Institute of Directors chief executive Simon Arcus
Focusing on long term business sustainability whist also managing increasingly diverse and complex risks is a key challenge for boards. Top issues in 2016 include global economic challenges, the impact of the TPP, international tax reform, technology and people, changes to audit reporting, corporate transparency and managing stakeholder and shareholder relations. Boardroom culture, and diverse and appropriate capability underpin the effective board.
1. Long-term business sustainability
Board capability and diversity are key. Navigating the way forward is a challenge with greater business complexity and potential disruption. Governance is about planning for the future. Boards need to understand the business model and the drivers of sustainable value to ensure they both survive and thrive in the long term.
Strategy and risk oversight go hand in hand as cornerstones of how directors add value. 73% of boards in the Director Sentiment Survey are spending more time on risk oversight now than a year ago. 47% of directors think their industry will be affected by disruptive change in the next two years. The good news is most boards (79%) are looking at the long term sustainability of their business models. However, only about half regularly discuss succession planning for the CEO and key staff.
Good quality directors and board members, with diversity of appropriate capability and experience are critical for long-term business sustainability. Diverse skills such as digital leadership capability and deeper consumer knowledge are driving shifts in board composition.
A particular issue for Not-for-Profit and NGO boards is changing funding models. Funding of NGOs under the government’s Investing in Services for Outcomes (ISO) programme will be targeted at the achievement of specific outcomes and aim to streamline funding and contracting. These boards need to be clear about what they are achieving and the difference they make to enable long-term sustainability.
Tips for directors:
Take the helicopter view and ensure strategy is always on the board agenda
Ensure board risk capability is fit for future purpose – is there enough diversity to ensure broad and variable perspectives?
Be clear about how success will be measured – and also for NfPs what impacts or outcomes are achieved
Prioritise succession planning for both the board and key staff
2. Trust and transparency
Is more holistic reporting needed? Public trust in companies and their boards can be destroyed in seconds but take decades to rebuild. Financial collapses, environmental scandals, unethical behaviour and harmful products are driving demands for greater corporate transparency. Consumers and investors want to know the origins and composition (including supply chain) of products, to ensure, for example that they are not buying products of child labour or environmental damage. Global expectations for more holistic corporate reporting are on the rise.
Financial information doesn’t tell the whole story, so we are seeing more reporting on environmental, social and governance (ESG) strategy and risks, and sustainability and integrated reporting. Having gained influence and traction in a number of countries, non-financial reporting such as ESG and Integrated Reporting is gaining greater prominence in New Zealand.
NZX is asking for feedback in its corporate governance reporting review about introducing ESG reporting for listed companies (main board). The New Zealand Corporate Governance Forum (a group of institutional investors) launched guidelines in July 2015 that say boards of listed companies should do an integrated report.
Tips for directors:
Discuss corporate transparency and what it means for your business
What are the risks and opportunities?
What do your investors and consumers need and want to know?
Look at international, industry and competitor developments and trends in reporting
3. Leading in a digital world
Opportunities and risks abound – we live in a digital world where technology, cyber space and the Internet of Things bring great opportunities and great risks. Technological change and innovation are transforming businesses and industries – both in the customer experience and the way organisations deliver their products and services; think taxis, Uber and a future with driverless cars.
Major and disruptive changes are expected by nearly half of surveyed directors. Businesses may be on top of New Zealand today and either top of the world or tumbling in five years’ time. Boards need to focus on strategic risks, asking what could disrupt their core strategy and objectives. Taking this view opens up new opportunities and risk.
Most organisations use or rely on technology to operate and cyber risk is a reality of doing business today. Boards need to approach cybersecurity as an enterprise-wide issue – not just an IT issue. It is concerning that only 27% of boards are regularly discussing cyber risk and are confident about their capacity to respond to a cyber-attack or incident. This needs to change - the board’s role in technology governance is about leadership in a fundamentally different era and understanding a new landscape of opportunities and risks.
Tips for directors:
Think about business and technology in an integrated context – in terms of strategy, opportunities and risks
Ensure you have the right board and management skills and experience for current and future needs
Put cyber security on the agenda before it becomes the agenda
Ensure the board has the skills and experience to ask management the right questions to ensure confidence in the organisation’s cyber resilience.
Use the framework in the IoD’s Cyber-Risk Practice Guide to help monitor cyber risk and develop strategies for seeking assurance and overseeing management.
4. Talent and people
The Maori response to ‘what is the most important thing?’ is: He tangata. He tangata. He tangata. It is people. It is people. It is people.
It’s not surprising then that directors identified people, labour quality and capability as the most prevalent single biggest risk to their organisation in both the 2014 and 2015 Director Sentiment Surveys. Boardroom discussions about people, culture and behaviour are focusing on not just what we do but how we do it. Attracting, retaining and developing talent – the best and the right people – and ensuring strong cultural fit drive high productivity and performance.
The intergenerational workplace includes a range of expectations and needs. Adding to this, expectations of career development, job progression and culture are changing across generations.
The board’s role in strategic talent management is to ensure the organisation does the right things for its people now and for long-term future success.
Tips for directors:
Consider development needs and expectations of the intergeneration workforce
Ensure you understand what will attract the next generation of work-ready talent to your organisation – be aware of unconscious bias so you can access the widest talent pool
Ensure an effective talent pipeline and prioritise succession planning and strategies.
5. Health and safety leadership - driving a new culture
The Health and Safety at Work Act 2015 comes into effect on 4 April 2016. The Act aims to improve New Zealand’s workplace health and safety by creating a proactive partnership between employers and workers.
The board’s role is to lead and foster an effective health and safety culture. Directors need to understand the health and safety risks in the organisation they govern – this is a fundamental part of risk management and should be no different to managing other risks, such as financial or business risks.
Sixty per cent of directors in the 2015 Director Sentiment Survey said their boards were ready for the new Act which is a step up from 51% in 2014 and shows health and safety leadership is gaining traction in the boardroom – we expect this trend to continue.
The main duty of care for the health and safety of workers still lies with the company. A director’s duty is to exercise due diligence to ensure that the company meets its health and safety obligations. The Good Governance Practices Guidelines are being updated to reflect the new Act. They set out what health and safety leadership means and provide a framework for directors to exercise due diligence.
Tips for directors:
Prioritise health and safety leadership, including worker engagement and building an effective safety culture in the workplace
Be proactive, actively engaged, informed and responsive about health and safety risks, trends, audits and investigations.
Check out the health and safety governance resources at www.iod.org.nz.
Simon Arcus is the chief executive of the Institute of Directors.
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