First of two parts
Organizations today find themselves navigating a previously unheard-of range of challenges, including the ongoing pandemic, the effects of climate change, shifting regulatory requirements, and more. Boards play a critical role by helping management teams explore options and find ways to thrive in unpredictable circumstances, supervising plans to traverse this complex corporate climate, and by providing guidance on transformational investments.
Resilience — the capacity to foresee, plan for, respond to, and adapt to a changing environment — is essential. Given the uncertainty in the market, deciding where the board should focus its time and attention is vital.
To learn more about board priorities for 2023, EY conducted a study, Americas board priorities 2023: how to build resiliency in uncertain times, surveying more than 400 corporate board members across the Americas, including Argentina, Brazil, Canada, Chile, Colombia, Mexico, and the US. Given the distinctive difficulties businesses are facing in this area and their responsibility for financial oversight, it may not be so surprising that boards placed the highest priority upon economic conditions. Though the study focuses on western markets, the insights on the five top board priorities are also relevant for Philippine companies.
DIFFICULT TIMES AHEAD
Several factors indicate the increasing possibility of a global recession in 2023. These include the ongoing conflict in Ukraine, stricter financial restrictions, and a simultaneous economic slowdown in the US, Europe, mainland China, and several emerging markets. Persistent inflation, rising borrowing costs, declining private sector sentiment, and the rapidly slowing global economy are all contributing to a potential global economic cooldown. Some businesses are choosing to exercise more caution in hiring people and undertaking investments due to ongoing cost challenges, deteriorating demand, and increased uncertainty.
Drivers of economic activity that were once taken for granted will now require more attention from boards in the current business landscape.
In the first part of this article, we will look at the first two top priorities identified in the report:
1) Economic circumstances that companies have to focus on to support themselves through economic volatility (these include inflation, labor, capital costs, supply chain and energy switch) and
2) How to rethink capital strategy through investment in technology.
ECONOMIC CIRCUMSTANCES
Inflation. It is unlikely that the supply and demand mismatch in the energy sector, which is caused by geopolitical unrest and climate change, can be remedied very soon. Price inflation in energy, commodities, and food will likely continue to be volatile.
Boards should monitor how companies are developing price and supply strategies that are flexible enough to react to demand fluctuations that have become more severe in recent years. The part that cost control and productivity improvements play in a company’s inflation strategy must also be considered.
Labor. While laying off excess labor has historically been a tactic to control expenses during economic downturns, talent is now not only more expensive, but it is also more valued. Business executives currently prefer strategic hiring freezes, strategic layoffs, attrition, and furloughs over broad-based layoffs as cost-control methods.
As they monitor how productivity, training, and efficiency benefits might offset increasing labor expenses and keep an employee base engaged when rehiring is possible, boards will need to keep an eye on the long-term talent agenda.
Capital costs. The rapid and coordinated tightening of monetary policy around the world has resulted in an increase in borrowing costs, a decline in equity values, and major changes in foreign currency rates. The focus on optionality to meet strategic goals is increasing due to the rising cost of debt, and the wide variations in equity valuations have widened the gap between the perceptions of buyers and sellers of the true value of an asset. In order to address this, boards can collaborate with management to explore business capital strategy plans.
Supply chain. The switch some firms made from just-in-time to “just-in-case” inventory management during the pandemic may likely be unsustainable, and some organizations may experience new challenges as demand slows down and inventory builds up.
As businesses explore reshoring options, geopolitical developments are also quickly altering the business environment and redefining supply chain risks and opportunities. In an increasingly fragmented environment, boards should monitor how management can strike a balance between supply chain risk and redundancy.
Energy switch. The impact of the war in Ukraine on energy security and supply, coupled with other climatic repercussions, is disrupting economic activity in real time and making the energy transition urgent. While inflationary pressures might postpone some plans, boards can also collaborate with management to determine whether this is a chance to accelerate that transition.
CAPITAL STRATEGY AND TECH INVESTMENT
Many businesses are committed to modernizing their operations, despite rising interest rates, in order to stay ahead of disruption. Additionally, they continue to maintain their investment plans in an effort to increase value, resilience, and long-term options. Nearly three-fourths of worldwide executives (72%) surveyed for the EY 2022 Digital Investment Index stated they must significantly transform their operations to remain competitive by investing in technology and digital capabilities.
Many businesses are looking to build long-term value through cost-of-capital optimization, reduced operational disruption, creating stronger connections with customers and employees regarding the environmental, social, and governance (ESG) agenda, and putting environmental and social sustainability at the core of the business. Organizations are also interested in investing in early-stage companies to expand their current portfolio, obtain fresh talent, or build new business platforms.
Mergers and acquisitions (M&A) continue to be a crucial alternative to improve capabilities in technology, talent, and innovation as well as sustainability plans. Divestment may also be a key strategy to free up capital to reinvest in core capabilities and growth areas.
It will be crucial to maintain flexibility in order to achieve strategic objectives, especially with the rising cost of debt. Boards can play a significant role in addressing the assumptions that underlie management decisions and disputing possible options that management has explored. They can facilitate discussions that aid in strategy clarification and provide a clear view of the markets and underlying growth factors, such as demand, competitive advantage, alignment to company vision, and potential for long-term value.
Finally, boards have the chance to direct management’s investor engagement strategy as a crucial component of long-term value creation initiatives in the current downturn. They will need to determine if their efforts to proactively communicate with shareholders are sufficient and ensure that potential innovation and growth opportunities are considered.
The second part of this article will discuss the other three priorities, specifically on how boards can enable innovative technology transformation, champion a future-focused talent agenda, and establish cybersecurity as both an enterprise risk and strategic opportunity.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.
Maria Vivian C. Ruiz is the vice chair and deputy managing partner of SGV & Co.
