Good governance will help tech firms get to the “productivity frontier”

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Kirsten Patterson

Why are some Kiwi businesses globally productive and successful, and others not? If you are a tech company business leader structured governance is key to accelerating growth and performance, says Institute of Directors Chief Executive Kirsten Patterson. She says good governance will help drive organisations toward a sustainable future and be the roadmap of the “productivity frontier”.

“Technology is central to the future of work and will enable dramatic change on a scale not seen before. Boards are in the driver’s seat in these uncertain times, responsible for navigating their organisations into the unknown. The way forward lies in staying on top and current, at increasing speed, in relation to new and emerging technologies, data, digital opportunities and innovation.”

– Always on Duty board, Institute of Directors and MinterEllisonRuddWatt

“Frontier firms” are some of the most productive firms in our economy.  Post-COVID and starting from now, innovative technology businesses must be part of the equation to get more New Zealand firms at the global productivity frontier. Strong governance leadership and high performing board cultures will be imperative for them to accelerate growth and performance.

This is the perfect time for senior leaders and board directors to focus on lifting productivity, and digital technology is key. When COVID-19 struck, cloud-based software and mobile technology enabled those organisations most well-equipped to quickly regain tempo. Now you may need to go bigger and faster.

Why are “frontier firms’ are more successful and productive than others? 

The Productivity Commission is currently seeking to understand the frontier firm point of difference.  It wants to know how the economic contribution of frontier firms might be maximised, not only through their own performance, but also through the way they diffuse new technologies and business practices to other domestic businesses.

Low productivity is a Kiwi conundrum. The IoD has been talking with the Productivity Commission about how directors can encourage entrepreneurship, innovation and productivity through governance.

“New Zealand has a longstanding problem with poor productivity, as productivity levels are well below the average of high-income OECD economies,” the Productivity Commission says in its issues paper on ‘frontier firms’. Even our most productive Kiwi firms are about one-third less productive than international firms operating in the same industry.

The IoD believes best practice governance is needed to unlock the potential of our frontier firms to match international counterparts. We need knowledgeable and skilled directors governing companies, encouraging them to find and build comparative advantage, improve the country’s macro-productivity growth and operate internationally.

Governance leadership for frontier firms important in 2020

Productivity is about how well people – individuals, businesses, countries – combine resources to produce goods and services,” the Commission says. It commissioned the study by David Skilling, Frontier firms: An international small advanced economy perspective, which describes our longstanding productivity challenge.

The “productivity frontier” is a theoretical boundary of performance, promulgated by the famous business thinker Michael Porter

Frontier firms are the most productive in their particular industry.  They usually operate internationally and have governance through boards of directors. They are the companies the government hopes will our lead economic restoration after the worst of COVID-19 is over. New Zealand only has a few frontier firms. We need more.

How can companies not yet ‘match-fit’ get off the bench, onto the field and edge toward the “productivity frontier”?

The IoD believes structured governance is the answer to improving productivity and performance. Many expanding businesses have already discovered the power of establishing an advisory board before going for a fully-fledged board of directors.

With COVID-19 having crippled parts of our economy, it is more desirable than ever that more companies lift their game and reach the “productivity frontier”. If that happens, the expectation is that New Zealand as a whole will benefit, life will reset and improve, and New Zealanders will be better off.

The idea is that if businesses work smarter with greater financial and knowledge capital employed per worker, New Zealand’s economy will become more productive. As a country we would transition from being an economy based on inputs such as labour and natural resources, to one based more on knowledge, technology, science, innovation, and creativity.

With a few exceptions, evidence suggests that Kiwi firms have not innovated as effectively as businesses overseas. Public and private investment in research and development has historically not been on par with what other OECD countries are doing. Government took steps to boost that on 3 June 2020, with $401.3 million released to support our entrepreneurs, innovators and crown researchers.

What role for governance in driving up productivity?

The IoD believes that good governance has the power to transform organisations, communities – and the country. They are in place to help their organisations work towards their vision, deliver the business objectives, drive innovation and navigate through when times are tough. They are there to help see what is coming, see where you might go and help you make the right choices.

It is well-known that strong governance leadership and vibrant board culture accelerates business growth. The IoD is passionate about good governance and keeping directors ahead of the curve. While directors are already dealing with new, innovative ways of working and technologies, it is possible and promising that they will deliver their roles in new ways and styles of governance in future.

A challenge for tech company directors

Events this year have impacted all areas of governance. This coming decade governance may become more agile, change, and in order to deal with a world moving at breath-taking speeds. Coming months will be challenging for many boards and directors, including those governing tech firms. But alongside anxiety and uncertainty, we are seeing optimism and confidence among directors nationwide.

I encourage directors of tech firms to challenge the productivity frontier – by accelerating your knowledge and through-intensive, growth-oriented international activities.

Kirsten’s tips for reaching productivity frontier:

Productivity rises when ideas and knowledge spread, are turned into products, and when resources are allocated more efficiently. As a business leader aiming to be a frontier firm, the IoD encourages you to be courageous:

  • Be open to new ideas, research and technologies
  • Network internationally with other tech companies
  • If you are a small business, network with firms bigger than you
  • Collaborate locally with others, to innovate in technology clusters
  • Invest in the most up-to-date infrastructure
  • Invest in learning and development
  • Prioritise cybersecurity.

Read more on “Frontier Firms”:

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Kirsten Patterson

Kirsten Patterson LLB, CFHRINZ, MInstD is the chief executive of the Institute of Directors New Zealand. Her current governance roles include sitting on the board of the NZ Rugby Foundation and chairing the Wellington Homeless Women’s Trust. Kirsten is a qualified lawyer and a Chartered Fellow of the Human Resources Institute of New Zealand.

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