Insights Volume 17 June 2015 by The Faculty of Business and Economics, The University of Melbourne

insights melbourne business and economics volume 17 june 2015

Changing the image of the profession: economic reality in accounting and the increasing value of the audit

By David Tweedie Enhancing value with clarity of purpose

By Peter Nash Financial globalisation and asset bubbles: dealing with a new world economy

By Jaume Ventura Is there a future for manufacturing in Australia?

By John Pollaers Designing the twenty-first century workspace: shaping business culture and practice

By Rosemary Kirkby Faculty of Business and Economics â&#x20AC;&#x201C; 90th anniversary celebration

By Geoff Burrows, Ross Williams, Jeff Borland How will you achieve success and satisfaction?

By Michael Andrew

Insights: Melbourne Business and Economics ISSN:1834-6154 Editor: Associate-Professor Geoff Burrows Sub-editor: Ms Rebecca Gleeson Advisory Board: Professor Kevin Davis Professor Emeritus Ian McDonald

Design: Ms Sophie Campbell Illustration: Ms Sophie Campbell and Mr Nicholas Kallincos Photography: Mr Joe Vittorio and Gollings Photography

insights vol 17 Table of contents 02 Welcome

By Geoff Burrows, Editor

05 Changing the image of the profession: economic reality in accounting and the increasing value of the audit

By David Tweedie The audit profession is a noble one – it oils the wheels of capital markets – but the general fall in share prices after the Enron and WorldCom scandals shows what happens when markets fail to trust auditors.

27 Is there a future for manufacturing in Australia?

35 Designing the twenty-first century workspace: shaping business culture and practice

15 Enhancing value with clarity of purpose

By Peter Nash By embracing and responding to calls for transparency with openness, accounting stands to evolve as a profession, enhancing its perceived value, while restoring trust and inspiring confidence in the integrity of financial reporting.

21 Financial globalisation and asset bubbles: dealing with a new world economy

By Jaume Ventura Understanding credit booms and busts requires a theory of collateral fluctuations.

By John Pollaers The role of leadership will be crucial in shaping and driving Australia’s transition to a high-value manufacturing economy.

By Rosemary Kirkby In this second decade of the new century, the issues shaping workplace design are less place-related and more about the redesign of work and the development of organisational cultures.

43 Faculty of Business and Economics – 90th anniversary celebration

By Geoff Burrows, Ross Williams, Jeff Borland Addresses at a function celebrating the 90th anniversary of the commencement of lectures in the Faculty of Commerce.

Occasional Address 50 How will you achieve success and satisfaction?

By Michael Andrew At this critical stage of your life, think carefully about your plans and how you are going to achieve them.

Insights Melbourne Business and Economics

Welcome

Insights publishes condensed and edited versions of important public lectures connected with the Faculty of Business and Economics. Its object is to share these lectures with the wider public, especially Alumni. The issues presented and developed generally relate to research findings on public economic and social policy. Insights also constitutes an archival source of an important part of Faculty life. Suggestions and comments from readers on any feature of the journal are welcome.

This edition leads with a summary of a special event, Sir David Tweedie’s address on changing the image of the auditing profession, given as the 75th lecture in the University’s longest-running annual public lecture series, and what is believed to be the world’s longest running accounting-research lecture – the CPA Australia/University of Melbourne Annual Research Lecture. The broad challenges facing the accounting profession, particularly in relation to globalisation, transparency and the digitisation of information, were the subject of Peter Nash’s address to the 2015 Accounting Hall of Fame induction ceremony. Continuing the tradition of the Corden Lecture being delivered by eminent international economists, the 2014 lecture given by leading Spanish economist, Jaume Ventura, explored the role of collateral in credit booms and busts, advancing the notion that asset prices are partly driven by ‘bubbles’ or ‘pyramid’ schemes. Countering the ‘gloom and doom’ attitude frequently voiced concerning manufacturing in

Australia, John Pollaers points to local success stories and identifies the policy initiatives and leadership qualities needed to boost advanced manufacturing and avoid a future in which Australia becomes predominantly a buyer of high-value goods. Rosemary Kirkby’s Foenander Lecture links architecture, interior design and the nature and location of work in an examination of how technology has impacted on the design of workplaces, and where and how work is undertaken. At a degree-conferring ceremony on 18 December 2014, Michael Andrew, the former global chairman of financial services firm, KPMG, was both the recipient of a Doctor of Commerce (honoris causa) and the deliverer of an occasional address in which he reflected on the lessons of his own career and their relevance to graduands about to enter the workforce. Also in this issue is a piece marking the 90th anniversary of the commencement of lectures in the then Faculty of Commerce. At a celebratory function on 31 March 2015 to mark this anniversary,

Ross Williams, Jeff Borland and I spoke briefly about different aspects of the Faculty’s history. Now, as we reach this milestone in the Faculty’s history, we move into a dynamic and exciting phase of growth and development focused on enhancing our applied research outcomes, expanding our curriculum, and bolstering our connections with industry. To support this strategic direction we will launch a single publication for Faculty research, news, expert comment and events. Insights will no longer continue in its current hard copy illustrated format but our public lecture program will be featured across the Faculty’s digital and print platforms. To receive a printed or digital copy of the new business and economics magazine when it is published later this year, please sign up at www.fbe.unimelb.edu. au/mag. Since Insights’ launch in April 2007, both myself and my editorial predecessor, Joe Isaac AO, have benefited from the expert support of sub-editor, Rebecca Gleeson, and designer, Sophie Campbell. The appearance and readability of the journal owe

much to their professionalism and flair. Insights thanks them for their sterling efforts and wishes them well in their future endeavours. Closer to home, I would also like to record my appreciation to Kevin Davis and Ian McDonald for the important encouragement and advice they have provided as members of the journal’s Advisory Board. I should also record my gratitude to senior officers in the Faculty of Business and Economics for the substantial financial support they have provided for the journal since its inception. It has been a privilege to edit Insights for the last four years and to liaise with the many eminent thinkers and practitioners involved in the Faculty’s public programs. For their work in once again bringing added character to articles, Insights is indebted to Sophie Campbell, Nicholas Kallincos, Joe Vittorio and Gollings Photography. Geoff Burrows Editor ghb@unimelb.edu.au

Insights Melbourne Business and Economics

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CHANGING THE IMAGE OF THE PROFESSION: ECONOMIC REALITY IN ACCOUNTING AND THE INCREASING VALUE OF THE AUDIT The audit profession is a noble one – it oils the wheels of capital markets – but the general fall in share prices after the Enron and WorldCom scandals shows what happens when markets fail to trust auditors. BY DAVID TWEEDIE

A condensed version of the 75th CPA Australia/University of Melbourne Research Lecture, presented at the University of Melbourne on 13 October 2014. For a PDF of the full article please contact the CPA Library at cpalibrary@cpaaustralia.com.au.

My impression after 40 years in the accounting profession is that the challenges are, if anything, greater today than they were four decades ago. For the purposes of this summary, I will concentrate on just three matters out of many possibilities: – The role and importance of the conceptual framework; – The particular problems of valuation thrown up by the GFC; and – Increasing the value of the enormous economic effort devoted to the audit function.

The conceptual framework Like over 100 countries, the UK has adopted the International Financial Reporting Standards (IFRS) – some 2,500 pages of standards, interpretations and guidance notes (that said, the US Generally Accepted Accounting Principles, GAAP, is some seven times larger). Those opposing the introduction of accounting standards usually argue that various methods should be allowed, and that industry would sensibly choose the most appropriate in the long run and instinctively move to best practice. Experience shows that this is not necessarily the case. The growth of equity

markets, management incentives and increasing demands by shareholders all pressure managements to show companies in advantageous lights. Volatility is unwelcome – smoothed earnings are much more popular. On occasion, draft accounting standards seeking to reflect the economic realities of particular transactions or situations are opposed and politicians are lobbied to deny standard-setters their freedom of action. If change seems inevitable then delay is deemed to be preferable. Requests for field trials, further exposures and economiceffect analyses have all delayed the introduction of unpopular standards. Some argue that, instead of a suite of standards, a conceptual framework is all that is required. Once, there were countless ‘private’ conceptual frameworks – each partner had his or her own. The profession’s conceptual framework was born to stop revisiting the same arguments ad nauseum. This led to general agreement over the objectives of financial reporting, the qualitative characteristics of reported information and definitions of key accounting concepts. The conceptual framework is the standard setter’s best chance of keeping corporate reporting honest and resisting vested interests. While still a work in Insights Melbourne Business and Economics

progress – particularly in the areas of presentation and measurement – the framework has been used successfully in reforming accounting. However, finding the theoretically ‘correct’ accounting for a transaction by no means settles the arguments, especially if strong vested and politically-powerful interests are involved.

The GFC and fair value Arguments about the use of fair values in financial reports are longstanding. While far simpler to audit, historical costs are frequently far less relevant than current values. When inflation was seemingly conquered, interest in price-level accounting largely disappeared – but support for fair values emerged when historical costs failed to reflect economic realities, leading to excesses in earnings management.1 So we came to an era where agricultural produce, commodities and above all financial instruments were disclosed in financial statements at fair value. In the GFC, markets froze. Few transactions took place and often the only evidence of values were fire sales. The International Accounting Standards Board (IASB) had to set up a task force to issue guidance on valuing assets in illiquid markets, proposing methods used by those banks which had calibrated their models to the markets pre-crisis and which were not showing values based on forced sales. Many financial institutions, which in boom periods had enjoyed revealing profits based on fair values, were faced with disastrous losses as these values fell. An obvious solution to some bankers was to allow financial institutions to stop using such values. The IASB consequently came under sustained pressure from the European Commission, which proposed to legislate within days allowing companies to switch from fair value to historical cost in certain situations on the grounds that in the US this was allowed on ‘rare’ occasions. The IASB’s initial reaction was not to bow to political pressure. Yet it soon became clear that if the law went through 06

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as drafted, institutions would be able to write back recent (and still existing) losses without disclosing any loss of fair value. In the febrile state of the markets, securities regulators were concerned that if the law was passed, the resultant uncertainty about the real performance of EU financial institutions could lead European markets to implode and the contagion to spread globally. Within a week, with the help of the major accounting firms and the SEC, the IASB reluctantly allowed reclassification from fair value to cost under similar circumstances to those permitted in the US GAAP, but also to require disclosure of the financial-statement effects of each reclassified financial instrument until the instrument was derecognised. The IASB was excoriated for acting without due process but faced with the alternative of market contagion, felt that it had little choice. When the European Commission came back requiring more changes – suspecting there would be further political demands and with the support of standard-setters worldwide – the IASB very quickly decided to undertake a major revision of the financial-instruments standard and not to make piecemeal amendments, and thus rejected the Commission’s requests. The IASB had already intended to revise IAS 39 – the Financial Instruments standard – and replace it with a principled model (IFRS 9) that required fair value of those instruments for traded items or where cash flows were not known (i.e. equities and derivatives), and only allow cost to be used for items where the cash flows were known (i.e. loans and bonds), and only if the instruments were not intended to be traded. A cost measurement was accepted on the grounds that using fair value for these instruments would just bring ‘noise’ into the financial statements. The fair values would fluctuate as interest rates altered – but given that such instruments were intended to be held until maturity, there would be no intermediate cash flow effect. The role of value in accounting is still controversial

and the IASB has recently adapted the IFRS 9 model to bring back a form of ‘available for sale’ accounting. This creates a third category of financial instrument which might be held to redemption, but which could be used for trading – in which case the instruments would be marked to market with the change in value initially going through Other Comprehensive Income. Some will argue that marking all financial instruments to market could have major consequences. If banking books in the UK had been shown at fair values the profits of UK banks would have been far more volatile. In 2009, the UK banking system would have been technically insolvent on a fair value basis. As asset values recovered, UK banks went back in the black within a matter of months – full fair value is not necessarily a panacea.2

Increasing the value of the audit Role of the auditor The GFC led to concerns over the role of the auditor. Why was the investing public not warned about the impending disaster? The moves in Europe for compulsory tendering for audits and rotation of auditors reflect one of two beliefs: – Auditors are too close and obliging to clients at the expense of financial markets; or – Fresh pairs of eyes are always useful after a certain period to bring different perspectives to an audit. The auditor-client relationship needs to be reformed to increase the value of audits to the financial community. This would involve more direct reporting by auditors to investors. Auditors should be free to say exactly what they wish about financial statements. Insights Melbourne Business and Economics

Audit reports must provide value While bad audits receive extensive press coverage, there is presently no way for outsiders to know if there has been a good or outstanding audit. Audits are seen by some companies as necessary burdens to be endured as a result of seeking capital from investors. Forty years ago, the UK audit report was three to four lines long. You could tell at a glance if the opinion was qualified by its length. Sadly, since then, the ‘expectation gap’ buried the opinion in ‘boilerplate’ language concerned with ‘who is responsible for what’ that could easily be accessed on a website. The audit report is the principal output from a very costly activity and, therefore, should give added value to its recipients – the investors. The Public Companies Accounting Oversight Board (PCAOB) states that matters which investors would like to see highlighted in auditors’ reports are: – Areas of high financial-statement and audit risk; – Areas of significant auditor judgement;

Changing the image of the profession

– Areas in financial statements involving significant management judgement or measurement uncertainty; – Significant changes or events including unusual transactions; and – Identification of where significant matters are disclosed in the financial statements. Instead of meeting this basic need of ‘adding value’, the present report appears to be one of limiting responsibility rather than giving investors what they might want. The statutory monopoly, the payment model and pressures from management do not encourage auditors to innovate. The profession now has a wonderful opportunity to end the notion of the audit being a necessity and begin to make it a vital part of investment analysis. The PCAOB and the International Auditing and Assurance Standards Board (IAASB) are proposing significant changes to the audit report, meeting many of the investors’ requests listed above. The

UK, in the form of IAS700 ( June 2013), has already mandated a different style of report. If evidence is sought that the audit report should be more expansive, it can be found in the PCAOB papers for March 2011. Here, it is stated that US pension fund CalPERS noted that the auditor’s reports for 2008 (costing $US119 million) and 2009 (costing $US193 million) for one of the many companies that were the recipients of Troubled Asset Relief Program (TARP) funds were ‘word for word exactly the same’. Clearly the 2009 audit was of an entirely different intensity than that of 2008, but where was the emphasis? Investors paid an extra $US74m to learn that once again the financial statements gave a fair presentation. Was there nothing else? Wouldn’t investors want to know what had seriously troubled the auditor? Presently there is a debate about whether auditors should disclose information that is not reported elsewhere in financial statements. One view is that auditors should be confined to commenting on the financial reports (including audit committees’ reports) where items desired by investors could be disclosed. The alternative view, which I share, is that auditors represent investors not management and should be free to comment on issues which concern investors. Gratifyingly, the PCAOB and IAASB are moving towards the direction of the new UK audit report. The latter requires auditors to describe risks of material misstatement which have had the greatest effect on audit strategies or the allocation of resources in audits and in directing the efforts of engagement teams. In other words, what involved the most difficult, subjective or complex auditor judgments; posed the most difficulty in obtaining sufficient evidence; or posed the most difficulty in forming the opinion on the financial statements. However, UK auditors are required to give an overview of the scope of audits and how the scope addressed the risks of material misstatements. These explanations help users to understand their significance in the

context of the audits and the financial statements as a whole, and not as discrete opinions and separate elements of financial statements. To avoid boilerplate legalese, this information must be directly related to the specific circumstances of the audited entities – that is, audit disclosures should not be generic or expressed in standardised language. Two examples of the development of the UK audit report can be found in the 2013 auditors’ reports on the accounts of Rolls Royce PLC and BP PLC. In reporting on Rolls Royce, for each major issue, auditors KPMG nominated the key area of judgement, the significant accounting policies, the audit committee’s view and the auditor’s findings. The areas covered encompassed revenue recognition, recoverability of intangible assets, consolidation issues, the valuation of liabilities and bribery and corruption. The relevant comments included: – ‘The resulting estimate was acceptable but mildly optimistic resulting in a somewhat lower liability being recorded than might otherwise have been the case’ (valuation of a put option); – ‘We found the Group’s judgement to have been balanced’ (the basis of accounting for revenue and profit in the civil aerospace business); and – ‘Overall our assessment is that the assumptions and resulting estimates (including appropriate contingencies) resulted in mildly cautious profit recognition’ (measurement of revenue and profit in the civil aerospace industry). The overall impression was that ‘on balance’ a fair presentation had been given by the company. Ernst & Young’s report on the 2013 financial statements of BP was less detailed than that of KPMG, but outlined significant risks concerning: – Uncertainties of provisions and contingencies related to the Gulf of Mexico oil spill; – The impact of estimation of the quantity of oil and gas reserves on impairment testing and depreciation; Insights Melbourne Business and Economics

– Unauthorised trading activity; – BP’s ability to exercise significant influence over Russian oil major Rosneft (in which it had a minority interest) and the consequent accounting for the interest in Rosneft using the equity method; and – Fair-value accounting and the acquisition of the equity interest in Rosneft. The report identified that the scope of the audit concentrated on key locations and explained how each of the above risks were tackled in a manner that represented a big improvement over the conventional audit reports of previous years.

Going concern One area yet to be successfully tackled is that of going-concern assumptions. Auditors struggle with giving adverse going-concern opinions which could precipitate the collapse of the audited companies. They could do more. None of the top-10 US TARP recipients received going-concern opinions before receiving $295 billion from the US Government. Of the 10 largest bankruptcies during the crisis, only two had going-concern opinions. In the year prior to their collapses, the market capitalisation of the eight companies without going-concern opinions declined from a collective $75.5 billion to just under $700 million – a 99 per cent loss in investor value. The link between regulators, auditors and the investing public was broken. New proposals emanating from the auditing standard-setters probably do not go far enough, being based on auditors claiming that management’s use of the going-concern assumption is reasonable and that neither party has identified any material uncertainty. However, the IAASB proposals do state that the report should contain a warning that ‘neither management nor auditor can guarantee the entity’s ability to continue as a going concern’ – the auditor’s equivalent of the investor’s caveat that the value of investments can go down as well as up. 10

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To be more informative, auditors could comment on their reasons for accepting the validity of the going-concern assumption. One of the major UK casualties of the GFC was Northern Rock. Almost three-quarters of its liabilities were short term while these funds were lent for periods up to 25 years. The liabilities consisted largely of funding from wholesale markets. The theory behind the going-concern assumption was that these markets would always stay open – as they had done until the liquidity crisis struck. The initial assumption was therefore quite reasonable, but had it been brought to investors’ attention some may have decided that the risk of the markets closing was one they were not prepared to take.

Auditor independence The European Commission has been determined to reform and clarify the role of auditors, to reinforce their independence and improve their supervision. The main objectives are to increase competition between audit firms and improve the quality of audits. The legislation came into force in the middle of 2014, although most of the measures will take effect from July 2016. Two key changes in the audit of companies that are considered ‘public interest entities’ stand out: – A requirement to change audit firm after 20 years (24 years for a joint audit), with the statutory audit retendered after 10 years (extendible to 14 years if the audit is joint); and – Limiting the permissible non-audit services that audit firms can provide in any one year to 70 per cent of the audit fee based on the average fee over the preceding three years. The regulations are clearly aimed at moving auditors away from undue influence on them from the audited company. More, however, could be done to increase the auditor’s independence: – Repositioning the audit; – Training the new professionals; and – Strengthening the regulator-auditor relationship.

Repositioning the audit If I were an Audit Committee chairman, I would want the toughest auditor I could hire to prevent the company – and me – from being the subject of front-page articles in the financial press. It is not sufficient merely to state in the audit report that the auditor is independent. It must be manifestly obvious. More could be done to reduce companies’ ability to put pressure on an auditor to accept their position and to improve audit quality, namely by: – Removing annual appointments, common in many countries, and extending appointments until the next proposed date of retendering so auditors have time to demonstrate audit quality without the constant pressure of being fired;

– Making the removal of an auditor during the appointment subject to a shareholder vote after both sides put their case. Incompetence or excessive fees would obviously be cause for dismissal, whereas complaints from management that the auditor was tough would not; and – Initially removing price competition from any decision involving tendering. Audit committees should be required to select auditors that they deem are of the highest quality – and then ask for a price. If a committee believes that another auditor offers a better cost/benefit balance, then investors should be advised that a different auditor would have been chosen if the sole criterion were quality. Any savings made should be disclosed. Insights Melbourne Business and Economics

Audits are becoming a decreasing portion of audit firms’ revenues and have shrunk in comparison to other client service lines, not all of which depend on the fundamental exercise of scepticism. In the US the Sarbanes Oxley Act puts audit committees in charge of choosing auditors, yet committees have limited information on which to judge audit quality. The battleground, therefore, for market share tends to be price. From 2006 to 2011, 418 companies in the Russell 3000 index changed auditors. The median change in fees was minus 11.5 per cent. Of companies changing auditors, 62 per cent reported reduced fees.3 But did fees fall because new auditors were more efficient, the scope of audits were reduced, or audits were priced below cost to obtain new clients? Some audit committees seem to believe a major part of their job is to force down audit fees. Based on the PCAOB’s own evidence, it seems that many audit committees have succeeded in achieving such an objective, jeopardising the whole financial-reporting model. If audit fees are too low, auditing firms will struggle both to reward their teams appropriately and attract highly-qualified graduates – the expert auditors of tomorrow, who must be as intellectually agile as those whose work they audit. Furthermore, if fees fall, to retain key partners by maintaining their incomes, firms may try to make audits profitable by cutting partner time on engagements, thereby reducing audit quality. Another disclosure in the financial statements could sound a warning to investors about the potential dangers of lower-quality audits caused by falling audit fees, namely, time spent on audits analysed into time spent by partners, managers and junior staff. Investors should note any false economies and pressure directors to pay sensible fees.

Auditor training Within audit firms, an almost unseen threat to audit quality is emerging – the intergenerational issue. Today’s and tomorrow’s auditors need to be 12

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more closely related. When I trained in Glasgow 40 years ago, there were no accounting standards. Neither were there any ethical standards, but I was apprenticed to a giant of the profession, Professor David Flint. When accounting problems came up we would almost have a seminar discussing what should be done to ensure that a true and fair view was shown in the accounts. I learned so much in those early days, above all the need for backbone and ethics in the profession. I didn’t need to be taught ethics, they were absorbed just by watching David at work. Partners would explain what they were doing and why – they would take you to meetings with senior management, you would see them in action and you could see their unbending nature when they believed that a fair presentation was not being displayed in the financial statements. Rather than large firms boasting about profits per partner, I would like to see another metric – time spent with students per partner. I recently raised this issue with a senior partner in a major firm only to be told that such mentoring wasn’t necessary as the firm had a human resources (HR) and training department. If that attitude is widespread, the profession is in great danger. Every qualified accountant has an obligation to facilitate the training of youngsters entering the profession. Beginners have to know the exact role the profession plays in the raising of finance and the running of capital markets. They have to experience seasoned professionals doing what they should do – ensuring that the information given to investors is unbiased and reflects the true economics of the situation. Leaving training to HR departments is not delegation, it is abrogation. If partners’ time is scarce, get more partners. Accept a slightly lower return and do what you are committed to do as a professional – pass on your knowledge to the accountants and auditors of tomorrow.

Auditor-regulator relations Finally, to increase auditor independence, auditorregulator relations need to be examined. Auditors

are one of two external forces keeping companies honest; regulators are the other. These two forces need to work more closely together, highlighting the auditor’s public duty and assisting regulators in their mission of serving investors or ensuring financial stability. When I chaired the UK’s Auditing Practices Committee (APC) in the late 1980s, we struck a deal with the prudential regulators and issued an Auditing Guideline, The Audit of Banks, considering the relationship of the bank and the auditor to the regulator. The Bank of England, the regulator, had requested that auditors report directly to the Bank over any aspects of client banks’ businesses that raised concerns. The APC believed this to be too one-sided. We considered that if the regulator had information presently unavailable to the auditor that raised concerns over a particular part of a bank’s business, then the auditor should be forewarned and pay particular attention to such an area in the audit. We were also concerned at the idea of going to the regulator without the client’s knowledge. The Guideline eventually required the auditor to make the client report problems to the regulator – if it would not do so then the auditor would go directly to the regulator. If, however, the auditor was convinced that senior management were acting fraudulently or recklessly, and thus placing the bank in a dangerous position, the auditor would report directly to the regulator. In return, the regulator agreed that they would warn the auditor of any concerns they may have. For some reason, during the period when the Financial Services Authority regulated UK financial institutions, that Audit Guideline fell into disuse. How useful it would have been during the GFC – I am delighted to say that it has now been resurrected.

must never forget that companies are owned by investors, not management; and it is to the former that auditors owe their duty.

Conclusion Audit is at a tipping point. Its worth to investors and society as a whole is seriously underestimated – yet the profession has a wonderful opportunity to demonstrate to the public the worth of an audit until now hidden behind the phrase ‘fair presentation/ true and fair view’. There is much to do, but change is on the way and the increasingly important role of the accountant in the financial reporting system is changing with it. Sir David Tweedie chaired the International Accounting Standards Board from 2001 to 2012 and currently chairs the Board of Trustees of the International Valuation Standards Council. 1 For a discussion of the Australian experience of inflation accounting, see Tweedie D P and Whittington G, The Debate on Inflation Accounting, Cambridge University Press, 1984, pp.192 – 204. 2 See A Haldane, Fair Value in Foul Weather. Bank of England, 2010, p14. 3 See the speech by PCAOB Chairman Doty at http:// pcaobus.org/news/speech/pages/05012014 Baruch.aspx.

The Guideline dealt with the auditor’s role in relation to the prudential regulator. If the auditor is to become a key player in society’s bid to ensure that listed companies are well run, something similar should be agreed with securities’ regulators. As before, the aim is investor protection – managers Insights Melbourne Business and Economics

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ENHANCING VALUE WITH CLARITY OF PURPOSE By embracing and responding to calls for transparency with openness, accounting stands to evolve as a profession, enhancing its perceived value, while restoring trust and inspiring confidence in the integrity of financial reporting. BY PETER NASH

An edited version of an address given at the Australian Accounting Hall of Fame induction ceremony at the University of Melbourne on 18 March 2015.

Speaking in India recently, Hans Hoogervorst (2015), Chairman of the International Accounting Standards Board (IASB) reflected on International Financial Reporting Standards (IFRS) and progress towards global accounting standards relative to progress in other regulatory areas. Citing the aviation industry, he noted that standards set by the International Civil Aviation Organisation are today applied in full by 190 countries across the globe. He pondered, ‘Does anybody bemoan a loss of sovereignty here?’, before going on to explain that: The rationale for global [accounting] standards is similar ... to establish highquality standards that improve the efficiency, usability and safety of the international system. For civil aviation, it’s about protecting passengers. For financial reporting, it’s about protecting investors. This is a compelling articulation of one of the defining issues of the era for the accounting profession. It also serves to remind us of the underlying purpose we serve – why we do what we do and why it matters. The accounting profession has a critical role to play in maintaining confidence in the capital markets. We protect life savings. This is a purpose that has

the potential to inspire the current generation of accountants to uphold standards of quality and integrity and to be responsive to the investor community. Moreover, it has the potential to inspire and attract future generations. It is a purpose we should carry and honour with pride. Embracing our purpose has perhaps never been as important as it is today. In the years following the GFC, we have faced an unprecedented convergence of challenges, namely: – Our relevance has been challenged; – The quality of our work, our integrity and our independence have all been questioned; – We are subject to an increasingly complex set of rules and regulations; – We face calls for greater transparency and clarity in reporting; and – Technology and big data are threatening traditional practices and creating higher levels of competition. Through our response to these challenges, we have an opportunity to evolve. We must listen and respond to competing stakeholder demands. We must open ourselves up and embrace change. We must act swiftly, boldly and innovatively. Above all, we must preserve Insights Melbourne Business and Economics

the legacy of generations past by maintaining our hallmarks of quality and integrity. Responding in this way, our profession can help restore levels of trust and confidence in capital markets. Tonight, I’d like to touch briefly on three dynamics confronting our profession – globalisation, transparency and digitisation.

Globalisation I’d like to start by taking you back in time, to the mid-2000s when I was lead partner on the BHP Billiton external audit. I found myself sitting with four different sets of accounts – Australian Generally Accepted Accounting Principles (AUS-GAAP), UK-GAAP, US-GAAP and IFRS – each producing different profit results. From my perspective this made a mockery of our role, challenged our credibility and undermined the integrity of the process. The picture today is thankfully quite different – BHP Billiton produces one set of numbers according to IFRS that is accepted in all jurisdictions. While recent research by the IASB (2014) found that 114 of 138 countries reviewed require the use of IFRS for all or most publicly listed companies, indicating strong take up of IFRS globally, the fact remains that we are not there yet. We still have one of the major economies of the world operating under its own rules and so long as arguments of sovereignty persist and implementation challenges are raised, we run the real risk that the convergence discussion will slip backwards. As a profession, we need to keep advocating the case for uniformity – and the rapid pace of globalisation serves as a powerful ally. Capital is bouncing around the globe at unprecedented rates, new markets are opening up and the global investment community is looking for certainty and consistency. Uniformity provides investors with confidence in the quality and integrity of financial reporting and in the comparability of investment opportunities. The progress we have made towards uniformity is 16

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perhaps one of the major achievements of our era. Yet the corollary of having come so far is, of course, that we have a great deal to lose. The next few years will prove pivotal if we are to see this effort through to completion.

Transparency The public profile of accountants is undergoing an overhaul. In a world driven by a 24/7 media cycle and with capital markets having an unquenchable thirst for information, the profession has been called out from behind closed doors. No more hiding behind spreadsheets and 300-page jargonfilled financial statements. Accountants are being thrust into the public spotlight to talk about their work – the assumptions made and the nature of discussions between management and auditors. Investors want more than a pass/fail opinion from external auditors and they want assurance on a broader range of matters. If accountants embrace and respond to calls for transparency with openness, we stand to evolve as a profession, enhancing our perceived value, while restoring trust and inspiring confidence in the integrity of financial reporting. Resist and we risk fading into irrelevance. This transparency dynamic has three elements. First, it is asking us as professionals to stand by our work. It is an opportunity to demonstrate to the world the legitimacy of our role and the quality and integrity of what we do. The new, enhanced IAASB auditreporting requirements have handed the auditors of the world an opportunity to provide a behind-thescenes view of audits, creating the opportunity to showcase the degree of professional scepticism and management challenge auditors apply. Early impact assessments out of the UK, where expanded reporting requirements were introduced in 2013, certainly suggest end users value the additional insights. Further, there is a suggestion that this increased visibility has seen auditors sharpen their focus, apply increased scepticism and, in turn, enhance audit quality.

Second, the transparency dynamic is about calls for clarity in reporting. Cutting the clutter and complexity in financial reports brings into focus those items most relevant to investors and stakeholders. Companies embracing the declutter trend are removing immaterial disclosures, re-ordering and grouping notes and re-writing technical wording into plain English. As a consequence, many have significantly reduced the length of their reports.

a way of producing integrated data that succinctly captures the core elements on which investors place value: strategy, execution, performance and outlook. Why then is such a seemingly simple and important concept resisted? It is a resistance to change – a mentality so intently focussed on the current approach to reporting that some simply can’t set a higher aspiration. The solution will not be found in refining our current approach. A broader perspective is required.

Embracing the de-cluttering principle calls for a certain amount of courage and skill by the profession. It is the courage to find comfort in a ‘less is more’ approach; and to shake off long held views that length and complexity mitigates the legal threat of omissions. It is the skill of storytelling; and of distilling complex technical language into plain English. Clarity engenders trust, enhances our relevance and ultimately the value we bring.

How do we inspire the profession to move in the right direction? In my view, the answer is not regulation. It must be a market-led process. Surely capital must flow with greater ease to those organisations that embrace and respond to end-user demand. Organisations that better tell their value story should benefit from this approach.

Third, if we take the view that financial reporting as we know it is perhaps broken, the answer may well be to start again and go down the path of integrated reporting. Viewed objectively, the drive towards integrated reporting seems totally logical. It presents

Digitisation The availability of data and the speed at which it moves around the globe is challenging traditional paradigms based on historical point-in-time financial reporting. Historical data is simply that – historical. The market place is demanding more timely, perhaps even real-time reporting from Insights Melbourne Business and Economics

companies with an expectation that the audit process may run concurrently. It is hardly surprising then that research by Frey and Osborne (2013) found the accounting and auditing profession ‘highly susceptible’ to disruption, with a 94 per cent probability of disruption, ranking not far behind telemarketing.

of today’s business environment. The intersection

Internet-based accounting systems and the commoditisation of compliance services are a reality

the value of the profession beyond the truth or

Enhancing value with clarity of purpose

of accounting and data science, whether we like it or not, is well and truly here. The digital age has handed our profession an opportunity – to take the mass of data, apply sophisticated analysis and deliver insights into business trends and risks with a truly strategic orientation. It is about demonstrating otherwise of historical numbers.

Does this pose too great a risk to our integrity, our reliability, our innate conservatism? Is it a risk? The answer is ‘yes’, but it is a risk that can be managed. The opportunity is about embedding data science and analytics in accounting and auditing processes to achieve greater quality, accuracy and efficiency. At KPMG, I’ve watched some of our junior team members embracing the power of analytics with enthusiasm, optimism and an innovative mindset that bodes well for the future of our profession.

Conclusion I am optimistic for the future of the accounting profession. Optimistic that we will seize the opportunity to evolve and enhance the value we deliver to society. I am optimistic because of the progress we have made to date in the move to uniformity; because of the way we have seen organisations and the external audit profession respond to calls for transparency and relevance in reporting. And because of the way we are embracing data analytics to drive better quality and insights. I am optimistic because of the way that practitioners in the field, academics, external auditors, industry associations and regulatory bodies are all working together to shape our response to the challenges we face. This response allows us to evolve whilst maintaining standards of quality and integrity, and fulfilling our ultimate purpose – protecting life savings.

of the impact we can make beyond the day-to-day and has the potential to inspire future generations. Finally, I’d also like to thank the major sponsors of this evening’s awards – CPA Australia and Chartered Accountants Australia and New Zealand. Industry bodies give practitioners a voice and with that voice, the opportunity to influence the future of our profession. Peter Nash is Australian Chairman, KPMG.

References Frey, CB and Osborne, MA, 2013, The Future of Employment: How susceptible are jobs to computerization?, Oxford: Oxford Martin School, University of Oxford. Hoogervorst, H, 2015, ‘Ind AS: A big step forward’, Address to IFRS-KPMG Conference, Mumbai, India. IASB, 2014, http://www.ifrs.org/use-around-theworld/pages/jurisdiction-profiles.aspx

Today’s generation of accountants has a real opportunity to make a mark. I’d like to think the inductee to the Australian Accounting Hall of Fame in 10 years’ time will be someone intimately involved in reforming corporate reporting or someone at the forefront of the application of data and analytics in the field of accounting. I’d like to acknowledge and thank the University of Melbourne and its Centre for Accounting and Industry Partnerships for the great work they do bringing the business and academic worlds together and for continuing the Hall of Fame initiative. Honouring the Hall of Fame inductees reminds us Insights Melbourne Business and Economics

Article heading here

Financial globalisation and asset bubbles: Dealing with a new world economy Understanding credit booms and busts requires a theory of collateral fluctuations. BY JAUME VENTURA

An edited version of the Corden Lecture given at The University of Melbourne on 6 August 2014.

Banks and other financial intermediaries play an increasingly important role in modern capitalist economies. In industrial countries, for instance, credit has risen from 100 per cent of GDP in 1970 to approximately 160 per cent today, and this growth would have been substantially higher without the financial crisis of 2007–2008. This large average growth masks substantial variation in country experiences, though. In the US, credit grew by approximately 40 per cent of GDP between 1990 and 2010, only to contract sharply afterwards. In Greece, Ireland, Spain and Portugal, the dynamics of credit look similar during the last decades: – Stagnant or declining credit between the mid1980s and the mid-1990s;

Credit booms and busts One common feature in all these different country experiences stands out – credit has often alternated between periods of rapid growth or booms, with periods of stagnation or significant decline or busts. These credit booms and busts tend to be accompanied by changes in key economic variables. It has been thoroughly documented that credit booms are associated with high asset prices and high growth rates of real GDP, consumption and investment. According to some estimates the growth rate of investment doubles during booms. But credit booms eventually end, and their aftermaths are often characterised by financial crises and low economic growth.

– Stagnation or a sharp decline since then.

These credit booms and busts seem to be part of a broader of picture of the world economy. Indeed, the last 25 years can be broadly described as a period of falling interest rates, rising financial integration and increasingly frequent credit booms and busts.

Looking ahead, these drops in credit need not be short-lived as the Japanese and Swedish experiences show. In Japan, for instance, credit grew rapidly in the late 1990s and has fallen steadily since its 1999 peak. In Sweden, credit collapsed during the financial crisis of the early 1990s then took over a decade to return to its previous peak.

As Figure 1 shows, the real interest rate falls progressively and becomes negative towards the end of the sample; the share of countries experiencing credit booms, in the meantime, has increased over time. In the run-up to the financial crisis of 2008, almost 30 per cent of the world’s countries were experiencing credit booms.

– A spectacular surge in credit between the mid1990s and 2010; and

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Figure 1. The evolution of the real interest rate and the share of countries experiencing a credit boom between 1990 and 2012. 5

-5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Figure 2. The International Financial Integration (IFI) index, defined as the sum of a countryâ&#x20AC;&#x2122;s foreign assets and liabilities as a share of GDP. OECD Countries 4.0

IFI

3.5 3.0 2.5 2.0 1.5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

1.6

Non-OECD Countries

IFI

1.4 1.2 1.0 0.8

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Financial globalisation and asset bubbles: dealing with a new world economy

US Real Federal Funds Rate (%)

% Countries with Credit Booms

Concurrence of Credit Booms 40

Both the top panel, which depicts the evolution of the IFI for advanced economies, and the bottom panel, which depicts the IFI for emerging economies, reflect a substantial increase in financial integration between 1990 and 2012.

for positive reasons, such an increase in business prospects, or for negative reasons, such an increase in government debt. Traditional models of credit incorporate some or all of these factors and try to predict how they affect credit.

It is tempting to view these three stylised facts as part of a general narrative in which greater financial integration, low and declining interest rates and frequent credit boom/bust cycles are different aspects of the same phenomenon. This is exactly the view that many espoused in the aftermath of the 2008 financial crisis when it was widely argued that low interest rates in advanced economies, which resulted from excessive capital inflows and relaxed lending standards, fuelled the credit boom that would eventually give rise to the crisis.

Credit and collateral

Although appealing, this narrative raises a number of questions. What generates these low interest rates? Why should they give rise to credit booms and busts, as opposed to a permanent rise in credit? Moreover, the observation that the aftermaths of credit booms are characterised by financial crises and low economic growth has also prompted calls for policies that restrain credit during booms, in the hope that smaller booms will lead to smaller crises. Yet is this view justified? To evaluate the merit of these calls for policy, one must have a view of the forces driving these credit cycles. Not surprisingly, a lot of macroeconomic research in the last few years has been devoted to this matter.

Recently, macroeconomists have focused on models of credit fluctuations that are driven by fluctuations in available collateral. Indeed, the concept of collateral has now become a central element of modern macroeconomics. Financial markets intermediate funds from those that have them (that is, savers or creditors) to those who know what to do with them (that is, entrepreneurs or borrowers). This intermediation is useful because it makes the economy more efficient. However, for this intermediation to be feasible, savers need guarantees from entrepreneurs that the funds they lend them (plus an attractive return) will be paid back once the investments pay off. The collateral of entrepreneurs, that is the amount of future funds that they can pledge today to creditors, is akin to those guarantees. When collateral is low, entrepreneurs cannot borrow enough and the economy operates inefficiently. When collateral is high, entrepreneurs can borrow enough and the economy operates efficiently. In a world with an ample supply of funds, the level of credit is determined by the amount of collateral. In such a situation, understanding credit booms and busts requires a theory of collateral fluctuations.

Credit may fluctuate for variety of reasons and different types of fluctuations may call for different policy responses. At a very general level, fluctuations in credit may reflect changes in the supply of or the demand for funds. The supply of funds typically grows when income grows due to favorable changes in the terms of trade, increases in production and successful policy reforms. The supply of funds might also grow for reasons that are less positive, such as an increase in uncertainty that raises precautionary savings, or widespread doubts about the future of the public pension system. The same is true when it comes to the demand for funds. It might grow

This simple idea is at the heart of the new generation of models that academics developed after the crisis. These models are nowadays used by central banks, government agencies and international organisations around the world. The underlying view is that the supply of funds is abundant due to financial globalisation. In such an environment, credit is determined by the ability of entrepreneurs to absorb these funds. That is, credit is determined by available collateral. The view that we live in a new world with an abundant supply of funds is consistent with the observation that interest rates are now lower than ever before. Insights Melbourne Business and Economics

This first generation of post-crisis models, with their emphasis on the role of collateral, constitute a substantial improvement over the traditional models that were used before the crisis. But these models still face an important problem when they try to confront the evidence. To understand why, let me mention that these models have two cornerstones. The first is the assumption that fluctuations in collateral are driven by movements in asset prices. That is, they postulate that the collateral of firms is proportional to their value, and the collateral of households is proportional to their wealth. This, I think, the models get largely right. A second cornerstone of these first-generation models is the assumption that movements in firm

values or asset prices are driven by changes in their ‘fundamental’ values. That is, these models are based on the old view that firm and real-estate prices equal the net present value (NPV) of the profits or rents that they generate, which is what is meant by their ‘fundamental’ value. This assumption is not surprising since there is a longstanding tradition in economic departments and business schools of teaching students that, sooner or later, market forces ensure that asset prices eventually converge to their fundamental value. And yet this assumption is a shaky foundation on which to build models for policy analysis. Nobody denies that changes in fundamental values affect asset prices. But both theoretical work and empirical evidence show that

Financial globalisation and asset bubbles: dealing with a new world economy

modern capitalist economies also experience large and persistent movements in asset prices that are not driven by fundamental values. This is why some academics are now developing a second generation of post-crisis models that show how movements in asset prices are driven by both fundamental and bubble components. Unlike the fundamental component, which reflects the value of the payoffs that assets are expected to generate, the bubble component reflects what the market believes that the market will pay for the assets tomorrow. It is mainly driven by self-fulfilling expectations. This new class of models shows that part of the price of any asset is just a pyramid scheme. In such a scheme, participants make voluntary contributions in the expectation of obtaining future voluntary contributions by other participants.

Asset prices and bubbles At first sight, the notion that asset prices are driven by bubbles or pyramid schemes might seem quite abstract or exotic. But it is easy to find real-world situations that correspond fairly well to this concept. Consider, for instance, the stock of a firm that is traded at a price that exceeds its fundamental value – in other words, the NPV of the dividends that this stock will generate. This ‘overvalued’ price might be paid by investors who rationally expect to sell these stocks in the future at prices that also exceed the fundamental values. Consider, alternatively, credit given to a firm in excess of the NPV of the cash flows that this firm will generate. This ‘excessive’ credit might be given by banks that rationally expect that the firm will be able to raise enough credit in the future to repay them. Overvalued stock prices and excessive credit can, therefore, be interpreted as bubbles or pyramid schemes; that is, as voluntary contributions to the firm’s financing that give the right to the next voluntary contribution. Once we think in these terms, the concept of a bubble ceases to be abstract or exotic and becomes quite mundane. Indeed, it seems to capture the type of real-world behaviour that we see every day.

Beyond being consistent with the observation of non-fundamental movements in asset prices, these second-generation models have already generated a number of interesting results. The first one is that there is an optimal bubble size that provides the right amount of collateral that the credit market needs to channel funds from savers to entrepreneurs. If the bubble is too small, as seems to be the case now, this intermediation process is impaired and funds do not reach their targets. If the bubble is too large, as might have been the case in the recent past, the intermediation process is overheated and interest rates are too high. The optimal bubble trades off these two effects. A second result is that markets are typically unable to generate the optimal bubble. The reason is that market-generated bubbles depend on investor sentiment. That is, on the expectations of many decentralised market participants. It is highly unlikely that these market participants coordinate their expectations in such a way that the optimal bubble arises. This coordination failure provides a new challenge to policymakers. The third result is that there exist ‘smart’ policies that can help insulate the economy from the whims of investor sentiment. These policies work in the models, but they have not been tested in the real world yet. A lot of work is still needed to determine how these policies transition from theoretical models to real world policymaking. This will surely be a tricky business. But it is what makes it so exciting to be doing research in macroeconomics right now. Jaume Ventura is a Senior Researcher at the Centre de Recerca en Economia International, Professor at the Universitat Pompeu Fabra, Barcelona, and Research Professor at the Barcelona Graduate School of Economics.

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Is there a future for manufacturing in Australia? The role of leadership will be crucial in shaping and driving Australia’s transition to a high-value manufacturing economy. By John Pollaers

An edited version of a public lecture given at the University of Melbourne on 29 October 2014.

Introduction Some of you will have seen the title of this evening’s lecture and decided you are pretty sure you know the answer. Doom and gloom about manufacturing is widely reported. Problems and challenges abound: the imminent automotive-industry exit, the high cost of the Australian dollar, our high wages and standard of living. You may have come along because you still hold out a faint hope.

The context I want to put this question in context because it is a crucial issue for Australia’s economic and social future. There is no doubt that Australia stands at a significant crossroad. We quite rightly do not want to prop up uncompetitive industries. Such a policy is not sustainable. Nor do we want to be a customer only of the world’s knowledge markets. That is not sustainable either. Our first-world lifestyle cannot be sustained as predominantly buyers of the world’s high-value goods and sellers of low-value raw materials. Ultimately, something has to give. The Australian economy – as we hear from the Reserve Bank, corporate leaders, business organisations and economists – is exposed to significant risks from the combination of the end of the mining boom and the GFC and its aftermath.

We need to set about correcting the emerging imbalances, both for our longer-term resilience and to fill the growth gap that is becoming increasingly evident as the mining boom retreats. At the same time, we’ve become trapped within an old framework of understanding what our manufacturing sector actually is. For far too long this trap has tended to divert industry-policy discussions. Despite a growing number of Australian manufacturers transitioning successfully in terms of production technologies, corporate structures, specialist expertise and higher-value activities, we hear mostly of the failures. Successful companies are turning their focus to new areas of growth and tapping into multinational supply chains, and many are now significant players in the global marketplace.

Why is manufacturing important? Public discussion about the potential of manufacturing in Australia is gaining prominence thanks in no small part to business and political leaders who not only care about Australia, but also understand the value of manufacturing to a sustainable future. It is the foundation that underpins a diverse economy. As Peter Gahan and his colleagues in the Faculty’s Centre for Workplace Leadership have pointed out, there are direct co-relations between economic prosperity and a Insights Melbourne Business and Economics

viable manufacturing sector. These links reflect three factors: – The direct relationship between the expansion of manufacturing and flows of new direct foreign investment; – The critical connection between manufacturing and the development of new technologies and other innovations; and – Manufacturing as a key driver of national productivity growth. These connections do not appear to be true for most service-based industries. While services sectors are generating an increasing proportion of jobs, they do not appear to be associated with the same aggregate effect on productivity growth or innovation. It also must be emphasised that despite employment in the manufacturing sector falling from 1.1 million to approximately 950,000 workers since 1994 – a decline of around 15 per cent over 20 years – manufacturing continues to be the fourth largest sector in the Australian economy in terms of total jobs, ranking just behind healthcare and social assistance, retail, and construction; but ahead of agriculture, telecommunications, financial services, mining, and oil and gas production.

Manufacturing and innovation: close relations The importance of the link between manufacturing and the development of new technologies cannot be overemphasised. Where manufacturing goes, innovation inevitably follows. When companies are deciding where to build their research and development (R&D) facilities, they increasingly find it sub-optimal to build those facilities far away from the manufacturing plants themselves. We have to remember that the rest of the world is not sitting still in developing knowledge capabilities. We are in a competitive environment at every level. When manufacturing moves offshore, engineers’ and designers’ jobs, and thus innovation itself, will follow. 28

Is there a future for manufacturing in Australia?

Some have referred to this phenomenon as the ‘sinking skills ladder’: advanced economies lose their higher-valued skills – including management and leadership capabilities – because research and innovation work best when they are linked to application.

Advanced manufacturing Regrettably, manufacturing in Australia suffers from an image problem. When most Australians (including policy makers) think of manufacturing, they think of the industries that have been at the centre of public debate for the last twenty years. These industries had several characteristics in common (and please excuse the very broad generalisations), namely: – Plant and capacity built for a relatively small domestic market; – Protection behind tariff walls often combined with the receipt of subsidies; – High labour costs; – Business models that were largely uncompetitive when faced with global competition; – Few incentives to reform or innovate; – Low-margin products; and – Large capital-intensive ventures. The concept or term ‘advanced manufacturing’ is necessary to distinguish the older industrial model described by the characteristics above from the kind of manufacturing where Australia is, in some areas, already triumphing. Again, using very broad generalisations, the characteristics of advanced manufacturing are: – High intellectual property component combined with high knowledge base; – Dependence on global supply chains; – Public-sector support needed only at the R&D phase through tax credits or leveraging public/ private partnerships;

– Collaborative engagements with research-based organisations such as universities and the CSIRO; – Removal of the domestic market as a constraint through selling to the global market on the basis of distinctive qualities; – Constant innovation to remain competitive via leveraging the latest thinking in technology and materials; – Production of high-margin products; and – Relatively small capital and labour footprints combined with highly-paid high-quality workforces.

Success stories in Australian manufacturing So how do we change the conversation? And what role does leadership play in this? First, we must look at our successes and celebrate them – as we are fortunate to have many manufacturing

companies that demonstrate Australia’s creative and technological prowess and business acumen. Examples include the new breed of transformative SMEs like Redarc Electronics (battery and power devices) and ANCA Technologies (machine tools). These companies are characteristically lean in operations, nimble, creative and export-focused. Sydney-based design and engineering specialist, D+I, has won lucrative and cutting-edge global contracts including fireproofing and condensationmanagement projects for James Cameron’s Deepsea Challenger vessel. Second, we can salvage some of the great things from the transformation out of our older industries, particularly infrastructure, transfer skills and design capabilities. Innovation is the one element enabling Australian manufacturing companies to stay competitive in a globalised economy. Bluescope Steel, for example, is transforming from a traditional steel manufacturer into a designer and producer of state-of-the-art corrosion-resistant Insights Melbourne Business and Economics

products, as well as next-generation roofing panels that produce solar power. Textor Technologies, originally a textiles manufacturer, now supplies state-of-the-art water-resistant fabrics to the global baby-nappies industry. By combining CSIRO technology with creative management, it has become a world leader in advanced fabrics. Then there is Marand, originally a supplier to Ford, which is now a medium-sized precision-engineering company involved in the production supply chain of the F-35 Joint Strike Fighter. It has constantly innovated and now manufactures production tools and components for the aerospace industry. Third, we can define our competitive advantages in global terms and play to them by focusing on and reinvesting in what do well. We can leverage these advantages, for example, in biotechnology,

Is there a future for manufacturing in Australia?

agriculture, mining and resources, advanced materials and robotics. Res Med, makers of sleep apnoea technology, and Cochlear, makers of the bionic ear, are stellar examples in the medicaldevices field; as is CSL Behring in biotechnology. Originally the Commonwealth Serum Laboratories, CSL is now a $30 billion global manufacturer of vaccines and plasma protein biotherapies. Australia supplies the mining and oil and gas industries with world-leading infrastructure, safety equipment and advanced robotics. We are world-class suppliers of complex cable systems and health management diagnostics tools; and we are developing advanced materials such as carbon-fibre and silica-infused composites for the aerospace and defence industries through public-private collaborations. In all of these areas, we can do more to drive growth and export these successes.

Fourth, we can discard the notion that government is not a player. Australian governments spend $8.5 billion a year intervening or investing – depending on your predisposition – through the Australian Research Council, the National Health and Medical Research Council (NHMRC), the CSIRO, the Defence Science and Technology Organisation (DSTO), tax benefits, and cooperative research centres (CRCs). What we need to do is focus on the work which delivers a competitive advantage – that is what the US and the UK have done. Finally, we can create the conditions for our research to thrive and develop, and to find commercial applications. We can build greater collaboration and synergies between the research that universities and businesses perform, which currently involve some interesting mismatches. A Queensland University of Technology study has found the areas of R&D investment by the business and university sectors in Queensland are very different – with most Business Enterprise Expenditure in R&D (BERD) focused on the resources, manufacturing and information domains, while Higher Education Expenditure in R&D (HERD) is focused on medical, frontier and behavioural domains.

An innovation ecosystem Innovation requires what researchers have been calling an ‘innovation ecosystem’ in order to survive. The term ‘ecosystem’ is used because it helps to understand a system that is not necessarily planned but has all the elements conducive to survival. Ecosystems apply both at national and company levels, and are not simply a list of good policies or institutional structures, where the more we implement, the more innovation we obtain. An innovation system has to be coherent to be effective. Many researchers have observed that when, say, only four out of the five elements of an effective system are present, nations achieve few or even no benefits. It may be a case of all or nothing.

Let me refer briefly to the ideas of Jonathan West – a former Harvard Professor and repatriated Tasmanian – whose essays in the online Griffith Review are based on his studies of the systems of successful nations. He has identified two important characteristics that these countries have in common: – Their not-for-profit institutions are a vital part of national R&D systems through sponsoring the creation of knowledge; and – To make investments in innovation, and to support new sectors, their economies mobilise substantial investment resources which are devoted to inherently risky undertakings in preference to other potential investments. The first characteristic is an established and widelyaccepted feature of successful innovating nations. Free and competitive markets fail to allocate enough resources to invention because individual companies often cannot capture sufficient returns to justify taking risks on their own. A comprehensive US study examining the innovation outputs of 17 industrialised nations found that a one percentage point increase in the share of resources going to higher education increased the output of that nation’s innovation by 11 per cent. While academics insisting on the value of education and government-funded research might seem a little self-serving, the evidence is compelling. Advanced nations find ways to supplement the inevitable under-investment of private capital in the development of knowledge. In Australia, we can point to the enormous successes of the CSIRO, and of our world-class universities and research institutes around the country. The second characteristic identified by West is largely missing in Australia – and one that deserves more careful consideration than it has received (although we have had some recent very positive announcements which I will come back to). West uses the stellar example of the development of Taiwan’s semi-conductor industry from the 1970s – which involved substantial government-funded Insights Melbourne Business and Economics

venture capital, dedicated science and industrial parks, tax and R&D incentives, and so on. It was only after 15 years of the Taiwanese government’s absorption of risk and government input of resources that the first private capital entered the industry. The recent announcement by the Federal Government of its Industry Innovation and Competitiveness Agenda is an important step towards building a better innovation ecosystem in Australia. Industry leaders will help drive priorities and focus our research investments to improve commercial outcomes. The UK and US responses to the innovation investment issue are instructive for Australia. The UK has implemented its Catapults program – a series of R&D centres aimed at de-risking the commercial development of new ideas. These cover: future cities; the connected digital economy; cell therapies; offshore renewable energy; satellite applications; transport systems; energy systems; precision medicines; and a specialist centre for socalled ‘High Value Manufacturing’ which includes automation and improved processes. In the US, the Obama Administration has similarly developed a national Advanced Manufacturing Partnership (AMP) between the three legs of the innovation tripod: government, academia and the private sector. Despite what some may think, the US is not the land of the free in terms of its research directions – the government makes choices and defines priorities, and it has had a successful smalland medium-sized research support program for 35 years that has weathered multiple changes in government. The new AMP is a 10-year program to build 15 institutes for manufacturing innovation – to help strengthen the global competitiveness of existing US manufacturers, and innovate and scale-up advanced manufacturing technologies and processes. It defines the cross-cutting technologies in which the US already had advantages; it promotes a campaign to have companies manufacture in the US; it addresses 32

Is there a future for manufacturing in Australia?

energy costs; and it provides tools and incentives to re-shore. With the AMP, the US Government explicitly rejected industrial policy in favor of innovation policy, with a focus on manufacturing based on new technologies or new processes.

Role of leadership We know that to produce significant change, a leadership vision must be articulated at the national level. In the US and Germany, there is an alertness in both governments and boardrooms to the power of science, the power of new technological advances and the contribution manufacturing makes to the quality and diversity of an economy. In Australia, we need to undertake a brutal assessment of our research capabilities by determining which of our institutes are producing what the world wants and needs – and we need the allocation of our research grants scrutinised by industry leaders. We need to look at whether our investment settings encourage venture capital, and if our tax base is globally competitive. In this context, the Federal Government’s recently-announced intention to re-direct Chinese investment funds from low-risk Australian government bonds and real-estate trusts to more risky areas such as venture capital and small cap companies is to be genuinely applauded. We encourage the notion of public/private partnerships at the R&D stage. Let’s embrace the new Industry Growth Centres that the Federal Government has announced and help define them. Let’s ensure a rigorous and continual review of their effectiveness proceeds. We need to focus these resources around where we can win rather than adopting a scattergun approach. Australian leadership needs to be hard-headed. Let’s recapture the competitive advantages we have lost especially in terms of energy costs. Energy should be Australia’s great enabling competitive advantage but we have squandered it. The US has low energy prices and its manufacturing sector is returning. With it have come jobs, particularly those involving high-end design and research.

The Australian Advanced Manufacturing Council (AAMC) The AAMC was formed with the express purpose of finding policy solutions to these issues. Contemporary global conditions are fundamentally different to those that prevailed in the past, and our industrial policies therefore need to adapt in several ways. First is the need for greater rigour and focus in any government interventions that are made. To this end, we have met regularly with Government over the past 12 months and have been encouraged by the Competitiveness Agenda announcements this month by Industry Minister, Ian Macfarlane, and the Prime Minister, Tony Abbott. Second, we advocate ending industry welfare – we need to support the neo-natal end of industry, if you like, not the palliative care end. Programs and interventions in the past have focused on trying to stem the tide by defending historical practices and conditions. We must encourage and lead transformative measures. Third, we want a strategic view of Australia’s advantages and how best to exploit them. This is critical to creating a diversified economic base and allowing the greatest value to be realised by the Australian economy. We want this discussion to be private sector led – not a government construct. A partnership between government and industry in this strategic development is essential. Finally, we want to show and celebrate the successes. We can give Australians the confidence and pride they should have in what we have done – and what we can do.

Defining and strengthening our competitive advantages Australia fared relatively well during the GFC by avoiding recession and keeping unemployment low. But other realities have since emerged: employment growth across the economy is slowing, the exchange rate movement continues

to disadvantage manufacturing, and our global competitiveness rankings are slipping. We’ve allowed some of our competitive advantages to languish or be compromised – our science and technology education, our investments in R&D, our energy costs. We should be building and supporting a smart manufacturing sector by focusing our efforts on those areas where Australia has clear comparative advantages. This is not about picking winners but about picking the sectors and technologies that will provide meaningful jobs for Australians into the future. We are one of the most open economies in the world – something we can be proud of – and as a consequence our businesses are increasingly engaged and winning in the global economy. Our methods of manufacture are among the safest and most efficient in the world. Our universities and their graduates are some of the best in the world. We are clever and innovative. Yet we lose sight of the successes in our rush to point to the failures. The fact is, we appear to have two choices in Australia: – Focusing on what has worked in the past, and trying to adjust factors to suit our historical practices and conditions; or – Concentrating on what is working in the present, and adapting and transforming our practices and conditions in order to strengthen that success. We can be creative. In other words, we can disrupt our old ways of doing things; we can embrace change and innovation. If the truth be told, we really have no choice. We must adapt – and I know we can. The AAMC wants to change the direction of public policy from backing losers to enabling those that can to win. John Pollaers is the former managing director and CEO of Pacific Brands and currently chairs the Australian Advanced Manufacturing Council.

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Designing the twenty-first century workspace: shaping business culture and practice In this second decade of the new century, the issues shaping workplace design are less place-related and more about the redesign of work and the development of organisational cultures. By Rosemary Kirkby

A condensed version of the Foenander Lecture given at the University of Melbourne on 20 August 2014.

In 1998, a group of Generation X-ers working at MLC, Sydney, were asked what their ideal working environment might be. ‘Taking laptops to work in the park’, was the resounding response of this group born between 1966 and 1980. Today, with nearubiquitous Wi-Fi and all the advantages of cloud computing this hardly seems radical, but at that time it was. As employees, they were tethered to their desks in a place to which they needed to come each day to access the technology necessary to do their work. Today, we have been liberated from dependence on place and, theoretically, can work anytime, anywhere. Generation Y (born between 1981 and 1994), the first to grow up on the internet, is bringing its own aspirations to bear on the design of work and the spaces in which it takes place, both locational and virtual. This lecture looks at the changing role of place in supporting the development of high-performance cultures as the world of work moves increasingly online. In the first decade of the twenty-first century, Australia’s major companies learned how to design workplaces – and the buildings that house them – to increase the effectiveness of their people. The best

results came from design and delivery teams which integrated business and behavioural expertise with that of technology and place, and they were subject to strong leadership and governance. As business leaders came to understand how space could be used strategically, they retained responsibility for design. Today, the architectural interventions that create the environments in which knowledge workers can do their best work are well understood and will be explained in this lecture. In this second decade of the new century, the issues shaping workplace design are less place-related and more about the redesign of work and the development of organisational cultures, including new styles of leadership. The focus is shifting to the creation of highperformance cultures which are inclusive of an organisation’s stakeholders. They might be customers, members of the supply chain, and sometimes competitors. Cost-effective mobile technologies, near-ubiquitous Wi-Fi and cloud computing make it easy to access business applications. The opportunity to work remotely is real. Now, one of the principal issues facing leaders is how to develop the appropriate balance of placeInsights Melbourne Business and Economics

based and virtual working and how to access the benefits embedded in the wider urban fabric. Flexibility is a guiding principle; the role of place is changing again.

Service brands lead the way So far this century, Australia has been a leader in understanding how to use workplace design to support new ways of working arising from rapid changes in global market conditions. Companies in the financial services sector have led the way. This development seems to be a logical outworking of extensive workplace reform in the sector in the 1990s and the recognition that service brands are built from the inside. One project in particular, which was completed in 2000, established new ways of thinking about the commercial value of design as applied to the workplace. It was the North Sydney office of MLC, then the financial services subsidiary of Lend Lease 36

Corporation, and it became the catalyst for the new era of workplace design which has followed. Philip Goad (2001), Professor of Architecture at the University of Melbourne, summarised its impact with the words, â&#x20AC;&#x2DC;the new interior that is Campus MLC represents one of the most profound shifts in the history of postwar Australian office designâ&#x20AC;&#x2122;. The shift in workplace design Professor Goad referred to was achieved through a number of principles which are now central to designing twenty-first century workspaces. They relate to the purpose of the workspace, the methodology for delivering it and the architectural elements which best support new ways of working. A built environment, which creates value over and above the efficient use of space to accommodate people is one that is clearly aligned with and facilitative of the business strategy, the culture and values of the organisation. This was the case with Campus MLC.

Designing the twenty-first century workspace: shaping business culture and practice

Collaborative design The redesign of MLC’s workplace was preceded by extensive redesign of the business after its acquisition by Lend Lease in the mid-1980s. The business case for refurbishing the MLC building was presented to the Board for funding on the basis of it being a longterm investment in the business and its people rather than as a necessary accommodation cost which needed to be minimised. This ensured every major decision was evaluated against its potential to add value to the business beyond what was traditionally expected of the building itself. It was an important shift in mindset. The second principle which underpinned the design of Campus MLC was that of co-design by the organisation’s people. MLC’s Chief Executive at that time was Peter Scott, who was quoted by journalist Jennifer Hewett (2000) as saying, ‘my view is that it is worth the time because once they own the decision, if they are the ones to have determined that process, then they will actually make it work’. McKinsey & Co published its seminal thesis on the ‘war for talent’ in 1998 (Chambers et al.), and from it the best employers began to recognise that they needed to engage their people more effectively. When used strategically, workplace design has become one of the mechanisms for giving employees a voice in the future of organisations, and for identifying the cultural shifts necessary to stay competitive. In this sense, good design contributes to future-proofing organisations – and, of course, ensures functionality of the workplace design. Viewed this way the process of design becomes at least as important to the effectiveness of the organisation as the resulting place. Aspirations for the Campus MLC project were captured in a document titled ‘Imagine’ (see: www. youtube.com/watch?v=9tkj8oZiizs), in which Generation X reimagined work with the integration of personal and professional lives as the starting point. Then, Generation X made up 70 per cent of

MLC’s employees – and they were all still under 40. Within the life of the 12-year building lease, they would be joined by Generation Y – a group that was just entering secondary school. Through its flexible and non-traditional design, this workplace anticipated their arrival. Four strategies guided the final design of Campus MLC: efficient use of space, easily adaptable, facilitative of collaboration, and enriched with a sense of community. The resulting architecture is now widely understood to support behaviours which are characteristic of high-performing cultures in this new century. The 12-storey, 50 year-old MLC building was transformed. Gone were the corner and perimeter offices of different sizes that used space as a signifier of status, gone were the cubicles, high partitions and lack of natural light. Instead, it became an open, transparent, light-filled, democratic space. The building was sliced by a staircase from top to bottom, the executive floor and bathroom disappeared. The Generation X employees’ dream of taking a laptop and working in the park could not yet be made a reality because the technologies to support mobility were either not yet available or too costprohibitive. So there were dedicated desks and dedicated desktop technology for everyone – but mobility through the space was encouraged by the provision of many different work areas to facilitate different kinds of work, with no barriers to movement across 22,000m2. The space which had been saved by removing the closed offices was returned to the whole MLC community as spaces to meet, to collaborate on projects, to share a meal, to celebrate achievement. Finishes were warm, influenced by the architect’s background in award-winning residential work. MLC’s leaders role-modelled new behaviours, giving their people permission to fully utilise the activity-based workspace. It was a humanising, energising and joyous place to be. Insights Melbourne Business and Economics

Connections promote collaboration

needed. It also lessened fear of the merger.

Starting with MLC and a handful of similar projects, we’ve now come to understand which architectural interventions best facilitate new ways of working and how to use space to better engage customers and colleagues, and to enhance health and wellbeing. Connecting people and removing barriers to collaboration are perhaps the most important interventions. Horizontal and vertical connection of people is provided by stairs and bridges as well as the location of civic, shared spaces. The transparency and openness of the place helps to build trust.

Professor Jeremy Myerson (2007), at London’s Royal College of Art, acknowledged the leadership provided by Australian financial institutions when he stated, ‘as the global workplace explores themes related to neighbourhood and community – what Franklin Becker has called the “eco-system of the office” – architects and designers Down Under can rightly claim to be at the forefront of the field. And the key driver is the banking sector’.

Connection with the natural environment has increased with the advent of the ‘green’ building revolution. Access to natural light, fresh air, outdoor terraces, rooftop and vertical gardens and the rhythm of the day have all been delivered out of a heightened appreciation of how design contributes to human health and wellbeing (physical, emotional and spiritual). The long, communal table for the sharing of food and drink has become a standard feature, facilitating chance encounters and informal conversations. The importance of providing the right balance – quiet, sometimes enclosed spaces for working uninterrupted, and noisier, more energised spaces for group collaboration – is now well understood; but so too is the realisation that none of this will in itself deliver a collaborative, innovative, highly productive culture. That is the role of leadership. Organisations have learned how to design flexibility into space so that they can accommodate seasonal or other business fluctuations of people. Campus MLC allowed for the Integration team of around 130 people – which was set up during the merger of the MLC business with National Australia Bank Funds Management (after the company’s acquisition by NAB in 2000) – to be accommodated within the existing business. By doing so it made the job of designing the structure, products and services of the new Wealth Management Division much easier, as all MLC people could be engaged quickly as 38

The future: striking the right balance In 2015, major organisations in all sectors of our economy are facing new challenges as disruptive technologies transform our industries and challenge our assumptions about business models and cultures, the way in which we organise to serve our customers, and the way we lead our people. Some authorities believe that six billion people will be connected to the internet via smartphones by 2020. The pool from which we can draw our talent is now global. Global economic integration is accelerating although political fragmentation is also evident, contributing to the complexity of the environment. There is constant pressure on organisations to do more with less and an increasing expectation – see Porter and Kramer (2011) – that our business models will take account of the communities in which we are embedded to create shared value. Speaking at UTS in Sydney, Ahmet Bozer (2013), President of Coca-Cola International, characterised the global market conditions as akin to being in ‘a permanent cross-wind environment’. If, as leaders, we are feeling pain and stress in this turbulent working environment it may be because we continue to work with organisational tools – structures, systems, processes, skills and leadership styles – which were more suited to the stable market conditions of mid-twentieth century. In the search for flexibility to deal with market turbulence, we need to challenge all the

Designing the twenty-first century workspace: shaping business culture and practice

assumptions which underlie our operating model and then identify the cultural shifts needed to keep organisations competitive. If architecture gives us the hardware for our working environments, culture provides the software which leverages the investment in bricks and mortar. Cultural change, aligned to business strategy, needs to precede investment in property leases and bricks and mortar – and the most effective way to do this work is, again, by engaging all staff in the co-design of their futures. From a talent retention point of view, there is nothing more important than challenging the notion that one should come at a set hour each day to a specific place, often to a specific desk in that place. For many knowledge workers there is no longer a need to ‘go to work’ – work can as easily go to them. Indeed work can cross borders more easily than people. This is particularly so for IT development projects, as shown by the growth of online recruitment firm Elance (see: https://www. elance.com). Currently the merged firm has more than eight million freelancers registered, in more than 180 countries, with more than two million

businesses as clients on their platform. In 2013, $US750 million worth of work was completed. A survey conducted by Freelancers Union and Elance recently estimated that 53 million Americans, representing 34 per cent of the workforce, are currently doing some freelance work. So, what is the role of place in a world which is increasingly moving online? Work remains something that is done from a place. It is just that this ‘place’ now comes in diverse guises. Many have experimented with working from home over the last two decades, particularly as mobile technologies enabled ‘anywhere’ working, but many found it inefficient or lonely. Those who were mobile, by necessity or choice, found that the shared spaces of our cities presented new opportunities as access to Wi-Fi became widespread and as devices to connect to the internet became more portable. Coffee shops, libraries, buses, trains, aircraft and airline lounges, hotel and commercial building lobbies, our universities and town squares have become places of choice or convenience in which to work. The MLC employees’ dream of taking a laptop and working in the sunshine and fresh air of the park is now a reality. Insights Melbourne Business and Economics

It seems there is a social and innovation premium embedded in a well-designed workplace. We have learned to design for it in the first 14 years of the new century. We’ve created opportunities for the serendipitous contact that strengthens social and ultimately professional bonds. We’ve designed spaces that serve the many reasons we have to bring people together, whether to communicate and collaborate or simply to celebrate achievement or share a cup of coffee. A growing number of people no longer work for big employers, sometimes by choice, sometimes by necessity. It is one reason why self-employed contractors, consultants and entrepreneurs often seek out the company of others for social interaction and as discussion partners in more public places. It is this phenomenon which has influenced the growth of co-working spaces in the public domain. The members of these co-working places determine the culture that prevails. Since most hail from generations X or Y, the culture tends to be informal, can-do, collaborative and sharing. Its people are highly IT-literate and well networked. This, of course, is exactly what our major companies say they want for their own cultures. Their ability to develop these cultures is directly related to their ability to lead the generations in their midst in this more turbulent world. If, during the first 14 years of this new century, we have learned how to use space to create a platform for innovation, then the task for the next five years is to activate it. This requires a culture of trust. Leaders who succeed will be inclusive and collaborative. They will manage by outcomes rather than by ‘presenteeism’ in order to manage a workforce which is not always present in the workplace. One of the biggest issues facing corporate leaders will be to help their teams determine the appropriate balance between place-based and virtual working. The answer will vary between teams, based on the business plan and the individual needs of team members. It will be customised to the individual 40

and the team. The days of the one-size-fits-all human resources policy are numbered if we wish to harness available talent. There will be a wider choice of place, including the virtual. In the future, we are likely to see a number of hybrid models of place emerge as companies harness ‘Smartwork’ centres located close to where employees live. More companies will embrace space-sharing platforms like LiquidSpace (see: https://liquidspace.com) to support highly mobile employees. This makes sense for many reasons, including the ability to take less space in high-priced CBDs, the savings in money, time and stress that arise from decreased commuting, and a probable increase in productivity. But how do we determine what balance is appropriate? Clearly, work that can be done autonomously by an individual at a computer screen, can be done remotely. Managers who are used to managing through ‘presenteeism’ will find they have plenty of electronic tools at their disposal to monitor performance in real time. It is then for workers’ colleagues and leaders to determine how often, and for what reason, they need to come to a place to meet with others. However, research by Professor Lynda Gratton (2011, 2013, 2014) of London Business School suggests that many of the complex challenges faced by business are best solved by bringing people together in spaces designed specifically for collaboration. Such spaces can act as a crucible for innovation when diverse skillsets, experiences and thinking styles are brought together in pursuit of a common purpose. These two trends have implications for the design of workspaces. Many in the future will only come to a central place to meet and collaborate rather than to do individual work. ‘Collaboration’ and ‘community’ as drivers for design are likely to be augmented. However, the organisation doesn’t have to provide the complete package of amenity itself. The precinct in which the workplace is located will

Designing the twenty-first century workspace: shaping business culture and practice

assume more importance for many who will seek to leverage the potential of this. Google’s decision to relocate to the precinct development at London’s Kings Cross reportedly reflected their understanding of the benefits of co-location with other creative industries. Central St Martins, a tertiary art and design school, was already a tenant in the precinct. In Australia, in 2012, when the GPT Group redesigned two floors of its Melbourne Central office tower for its own people, it incorporated a co-working space, a variety of meeting spaces and a commercial coffee shop for the use of its people and those of its tenants. This has proved an attractor for prospective tenants and it is easy to see the potential for commercial, as well as personal, relationships which will be activated by coming together in this space. Jennifer Hewett, the Fairfax business journalist who interviewed MLC CEO Peter Scott in 2000 about Campus MLC, wrote: What makes it particularly interesting is whether or not this sort of flexibility is the way of the future for lots of Australian businesses which are so dependent on the skills and enthusiasms and ideas of their staff in an economy where manufacturing is ever less significant. So far, such Australian “services” companies still seem reluctant to risk the loss of direct management control, much less the sense of management status, that it involves. Bureaucracy is still safely ensconced in many workplaces. Fifteen years later there are many signs that major Australian organisations understand that, to remain competitive globally, they need to build customised work eco-systems. These new places should encompass re-examined values and re-engineered cultures (processes, systems, and behavioural expectations), and draw on a more sophisticated understanding of how ‘place’, in its many forms, together with collaborative

online tools and open innovation platforms, can support the quest for speed and innovation. The establishing of the Centre for Workplace Leadership in the Faculty of Economics at the University of Melbourne is a recognition of the criticality of leadership culture. Rosemary Kirkby advises CEOs and their leadership teams on cultural change and development, the future of work and workplace design. She has held senior executive positions with the Lend Lease Group, National Australia Bank and the GPT Group.

References Bozer, A 2013, speaking at UTS Business School, Sydney, 4 April. Chambers, EG, Foulon, M, Handfield-Jones, H, Hankin, SM and Michaels, EG 1998, ‘The war for talent’, The McKinsey Quarterly, 1(3): 44 –57. Goad, P 2001, ‘Office revolution’, Architecture Australia, 90(1): 54-59. Gratton, L 2011, The Shift: The Future of Work is Already Here, London: Collins. Gratton, L 2014, The Key: How Corporations Succeed by Solving the World’s Toughest Problems, New York: McGraw-Hill. Hewett, J 2000, ‘Zen and the new art of banking’, Sydney Morning Herald, Saturday, September 2. Johns, T and Gratton, L 2013, ‘The third wave of virtual work’, Harvard Business Review, 91(1/2): 66–73. Myerson, J 2007, ‘Bank statement’, Onoffice, Issue 12. Porter, ME and Kramer, MR 2011, ‘Creating shared value’, Harvard Business Review, 89 (1/2): 62–77.

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FACULTY OF BUSINESS AND ECONOMICS – 90TH ANNIVERSARY CELEBRATION BY GEOFF BURROWS, ROSS WILLIAMS, JEFF BORLAND

A condensed version of proceedings at a function held at the University of Melbourne on 31 March 2015 to celebrate the 90th anniversary of the commencement of lectures in the (then) Faculty of Commerce.

Dean Paul Kofman opened by drawing attention to the lightning speed with which the initial Faculty was created; the opulent office decoration of the founding Dean Douglas Copland (including a collection of Aboriginal tools and weapons); the emphasis on part-time study and evening classes – the flexible delivery of the time; and the narrowness of the initial curriculum, dominated by economics and accounting. But, as he remarked, ‘It was a success from the start and what we’ve done in the last 90 years is tweak it and embellish it to become the most desirable commerce education in the country.’ He also predicted, ‘There’s another 90 years of BCom prestige ahead of us.’ Deputy-Dean Nilss Olekalns then reflected on the current and historic ‘flagship’ status of the BCom, made special by the Faculty’s outstanding professional and academic staff, high-quality local and international students, and loyal alumni. He summarised the degree’s standing by saying: The BCom is a bridge, an important rite of passage for the best and brightest as they move into professional life or further study. Our job, and I think we do it brilliantly, is to value add. The BCom wouldn’t be held in the esteem it is if we weren’t doing that. After expressing confidence that 90 years hence there would still be a BCom taught to the best available students by outstanding Faculty,

supported by exceptional professional staff, he also forecast that the BCom would continue to be the University’s ‘cash cow’. Geoff Burrows, Ross Williams, and Jeff Borland then followed with brief addresses on different aspects of the Faculty’s history, respectively its early students, 90 years of technology in teaching and research, and changes in the experiences and behaviour of students in the last 40 years. Here, we recount their addresses.

Geoff Burrows on early students When lectures commenced exactly 90 years ago today – coincidentally also a warm Tuesday – the first lecture was Commercial Law 1 at 5.15 p.m. Responsibility for teaching this and other commercial/business law subjects has now been transferred to the Law School – I will concentrate on those subject whose descendants are still taught by the Faculty’s own staff. The next lecture, at 7.15 p.m. that evening, Accountancy and Business Practice, represents the first lecture in a subject which continues to be taught (as accounting) by Faculty staff. Approximately 60 students attended. The following day saw the commencement of lectures in Economics 1, for which the attendance was about 200 students. Note the qualifiers, ‘approximately’ and ‘about’. There appear to be no surviving enrolment records. Whether they ever existed is an open question. What we do have are examination entries – Insights Melbourne Business and Economics

effectively end-of-year enrolments – and, for accounting, some tutorial rolls, which indicate a drop-out rate of about 20 per cent. This pattern of about 200 enrolling for Economics 1 and much smaller numbers in Accountancy 1 continued for the first three years of the Faculty’s existence. The problem I initially had when preparing a history of the accounting discipline was reconciling these figures, knowing that both subjects were compulsory.1 The explanation was that until the early 1930s, qualified or part-qualified accountants who enrolled in the BCom were exempted from accounting and commercial law subjects if they had passed the equivalent exams of the professional accountancy bodies. These credits represented up to 5½ subjects in the then 14-subject degree. Although economics appeared in the syllabuses of these bodies, the subjects were considered too ‘mickeymouse’ for an exemption from Economics 1. Ultimately, of the students who turned up to the first week of the Faculty’s lectures in 1925, about 75 per cent were qualified or part-qualified accountants – an absolutely shocking statistic to some. While the generous exemptions granted to accountants considerably reduced the study demands, there must have been other reasons, as yet unexplored, which made the BCom so appealing to the profession. Whatever the explanations, I wish I’d known this historical background when I headed the accounting discipline during 1987–90 – because I often sensed that other departments were ‘disappointed’ with the popularity of accounting as a major. I wish I’d been able to say that the Faculty effectively started out as an institution for teaching accountants the fundamentals of economics, statistics, economic geography and economic history. Two major differences between the present commencing student cohort and their counterparts 90 years ago are a direct consequence of the early predominance of accountants, namely: – The first students were significantly older than today’s. To have qualified as an accountant via the 44

Faculty of Business and Economics – 90th anniversary celebration

prevailing system of ‘articles’ and part-time study, one would have to be aged at least in the early twenties. A photograph of the first 10 BCom graduates taken on 9 April 1927 shows that most were middle-aged. Seven of the 10 were qualified accountants and the other three already held degrees in Arts and Law. – The early students were overwhelmingly male. Only 4 per cent of the first intake of students in 1925 was female. This estimate relates to enrolments in Economics 1 which basically captures the total student population, including all those with previous accounting studies. Curiously, in Accountancy 1 the proportion was 14 per cent due to very few females entering the accounting profession in that era and, thus, being eligible for exemptions granted to accountants. Another difference, which cannot be attributed to the predominance of accountants, is that the first cohort of students and staff were almost entirely of Anglo-Celtic ethnicity. The surnames of the seven females who sat the Accountancy 1 exam in 1925 can be taken as indicative – Amies, Dillon, Dixon, Doyle, Fitzgerald, Ledger (doubtless she was teased that her name was her fate), and Malone. You only need to visit the Faculty’s current teaching spaces to see that Anglo-Celts are definitely in the minority. Elsewhere, I have drawn attention to the significance of this date 90 years ago to point out that accounting had a lucky escape in just missing commencing on April Fool’s Day. Economics had no such escape and did commence on April Fool’s Day 1925. With that observation, I think it’s appropriate to let economists Ross Williams and Jeff Borland continue the story.

Ross Williams2 on technology in teaching and research Teaching in the Faculty has never been just ‘talk and chalk’. Recently I came across a box of professionally-made glass slides illustrating quite complex issues in what I think was financial accounting. They are now in the University

Archives. The slides would have been projected in lectures in the 1930s, perhaps even from 1925. Given the ephemeral nature of today’s PowerPoint presentations, I suspect in a decade we will know more about the content of some lectures of the 1930s than the 2010s. In the 1940s and later, images from printed material were shown on overhead projectors, especially in Economic Geography, where a unit headed by Joyce Wood, daughter of Gordon Wood, drew statistical and other projectable images on clear plastic sheets. In 1954, the Faculty purchased one of the few MONIAC machines developed by Bill Phillips. The flow of water through the machine was designed as a teaching aid, but it proved too leaky for regular use. It is now located as a museum piece at the entrance to the Giblin Library. In research, numerical calculations were undertaken using mechanical calculators. Joe Isaac recalls two

machines being available for staff and research students in the 1940s. Mechanical calculators would have been used for the war-time Melbourne Housing Project led by Wilfred Prest. As students in the 1960s, we had to make do with logarithmic tables and slide rules, at least in the Faculty. In the better-funded Department of Statistics, then in the Faculty of Arts, we had access to both handoperated and electrical calculating machines – so valuable they were signed out from locked cabinets. The first battery-operated calculators appeared in the early 1970s and cost more than today’s personal computer. Student use of calculators of all types was widespread in the 1970s. The mainframe computer came into general use in the 1960s for research. The University had one mainframe computer, initially an IBM 7044 and in the 1970s a Cyber 73. The Melbourne Institute was the second largest user of this facility after the Department of Meteorology. Input was by paper

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tape or cards and all output had to be printed. Observing the paper generated in the Institute, its canny director, Ronald Henderson, reputably bought shares in a paper company. Dropping off the input and picking up the output both required a visit to the computer centre which was located on the Swanston Street side of the University. A misplaced comma would result in an abortive run and a return visit. The one upside was that it improved staff fitness levels. Lack of package programs initially limited use of the computer for teaching. This constraint was overcome, at least for advanced econometric students, by the installation in the mid-1970s of a suite of programs written by Adrian Pagan at the ANU. With greater use by students, a number of punch card machines were installed in the foyers of several floors of the Commerce building â&#x20AC;&#x201C; their noise combined with that of the nearby lifts created an atonal musical interlude.

Faculty of Business and Economics â&#x20AC;&#x201C; 90th anniversary celebration

The technological developments of the early 1980s initiated the universal use of computers. The big change was being able to enter data at your desk and to see both input and output on the screen. Staff now had terminals in their rooms connected to a mainframe â&#x20AC;&#x201C; walking to the computer centre was over, with a resultant reduction in staff fitness levels. In the mid-1980s, the Faculty opened a teaching laboratory consisting of 20 DEC terminals connected to a VAX mainframe and 20 IBM PCs. For students in accounting, it was the PCs combined with the introduction of the spreadsheet (initially Lotus 1-2-3 which was written for IBM machines) which transformed teaching and learning. In quantitative methods there were few package programs for use on the PCs (which had limited capacity) and so mainframe machines remained important. With rapid increases in the capacity of PCs and the development of software, research and teaching migrated to PCs, albeit linked to servers.

Universities were very early users of the internet, and email became widely used during the 1990s. The Internet has transformed research, teaching and administration. In research it has overcome ‘the tyranny of distance’ such that today 40 per cent of articles published by Australian academics have an international co-author. In teaching and learning it has enabled online discussion, submission and evaluation. The downside is that it reduces personal interaction – the morning tea has been replaced by emailing a colleague in the next room; staff doors are less open to students. In teaching much is learned by doing. In the mid1980s the Department of Economics experimented with replacing first-year lectures with videopresentations. The experiment was undertaken to reduce lecturing loads at a time when the Faculty was very poorly funded. The videos were done in-house and crude by today’s standards. They were shown continuously like in an old-style newsreel theatre, and even incorporated an intermission. Lecturers would wander into the theatre occasionally to ensure that the furniture was not being destroyed. Not surprisingly, the experiment was not liked by students and soon abandoned. In the 1990s lectures in actuarial studies were beamed live to students at the ANU. Lecturers could also see the ANU students who could ask questions. While technical problems arose from time to time it was a pioneering initiative which only ended when the ANU appointed its own staff. Some lecturers, especially in Economic Geography, made audio tapes of lectures available to students from the 1970s. Today, this extends to full ‘lecture capture’ with PowerPoint slides and other visual material being added to the audio presentation. With the development of Massive Open Online Courses (MOOCs), teaching is following research and becoming international. It is possible to sit in one’s room and view lectures on a topic by a world authority. Indeed the only reason now for leaving one’s room is to attend weight-reducing classes.

Jeff Borland on student changes in the past 40 years I was a student in the Faculty from 1979 to 1984. After four years away at graduate school I came back to join the Department of Economics as a staff member in 1988. I have been here ever since, apart from periods visiting other universities. To spend such a long time at one place might be seen as the epitome of a narrow and boring work life. I have to say, however, that I haven’t found my time in the Faculty to be either narrow or boring. On the contrary, on the occasions when circumstances have caused me to reflect on it, I’ve always decided that the Faculty was the best place to have an interesting and fulfilling career. There have been big changes in this time. I don’t want to claim that they are bigger than in other eras. My guess is that someone in the Faculty from the mid-1950s to the mid-1980s would have also thought they had seen substantial changes. But I do think it is fair to call the changes that have occurred since the mid-1980s ‘big’; and I would also say that while universities are often seen as archaic and slow-moving, our Faculty has accommodated these changes in ways that establish it as quick-thinking and nimble. One change is scale. When I was a student you could fit every Introductory Microeconomics student into two streams in a 300-seat Copland Theatre. This year it takes five streams in a 500-seat theatre. The growth in student numbers has impacted on staff numbers. Tutoring in economics in the early 1980s, I knew everyone in the Faculty. At morning tea one day you might sit down with the Dean, another day it would be with the tutors in accounting, and another day with researchers from the Melbourne Institute. Today I have to admit that I am sometimes unsure about the new staff in my own department, let alone knowing members of other departments. The experience that Commerce students have is vastly different today. When I was a student the experience might be best described as homogeneous. Insights Melbourne Business and Economics

Commerce students were 90 per cent male, and those males were mainly ‘anglo’ from private schools. Most of us went straight from school to university to work – the expression ‘gap year’ was still about 20 years from being invented. The curriculum was restricted to economics and accounting, not unlike the Monty Python skit ‘we have spam, spam or spam’. The only choice of club was the Commerce Students’ Society with the three ‘Bs’ – Barbecues, Booze Cruise, and Ball. Nowadays, the mix of students is more representative of the population and Australia’s increasing engagement with the Asian region; the pathways through university are more diverse; and economics and accounting share the Commerce degree with management/ marketing and finance. To my mind, the expansion in student clubs has been an especially exciting development. As a couple of examples, CAINZ gives opportunities for students to develop their writing skills by writing for a student-run commerce magazine; and Melbourne Microfinance Initiative sends several teams of students each year to assist 48

Faculty of Business and Economics – 90th anniversary celebration

microfinance organisations in places such as American Samoa, Cambodia and Vietnam. The role of IT has changed dramatically. It’s not the case that there was no IT in the past. When I was a student, the Department of Regional and Urban Economic Studies used to have some subjects with lectures on cassette tapes. Doing those subjects meant borrowing the cassettes from the department office, and going to an audio room with multiple cassette players and headphones where you could listen to the lecture. From these modest beginnings, IT has certainly taken off. These days there is some attention to the problems of IT – such as effects on lecture attendance. But it has also brought numerous benefits. In my teaching of Introductory Microeconomics I used to have a multiple-choice test during the semester. When I started teaching the subject we had to give this test in lectures, a logistical nightmare. With new developments in IT we were able to switch the test to online. This saved a huge amount of time and paper – and reduced disruption.

One year, during the test, a student suddenly jumped up, ripped up his exam paper, and ran from the lecture theatre screaming ‘I hate this ******* subject’. Another student quickly followed, also shouting criticism of the subject. It turned out that they weren’t students in Introductory Microeconomics, but Engineering students who had been to a Commerce BBQ just prior to the test where the influence of what they’d consumed made them think it would be a good idea to ‘crash’ the test. You may wonder how I knew they were Engineering students. Well, when we looked at the exam papers they had left, it turned out they had written numbers in the ‘Student ID’ section. I was sure that no one who was planning to muck-up would put their real student number on their exam papers. They had, and ended up having a meeting with their Dean to explain the episode – proof that Commerce students are smarter than Engineering students! One final change that I can’t resist mentioning is the disappearance of paper planes. In my first-year Commerce subjects the flying of paper planes often seemed to be the main activity of most students at lectures. Many lectures would finish with a carpet of planes at the front of the lecture theatre. There was even one lecture when a group of Engineering students known as LFA (Let’s Fail Again) turned up at a lecture wearing tuxedos and carrying violin cases – which they opened to reveal multiple paper planes and proceeded to throw at us. I’m not sure of the explanation; however by the late 1980s the paper planes had disappeared. I’m going to finish by saying something about why I’ve enjoyed my time working in the Faculty so much. My observation is that a variety of factors that make for a good job. Anyone in their job wants to feel valued and treated fairly. We like to be able to create our own vision for how a job should be done and to have the opportunity to put that into practice. Another factor that is important is to be able to improve as an individual – for example, to develop extra skills and master new challenges; and, because we are social beings, to be part of building

an organisation that is getting better. A big reason why I have enjoyed being in the Faculty is that it has always given that scope to improve. Every day I have come to work thinking that I can make my teaching better and improve the quality of my research; and I’ve always had the feeling that any good idea for improving the Department or Faculty will be taken up. This is an aspect of working in the Faculty that I cherish. We should regard ourselves as so lucky to have the resources, academic and professional staff colleagues, students and alumni that provide the environment where we can keep trying to improve. Of course not everything about the environment in the Faculty comes from luck. In my time we have had exceptionally good management – leaders who have cared about the well-being of the Departments and the Faculty, and had great intelligence in how they have done the job of managing. As well, on the occasion of the Faculty’s 90th birthday, I think it is worth reflecting that all of us who work here should feel we have made a contribution to the Faculty’s success and can take pride in having done that. Geoff Burrows headed the Department of Accounting and Business Law during 1987–90 and currently edits Insights. Now a professorial fellow in the Melbourne Institute, Ross Williams, AM, was the Faculty’s foundation Professor of Econometrics during 1975–2002, and Dean for the last eight years of this period. Jeff Borland has been Professor of Economics since 2001. 1 Burrows, G 2006, Promise Fulfilled: A History of the Accounting disipline at the University of Melbourne 1925 –2004, Melbourne University Publishing, Melbourne. 2 Helpful comments by Joe Isaac are acknowledged.

Insights Melbourne Business and Economics

occasional address

HOW WILL YOU ACHIEVE SUCCESS AND SATISFACTION? At this critical stage of your life, think carefully about your plans and how you are going to achieve them. BY MICHAEL ANDREW

An edited version of his Occasional Address given at the Royal Exhibition Building, Melbourne, on the occasion of the award of Doctor of Commerce Honoria Causa on 18 December 2014.

I am honoured as a proud alumnus to be invited to give this graduation address and to become a Doctor of Commerce (honoris causa). I am sure each of you must be feeling a sense of pride in having achieved a hard-earned qualification at one of the worldâ&#x20AC;&#x2122;s great universities. Congratulations to not only you but your parents, partners, siblings and friends who have supported you through this important chapter of your life. I am at the other end of my career, having spent almost 35 years in industry and commerce, culminating in being the first Australian to be chief executive of one of the Big 4 accounting firms. Yet I can assure you that I am experiencing the same degree of achievement and pride in receiving this prestigious award as you are today. Iâ&#x20AC;&#x2122;d like to thank the University of Melbourne for recognising my contributions to the global accounting industry, education, philanthropy and world commerce. My executive career of 35 years must seem like a lifetime to you, but being back in this building still sends shivers down my spine. I distinctly remember wondering how I was ever going to pass Statistical 50

How will you achieve success and satisfaction?

Method or Microeconomics; the rickety tables, the exam booklets, and the austere exam supervisors patrolling; and, dressed in my T-shirt, how a building could be 16C inside and 35C outside. Exams honed my competitive spirit in those days. I used to enjoy calling for an additional writing book about 45 minutes into a three-hour exam just to see the look on the faces of the other students. I always went for a comfort break after 90 minutes or finished early to try and psyche out the other students. Equally, as a keener student of horseracing form, I insisted on being allowed to break from my exam to listen to the Melbourne Cup. It cleared my head and again showed I was in control. Exams taught me to perform under pressure, and to analyse and interpret vast amounts of information and translate it in a usable form within a limited timeframe. Assignments instructed the necessary research skills and lateral thinking. Even group assignments highlighted the importance of teamwork, leadership and sometimes tolerance. Only subsequently did I recognise that these were important business-process skills.

Ending my career at KPMG, you might ask what we have in common. I am going through a very similar thought process as you are likely to be. How am I going to plan the next stage of my life? What is really important? How will I measure success? I have recently finished my work at the G20 Leaders Summit where I presented the business recommendations to world leaders, especially the anti-corruption measures which I chaired and developed for the past 12 months. Like you I am receiving many career offers – mine are for prospective Board positions on public companies, requests from government to take on policy development roles, approaches from philanthropic and not-for-profit organisations, entreaties to continue my anti-corruption crusade, or simply to spend time with family and hobbies. How do you balance all of these competing interests? Not like my German KPMG senior partner who, when asked how he achieved work/life balance replied, ‘work is life, life is work’. Wrong answer! What I have learned is that we generally do a poor job planning our lives. When I reflect on my university class, my friends have had mixed success. Some have risen to great heights, some have had dysfunctional families and relationships, some have travelled, some have had sea changes. Some are very wealthy, some lonely, some unfulfilled and some satisfied. I wonder if they planned it that way? My core proposition is that this is the next critical phase of your life; plan it, think carefully about what is important to you and how you are going to achieve it. To come this far all of you have great potential. Will your success be measured by your wealth, skills, health, friendships, satisfactions, relationships, philanthropy, contribution to creating or building something or your comfort? I will describe some of my experiences today – and offer some advice – but please draw on others to set long-term goals; and ask yourself how will you achieve success and satisfaction.

During campus life I was soon thrust into the hard world of commerce as a vacation student, thereafter completing a year’s Articles of Clerkship in the Corporate Legal Department at ICI Australia. I went on to do two years as a cost accountant in the Ethylene Oxide business, and two years in the Tax Department. Then, one day, they decided I should move to PNG to become the company secretary. With a young family this was not the career move I was looking for! So I joined one of the then Big 8 international accounting firms, Peat Marwick Mitchell, to practise in Tax (a combination of law and commerce as I couldn’t make up my mind which I wanted to be). The very fact that I had not followed the conservative route – that is, direct entry into the accounting or legal profession – and that I’ve had commercial experience outside of the accounting profession was in hindsight a huge advantage. I knew how business organisations worked and thought; I was able to tailor my advice appropriately; and I stood out to the clients. What I probably didn’t understand then was how that organisation would develop, or how it would provide growth opportunities and how it would develop me. I joined an audit firm in the growing niche business of tax consulting in 1984. Today KPMG turns over $US24 billion, has 155,000 employees and operates in 156 countries. Audit constitutes one-third of the business. The organisation focuses on strategic-consulting, social-media analysis, organisational behaviour, cyber-crime, data analytics, fraud detection, IT consulting and leads the world in risk management in banking, treasury, insurance, energy policy and advising governments. This is not an advertisement for KPMG as all Big 4 accounting firms have evolved in a similar way, but a way of stressing the importance of the variety of options you will have as the market evolves, business develops and the recognition and demand for skills learned from your degree will change. Part of your career probably doesn’t exist today. I was quickly accelerated to partner but my big Insights Melbourne Business and Economics

break came in 1988 when my managing partner walked in on a Friday and said the firm needed a lawyer who understood accounting firms. My wife’s plan had always been to live in Europe for a period. Overnight, we had to decide whether I would transfer to Amsterdam to put together a merger of Peat Marwick Mitchell and KMG, to become KPMG – the first of what is today’s ‘Big 4’. Naturally we agreed and spent a year in Europe – on our first ever passports. Probably because of that experience I was invited back during 1992–94 to run the International and European Tax Centre in Amsterdam and Brussels; to open up our offices in Central East Europe in Budapest, Prague, Bratislava, Moscow and Warsaw; and to write the first strategy for this new emerging region called ‘Asia Pacific’. After two and a half years, I returned to Australia branded ‘the international expert’. As the European Union was only just being formed, border controls were abolished, pan-European law introduced and Eastern Europe was opening for investment after the fall of the Berlin Wall, people were thirsty for my knowledge and first-hand relevant experience. In 2000, I became managing partner of the Melbourne office and was transformed from a technician to a people-manager, as well as someone who gave advice on corporate governance, risk management and took on strategic and relationship responsibilities for major clients such as BHP Billiton, National Australia Bank, Mayne Nickless and Pacific Dunlop. This role exposed me to world-class business planning, brilliant executives and strategic thinking. I was able to study these organisations and listen and learn from the best. In 2006, I was elected the KPMG Australia Chairman, and in 2010, Chairman of our Asia Pacific Region, overseeing 17 countries. Despite having these roles, I was amazed in 2011 when the Global Board approached me and said that they wanted me to lead our global firm. This is where serendipity converges. They wanted someone who had experience in the emerging frontier markets to deal with the rise of the so-called 52

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BRICS countries. I went back to my 1988 and 1992 experience in Amsterdam and Eastern Europe, the fact that I had knowledge and experience and was based in Asia Pacific, and I was well-known internationally within our firm because of my overseas experience. I had always constructively challenged the organisation to improve and not just follow tradition. So: always leverage your actual strengths and your total life experience in your career. I joined the International Business Council, a group made up of the top 100 Global CEOs in the world, and participated in meetings through the GFC with the Financial Stability Board, the Global Public Policy Group, the UN and the World Economic Forum. I became involved in public policy and again listened to some of the best and brightest minds. It was one of the best jobs in the world. So what did I learn? I want to help you with 10 key thoughts that may help you plan your futures.

What are you passionate about? To achieve true satisfaction, you have to enjoy or be inspired by what you do. The most important questions you can ask yourself are: – What is the purpose of the organisation you work for? – How does it relate to what you want to get out of life? When I assess the various job offers put to me today, I ask myself: – Will I enjoy this? – Will I work with creative and inspiring people I can trust? – Am I making a difference? – How will it impact my important relationships and my desire to watch my beloved Demons, improve my golf handicap or give back to my devoted family? – Will it give me satisfaction, not just an income? Everything should have a purpose.

Value relationships When I reflect on my close friends and support base, most of them come from my university connection. Today, they are captains of industry, philanthropists, lecturers, partners of major legal and accounting firms, leaders in commerce. They weren’t always in Who’s Who, rather they were friends who became a network to me, people who I do business with, pick their brains, share problems and get contacts, enjoy a wonderful glass of red wine or go to sporting, arts and cultural events together. All of this is a long way from sessions at Naughtons or The Clyde or the Otway Ranges Appreciation League. More importantly, as I travel through Asia I encounter key clients and government contacts who I studied with or at least shares an alumni experience. Make sure you stay in touch – everyone here today has the potential to help you fulfill your life and assist your career. Work hard at maintaining and cultivating those relationships.

Creating and mentoring your team defines your success Success in life depends on the number of people that you help develop to their full potential. Be it family, work colleagues or the under-privileged, the best human beings are those that embrace and lead, support others to achieve and exceed their aspirations in life. It’s a real skill as each human’s potential is inspired in different ways. True leaders understand and activate the switch. Looking back at my achievements, it’s not the titles or the roles I’m most proud of. It’s the number of young people that I have been able to help – in developing their lives and careers, giving advice and ultimately seeing them rise to positions of authority and influence. Always treat your employees well as one day they could be your boss or customer.

Your role in civil society The GFC has really put a spotlight on the role and relationships of individuals, business and government in civil society. I visited Greece, Egypt,

Spain and Portugal regularly during the GFC and witnessed the devastating effects that occur in dysfunctional societies. We are a community; we act and work together. It’s important that we contribute together for a common goal to create the best civil society for all. The most inspiring moments in my career have been when I have been able to bring the power of my organisation, the strength of my intellect, contacts or even my financial capacity to help disadvantaged groups overcome inequality. Thus, some of my career highlights include my work in Indigenous communities, trying to bridge the gap by supporting Noel Pearson’s ‘Good to Great Schools’ initiative or at the Business Council of Australia and Committee for Melbourne, looking to raise educational standards to make Australians more competitive and employable, and working with the UN to develop partnership models which can be applied between NGOs, governments, and the private sector. One of the issues I admire most about your generation is the ability to understand and execute on this. In my KPMG experience, the volunteering of staff and a general awareness of broader issues such as climate change, youth unemployment, food and water scarcity, and disadvantage developed the best leadership group, as they understood society’s expectations and needs. You have a duty to contribute to improving the society and community in which you live, and you will be the better for it.

Core competencies are beyond technical University has taught you technical skills. You know where to find reference material. Exams and assignments have prepared you for business processes. But that is only half of the key to success. When I employ people at KPMG, I put a 50 per cent weighting on their academic performance, and 50 per cent on their soft skills. I am interested in hiring people who can: – Work as a team; – Relate to people; Insights Melbourne Business and Economics

– Present well; – Think laterally; – Display resilience; and – Improve the business. I would like to think these core qualities reflect broader societal needs than purely in a business context. Too often new graduates don’t give sufficient thought and weight to the organisational behaviours that will actually contribute to success. Customers, suppliers and peers want to work with real people they can relate to. Employers want team players who can make constructive suggestions to improve organisations. I was lucky at a young age to take on various positions and responsibilities at sporting clubs and charities, to gain work experience and accept publicspeaking challenges. I reflect today on how those early experiences honed my soft skills of stepping in to help colleagues under pressure, doing the additional reading of The Economist, or going to listen to thought-leaders and external speakers who really shaped and influenced my future. I encourage you to think outside of box, expose yourself to continuous learning, take opportunities to listen to the brightest minds and develop not necessarily just technically but in terms of your human capacity and capability. It’s who you are not what you know.

Embrace change not tradition The world is changing quickly. The whole nature of the major societies and economies throughout the world are changing dramatically. China is moving from a low-cost export manufacturer to a domestic economy; India, Japan and Indonesia are undertaking serious reform; and the US has a huge energy source in shale gas which is transforming its economy. Robotics, big data, digitisation, nano technology and personalised medicine are new growth sectors. Technology is disrupting organisational structures, supply chains and the way we live our lives more than ever before. Climate change will alter your lifestyle. 54

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Innovation defines countries’ futures now, not just their cost structures. In the last decade it was lowand high-cost countries that defined competitive advantage. Now it is high- and low-innovation countries. The great advantage Australians have is that we are not trapped in tradition. We are prepared to have a go; we are prepared to do things differently and communicate openly and honestly about the things that are important to us. We embrace new ideas and the benefits of multiculturalism, and are prepared to push the boundaries. With such a small domestic market it is critical that our competitive edge is honed by brain power and the ability to accept change. One needs to be very observant to fully understand these structural changes; and one needs to be more creative and global to benefit from them. To be competitive, Australia needs bright, intelligent, globalised thinkers who exhibit entrepreneurial spirit, to drive this economy away from its traditional reliance on two or three concentrated sectors. Embrace change as an opportunity. Tradition is a threat.

Integrity If there was only one piece of advice that I could pass on to you today it would be that your personal integrity stands above everything else that you will do in life. Many of you will go into a profession or hold positions of trust. As my parents taught me, you only have one reputation; one set of values to live by, which define the respect that you have from your peers, your family and even people that you’ve never met. Unfortunately in my profession I have seen too many people chase the fast dollar or getrich-quick schemes, get involved with organisations with poor values, or compromise or sacrifice their principles and integrity only to find they have destroyed their reputations, their status in society and standing with friends and family. We all have crazy moments in our lives, but just reflect if you or your friends and family would be proud if what you were doing appeared on tomorrow’s front page of the Herald Sun or the Australian Financial Review.

Could you could stand with your hand on your heart and say, ‘I was true to my values and I showed the right ethical balance’? Your personal reputation is your biggest asset in your future career, and like any asset, it has to be maintained, improved, and strengthened consistently.

International connection In Economic History we read in Professor Geoffrey Blainey’s historic Tyranny of Distance that Australia would continue to be an island isolated from the rest of the world, and that this would bring both advantage and disadvantage. With the rise of the internet, globalisation and particularly the explosion of industrial revolution in China and Asia, Australia is now heavily interconnected with and dependent on the rest of the world. Thus, we need to make informed decisions around that connection. Moving the office of KPMG’s Global CEO and Chairman to Hong Kong was to be at the heart of this particular economic and social revolution. The ASEAN group plus China and India will drive the economies in your lifetime, and we must be investing in them today as service provider, technology innovator, commodity supplier and connector between these great future economies. It has always puzzled me why students want the great New York or London experience when, as an employer, I would much rather have people who have worked in Shanghai, Guangzhou, Mumbai, Delhi or Jakarta – some of the great emerging cities of the twentyfirst century. You have been very fortunate to share your education with other international students from different cultural backgrounds. As Australia continues its drive into Asia, those bilateral personal relationships you developed at university will be a great asset, so stay in touch and one day they will be a customer, supplier, advisor or banker. Asia is our future, invest in understanding it.

Your support Satisfaction in life starts at home. In your job and in life you will experience highs and lows. The ability to share the joy and pain, to receive advice, and to work

through issues with people you trust is probably the most important asset you can find. I was blessed that I met my wife in the ‘pie and chips’ queue at this university’s buffet. I could not have achieved my goals in life without her. When asked for career advice I tend to say ‘marry well’. Indeed, if you google ‘Deputy Chair of KPMG’ you will get Mardi Andrew. While done as a joke by one of my Board members, in essence it’s true – the more important your role in life becomes, the more your partner and your family becomes intertwined with your career choices. My family has been a rock for me, sharing success while keeping my feet on the ground and being there in those dark moments. Your personal friends, family and relationships are paramount in life, well above any company or organisation. Nurture these people, don’t neglect them. I recall, as an early partner, a Canadian professor asking us all to picture ourselves at 80 years old, paralysed by our third stroke, lying in hospital, saliva dribbling out of our mouths and asking us who is going to wipe that away. Who loves you enough to do this? It won’t be KPMG. That anecdote refocused me on who was important in my life.

Stretch yourself Finally, this is one of the greatest universities in the world. This is from someone who has been to 106 countries and many more cities, and visited many universities. You should be very proud to be educated here. One reason why we have some of the world’s greatest universities here is the connectivity to the city of Melbourne, in particular its lifestyle or livability. Equally, Melbourne only becomes a great city because it has great universities that attract, retain and nurture creative talent. Travelling around Asia now, I am struck by the number of alumni from these universities who have such a strong affection for the Melbourne experience, the academic training and the honesty and openness of Australians. This is what will drive our economy and society in the future. Insights Melbourne Business and Economics

It is important that we give back and support this great institution by becoming proud alumni, mentors, ambassadors and philanthropists – or simply by living the values we have learned here. By planning your life around what is not just important to you as an individual but also to your family, your relationships and civil society, you will be enriched and make this university very proud. So go beyond, stretch your mind, and work with exciting and talented people. Know that if a country boy from Maryborough – who had no ambitions to be an accountant, no ambitions to travel outside of Australia, and was an average university student – can run one of the most complex global business in the world, anything is possible with the right attitude and a degree of planning! Anything is possible if you focus, stretch your ambition and understand your talent. One day I hope that you can measure your life, give this speech and reflect on how you leveraged your university experience to contribute positively to civil society and Australia’s future – and you became a better person for it. Good luck and best wishes in your life ahead. Michael J Andrew was Global Chairman of KPMG during 2011–2014.

How will you achieve success and satisfaction?

Mailing Address: The Faculty of Business and Economics The University of Melbourne Victoria 3010 Australia Telephone: +61 3 8344 5311 Internet: http://insights.unimelb.edu.au Published by the Faculty of Business and Economics, June 2015 ÂŠ The University of Melbourne Disclaimer Insights is published by the University of Melbourne for the Faculty of Business and Economics. Opinions published are not necessarily those of the publisher, printers or editors. The University of Melbourne does not accept responsibility for the accuracy of information contained in this journal. No part of this journal may be reproduced without the permission of the editors.