Are Australian CEOs acting fast enough?

The survey was launched in January 2024 at Davos (Switzerland) by Bob Moritz, PwC’s Global Chairman, and included responses from almost 4700 CEOs across 105 countries and territories. The results found that CEOs worldwide were generally more optimistic about the economic environment than in previous years. 

This year’s results also showed an increase in CEOs globally who believed their businesses would not be viable within 10 years if they continued on the same path; an increase from 39% in 2022 to 45% in 2023. They’ve been met with the realisation that some degree of operating model or value creation change will be necessary, just to survive. 

But in Australia, 85% of local CEOs believe their businesses will remain viable in 10 years time if they remain on the same path. It seems local CEOs generally think they still have time to make changes before their revenue growth and viability is seriously impacted.

The other trend that has really accelerated is the use of generative AI, although CEOs are still concerned about how to manage risks appropriately.

While those were the significant trends coming out of the survey, it’s important to note that priorities differ between the US, European and Asia Pacific marketplaces, as they do across the different industry sectors. As Non-Executive Directors, we encourage you to review the results of the global survey, as well as the Australian-specific results.

• Will our current product/service offerings be viable in 10 years time?

• Have we considered what others are doing within this industry worldwide?

• Are we keeping pace with community expectations around our business?

• Where is regulation heading and are we ready for it?

• Have we considered the changes in our environment, customer preferences and demands?

This discussion was facilitated by Louise King (LK), Many Hats Lead Partner and Technology, Media & Telecommunications Industry Leader. 

LK: What is the ‘reinvention imperative’ and why do Australian businesses need to transform? Do you think Australian CEOs are moving fast enough?

KB: There are two instances where CEOs in Australia are bucking the global trend. Firstly, a much higher proportion think they're fine and are going to be okay for at least 10 years without major transformation. Secondly, they are far more optimistic about the revenue generation from their existing business over the next three years than other CEOs around the world.

As mentioned previously, 45% of CEOs globally say their organisations will not be viable in 10 years, and that’s down to a combination of megatrends including:

• Technology and the speed with which it can disrupt business

• Climate and biodiversity changes and community expectations on businesses

• Migration and the impacts of age and demographics on business models and consumer expectations. 

Looking at that horizon, many global CEOs are coming to the conclusion that they need to radically change their business. And while 45% understand that need to change, 55% still believe that they're going to be viable in 10 years time without major change. With that in mind, 76% of CEOs worldwide have taken action over the last five years that have had a significant impact on their business. 

In Australia however, 85% of CEOs believe their business will be viable in 10 years time if they remain on the same path. They believe that they're going to keep growing quite satisfactorily with their existing group of products and services, and appear to see less urgency to transform.

LK: Some of our clients see innovation through acquisition, but are not reinventing their core business. Are they considered to be on a transformation journey, or just looking at the peripherals? It’s an important question for boards to challenge management on. What are the barriers to reinvention? What’s getting in the way?

KB: In Australia, there were two major barriers cited. Firstly regulation, which was far higher up the list than anywhere else in the world. The second (equal first) was competing operational priorities. This is a real challenge for CEOs around the world. They're under so much pressure to perform every month. At the other end, you've got longer-term imperatives to transform. I reflect on the CEOs at Unilever and Danon who were so switched on to thinking about the future, the day to day results started to drop off, and they both lost their jobs. Getting that prioritisation right is really tricky. 

When 85% of CEOs think their businesses will be fine for the next 10 years, that doesn’t create a compelling case for change. 

There's an interesting conundrum around this. In Saudi Arabia, they understand that demand for oil is going to decline with the growth of sustainable energy and circular economies. They have set out to reinvent themselves as a country, and are spending billions of dollars on their NEOM initiative to make them a more attractive tourist, education and entrepreneurship destination. 

Blair Sheppard, PwC’s Global Leader for Strategy and Leadership, was in Australia towards the end of 2023 and challenged Australia's position. In Western Australia, we extract approximately 1.2 million tonnes of iron ore every day. His view was that can't continue. Demand will eventually decrease for a whole range of reasons. Why aren’t we adding more value to those raw materials before we export them? Why don't we change our ecosystem? Part of the reason is because CEOs don't think they need to change. Blair would say, “You’d better start now, because in 20 years, when it all changes, it will take you another 20 years to recover”. I think that the reinvention challenge for us in Australia is a very real one. But given the competing priorities for our CEOs around short-term performance, that’s why it’s not being properly considered.

LK: When I read, in the survey, about regulation as a barrier to reinvention, I wasn't clear if that was regulation that CEOs have to deal with on a day-to-day basis in their operations or the regulation that allows them to transform and get on with things like generative AI. We have some pretty strong laws around those areas, whereas other countries may not. Across Australia, businesses are all burdened with the same regulation so maybe they feel like they're in the same boat. But globally, not all CEOs are burdened with it, and while they are transforming and being innovative, we could be left behind. 

What do you think boards can do to help drive business innovation? And what questions should they be asking their CEOs and management teams? 

KB: Firstly, have they got the right time horizons? Are they thinking carefully enough about changes in their environment and customer preferences and demands? Ask your CEO where they see the business in 10 years. We’ve seen that globally 45% of CEOs are worried about the viability of their business, why would we be different? 

The second question would be around relevance. Are we thinking carefully enough about what others are doing in this industry worldwide? Where are they going and why? Do we think it's not relevant to the Australian market or have we already got something in motion, and if so can we afford to wait for it? 

Are we keeping pace with community expectations around our business? This is changing so quickly that at least a three or six monthly assessment changes in community expectations is required.  

And finally, where is regulation heading and are we ready for it? What is our role in trying to influence regulation? Can we use it as a strength rather than a weakness? If we have to comply, how can we comply in the best possible way rather than be a laggard? You'd be amazed how many businesses we see that are not in compliance with regulations.

LK: Most CEOs in Australia nominated regulatory environment (74%) and competing operational priorities (74%) as factors inhibiting their company from changing the way it creates, delivers and captures value - yet only 4% indicated a lack of support from the board (vs 25% globally). Do Australian boards need to be more challenging to overcome this sense of complacency?

KB: We shouldn't view a lack of challenge or perceived lack of challenge as necessarily a bad thing. I'm sure there's a lot of challenge going on, but CEOs don’t feel inhibited by their boards. 

Again it comes back to the 85% of Australian CEOs who have no plan for reinvention. I've sat around a lot of board tables and when a CEO brings a very confrontational idea to change the business model or divest part of the organisation, you may well see a lot more challenge from the board. 

A great example is Philips which are known for a variety of products, in particular light bulbs. But they made the decision several years ago that they were not in the right businesses anymore. Philips now operates exclusively in the high-end medical devices business. It completely changed its operating model. I don't know how the board reflected on those changes, but there were probably very many long conversations before it gave approval. 

My questions for Australian directors is are you supportive of everything that comes along? Or are you getting enough ideas from the CEO about the changes that perhaps may be necessary to survive the next 10 years? Are you certain, when elsewhere in the globe 50% of CEOs are seeking to reinvent, compared to only 15% in Australia, that a “steady as she goes” approach is enough to survive?

LK: One of the key topics that we're having lots of conversations with clients around is generative AI? How can directors think about the opportunities and the risks of using AI to transform?

KB: Let's start with a statistic from our global survey, which showed that CEOs globally think that 40% of productivity is wasted inside their organisations on unnecessary emails, expense approvals, difficult procurement processes and so on. CEOs understand the potential that generative AI can bring and how it can improve finance, HR and other operational processes.  

There is a belief that generative AI will drive cost savings and put a lot of people out of work. But I would highlight that generative AI can also be used really effectively for product development, customer engagement, people engagement, and uplifting quality and risk.

For example, Chile is one of the biggest consumers of mayonnaise. A few years ago a company decided to generate a smart, non-egg based mayonnaise. They put the characteristics of 1000s of plant proteins into an AI system and asked it to generate something like egg-based mayonnaise. This is an example of using AI for product development. The first sample came out green which wouldn’t sell well. So they used generative AI to add together proteins in a way that makes the colour cream, however, the product came out in a liquid state. After a few more tries and more specification, the product was finalised. It is now the second best selling mayonnaise in the country. After the success of that product, the company continued to produce other products such as non-dairy milk.

There are many other examples on how an organisation can use generative AI to expand their products, lower HR costs, and enhance productivity.

On the risk side, it’s just about good risk management. We spent a lot of time at PwC thinking about this. How do we manage the boundaries with PwC around our own solutions? You have to just be very thoughtful. As a board member, there are two things that you can’t miss:

1. If you let your business run away with the use of generative AI, make sure you've got a view on the risk of the costs. One company we were dealing with signed a contract with a generative AI provider. After a few months, we were asked to do a review. We found out that the contract payments were by word. Every time someone typed in, “please can you write a letter for me?” It produced 100 lines, which the company had to pay for by word, and the CEO didn't know that.

2. Think carefully about the interdependencies of your AI with your carbon commitments, because it uses a lot of electricity, it uses a lot of data centre capacity and that can ruin your carbon commitments.

What we are also seeing is that large global companies want to get on and experiment — to try it out. However, they're doing that without properly putting their principal frameworks, as well as the governance in place. As we were working with one company, they said, “We're going to do a case study”. After four weeks, we went back and discovered the case studies were wrong, or the pilots were wrong, they had no governance and no control over it. We suggested they stop and place the framework around this properly before making a start.:

LK: As a board member what are the top questions you should be asking of your CEOs to encourage them to accelerate transformation?

KB: Two that are on top of my mind are:

• Are you really certain you've got your time horizons right?

• Have you thought carefully through the long term viability of the business?

Some of the companies we surveyed have got 25,000 employees, so you want to make sure that you think carefully about the future of your firm as well as your employees. 

As an Australian-based organisation, why do you believe that your company is going to be viable in 10 years time, and 50% of CEOs around the world don't? 

Secondly you have to streamline operationally as quickly as you can because that gives you flexibility, it gives you investment dollars. It means that you can react more quickly to market opportunities. You need to question the generative AI point. How are you doing? How are you going to accelerate it? You are not going to be able to spend three years trying to do it, because your results aren’t going to look good compared to someone that's an early adopter. 

The survey results show a high number of CEOs in our country felt their products don't need to change, and they're fine for three years and there is more money to make out of those products. I believe those companies will get left behind. In my opinion, the acceleration of AI and the strategy around it is something that I would ask a CEO. 

And then lastly, I would suggest to CEOs that they understand the ecosystem within which they're working in. An organisation can have a strategy to go from from A to F, however, if their ecosystem doesn't move, they could be making some bad choices.