Regulatory and Governance
Regulatory and other developments regarding shareholder proposals for proxy access, conflict minerals, mandatory auditor rotation, compensation claw backs… boards of directors continue to face an active regulatory and enforcement environment. They’re also digesting the impact and consequence of new regulations and enforcement initiatives that have already been implemented.
What worries directors?
- The possibility of mandatory auditor rotation, with 70% of directors expressing at least some “substantial” concern about the prospect
- And 59% have the same level of concern about Dodd-Frank disclosure rules on CEO/median worker pay ratios
- But only 31% directors are concerned about proposed rules on conflict minerals, despite the fact that public companies have to comply with them
- The Securities and Exchange Commission expects the rules will affect about 6,000 public companies
Boards of directors have woken up to the IT revolution. More directors spent more of their board hours discussing IT risks and opportunities in the last year. Additionally, 62% of directors say their company’s IT strategy and risk mitigation approach anticipates potential competitive advantages from emerging technologies, up from 56% a year ago.
And many boards recognize the opportunities specifically associated with social media and mobile computing; 80% of executives believe social media engagement leads to increased sales.
But not all boards are fully confident in their ability to effectively oversee all aspects of IT. There are complicated risks that come with the adoption of new technologies, as well as constant cyber security threats and concerns about protecting customer data. So many boards are doing the following.
- Looking for future directors with technology or digital media experience.
- Tapping IT consultants for advice more often, with twice as many using consultants on a regular basis than last year.
- 20% communicate with the CIO at every formal meeting, up from 18% a year ago, and 31% do so at least twice a year, up from 30% in 2012.
Directors are getting their arms around risk oversight
Just about 95% believe their board understands the company’s risk appetite at least moderately well. They’ve made significant strides in allocating risk oversight: 80% of directors now think there is a clear allocation of risk oversight responsibilities between the board and its committees, up from 63% a year ago. Nearly three-quarters of directors took action to reduce fraud risks during the last year. And 60% say they want to spend more time on risk management in the coming year.
Companies today are pursuing new business models for growth, many of which are anchored on emerging technologies and what they are making possible. But these new territories for companies are often rife with new risk. Board discussions about strategy inevitably lead to discussions about risk, and vice versa. That’s because the two are intertwined and boards recognize the importance of both.
Talent continues to top the list of executive concerns. And it’s no wonder, given that talent has such a far reaching impact on every aspect of corporate strategy and operations. But it’s more than Changing business and workforce dynamics are challenging company leaders on many fronts. Technology and the digitization of the workplace are dramatically altering the way organizations attract, engage, and develop talent.
Where talent matters most today Instead of thinking solely in terms of their people strategy, company leaders are zeroing in on where talent makes a fundamental difference in business strategy. They start with these guiding questions:
1. Power growth. Are we acquiring, developing, deploying, and retaining the talent we need for today, when new opportunities arise, and to support the way we will do business in 3, 5, and 10 years?
2. Realize ROI. Are we maximizing our investment in talent, from compensation and benefits spend to talent mobility and executive development?
3. Manage risk. How are we managing our significant financial risks related to pensions and healthcare costs? Do we have sufficient bench strength when it comes to our executive team?
4. Enable transformation. How do we ensure that we effectively integrate critical talent following a merger or acquisition? How do we remake the HR function so it is more relevant to the business?
What makes businesses sustainable has moved beyond one-dimensional measures like how much diesel they use or plastic they recycle. Instead, it’s become much more about how much they benefit the community or pay in taxes in other words, the total impact of their business activities. This is hard to measure, so tools like our Total Impact Measurement and Management (TIMM) help to quantify and value the impact, as well as helping business leaders identify trade-offs and compare options. Increasingly companies want to plan for a sustainable future with good growth in mind, and to ultimately be able to select the best strategy for their business and their stakeholders.
Business leaders also need to look beyond their own operations. We’ve found that companies are making progress in reporting on their approach to climate change, including reporting emissions from their supply chains. But despite this, companies in general aren’t cutting emissions fast enough. Globally, carbon intensity rates have fallen at only 0.7% a year over the last few years. But we need to cut carbon intensity by 6% a year, every year for the rest of the century, if we’re to give ourselves a reasonable chance of limiting global warming to two degrees Celsius.
Building agile, flexible operations
As market conditions shift and competitive pressures intensify, so companies have to adopt new strategies. That, in turn, means they need new operational models to accommodate these new plans. But rising volatility and business complexity have recently made operational transformation much more difficult. And, as another three billion consumers join the global middle class in the next few decades – straining far-flung supply chains – conventional operational models will come under increasing strain.
In a perfect world, a company’s day-to-day operations are managed for peak performance, so that it maximizes its profits while minimizing its risks, costs and losses. But in the real world management must make constant trade-offs in the risk-cost-loss equation, if it’s to keep the company’s operational infrastructure aligned with its current strategy. To strike the right balance, management must be crystal clear about its operational goals and develop key performance metrics that will enable it to manage those operations within well-defined tolerances.
Tapping into new markets
Showing signs of recovery, the global economy is projected to double in size by 2032 and nearly double again by 2050. China will outstrip the US by 2017 (measured in terms of purchasing power parity). And India is likely to become the third ‘global economic giant’, a long way ahead of Brazil, which we expect to move up to fourth place, ahead of Japan.
As the emerging economies become bigger and wealthier, demand for services is rising. This phenomenon is already shaping global markets: in 2010, emerging economies spent more than the G7 on imported services for the first time since reliable records began.
The emerging markets can be difficult places in which to do business. The ability to understand and adapt to local rules and customs will be essential, as will the right entry strategy and, where appropriate, the right partners. Good relations with local government and regulatory bodies will also be crucial. And, in some cases, the best production centers may not be the largest consumer markets.
