Summit 2017: Changes ahead

Adapting to a changing and volatile world was the key message for delegates at this year’s Australian Governance Summit, writes Angela Faherty.

Boards must move outside their comfort zone and be prepared for change if they are to survive the next two decades of business challenges, according to Elizabeth Bryan AM FAICD, chairman of Virgin Australia.

Speaking at the second annual Australian Institute of Company Directors’ Australian Governance Summit in Melbourne last month, Bryan warned of shifting business dynamics in an increasingly volatile and changing world and outlined key areas of focus for boards as they navigate radical change.

In her keynote address, Directing in a complex environment, Bryan highlighted new industries, the need to build resilience and the significance of harnessing enablers of change and innovation as the main drivers for future business success.

“Over the next decade, the western business environment that we know today will undergo radical changes,” she said. “These challenges in front of us are going to require boards to move well outside business as usual, and to guide their companies through quite radical change that will embrace your company’s positioning in the external world. To do this, boards are going to require insight, boldness and a refreshed tolerance for risk.”

Driving this change are greater stakeholder engagement in the role of corporate behaviour, increased regulation that requires companies to pay greater attention to the effects of all aspects of business on consumers and society, global economic challenges and ever-changing technological advances.

“If we can develop a thoughtful discussion among the governance community in Australia on some of the big economic and social issues that are coming upon us, it will be invaluable to each of us in properly carrying out our corporate duties and having a meaningful engagement with the social, environmental and political challenges of our time,” she said.

New industries

Bryan identified the five new industries of robotics, advanced life sciences, the code-ification of money, cybersecurity and big data as future sources of sustainable growth and innovation, and urged boards to consider ways to invest time and resources in understanding the impact of each on business over the next two decades.

“Jobs in the service sector that were largely immune from jobs loss during the last stage of globalisation are now at risk due to these advances in robotics. To be left behind in the productivity race will not be an option for any of our companies in the service sector,” she said.

Signalling the challenges facing companies in the financial sector, Bryan said the move towards digital payments and the subsequent move away from the use of physical money was a significant threat as it could lead to the disintermediation of existing financial channels and a fundamental change in the global payment systems.

However, it was the imminent and ever-changing threat posed by cyber attacks that posed one of the greatest challenges, she said. “The cost of cyber attacks is now larger than the gross domestic product of about 160 of the 196 countries in the world,” she said.

“Cybersecurity attacks can destroy companies and no one is immune. Cybersecurity has grown into such a mission-critical function that it must come out of the technical backroom and become part of the expertise of a boardroom just as auditing has.”

Turning her attention to big data, Bryan referred to the industry as “the new raw material that all our companies will base their businesses on” and said boards will have to understand how to use big data in their business.

As both an enabler and disrupter of other industries, Bryan said big data would give rise to new ways of dealing with old problems as well as provide new services. “Boards need to understand the developments in big data and find ways to link big data with their own domain knowledge, in order to shape the future of their companies,” she said.

She added: “Early moves by some large companies in Australia have been to acquire the technical skills by buying data analytics companies. But that is just the first step. Integrating data analytics into the way we do business is the goal.”

Preparing for the future

With such innovation bringing both promise and peril to the operating environment for directors, Bryan moved on to discuss what the governance community should be doing now to prepare their companies for such challenges.

Pointing to the need for boards to build greater resilience into the companies they govern, Bryan highlighted developing awareness, diversity, integration, self-regulation and the ability to be adaptive as the key tasks facing boards today.

“These should be regarded as survival skills and squarely in the remit of the governance of companies,” she said. “If the board and its executive team are not talking about and monitoring resilience, then they will be less equipped to manage the inevitable shocks to the system that will hit them.”

Turning her attention to “the enablers” of trust, respect, people and culture, Bryan said getting these correctly embedded in companies is critical to getting through the upheavals ahead.

She added that since the turn of the century, the reputation of the business sector has taken a battering with too many tales of bad corporate behaviour, the impact of the global financial crisis and the widening of income disparities all playing a significant role.

This has taken place at a time when intangible assets are becoming much more important to value creation than they have been at any time in recent history, she added. Quoting figures from 1975, Bryan said 83 per cent of the market value of companies in the S&P 500 was accounted for on their balance sheets. Today that figure is around 16 per cent and signals the need for a different approach to governance.

“The bulk of company value is now made up of intangibles that are not capitalised such as brand, reputation, intellectual property, human capital, and culture. The sustainable value of all these assets is deeply rooted in the community’s acceptance of the role companies play in society and the trust and respect accorded to individual organisations. “Reputation, stakeholder management and business conduct are all front and centre for boards these days and will be key to their company’s success in mastering the digital age,” she said.

Purpose and values

While Bryan said that most good boards in Australia operate in the “grey zone” where much of these practices are in place but not fully and deeply embedded throughout the organisation, establishing and delivering these practices continues to be essential work in progress and is dependent on one thing: people.

“Purpose and values and culture only exist when they come off the page and exist as automatic responses and practices of people. When all the right words are in place but it doesn’t work, there is likely a lack of genuineness in the commitment and in the culture in the organisation. This is where companies and organisations have so much work to do and where change will be hard and slow,” she said.

Such change includes the elimination of KPIs, measurements, bell curves, classifications, bi-annual or annual feedback sessions and reports to HR and the restructuring of performance management.

“Much more is going to be required of boards over the next decade,” she said. “The emerging role of a director in the next decade and beyond will be a responsible and stressful role, but rewarding and exciting at the same time, and a real chance to contribute to the shape of our society.”