Boards of directors must embrace disruption in our volatile global business environment, including surprise elections, cyber risks, and activist investors. This will require courage.
Strategy will be the board of director’s best weapon against risk. FEI Daily spoke with Dan Konigsburg, managing director of Deloitte Global’s Center for Corporate Governance on Deloitte’s 8th annual Directors’ Alert, which highlights key concerns facing boards today and how to address them strategically and courageously.
FEI Daily: What are the disruptions boards will face in the coming year?
Dan Konigsburg: Some of them are new, some of them are not. We have the results of the U.S. election. We have Brexit in the UK. We had the surprise Italian election. We’ve got elections coming up that people are concerned about in Europe. I think for the first time in a while, people are concerned about the consequences to their business. Not just political disruption but the growth in populism and how that might affect business.
People are also closely watching what’s happening in China (in the South China Sea), what’s happening in the Euro zone, what’s happening between the U.S. and Mexico.
Cyber is a disruption that remains. Boards are very closely following the way that cyber risks, hacking, problems with the breakdown of intricately interconnected connected systems are disrupting them.
And activism would be the fourth one I would raise. Shareholders becoming much more active as owners and challenging companies in a way that perhaps they weren’t four or five years ago.
FEI Daily: What are some of the differences in areas of concern between the U.S., Europe, and Asia?
Konigsburg: There’s an interesting difference around disruption. A lot of people point to disruption in business models as being one of the biggest concerns for boards, and not just business models, but political disruption. In Asia, we heard, “I don’t actually believe in disruption.” Disruption is another way of saying you haven’t prepared yourself, you haven’t looked at all the risks. That is a real distinction. We’re generalizing, but perhaps we ran into that a bit more in Asia.
FEI Daily: How should boards approach these disruptions?
Konigsburg: Boards have to be more courageous in challenging old ways of thinking. Challenging management certainly takes courage. Being courageous without thinking about all the risks is not courage, that’s being foolhardy. It’s about being able to be contrarian, with full knowledge of the facts and being aware of risks.
FEI Daily: What are some of the questions that boards should be bringing up and discussing?
Konigsburg: First of all, boards should start by asking questions about themselves: Do we have the right people around the table to deal with these disruptions, and these risks? This brings up questions of board composition and diversity. Do we have folks that come from different backgrounds, do we have women on the board, do we have racial minorities who can see things differently and give a better chance at thinking divergently and dealing with problems?
The questions that boards should be asking of management includes are we prepared? Management, walk us through a scenario. If we start to see a border, import tariff in the U.S., and we’re big importers into the country, what does that do to our costs, what does that do to our cost of capital? Walk us through that and take us down to the agile line, and what does it mean.
FEI Daily: Conversely, what should management understand about the challenges their boards will be facing?
Konigsburg: I think management doesn’t often think about things from the board’s perspective. They’re looking at the canvas one inch away from the picture. So it’s good for management to take a step back and ask themselves some basic questions. These are people who come together four, five, six, seven times a year. They’re not working at the company. They’re very thoughtful, smart people, but perhaps they don’t know every in and out of the business. So if you were in that position, how would you want to be presented to? What information would you need? What are the big picture areas of discussion that would help lead to better decision making?
So I think it can be very helpful for management to turn that picture around and say, let me imagine what directors are going through. And that has implications for board reporting, for the type of discussions that you have. It can help management pull the board back if they’re trying to go too deep and micromanage. And equally, it can help them pull back and say, let’s look at the bigger picture: let’s look at economic trends, let’s look at geopolitical questions.
FEI Daily: Given where we are politically, do we think the role of boards will expand?
Konigsburg: I think for the U.S., yes. There are certain industries where the board is going to become a much bigger player. I would say banks and financial institutions certainly. The regulators are encouraging boards to play a larger and larger role.
The trend is for boards to do more and more. I think one of the questions as you look into the future is where does it stop? We put a lot of responsibility on the shoulders of outside directors. And as I said earlier, they’re only there at the end of the day, as part-timers.
From both the perspective of regulators and from the perspective of a mom-and-pop investor who rely on boards to protect their interests, what’s reasonable to expect? What’s unreasonable? I don’t think we’ve reached a conclusion about that. I think that’s really open to debate still.
FEI Daily: How can boards develop a resilient strategy?
Konigsburg: When we talk about resiliency, we mean a strategy that holds up over time. We’re talking about strategies that can be flexible that can change, perhaps as external circumstances change.
You want a strategy that is not rigid. A poor, non-resilient strategy would be one-dimensional. You need people on the board that come from different backgrounds that are approaching this from different angles, who can see around corners. I think one of the advantages of having outsiders on your board is they aren’t there in the weeds. And that increases your chances of having a strategy that holds up over time.•