In this environment, just as with Richie McCaw after 2007, having the right toolkit is critical. And this requires firms to work on both their "ordinary" and "dynamic" capabilities, as Professor David Teece and Kieran Brown have written in a paper for the Productivity Commission.
Ordinary capabilities involve "doing things right", such as incorporating best practices when it comes to the management of operations, people, finance, marketing and technology. Dynamic capabilities involve forward-looking, strategic decisions about why and what a firm does, or, more colloquially, "doing the right thing".
To draw a rugby analogy, ordinary capabilities are like making sure you get your scrum technique right, while dynamic capabilities can help you decide when it is better to play an expansionary game and when it is better to keep the ball in close.
This is important because, as Teece and Brown argue, firms with strong dynamic capabilities are more resilient and more productive, which in turn allows them to pay higher wages. Strong dynamic capabilities can also help firms be more innovative, which is a critical skill in today's challenging and deeply uncertain business environment.
The question that follows from this is how can firms build their dynamic capabilities? To help answer this the Productivity Commission teamed up with the Institute of Directors and interviewed 22 of some of New Zealand's most experienced directors, who between them work with dozens of New Zealand's top companies.
One thing directors told the Commission was that good governance is important, and not just for ensuring compliance with rules and regulations. Good governance is a central ingredient for growth. It can spur innovation, through supporting well-calculated risk-taking, and bring a long-term view to strategic investments.
Yet there can be a tension between the roles of company boards in encouraging long-term value creation and in monitoring compliance. The risk is that increasing legislative obligations, including personal director liability, can encourage boards to focus on their monitoring and compliance roles at the expense of time spent on strategy and long-term performance. This "directors' dilemma" has been identified as a key challenge to boards effectiveness.
This dilemma makes it especially important to get the composition of boards right. Boards need to have the right diversity of thinking, skills and experience, including drawing on commercial, industry and international experience, as well as the more traditional pick of accountants and lawyers. Indeed, some of the directors who spoke to the Productivity Commission expressed concern that the traditional approach of emphasising people from legal and accounting backgrounds when recruiting for boards could lead to a focus on preserving value and avoiding failure – "keeping off the front page" – rather than growing value.
Yet, as Teece and Brown argued, Covid-19 makes the need for boards to focus on growing value more, not less, important. As they wrote: "Now, more than ever, boards need to favour the future, tolerate mavericks, support bold investment, and remove complacent managers to help shift lacklustre businesses towards the domestic productivity frontier and catapult the best New Zealand firms toward the global frontier."
There is no doubt that the pandemic has been an unwelcome shock for many Kiwi firms. And this is exactly when having strong corporate governance in the toolkit matters, as boards and directors can lean in, share their insights and be an important source of support for management. Boards with the right mix of skills and experience can play a key role in lifting the eyes of firms and helping them survive and thrive in these challenging times.
• Dr Patrick Nolan is the Economics & Research Director with the New Zealand Productivity Commission.
