Being Attuned to Forces of Change Is Vital For Corporate Performance

We are living through a period of immense upheaval—economic, geopolitical, technological, societal, and environmental—which makes it harder for companies to succeed with the business models that served them well in the past. Indeed, over the past five years, the profits of the top 700 multinational companies have fallen by around 25 percent.

The annual Global Risks Report, prepared by the World Economic Forum with the support of Marsh & McLennan Companies and other partners, and launched in the run up to the annual World Economic Forum meeting in Davos, Switzerland, explores the key forces shaping uncertainty, volatility, and disruption in the world today. Some key takeaways are set out below.

Three Global Risks Stand Out

First, 2019 is unlikely to see any
let-up in
political friction—neither on the
domestic front in many countries, nor on the global stage. Almost all the global risk
experts surveyed for the report reckoned that economic tensions among major
powers and trade relations will deteriorate this year, and levels of gloom
about broader geopolitical discord were only slightly lower. Against a backdrop
of rising societal frustration, many democratic governments are incapacitated
by deadlock or division, while rising levels of pushback are on the radar of
more authoritarian regimes.  

Is this more problematic than twelve months ago? Arguably, confrontational positions are more entrenched and the pressure on government delivery is more acute. Levels of brinkmanship may reach an extraordinary pitch, with the possibility of disastrous missteps. And all this is taking place against a more bearish economic outlook, where a snapping of fragile ties may suddenly drain market confidence.

Second, the evolving cyber threat landscape has become integral to national security agenda. Cyber is the global risk of most concern to US business leaders (a view shared indeed by executives across advanced economies), with the scope for breaches and widespread damage escalating in line with the ever-greater deployment of digital applications across business ecosystems.

The
risk is exacerbated by a clear asymmetry between the capabilities of
state-affiliated hackers and the security arrangements of most individual
companies, which has obliged governments to play a stronger role in supporting
corporate endeavors. This, in turn, has escalated to policy level concerns
about the use of foreign technology in critical infrastructure, exposures
generated through corporate supply chains, and more intrusive foreign state
data requirements on company operations abroad.

Third, the long-term toll from extreme weather and climate change could dwarf all others, if we collectively fail to make the rapid and far-reaching transitions required in the next twelve years to prevent global temperature rises from exceeding the 1.5⁰C target. For the global risk experts surveyed for the report, extreme weather and the failure of climate adaptation and mitigation measures dominated risk concerns on a ten-year horizon, and a suite of national climate assessments have spelled out the consequences for individual countries.

Given the uncertainty surrounding multilateral climate agreements,
business leaders will need to navigate a dual challenge: responding to
increasing pressure from investors, customers, and other constituents (such as
state and municipal authorities) to commit to climate-related goals, all while
developing contingency plans that anticipate greater climate-related challenges.

Cross-Cutting Consequences

First, the undermining of multilateral
arrangements and promotion of nationalist agenda is sapping systemic will and
capacity to resolve cross-border challenges
. Not only is this spawning new risks and permitting
intractable problems to fester—in the near term it is placing companies of all
shapes and sizes at the mercy of political wrangling.

Increasingly
subject to new tariffs, sanctions, investment constraints, legislative and regulatory
requirements, requests for favors, and unwarranted attacks, firms need to be prepared
for the prospect of high performance volatility, shock events, and an erosion
of competitive positioning.

Second, a tightening nexus of political, economic and technological risks is threatening much-needed investment in infrastructure, a form of investment that is so vital for business continuity, economic progress, and societal prosperity. Analysis suggests that the shortfall of expected investment versus global need will amount to $18 trillion by 2040 (a $4 trillion shortfall in the US alone), requiring a 23 percent increase in current annual investment to close it.

The
onslaught from natural catastrophes and the escalation of foreign state-sponsored
cyberattacks is threatening the reliability of assets and systems on which we
all depend. At the same time, economic protectionism and national security
concerns are jeopardizing infrastructure development programs, affecting capital
availability, supplier choices, and construction costs. Better public-private
cooperation is needed both to enhance the resilience of critical infrastructure
and to ensure new projects are attractive for investors.

Third, many of the
structural shifts in the global risk landscape have engendered considerable emotional
strain for individuals and communities
, and the continuous psychological
impact should not be underestimated, both in the workplace and society at large. Looking simply through a business operations lens, a
failure to grapple with these developments may herald productivity issues, accidents,
insider threats, and industrial action among other potential disruptions.

In the rush towards new business models and workflow automation opportunities, firms should reflect hard on how to cultivate the right enabling environment for personnel, in terms of working conditions, career opportunities, and financial security arrangements, even when job security cannot be guaranteed.

Corporate Governance Imperatives

These are challenging times, to say the least, and the board and management teams have no choice but to embrace a world beset by complex uncertainties and strategic emerging threats. Few companies are under the illusion that they can control or inoculate themselves from these macro-level risks, but many have yet to fully appreciate the many ways in which their business might be affected, and to use these insights to arrive at effective and affordable responses.

The 2018 NACD Blue Ribbon Commission report on the governance of disruptive risks clearly articulated the importance of adaptive governance in a world where disruption is continuous. Boards have a vital role in helping set the tone from the top by demanding good intelligence on disruptive risks and establishing the right forum for discussing early warning signals and strategic implications. They should also set expectations of management teams as to how this type of risk thinking should percolate through the entire organization to spur agile, creative solutions that will help business leaders better navigate the challenges of a fast-changing world.

Richard Smith-Bingham leads MMC’s thinking on how
companies and governments can best anticipate and negotiate new challenges in
the macro-level risk landscape. He has been on the Advisory Board of the World
Economic Forum’s Global Risks Report for the past six years.

Fink Letter Says Purpose and Profits Inextricable: He’s Not the First

“Purpose is
not the sole pursuit of profits but the animating force for achieving them.
Profits are in no way inconsistent with purpose—in fact, profits and purpose
are inextricably linked.”

So wrote BlackRock founder, chair, and CEO Laurence D. Fink in his recently released 2019 letter to CEOs of the asset manager’s portfolio companies. And yes, it appeared in bold-face type. The letter, which was published January 17 on the BlackRock website, comes at a time of great uncertainty and at a time when managers, boards, and investors increasingly embrace the theory of stakeholder, not shareholder, primacy. In essence, Fink is calling for boards to oversee the management of business for the long term, and to do so by aligning profits with purpose. Fink specifically wants management and boards to articulate how their purpose informs their strategy, and to explain that linkage to investors.

This is becoming well-trod territory. While the dueling theories of stakeholder versus
shareholder continue to bifurcate some boards and management, there has been a
steady increase in the rise of companies who align purpose and profits. Such companies
as The Container Store, Campbell Soup Co., and PepsiCo—to name but a few—have
taken the stakeholder theory to the very core of their businesses.

Arguing for long-term value creation and the alignment of mission, purpose, and strategy is hardly new. In fact, NACD has been advocating for and tracking the progress of long-term value creation theory for decades, and our Blue Ribbon Commission reports and surveys demonstrate that.

What’s different about Fink’s appeal—in addition to his
outsized influence given the massive sums of other people’s money managed by
the 30-year-old BlackRock—is the context for his latest appeal. The fragility
of the global landscape, Fink writes, makes corporations and governments alike
more susceptible to short-term behavior. Combine that with a growing distrust
of governments and the proclivity of younger generations such as millennials to
hold the companies they work for, buy from, and invest in to a higher purpose,
and what results is rocket fuel for the theory of stakeholder versus
shareholder primacy.

Fink’s 2019 letter builds on the mandate from his 2018 CEO letter for corporate management to construct a strategic framework for long-term value creation that can be articulated by management and the board alike to investors such as BlackRock. “In order to make engagement with shareholders as productive as possible, companies must be able to describe their strategy for long-term growth. I want to reiterate our request, outlined in past letters, that you publicly articulate your company’s strategic framework for long-term value creation and explicitly affirm that it has been reviewed by your board of directors. This demonstrates to investors that your board is engaged with the strategic direction of the company.”

That also echoes the findings and recommendations of the 2015 NACD Blue Ribbon Commission Report on the Board and Long-term Value Creation. And indeed, Fink’s 2018 letter may have had a real impact. Board oversight of long-term strategy is now the top priority in discussions between boards and institutional investors, based on NACD’s most recent survey of public company directors.

As Fink implores in this year’s letter, the world needs
business leadership: “As divisions continue to deepen, companies must
demonstrate their commitment to the countries, regions, and communities where
they operate, particularly on issues central to the world’s future prosperity.”
In order to put its money where its mouth is, BlackRock takes an
engagement-first approach to its investments. Its engagement priorities this
year, according to Fink (and in this order), are: “governance, including your
company’s approach to board diversity; corporate strategy and capital
allocation; compensation that promotes long-termism; environmental risks and
opportunities; and human capital management.”

Also contributing to a focus on environmental, social, and governance (ESG) issues is the growing popularity of Certified B Corporations. B Lab was started in 2007 as the certifying agency for companies “that meet the highest standards of verified, overall social and environmental performance, public transparency, and legal accountability to balance profit and purpose.” B Corp companies now include Danone North America, Patagonia, Gap subsidiary Athleta, and the Unilever-owned Seventh Generation and Ben & Jerry’s.

The B Corp model also reportedly
helped inspire Sen. Elizabeth Warren (D-MA) to propose the Accountable
Capitalism Act that would require companies with revenues over $1 billion to
consider the interests of employees, customers, and their communities alongside
those of investors. Warren earlier this month announced a run for the
Democrats’ 2020 presidential nomination. As one commentator wrote, the stakeholder
versus shareholder primacy debate could soon be aired on prime time.

And let us not forget legal titan Martin Lipton. The founding partner of Wachtell Lipton Rosen & Katz published “The New Paradigm” in 2016, which, at the behest of the World Economic Forum, provided a road map for long-term value creation aimed at companies, asset managers, and investors. One of the paradigm’s precepts for management and boards was to: “Set high standards for the corporation, including with respect to human rights, and the integration of relevant sustainability and environmental, social and governance (‘ESG’) and corporate social responsibility (‘CSR’) matters into strategic and operational planning for the achievement of long-term value.”

While Fink is hardly the first to endorse corporate purpose,
BlackRock’s cadre of 30 or so investment stewards have begun speaking to
companies about how their purpose aligns with culture and corporate strategy. “We
have no intention of telling companies what their purpose should be—that is the
role of your management team and your board of directors,” Fink writes in the
2019 letter. “Rather, we seek to understand how a company’s purpose informs its
strategy and culture to underpin sustainable financial performance.”

Forewarned is forearmed.

Four Reasons to Cast Sunlight On Director Succession Planning

Sometimes, making decisions in secret seems like the easiest
option. You don’t have to deal with other people’s opinions. You have a better
chance of satisfying your own interests. You can move more quickly because you
only have to sell your idea to one or two other people.

But the easiest option isn’t always the best one. Board
leaders that take the backroom-deal approach to succession planning often
suffer the consequences: impulsive appointments that don’t fit the needs of the
organization, missed opportunities to add diversity, disgruntled directors who
weren’t consulted, and board members who aren’t aware they have outlived their
usefulness.

Letting in some sunlight on this process could alleviate many
of these problems. Here are four reasons why board leaders should create a more
transparent, inclusive succession planning process:

1. It fosters a stronger, healthier board culture.

Here’s a scenario I hear all too often. Some directors at a
Fortune 200 company told me the other day they had received an email from the
lead director that announced two new board members (bios attached) would be
joining them at their next board meeting. The directors, who weren’t even aware
a search was underway, were miffed about being left out of the process. “Why
are we hearing about this after the fact?” they asked. “Why wasn’t our input
solicited?”

This secretive, closed-door approach to board succession creates
distrust among fellow directors and feelings of exclusion that erode teamwork
and collegiality. It’s also a missed opportunity; the directors who were
excluded from the process might have been able to suggest better candidates from
their networks or make useful suggestions about the skills new directors should
bring to the table.

2. It creates a higher-performing board.

Markets change. Technologies change. And companies change
along with them, which means they may need directors with different skills than
in the past. The succession planning process gives board members a chance to
imagine their board dream team, then create profiles of candidates who would help
make the dream a reality.

The nominating and governance committee can use the planning
process to assemble a board skills matrix that outlines the abilities,
experience, and attributes of current directors against the company’s current
and future needs. The full board should discuss and debate this matrix to reach
an agreement on what skills are important today and what skills will be crucial
in the future. Then, they have a clear profile for the types of candidates they
are looking for.

When boards plan ahead on succession, they can also build in
considerations like committee chair rotation by mapping out a timeline of when current
board leaders are likely to retire or need to rotate, which gives the board
plenty of time to find suitable successors. By thinking ahead, boards can
arrange to have new directors and committee members shadow the incumbents and
gain valuable insights before assuming their positions.  

3. It tackles the issue no one wants to talk about: board refreshment.

Nearly half of the directors in PwC’s 2018 Annual Corporate Directors Survey think at least one fellow board member should go, but few lead directors feel comfortable initiating retirement conversations. Because boards are composed of peers, they are unaccustomed to giving each other honest feedback. When a director isn’t pulling his or her weight, or their skills have become less relevant, board leaders have a tough time broaching the subject. “What do we say?” they worry. “How do we explain it to them?” So, they end up saying nothing.

Being transparent about succession planning makes having
these difficult conversations easier. While developing the board skills matrix,
everyone on the board can see whether their expertise and experience fits with
the company’s strategy. This provides board leaders with context for having
conversations with directors whose skills don’t match the organization’s future
needs. Those directors are less likely to be surprised when approached about
retirement and less likely to take it personally.

4. It satisfies stakeholders—the right way.

As investors continue to challenge boards on their
composition, those that lack strong succession plans may rush to assemble more
diverse teams only to end up with a hodgepodge of directors who may not work well
together or understand the company’s operations. Advance succession planning gives
boards the opportunity to be strategic versus reactive and take the time to
find candidates who not only tick a diversity box but also bring key skills and
talent.

By building relationships with promising candidates in
advance of an actual vacancy, boards can cast a wider net and recruit talent
with a diverse array of valuable experiences and perspectives that align with
the company’s long-term strategy.

Opening Closed Doors

Boards that don’t have a formal succession planning process often
scramble for replacements and waste opportunities to be more thoughtful and
deliberate about their recruitment process. When lead directors don’t involve the
entire board in this effort, it can create distrust and resentment. For boards
that have historically taken a closed-door, ad-hoc approach to choosing new
members, the shift to transparency and planning can be a major adjustment. But the
long-term gains of having an open process will make the effort worth it.

For further guidance on this topic, see PwC’s The Road to Strategic Board Succession.  

Paula Loop is a partner with PwC and the leader of PwC’s Governance Insights Center, which strives to strengthen the connection between directors, executive teams, and investors by helping them navigate the evolving governance landscape.

Emerging Technologies and Financial Reporting: Key Questions to Ask

Emerging technologies—such as artificial intelligence, robotic process automation, drones, and blockchain—are changing how business gets done. The Center for Audit Quality (CAQ) has developed a tool to help audit committees execute their oversight responsibilities for financial reporting impacted by emerging technologies. Leveraging the work of the Committee of Sponsoring Organizations of the Treadway Commission (COSO), this tool provides a framework for conducting effective oversight of a company’s use of emerging technologies in the financial reporting process.

This framework has five key
components, plus questions within each of the components that audit committees
may ask management and auditors to help inform their oversight. While not a
checklist, these questions should be useful discussion points in audit
committee meetings.

Control
Environment

The control environment is the set
of standards, structures, and processes that provide the foundation for
carrying out internal control across the organization. Audit committees help to
establish the right control environment for the adoption of risk management
practices related to emerging technologies that impact financial reporting.

  1. What
    are the objectives associated with the use of the emerging technology?
  2. How
    does the emerging technology project integrate with management’s existing
    digital and analytics plans?
  3. Does
    use of the emerging technology raise tax, legal, regulatory, or financial
    reporting questions that require external advice?
  4. What
    has the company done to train and maintain its internal resources and
    technological competencies related to emerging technologies?

Risk
Assessment

Audit committees might consider whether management has assessed the risks associated with changes to company processes as a result of emerging technology projects—and whether controls are in place to identify new risks as they arise.

  1. What risks associated with the use of the emerging technology have management considered?
  2. Has management considered the adequacy of the current risk assessment process relative to the risks introduced by the emerging technology?
  3. How has management evaluated the sufficiency of existing policies and procedures related to the safeguarding of assets when implementing the emerging technology?
  4. Has management identified intermediaries or third parties integral to the emerging technology functionality? If so, are current third-party risk management practices sufficient to adequately address the emerging technology?

Control
Activities

Control activities are the specific
actions established to ensure that the risk of failing to meet an objective is
mitigated to an appropriate level.

  1. How
    has management assessed the current control environment to determine whether
    new controls are needed in response to the additional risks introduced by the
    emerging technology?
  2. Are
    controls in place to address the risk that the technology is not operating as
    intended (i.e., to assess the reliability of the outputs from the technology)?
  3. What
    controls are in place to help ensure that those charged with oversight would be
    informed if a cybersecurity breach occurred?
  4. How
    have contingency plans been assessed or updated to help ensure continuity of
    business and management of risks?

Information
and Communication

Audit committees should have
communication protocols for obtaining the information they need to effectively
carry out their responsibilities, which may require the managers of large
technology projects to present their progress on a periodic basis.

  1. How
    will key financial reporting needs be considered to minimize potential
    disruptions when implementing the emerging technology?
  2. How
    will the technology integrate with the current IT systems? Are there any
    integration risks that need to be addressed?
  3. How
    has management evaluated existing IT practices to help ensure they address data
    management and governance for the emerging technology?
  4. Do
    existing communication lines (internal and external) need to be evaluated to
    help ensure continued compliance with financial statement disclosure
    requirements?

Monitoring
Activities

Monitoring represents an ongoing
process to ensure that policies, procedures, and controls are present and
functioning effectively.

  1. What
    monitoring activities have management put in place to validate the operational
    consistency of the emerging technology?
  2. Is
    the frequency of existing monitoring and reporting to the audit committee
    sufficient in light of the pervasiveness of the emerging technology and its
    impact on financial reporting?
  3. What
    monitoring has been established by management to consider the emerging
    technology risks related to recording, processing, summarizing, and reporting
    on financial information—including management’s discussion and analysis—and
    financial statement disclosures?
  4. In
    the event of a failure or deficiency related to management’s obligations, what
    processes and controls are in place to help ensure that appropriate levels of
    management and the audit committee are involved in the review of the related
    disclosures, if applicable?

An understanding of the opportunities and risks that emerging technologies present is essential for audit committees to discharge their oversight responsibilities. I encourage you to consult the full oversight tool, which, like other CAQ resources for audit committees, is available on the CAQ website free of charge.

Cynthia M. Fornelli is a securities lawyer and has served as executive director of the Center for Audit Quality since its establishment in 2007.

Career Partners International Names Bill Kellner New President & COO

Career Partners International (CPI) is pleased to announce the arrival Bill Kellner as new President and COO.  An experienced international business leader, Kellner has held various senior leadership positions in the talent development and human resources industry.

In his new role, Kellner will provide CPI with operational direction and support for Partners across the globe.  Kellner will report to former President & CEO, Douglas Matthews, who has announced his retirement but will continue to serve CPI in an advisory capacity to ensure a seamless leadership transition.  With over 350 locations throughout 50 countries, Kellner looks to solidify CPI’s reputation as the world’s most effective talent development and career transition consultants.

“Bill has proven himself time and time again to be an innovative leader in our industry.  We could not be more excited to welcome him as our new President and COO.  Having previously worked alongside Bill, I am confident he will help our partners continue to deliver exceptional services and grow exponentially,” said Douglas Matthews.

With decades of human resources experience, Kellner is innately aware of the value of CPI’s services.  His strengths in talent management, organizational design, and leadership development make this is a natural fit, sure to enhance the organization’s offerings.

“After meeting with multiple Career Partners International leaders, it became clear that their goals closely aligned with my experience and priorities.  CPI’s dedication to supporting their clients and candidates is truly impactful.  I look forward to continuing this tradition of providing exceptional services,” states Kellner.

The post Career Partners International Names Bill Kellner New President & COO appeared first on CPIWorld.

The Evolving US-China Relationship: What to Pay Attention to In Q1 2019

The year 2018 ended with the
US-China relationship in a precarious position, leaving many onlookers
wondering if this may be another crucial turning point in what’s arguably the
most important bilateral relationship in the global economy—a turning point
that, this time, is taking a hard turn for the worse.

Sixty-seven percent of respondents to the 2018–2019 NACD Public Company Governance Survey were concerned or very concerned that intensifying global trade conflicts would impact their organizations over the next 12 months, and 38 percent of respondents specifically identified increased competition with China as impactful to their organizations.

A survey of US-China Business Council (USCBC) members in 2018 reiterates these concerns: worsening US-China relations ranked as the number one challenge to US companies doing business in China in 2018—up from being ranked as the eighth biggest challenge in 2017. Seventy-three percent of respondents to the USCBC survey also indicated their business with China had been affected by the current US-China trade tensions.

With the future of US-China
relations more uncertain than ever before, here’s what to watch for this
quarter.

Prepare for continued volatility in the short
term as official talks continue.

The Development: Midlevel officials from the United States and China met in Beijing last week to conduct preliminary negotiations on resolving the trade dispute that erupted during 2018 and resulted in $250 billion in tariffs on US imports of Chinese goods and $110 billion in tariffs on Chinese imports of US goods. US President Donald J. Trump and Chinese President Xi Jinping agreed to a 90-day truce in December to stop increasing or initiating new tariffs—and China has since reduced tariffs on US cars and auto parts and recommenced purchases of US soybeans. The first round of talks also resulted in China’s approval for imports of genetically modified crops and a pledge by the Chinese “to purchase a substantial amount of agricultural, energy, manufactured goods, and other products and services,” according to the Office of the US Trade Representative.

A second round of midlevel talks will take place in Washington next week, with a meeting between cabinet-level officials scheduled for January 30. Ahead of these talks, US officials have discussed removing the import tariffs on Chinese goods as a way to advance the trade talks and extract concessions from the Chinese. However, resolving the underlying issues (aside from the trade deficit) that initiated the trade dispute in the first place—Chinese-government-directed acquisitions and investments, forced technology transfers, biased licensing processes, and cyberattacks targeting US networks—may prove difficult, as China collects foreign intellectual property (IP) through these methods to further its own technological supremacy goals. Made in China 2025 (MIC2025) is China’s plan to become the global leader in high-tech manufacturing by developing 10 sectors—including electric cars, agricultural technology, and aerospace engineering, among others—to become 70 percent self-sufficient in these industries by 2025 and completely self-sufficient by 2049 (the 100-year anniversary of the founding of the People’s Republic of China). For MIC2025 to succeed, China relies on copying and building upon Western technology.

Board Considerations: Boards should expect continued volatility in US-China
relations and prepare for tensions to exacerbate further—even if their
businesses aren’t currently affected by the trade dispute. “We’re at an
inflection point [in the US-China relationship],” said USCBC President Craig
Allen. “But like any real inflection point, it’s not safe to say what happens
after that inflection point. We are not wise if we discount the trade conflict
and if we believe it will stay in narrow, tariff-bound lanes. This has the
potential for expanding well beyond that.” The scenario of a prolonged economic
and political “cold war” cannot be ruled out.

Allen provides three possible
scenarios for how a US-China trade truce may shape up by the March 1 deadline,
with all scenarios equally likely:

  1. The Happy Scenario: The United States and China agree to provisions that improve US access to the China market and increase IP protections for US companies—leading the United States to lift the Section 301 tariffs and the Chinese to reciprocate by lifting their own retaliatory tariffs.
  2. The Baseline Scenario: The current arrangement is extended, with the existing tariffs remaining in effect and no agreement being reached by the deadline.
  3. The Unhappy Scenario: President Trump raises tariffs on Chinese goods that are currently at 10 percent to 25 percent, as he has threatened, and begins a process of imposing additional tariffs on the remaining goods imported from China.

Boards should ask management to consider how the company’s value chain can be diversified over the long term to avoid overreliance on a single country. Audit and risk committee members of industries currently unaffected by the tariffs should consider how long-term economic- or security-related tensions between the United States and China could impact future strategy. As the deep-rooted issues fueling US-China trade tensions, such as forced technology transfers, may not be easily overcome in the short term, boards of companies just entering the China market may reconsider entering into joint ventures—especially in light of China loosening its requirement for foreign automakers to enter into joint ventures with Chinese companies. Directors should ensure management is balancing the need to protect IP—upon which long term strategy may be contingent—with the short-term need to capitalize upon the size of the China market.  

In the short term, boards of
companies exporting goods to China should question whether the Chinese market
still remains profitable given imposed or potential tariffs, and explore alternative
growth strategies in other emerging markets. Boards should ensure management is
seeking alternate suppliers in the case that production inputs coming from
China are, or could be, impacted by escalating tariffs.

China’s government is focused on addressing slowing
economic growth, which may lead to downward pressure on its private sector.

The Development: In addition to undergoing negotiations on the trade dispute with the United States, the Chinese government is under pressure to deal with slowing economic growth and a high percentage of leverage in its stock market. China’s economic growth in Q3 2018 was 6.5 percent, which was its slowest growth reported since the days of the global financial crisis, and China’s projected gross domestic product growth for Q1 2019 was also reduced from 6.5 to 6.3 percent. By the end of 2018, the Shanghai Composite was down over 24 percent in comparison to the end of 2017.

Furthermore, over $600 billion worth of Chinese shares, or 11 percent, have been put up as collateral for loans by company founders or major shareholders—which are at risk of margin calls. To reduce the risk of continued selloffs as the market slides, state-owned enterprises (SOEs) purchased $6.2 billion worth of stakes in 39 Chinese private companies from January to October of 2018, and the government introduced a number of economic measures to cut down on “shadow banking” practices from private companies that were cut off from obtaining loans through official channels.

Board Considerations: The following developments may decrease opportunities for foreign firms to compete in the China market: slowing domestic growth; increased dominance by state-owned enterprises; and protection of mission-critical sectors such as technology, specifically artificial intelligence and e-commerce. Chinese SOEs, as well as Chinese private companies, are known to receive preferential treatment in regards to financing opportunities, tax incentives, and policy enforcement, among other areas. Directors are encouraged to discuss how a slowdown of China’s economic growth might impact profits, and how the company strategy could be adjusted to offset these impacts. Boards should question management’s strategy for competing with both Chinese state-owned and private firms, given their preferential treatment. Directors may also discuss at their board meetings what implications about the appetite of Chinese consumers can be taken away from Apple’s slashed sales forecast.

Slowing economic growth in China is also often coupled with increasing signs of nationalism and censorship from the Communist Party as a way to hedge against domestic instability. American companies operating in China, especially technology companies, should constantly re-evaluate requests for product modifications from the Chinese government, and discuss how those limitations might promulgate human rights violations in China. Could your products be used to further restrict freedoms of Chinese citizens or collect data on their activities? Is your company ready to deal with the reputational backlash from its stakeholders?

Look for continued analysis in the NACD BoardTalk blog on the business climate in China as trade negotiations continue
to evolve.

Survey of Global Directors Finds That Data Is King

In order to benefit from emerging technologies such as automation,
robotics, cognitive computing, and artificial intelligence (AI), companies will
be required to leverage a critical resource: data. Given that reality, it’s not
surprising that big data ranks as a top disruptor for boards—a recent
survey finds that a whopping 63 percent of directors around the world view it
as the biggest technological disruptor.

To help the public understand how directors globally view business
risks and governance issues, the Global Network of Director Institutes—an
international network of 21 corporate director institutes, that includes
founding member NACD—produced the 2018
Global Director Survey Report
. The association represents
130,000 individual members globally and seeks to enhance director
professionalism through research and education. This first-of-its-kind survey
reflects the perspective of roughly 2,000 public and private company directors
from Africa, the Middle East, the Americas, Asia-Pacific, and Europe. The
results provide important insights into the challenges and priorities of board
members around the world.

What social
and economic issues are top of mind for this group of directors?

Boards across the globe are increasingly finding social issues on
their radar. When asked which key social and economic challenges are facing
their countries, participants’ responses largely coalesced around three issues:
poverty and income inequality, taxation and government spending, and the cost
of health care. That said, there were some regional differences in directors’
ranking of these issues. Survey participants from European companies are more concerned
with the cost of health care than their American counterparts, who point to
taxation and government spending as a key priority for their countries. For
their part, Middle Eastern and African directors worry most about poverty and
income inequality.

How do boards
evaluate themselves?

Conventional wisdom holds that what gets measured gets managed.
In an effort to enhance governance, assessing directors individually and the
board collectively is critical to ensuring that the board’s composition aligns
with the company’s long-term strategy. The survey found that the majority of
respondents (80%) conduct evaluations. However, out of those who conduct
evaluations, the highest percentage of directors (46%) said their boards
evaluate performance via informal discussions. This is compared to 42 percent
whose assessments are done using formalized discussions and processes. The
Americas led the group in using formal evaluations (57%).

Source: 2018 Global Director Survey Report, p. 16.

How do directors view
the impact of ESG issues on their companies?

Despite investor calls for more robust oversight of environmental
risks, these issues continue to be lower priorities for boards. When asked
about the relevance of select risks to the strategy and operations of their
organizations, nearly half (42%) of respondents said the depletion of fossil
fuels was not at all relevant; 38 percent said the same about measuring carbon
emissions and their carbon footprint. Climate change fared slightly better,
with 30 percent of directors saying it was irrelevant to the company’s strategy
and activities.

Issues involving personnel, however, ranked fairly high for directors: 72 percent believe ethical behavior is critical to company strategy and operations, compared with 65 percent for employee health and safety, and 57 percent for employee relations and engagement. Given the tight labor market in the United States, human-capital management is likely to become a more pressing issue on board agendas. In fact, employee engagement was slightly more important to American directors (62%) than their European counterparts (45%). This concern also underlines the growing focus on culture as an enabler of company strategy and success.

Culture can have wide-ranging repercussions for an organization—both beneficial and detrimental—and, therefore, the board should dedicate adequate time to oversight of organizational culture. As noted in the Report of the NACD Blue Commission on Culture as a Corporate Asset, “a healthy culture serves as a unifying force for the organization and reinforces the elements of the strategy and business model in a productive way,” while a “dysfunctional [one] has the potential to undermine the business model and create significant risk for the company.”

Are directors
confident in their board’s ability to oversee technology?

Technology can either catapult an organization to unexpected
success or so effectively disrupt its business model that the organization
becomes virtually or actually insolvent. And directors believe that big data
and AI are likely to disrupt their companies, with a majority (63%) selecting
big data as the top potential disruptor, closely followed by AI (60%). The
application of emerging technologies is likely to change the ways in which companies
across industries do business; however, it also represents unpredictable risks.
Even if their companies are not early adopters or first movers in their
industries or sectors, directors should ensure their companies are well
positioned to capitalize on the changes these technologies may usher in. 

GNDI also recently issued guidance for boards across the globe to strengthen their oversight of increasingly complex and advanced use of data. These data governance guidelines can be adapted to meet the needs of individual boards.

Source: 2018 Global Director Survey Report, p. 25.

Directors of any company type—regardless of its corporate domicile—are
charged with creating long-term value for their companies. As the global
business landscape continues to evolve, directors must ensure their board is
keeping up with the skill sets and practices necessary for effective oversight.
That said, understanding the answers to the above questions, and how those
answers may vary from region to region, will be increasingly important as more
companies extend their cross-border operations.

For more insight into how varying governance approaches may impact your company’s global operations, download the full 2018 Global Director Survey Report.