Episode #123 transcript

Failures in Leadership: Notable Cases from 2020

Hey there and welcome to Episode 123 of the No Bullsh!t Leadership podcast. This week's episode; Failures in Leadership: Notable cases from 2020. There was a lot to celebrate in 2020 despite the difficulties we all faced. And where as much of the world was focused on leading through the pandemic, it still didn't stop the run of the mill failures that come from deceptive, negligent and self-interested leadership. Now at the end of each year, the Australian Financial Review (which is our daily Wall Street Journal equivalent), publishes what it has judged to be the best examples of corporate failures. In today's episode, I'll take a look at some of these failures in a bit of detail to deconstruct the leadership anomalies that led to such poor outcomes. So this episode is pretty simple. I'm going to take a look at four of these cases from the article and give my commentary from a leadership perspective. And I want to finish by replacing the fifth case with my pick for the most breathtaking accountability failure of 2020. So let's get into it.

Our first example today was simply a case of not being able to read the play. Chief Executive of Australia Post Christine Holgate was forced to resign for gifting Cartier watches to four of her executives for doing a good job. Now, this was just a simple lack of judgement. The difficulty with Australia Post is that it is a government owned organisation. The federal government of Australia owns 100% of that company. The tricky thing is that this is a hybrid organisation, and I've worked in these organisations before. Part of what Australia Post does is simply social service - they deliver the snail mail around the country. But a much bigger part of the organisation, and the part that they're trying to grow right now is commercially competitive. It's parcel delivery and pickup. Now this competes directly with the UPS's and FedEx's, but it's still government owned. So you end up in this strange twilight zone. You're running a commercially competitive business, and after all Holgate is a commercial CEO, but, being owned by government, there's this perception that you're spending money on the public purse. Now the total value of the gift of the watches was immaterial like $20,000. And in a company that turns over about $7.5billion in revenue, it's a drop in the ocean. It means nothing. So how does a commercial CEO keep commercial strength executives motivated and rewarded when they do really good jobs? Well, this gets super, super tricky.

It reminds me of when I first joined Queensland Rail in 2008. Now at the time the business was exactly like Australia Post, it was a hybrid. So part of what they did was social service, running passenger trains around Southeast Queensland. And another part of it was highly commercial and competitive, hauling freight for big customers around Australia. But, given it was owned by the Queensland government 100% at that point, you couldn't just act as freely as you would if you were running a wholly commercial enterprise. Now the new CEO at QR at that time was Lance Hockridge and he'd just come off the back of a very long career in mining and minerals. Every year in Brisbane, there's an event called RiverFire, which has an incredibly impressive fireworks display, and there's lots of corporate entertaining that goes on around this event. Now Lance booked a prime venue on the river to host an event for QR's largest customers. And these are the heads of commercial businesses, mining companies who represented about $4 billion of annual revenues at the time for QR. Anyhow, as the story goes, a local journalist got wind of this and broke the story in the paper the morning of the event. It was a big scandal that QR would be using taxpayers money to fund a lavish party.

Well, the whole event was estimated cost about $30,000. But the politicians responsible for QR's ownership decided that they couldn't handle the scrutiny of a media story alleging misuse of taxpayers' funds. Totally ridiculous given the context. But, on the day of the event, Lance had to call our customers and tell them that the event was cancelled, and some of them were flying in from inter- state. The result. It actually only saved $6,000 of taxpayer's money because the cancellation fees absorbed almost the whole of the cost and the newspaper printed the article anyway. This is why governments are really poor owners of commercial assets. In business, the currency is dollars. In politics, the currency is votes. So what lessons do we learn from Christine Holgate's example at Australia Post? Well, the first thing is context awareness. You've just got to understand the context you're operating in and why it's important to do things a certain way. Had she done the same thing in a different business, no one would have batted an eye. The second thing though, is board continuity and support. Now the gifts of the Cartier watches were given in 2018 under a different Chairman. And the Board had full knowledge of and had approved the gifting of the watches to those four executives. But when push came to shove, Holgate was the one that took the fall, and the Board's still happily sitting there.

The second case is Rio Tinto's destruction of the cultural heritage site in a mine expansion in Western Australia. Who knew what was going on and who knew about the decisions that will be made to blast through this site in the expansion of the mine? Well clearly, someone knew about the importance of the site to the original owners. Rio called for an independent investigation. Well first of all, its independence was very questionable because existing non-executive director, Michael Estrange was appointed to run the inquiry. So perhaps it's not that surprising that the inquiry found no single person responsible for the decision. It blamed the failures on a gradual decline in the company's risk management and governing culture over a period of a decade or more. Now initially, the Group CEO, the Head of Corporate Affairs, and the CEO of the Iron Ore Division were given a slap on the wrist by the Board.

It was a decent slap, don't get me wrong, when the Board withheld $8 million of bonuses that would have otherwise been granted to the three. But the Board completely misread shareholder and community sentiment. With iron ore prices going ballistic, one can only imagine that this factored into the decision making of the Board. Did they read shareholder sentiment correctly? Well, eventually the three agreed to resign. But as the newspaper reported earlier, they were treated as good leavers by the Board, which approved their longterm incentive grants. These amounted to $40 million for the three executives. So here's where it gets hilarious. The three were initially penalised $8 million to stay, and then they were given $40 million to go. So what do we learn from this? The first thing is accountability has to be defined for Board much more strongly. Where was the one head to pat and one ass to kick on this one?

How could you possibly get an independent inquiry that said "No one was responsible to make a decision of that magnitude?" The second thing is the concept of throwing the baby out with the bath water. Now the independent review found that there was little depth left in Rio's Indigenous Affairs division. Success comes when you're trying to change an organisation from blending the best of the old, with the new. It's really difficult to succeed when you comprehensively erase corporate memory and get rid of all of the skills and capability that have been built up over a long, long period of time. So you might get away with having one executive with little content knowledge, but if that becomes two or three layers, it can become a real problem. The third lesson is when businesses are performing well, executives are forgiven a lot of sins. The question is, is this appropriate?

Now in the third case AMP, promoted a star performer who had previously been disciplined for sexual harassment. And there was a history of this at this company. Within a very short period of time, Alex Wade, who was the CEO of one division, had to step down unexpectedly after allegations of sexual harassment had surfaced. Then, really shortly after that AMP promoted Boe Pahari to the role of CEO at AMP Capital, another division, despite the fact that he had previously settled out a suit for sexual harassment to the tune of $2 million. This was incredibly tone deaf, and eventually after a little bit of to-ing and fro-ing both the chairman had another non-executive director were dismissed, and Pahari was demoted. What lessons do we have from this one? Well, first of all, how tone deaf is that Board? Putting profit and performance ahead of values and ethics is a sure way to get your people to distrust you. And it makes the whole diversity thing, rather a bit of a joke. But there's also a deeper message here. You can't legislate attitudes. It doesn't matter what rules you've got in place. It doesn't matter what the code of conduct says. If your organisation from the top down, from the Board, the CEO and the executive team, doesn't actually take these things seriously, it speaks volumes to every single person inside the organisation and outside. Which is why I'd imagine it's still pretty hard in some organisations to get a level playing field.

The fourth case, was a bunch of accounting anomalies at Freedom Foods. Now, this reminds me of a case study I did at Harvard called "The Kansas City Zephyrs". This was a dispute between the ownership and the players of a major league baseball team about who should take what share of the profits. This is where I learned that there is no such thing as black and white when it comes to accounting. Depending on your treatment of certain things, it can make a really big difference as to whether or not you're making money or losing money as far as the books are concerned. Now, there were a number of accounting disputes in The Kansas City Zephyrs case. There was rostered appreciation, signing bonuses, deferred compensation, and stadium costs, and how these were treated, made all the difference as to whether or not the club was losing money or actually making a killing.

And so they fought this out, in terms of interpretation, of how the accounting rule should be applied. Now, the Freedom Foods case is like this, but it's a classic case of hiding bad news and falsifying accounts. In my experience this often starts as the thin edge of the wedge, and then it becomes circular really, really quickly. I've seen firsthand, CEOs, pressuring Chief Financial Officers and finance teams to reclassify accounting items as one-offs or extraordinary items so that they can be omitted from the underlying accounts. As a classic example of this is restructuring costs. Now all of these things have to appear in the statutory accounts that are submitted, but quite often, bonuses are assessed based on the underlying accounts. So this can give you a fair bit of wiggle room in terms of what costs to shift where to make the underlying performance look as good as possible. And this can feed directly into executive bonus payments, both short-term and long-term.

Quite often, it's also used to pump up the share price of a listed company. So what lessons do we get from this? Well, once again, weak boards with insufficient oversight of management, are always going to have problems. This happens more often than we like to think. It's very, very tough for a non executive director to be on top of these things. The only real defence you have is a CEO that can be trusted. Sure, you could put a whole lot of governance structures in place, but ideally you want to know that the CEO and the executive team are always going to act in good faith, and if you know that, that's going to give you the best protection you can possibly hope for. But another lesson from this is, if you're a leader don't ever start down the slippery slope. There are lots of ways where you can just make a minor concession here or a little one there, and then before you know it, it snowballs and you're chasing your tail because you've already set things up a certain way and you've got to keep going down that path. Now at CS Energy, I was always really, really tough on how we set our bonus calculations. And, you know in retrospect, I was probably a little too tough. I set stretch goals, and I backed ourselves to make those goals. I looked around at similar companies and they were setting really soft targets and achieving them and making lots of money. But I didn't want to make any exceptions because integrity is more important than money.

Let's finish off with my favourite. The failure of accountability in the Victorian Government's COVID-19 hotel quarantine programme. Now I just want to make it really clear at the outset, that this is in no way, a political statement. It's simply a wonderful case study of the issues caused when accountability is either low or absent. And in this instance, the lack of accountability was nothing short of breathtaking. By way of background, Victoria, Australia's second largest state and home to the wonderful city of Melbourne, implemented a hotel quarantine programme for travellers returning from overseas. And this was designed so that they could stop the virus from reaching the broader population if someone was carrying it asymptomatically. Every single person returning from overseas had to go into a government administered hotel facility for 14 days. And this has become pretty routine in Australia, and even movement between state borders requires mandatory 14 day hotel quarantine under certain circumstances.

So for example, if you're entering certain states with low COVID penetration, from a state with a higher number of cases, then quite often you'll be required to go into a mandatory hotel quarantine. And this is in line with Australia's quasi elimination approach to the virus, which I'm not going to go into here. Anyhow, let's get back to Victoria. Now in Melbourne, a failure in the security at two of the hotels, saw the virus being transmitted and spread in the community. And this created a massive second wave in Melbourne and Victoria. As the community spread of the virus got out of hand, Melbourne underwent a draconian lockdown that lasted for almost four months. There were two massive failures here. The first, was a private security firm that was engaged to deliver the services, and by the way, this contract was worth tens of millions of dollars.

They had poorly trained and managed staff, and they enabled a massive breach of protocols, which let the virus escape from the hotels. The second failure was in the states testing and contract tracing regimes, which were woefully inadequate to cope with the situation. Now look, I wasn't there obviously. So I don't know what conversations were held. But there was an inquiry set up, an official inquiry into the events, and a roughly 700 page report was released. Its conclusion, may not surprise you. There was no person accountable for making the decision to use private security. There were literally hundreds of thousands of documents, days and days and days of interviews and evidence, and still no one was found to be accountable. The Federal Government had offered the assistance of the army to manage security at the quarantine hotels, and this was rejected by Victoria. Although no one in the State seems to recall who actually declined the offer. Politicians and public servants alike, all blamed everyone else and had mysteriously vague memories of who did what.

There was also no accountability trail of how the decision was made to appoint the security firm that was eventually engaged. Even though this firm wasn't on the procurement panel from which suppliers were normally chosen. And I could speculate on possible reasons for why that company was chosen, but I won't. I'd just really like find out who was making those calls and who was having the influence behind the scenes. What lessons do we take from this one? Well, the first is obvious. Shared accountability is no accountability. Let's give everyone the benefit of the doubt and say there were absolutely no nefarious reasons behind any of the decisions and there was no corruption. It does show, that where accountabilities aren't clear, gaps and overlaps will appear really quickly. Some of which can have catastrophic results.

Now, governments the world over are not known for having strong accountability structures, but there are lots of commercial organisations that succumb to the same mistakes, and so you've got to make sure that you're not one of these leaders. The second lesson is, if you can't handle it yourself, don't be afraid to put your hand up and ask for help. This has to be part of a culture you create in your organisation. Whoever's decision it was, Victoria refused the offer of assistance from the Federal Government that likely would have saved 5 million people from being locked down for months on end. Victoria also refused help with its contract tracing regime, which proved to be woefully inadequate. Now there's some obvious and fundamental failings of leadership that seem to crop up time and time again. They're driven mainly by self-interest, fear of consequences, and lack of a firm, value based foundation for decision-making. As you head into 2021, take a moment to make sure that you're working on your own personal foundations. These incidents, for the most part, aren't just one-off lapses in a leader's judgement.

They are the inevitable outcome of a lack of character, which pushes leaders down the path of least resistance. It's incredibly easy to rationalise why you don't have any other choice when you make a decision for the wrong reasons. But you always have a choice, and if you make the right ones, you'll be way better off. Just remember, karma is reliable and eventually you'll pay the price.

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