Should leaders lead by example or merely declare their virtue?

Dr Bryce Wilkinson
The National Business Review
16 November, 2019

To misquote from Shakespeare’s Hamlet, “Methinks today too many business leaders and politicians doth protest too much.”

Less lip service to virtue and more meaningful action might be a fine thing. Or, at least, the risk of having to act in accordance with professed virtues might temper such protestations.

We have a government that protests to the world it cares about wellbeing and has brought down a world-leading wellbeing budget. Measures to achieve faster productivity growth (greater wellbeing from given resources) would lie at the heart of such a budget, but did not. Even flagship wellbeing budget items such as new spending in mental health came with no framework for checking the quantum of wellbeing delivered.

Prime Minister Jacinda Ardern sees climate change as her generation’s nuclear-free moment. Under her leadership, Parliament has just passed a Zero Carbon Act. But the bill seems to be as much about economic transformation as it is about greenhouse gas emissions. Why else would the Act include no provision for checking that climate change policies are efficient and effective? And why else would the Act rule out New Zealand projects addressing the 99.83% of emissions that happen overseas?

The Act’s regulatory impact statement contrives to support the measure while documenting that the costs to New Zealanders will be heavy while any environmental benefits are little more than wishful thinking. The New Zealand Initiative’s report last week, Real Action not Empty Words: How to Make the Zero Carbon Bill About Cutting Emissions, suggested ways of strengthening the act; Parliament’s urgency may come at the expense of the legislation’s effectiveness.

The problem is hardly novel: the government’s early knee-jerk measure to ban offshore oil and gas exploration had the same characteristic – as, of course, have countless policies under previous governments.

Business is often accused of being short-term focused. The criticism never made much sense; shareholders surely care more about share prices than about the current quarter’s dividends, and share prices reflect long-term expectations. But short-term incentives will plague politics whenever voters pay more attention to the latest visionary announcement than to the effects of the last one. The political benefits, such as they are, of setting grandiose long-term goals are immediate; dealing with the reality of high future costs for little benefit will be another government’s problem.

But business may have been learning a trick from the politicians. Consider the case of the Aotearoa Circle. It proclaims itself a unique partnership of public and private sector leaders who are unified and committed to the pursuit of sustainable prosperity for Aotearoa New Zealand. What does that mean? Is anyone against sustainable prosperity? If not, what is the beef?

Last week, Circle members published a report proclaiming their intention “to promote transformational change.” They said that they “need to shift, urgently, to a sustainable economy.”

Why not just do it?

The leaders confess in the report that they are misallocating capital through “short-termism, the failure to properly price social and environmental costs and a lack of information and awareness.” They are calling on themselves to stop doing this pronto: “We can’t wait for legislation or regulation.”

Good for them but why tell the rest of us? Why not just do it, and stand or fall by the results?

They declare the first thing they need to do is to change their mindset, and to do so in the next decade. Really? So what is wrong with their “transformational change” mindset and why would it take them a decade to change it?

Well, as readers will have guessed by now, when those writing this report use the word “we” they do not mean themselves. Oh no, they are OK. What they mean is “the rest of you” or something akin to that. When they wrote “we need to rethink the way we define economic success,” they meant that you had to, not them.

The authors exhort “we,” the readers, to adopt a world view centred on a duty of care. To exhort others to act is cheap. To recast one’s business model in the direction of a reduced ability to repay the bank or satisfy investors is a much bigger ask.

It is as if leadership does not mean leading by example.

The report also raises issues of economic and educational inequality. 

Here at last is scope for common ground. These are public policy issues where leading by example for business leaders would be difficult if not impossible. The slipping and highly uneven outcomes from school education have been a major focus of the New Zealand Initiative’s reform efforts.

The issue of undue barriers to productive paid work for the least employable should also be common ground. How does putting up the minimum wage in the name of reducing inequality help the person who could not get a job at the lower minimum wage? Are the least employable mere collateral damage that “we” should not bother our little heads about?

There should also be common ground about the pricing of genuine externalities. They result from problems of ill-defined, allocated and/or enforced property rights. When these problems are absent the polluting producer is confronted with the costs to others of the pollution. Symmetrically, those seeking less pollution are confronted with the cost to the community of any lost production. Less income from dairy farming means less national income to fund wages, healthcare, poverty relief or anything else. That loss might be worth it in the eyes of those affected, or it might not.

Where fresh unpolluted water is scarce, well-defined tradeable water rights impose that symmetric discipline on developers and conservationists alike. No one has a free lunch.

State-sanctioned externalities

The world where anyone can hope to stop a housing or other economic development simply by objecting and putting no money on the line is a world of state-sanctioned externalities. Too little housing and too little economic development can be expected.

That, in a nutshell, is the central problem with the Resource Management Act when combined with incentives facing councils that turn growth into a cost. Ironically, the RMA has multiplied and entrenched externalities while intending to do the opposite. Ridiculously high prices for land for housing are currently the most visible manifestation of its imposed externalities.

The private business community is generally, out of necessity, more pragmatic and more focused on what can really be achieved than are politicians. Former Soviet Union leader Nitika Khruschev reportedly once said “politicians are the same all over, they will promise bridges even when there are no rivers.” (Don’t blame the politicians, blame the voters or the voting system.)

It would be a fine thing if there were less highfalutin talk about economic transformation and more focus on addressing the public’s pressing concerns. These include housing and inadequate income from inadequate productivity.

Let’s hope the Aotearoa Circle’s next report is better grounded, with a stronger separation of things firms can change without the permission of anyone else, and on matters of policy concern. 

We could fast-forward a few centuries from Shakespeare’s Hamlet to Reinhold Niebuhr’s instructive old prayer for serenity. It suggests having the wisdom to recognise those changes one can make, and the courage to make them. 

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