Vital signs: Christine Holgate’s ‘main’ mistake was to apply business logic to Australia Post
Perhaps the most important lesson from the Christine Holgate controversy is that the confluence of sexism and politics leads to double standards for female executives.
But Holgate’s disappearance – push from her post as CEO of Australia Post last november for gifting four Cartier watches (worth a total of nearly AU $ 20,000) in 2018 – is also a good example of how public sector standards and private sector competition don’t mix well.
In particular, Australia Post’s status as a so-called “public enterprise” means that it must serve two masters: its social purpose and its business purpose.
Australia Post’s website highlights these two rather contradictory objectives. The very first thing he says is:
Throughout our long history, our social purpose and our commitment to community have remained the same; to create the relationships and opportunities that matter to every Australian.
But further down on the landing page, it asks us if we know that:
Our self-funded government business is owned by all Australians and receives $ 0 tax funding. Over the past decade, we have paid over $ 1.5 billion in dividends to the Australian government.
These goals may not be mutually exclusive, but they require very different incentives and compensation packages for executives in these companies than the norm in the private sector.
It all stems from the “effort substitution problem” – one of the fundamental tenets of the branch of economics known as contract theory, for which Oliver Hart and Bengt Holmstrom received the award. Nobel Prize in Economics 2016.
The principal-agent problem
Holmstrom’s contribution for which he shared the Nobel was to advance our understanding of the “principal-agent problem”.
This involves understanding how a principal (such as the company’s shareholders or the board of directors) should optimally design a profit-sharing contract for an agent (such as a CEO).
Image: Zirguezi / Wikimedia Commons, CC BY-SA
The important wrinkle is that the principal cannot perfectly observe the effort or the actions of the agent. The principal can only observe a noisy signal of the agent’s actions – such as income, profits, or the share price (if the company is publicly traded).
Holmstrom made fundamental contributions to this question in the 1970s and 1980s, which helped us understand on which variables agents should be rewarded, and why contracts sometimes take the simple form of a base rate of pay plus a performance bonus.
Multitasking and substitution of effort
Imagine that you are a principal who designs an incentive contract for an agent who performs two main tasks. One of these tasks is quite easy to measure. The other is very hard. What should the optimal incentive system look like? How powerful should the incentives be?
Take the example of school teachers.
Let’s simplify it and assume that teachers impart basic skills such as reading, writing and math, but also other skills or values such as’ higher level thinking ‘and’ love of learning. “.
The former can be measured imperfectly but reasonably well by standardized assessments and tests. However, it is quite difficult to measure whether elementary school children have developed ‘higher order thinking’ skills.
Since there are only a certain number of hours in a school day, teachers cannot do everything. Give them powerful basic skills incentives and they will focus, at least to some extent, on preparing children for standardized tests. This will reduce the emphasis on higher order thinking and the love of learning.
This is the “effort substitution problem”.
The extent to which a teacher changes emphasis will depend on their own values and motivations. Some will change a bit. Others, as we have seen in the United States, will focus almost exclusively on probationary teaching. Some may even resorting to cheating on behalf of students.
Incentives in public enterprises
The same goes for executives of public enterprises. Not cheating, but if they have powerful incentives based on standard private sector “metrics”, they will do what people do: respond to the incentives.
This is what led, in the case of Australia Post, to four executives successfully negotiating a very valuable contract and Holgate rewarding them with expensive Cartier watches.
In the private sector, none of this would have raised eyebrows.
But that didn’t seem to fit too well with Australia Post’s “social purpose”. Or at least it opened the door for those who saw an advantage in attacking Holgate while hiding behind a semi-believable excuse.
The lesson is that private sector incentives don’t lead to the best results when an organization tries to balance a hard-to-measure social mission with a relatively easy-to-measure corporate mission.
The way forward for Australia Post
In the end, it is difficult for Australia Post to have two results.
Australia Post may have a dual mission, but the ‘underpowered’ incentives required to avoid the effort substitution problem and achieve its public goal mean that it will not be as successful in meeting its corporate goal. .
One solution to this dilemma is privatization, but it would undermine Australia Post’s social mission. Not once in the history of the world has the privatization of these services (based on mandatory service standards) ever worked well.
The other solution is to tolerate low power incentives and live with the fact that the dual mission requires balance and imperfect performance on both.
There really is no getting around it.
As often, Bob Dylan best says: “They can call you doctor, they can call you chief, but you’re going to have to serve someone […] Well, it might be the devil or the Lord, but you’re gonna have to serve someone.