Subscribe

Understanding Australia's risk culture – or lack thereof

An enduring theme in corporate Australia, picked up by a new prime minister, is concern around a lack of innovation, often sheeted back to a lack of risk appetite.

In this roundtable in conjunction with PwC following its 2015 Capital Markets Forum, BlueNotes managing editor Andrew Cornell spoke with entrepreneur Craig Shapiro, CEO and Founder of Blue River Group, the Australian Securities and Investment Commission's Cathie Armour, and PwC partner and head of Assurance strategy, Kristin Stubbins.

" We're actually making some big risk calls when we don't invest and we don't do things."
Cathie Armour, ASIC Commissioner

In this roundtable in conjunction with PwC following its 2015 Capital Markets Forum, BlueNotes managing editor Andrew Cornell spoke with entrepreneur Craig Shapiro, CEO and Founder of Blue River Group, the Australian Securities and Investment Commission's Cathie Armour, and PwC partner and head of Assurance strategy, Kristin Stubbins.

Click image to zoom Tap image to zoom

Andrew Cornell: We have a new prime minister in Australia and there has been a shift in temperament in business Australia. Setting aside global turmoil, both consumer and business confidence look a little better. Are people more prepared to take risk when they're more confident?

Craig Shapiro: You do have to have the right frame of mind but risk is about investing capital and putting actual dollars into an investment. It's not just about talk. At the moment what is coming out of government is the right rhetoric and it's framing a conversation - it's a conversation around long-termism and building a risk taking culture but to get that you need to build confidence so yes, I think that's the first building block.

Cathie Armour: I think we often forget we're actually making some big risk calls when we don't invest and we don't do things. The important thing is to have a framework which encourages people to understand all the risk calls they are making. The financial system is all about risk. It's the fundamental nature of the system.

AC: That's the opportunity cost of not taking risk?

CA: Absolutely. Not making decisions, not making investments, there is a real cost to doing that and it's important that we are making decisions not to do things with our eyes open just as much as it is about the things we are doing.

Click image to zoom Tap image to zoom

Kristin Stubbins: You can be confident and not take risks. I actually think, in Australia, culturally we're quite good at that because we have a wonderful environment. I have been travelling a lot recently, and the status quo is very nice in this country.

CS: Our fear of failure limits our risk culture so we are not willing to learn from failure. And then on the flip side we don't know how to celebrate success. So what that does is confines us to the middle ground which is status quo, being mediocrity.

We don't think “oh that was a failure, that's unfortunate, I wonder what might be the next opportunity in this investment?" We tend to miss that. The way our country defines failure and responds to it is an issue worth thinking about.

KS: It manifests in the corporate world around not having processes like US Chapter 11 protections. The concept of celebrating a failure in Australia is quite rare. What did you learn from that experience? Fail fast; learn from your mistakes; move on to the next challenge. We don't see a lot of that.

CS: In Israel, for example, which is increasingly seen as a model for innovation, you will find some investors who won't necessarily invest in a company unless the founder has failed. They use that as a yard stick; what have they learnt from failing? That is a really interesting aspect when you speak to some of the VC investors in this space.

AC: Cathie, as a regulator, are there regulatory impediments to risk taking in Australia that some of these other jurisdictions don't have?

CA: I think there might be regulatory settings that could change in weight to facilitate various business models but I actually don't think the overall regulatory model is driving our risk culture. I think there are always issues about how to interpret our regulatory model and I know one thing that we are very conscious of as a regulator is that our job is actually, first and foremost, to ensure that we are helping markets to work for their real purpose, so that is to fund the economy and to have risk taking occur.

Key themes that emerged from PwC's 2015 Capital Markets Forum

  • The importance of fostering innovation for Australia's future prosperity;
  • The wholesale effect the sharing economy, which is epitomised by online marketplaces, is having on trust;
  • How technology is disrupting and disintermediating traditional businesses and the way we connect with each other;
  • The need to build a bridge between government, business & academia to ensure we get capital to the brightest ideas;
  • Changing Australia's blasé, risk adverse culture from one which is all about "fair go" to one where more people are willing to "have a go"
  • The role of regulation in encouraging and hindering innovation.

But do we have those conversations almost as an excuse sometimes, for not diving in and taking the risks? We delay decision-making about whether or not we should invest in various products or various types of industries because we are looking for a perfect model.

AC: How do you change that sort of mindset and behaviour?

CS: Sometimes we need a crisis to generate change because no one likes change. Maybe it's our colonial past, but the change aspect is really hard. Cathie and I both previously came from the corporate environment at Macquarie Group and its modus operandi was constantly managing change.

But as a society, I don't think we do manage it well so unfortunately you may need a shock.

CA: If you think about it, there are a whole bunch of things happening right now that are not a crisis per se but situations where you can grasp opportunities. Massive technological developments, real opportunities for disruption. We have got wonderful universities, we have got the CSIRO - the leading innovator in connection with all this - we can exploit that.

We sit on the edge of the fastest growing part of the world where there is going to be the most opportunities, we have a really highly educated workforce, we have got good levels of immigration so we are creating an environment of much diversity…the time is right to exploit these opportunities.

The crisis element is if we don't do it, there is going to be this drift of jobs, and we have seen rival financial hubs setting up in Asia. So how weird is that - we have a wonderful superannuation system, a massive pool of funds, why on earth don't we think it's an emergency when jobs designed to make investments using that pool of money are drifting off into other jurisdictions?

KS: If you think about the world we live in today compared to the world 30 years ago, it's like comparing night and day. But we are an island, a very lovely, safe, secure island, and we are not looking outside of that lens. And the world's going to be a very different place quickly…it won't take as long as 30 years to change beyond recognition again.

AC: What do you see in those companies that do embrace risk taking or create innovation or have the sort of culture that facilitates it? Are there things there that are different?

KS: If you talk about a large corporation trying to innovate, for example, there is a need to put boundaries up and to innovate in a safe way. With risk taking, we are not talking about abandoning all sense of judgement. We are talking about taking managed, calculated, appropriate risk. It works well within a large corporation where there are defined boundaries, a separate focus; quite often it may even be cannibalising an existing business, so it has got to be separated from the whole.

There is also a willingness to give something a go and then, if it fails, acknowledge we lost that small amount of money and celebrate what we learnt out of that experience. The alternative is, and what can easily happen, is people not having a go in the first place because of the existing structures and metrics and what they are being asked to do every day doesn't facilitate thinking differently or doing something innovative.

AC: How do you set those boundaries? How do you define a good failure and a bad failure?

CA: It's really important for there to be a great deal of thought given to what is this organisation about, what's our value proposition, and what are the things that can make it unlikely that we will achieve the outcomes we are looking for, what are those sort of fundamental risks? And then assessing and understanding your appetite in relation to those particular risks. The corporate governance guidelines, setting up the established principles.

Then there's the question about what happens if someone has failed in the past and should they have a ticket to put their hand out for money from people in the future. From our perspective it's about the sorts of disclosures that you need to make, you need to say to people, the sort of enterprise, or the sort of product we are asking you to invest in has got these fundamental risks and to have people sitting there soberly thinking about whether they're risks that are appropriate to them.

I just wonder if we, and I am talking myself here as a financial consumer, whether we do soberly think about that enough and I do think perhaps there is work for us all to do in making sure that we are arming people with the skills to actually think a little bit more about the risks.

There is a lot of work to be done on the literacy that goes with risk taking.

AC: How do you distinguish when failure is being used as a good positive learning experience and someone to follow?

CS: I don't think there is any hard and fast rule, that's the first thing. It's a mindset, it really has to be a mindset to say “well, ok, this person hasn't done as well as they initially thought, and the idea fell over, but can you build on that?"

KS: The learning culture is critical.

CA: And it probably depends on the nature of the investment, I imagine some sectors, for example in biotech where you have science driving things, there are things that may not be within your control quite as much as in other sectors.

CS: If you don't have the vision already defined then it's very hard to set boundaries. Without that you're potentially just going to be running on the spot and wasting a whole lot of energy with no outcomes.

Click image to zoom Tap image to zoom

AC: So are you really investing in people rather than industries or company structures or sectors? How do you assess people?

KS: That's a very big question. It is things like assessing the idea, specifically “have you learnt from your mistakes?" In terms of whether I would back a particular company, I would look first at the company's learning culture. In addition, the substance is always very important to me - people can talk a good game - but the substance behind it is important. In terms of backing an individual, smeone can have a great idea but can they execute it? This is the critical question. There are a lot of great ideas that don't get off the ground because they have failed in the execution phase.

CS: And that comes down to people because you need to collaborate with the right people to be able to execute.

KS: If you have a really dominant CEO for example, who stifles innovation…that's important to factor in. It also often means there may not be that awareness of one's own areas of strengths and weaknesses. Essentially you need to put the right people around you, so that is an importance aspect to look for in an organisation.

AC: How about location? Hubs? Ecosystems – which we now hear a lot about.

CA: We often look in Australia for somebody else to give us the answers and we don't value creating circumstances for organic growth. There is a lot of benefit for us in making sure we are creating a situation where organic growth can be fostered; we are not trying to engineer an outcome along the lines of the Multifunction Polis.

Rather than looking somewhere else, at other cities, I think more the local roots approach, rather than always wanting to go for the big thing - the big tax cuts or the big structural reforms. I think those things are important but we underestimate the value of the organic.

London for example has fostered some of those organic things, as well as doing the other structural things.

AC: So what can we do now to spark a risk taking culture?

CS: Two things: four year fixed terms for government in Canberra and getting corporate boardrooms focussing more on longer term issues not just short term outcomes.

If the boardrooms and their chairs and CEOs start thinking more medium to long term and at the same time government had more certainty around their time to govern, it would increase the ability to implement a vision for the country.

But of course, that all needs leadership so the question now is whether our current government under Turnbull can provide that leadership. There is only so much talk that the community will take before it wants to start seeing results, so managing expectations is critical for government.

CA: For me it's a national conversation that says to all of us: what are you thinking about the things you are spending your money on? Why aren't you investing in these other opportunities? Do you understand what you are doing with your money? So it is really about improving financial literacy. ASIC is doing a lot of work in this regard.

If we can generally change the tone of our conversations so that we are starting to say “oh this didn't work out, or this hasn't performed quite as well as was hoped, but gee it looks like it was a risk realised", if we could change the tone I think that would go a long way to changing things.

Wearing my regulator hat, if there is one thing structurally that I think would make a massive difference, and I know it's something that Treasury and government have been looking at, it's changing the market licensing regime in Australia so we have a really flexible regime. That would really facilitate FinTech developments at the same scale as in America and in Europe so I would love for that to happen.

KS: Collaboration and fostering collaboration. Bring the influences together to actually work on Australia as an innovation nation. Get down into the execution level and that's about educational institutions and corporates and government representatives actually getting together and putting an umbrella over innovation and collaboration.

The second one is around the learning culture and it probably goes deep into our psyche and would be a long-term change around our education system.

Collaboration is very achievable. It just needs leadership and the will to do it.

CS: We can learn from how others around the world are collaborating, in particular Israel, and the ecosystem that exists between government, the universities and the private sector as being a shining light of how collaboration can work for the benefit of the country and innovation.

This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. The views expressed in this document are the views of the individual author and are not to be seen as the views of PwC.

Over the coming months, BlueNotes, in conjunction with PwC, will explore some of the big ideas that were discussed at the Forum and speak with some participants. It's important to keep the debate around innovation alive and begin to pave a way forward to secure Australia's future prosperity to the benefit of the entire community.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

editor's picks

27 Oct 2015

Cultivating risk

Andrew Cornell | Managing Editor bluenotes

The first law of thermodynamics is energy cannot be created or destroyed, just transformed from one state to another. That pretty much sums up the first law of risk as well.

20 Oct 2015

Leverage, risk, culture and Australian bank capital

Andrew Cornell | Managing Editor bluenotes

Westpac Banking Corp's decision to raise $A3.5 billion in new capital immediately raised investor questions about a new round of equity raisings even though the other three Australian majors had already raised comparable amounts.

20 Apr 2015

Standardising risk or the risk of standardisation?

Brad Carr | Director, Institute of International Finance

The Basel Committee on Banking Supervision, the global regulator, has issued two documents for discussion on how banks’ capital requirements are calculated, Capital Floors: the Design of a Framework Based on Standardised Approaches and Revisions to the Standardised Approach for Credit Risk.