starting a governance career? A good mentor. So, I think having a good chair really does help, but if you don't have that, then having somebody who you can talk to about your experiences and your questions and issues is really helpful. I've been very fortunate to have worked with some excellent chairs, but also boards who have been very nurturing, caring, and collegial. And you do need that. Even though you might be very experienced and good at what you do in your professional life, this is actually a new thing. Yes. A new skill that you're learning, and it takes time. So, like anything, learning by doing, but learning from the best short-circuits the process. Yes. So to me, there's, the mentorship is really powerful, and taking the time to just, I think, reflect on your experiences, dealing with the questions. But actually thinking deeply about, why do you do this? And are you contributing your best? And if not, figuring out why not, right. And also, don't be too hard on yourself. It should be fun, right. It should be interesting. I mean, it's a huge responsibility, but it's also a huge privilege. Yes. You know, being the stewards of a company or an organisation is a huge privilege, and it should be fun. Because you're there, more often than not, to actually do something really good for some people, or some groups, or the communities, whatever it is, or all of those things. And to my mind, the reason why you do governance is not because of some kind of ego-driven thing. If you're doing it, don't do it, you know, don't be a dick about it. You really have to do it because you really, truly care about the mission. And you'll find that rewarding and enjoyable in its own right. Yeah, and I mean, intellectually I find governance is very challenging. Yes. Because you are, essentially you are not an expert, but you're trying to provide this environment of questioning and reasoning and good decision- making, right. It's hard, it's meant to be hard. If it was easy, they wouldn't need you. Yes. Well, Shamubeel, again, it's been great. Thank you so much for your time. Really enjoy catching up with you. See you next episode.