How can Australia improve its productivity performance?

The federal government has announced that the Productivity Commission will conduct its second five-yearly inquiry into Australia’s productivity performance in 2022. The inquiry will identify priority areas for reform, including data and digital innovation, workforce skills and consider how the COVID‑19 pandemic has shaped Australia’s productivity challenges and opportunities. The AICD is seeking views from directors on how potential changes to governance obligations and practices will drive improvements in productivity.

Consistent with trends in other advanced nations, productivity in Australia has slowed considerably since the mid-2000s. The 2021 Intergenerational Report highlighted declining rates of labour productivity, with recent growth averaging 1.2 per cent annually, which is around half that experienced during the 1990s productivity boom and less than the 1.5 per cent historical average.

Labour productivity measures the quantity of goods and services produced per hour of work and is the most common measure or overall proxy for productivity. Labour productivity is central to growing living standards and reducing poverty, with the Intergenerational Report finding that over the past 30 years it has contributed over 80 per cent of growth in real gross national income per person.

Declining productivity growth has been attributed to a number of factors, including:

• lower economic dynamism, including slowing rates of innovation and technology adoption and weak reallocation of resources – both capital and labour – from less productive to more productive firms;
• structural shifts in the economy, including the increasing size of the services sector;
• lower business investment; and
• slower growth in educational attainment and labour quality.

The inquiry

The terms of reference of the inquiry are very broad and provide the Productivity Commission with discretion to examine Australia’s performance and identify priority areas for reform. A key area of focus will be how the COVID-19 pandemic has impacted productivity and whether it has created opportunities, such as in labour markets and the delivery of services.

The broad scope of the inquiry is reflected in recommendations made following the last productivity inquiry in 2016-17. In the final report, ‘Shifting the Dial’, the Productivity Commission made recommendations ranging from eliminating certain medical procedures, amending alcohol taxation arrangements and applying the Australian Consumer Law to universities.

The final report is due in February 2023.

AICD preliminary position

The AICD, along with other stakeholders, has had success in recent years in advocating for governance reforms that will result in productivity improvements. Notably, recent reforms to continuous disclosure laws and enabling virtual AGMs and electronic communications should in time result in genuine cost and time savings for organisations, directors and shareholders.

Further, the AICD was a strong supporter of insolvency and restructuring law reform in 2017, through the creation of the insolvency safe harbour. The safe harbour promotes a dynamic approach by directors in attempting to resolve financial difficulties of businesses of all sizes without resorting to formal insolvency. Importantly it is consistent with a modern economy focused on promoting entrepreneurship, responsible risk-taking and employment.

However, the AICD is of the view is that there are further opportunities for governance-focused productivity reform. We view the Productivity Commission inquiry as an opportunity to make the case for future reform in key areas, including:

1. an evaluation of the current personal liability burden on directors and how this is stifling innovation and risk taking, including the potential for further insolvency law reform;
2. the need for continuing progress and attention in addressing overlapping and conflicting regulatory obligations at a Commonwealth and state level, for instance in the obligations facing not-for-profits;
3. a coordinated approach by government and regulators to address emerging risks, such as cybersecurity, to avoid piecemeal and costly changes that impose a burden on organisations and directors with no material improvement in mitigating the underlying risk; and
4. a comprehensive analysis of where digital tools and innovation can be harnessed coming out of the COVID-19 pandemic and building on the recent changes to virtual AGMs and electronic communications.

The AICD recognises that the government has made progress in a number of the above areas through recent legislative change and its deregulation agenda.

Call for assistance

The AICD is seeking views from company directors on where governance focused productivity improvements could be made to inform our response to the inquiry. We would particularly appreciate feedback on:

• the current challenges or barriers to improving productivity, particularly from a governance perspective;
• opportunities at a policy or regulatory level to enable the harnessing of digital tools and systems to enhance productivity; and
• reflections on the impact of COVID-19 on labour productivity, including remote working arrangements.

We are keen to hear from directors across all sectors, including directors of listed companies, SMEs and not-for-profits.

Please email comments to policy@aicd.com.au or smitchell@aicd.com.au. All feedback will be kept confidential.