What does 2023 have in store?

Good practices to consider…

Work out the oversight and risk implications of a high inflation and higher interest rate environment. Management will be dealing with the operational consequences across financing costs, treasury, budgeting, pricing, bidding, salaries, staff welfare… The Board needs to work out what new questions arise for budgeting, business models, risk and performance monitoring, remuneration, and so on.

Things to avoid…

Assuming that it’s a short-term challenge which will sort itself out.  That might be the happiest ending to the story, but it’s not looking likely.  Inflation takes time to drive out so will remain a factor for some time.  And that means the interest rate implications will have to be managed too.  Has your board spent enough time on scenario discussions?  With a rigorous enough questioning of assumptions?

Good practices to consider…

Take stock of the “principal risks”.  A lot has changed in the past year.  And that’s on top of the pandemic fallout.  Most landscapes will have changed: competitor, consumer, regulatory, geopolitical, supply chain.  They’ve probably gone well beyond what used to be expected as the norm – which must mean that the strategic risk profile has changed.

Things to avoid…

Regarding the principal risk list as simply part of external reporting requirements.  Instead, a review should be an opportunity to stand back and check that the main things which might knock the strategy off course are on the radar.  Even if they can’t be mitigated away, they should at the very least be factored into management thinking.

Good practices to consider…

Keep thinking through the strategic impact of “Working From Home”. The year just gone has been one of adjustment and few think that they’ve got it sorted. There’s a growing realisation that there’s a “new normal” but it’s not clear what that is. The impact on expectations, working methods, learning, communication, recruitment, retention, morale, welfare, premises, operational risks, and so on should become clearer over the next year. How do you want the operating model to develop?

Things to avoid…

Seeing the changes as operational issues to be dealt with by management. Or temporary, which will largely go away once true normality returns. Many boards have already recognised the shift to new working practices but are also watching management struggle with the fallout. Carving out board time to consider the developing implications should be seen as a strategic issue: such a major shift to the way of working must surely have significant and long-term ramifications.

Good practices to consider…

The impact of supply chain difficulties and delays continues.  What was initially a temporary pandemic-driven difficulty looks like becoming a more fundamental shift, or at least a continuing challenge.  Boards will need to make sure that management is taking a long-term view of the prospects for costs and stability of supplies, with a realistic assessment of the risks and potential impact on the business model.

Things to avoid…

Maintaining a short-term mindset. No doubt some local difficulties will get resolved. And we must all hope that the geopolitics will calm down. But for the time being, boards will need to be reviewing the assumptions underpinning costs and reliability and making a call on how to mitigate the potential consequences.

Good practices to consider…

Keep customers front and centre.  It’s now much more than just the perennial question of monitoring buying trends and competition.  Pressure on household budgets could mean shifts in behaviours.  And customer welfare – or at least how you treat customers in stressful times – will become even more of a strategic issue as well as, for some, a regulatory risk.

Things to avoid…

Taking it for granted that prioritising customer interests comes naturally as part of business as usual. Some prompting and probing in board discussions can help in ensuring that the organisation, across many levels, is being sufficiently sensitive to the changing customer experience.

Good practices to consider…

Management (and board?) burnout might be increasing as a risk. The relentless pressures of dealing with extraordinary circumstances over a long period can increase stress levels to an unacceptably high level.  Boards, and chairs in particular, need to be attuned to how leaders and directors are faring personally.

Things to avoid…

Failing to spot the signs. Organisational stress and the impact of change often doesn’t come on to the board risk agenda as much as it should. Even less so are the risks around key individuals, and the stress levels amongst senior teams more widely. At (continuing) times like these, the emotional antennae need to be working well.

Good practices to consider…

Increasing demands on the ESG front mean that ESG audit and assurance requirements will only increase.  The European Sustainability Reporting Standard will be one to watch, with 2024 as the first reporting year with “audited assurance” a requirement.  That’s just part of grappling with an overall increase in audit demands across reporting and systems.

Things to avoid…

Assuming that management will simply absorb the pressure.  Audit committees need to make sure that discussions around planning and resourcing for new reporting and audit requirements are looking far enough ahead.  And to discuss how the “audit burden” might be increasing tensions as managers get frustrated at the time and financial cost of meeting external requirements.

Good practices to consider…

Getting ready for new obligations on audit committees and management.  The Government doesn’t seem in much of a hurry to implement ARGA and all the other joys promised a few years ago in response to Kingman, Brydon and the CMA.  But nonetheless expectations are changing and the pressure on audit committees to up their game is rising.  A good place to start is to prepare an audit and assurance policy that brings together all the sources of comfort over control and reporting.  It doesn’t yet have to be reported publicly, but the exercise of preparing it leads to valuable discussions.

Things to avoid…

Supposing that, because the FRC hasn’t been abolished yet, nothing much will change in the foreseeable future. The FRC is bent on getting as close to being ARGA as it can do without the help of legislation, and it turns out that’s closer than many expected.  The recently proposed standard for audit committees in relation to external audit is a straw in the wind and we can expect more on internal control and internal audit. Audit committees need to challenge their past assumptions about how much is enough.

Good practices to consider…

Dealing with economic recession.  It looks like a low growth year is coming, with some economies struggling with stagflation and most having to bear down on inflation with much higher interest rates.  The knock on effects must be felt across consumers and suppliers as cost of living pressures combine with a housing market slowdown.

Things to avoid…

Being reactive rather than proactive.  For sure, economists’ projections vary and aren’t always a helpful basis for strategic or tactical decision-making.  But there’s little reason to doubt that a slowdown and increased stresses in multiple parts of the economy will change the business equation and that some strategic adjustments are likely to be necessary.

Good practices to consider…

Keep on top of innovation and the impact of AI.  Transformational change was reaching the top of board agendas before being knocked sideways by more extreme operational challenges.  It now needs to reclaim a top space on agendas.

Things to avoid…

Losing sight again of the strategic importance of innovation in the face of immediate cost and operational pressures.  Technological change continues apace, and future winners will have kept it at the heart of strategic discussions despite the distractions.

Good practices to consider…

Alongside all the other challenges, cyber risk management may have slipped into the “business as usual” category.  That might make sense, but boards need to make sure the organisation is keeping on top of the changing environment.  As everybody understands, the tools of the attackers’ trade are constantly evolving so the Board needs to keep asking how the organisation is keeping on top of the risks and will manage the fallout when it comes.

Things to avoid…

Allowing a red risk to fade to pale pink through over-familiarity. You’ll want continuing reassurances from the CIO. But directors need to know what is changing in order to be able to ask the right questions. And to have access to the technical know-how to understand assurances that the risk response remains optimal. Even though most directors can’t be expected to keep up with the latest technicalities, the board has to keep itself equipped for effective oversight of a risk that remains very significant.

Good practices to consider…

And lastly, another area where novelty evolves into normal is climate change.  But momentum needs to be maintained, and many aspects of this multi-faceted problem keep moving apace: political, technical and strategic, as competitors set out their plans and stakeholder expectations develop.

Things to avoid…

Letting the long-term nature of the challenge lead to insufficient pace and dynamism. With many now having formulated ESG strategies and registered the new reporting requirements, the push to net zero can appear to be “covered”. But boards have a responsibility to make sure that progress is maintained and faithfully reported, despite operational pressures or governmental procrastination.