Governing for success in the next decade

On Monday, 2 August 2021, MinterEllisonRuddWatts held its annual Corporate Governance Symposium for directors and executives. With last year’s symposium being held via webinar due to COVID-19, we were excited to be back at the Cordis in 2021.

The Right Honourable Sir John Key, the symposium’s keynote speaker, began by outlining some of the current and future opportunities and challenges facing governors as organisations look forward towards the next decade, while continuing to manage the effects of the global COVID-19 pandemic.

This was followed by a panel discussion featuring highly regarded governors Rod Carr (Chair of the Climate Change Commission and director of ASB and Christchurch rebuild agency Ōtākaro), Leonie Guiney (director of Fonterra, chair of Fonterra’s risk committee), Rob McDonald (Chair of Contact Energy Limited and a director of AIA New Zealand Limited, Fletcher Building Limited and Chartered Accountants Australia and New Zealand) and Jan Dawson (Chair of Westpac New Zealand and director of Air New Zealand, AIG Insurance New Zealand and Meridian Energy).

With an eye on the next decade, several themes emerged from the symposium, including:

Same, but different (and faster)

Despite the rapidly changing economic and social environment, the principles of good business have not changed: profitability, longevity and market perception of a company and its brand remain the significant focus for governors, and the key markers of success.

With global financial turmoil potentially on the horizon as a result of fallout from the massive ‘quantitative easing’ and stimulatory interest rates measures taken in response to the COVID-19 pandemic, debt reduction and maintaining strong cash positions are more relevant than ever. This remains one of the core roles of good governance.

However, the world is changing rapidly, bringing with it a host of new considerations and issues for governors to consider. To be successful, good governors and boards need to recognise this, be adaptive and willing to move with the times. The pressures to change brought about by activist shareholders and the changing consumption trends of younger generations need to be recognised and given careful consideration.

There is an increasing emphasis on the need for greater diversity on boards. The conversation started a number of years ago with calls for greater gender diversity. There is now a growing focus on achieving greater ethnic diversity on boards, and this is likely to continue.

Some overseas jurisdictions are legislating for gender diversity on boards, with fines for businesses that fail to comply. There may be increasing pressure on local legislators and regulators to put in place similar measures to encourage greater diversity on boards of New Zealand companies.

However, in responding to market trends, boards must avoid becoming “mini parliaments” responding to every vocal interest group at the expense of focusing on core business and customers, and recognising long term trends.

The core role of a board remains to understand the organisation’s business and industry, work out your differentiating competitive advantage and how to maximise it, employ the right CEO and management to deliver on it – and then hold them to account on those measures.

Climate change: The “unwinnable war”?

Climate change is one of the key challenges facing the world (and governors) today. While the science of the cause and effects of climate change is now relatively clear, climate change policy is complex and climate action to date has been the subject of debate (both globally and nationally).

Directors need to consider climate change, both in terms of its immediate effect on their organisation, and in a wider sense, including:

• Risk and liability may arise if unachievable ambition causes inadequate action. Governors should look at all climate change commitments through that lens.
• A lack of transparency and accountability can hit hard on an organisation’s brand and reputation.
• Beware of “greenwashing”, as puffery can lead to deception and a suggestion it could be criminal fraud. If you are going to make statements about your organisation’s impact on the environment, don’t just ask your expert advisers to tell you – challenge them to show you the evidence.

With an economy that is reliant on growing, producing and exporting high quality products that the world wants, New Zealand has a unique perspective on climate change and the challenges that it poses.

Public policy and market forces both have an important role to play in responding to the challenge of balancing environmental outcomes with ensuring that New Zealand maintains its international competitiveness.

Organisational culture: The importance of attracting and retaining talent

Ultimately, an organisation’s success comes not from predicting the future, but from creating an environment in which people and businesses can thrive despite what will be an unpredictable future.

Talent (or human capital) management will likely be an important matter for governors during the next decade. Organisational culture matters. How an organisation treats its staff, retains talent and rewards performance should be on every board agenda.

As the world begins to re-open, the global marketplace for talent is likely to be very competitive. New Zealand companies could be quite disadvantaged – it is anticipated that young New Zealanders will start to look for opportunities overseas and the country could experience another “brain drain”.

While this is not a new issue, some of the solutions that organisations have relied on to fill gaps in the past (e.g. open borders and low inflation) may not be available to the extent that they once were.

Talent acquisition is one thing, but talent retention is equally (or more) important. People committees will increasingly become key to a board’s oversight of talent risks.

In the coming years, as competition for talent in a changed market becomes fierce, boards and people committees need to make sure the basics are being done by:

• Being aware of the talent risks
• Having access to the data with measurable outcomes
• Ensuring that talent strategies are aligned directly with business strategies
• Monitoring the talent pipeline and scanning the market

Cyber security

Cyber security has become a pressing issue, as demonstrated by recent high profile hacking events and data breaches both at home and abroad.

Boards need to think seriously about cyber security and understand the extraordinary challenges that their organisations face in an increasingly hostile environment. Hackers are becoming more sophisticated at what they do, and the technology that they are using is incredibly advanced.

Governors should be asking hard questions of their organisation’s cyber security teams and external providers. It is not just about how much your organisation is spending, but also making sure that directors understand what sort of analysis cyber security providers are doing.

Overseas jurisdictions are taking cyber security more seriously than New Zealand currently does, with some introducing personal criminal liability for directors who do not give sufficient attention to it. This may be a sign of things to come for directors of New Zealand companies.

A recalibration of the global political order?

The geopolitical world is in an interesting space at the moment. The world view on China has changed in recent years and will most likely continue to do so.

Boards should be prepared to discuss geopolitics more and more. A greater understanding of geopolitical matters will help governors to think and act strategically to mitigate political risks and seize opportunities when they arise.

The accelerated pace of disruption

Disruption has been a hot topic in recent years. And while many considered the rate of progress and change in many areas over the past decade to have been fast, COVID-19 served to accelerate disruption in a number of organisations’ ways of working:

• Future of work: While the focus before COVID-19 was concern about machines taking over from humans, the discussion in many parts of the world is now focused on when (or whether) humans are going to return to the office, and the flow on effects that this will have on communities and local economies.
• Online offering: COVID-19 established very quickly that organisations that do not have an online presence will fall behind their competitors. COVID-19 proved to people that they do not necessarily need a face-to-face interaction to do business.
• Changing demographics of consumers/customers: The consumers and customers of the future are going to be “digital born” and the way they interact with companies will change accordingly.
• Accountability and authenticity: Consumers are demanding more from organisations in terms of their accountability on big issues (especially on climate) and the authenticity that business’ project in their communications on those issues.