New Responsibilities for the Board: Cultivating Investor Trust

Recently published research has revealed new factors for boards of directors to cultivate investor trust in companies. The Edelman Trust Barometer: Institutional Investors surveyed more than 500 chief investment officers, portfolio managers, and buy-side analysts in five countries (the US, Canada, the UK, Germany, and Japan) representing firms that collectively manage over $4.5 trillion in assets.

The research
identifies several new and emerging focus areas for the investment community in
which the board has a direct role:

1. The reputation
of the board itself impacts investor trust.

Boards of directors
have historically operated behind closed doors. If you asked a director whether
they believe their board should have a public reputation, most would respond
with a resounding no. However, the research clearly shows otherwise. Ninety-four
percent of investor respondents said they must trust a company’s board of directors
before making or recommending an investment. Ninety-two percent also agreed that
an engaged and effective board is important when considering a company in which
to invest.

A board’s
reputation is most acutely on display during times of severe corporate
controversy or distress, during which the board’s actions come under a public
microscope. Shareholder activism has similarly intensified the spotlight on boards.
A board viewed as entrenched will be immediately vulnerable to public and
personal attack. Beyond investors, employee groups, labor unions, and non-governmental
organizations are also holding boards publicly accountable with increasing frequency.

In addition
to the obvious characteristics of expertise and perspective, boards must now
consider several reputational dimensions. A board must be known as truly
independent, actively challenging management to ensure the organization is
pursuing the best course to maximize value, and it must be seen as deeply in
touch with strategy and its impact on society. Additionally, a board must be
known for diverse thinking, with diverse perspectives necessary to anticipate
the future.

2. Investors view environmental and social
considerations as important as governance.

Investor
focus on environmental, social, and corporate governance (ESG) issues is now
pervasive. According to our research, 89 percent of investors say their firm
has changed its voting and/or engagement policy to be more attentive to ESG
risks, and 63 percent report this change has taken place in the past year. Importantly,
in all five countries surveyed, investors strongly agree that environmental and
social practices are as important as governance when it comes to investment
criteria.

In the 2018
proxy season, environmental and social proposals were the largest category on
proxy ballots, accounting for 55 percent of all shareholder proposals, with
climate change and environmental issues ranking as the most common environmental
and social proposal topic. Vanguard and BlackRock have both cited climate
change as a priority issue for 2019. Furthermore, 98 percent of investors think public companies are urgently
obligated to address one or more societal issues relevant to their business,
with cybersecurity, income inequality, and workplace diversity as top
priorities.

Boards of directors must take responsibility for ensuring their
companies are considering impact on society and the environment, proactively
pursuing ways to contribute as positive corporate citizens and communicating
this to the investment community.

3. Investors care
about corporate culture and
expect boards to provide oversight.

Investors see
the impact that healthy culture and engaged employees have on corporate
performance. Countless examples of corporate crises show the value risk of not
maintaining a healthy corporate culture. Our research found that two-thirds of investor
respondents believe maintaining a healthy company culture and enforcing a
corporate code of conduct at all levels of the company have a great deal of
impact on their trust.

There is no question that boards historically believed that corporate culture was not their responsibility. Thankfully, this is changing. Recent research by PwC found that 87 percent of directors believe that an “inappropriate tone at the top leads to problems with corporate culture.”

Corporate culture has become the province of board oversight, and any board that is not proactively evaluating the health of its company’s culture is neglecting an important asset and possibly cultivating a powerful risk. The NACD emphasized the importance of the board’s role in corporate culture in a recent report, which recommended that “directors and company leaders should take a forward-looking, proactive approach to culture oversight in order to achieve a level of discipline that is comparable to leading practices in the management and oversight of risk….Shareholder communications should include a description of how the board carries out its responsibility for overseeing and actively monitoring the company’s culture.”

4. Investors expect boards to stay ahead of
technology disruption.

A board must
be known for having the capacity to steer a company ahead of technology
disruption. Most industries are facing existential threats brought on by
technology, creating real and present danger for corporate valuation and
long-term viability. Investors expect boards to have the foresight to guide
management in anticipating and overcoming these threats. To underscore this
point, our research found that 95 percent of investors believe that a company’s
investment in innovation impacts their level of trust, with 62 percent saying
it impacts their trust a great deal.

Boards must
proactively ensure they have cutting-edge technology expertise among their
ranks, and they must actively challenge management to ensure the company has a
plan to capitalize on technology innovation rather than become a victim of it.

In summary, expectations of boards of directors are rising, not only from the investment community but also across stakeholder groups. Investors, in particular, are prepared to take action if they do not see boards doing enough. Eight-seven percent of institutional investors say their firms are more interested in taking an activist approach, and 92 percent will support a reputable activist investor if they believe change is necessary at a company. Boards should therefore expect activism from any of their investors if they do not proactively embrace these issues and ensure their companies are on the right track.

Lex Suvanto is Global Managing Director of Edelman Financial Communications & Capital Markets.

Judge Approves Settlement in Yahoo! D&O Shareholder Suits

A California judge recently approved a $29 million settlement in three shareholder derivative lawsuits filed against Yahoo!’s former officers and directors over allegations that they breached their fiduciary duties in failing to properly oversee the handling of a series of cyberattacks from 2013 to 2016. Three billion user accounts were compromised in the attacks, making it one of the largest reported hacks in US history.

The settlement
is more or less a win for Yahoo’s former leaders, including ex-CEO Marissa
Mayer, but by no means cause for a victory lap. The settlement is, to date, the
only cash recovery in a derivative action involving a data breach, which sets
potentially dangerous precedent for future breach-related derivative actions.

Until now, breach-related derivative lawsuits have been settled for a combination of governance changes and modest attorney fee awards. The money from the settlement, to be paid by insurance carriers, will go to Altaba, the holding company created after Yahoo’s internet operations were sold to Verizon Communications last year for $4.48 billion.

Under the settlement, the shareholders’ lawyers will walk away with approximately $11 million in fees and expenses, with the remaining $18 million paid directly to Altaba. (Click here to review the settlement in whole.)

While in corporate America $18
million is a relatively modest sum—especially for an Internet pioneer that once
touted a market capitalization of more than $100 billion—it begs the much
broader question of why the insurers broke with precedent and agreed to a
settlement that exceeded governance changes and attorneys’ fees.

The official justification for the
settlement payment is that it was in all parties’ best interests and that
significant data security improvements have been put in place with the help of
the plaintiff’s lawyers. That makes sense and is consistent with past
breach-related derivative settlements.

But what accounts for the $18 million
now headed for Altaba’s coffers? There are at least five reasons that merit
consideration:

First, the 120-page shareholder complaint—much of which is heavily redacted—is chock full of nasty allegations. It accuses Yahoo’s former leaders of engaging in a years-long, elaborate plot to cover up hacks going back to 2013, and conducting a “sham” investigation to “conceal the largest hacking incident in U.S. history.” 

Second, Yahoo was a
pioneer of the Internet era and provided news, entertainment, and online
communications—a confidential way for users to communicate with each other. The
expectation was that those communications would stay private, a fact not lost
on the shareholders or insurance carriers. It’s one thing for the corner dry
cleaners not to understand the importance of consumer privacy. It’s quite
another for an Internet company to lose sight of this fact.

Third, shareholder derivative suits are difficult but not impossible cases to win. Shareholders carry a heavy legal burden and must show that board members breached their fiduciary responsibilities by consciously disregarding their duties. These claims have been called “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Yet, even with such an uphill climb, the insurance carriers clearly saw the risk of potentially damaging facts coming out in the course of the case that might substantiate the allegations in the shareholders’ complaint.

Fourth, the U.S. Securities and Exchange Commission (SEC) cease and desist order against Yahoo for failing to make timely disclosure of the data breach—the agency’s first action for a cybersecurity disclosure violation—also contains fistfuls of harmful charges. In fining the company $35 million for its tardy disclosure, the SEC didn’t mince words. According to the cease and desist order, “Yahoo had learned of a massive breach of its user database that resulted in the theft, unauthorized access, or acquisition of hundreds of millions of its user’s personal data…Yahoo senior management and relevant legal staff did not properly assess the scope, business impact or legal implications of the breach…[and] did not share information regarding the breach with Yahoo’s auditors or outside counsel…”

And finally, although the sale of Yahoo’s Internet assets to Verizon went through, the purchase price was lowered to $4.48 billion because of the cyberattacks and Yahoo’s failure to disclose them during the due diligence process. That resulted in a $350 million or 7.25 percent hack discount.

Even if there’s a hint of truth
behind the allegations made against Yahoo’s former leaders, the risks of not
settling the derivative cases would be overwhelming and explain the insurers’ motivation
for breaking with precedent. At minimum, though, companies and their boards might
want to think long and hard before concluding that they have nothing to fear
from shareholders.

Craig A. Newman is a partner
with Patterson Belknap Webb & Tyler , the New York law firm, and chair of
its Privacy and Data Security Practice. All thoughts are his own. 

Launch the New Year with Your Own Board of Directors

One common piece of career advice is to find a mentor, someone you respect and trust to offer guidance on your journey.  If you have a mentor, or multiple mentors, how can you take this process a step further to elevate your career development?  Start this year off with a strategy to establish your own board of directors.  A group of people you can go to for goal setting, problem-solving, and to hold you accountable.  When you look at any company with a board, there’s usually a lawyer, a strategist, an accountant, and a human resources leader. Just as a company benefits from various experts, so will you. Surround yourself with people who have skill sets, personalities, and experiences that are different than yours.

What’s in it for me?

  • Receive advice from individuals who have specialized knowledge and/or business experience that is different than your background.
  • Acquire feedback on how they see you leading yourself and others.
  • Accelerate introductions to other key stakeholders in your development.
  • Gain encouragement, support, and honest reactions from other professionals who want to see you succeed.

What’s in it for them?

  • Expand their relationships.
  • Expedite their knowledge of other areas within the organization or the community.
  • Improve their strategic and political acumen.
  • Fast-track another person in achieving their goals.

How do I approach a potential board member?

  • Let the person know that you respect and admire them.
  • Explain what you would like the person to do to serve as your advisor on your personal board of directors.
  • Offer to reciprocate by helping the potential board member.

What do I need to know about selecting and maximizing my board of directors?

  • Identify people you admire inside and outside your organization. These advisors are people with important connections and those who want to see you succeed.
  • Use your board to provide guidance about professional image and presence, to expose you to valuable connections, and to provide unique outside perspectives.
  • Just as a code of behavior applies to networking groups, it is also critical to thoughtfully manage the advisor-protégé relationship. Most advisors are more than happy to provide guidance to a protégé that is eager to learn and uses the advisor’s time well.
  • Expressing gratitude to advisors is a requirement of this special relationship. You can also reciprocate your board’s generosity by offering to support your advisors in their future endeavors.

Take the time to work with your board.  Focus on high priority situations and deliver on your commitments.  By utilizing this group you can gain exponentially more feedback and advice than through a typical mentor relationship.  Remember, your hardest critics can be the best people you learn from this year.

 

Authored by Barbara A. F. Greene, CEO of Greene and Associates, Inc. A CPI Firm

ICF Master Certified Coach and M.S. Degree in Counseling

The post Launch the New Year with Your Own Board of Directors appeared first on CPIWorld.

CES Experience 2019: How the Ground Is Shifting

The directors who traveled to Las Vegas to attend NACD’s CES Experience were well prepared to walk onto the showroom floor on Tuesday. A lively panel moderated by Nichole Jordan, Grant Thornton’s national managing partner of markets, clients & industry, helped prepare participants on how to best to sift through the hype and sheer size of the annual technology extravaganza that this year features some 4,400 exhibitors sprawled over 11 venues. Said panelist Nora Denzel, a CES veteran who serves on the boards of Advanced Micro Devices, Ericsson, and Talend: “Look at how the ground is shifting.”

Small group tours of around 20 directors and guests each were
led by The Palmer Group, with CES Experience attendees separated into two groups
led by Shelly Palmer and Jared Palmer. Each group toured two massive halls of
the Las Vegas Convention Center, which one of several major venues for the trade
show and where some of the most impressive exhibits are on display. Tour groups
explored the north and central halls of the convention center, focusing primarily
on vehicle, audio, and video technologies.

Some observations from today’s CES tour follow.

Voice is now the
ubiquitous interface.
While Amazon’s Alexa and other voice-command
applications were built into nearly everything yet again this year, the systems
are always getting smarter. While touring an exhibit of the Kohler connected
bathroom exhibit, one director pointed out that he was interested in
understanding the use in geriatric care application, while another director
mentioned that he had already outfitted his mother’s home with the devices.
From controlling the temperature of your bathwater to using on-the-spot
translation technologies, voice command is here to stay—and improves with use.
Directors should ask their managers have a strategy to include the application,
even in ways that might not seem obvious.

Kohler displays the power and convenience of the connected home.
Photo credit: Jamie Mason

The 5G revolution is
getting closer.
Be aware: there aren’t many 5G devices that companies were
ready to display. However, Intel, Qualcomm, Dlink, and others demonstrated
future applications or actual hardware slated to be released later this year. Autonomous
vehicle technology displayed by automakers showed the promise of what may come
with minimal latency and a wealth of sensors. Ford, for instance, demonstrated an
intersection without stop lights
. The catch? Once 5G technology
connects to in-vehicle sensors, cars will theoretically be able to talk to one
another and make real-time traffic calculations. While the promise of what 5G
could do to transform cities is alluring, we’re not quite there yet. One
director asked Jared Palmer, engineering lead at The Palmer Group and one of
our tour guides, when he thinks we’ll see cities build the infrastructure for
this future. The answer? “Whenever we can pass an infrastructure bill.”

A Qualcomm spokesperson demonstrates the difference in speed between 4G and 5G wireless networks. Photo credit: Jamie Mason

Wearables make
providing health care data easy.
Would you be more likely to wear a heart
rate monitor on your morning run if you were able to wear it on a specialized
washable shirt? Could your skin chemistry change how a wearable medical device
is used? These are questions that companies such as 3M and Qus are helping
wearable medical technologies answer. CES exhibitors also showed off the “gamification”
of health care, including an application that identifies where teeth need the
most attention while brushing, as well as many devices to escape from
technology.

A spokesman from Qus explains the benefits of wearable athletic performance tracking.
Photo credit: Jamie Mason

Everyone loves flying
cars and robots.
As cities see changes in how people get around, companies
are exploring innovative, more varied solutions. One of the most jaw-dropping new
technologies at CES this year was Bell Flights’ flying
car concept
, which could be available from Uber as soon as 2020.
Meanwhile, one of Samsung’s many impressive displays included a family of
domestic robots. These exhibits showcase incremental improvements in day-to-day
life that have become commonplace at CES—and yet are no less awe-inspiring.
While in recent years CES has become less about paradigm-shifting mega-releases
of products, companies are moving so fast to create new versions of products
and release them that each year demonstrates something a bit better than
before. The same can be said for these Bell and Samsung products.

Bell’s spectacular flying car concept. Photo credit: Jamie Mason
Samsung’s friendly domestic robot. Photo credit: Jamie Mason

The mind truly reels walking amid competing exhibits, faces colored by neon display lights and the shine of new electronics. The only way to fully appreciate the size and possibilities represented at CES is to see it for yourself.

NACD will deliver more short videos on its social channels and look for coverage of NACD and Grant Thornton’s CES Experience in the March/April 2019 edition of NACD Directorship.

CES Experience 2019: Experts’ Takes on Big Ideas

A bread-baking robot that cranks out golden, fresh loaves every six minutes. Another robot built just to love you—and is cute enough to make you want to keep it around. A wearable electrocardiogram monitor that connects to one of the major innovations on a blood pressure cuff to emerge in decades. In-ear translation. The first wireless router built just for 5G.

Sound like a lot to sift through? It is.

This is a small fraction of what NACD staffers who attended a pre-show event for the press encountered ahead of the official opening of CES today, and we’re here to make sense of what to pay attention to, and to focus on what the experts are saying about the future of technology.

NACD and Grant Thornton on Monday night welcomed a group of directors and their guests to cocktails and dinner over a panel discussion that set the scene for a busy two days to come. Ahead of their arrival, NACD staff went behind the scenes to preview exhibitors’ booths and attend sessions featuring some of the foremost leaders in connected technologies.

What did the experts have to say ahead of the opening of the show floors? Their insights follow.

The guru of CES points out what merits directors’ attention. NACD Chief Programming Officer Erin Essenmacher snagged a few minutes with Shelly Palmer, CEO of The Palmer Group and emcee of one of the most-attended sessions at CES, to discuss how directors should focus their time and analysis of the items on the show floor. (For more from Palmer, stay tuned to NACD’s YouTube channel.)

When asked about what most excites him about CES, Palmer said
the event is like a crystal ball for business people looking to see what’s
next. Palmer emphasized that technology is about serving the customer and
changing their behavior. “Technology is a tool,” Palmer said, “and
it’s useless unless it changes the way we behave. It needs to make us more
productive, or healthier.”

Palmer, who has been attending CES for the last 30 years and will lead NACD’s CES Experience tour today, said he most enjoys witnessing the evolutionary steps that companies take, and how they respond to disruption.

Take, for instance, personal assistants and their recent iterations. Palmer in recent presentations has asserted that incremental innovations in personal assistants are not just hype. Rather, companies such as Amazon and Google are being improved to hook customers on the platform, and to improve the answers given based on voice commands. The more consumers change their behavior while using the tool, the smarter the underlying artificial intelligence (AI) becomes. The same iteration is happening in other devices, and in the companies that have entered the competition for their business lines.

Palmer also drew attention to the growing sophistication of AI and its ability to recognize people. While Apple has never exhibited at CES, its facial recognition technology is being used to log into phones and to identify patterns in data related to healthcare, for instance. In a presentation made exclusively to NACD members and others who will tour CES, Palmer pointed to Google AI’s Lymph Node System, a technology that has helped doctors recognize patterns in patient data that lead to breast cancer diagnoses with 99 percent accuracy. “AI is a super exciting field and technology. Everyone here claims it, and some lie about it, but ultimately this is a technology that is going to matter,” Palmer said.

The connected future
will require a paradigm shift.
A panel of executives from companies such as
Qualcomm and Verizon Technologies addressed a standing room-only audience about
the challenges that companies, governments, and the economy will face as
autonomous vehicles (AV) get closer to market. While the panel focused
predominately on AV challenges, many of the same principles could be applied to
other industries and facets of life touched by the Internet of Things.

We all have a
keen desire to make world better place,” said Lani Ingram, vice president of
smart communities at Verizon. “But it’s not always easy. I do think we have the
ability to make lives better. The goal is to make sure we don’t lose sight of
that while getting up to speed.” Ingram’s comments were made during a discussion
of the practical challenges to how we think about and operate as citizens and
businesses within cities as we now know them. Among the points discussed were:

  • The
    growing need for speedier, more adaptable regulations.
    The panelists agreed
    that regulation still has a place in ensuring the safe, secure operation of
    autonomous vehicles. However, they agreed that the slow pace of creating
    regulations hinders the development of new infrastructures that could make
    connected cities viable and safer.
  • Insuring
    against risks will significantly change consumer and business policies
    . One panelist pointed out that the
    current risk burden of operating a vehicle lies on the driver, not on the
    company that produced the vehicle. Who is responsible when the artificial
    intelligence and machine learning used to operate AVs fails to keep passengers
    safe? The question poses implications for companies that might face direct
    liability, and is still being figured out. Unknown unknowns also will likely emerge
    as the technology matures and more cities become connected.
  • The way
    that municipalities and governments think of infrastructure must change—or their
    citizens might get left behind.
    Panelists agreed that companies are likely
    to become heavier investors in the infrastructure and sensors needed in cities
    and towns for autonomous vehicles to operate widely. Cities that do not agree
    to allow or make their own investments in such infrastructure risk falling
    behind locales that might attract future-thinking citizens, and such a loss
    could result in a decrease in tax revenue and loss of talent and revenue for
    companies.

Check back on Wednesday for coverage and more expert takes on
the main event: tours of the CES show floors and a look at an exclusive
pitch-off sponsored by KITE.

CES Experience 2019: Behind the Magic

Can you imagine being one of the first people to see a
lightbulb illuminated by electricity? Do you remember witnessing the Apollo 11
moon landing mission and being dumbfounded by what it took to get there? What
about the first time you held a smart phone—which has the same power as the
computers that took us to the moon—in the palm of your hand? These and other innovations
have empowered and disrupted business and society, and the same can be said for
some of the technologies revealed at the Consumer Technology Association’s CES,
which opened yesterday in Las Vegas.

In fact, many technology companies facing the specter of
increased regulation, and growing skepticism about data security after a slew
of hacks and other incidents this year, may be banking anew on their ability to
iterate and wow consumers with simpler, smarter, or faster features.

NACD and Grant Thornton are hosting the second CES
Experience, a director-centric exploration of the six-day trade show revealing
the implications from new technologies likely to impact corporate strategy and
risk oversight for years to come.

Directors from industries ranging from banking to
manufacturing convene today, January 7, through January 9, to tour a fraction
of the 2.7 million net square feet of show floor and hear from some of the
keenest minds in corporate technology transformation and innovation. NACD
reporters and other experts on the ground will bring directors into the CES
experience through coverage here on NACD BoardTalk, video interviews, social
media channels, and in Director’s Daily—and all to help your board make sense
of the changes to disruptive technologies that will come in 2019.

Directors can expect coverage of the following emerging
technologies: artificial intelligence (AI), 5G mobile technology, health care
devices, and resilience technologies. You’ll also be treated to commentary and
analysis by Shelly Palmer from The Palmer Group, who will lead CES Experience
attendees through a curated show floor tour on Tuesday.

“When you come to CES in person you are given a crystal ball
that is super accurate 12 to 18 months of the future and relatively accurate 36
months into the future,” Palmer told attendees at last year’s event. “When you
want to have your thinking informed, this is one of the best place that you can
do that.”

In the meantime, here is a summary of some themes NACD
attendees can anticipate.

  • The
    presence of big players will again be felt in connected devices everywhere.
    Many
     players are vying for dominance in the
    race for producing the in-home digital assistant of choice. Amazon and Google
    will both highlight their digital assistant products at booths on the showroom
    floor this year, with Google committing to increase its presence this year
    after making its CES debut last year. However, directors should heed the
    ubiquity of Amazon Alexa and Google Assistant incorporated into sundry devices
    being showcased by others throughout the show. As technology companies evolve
    past their initial strategies and seek to be known as developers of AI platforms,
    the FAANGs are expected to let some of their power shine through others. The
    breadth of companies using their platforms as entry points into the magic of
    voice recognition and the automated home will do the talking for Amazon and
    Google.
  • While 5G
    and resilience technologies will be mentioned often, 2019 is expected to be
    another year of exploring the promise of what’s to come.
    The United States
    in 2019 will see the launch of its first 5G networks, while other nations race
    to scale up their own 5G infrastructure. Much as with the rapid adoption of devices
    such as Alexa, companies are likely to display next-generation devices to
    prepare for the speed that 5G is likely to bring to the Internet of Things—that
    is, once 5G has reached the capacity to power all of those connected gizmos. Of
    course, with greater connectivity comes greater potential surface for hacking.
    CES Experience attendees will see a curated selection of booths and exhibits of
    products developed to protect Internet infrastructure, among other critical resources
    and infrastructure, from major disasters, breaches, and other risks.
  • Expect to see 20 percent fewer Chinese exhibitors compared to 2018’s event. Chinese technology companies have significantly scaled back their presence at the trade show in light of geopolitical and trade tensions, the New York Times reports. Huawei CEO Richard Yu last year introduced a handset at a CES press conference—the same phone that AT&T at the last minute decided not to sell, likely at the behest of national security advisors who were concerned the devices would allow Huawei to commit espionage.
  • And expect even more wearable health technology exhibitors. According to a report in the Wall Street Journal, 511 companies registered for the healthcare tech hall, which is up from 472 last year. For medical companies looking to develop devices that have a shot at approval by the Federal Drug Administration, the wearables will display advances in sensor technology and how the collection of personal medical data will reshape the industry in the years ahead.

Hungry for more? Check back each morning for fresh takes on the biggest ideas at CES. 

Global Survey Identifies Top Risks for 2019

A challenging year lies ahead for companies in terms of macroeconomic, strategic, and operational risks, according to the latest survey of C-level executives and directors conducted by Protiviti and North Carolina State University’s Enterprise Risk Management (ERM) Initiative.

The global survey asked 825 C-level executives and directors (45 percent representing companies based in North America) about their perspectives on risk concerns. Consistent with prior years, boards and C-suite executives presented a range of views on the magnitude and severity of risks for 2019, suggesting the need for dialogue at organizations’ highest levels to ensure everyone agrees on the risks most critical to the enterprise.

The highest-rated risk themes from
this year’s survey are presented below, in order of priority, to provide context
for understanding the most critical uncertainties companies face in the new
year.

1. The global business environment
is riskier in 2019.
Survey respondents indicate that the overall
global business context is somewhat riskier in 2019 relative to the two prior
years. Survey respondents in 2018 only rated seven of the top 10 risks higher than
they did in 2017. However, for 2019, respondents rated each of the top 10 risks
higher for 2019 relative to 2018. A majority of respondents rated each of the
top 10 as a “significant impact” risk using our survey methodology. Looking
forward, the message is that digital disruption and changing demographics are
major drivers of risk, impacting uncertainty over business model viability,
customer preferences, the competitive landscape, workplace dynamics, and even
regulatory demands.

2. There were notable shifts in
the top 10 risks for 2019. 
Notably, the risk “existing
operations and legacy information technology (IT) systems not meeting
performance expectations against competitors, especially ‘born digital’ and/or
low-cost-base competitors” jumped to the top of the 2019 list from the tenth
position last year.

This risk is a composite of several
significant uncertainties, including assurance of the company’s digital
readiness, its lack of resiliency and agility in staying ahead of or keeping
pace with changing market realities, the restrictive burden of significant
technical debt, lack of out-of-the-box thinking about the business model,
failure to probe fundamental assumptions underlying the strategy, and the
existence or threat of more nimble competitors. Respondents in five of the six
industry groups we examined selected this risk as a top-five concern and rated
it as a “significant impact” risk concern for 2019.

One risk returned to the top 10 in
2019 after dropping off in the prior year. Respondents indicated their concerns
about increasing difficulty in sustaining customer loyalty and retention in
light of evolving customer preferences and demographic shifts in their customer
base. This risk had appeared on the top 10 risk list in our 2015, 2016, and
2017 reports.

The rest of the top 10 risks are similar
to prior years, although their order has shifted. As in the prior year, seven
of the top 10 represent operational risk concerns, while the remaining three
represent strategic risk concerns. No macroeconomic risk concerns made the top
10 list in 2019 for the overall global sample. As noted below, economic risk
fell out of the top 10 list this year; that might not have been the case had
our survey been conducted in December 2018.

3. The nature of concerns over uncertainty
varies across the world.
Overarching views about uncertainty in the business
environment seem to be global in reach. Survey respondents in North America
identified the same top five risks as reported globally, with resistance to
change and cyber risk in the fourth and fifth spots, respectively. Reported
results from different regions follow:

  • Europe: regulatory, economic conditions, cyber
    risk, competitor risk, and talent risk.
  • Asia: big data, supply chain issues, talent
    risk, regulatory risk, and competitor risk.
  • Australia and New Zealand, Latin America, the
    Middle East, and India: These regions reported the same top risks as the global
    results, except for cyber risk; in its place is the risk of disruptive innovation.

4. Firms are more likely to invest
in risk management.

Interestingly, respondents indicate they are more likely to devote
additional time or resources to risk identification and management over the
next 12 months relative to their plans in the prior year, suggesting a greater
desire to invest in strengthening risk management capabilities. That is
especially true for financial services organizations as well as the largest
organizations (revenues greater than US10 billion) in our sample. Individuals
serving on boards indicate the greatest desire to devote additional time or
resources to risk management, perhaps to better inform their risk oversight
processes.

5. Regulatory concerns persist,
and economic concerns vary across the globe.
Survey respondents (particularly
in Europe) remain troubled by the threat of regulatory change and increased
scrutiny, which has been a top 10 risk in all seven years of the survey. But
for the first time, concerns about economic conditions fell out of the overall
top 10 list. However, despite that finding for the overall sample, respondents
in Europe, Latin America and South America, the Middle East, and Africa did
include economic concerns as a top five risk concern for 2019.

Perceptions of economic risks are
like a pendulum, as they can change quickly over a short period as new
developments transpire (including after our survey period). Interestingly,
board members and chief executive officers rated economic conditions as a top
five risk, ranking it in the third and fourth spots, respectively.

In summary, it’s clear that
organizations must align their culture, people, processes, and
intelligence-gathering to embrace this rapidly changing business environment.

We encourage interested parties to read the executive summary of our survey results to learn more and explore deeper analysis into this annual survey. As with our prior surveys, the results captured significant uncertainties by industry, executive position, company size and type, and geographic area.