The top five issues for directors in 2021

Kia kaha, kia māia, kia manawanui.
Be strong, be brave, be steadfast.

There really has been no better place to be in 2020 than in Aotearoa New Zealand. Although it has been a tumultuous and difficult year there have been many things to be proud of – not least how our nation joined forces to combat the coronavirus pandemic.

Dealing with and recovering from the global pandemic is paramount but we cannot take our eyes off the growing climate crisis. As kaitiaki and stewards of your organisations, board leadership and adaptability are now more critical than ever to create and innovate for a sustainable future.

The top five issues for 2021 are:

1. Revival: rethink and redesign
2. Climate urgency
3. Adaptive boards
4. Prioritising people
5. Cyber resilience

1. Revival: rethink and redesign

COVID-19 has been the ultimate disruptor but also the catalyst to rethink and redesign our future and build back better and more sustainably.

2020 has been a rollercoaster – global uncertainty, economic challenges, innovation and opportunity. It has also put a spotlight on the rise of societal and environmental challenges. As economies restart, the World Economic Forum is encouraging the embedding of greater societal equality and sustainability into the recovery to build back better (COVID-19 Risks Outlook, A Preliminary Mapping and its Implications).

Koi Tū’s New Zealand’s Economic Future: COVID-19 as a Catalyst for Innovation sets out three goals:

• To grow the economy, diversify the economic base, and increase productivity while recognising the expectation of greater resilience, sustainability, and social justice.
• To expand the weightless (intangible/digital products and services) economy.
• To promote technology adoption and reduce the environmental footprint of the primary sector.

In 2020 boards were focused on protecting the health of their people as well as the health of their organisations. Many had to navigate periods of financial stress. In our 2020 Director Sentiment Survey, 29% of directors said their boards had solvency concerns at some point since the first national lockdown. But for some there was a silver lining, as although the majority (60%) of directors said their organisations were adversely affected by COVID-19, one in five directors reported it had a positive impact on the performance of their organisation.

New Zealand’s reputation has never been stronger on the global stage. Our unified approach and success in combatting the pandemic is envied by many. Strong leadership with a collective call to action to unite against COVID-19, and to be kind, resonated with the nation. Our strong national brand provides a competitive advantage now to many sectors and industries in a world still battling the pandemic. The returning Kiwi diaspora also brings international talent and huge potential as New Zealanders return home and others defer leaving.

KPMG’s Reset: A Thought-Starter for the Future of New Zealand After COVID-19 highlights the opportunity to shift from telling the world to visit us as tourists to telling the world to move their high-tech businesses, talented people and capital to New Zealand.

The Productivity Commission’s report New Zealand Boards and Frontier Firms provides insights on how boards can help “lift the eyes” of firms to drive innovation and success, including on a global stage. It confirms that high performing boards have the right diversity of thinking, skills and experience. Other key insights include:

• matching board composition to a company’s life stage and strategy
• using internationally-experienced directors to help firms avoid common missteps when expanding overseas
• emphasising how directors with the appetite for calculated risk-taking can spur growth and innovation
• promoting the importance of long-term investment horizons and tolerance of failure.

As Silvana Schenone (partner at MinterEllisonRuddWatts) succinctly states in the Oct/ Nov issue of Boardroom: “Now is the time to be bold, take calculated risks, reset strategy if it’s no longer fit for purpose and act at pace.”

Understanding the business is a key step in reinventing the future and in a rapidly changing and complex operating environment this may need turbo charging in some boardrooms. Boards need to ensure they’re getting the right information from management to dig into areas that may not have previously received sufficient attention. For example exploring the organisation’s intangible assets, which are more often than not underrepresented on the balance sheet. Data, brand, design rights, computer code and business knowledge can all provide strategic opportunities to innovate and grow.

2. Climate urgency

Go beyond compliance on climate reporting and proactively consider climate-related risks as part of your strategic thinking and opportunities.

Responding to the coronavirus crisis was the all-consuming task of 2020. But climate change and its effects were also with us – including mega fires and extreme weather events. While unsurprising, it is still worrying as we see the effects of climate change getting worse at speed.

Urgent action is needed to protect our species, and others, from serious harm and possible extinction. Sir David Attenborough’s 2020 witness statement states that the next few decades represent our final opportunity to ensure our future on the planet.

Individual and collective action is the only way forward. Boards have a critical role to play in taking action on climate-related issues reducing the environmental impact of their organisations – and in turn building a sustainable future for them.

Significant developments in relation to corporate climate-risk include a legal opinion on director duties and the September announcement that mandatory reporting on climate-related financial risks will be introduced. While these developments won’t affect all organisations and sectors initially, it is likely that they will expand in future years.

The Aotearoa Circle Sustainable Finance Forum’s (SFF) legal opinion in 2019 determined that directors’ fiduciary duties of due care and diligence require them to consider climate-related financial risks when making decisions and factor them into risk management and strategy. Globally, court rulings on climate change considerations are on the rise, for example the English Court of Appeal quashed plans for a third runway at Heathrow Airport in February 2020 (this is now under appeal in the UK Supreme Court).

In September 2020 the government announced that climate-related financial disclosures will become mandatory – on a “comply or explain” basis – for publicly listed companies and large insurers, banks and investment managers (around 200 entities). New Zealand is the first country to introduce mandatory reporting of this type, although others are following suit with the UK announcing a similar move in November 2020.

The new reporting regime will be based on standards issued by New Zealand’s External Reporting Board (XRB) developed in line with the global Task Force on Climate-related Financial Disclosures (TCFD) framework. The Ministry for the Environment is developing guidance on technical aspects such as scenario planning. Reporting is expected to be required in 2023. This is a short timeframe and means getting ready now.

In the 2020 Director Sentiment Survey 13% of directors (42% for publicly-listed companies) said their organisation had included disclosures on climate-related risks and/or the impact of climate change on their organisation in their latest annual report. Current reporting is under a range of frameworks and there is a wide spectrum of maturity in terms of thinking, analysis and reporting. As a new regime is introduced it’s critical that reporting is relevant and meaningful and doesn’t just become a compliance, tick-box exercise.

Developing standards is a significant opportunity for the XRB and New Zealand to lead and influence sustainability reporting and promote consistent and comparable reporting. The IFRS Foundation is also consulting (until 31 December 2020) on whether an international Sustainable Standards Board should be established.

The stakes are rising rapidly for directors. But, there is also on opportunity to create value and gain a competitive edge. This rests on the board driving climate disclosure and transparency, and building the climate competency of their organisations.

Early adopters, such as Meridian, which has now produced two reports using the TCFD framework, expound the value of embedding climate into corporate strategy and long-term thinking. As well as growing public interest in corporate climate transparency, investors are also driving change. In November 2020 Meridian disclosed the beginning of a substantial holding by BlackRock (the world’s largest institutional investor) in Meridian as part of BlackRock’s ESG portfolio. The opportunity for growth and development through access to global capital is a real and present opportunity.

3. Adaptive boards

Courage, innovation and learning in the boardroom will power future-fit boards.

Boards have tremendous impact on the success and wellbeing of New Zealand. Successful boards mean thriving organisations, and a flourishing economy and society. Board leadership is more important now than ever. The board represents the power of the collective by bringing together a range of skills, expertise and diverse perspectives to help drive the success and wellbeing of organisations. Smart, adaptive boards have a key role in driving innovation, growth and a sustainable future for businesses and communities.

Our 2019 paper Always on Duty – the Future Board (developed with MinterEllisonRuddWatts) asked boards to consider how technology and innovative practices could transform their operations and contribute to future effectiveness. Little did we know that within a year COVID-19 would emerge as an ultimate disruptor – including in the boardroom. The way boards met and operated changed dramatically. There was a major shift to conducting virtual board and committee meetings, and in many cases board meetings became more frequent and nimble, meeting as and when needed.

In the 2020 Director Sentiment Survey 83% of directors reported that their board was more flexible/adaptive in the way it operates compared to the previous year. And, 80% of directors said their board will continue to use virtual meeting technology in the future.

It is essential that boards build on the 2020 crisis experience and capture the benefits and value from some of the positive shifts in how they operated.

Taking some time to perform a post-mortem now to reflect and assess what worked well is highly recommended. Especially to capture what could work better and to ensure you have the right practices and protocols in place. For example, some boards may prefer all participants to join via an online meeting platform in preference to having a hybrid model (in-room and some online) which might impact the meeting dynamic. Some boards may find online is best for committee meetings and in-room for some or all full board meetings. It’s a question of thinking through what works best for each board.

Board leadership in a crisis requires courage, high standards of ethical conduct, commitment and continuous learning and development. In the 2020 Director Sentiment Survey 25% of directors said the capability needs of their board had changed due to the impact of COVID-19 on the operating environment. A strategic approach to new appointments and developing existing board members, will enable boards to have the diversity of background, skills, experiences and perspectives to keep up with rapid changes in the operating environment to govern now and for the future.

Questions for boards seeking to enhance effectiveness:

• How could your board and committees meet more effectively now and in the future?
• How can board papers (and other reporting from management) be improved?
• Can board agendas and annual work plans be restructured for effectiveness and efficiency?
• Does the chair (or committee chairs) need extra support?
• Can board members be utilised in different ways, for example, sharing the load and taking the lead on certain agenda items?
• Is there a role for virtual on-boarding of board members including with due diligence and induction?
• How else can technology and innovation help your board work more effectively and efficiently?
• What can your board do to support more effective communications and relationships with stakeholders?
• How can the board be more visible and accessible to staff and stakeholders? For example, are there opportunities to attend significant staff meetings?

4. Prioritising people

Continue to focus on your employees in the short-term and the future.

People have been front and centre in responding to COVID-19. Most organisations have their own story to tell about how their people pulled together in trying times. There are many powerful and positive examples of courageous leadership and collective action.

Boards also stepped up their focus on people in many areas. This is reflected in the 2020 Director Sentiment Survey, which shows that 81% of directors (up from 62% in 2019) discussed workplace mental health and wellbeing issues. The impact on people has been significant. And it won’t simply disappear with the advent of a new year. Boards will be conscious of this in determining strategy and overseeing risk.

Labour quality and capability is a perennial issue for directors. Closed borders and a constrained market has added to the burden and some industries are doing it tough in trying to access critically skilled workers. While the government is under tremendous pressure in relation to immigration settings and border restrictions, organisations can control some elements. For example, boards can ensure priority is given to their people and culture strategy to help retain, motivate and attract workers. Organisations will also be competing to capitalise on new opportunities as a result of the pandemic such as accessing returning Kiwis and remote workers globally.

The rise of the “S” in ESG was a key governance trend in 2020 and is set to continue with the increasing need and expectation for boards to focus more broadly on social issues, including workforce-related matters such as diversity and inclusion, and training and reskilling workers.

The future of work just got real, including the momentous change in attitudes to working from home. This presents significant opportunities to do things differently. The World Economic Forum’s 2020 Future of Jobs highlights the views and expectations of business leaders including in relation to:

• technology adaption
• the impact of automation
• desired skills and skill groups and learning and development.

The government also has workers firmly in its sights with employment and workforce reform on the agenda. Labour’s election manifesto includes:

• increasing sick leave entitlement and the minimum wage
• strengthening and simplifying the Holidays Act
• introducing fair pay agreements
• addressing the exploitation of migrant workers (with a focus on exploring implementation of modern slavery legislation).

There have been recent amendments to the Pay Equity Act and various changes are on the way for whistleblowers. A range of other significant culture and conduct reforms are also in progress, including the Financial Markets (Conduct of Institutions) Amendment Bill, currently before Parliament, and a new “accountability regime” that is being developed for directors and executives of banks and insurers that will cover conduct matters.

5. Cyber resilience

Increasing digital dependency is amplifying cyber vulnerability.

While digital infrastructures allowed many organisations to keep operating under challenging conditions this year, they also posed more cyber risk than ever.

The reliance on online technology and many more people working from home increased the risk of data privacy breaches, fraud and cyber attacks. Cyber resilience means being prepared for a cyber attack, being able to keep a business operating, and able to quickly respond to and recover from an attack. Boards need to:

• manage the risks strategically
• use a recognised cyber security framework
• ensure a strong cyber security culture
• consider how their organisations might work together with their partners and supply chains.

A board’s role in data governance includes big data, analytics, data privacy, the Internet of Things and artificial intelligence. These all provide opportunities but also require cyber resilience to fully capitalise on benefits. Only 35% of directors in our 2020 Director Sentiment Survey said their board had the right capabilities (skills and experience) to lead their organisation’s digital future.

There have been several high profile cyber attacks in New Zealand and Australia this year, including on the NZX, Toll, Lion, and MetService. CERT NZ reported a 42% increase in the number of incident reports during the first six months of 2020, compared to the same period in 2019. Aura Information Security’s Cyber Security Market Research Report 2020 reported that more than half of the businesses they surveyed had been successfully targeted by a ransomware attack in the past year, with one in five businesses saying the attack caused serious disruption to operations. Cyber-attacks are constantly evolving and boards need to remain vigilant.

Boards can expect to see a greater focus on cyber security in 2021. In New Zealand some regulatory authorities are making it clear that boards need to take responsibility for overseeing their organisation’s cyber security. In October, the Reserve Bank released its draft guidance on what regulated entities should consider when managing cyber resilience, stating that the board was ultimately responsible for the cyber-resilience of the organisation. The FMA’s report (July 2019) on Cyber Resilience in FMA-regulated Financial Services also notes that an organisation’s governance arrangements must include board and/or senior management ownership and visibility of the cyber-resilience framework.

Recently the Australian Securities and Investment Commission took action against a company for contravening its obligations as a financial services licensee by failing to have adequate cyber security measures in place. This raises the possibility that similar action could be taken in New Zealand.

Most boards should already have appropriate policies and processes in place to comply with the new Privacy Act 2020. As the new Act introduces mandatory notification of privacy breaches we expect to see a significant increase in reporting in the coming months. Australia had a 712% increase in notifications in the first 12 months after mandatory reporting was introduced.

The article is featured in the December/January 2021 issue of Boardroom magazine