The year ahead: Top five issues for company directors in 2017
It's been a year of disruption and uncertainty because of startling geopolitical turmoil, with the Brexit vote in the UK and Trump election in the US. Both events showed a backlash against social trends, with growing anti-establishment and anti-globalisation movements.
The implications for New Zealand are still being considered alongside reverberations from major earthquakes.
Governance is about planning for the future. The following following give issues that should be top of mind for boards in 2017.
1. Digital leadership
Develop board capability to enable success
The digital age is transforming business and consumer experiences – think Uber, Airbnb, drone deliveries, Apple Pay and driverless cars. Although change in itself is not new, what’s different now is the exponential speed of change. Blockchain, Fintech innovations, mobile apps, the Internet of Things, Big Data and the rise of Artificial Intelligence pose great opportunities and risks.
Nearly half (47%) of directors expect to be impacted by major or disruptive change but only 35% of boards have the right capability (skills and experience) to lead their organisation’s digital future, according to our 2016 Director Sentiment Survey. Also less than a third (32%) of boards are regularly discussing cyber-risk and are confident about their capacity to respond to a cyber-attack or incident.
It’s important that boards develop a digital capability to stay on top of risks and opportunities and hold management to account. The diversity of skills, experience and thinking around the board table needs to include technology knowhow so that there can be robust discussion and challenge to enable the board to add value. Directors don’t need to be digital experts but they do need to develop digital literacy to suit their business needs.
Tips for directors:
- Ensure the board has the right digital skills and experience for current and future needs and so that it can hold management to account on implementing digital strategies.
- Think about business and technology in an integrated context – in terms of strategy, opportunities and risks.
- Prioritise building cyber resilience.
2. Labour capability and the future of work
Think about disruption and future skills needs
Labour quality and capability was identified in the Director Sentiment Survey for the third year running as the top risk for businesses and a major impediment to economic performance. Challenges include labour shortages and changing skills needs.
We are in the Fourth Industrial Revolution as technology fundamentally changes how we live, work and relate to one another. Advances in computing technologies, nanotechnology, connectedness, digital innovation, 3D printing, data analytics and artificial intelligence can result in radical and fast system-wide change.
The challenge for boards is ensuring they have the right skills and people for future success and business sustainability. Boards across society and business need to think about technological and business disruption and the human resource implications for their organisations, and be proactive about adapting to the future.
Tips for directors:
- Prioritise strategic discussions about disruption, innovation and future workforce and skills needs.
- Ensure that the organisational approach to learning and development is aligned to strategic objectives.
- Lead and monitor organisational culture to retain and grow employee talent.
3. Risk intelligence
Integrate risk, strategy and sustainability
Greater business complexity, technology, disruption and uncertainty mean boards are spending increasingly more time on compliance and risk; it can inundate the board agenda.
In 2016, the survey said 80% of directors were spending more time on compliance and 74% said they were spending more time on risk oversight than they were a year ago. However, only half of boards prioritised strategic discussions at every board meeting.
Risk intelligence means thinking holistically about uncertainty – integrating risk, strategy and sustainability. The board needs to determine its appetite for risk and its appetite for innovation and for failure along the journey of value creation. In an increasingly complex and fast-paced world some boards may need to rebalance the amount of time they spend on performance and conformance to ensure they don’t get swamped in risk and compliance.
We are also seeing increasing demand from stakeholders, including consumers and institutional investors, for businesses to give greater consideration to environmental, social and corporate governance (ESG) issues and risks. Global trends in driving the ESG agenda forward are also gaining greater traction in New Zealand. For example, the new NZX Corporate Governance Code due out in 2017 is expected to include commentary about ESG.
Tips for directors:
- Assess the time spent on compliance and risk management compared to performance and strategy – rebalance if needed.
- Ensure board committees are structured effectively to support risk oversight and strategic objectives.
- Integrate risk intelligence into strategic discussions and assess what ESG issues are important to your business.
4. Ethical business and culture
Address conduct risk
Ethical business and a healthy corporate culture are critical to long-term business success. Conduct risk, including fraud, corruption, bribery and unethical behaviours can cause substantial financial and reputational damage.
Corporate governance failures and scandals around the world, including those of Volkswagen and Wells Fargo, have shone the spotlight on corporate culture and conduct risk. Business impacts can be devastating. For example, the emissions scandal at Volkswagen is expected to cost more than $US18 billion.
Boards have a key leadership role to foster high ethical standards and "set the tone"’ for a healthy organisational culture. It means leading from the top as well as supporting management and holding them to account on achieving and maintaining a healthy culture and ethical practices. However, only 37% of boards receive comprehensive reporting from management about ethical matters and conduct incidents and the actions taken to address them.
Culture and conduct is also a key strategic priority for the Financial Markets Authority (FMA). A new guide sets out the FMA’s view on conduct and how it will examine what financial services providers do and how they do it.
Tips for directors:
- Be clear about purpose, values and the behaviours required to achieve strategic goals and business sustainability.
- Lead from the top – inspire, promote and embody organisational values and expected behaviours.
- Ensure management are reporting comprehensively and regularly to the board on ethical matters and conducts risks.
5. Executive pay and income disparity
Expect more scrutiny and transparency
Executive pay increasingly features in the headlines here and overseas. A report by the UK Financial Reporting Council (FRC) in July said that continuing inconsistent alignment between executive remuneration and company performance, and between the remuneration of senior executives and employees was undermining public trust and confidence in corporates. The UK parliamentary inquiry into corporate governance is looking at executive pay and what the government should do to influence or control executive pay.
The US Economic Policy Institute reported in 2015 that top CEOs make 300 times more than typical workers (compared to 20-to-1 in 1965). An Australian commentator has called for public companies to disclose how much CEOs make each year compared with how much their average employee makes (similar to the pay ratio disclosure requirements in the UK and those soon to be in force in the US).
In South Africa, King IV increased disclosure requirements around remuneration and ensuring executive remuneration is fair and responsible in terms of overall employee remuneration (to close the pay gap) and takes into account performance of economic, social and environmental matters (and not financial performance only).
If New Zealand follows international trends we can expect greater scrutiny and debate about executive pay and income disparities. The upcoming NZX Corporate Governance Code says remuneration should be ‘transparent, fair and reasonable’ and recommends publishing a remuneration policy in relation to directors and senior executives.
Tips for directors:
- Ensure the board understands the relationship between executive and worker remuneration and that it fits the organisation’s business needs and strategic objectives.
- Be proactive in disclosing remuneration policies to aid transparency and trust.
- Monitor global, national and industry trends to stay ahead of the game.
Felicity Caird is manager of the Governance Leadership Centre at the Institute of Directors