The University of Auckland

The critical challenges facing New Zealand’s chief executives: implications for management skills

Ann Hutchison The University of Auckland, New Zealand Peter Boxall The University of Auckland, New Zealand

This paper reports a 2012 survey of 265 New Zealand chief executives, representing 27% of the

nation’s largest organisations. It examines their most critical challenges in the current environment,

discusses the implications for New Zealand’s management skills, and considers how human resource

practitioners can support such skill development. The results reveal a complex environment of

changing markets and technologies in which the support of stakeholders, including key funders, is

more guarded and conditional; in which there is an ongoing war for talent; and in which business

models need to be reframed to respond to fast-paced and ambiguous change. The data suggest three

fundamental management skill needs: managing uncertainty and renewal, managing stakeholders

and business partners, and managing people and limited resources. Now, more than ever, human

resource specialists need to focus on the development of managers, and take part themselves in

development processes that bridge internal and external boundaries.

Keywords: chief-executive opinion, management development, management skills, New Zealand

Correspondence: Dr Ann Hutchison, Lecturer, Department of Management and International Business, The University of Auckland, Private Bag 92019, Auckland 1142, New Zealand; e-mail: [email protected]

Accepted for publication 18 August 2013.

Key points 1 New Zealand’s chief executives report a fast-changing, ambiguous environment

characterised by constrained funding.

2 In this environment, managers need capabilities in managing uncertainty and

organisational renewal.

3 Managers need political and interpersonal skills to handle a complex web of rela-

tionships with stakeholders.

4 Managers need skills in, and a systemic approach to, managing people and limited

resources.

5 HR specialists should design, foster and model the developmental processes that

support these skills.

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Asia Pacific Journal of Human Resources (2014) 52, 23–41 doi:10.1111/1744-7941.12020

In large organisations, chief executives sit atop a pyramid of managers and employees. Reporting to the board of directors, they are charged with leading the organisation into the future, co-ordinating its response to the opportunities and threats in its environment. Their role is inherently interdisciplinary and integrative: they must bring the parts of the organisation together to perceive and pursue a common agenda – or fail. But what chal- lenges and risks do they see, and which are the most severe? This paper’s goal is to report a survey of chief-executive opinion in New Zealand, examining what chief executives in the private, public and not-for-profit sectors perceive as the most significant issues in their current environment, and to examine their implications for management skills.

This is a timely moment for such an assessment. Since the global financial crisis (GFC) of 2008–09, New Zealand, like other nations, has experienced lower rates of economic growth. Its government has used increased borrowing to make up the deficit in the national accounts and has carefully reviewed public expenditure across the board (The Treasury 2012). The situation has been complicated by the need to rebuild Christchurch’s economic and social infrastructure following the sequence of earthquakes that began on 4 September 2010. New Zealand does have opportunities for growth, including in its world- class primary industries, in its attractive tourism sector, and in high-value manufacturing and services, but New Zealanders have continued to emigrate in search of better career possibilities, putting at risk the country’s skill base. This is a trend that has concerned gov- ernments, of all political stripes, but which they have struggled to arrest.

In this light, our aim is to present what New Zealand chief executives currently report to be their greatest challenges, and to discuss the implications for management skills. Given what is known about the business environment, what managerial capabilities are important, and how can human resource (HR) specialists support their development? We base our discussion on a recent survey of 265 chief executives from New Zealand’s largest organisations. We begin with an outline of key features of New Zealand’s organisational landscape and a review of existing research on its management capabilities. This leads into an analysis of the survey’s quantitative and qualitative data and to an examination of the implications for management development and the HR function.

New Zealand organisations and management capabilities

New Zealand is a small economy of 4.5 million people remote from international markets. Apart from the dairy industry, in which New Zealand is a world-class player, it has few organisations of global reach. In 2011, New Zealand had no companies in the Fortune Global 500 while Australia, with a population of 23 million, had eight, and Singapore, with a population of 5.2 million, had two (CNN 2011). The average New Zealand organisation is a small or medium-sized enterprise. Although many multinational firms have branches in New Zealand, a smaller percentage of New Zealand employees (44.8%) work in firms with at least 100 employees compared with employees in the USA (64.4%) and in the UK (60.2%) (Mills and Timmins 2004). As might be expected, the average size of New Zea- land’s large firms is smaller than in the biggest Anglophone countries: ‘the average number

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of employees per firm in firms with 500 + employees is 2532.2 in the UK and 3321.1 in the USA, but only 1593.9 in New Zealand’ (Mills and Timmins 2004, 15).

While there are niche players in various spheres, there are many types of manufactur- ing, including automobiles, aerospace and semiconductors, that have little or no presence in New Zealand, restricting opportunities for individuals who wish to specialise in these fields. New Zealand has the kind of business and consumer services one expects in an advanced economy, but much of it is in foreign ownership, including almost the entire banking sector and large parts of retail and distribution (Boxall and Frenkel 2012).

In this context, it is commonplace for New Zealand managers to feel they have out- grown the country, and to seek advancement by emigrating to a larger economy or by transferring from the New Zealand branch of an international firm to one of its much larger international offices (Gilbert and Boxall 2009). Lack of progression to the ‘really big jobs’, and the absence of the kind of highly specialised roles available in the world’s largest economies, make recruiting and retaining management talent a fundamental problem. On the other hand, New Zealand organisations do have some advantages. They are less bureaucratic, tend to provide individuals with greater job autonomy, and can argue that New Zealanders have an enviable quality of life (Gilbert and Boxall 2009). An empowering kind of management style seems to be commonplace in New Zealand’s smaller, more informal organisations (Macky and Boxall 2008). None of this, however, is stemming the ‘brain drain’. In the year to 31 August 2012, 53 900 people migrated from New Zealand to Australia while only 13 900 moved in the other direction (Statistics New Zealand 2012). There are now some 650 000 New Zealanders living in Australia (Department of Immigration 2013), where they have a high level of success in the labour market. Based on census data collected in 2006, ‘83% of New Zealand-born men and 70% of New Zealand- born women’ resident in Australia were employed, ‘compared with 72% and 62% for the comparable Australian groups’ (Department of Labour 2010, 5).

Given the small scale of New Zealand industry, and the challenges the country faces in retaining its educated workforce, what is the calibre of New Zealand management? Does the country have the management talent it needs? This is increasingly the question raised in relation to New Zealand’s productivity performance. As the New Zealand Productivity Commission notes, New Zealand ‘slipped from one of the wealthiest countries in the 1950s to now around 26th in the OECD’ (New Zealand Productivity Commission 2013). New Zealand has one of the lowest rates of productivity growth in the developed world (NZIER 2011). With the US economy providing the reference point (US = 100), the OECD currently rates Australia’s labour productivity (in terms of GDP per hour worked) at 81.4 while New Zealand is rated at 56.5, some 69% of the Australian level and below the OECD average of 74 (OECD Statistics 2013). This productivity gap, in turn, has resulted in substantially lower wages in New Zealand. In fact, based on 2006 figures, the income gap with Australia has been estimated at $14 000 per person (NZIER 2011).

Clearly, the productivity and income gap with Australia is a key concern for New Zealand. In the early 2000s, analysis of the productivity problem placed emphasis on the difference in capital intensity (Black, Guy and McLellan 2003). Australia has a higher

Ann Hutchison and Peter Boxall

capital-to-labour ratio, reflecting the fact that ‘the Australian economy has a larger mining and quarrying industry’ (Black, Guy and McLellan 2003, 23). There is no doubt that Aus- tralia benefited strongly from the resources boom prior to the GFC, but a recent study by the New Zealand Institute of Economic Research of the period from 1989 to 2006 argues that 70% of the productivity gap between the two countries ‘is due to underperformance of New Zealand’s industries rather than a difference in the industrial structure of the two countries’ (NZIER 2011, ii). While capital intensity plays a role, the report attributes most of the difference to ‘the quality of management, organisational innovation, the production process, and the quality of labour and capital’ (NZIER 2011, ii). This assessment, it should be noted, masks important sectoral differences. New Zealand’s agricultural and utility sectors have strongly outperformed their Australian counterparts, as, remarkably, has New Zealand’s much smaller mining sector (NZIER 2011, 5). It is in services – including wholesale, retail, hospitality, finance and construction – that New Zealand’s relative per- formance has been much weaker. Given that services employ around 70% of the work- force in both countries, this is a serious issue for New Zealand (NZIER 2011, 6).

As the NZIER’s (2011) analysis implies, part of the productivity problem must relate to management capabilities, and surveys often point to shortages of managerial resources in New Zealand (e.g. Statistics New Zealand 2007). An analysis of management skills in New Zealand manufacturing firms has been conducted by Green et al. (2011), using a methodology developed by academics at the London School of Economics and consul- tants at McKinsey & Co. The approach relates management-reported practices in opera- tions, performance and people management to productivity indicators. They rank New Zealand at 10th place in the 17 countries studied so far, arguing that:

while some of New Zealand’s firms are as good as any in the world, there is a substantial ‘tail’

of firms that are mediocre . . . This is a key differentiating factor between New Zealand and

better performing, more innovative countries. (Green et al. 2011, i)

Green et al. (2011, iii) conclude that ‘New Zealand manufacturers would benefit by focusing much more on the development of management capabilities within their firms’. Scale and ownership seem to make a difference: the study suggests that larger and foreign- owned firms have better management practices. The study’s authors indicate, however, that we should be cautious with the results (Green et al. 2011, 13–14), as limitations in the availability of financial data meant that Green et al. were able to base their analysis on a sample of only 50 New Zealand firms.

It is safe to assume, nonetheless, that management capabilities in New Zealand can be enhanced, which leads to the question of what capabilities are necessary in the current environment. Context is an important consideration when assessing capability require- ments, as is illustrated by Hitt, Keats and DeMarie’s (1998) analysis of organisational chal- lenges at the end of the 1990s. These authors observed an impending technological revolution and increased globalisation that, together, would lead to ‘highly turbulent and chaotic (business) environments that produce disorder, disequilibrium and substantive uncertainty’ (Hitt, Keats and DeMarie 1998, 23). They argued that managers would

Asia Pacific Journal of Human Resources 52

need to adopt new paradigms in order to facilitate strategic flexibility within their organisations. In particular, they argued that the most critical management skill would be non-linear thinking, which they defined as the ‘ability to conceptualise (and reconceptualise) different and possibly contradictory information and scenarios’ (Hitt, Keats and DeMarie 1998, 28). This emphasis on the ability to manage environmental tur- bulence has been reinforced by the events of the first decade of the twenty-first century, including political uncertainty and the severe economic challenges posed by the GFC and the great recession (Hitt, Haynes and Serpa 2010).

As is occurring elsewhere, New Zealand is now not only contending with technological revolution and globalisation but facing major economic threats. These challenges can be better understood by seeking the views of the chief executives who must wrestle with them. Yet, the literature appears to lack an in-depth survey of the nation’s chief-executive population on how they perceive their context. In the analysis that follows, we ask what the key challenges are that chief executives see in their environment. These data are then used to develop a set of implications for managerial capabilities.

Method

A survey was sent in June 2012 to the chief executives of New Zealand’s 1000 largest organisations from across the public, private and not-for-profit sectors. These organisations were identified using the New Zealand business who’s who (2013) directory with the number of full-time-equivalent staff being the indicator of organisational size. Most had 100 full-time-equivalent staff or more, although some organisations had less. Nineteen surveys were returned to sender, leaving 981 that reached their destination. Of these, 265 chief executives (135 private sector, 62 public sector, and 68 not-for-profit sector) completed the survey, giving a response rate of 27%. For a chief-executive sample, this response rate aligns with senior-executive studies in top-ranking journals, which gen- erally struggle to report response rates above 30% (Baruch 1999; Cycyota and Harrison 2006). Organisational leaders are notoriously difficult to survey due to time pressures and survey frequency.

The sample was checked to ensure that it contained a wide range of industries and organisational sizes. Where any groups were initially underrepresented, targeted organisations were contacted, resulting in an appropriately representative sample that included organisations from each broad category in the New Zealand Standard Industrial Output Categories (NZSIOC) classification (Statistics New Zealand 2013). The resulting sample included organisations from industries such as banking and finance, professional services, health, media, construction, dairy and agriculture, social services, retail, charity, local government, and central government. The response rates were 24% for the private sector, 29% for the public sector, and 35% for the not-for-profit sector.

The survey included quantitative and qualitative sections. In the quantitative section, respondents were presented with a list of 19 challenges and a separate list of 14 risks, and were asked to rate the intensity of each item using a Likert scale. With regard to the

Ann Hutchison and Peter Boxall

challenges, the Likert scale ranged from 1 to 4, with 1 being ‘among the top three to five challenges faced by my organisation’ and 4 being ‘not challenging’. With regard to the risks, the Likert scale ranged from 1 to 3, with 1 being ‘one of the riskiest issues faced by my organisation’ and 3 being ‘not a significant risk’.

The lists of challenges and risks, shown in the Appendix, were created by the authors first compiling a master list of all possible areas of business risk, opportunity or operation, using corporate governance guides (The Cadbury Report 1992; The Turnbull Report 2005), management consultant reports (Ernst & Young 2012; Grant Thornton 2012), and further material from two websites: http://www.charities.govt.nz and http://www. icaew.com. Following this process, the authors then worked with a team of three senior executives, two of whom had held chief-executive roles, to narrow these terms into a set of risks and challenges that would capture the key issues as comprehensively as possible, while also remaining short enough for chief executives to complete. When the list was ready, it was piloted with an executive MBA class, and, as no problems were identified, no subsequent changes were made. Although the items did not necessarily need to be pre- sented in two separate lists (for example, a risk and a challenge could be seen as the same thing), they were broken into two lists in order to make the survey easier for respondents to complete.

Following the quantitative section of the survey, five open-ended questions prompted respondents to elaborate. These questions were: 1) ‘in the two lists, is anything not included that poses a significant challenge or risk to your organisation? Alternatively, would you like to pinpoint a more specific risk/challenge than was allowed by the above broad categories?’; 2) ‘please list any specific economic issues that currently pose a major challenge to your organisation’; 3) ‘please list any specific political, legal or regulatory issues that currently pose a major challenge to your organisation’; 4) ‘please list any spe- cific emerging technologies that currently pose a major challenge to your organisation’; and 5) ‘please list any specific social changes that currently pose a major challenge to your organisation’.

Results

The private-sector results are presented separately from the other two sectors, as the data differed slightly between those organisations that were primarily profit-seeking and those that were not. For each sector, the quantitative data are presented first, analysed as the per- centage of respondents who rated each item as a ‘1’ (i.e. ‘among my organisation’s top three to five challenges’ or ‘among the riskiest issues faced’). The qualitative data follow, serving to illuminate the quantitative responses.

Private sector For the private sector, market risks were reported as the biggest factor, with 32% of respondents rating such risks as among their top 3 to 5 challenges. Following this were access to finance (27%) and dialogue with shareholders (27%). Finally, 23% of

Asia Pacific Journal of Human Resources 52

respondents rated changes in the economic climate as being one of their riskiest issues, 21% rated doing business across cultural barriers as a major challenge, and 20% listed attraction and retention as a key issue. The full results are shown in Figure 1.

In the survey’s qualitative section, chief executives elaborated extensively on the market risks, describing a rapidly changing environment with emerging technology, changing consumer values, and shallower consumer pockets prompting them to think very carefully about their market(s) and their business model(s). In some cases, market shifts, particularly from technology, were threatening their core business. For example, a print-media chief executive commented that ‘we have full exposure to a market that is in structural decline because of the choices available to customers through electronic media

1 2 2

3 4 4 4

7 7

8 8 8

9 10 10

11 11 11

13 13 13

15 15 15 15

16 18

20 21

23 27 27

0 5 10 15 20 25 30 35

Risks faced by directors Threats to business continuity from the physical…

Conflict with the workforce over terms and… Risks associated with tangible assets

Risks associated with information technology Risks associated with intangible assets

Employee health and safety Risks associated with financial security of business…

Enhancing workforce performance Building the flexibility to manage change

Controlling and reducing costs Fostering innovation

Balancing long and short-term returns Risks associated with debt levels

Risks associated with managing property Compliance with government regulations and…

Cost escalation Retaining existing customers / maintaining…

Enhancing the quality of products or services Responding to societal changes

Responding to emerging technologies Creating and/or managing alliances or joint…

Demonstrating corporate social responsibility Engaging in effective dialogue with other… Raising productivity to world-class levels

Achieving desired outputs from outsourced… Identifying profitable opportunities for the business

Attracting and retaining talented employees Doing business across cultural barriers

Changes in the economic climate Gaining access to finance

Engaging in effective dialogue with shareholders Market risks

Figure 1 Private-sector chief executives’ most critical issues

Ann Hutchison and Peter Boxall

and technological advancements’; and a chief executive of a garden-centre chain noted that their revenue had dropped substantially due to ‘people doing less around the home’. In all, numerous chief executives mentioned some kind of market shift, with further examples being ‘a greater awareness of environmental issues’, ‘a move to smaller cars’, and ‘most consumers [having] a drive towards low cost and low value’. Others couched the problem in more general terms: ‘the niche market we used to service well no longer exists’, ‘the biggest risk is failing to renew our offerings’, and ‘different business models need con- sideration’.

Chief executives also noted how difficult it was to grow their business in the current environment, with revenues having been so severely affected. The global economic situa- tion was described by one chief executive as a ‘calamity escalator’, and by another as ‘eco- nomic Armageddon’. Several chief executives noted the ‘knock-on’ effects of the economy from one industry to another, and several conveyed the sense that they were waiting, delaying any radical developmental initiatives until the economy improves. Growth was also constrained by the fact that banks were unwilling to lend, shareholders were display- ing a ‘low appetite for risks associated with business and strategy’, and overseas investors were ‘unwilling to invest in New Zealand’. It is these comments that appeared to be behind the 27% who found access to finance challenging and the 27% who listed dialogue with shareholders as one of their top challenges.

In their answers to the open-ended questions, chief executives confirmed that global staff mobility is posing a critical skills shortage; but they also identified the exacerbating influence of impending baby-boomer retirements, with one respondent observing a ‘daily [baby] boomer retirement from the workforce’, and another saying that ‘a dom- inance of leaders all within a range of 10 years in age difference’ means that ‘care needs to be taken in developing succession plans’. It was clear from the qualitative data that these skills shortages are being experienced across a wide range of levels and professions, and the data – from all sectors – saw mention of shortages of apprentices, qualified tradespeople, social workers, scientists, nurses, managers, senior executives, and board members.

Public sector and not-for profit sector As the public and not-for-profit sectors showed reasonably similar patterns to each other, their results are presented together. Changes in the economic climate were considered the most salient risk, particularly for the not-for-profit sector where 50% of chief executives rated such changes as particularly critical (compared with 26% of the public sector). This focus on the economic environment was combined with a concern about fund raising (26% for both sectors) and escalating costs (24% of the not-for-profit sector, 21% of the public sector). Around one-quarter (24%) of the not-for-profit sector and 18% of the public sector also rated corporate social responsibility as a major challenge, while 23% of the not-for-profit sector and 14% of the public sector rated employee attraction and retention as a critical issue. Finally, both sectors listed access to finance as being a major challenge (21% for the not-for-profit sector and 19% for the public sector); and alliances

Asia Pacific Journal of Human Resources 52

and joint ventures featured strongly for the public sector (23%) while outsourced and shared services were challenging for the not-for-profits (21%). The full results are shown in Figures 2 and 3.

The open-ended questions gave rise to comments about a severe drop in revenue, whether it be in reduced income from local ratepayers not being able to afford rates or whether it be the national government freezing funding. Several not-for-profit organisations highlighted how difficult it was to raise funds in an environment where the charitable spend is the first to go in a household. Fundraising events also held risks, with

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