Throughout the many incarnations of Doug McTaggart FAICDLife — director, CEO, academic, government adviser — his economics training has been the bedrock.
For Brisbane-based Doug McTaggart FAICDLife, economics is about life choices and what making those choices means.“That’s very important to me, so I’d encourage everyone to get a good background in economics and then in business,” says McTaggart, chair of the ASX-listed Lottery Corporation and Indigenous Business Australia Asset Management. A holder of a PhD in Economics from the University of Chicago, he recently retired from the board of Suncorp Group and has previously had roles in academia and as CEO of the Queensland Investment Corporation (QIC).
“The University of Chicago took a very customer-centric approach to both microeconomics — and even macroeconomics,” he says. “That taught me a lot about customer behaviour, incentive structures and the whole notion of opportunity costs.”
Boards are faced with a myriad of choices, approving something that management proposes or deciding which approach to take to a problem. For each one they should ask, what other approaches are there? What are the costs of using this approach instead of using that approach?
“This is a fundamental notion of opportunity cost,” says McTaggart. “If management simply comes forward with one approach, one suggestion or one recommendation, you need to ask what are the other possible outcomes here?”
Boards can consider opportunity costs when they look at the long-term strategy of the company, as well. For example, forgoing an opportunity today because it might not be sustainable or in the long- term interest of the organisation. However, boards sometimes fail to consider the long term because they get caught up in the moment. Likewise, directors should be cognisant of business cycles as they seek to manage their organisations through an uncertain economic climate.
“Having a business organised to grow at trend or above trend is what’s going to actually hold value,” says McTaggart. “So being well aware of where the longer-term trends are going is important.”
He also notes that directors should know that booms turn into busts — and manage the business during the good times to be ready for the bad times.
The lure of economics
McTaggart originally studied science, switching to economics after reading Nobel prize-winning economist James M Buchanan’s The Limits of Liberty: Between Anarchy and Leviathan, which outlined how economic principles led to the evolution of society from hunter gatherer through to sophisticated civilisation.
After finishing his undergraduate degree at the Australian National University, McTaggart completed his master’s and PhD at Buchanan’s alma mater, the University of Chicago, on a Milton Friedman scholarship — although by the time he arrived, Buchanan and Friedman had both left. McTaggart taught at the University of Chicago while studying, then joined the privately-owned Bond University on the Gold Coast, eventually becoming a professor of economics.
During this time, he periodically received calls from Queensland shadow treasurer Joan Sheldon AM, who asked him to head up Queensland Treasury as Under Treasurer when the Borbidge government was elected in 1996. Two years later, after a change of government, he was appointed CEO of the government-owned Queensland Investment Corporation, which managed funds for government clients.
He found himself in a bureaucratic organisation with little customer service. “Changing the culture of the business — getting them to focus on the customers’ money, not their [own] money — was important,” says McTaggart. “Raising the performance standards required the organisation to be competitive externally.”
McTaggart persuaded the government to remove the mandate that forced government- owned clients to invest their money with QIC, allow it to compete in the wholesale investment market and, because it would be competing on the open market, to remunerate investment professionals appropriately.
“It was a risk, but it worked,” he says. “QIC remains an excellent organisation and is still owned by government.”
QIC’s assets under management have grown from $20b in 1998 to more than $100b today.
Lessons learned
McTaggart had other formative experiences during 14 years in charge of QIC, in particular learning about the importance of culture.
“The board needs to ensure that the business or the organisation has a purpose and knows what its purpose is,” he says. “That is a strong foundation on which to build a strategy going forward.”
Tied into this is another lesson he learned at the University of Chicago — the importance of understanding what the incentive structures around the key people are, and avoiding the law of unintended consequences.
“If you put something in play, then certain structures take behaviour down different directions,” says McTaggart, reciting the adage that “strategies don’t fail, the execution fails”. He adds that effective execution can depend on how a company incentivises and sets up the environment in which the strategy is to be delivered.
Costello report
In 2012, McTaggart, along with former federal treasurer Peter Costello AC and academic Professor Sandra Harding AO FAICD, was hired by Queensland’s Liberal National (LNP) government to review the state’s finances. The Costello report recommended driving productivity through marketisation and contestability, exposing a broad range of public services that were then delivered by governments to the disciplines of competition, and also recommended the sale of government- owned corporations.
The challenge for the public sector is that it operates in an environment where the market has failed and it has inherently complex products, so doesn’t face any competition, says McTaggart. With no competition, organisations tend to become internally focused and start to ignore the needs of their consumers. He declines to provide an assessment of the Costello report’s lasting influence, saying he has been out of the picture too long.
“I thought the work we did on that report was very good,” he recalls. “It set a blueprint for how the public sector can deliver on the needs of government and community. Again, it encouraged the bureaucracy to be more outwardly looking as opposed to internally focused.”
McTaggart says it is just as important for governments to weigh up the opportunity cost of a decision as it is for directors — and academics have an important role to play to help them do so.
“Academic research, particularly in economic and social policy, should throw light on choices or options available to government, the opportunity cost of those different choices and the incentive structures around the entities that deliver on it. Fundamental research in this area is important and should be funded. That research and the outcomes of that research should be made accessible in a readily absorbable fashion for boards and management to understand.”
This article first appeared under the headline 'Trading Places’ in the September 2024 issue of Company Director magazine.
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