Date posted: 1/12/2016 5 min read

Malcolm Turnbull on the value of innovation

Prime Minister Malcolm Turnbull is adamant that Australia’s risk-averse corporate culture must change

In brief

  • Australia’s risk-averse corporate culture must change to encourage entrepreneurialism
  • Reforms to Australia’s insolvency and bankruptcy laws are key to the government’s innovation agenda
  • New research funding for universities will emphasise both industry success and research quality

By Steve Lewis
Photography by Nic Walker

Having put innovation at the centre of his pitch to voters ahead of the July federal election, the man who made a fortune from start-up ventures wants the nation to celebrate and not deride entrepreneurs who give it a red hot go.

“Not everybody is (Facebook co-founder) Mark Zuckerberg and has one swing and hits the biggest home run in the history of the internet,” Australian Prime Minister Malcolm Turnbull says.

In a sweeping interview with Acuity, conducted from his prime ministerial suite in Canberra, Turnbull spruiks the importance of backing entrepreneurs even if their CVs include failure.

“If they have had a couple of ventures that they have started and have been unsuccessful, that is actually a plus — because they have been around the block, and they have learned quite a bit,” he says.

His government’s A$1.1b National Innovation and Science Agenda — unveiled last December — is designed to usher in an ideas boom and help Australia’s economy move from its previous reliance on resources to growth fuelled by technology and digital ventures.

The reforms have mainly received bipartisan support. For instance, legislation that gives tax concessions to eligible early-stage investors who invest in qualifying companies passed the Senate just days before parliament rose in early May.

That was welcome news for a tech-friendly Prime Minister who insists that Australia’s traditionally risk-averse corporate culture must change to encourage the next generation of entrepreneurs.

“You have got to actually reward people for having a go, even if it doesn’t work,” he says.

“If you come down like a ton of bricks on people who try something that doesn’t work out, then you will never have an innovative culture.”

Innovation agenda

He cites Telstra as an example of a large corporate that has shifted from being an innovation laggard to an innovation leader with stronger customer focus.

“For a long time, even after it was privately owned, many people felt that Telstra’s attitude to customers was that the Postmaster-General has been kind enough to rent you one of his fine bakelite telephones and whatever you do, don’t chip it. That obviously had to change.

“Competition came, they had to become more customer-focused and they needed also to become more innovative.”

A “not invented here” stance against externally created products was a big thing at Telstra in previous days and so (former chief executive) David Thodey set out to change that. One of the ways that he did it was by establishing incubators — Muru-Digital (muru-D) being the best known one.

Telstra’s muru-D accelerator program is a start-up incubator launched in October 2013 and housed in Sydney. While it’s had a pretty good investment track record, it is unlikely to ever be so successful that it will make a real difference to Telstra’s bottom line — so where is the value for Telstra?

“You have essentially got an innovation agenda inside your business. And so (muru-D) provides a role model, it provides some cultural change, it’s something to talk about and it has definitely changed the culture there,” Turnbull says.

Money matters

The Prime Minister does not join the criticism from key figures in the innovation space of the big four banks over their conservative lending practices.

“You have to remember that for a start-up business, especially in the technology area, it is risky, so it’s unlikely to qualify for an unsecured loan from a bank,” he says.

“The early stage start-up businesses are really more suited for equity and that is why we have provided in the innovation agenda some tax incentives for these early-stage investors.”

The Tax Incentives for Innovation Bill 2016 — which passed the Senate on 4 May — provides a 20 per cent non-refundable tax offset on investments up to a million dollars, plus a ten-year capital gains tax exemption for investments held for 12 months or more.

These investments will target early-stage innovation companies with high growth potential incorporated in the last three years, which are not listed on the stock exchange and which have expenditure and income of less than a million dollars.

“Now that is designed to quite avowedly go after the very early stage where we felt there was a degree of market failure. This essentially provides an extra incentive for people to invest at that stage,” Turnbull says.

Fail safe

The Prime Minister also concedes more generally that Australia needs to address a “cultural issue”.

“That applies in all large organisations — including government — and that is people’s concern about being seen to fail (which) makes them reluctant to experiment.

“If the rewards for success are modest and the penalties for failure considerable, then the rational actor chooses to do nothing and wherever possible, manage decisions up.

“So you have got to have a culture that encourages innovation and that means you have got to encourage people to intelligently experiment and if something doesn’t work then cut it quickly and learn from it.’

But can government help change that? Can parliaments legislate to encourage more agile and innovative enterprises to overcome that risk of failure?

Evoking Barack Obama’s famous (and winning) 2008 election war cry, Mr Turnbull says: “Yes, we can.”

“Perhaps the best way that we can change it is by example; government as an exemplar is very important,” he says.

“So when we announced the innovation agenda, some (journalists) in the Press Gallery were shocked.

“Someone asked me if I would guarantee that all of these would work. I said no, absolutely not. I guarantee you they are the best ideas we have got and we can afford at the moment. If any of them don’t work, we will drop them. If any of them can be modified so they will work better, we will do so. And if we see somebody addressing the challenges or problems better somewhere else, then we will gleefully plagiarise or emulate them.

You have got to have a culture that encourages innovation and that means you have got to encourage people to intelligently experiment and if something doesn’t work then cut it quickly and learn from it.

Safe harbour

Reforms to Australia’s insolvency and bankruptcy laws are central to the government’s innovation agenda. The Prime Minister has been advocating change in this area for some time, including the introduction of a “safe harbour” provision partly based on the United States’ Chapter 11 provisions.

The safe harbour provision will protect directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company.

“It is designed to fulfil essentially the same objectives as Chapter 11, (which) is very legalistic in a very American way. What we wanted to do was to achieve the same objective — having a greater leaning towards business continuity than we have at the moment — and this is the way we believe we can solve it.”

There are two other important changes:

  • Reducing the default bankruptcy period from three years to one year
  • Making ipso facto clauses, which allow contracts to be terminated solely due to an insolvency event, unenforceable if a company is undertaking a restructure

While the insolvency profession has been advocating such changes for some years, some have expressed concerns that they will usher in a new era of corporate malfeasance.

But the Prime Minister is not concerned.

“I don’t think anyone is suggesting there is any more corporate malfeasance in America because of Chapter 11. The issue is to make sure that the law better promotes business continuity.”

But won’t reducing the default bankruptcy period from three years to one encourage those already operating on the edge of corporate morality to go a little harder?

“Malfeasance suggests criminality. If people have broken the law — the criminal law — they can be prosecuted. If they have been negligent then they can be sued for damages,” the Prime Minister says in response.

“Most businesses that become insolvent don’t become insolvent because of dishonesty or malfeasance, so it is important that people are able to get started again. The critical thing here is business continuity.”

Collaborate with researchers

Turnbull argues that Australia already is a powerful player on the global innovation landscape, even though the number of companies listed on the NASDAQ is miniscule compared to nations such as Israel.

“The only bit that is missing here is that historically we have had low levels of collaboration between research and business,” he argues.

To that end, the government claims it is for the first time introducing new research funding arrangements for universities that give equal emphasis to success in industry and other end-user engagement as it does to research quality.

“The whole research grant system will be rebalanced so that there is an incentive for researchers to do more than just publish or perish.”

He points to two OECD measures that record Australia lagging badly on the level of collaboration between university research institutions and business: “We come last on one and second last on the other. So there is no question that we are at the wrong end of the league table.”

Talk it up

Despite the limited pool of public and private money, Turnbull believes the field is wide open.

“Generally, if you get a change to a more innovative culture, you will find innovation and collaboration occurring in places not necessarily where the government placed the highest priority.”

At the same time the Prime Minister is hoping that Australia’s superannuation sector will shake off its ‘index-hugging’ conservatism and embrace the suite of start-up ventures emerging in fintech and beyond.

“The fact that I am talking about it means if you are on the executive of a super fund, your directors will be saying, ‘oh, the Prime Minister keeps on going on and on about innovation. What are we doing there?’

“One of the many good things about being Prime Minister is that if you talk about something a fair bit it will get a lot of traction.”

Acuity also invited the Leader of the Opposition Bill Shorten to participate in an interview but he was unavailable.

Steve Lewis is an author, journalist and senior adviser with Newgate Communications.

This article was first published in the June 2016 issue of Acuity magazine.