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Warning: So called ‘Perfect Storms’ could be on the Horizon

Although we have recently experienced an unprecedented level of corporate failures, boards today are expected to be more engaged, more knowledgeable and more effective than in the past. Despite such expectations, today’s boards are operating in a faster-paced, ever changing environment brought about through intensifying regulatory and technological changes and globalisation. Emerging innovative initiatives played on new economic playing fields could turn boards into neurosis-generating machines, unable to take a rationally objective perspective unless better scenario visioning occurs at board level as perfect storms avoided.

The blight of Solid Energy is being referred to as the ‘Perfect Storm’.  Solid Energy embarked on an ambitious program which saw it invest in potentially new areas, including biofuels and conversion of lignite to fuel and urea. But its storm arrived in the form of falling coal prices accompanied by the fluctuating New Zealand dollar. Could Solid Energy have read its long term weather forecast more accurately than it did, or should the financial crisis continue to be blamed for the outcome?

What we do know is that financial crises have occurred at least every decade since the Wall Street crash, some driven by shareholder unrest, others by changing market conditions. After each, board processes and behaviours have gone under the microscope and refreshed ‘best practice’ emerges. Yet courts are still reminding us of the same types of shortfalls that lead to corporate failures: Related Party transactions, dominant CEOs, weak chairs, poor money management, lack of transparency, poor risk management, money laundering, rogue trading or just fraudulent behaviour. While the judicial process is actively holding directors to account where fraud or inappropriate disclosure can been shown the real issue is quite obvious: the decision-making capability, in at least some boards, lacked process, integrity and insightfulness.

History continuously reminds us that the economic winds of change continue to blow, to change course, to intensify or to abate.  The mid to long term business forecast has the potential to bring with it riskier situations which means board members may have to scan the horizon more regularly and vigilantly than they do right now.   

So what's on the horizon? We recognise facilitating organic growth may include mergers or acquisitions or acquiring new technologies and capabilities in a different manner than in the past and the substance of which may open up various scenarios.  We also know that if the economy is not growing companies will need to find other ways to retain, and where possible, increase their profits.

New regulations continue to be introduced, often in piecemeal or in a disconnected fashion. Alongside better scenario-risk planning there is a recognised and somewhat critical need for compliance adherence to be part of a healthy checks-and-balances system.  Forward-looking boards are already taking this first step. For instance international boards, such as Goldman Sachs, HSBC, Barclays, and JPMorgan Chase, are now elevating the
position of the once backroom Compliance and Risk Officer role. While many New Zealand companies may not accommodate such a position in-house this change on the international front reinforces that boards are becoming more aware of their fiduciary responsibility and ensuring all aspects of business not only operate efficiently but are compliant.

Better scenario planning in a riskier yet more compliance demanding environment become even more mind-boggling when new technology enters the fray. For example: social media, once viewed by some as the enemy, is really an enabler, transforming the way organisations take their product/service to market, enabling communication channels to be opened up and increasing transparency. As Apple Corporation has clearly illustrated, companies may need to reinvent their products/services, often at the cost of their existing ones, so speed to market makes social media attractive. But as new products and services emerge so too is the likelihood of a new set of regulations.  Board members need to ensure the organisations they serve don’t face legal issues such as Apple Corporation is currently facing under the US “anti-bundling” rules.  Boards therefore, will need to work closely with forward-looking advisory services. Technology is not only changing organisations’ operating platforms it’s also changing the way boards communicate inside and outside the boardroom.  Today iPads are now part of the operational tool kit for many boards. Such change highlights that board policies need revisiting and updating as change occurs. 

As communication develops new international business opportunities emerge so boards have to keep abreast of actual and emerging regulatory changes in other counties, particularly those they are conducting business with. 

Only time will tell us if the recessionary conditions have woken a sleeping giant.  How long will shareholders stay passively on the side-line?  As stakeholders’ realise they have power, so too could their expectations grow in respect to the performance of organisations as well as the quality, transparency, and timeliness of the information they want disclosed.

What we need are board members who insightfully challenge propositions, to ensure that new economic conditions will provide the right climatic conditions for healthy growth.  In the world of abundant possibilities coupled with enforced change it may be easy to go limp from indecision, adapt a ‘follow the leader’ approach or just postpone the hard issues.  To avoid becoming a neurosis-generating machine board efficiency is going to rely on board members who are thinking clearly and strategically, who are informed in regards to new innovative and even evolutionary solutions, who understand the dynamics that change can bring, who know how to test any proposition wisely for the good of the organisation they serve, while being able to operate within regulatory boundaries.  

We know that effective boards will be the ones that can successfully adapt strategies to turn challenges into opportunities and leverage compliance requirements to make innovative developments. Instead of the gender and age balance debate that is raging, board composition should focus more on attracting individuals with the stamina and fortitude to investigate and explore alternatives, to comprehend the environmental swings, knowing that transitory or innovative solutions if introduced may bring even further change. Thus timely and unfiltered information as to ‘what must be done’, ‘what can be done’ and ‘what will build a sustainable future’, will demand more from all members of the governance team: board members, senior management and key advisors.

Rational, objective decision-making boards will need rational objective advisors who like the boards they advise:

  • act as part of the entity’s economic environmental and stakeholder surveillance team.
  • are smarter at reading the signs and making predictions as to how and where the winds of change may blow, and who are prepared to not only say what can be done but raise likely outcomes and pitfalls to be aware of.

 

Looking into the crystal ball to predict the future will in itself be a challenge, but the real challenge will lie in the ability of each board member to keep up with new developments, ideas and new knowledge. Only in this way will board members be able to deliver on their fiduciary responsibilities.