How Boards Can Help in Turbulent Times
Emerging technologies and business-model disruption are shaping company governance in several ways.
Public company directors have three issues top of mind: changing global economic conditions, cybersecurity and competition for talent.
These issues should also be on the agendas of private company boards, stresses Deborah DeHaas, vice chairman and national managing partner, Center for Board Effectiveness, Deloitte LLP.
As innovation and technological advances lead to disruption in more and more industries, the role of the board is critical when it comes to “helping companies navigate their way through what oftentimes are very [turbulent] waters,” she says.
“The No. 1 trend that public companies talked about as having [had] the biggest impact in the last 12 months is significant industry change. That was followed closely by business model disruption,” says DeHaas, citing a 2017-2018 National Association of Corporate Directors public company governance survey. “I think both of those are very much related. Every industry and every business is absolutely being impacted and disrupted by technology.”
Executives at many companies recognize that in addition to their core area of operation, today they are also in the technology business.
“There’s a unique opportunity for the board to be a really important part of that conversation, asking the right questions to make sure that the right strategy is really in place to deal with all those issues,” DeHaas says.
Today’s geopolitical situation is also causing uncertainty, DeHaas notes. “Some of my clients are really struggling with [ascertaining] the implications of shifting trade sanctions and other things that are potentially disrupting their supply chain.”
A Deloitte report, “Global Perspectives for Private Companies: Plans, Priorities and Expectations,” found that two-thirds of the 1,900 private company executives surveyed expect their revenues to rise in the year ahead. “The majority of respondents expected that revenues, profits, productivity and capital investments would increase in the year ahead, and 45% expected to hire more full-time employees,” DeHaas says.
Despite those positive findings, she notes, “53% of the respondents to that survey said they perceive a greater level of uncertainty around their future business prospects.”
So while private company executives are optimistic about the short term, they remain uncertain about the implications of emerging technologies and potential business model disruption.
When it comes to emerging risk, and opportunity, DeHaas cites three important areas that boards should address in today’s business climate.
Industry trends and business model disruption. “This is where I think a board can play a really important role,” she says. “One of the most important things the board can do is ask the right questions.”
Directors’ questions should prod management to assess whether they have an adequate understanding of the business climate and whether they’re taking the right steps to help the company to thrive amid very rapid change.
DeHaas offers examples of such questions:
• How are we responding to new technologies or business models affecting our industry?
• Are we keeping up with the pace of change?
• How are competitors responding?
• What new initiatives are happening inside the company, and which ones have the potential to scale into new areas?
She recommends “zooming out” to imagine where the company could be in 10 to 20 years, as well as “zooming in” to determine the two or three things you must focus on in the next six to 12 months to ensure your company is on the path to that future.
“This is a delicate balance for boards, but I think boards need to inspire the management team to be bold, to be courageous about taking risk” DeHaas says. Boards must also be cognizant of the risks that must be managed because they could potentially “take down the enterprise.”
Three issues your board should address
1. Emerging trends and business-model disruption. The board must ask the right questions to determine if management is taking the right steps to ensure the company’s survival amid very rapid change.
2. Talent disruption — the future of work and the work of the future. Compensation committees are expanding their charter to include diversity and inclusion, and to focus more broadly on HR beyond the executive suite.
3. Extended enterprise risk management. As more companies rely on outsourcing to execute their business strategy, the board must consider the risk posed by third-party vendors and the extended supply chain, particularly in the area of cybersecurity.
New ways of working, and the continuing war for talent. This could be called “the future of work” or “the work of the future.”
Compensation committees are beginning to expand their charter beyond the executive suite to address talent issues more broadly, particularly in the area of diversity and inclusion, DeHaas says.
Deloitte’s human capital practice has identified seven disrupters that are likely to affect competition for talent in the future: (1) the ubiquity of smartphones; (2) a tsunami of data, which leaves people “drowning in data and starving for insights”; (3) emerging technologies that will change how work gets done, such as artificial intelligence and cognitive computing; (4) more workers being displaced by automation; (5) increased entry of younger generations into the workforce; (6) the changing nature of work and careers; and (7) the explosion of the gig economy and the move from a full-time staff to an open talent model.
DeHaas suggests some questions for boards to consider regarding the future of work:
• Who’s going to make up your workforce?
• How do you source them?
• What’s the actual work that they will be doing, and will how some of these disrupters, like automation, play a role?
• Where is the work physically going to get done?
There are other questions, as well, she notes. “What’s your future digital and automation strategy? Because digital transformation is going to dramatically shift the way work gets done. How does the future of work change your organization design and behavior? How does the future of work change how you think about leadership and how you grow leaders? And then, last, how does the future of work change talent overall, careers and ongoing learning and development? You’re going to want to have agile learners in your organization who are constantly reinventing themselves, because most of the jobs of the future are not going to be jobs that exist today.”
Third-party risk and cybersecurity. The third emerging trend that boards should be aware of is “something that we’re calling extended enterprise risk management,” DeHaas says. In contrast to the typical vendor/customer relationships of 20 years ago, companies today rely extensively on third-party relationships to execute their business strategy. Having key operations performed by third parties poses risk to an organization.
In early May, for example, Ford Motor Co. had to shut down production of its best-selling F-150 model and temporarily lay off workers after a fire struck one of its suppliers and cut off the supply of an essential part.
Because the supply chain has become an extension of the enterprise, boards need to think about enterprise risk in a more holistic way, DeHaas says. One of the biggest risks posed by the extended supply chain is cybersecurity, she warns.
As the rapid pace of change to the business climate continues, establishing the right governance structures will position private companies for success, DeHaas says.
“The nice thing is that, as part of private organizations, you have more choice around how you structure those governance processes to make you most effective,” she says.