A panel discussion moderated by Sue O’Connor With panelists Jane Hemstritch, Sylvia Falzon and Rita Harris
Demographic change is a key megatrend that is affecting all organisations. Board members need to ensure that they and their organisations are methodically assessing the facts, testing their assumptions and responding to the opportunities and risks.
The topic on demographic change, what is happening and how do boards respond, came out of discussions that Sue O’Connor had with fellow directors over the past 6 months. These discussions have focused on three areas:
- Changing Shareholder expectations and behaviours
- New opportunities that are emerging in Australia and the Asia Pacific
- Boards’ response to demographic change in particular, and megatrends in general
Some facts on demographic change
By Sue O’Connor
Demographic change is identified by the CSIRO and others as one of the seven megatrends affecting Australia. In our region, the Asia Pacific, the population is predicted to grow to 5.2 billion by the year 2050, a 23% change from 2010. At the same time, the population is expected to become increasingly urbanised and on average, older.
How this is playing out varies country by country.
By 2050, 44% of the population in Japan is expected to be over 60. For China, this figure is 30%. The population in Japan has been falling for the last few years.
In contrast, Indonesia currently has an estimated population of 255 million. 27% are under the age of 14, and approximately half are under 28. Although its population is predicted to age, the percentage of those aged over 60 will be much lower than Japan or China.
These differences can also be seen in Victoria. In Melbourne, the population is predicted to double by the year 2050, driven primarily by migration. Most of this growth is in the outer metropolitan corridors. For example, at Yarra Valley Water we are currently planning for new suburbs equal to the size of Canberra to the north around Craigieburn.
In Victoria, currently 18% of the population is under the age of 14, and 32% under 24. In some growth suburbs, the under-14 population is approaching 30%. This is explains why we need so many new schools, and the challenge of finding quality childcare in some areas.
Turning to the equity market is a place where government superannuation policies and demographics meet money and risk. Australia is the fourth largest superannuation market in the world. Recent records from the Australian Prudential Regulation Authority (APRA) show that Australia is on track to have $9.5 trillion under management by the year 2035. About 85% of these funds are in the pre-retirement or accumulation phase, and that percentage was predicted to stay constant over time.
Currently, self-managed superannuation funds (SMSF) represent about one-third of superannuation funds under management. It is reported by the Australian Financial Review (AFR) that 17% of the ASX comes from SMSF. Most of these funds are for individuals and families at, or close to, retirement.
The announcements by both political parties, if implemented, could result in some significant changes to shareholder behavior and superannuation holdings. What, and how, these owners respond is an emerging picture that Directors will need to consider.
Investor and shareholder behavior and expectations
By Jane Hemstritch
According to ASX research, one-third of adult Australians invest directly in the share market. This is a very high proportion compared with other countries. When you break it down by age, share ownership "normalises" when people reach their early 30s, and around 40-45% in the over-55 age group.
If this pattern persists we will have a large number of millennials (or shadow boomers) take up share ownership soon. What can we expect from them? Dubbed by many as "lazy, entitled, narcissistic, spendthrifts, digitally-obsessed", there is a growing body of evidence that millennials are actually extremely conservative – both in their risk appetite, and their asset allocation.
They also have, in my experience, strong opinions about exactly what their investee companies should be doing, and the ability to harness all kinds of media to get their point across. Prepare for more activism of both kinds! This will mean engaging with investors on an emotional plane, not just a rational one and intensifying the focus on true sustainability. Too many Australian corporates have been flatfooted here.
For both millennials and their parents the Australian share market is proving disappointing. About ten years ago, on 8 May 2006, the ASX 200 index was at 5,324. At the close of the market last Friday 6 May 2016, it was at 5,292. There were many ups and downs in the intervening period, but the 12-month return is -7.03%. Combine this with a historically low interest rate, it is unsurprising that the pressure for yield has intensified – as has the pressure for capital management. Investors are much more vocal about the latter than even two years ago. This is especially the case if your company has high franking credit balances. If you are looking to mount an argument to keep capital, you will need a very good narrative – especially if the returns on that capital are long dated. Prepare for discussions about when and how to return capital – and with the corporate tax rate set to fall, expect those discussions sooner rather than later. Also expect those discussions to be initiated outside the company (or initiate them yourself)… Investors typically anticipate distributions to shareholders long before managers decide to undertake them!
Growth opportunities from these demographic changes
By Sylvia Falzon
One of the consulting firms in Australia recently identified the agribusiness, gas, tourism, education, wealth management, health and aged care sectors as those providing Australia with an expected growth of more than 10% above the global GDP (3.4%) over the next 20 years.
This section focuses on the health and aged care sectors, in which Sylvia has extensive experience as a board member of Cabrini Health and Regis.
To give some context, Cabrini is a not-for-profit (NFP) multidisciplinary private health provider operating in Melbourne with annual turnover in excess of $500 million, a workforce of over 4,300 and 1,300 doctors. Regis, on the other hand, is a residential aged care provider listed on the ASX in October 2014, with an annual turnover of around $430 million, and 6,000 operational places in 54 facilities throughout six states with around 5,500 staff.
The ageing population means increasing incidence of both acute illness (i.e. falls, heart attacks, strokes, cancer, etc.), and increasing prevalence of chronic conditions (i.e. heart failure, diabetes, respiratory problems, dementia etc.).
For treatment of chronic conditions, consumers tend to look for a well-integrated array of services – preferably a one-stop-shop. They want reliability and timeliness of access, and predictability in terms of financial outlays. For acute illness, patients now expect timely access to high quality care through emergency departments – they no longer look to the GP as the first port of call.
In both of these areas, the change for service providers is about scale (i.e. build up volume) and the standardisation of a service model (i.e. high reliability). In yesterday’s world, the attempt to get the scale was via the size of the hospital. In tomorrow’s world, it will be about the size and effectiveness of the service delivery network, of which the large hospital is the "hub".
In effect, most of what is the hospital beds of today will tomorrow be beds in people’s homes, where the consumers are linked in to and monitored by Cabrini’s (or someone else’s) health information network.
Therefore, the challenge is not building more hospital beds, it is linking in powerfully with beds in other facilities (including residential aged care), providing more intense clinical support to these facilities, mobilising and supporting family and carers to "co-produce", and doing much more to keep people at home.
For the aged care sector, the challenge is more about housing and living environment than health per se. This seems to be more about personal and wider social attitudes as to where people want to spend their latter years, and how they want to live. At the "high care" end, i.e. where the elderly is quite frail and need considerable support with activities of daily living, there will be increasing demand, and an expectation that such services have strong linkages to the health care network.
Consumers of health and aged care services will have more choice, and more information to make their choice. Consumers are increasingly looking for customised care, while health and aged care providers are looking for standardised care, thus creating tension in the system.
The co-production model is on foot, whereby service providers are supporting and educating their patients, residents, and their families and carers to take on more themselves. This leads to better informed consumers being increasingly be prepared to do this as a way of avoiding high (and unpredictable) costs.
Staff and others who provide the service
The biggest challenge service providers in both sectors face, especially in health, is their own ageing workforce. Older workforces are more vulnerable to sickness and injury – absenteeism increases, productivity decreases – and are more resistant to change.
Both industries are currently heavily reliant on direct service provision (i.e. person to person) rather than indirect (i.e. technology to person), and for this reason they have high turnover and are of declining attractiveness to younger talent.
The challenges are in:
- Design of the workplace to optimise worker health and safety and efficiency of service delivery
- Workforce planning to ensure that there is a pipeline to replace retiring workers
- Developing labour-sparing technologies e.g. robotics, smart machines, etc.
Historically, we have tended to think about our workforce from the lens of those entering at a young age (i.e. under the age of 25). While it’s critical to attract young talented and educated people to these growth sectors, we will miss an opportunity if we fail to re-skill our ageing workforce who can provide valuable skills and experience, albeit in a different way and in different roles.
Market opportunities – what is Cabrini Health doing?
The value proposition is combining Cabrini’s acute and chronic disease expertise (e.g. doctors, nurses, allied health) with the technical know-how to create a better, safer home environment (which may include residential aged care), so that our ageing population can stay at home longer to live better quality and more independent lives. Cabrini is doing this by:
Collaboration – constantly seeking to work in a more collaborative and integrated manner with our public hospital colleagues and also with general practitioners.
Innovation – working with University partners to develop innovative services or products for potential commercialisation.
Other observations on aged care
The biggest change in aged care will be when the baby boomers start to use aged care services, which will occur towards the late 2020s. There is no doubt that the model of aged care today will be different the future as these baby boomers transform the sector. Wealthier baby boomers will want to maintain a lifestyle, so the demand for private dwellings, gardens, tailored services and the need for skilled professionals to meet the demands of the new retirees will accelerate.
How do we bring these growth opportunities into the boardroom?
An important place and a good time to start the conversation is when management teams and Boards develop their strategy. Some of the questions that need to be addressed include:
- Where is the growth currently coming from, and what opportunities are coming over the hill that will disrupt us? Or do we turn it around and become the disruptor?
- How well do we understand the impact demographic change will have on our business? Put simply, elders are easily the largest component of the hospital market, and for aged care they are the market.
- Do we recognise the urgency of the workforce challenge, and do we have a plan in place to deal with it? Businesses need to face this head on.
- Are we investing, or plan to, invest in technology the same or with a higher priority as investment in bricks and mortar.
- Are we looking at what is happening beyond our shores? Three billion people in Asia are predicted to join the middle class by the year 2030. By 2050 the region is likely to represent more than half the world’s financial assets. They will also be housing about half of the world’s elderly.
So in Asia, especially China, we will see a massive shift to a consumption based economy, and countries such as Australia will be well placed to provide key services to meet this demand.
If we are to embrace the ‘100 year life’ then we need to think differently and challenge ourselves to ensure we are part of the rapid growth trajectory here in Australia and where possible in offshore markets.
Overview of the strategies and tactics boards in the Asia Pacific are using to think through and respond to demographic change and megatrends in general
By Rita Harris
Demographic change is a megatrend. A megatrend has been defined as a gathering wave of change that is slow to form, nearly impossible to reverse, significantly influences the future, has an aura of inevitability and has a far- and wide-reaching impact on society (Alcatel-Lucent Market Analysis 2012). A megatrend is like a tsunami – it can catch you unawares. It is very easy to sit back and think that the chances of one occurring are so unlikely that the impact need not be considered but when one hits it can be too late to respond unless you are prepared. Instead, we tend to focus on the emerging trends that are easier to observe, understand and act on.
Megatrends are complicated and inter-related. What you will find is that a discussion on demographic change can easily link into a discussion on globalisation, urbanisation and climate change. Demographic change itself has many components – aging, diversity, population growth, migration – and the impacts will vary by region or country. For example, the impacts of demographic change are significantly different for Australia than they are for India.
Faced with such complexity how then are boards responding? It is fair to say that although most companies are cognisant of the megatrends, they are more focused on the predictable and controllable implications rather than the long-term and uncertain implications. However, it is clear that boards are eager to understand how they should respond to inevitable demographic implications.
Here are ten strategies that boards can consider:
- Get it on the agenda – The first one sounds so simple but it actually involves a change in culture. Culture change doesn’t happen overnight, it requires persistent demonstration of the behaviours you wish to encourage, it requires leadership and on this topic the board is the most influential, especially if management is focused more on the here and now. It is not just a matter of getting it on the agenda for a general discussion it’s about changing the way you do things consistently and making sure that the whole organisation is on the same wave length. Megatrends are simply not high enough on the agenda.
- Take a long term view – How often do we hear this, probably the biggest failure of corporate governance today is its emphasis on short-term performance. The recent AICD paper on Governance of the Nation states, "Long term decisions that build value and growth are at the heart of good governance" yet pressure to meet quarterly earnings and a complex regulatory environment means that boards are consumed by quarterly reports, audit reviews, budgets and compliance issues. A significant proportion of a board’s agenda is typically backward looking. How should we define long-term in the context of a megatrend – at least 10 to 20 years!
- Incorporate analysis of megatrends in your strategic planning process – Megatrends are great topics to have on the agenda for strategic planning days and off-sites but make sure that they are not one-off occurrences as you won’t effect the culture change that is required. If actions are not forthcoming and regularly reported on then the topic will fizzle away.
- Take a risk management approach that is integrated with your strategic and governance framework – An integrated approach is central to informed decision making and adapting to changes in the environment. Risk management frameworks need to be more forward-thinking and challenging – not simply a sanity check on decisions already made. According to surveys conducted by our parent company Marsh & McLennan and research partners, risk professionals acknowledge that risk forecasting is getting harder yet also suggest that the emerging risks agenda remains a low priority. Review your risk management framework including your processes and personnel – does your CRO have a seat at the strategy table?
- Don’t just focus on downside risk but on opportunities as well – Demographic change is not inherently good or bad. It is unfortunate that risk management has tended to focus on what can go wrong but a robust risk management framework should identify the opportunities. At Mercer, we have found that this approach has worked extremely well with boards tackling the topic of climate change – another megatrend. It’s not about what investments to divest but where are the future opportunities if you are prepared to take a long term view and define a strategy to get you there.
- Invest in good data and analytics – There is so much research out there but it tends to highlight the issues not the solutions. To get to the solutions and strategies that make sense for you, you need to invest in data and analytics that are relevant and quantifiable for your business and target market. Let’s take a superannuation fund as an example – we know that Australia’s population is aging but to really understand the implications and determine the appropriate response – the fund needs to understand the demographic change that is occurring i.e. are retiring members being replaced by new members at the same rate, what are those members doing when they retire, where are our new members coming from, what are the characteristics of our members – are they dormant or active, are they affluent or struggling. Understanding these issues has profound implications for resource allocation, investment decisions, liquidity, insurance, products (such as longevity solutions) and services (such as financial planning). Investing in data and predictive analytics means that you can allocate precious resources for the best risk/return outcome.
- Don’t rely on hunches but on numbers – The actuarial skill set is under-utilised by companies except in financial services. Actuaries are trained to define the future probability of something occurring based on past experience and reasonable assumptions. Scenario and stress testing are key tools that can be used by companies to help define the risk and opportunities, thereby strengthening your corporate resilience.
- Tap into your executive and emerging talent – Ask your executive to articulate the impact that demographic change will have on the business, your customers, your governance and your people. As we have heard demographic change will impact your strategies, your products and services, the regions in which you do business and whether your workforce is appropriate for the future. Young bright people love this stuff. Establish a think tank of your brightest talent and ask them to take a long term view of the impact that demographic change can have on the business. This is also a great way to incorporate a focus on innovation. Ask them to present to the board.
- Use your demographic analysis to embrace diversity measures – Understanding the demographic environment in which you operate flows through to the demographic of your workforce. It needs to be comprehensive – looking at age, gender, cultural background and geography. It also flows through to the composition of your board – succession planning is more important than ever but give critical thought to the types of skills that will be needed on your board in future.
- Engage with your stakeholders to bring them along your journey – If you are bold enough to take that long term view that we all so desperately want to do then it’s important to engage with your stakeholders – your shareholders, your employees, regulators and customers.
Demographic change is a megatrend that can result in many positive opportunities for organisations that are prepared to invest for the long term and be innovative. If demographic change poses challenges for your organisation then it is important to take action now and plan for the future.
- Invest in understanding the future landscape through research, data analytics and long term projections
- Take a risk based approach to identifying not only downside risk but upside opportunities
- Be prepared to take a long-term view of your business strategy and sustainability having invested in understanding the key drivers
- Engage with your stakeholders to bring them along your journey
by Sue O’Connor
The external environment is changing significantly and demographics is just one of the megatrends affecting us. Directors need to be alert, open to, and thinking about the opportunities and risks these changes present and ensuring that our boards and organisations have the processes in place and resilience to think through, respond and profit from these changes.
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