As society continues to evolve towards a post-pandemic world and the economy adjusts to the new normal, organizations are presented with the opportunity to set the tone for how they adapt their operations and positively impact society. The current situation allows boards an expanded role in steering their organizations along this journey.
EY’s Global Board Risk Survey reveals that only 43% of board members in the Asia-Pacific considered their organization as “more than somewhat effective” in managing emerging risks, compared to 58% for traditional risks. Based on the survey, there are three pressing issues that boards should prioritize, reflecting the unique blend of challenges and opportunities in these uncertain times. These involve building trust in the face of digital disruption; managing capital allocation through business transformation scenarios; and addressing enterprise risk resulting from climate change.
BALANCING DIGITAL TRANSFORMATION, RISK AND TRUST
Organizations have been forced to rely almost completely on digital infrastructure to communicate, function, and be competitive. Looking ahead after the crisis passes, companies will need to consider becoming fully and truly digital. As digital adoption deepens, more businesses are investigating new ways to embed emerging technologies across their ecosystem while navigating increasing vulnerability to cyber-attacks.
Boards will need to regularly discuss data and digital issues such as data privacy, ethical and disinformation risk, and cybersecurity in board meetings. There is a need to ensure that they have the expertise to oversee these risks by way of a standalone sub-committee or subject matter experts. The stakes are especially high because should systems fail, customers, regulators and shareholders will hold executives and boards accountable for the resulting reputational and financial costs.
Furthermore, boards are expected to support their executives in building digital trust across emerging technologies such as intelligent automation, blockchain and artificial intelligence. Boards must understand what these emerging technologies mean for their organizations, what risks they bring, and the role of their Audit Committees in managing those risks.
PLANNING FOR MORE VARIED BUSINESS TRANSFORMATION SCENARIOS
When the EY Global Capital Confidence Barometer (CCB) was published in March, 55% of organizations in the Asia-Pacific were expecting a U-shaped recovery extending well into 2021. This resulted in organizations exercising more caution by renegotiating contracts, revisiting financial plans, and monitoring how direct cost increases affect their margins. However, many also planned to take advantage of a rise in distressed assets coming to market and lower valuations to either build resilience or support their digital transformation agenda. In addition, the CCB found that 52% of respondents from the Asia-Pacific expressed the intention to pursue mergers and acquisitions (M&A) within the next 12 months.
These reactions establish the necessity within organizations to balance the need to be cautious against seizing opportunities for sustainable growth through targeted acquisitions. Boards can reinforce this by influencing management to protect the organization’s assets while also taking calculated risks that offer the best chances of seizing a competitive advantage.
Divestments are another attractive option to fund much-needed investment in technology, as presented in a recent EY divestment study, in which 56% of Asia-Pacific companies responded that they are more likely to divest for this purpose compared to the 31% that articulated the same intention before the pandemic.
Boards need to discuss strategy on an ongoing basis as well as utilize scenario planning for a much wider range of possibilities. Employing this tool ensures that the models created remain relevant and updated, consequently placing the organization in a better position to quickly predict and adapt to a post-crisis future.
Boards must also plan for different economic outcomes and scenarios within a range of time frames. It is also vital to determine if they have a framework in place to assess their performance and progress. They need to question how frequently they oversee and challenge how their organizations allocate resources and capital, making sure they protect their assets, optimize operations and consider long-term growth strategies.
DRIVING TO COMBAT CLIMATE CHANGE
In the 2019 EY CEO Imperative survey, 40% of CEOs in the Asia-Pacific cited climate change as a top global challenge, while investors globally ranked climate change as the joint priority issue along with national or corporate security. However, what is more significant than the ranking itself is the investors’ expectation that CEOs respond to this appropriately. According to the 2020 EY Global Institutional Investor survey, investors are more rigorously evaluating environmental, social and governance (ESG) disclosures while factoring in disclosures made as part of the Task Force on Climate-related Financial Disclosures (TCFD) framework.
The COVID-19 crisis spurred this on by exposing unsustainable business practices. The pandemic revealed that climate action is vital to becoming a responsible, resilient organization that prioritizes long-term impact over short-term gain. Many of our ASEAN neighbors and Japan and South Korea have announced plans to stimulate low-carbon industries in their respective nations through their economic recovery.
Board members are in a prime position to advocate for their organizations to reduce their carbon footprint. This can be achieved by encouraging management to analyze the risks and opportunities resulting from climate change and transition to a decarbonized future. Boards can help management identify effective, non-financial KPIs that quantify progress when setting and acting upon climate targets. It will be imperative to understand the role the organization plays in transitioning to a green recovery, as well as to more comprehensively communicate these through TCFD reporting.
In addition, boards need to assess if they themselves have the skills, structures and processes to guide management teams in addressing climate change. The sooner management understands climate risks and opportunities, the better the organization can take actionable steps to transform the business to suit a low-carbon economy and create a competitive advantage.
CHARTING A COURSE FOR THE FUTURE
Decisions that leaders make are crucial as they set the course for the future. Such decisions give organizations the ability to adapt to that envisioned future through a well-crafted plan. Focusing on these priorities allows business leaders to navigate around uncertainty and to harness business transformation opportunities that will lead their organizations to a path of stronger resilience and greater competitive advantage. At this time of great uncertainty, the moment is for boards to seize.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.
Maria Vivian C. Ruiz is the Vice Chair and Deputy Managing Partner of SGV & Co.