During times of crisis or uncertainty, directors have an integral role to play in ensuring that the organisations they lead effectively implement governance and risk models that can react to changing environments.
Boards can and should help to build an organisation better able to absorb the shocks from operational risks and balance sheet blows that arise from events like pandemics, natural disasters, regulatory change, cyber incidents, technology failures and changing community expectations.
If the current COVID-19 pandemic has taught corporate Australia anything, it is the limited value of ‘prediction’. Few could have foreseen this time last year that our economy would shrink by an extraordinary 7 per cent in the three months to June 2020 — the biggest collapse since the Bureau of Statistics began compiling records. Nor could many have predicted that, in order to save our economy from a worse result, the Federal Government would ‘leave ideology at the door’ and introduce an unprecedented level of government support — more than $100 billion in JobKeeper and expanded JobSeeker payments alone, enough to actually lift some household incomes even while some 643,000 Australians lost their jobs.
It is hard, however, to plan for adversity while you are being confronted by it. Disturbingly, Governance Institute of Australia's 2020 Risk Management Survey reveals that almost 40 per cent of businesses are not regularly testing their risk and crisis plans. More worryingly, just 11 per cent are regularly running scenarios around risk events to test how the organisation and employees will respond.
But organisations with a focused governance model — particularly those that have effectively planned for crisis events — will be more likely to recover successfully, prosper across business cycles and build resilient growth. They will also be in a better position to capitalise on the inevitable opportunities that emerge from a changing business environment.
What should boards consider when designing a resilient governance model for the organisations they lead?
1. Scenario planning is key
In challenging times, boards can add real value by having already supported processes for testing entrenched beliefs and approaches. Scenario planning sessions can be used to argue for contrary positions.
Boards need to contemplate scenarios that explore changed circumstances and build proactive risk models that are both aggressive and defensive. Some scenarios may be more obvious than others, for example supply chain disruption, changed customer behaviours or impending regulatory change. Others may be less apparent, like infrastructure failure, allegations of inappropriate behaviour within an organisation or a foray into a different line of business. Market downturns, for example, can present good buying opportunities for organisations that have prepared themselves to take advantage of such opportunities. Putting M&A processes and teams together and advance planning increases the opportunity to take advantage of the changed environment.
2. Embrace the digital age
It is trite to say that organisations are struggling to manage technological change, be it a result of the shift to remote work, the adoption of business technologies or adapting to the likelihood that digital channels will serve a larger share of customers.
While they do offer opportunities, technology and related disruptions pose significant risks to growth. Weak consumer demand remains the most common risk to growth for many businesses, but business-model disruptions and fast-paced technological changes are significant risks that have been amplified by the COVID-19 pandemic. Similarly, effective cyber-security defences and responses to evolving cyber-security threats are critical to protecting an organisation’s business continuity, reputation and ability to grow.
Many boards lack confidence in understanding, much less embracing, technological change. Forward-looking organisations should use change scenarios to reassess their investment in people and systems, and consider appointing external advisers who are able to bring a digital perspective to governance models.
3. Take into account multiple stakeholder interests
COVID-19 has been another shock to what is a deeply disrupted business environment, with a widening disconnect between organisational and community expectations.
The role of a director involves weighing complex matters and decisions to safeguard both the short-term and long-term interests of an organisation. Those long-term interests extend beyond profit and shareholder return in any given year to consider the impact of organisational decision-making on employees, clients, suppliers and the broader community. As former Royal Commissioner Kenneth Hayne AC QC commented, ‘the longer the period of reference, the more the interests of all affected by a company’s actions will converge in pursuit of the long-term financial advantage of the enterprise.’
Boards should seek to foster stronger relationships with communities, regulators, customers, owners and other groups of external stakeholders to help organisations understand and meet their needs.
Boards have a key role to play in bridging the gap between their internal positions and external perceptions.
4. React swiftly to policy change and regulatory intervention
The traditional categories of damage to brand or reputation have been expanded by trends in human capital and people risks, whistleblower protection and exposure to modern slavery and anti-bribery and corruption risks. Increasingly, however, organisations are observing the impact of policy change and regulatory intervention on their businesses. Politicians run on platforms promising to decrease regulatory requirements, yet still impose new and poorly thought-through legislative responses to the crisis of the day.
Boards have a key role to play in bridging the gap between their internal positions and external perceptions. The banking royal commission is a powerful example of how many organisations took positions that seemed credible internally but were incredulous to outside observers and regulators. Even organisations that pride themselves on strong innovation and risk management cultures routinely ignore the impact of policy change and regulatory intervention until it’s too late to do anything other than react to the changed groundswell of a ‘set’ political environment.
Often, there is a disconnect that undermines efforts to engage productively with government and regulators. Too few organisations ask themselves why they are not succeeding in influencing regulatory decisions. This circumstance aligns with the well-known cognitive bias of excessive optimism. Boards can usefully assist management by putting themselves into the shoes of policy makers.
Further, because the typical career track of successful executives in many industries doesn’t involve exposure to government issues, those executives are often personally ill-prepared for shifting political winds that boost the importance of regulatory issues. Boards are uniquely placed to protect against under-investment in regulatory relations and to provide oversight.
Properly implemented, good governance models can and should help organisations manage an environment where radical change is an everyday fact — in ways that are sustainable and serve as a source of competitive advantage.