Best Practices

What is the Board's Role in Addressing Volatility?

by Amy Rojik

As companies continue to deal with volatility and a knot of recessionary pressures, the board’s evolving role is more important than ever. Proactive board oversight helps focus leadership teams on risk management while concurrently enabling delivery of strategic business priorities.

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The 2022 BDO Fall Board Pulse Survey polled 247 public company directors about their top priorities and challenges. Their answers revealed five key takeaways: 

  • Driving growth remains the top priority for boards.  
  • Supply chain challenges continue to threaten economic and operational success.  
  • Boards are adjusting strategies to address inflation and rising interest rates.  
  • Talent acquisition and retention still pose a significant risk.  
  • As boards focus on environmental, social and governance (ESG) considerations, assignment of responsibility varies.  

All organizations face a range of challenges and risks, but the unique circumstances differ by industry, geographic footprint, market capitalization, growth phase, etc. Below we highlight some of the most notable findings from the survey to better understand where boards are focusing their efforts now, and in the year ahead.  

Driving Growth While Navigating Obstacles 

Public company boards have a mandate to deliver shareholder value, but that task has grown in complexity in recent years. Addressing the needs of a broad range of stakeholders while also supporting growth requires alignment and clear communication between boards and management.  

It is not surprising to see that 62% of public company board members say their top strategic priority for the next 12 months is driving organic and inorganic growth. Accomplishing that goal calls for a deliberate approach due to volatility and persistent challenges. During 2022, analysts and even the World Bank have lowered their projections for economic growth due to a range of factors, including a historic spike in inflation, supply chain disruption, geopolitical turmoil and more.  

Enabling success during times of uncertainty requires a proactive approach to challenges and a disciplined focus on strategic priorities. Businesses that thrive in such times are typically those with both strong management teams and boards that provide keen oversight and insist on accountability.  

Clearing Barriers to Success 

Amid a range of obstacles that include an ongoing labor shortage and rapidly rising interest rates, 28% of directors see supply chain issues as the biggest challenge to their economic and operational success this year — ahead of both inflation and sourcing labor (18%). 

While all businesses face a range of risks, those can vary in importance and prioritization. That accounts for the variation in responses regarding the most significant challenge to their economic and operational success:  

  • Supply chain: 28% 
  • Inflation: 18% 
  • Sourcing labor: 18% 
  • Another wave of COVID-19 cases: 12% 
  • Interest rate hikes: 7% 
  • Competition: 6% 
  • Potential tax changes: 1% 

Similarly, 23% of directors say supply chain disruption is their single greatest business risk for the next 12 months — just behind talent acquisition and retention (25%) and recessionary declines in product/service demand (24%). On the plus side, compared to some other economic and operational challenges, there are a number of steps businesses can take to mitigate supply chain issues. Those steps include diversifying suppliers, honing demand forecasts, automating processes and leveraging technology for greater end-to-end visibility.  

Although the use of supply chain technology may be a key component of overcoming those challenges, just 11% of board directors say expanding technological advancement is their primary strategic priority in the coming year. Some companies are struggling to fund digital initiatives and innovation in the near term due to recessionary pressures, but technological advancement will undoubtedly continue to be a longer-term priority. Boards can play a key role in challenging management to prioritize needs while dealing with resource constraints.  

Adjusting Strategy To Support Priorities  

A skilled captain can sail forward in headwinds, but it requires careful preparation and clear communication to navigate changes in course. When faced with economic and operational issues, it is particularly important for boards to align with management teams about expectations for priorities, key objectives and execution of the agreed upon strategy.  

Inflation and rising interest rates have hampered businesses for months. To overcome these obstacles, companies are deploying a range of strategies, including:  

  • Increasing liquidity: 28% 
  • Adjusting compensation packages: 24% 
  • Rethinking M&A strategies: 22% 
  • Seeking an additional capital infusion: 21%  
  • Reducing capital expenditures: 21% 
  • Deferring investments: 14% 
  • Rethinking product and/or service launches: 13% 

As indicated by the close range of responses, there is no one-size-fits-all solution. For example, the M&A outlook may be more promising for one industry than another, and the pressure to increase liquidity may depend on a variety of factors and business objectives. During recessionary times, conventional wisdom holds that cash is king. Carefully reviewing plans related to liquidity, compensation, capital expenditures and new product/service launches can all help prioritize the areas of greatest need with an eye on cash flow and ROI for stakeholders.   

Competing for Talent During an Ongoing Shortage 

Despite some recent signs that the talent shortage may be easing somewhat, recruitment and retention remain a significant focus for boards: 25% of directors indicate their greatest business risk for the next 12 months is talent acquisition and retention. Offering competitive compensation is a critical part of those efforts. In fact, 72% say their company has adjusted compensation packages to help attract and retain talent. 

At the same time, compensation represents a significant portion of business expenses, and resource allocation is a top-of-mind consideration, particularly during economic volatility. Each business should maintain a balance between financial discipline and competitive compensation. As noted above, 24% say their company has adjusted compensation strategy in light of high inflation and rising interest rates. 

There are also other factors that attract and retain talent beyond the dollars and cents. Fifty-six percent of directors say their company is re-imagining strategies for hybrid and remote work, and 38% are enhancing employee benefits.  

The COVID-19 pandemic highlighted the importance of supporting employees through flexible modes of working, retirement savings programs, good healthcare benefits and wellness initiatives, as well as having a strong, identifiable corporate culture. When workers feel supported by their employer and have more control over their job, they tend to be more engaged in their roles — and more productive as a result. As the talent shortage continues to pose a threat to businesses across industries, boards and compensation committees are taking a more active oversight role in human capital matters to ensure the needs of workers are met.   

Assigning ESG Responsibilities  

ESG considerations have quickly become a priority topic on boards’ agendas. Pressure from a range of stakeholders — customers, employees, vendors, individual and institutional shareholders, and proxy advisors, as well as legislators, regulators, listing exchanges and others — have contributed to this sea change.  

As companies seek to mitigate ESG risks and uphold ESG commitments, board oversight has evolved to address it, but assigning responsibility within the board varies widely. Our survey indicates that various board committees are being charged with ESG oversight: 

  • Nomination and governance committee: 57%  
  • Audit committee: 35%  
  • Compensation committee: 22%  
  • ESG committee: 13%  
  • Risk committee 12% 

In our 2021 BDO Fall Board Pulse Survey, 35% of directors indicated plans to create a dedicated ESG committee within the board during the next three years. A year later, only 13% of boards have created that ESG committee.  

Some respondents also noted that ESG is an area where responsibilities extend across multiple committees or even across the entire board. The same is true for where ESG efforts are being conducted by management: within cross-functional teams. Specific roles and responsibilities will differ from one company to the next, but maintaining accountability for ESG, ensuring management is fulfilling the company’s ESG goals and communicating how that is being accomplished are the main objectives expected by stakeholders. Ensuring board-level oversight for this important risk area is critical, but it may not be prudent or feasible for smaller companies with smaller boards to create a separate ESG committee. 

The Road Ahead 

As companies deal with a range of macroeconomic and organizational challenges, board oversight has taken on even greater importance. Directors are meeting these challenges with a proactive stance. Whether on growth goals, supply chain issues, recessionary pressures, compensation or ESG, boards are working with management to adjust strategies and prioritize. Companies that clarify key business objectives, are held accountable for their execution by their boards, and report on and engage with stakeholders on their progress in a timely manner will be well-positioned to weather volatility and build competitive advantage.  

Amy Rojik is the founder of the BDO Center for Corporate Governance