Top five issues for boards in 2017

Governance is about planning for the future. Felicity Caird, manager of the Governance Leadership Centre, looks at some of the key and emerging 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 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 know-how 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.

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. Advancements 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.

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.

The 2016 Director Sentiment Survey shows that 80% of directors were spending more time on compliance and 74% are 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.

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 US$18 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 are also key strategic priorities 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.

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 current 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 increases 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 that remuneration should be ‘transparent, fair and reasonable’ and recommends publishing a remuneration policy in relation to directors and senior executives.

Published in Boardroom Dec Jan 2017 issue