Governance Bites #68: changing social demographics, with Shamubeel Eaqub.

In this episode, Mark Banicevich talks to Shamubeel Eaqub about changing social demographics, and how they could impact a business. He asks how a strong board can prepare for these types of changes, and asks about the demographic trends that are likely to impact New Zealand businesses over the next few decades. They discuss the uncertainty of change, and how a board can manage this uncertainty. Mark asks what type of information the board expect from management to keep ahead of change. He also asks what advice he would give to a new director who wants to bring a contrarian view to the boardroom. 
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 to talk about the economy. Hi, welcome to Governance Bites. My name is Mark Banicevich, and I get the pleasure again to spend more time with Shamubeel Eaqub. Shamubeel, thank you very much again for your time. Pleasure. You are an experienced economist, you're a Chartered Financial Analyst [CFA], very strong around data. You're also quite often in the press, out with a slightly contrary view to what other people are seeing; you're looking at different things. In fact, I remember when we caught up for a coffee recently, I asked you about ChatGPT, because I love it, and you said you don't use it, because it doesn't bring the information that you're looking for. You're looking for the things that are a little bit different. So we want to talk about changing social demographics and how they can impact the business, which is, you know, a bit of your bread and butter. With environments constantly changing, can you give us a few examples of how changing social demographics can drastically impact companies? Look, I mean, we have lots of really clear examples, right. So, we know that ageing is a big driver. We know that changing ethnic make-ups of communities is a big driver. We know that changing preferences of people are big drivers. So, you know, we're seeing this play out all the time. So, like, Auckland now looks different from the rest of New Zealand. We know that older people think about the economy and politics and business very differently from younger people. So all of those demographic shifts are very present in New Zealand today, and they're going to accelerate over the coming decades. We know that New Zealand will suddenly get much older. We know that suddenly New Zealand will get much more diverse. We know that New Zealand will probably become more reliant on immigration, but the political support will not be there. So there are lots of these big shifts that are all taking place all at the same time. And can you give any examples of how those such, you know, major macroeconomic factors or societal factors could impact 'Company A'? Sure. Well, I mean, you know, we've had a very lucrative industry in retirement villages in New Zealand for some decades, and, you know, there was a combination of two trends: a booming housing market and an ageing population. So, you know, some industries have been made on the back of demographic patterns, right. And so we've got lots of examples like that. And sometimes they're more subtle, right. There'll be some businesses that are very much geared towards nutraceuticals, or nutrient-rich food for older folk, you know. And these are very new niche areas of growth. So if you look at the big dairy companies around the world, not Fonterra, unfortunately, but they're really focused on, how do you get nutrients into people, rather than necessarily just milk powder. How can you create formulas so that you can get, particularly older people and infants, the food and the nutrients that they need? So we're seeing these patterns that sometimes are a little bit more subtle in terms of, they're changing the products, and the marketing of the products, and the reach into these markets, because there's new opportunities are opening up. And that comes down to understanding what your core skill is, what it is you have the capability to do, or what it is the market's going to need going forward and how you can match those two things together? That's right. I think it's not what you make, it's what need you fill. I think it's a mistake to think that, for example, that I am a milk producer. You're not. You feed people. The question is, can you feed the changing needs of your customers, or new customers? And you might, there might, it might be that you can do it as a milk producer or you can't, but the question to ask yourself is not, "What do I make?" The question is,"Can I make what my customer needs?" Yes, yes, right. Well, given, you know, you mentioned some examples of demographic change, technological change is another major one. How do strong boards prepare for these types of changes? Well, first by looking back and understanding that technological change is constant. It's always been with us, and there's always a big hoopla about every new technology that comes. Automation, AI [artificial intelligence]. God, it's like every conference is about AI now. It's just, you know, kill me now. And the reason why I say that is because, of course, these new technologies are important, but the reason why they're so interesting and exciting right now, is because we don't know how we're going to apply it yet. And once we figure it out, they will become much more normal, and we will stop worrying about it so much. With the right guardrails. My sense is that everybody hypes up the technology beforehand because we don't understand it. For example, with the AI, we were having a conversation over coffee with it, right. And my sense of AI is that it has got huge potential to automate certain things, but it's still not very good at doing the lateral thinking, the creative thinking, the solving of problems in a non-standard way. So the entire way that these large language models [LLMs] are organised is they're trying to look for patterns and, you know, the density of outcomes where the most likely outcome is - It's about reversion to the mean, right. That's right. But, you know, when you make a big bet, when you're looking for that angle, you're actually playing in the tails. The entire purpose of looking for an edge is to look for something that's not normal. So yes, these things will come, yes, these things will help, but actually for boards, staying on top of this is understanding what is the technology going to do in terms of your business? Does it change your customers' needs, customers' wants, and the competitive landscape? All those things, right. So it's the bread and butter of governance. I don't think anything changes, other than being able to identify that risk very specifically. You alluded there, as well, to the second factor stuff. It's not AI itself, the things that AI could do to our business. But what impacts could AI have on the environment around us that will impact our business? Sure. It could be that because of new technologies, it's harder for us to reach customers, because customers are able to block out, or filter out, approaches from other people. That they don't want to. But it's that unknown unknown, right. Yes. How do they know that they don't want to see your stuff, if they don't know you? But if they have used technology to, kind of, do that, then it might be really hard for you to reach these customers, right. So just one kind of left-field example. But to me, it is about thinking about it in that perspective. It's less about the technology in and of itself. That can matter. It's the other bits that matter more. So if you've got seven diverse people sitting around a table. Potentially none of them will be experts in this area of futurism, right, of future change. What would a good board then do to actually identify the things that could happen, and what could happen in their business? Well, my advice is always to lean on experts. So either invite in, or pay in, an expert to come and help you think about these technical issues. So you should not rely on generalists or experts in other areas to deal with very specific risks. If you have identified a risk and it looks like it's going to be an important one, then go and get advice.

I mean, that's what your job is: 7:24

to be well-informed on the big drivers for your business. And if you haven't got it at hand, then you should pay for it. Or get it from people by asking nicely. Absolutely. Thank you. You've already given some examples of this. What are some of the big social and demographic changes that are likely to affect New Zealand businesses over the next 30 to 50 years? Yeah, so look, I mean, ageing is, of course, a really big one. Yes. I think changing diversity is going to be a really big one. I think social division is going to be a really big one, because New Zealand is going to look very different across different parts of New Zealand. I don't think Auckland will be able to recognise other parts of New Zealand; they're just going to look so different. I think we're going to have to deal with some really big issues around climate change. That's going to have devastating effects on many of our coastal communities in terms of erosion, in terms of sea level rise, in terms of inundation, forest fires, right. Or fires more generally. So there's some pretty big stuff that's coming down the pipe. But we can see these ones. It's the bits that we can't see that really matter. But to me, it's kind of like, you look out 30 years, you kind of go, there's also so much hope and opportunity, right. Because we know that we're getting better at doing lots of things. Technology is absolutely going to be helpful in lots of things. And we are getting smarter with lots of things, right. So there's also reason to be quite optimistic when you look to the future. So as a board, it's not your job to only look at risks; it's also to look at opportunities. Two sides of the same coin really, aren't they. It is. It's kind of like if this risk is there, how do we respond to it? Because that's when it becomes the opportunity, right. And there are so many avenues that are available to people. It can be about not doing anything, or it could be about doing something, doing something differently, or doing something new. You know, we have lots and lots of choices. And again, the board's role is not to say,"We're only going to do this." The board's role is to give permission to explore, and to remain vigilant, knowing that if that doesn't work, we have a Plan B. Right, right. Now, some of the trends that you've talked about feel like they're fairly certain. It's a matter of time, although the time horizon by which these things will happen may be a little bit uncertain. There is a lot of uncertainty. And as you said, for example, the things that blindside you, are the things that we don't see coming. How does a board deal with this kind of uncertainty? I think being open, I think being flexible, right. So, you know, when Covid happened, the boards that I'm on, we met, we talked - on Zoom - but we did. And we had a good conversation, and we figured out

what the important things were: 10:03

our people, our customers. Those were the first priorities. Yes. Once you got through that, then you could take a step back and go, "Okay, how do I now think"about the business?" So I think, as long as you're really clear as a board that we are always there for the business and we are always there for the right reasons, these big risks, or big shocks, when they happen, you just deal with it as it comes. But also, I think most boards spend a huge amount of time preparing. You know, we all do risk registers, risk scans, strategy days, you name it. We do so many different things, and they're all kind of, practice runs, to tool ourselves up to think about the business in lots of different contexts. Not because we predicted all of them, but because we want to be ready for, if a crisis happens, can we respond? Yeah, I think one of the advantages of a good risk identification and management process is, the broader the array of risks you identify and think about, when something unexpected does happen, chances are it's got some similarities- Totally. - to some of the things you've already predicted. Totally. It's not, as you say, it's not going to be the same, but you may have some things that you can go,"Well, from that, without even thinking about it,"I'm taking that strategy and this strategy and this strategy," and you can adapt far more quickly. Absolutely. And by having a diverse board, you've also got the experience of people from different backgrounds who can also add solutions. So you don't only have to rely on the knowledge that's sitting inside of the organisation or inside of the risk register and the risk plans. It can also be that, because of that catalyst, somebody will bring something new to the table that will help. Yes. So again, that's where the diversity is really helpful, because it does help you to kind of navigate these unknown things with, I think, more flexibility and pragmatism. Absolutely. What type of information would a board expect from management to keep ahead of change? Look, I don't think management are very good at doing this kind of big-picture stuff. By and large, I think that's not the job of management. So, that's the role of when you're doing strategy sessions and those kinds of things. And of course, a good CEO [Chief Executive Officer], agood senior leadership, will engage in these things. But by and large, your executive is really focused on delivering on the plan, right. And so, that's why it's so important to spend time with your senior leadership, with externals, on strategy, and away days and those kinds of things to actually think about those bigger issues. When you have identified risks or opportunities, it's then you have to delegate that task to your executives to make sure they're monitoring it, and making it their BAU [business as usual], right, part of their business. So I'd caution against putting too much emphasis on your executive doing all of that, because I don't think it's their job. But I think it is helpful for them to be aware of these trends, ways of thinking, so that they are able to participate, able to float up information as and when they come up. And, of course, I would expect that, certainly within the swimming lanes, they'll be thinking about these factors anyway, right. Sure. But yes, as you say, the very broad thinking, yeah, the role of the board. If you were talking to a novice director that had probably been on one or two boards, maybe on their first board, and they were very concerned about making an impact, maybe come to you and say,"Look Shamubeel, I really want to have a conversation with you because I know you are not afraid"of being contrarian. I want to be contrarian, too. How do I make an impact on a board?" What would you say to somebody with a question like that? That's a hard question, because I don't think you should be contrarian for the sake of being contrarian. I think you should ask a question, because you have a question to ask. And like I said, I think it's the idea of reflection. That you have reflected an issue and you have a question that's really burning, right. That you haven't found an answer. So it's a question that needs to be posed. So when you read papers, when you're at the board, when you are having the conversations, this is all information that you are taking in. And after you have listened and you've reflected, then you pose a question. I don't think the purpose of asking a question is to be contrarian at all. You just happen to be contrarian because it's an issue somebody, others may not have thought about yet. Yes. But by voicing that, it now becomes part of the lexicon, right. So it becomes the norm. Yes. So it's only contrarian when you utter the words, but it's no longer contrarian after you've done it. So my advice is you shouldn't go out to be something that you're not. You should be doing it because you have a genuine curiosity about finding the answer to this particular question. And that question is a thoughtful one because you have prepared, you have thought about it, you have reflected upon it. And the reflection part, I know I go on about it a bit, but reflection is just such a critical trait for a good director. I see too many directors who come to board meetings not well-prepared, not having read the papers in depth, and not having reflected on what the papers mean. Right. So consider that if you've been adopted onto a board, you're there for a reason. You're there because somebody has seen something in you that, or a group of people if you've been elected, that will be valuable to the board. And consider what that value is and just let that come out. And as you say, I think the other key thing that you brought out there is be prepared for your board meetings. And that's not just reading through your papers once. You know, a number of people that I've spoken to have said, you read through your papers once, you think about it, you go back and read again. The second time through, you make your notes, and then, as you're saying, take your time to reflect on the things that you've discovered and really think about them before the board meeting. Yeah, and look, I think one of the challenges is quite often board papers are late. Right. And that makes it very difficult for board members to be effective. And so a good chair will ensure that board papers are delivered on time, they're in the right package, and they're fit for purpose. So, for example, management reporting may be quite verbose, quite big, because quite often it's designed for within the business. But what's prepared for the board needs to be really fit for purpose for the board. So sometimes I think we don't spend enough time preparing board packs that are actually suitable for that level of governance. Because people who are preparing it don't know what governance needs. Right. So it's a little bit of a two-way street. So the preparation, I think, would be much easier if the board packs were better, if the layouts were better, if it was really obvious what is it that they're looking for you. So, you know, a board paper should, at the front, tell you, what do they expect of the board member? Are they looking for a decision? Are they looking for a discussion? Are they looking for, you know, critique? What are they looking for? Like, that ask really helps you then read the paper in the right context, right. So it's a little bit of a tangent, I know, Mark, but I think it's one of those things that, from a very practical perspective for a board member to be effective, the material that you work with is really critical. Yes. And it's a two-way process. Even if the board pack is not perfect the first time you go, it doesn't matter. You give that feedback, you work with the chair, and you improve it. Because it's an ongoing process. Right. Like anything, right. I mean, there is no perfect. There's no perfect in anything, right. Any of this stuff is constantly changing because your needs will change, your preferences will change, and that's all good. So a very long-winded answer to your question. But, you know, if you're a board member that's trying to make an effect, I think it's really about taking time. It's about actually understanding the issues and, you know, having genuinely good questions. If you don't have a question, it's okay. Okay. Well, you know, that was a great insight. Well, there are a number of insights in what you just said there, so thank you very much for your time, Shamubeel. I really enjoy catching up with you every time we catch up, and I look forward to seeing you again soon. And see you next episode.