In a world where the pace of technological change seems to be increasing exponentially and the potential for digital disruption is a fact of life, businesses must be prepared for change. Today’s business leaders have a tough job finding growth and delivering results in a low-growth world where not only are the competitive pressures on companies increasing, but their reaction times are decreasing. Every business must be agile and able to respond quickly – or it will not survive.
Attempting to plan for the business environment going forward has been thrown into turmoil by events in the geopolitical landscape. Among the factors bubbling away in the background are China’s managed transition to a domestic-demand and services-driven economy; Japan’s attempts to revive its moribund economy; Russia’s growing nationalism and willingness for involvement abroad; the perennial problems of the Middle East; the internal stresses on the European Union, which culminated in the UK’s Brexit vote in June; and the stunning win by Donald Trump in the US presidential election.
As all of these factors rub up against each other, and the shape of the Trump program emerges over 2017 and 2018, the business environment, like the geopolitical landscape, will grow ever more challenging.
In this setting, Company Director asked a group of ASX-listed company directors to describe the greatest challenges facing them and their companies over the next two years. High on the list was cybersecurity, and the need to stay on top of digital risk. “Things are changing so quickly on the data front, and as a director it’s all about ensuring that we keep ahead of the game, and stay informed on what’s happening on those fronts. It’s just so important,” says Kate Thorley MAICD, a director of listed investment companies (LICs) WAM Capital Limited, WAM Leaders Limited, WAM Research Limited, WAM Active Limited, Future Generation Investment Company Limited and chief executive officer (CEO) of their management company, Wilson Asset Management.
“We’ve just engaged an organisation to do some work with us on data privacy and protection and the whole issue of cybersecurity, because we think it’s a huge area that needs a lot more focus. As a director it’s very important to do this work too,” says Thorley.
Holly Kramer MAICD, a director of Woolworths Limited, AMP Limited and Nine Entertainment Company Limited, concurs: “As more corporate data is shifted to the cloud, and more workers conduct their roles through internet-connected devices, the cyber-threat to businesses also grows.
“The solutions to keeping data safe do not reside only in the IT department, but across the whole of the business in terms of how employees use these devices on a daily basis. There is no sector immune from this enormous challenge, which seems to grow every day.”
If directors are not thinking long and hard about this threat, they should be, says Elizabeth Gaines MAICD, a director of Fortescue Metals Group Limited, Nine Entertainment Company Limited, Next DC Limited and Impedimed Limited, especially as automated processes and the Internet of Things (IoT) become a reality.
“Most companies are highly attuned to the risk of cybersecurity as it relates to financial risk and the efforts to defend payment and other financial processes from the risk of cyber-threat are well advanced. But there is a growing awareness of the need to defend operational systems and processes from the risk of breach of cybersecurity.
“This includes, for example, highly automated processing and manufacturing systems. I see this risk being elevated in board discussions regarding risk management,” says Gaines.
Gaines likens this to the need to stay abreast of innovation, and the potential impact of disruption caused by new business models and new market entrants. “It’s very important for directors to keep abreast of innovation as it relates to the sectors that (their companies) operate in.
“This can include the introduction of new methods of transacting and distributing product or content, as well as the impact of new offshore entrants to an established market that may not be subject to the same regulations as Australian-based companies,” she says.
The low-growth environment is also a major source of concern. As Kramer puts it, companies in all sectors are feeling the pressure to return growth for shareholders. “Yet as global experts forecast low inflation and low interest rates for the foreseeable future, both top-line and bottom-line growth will be more difficult to achieve. As a result, there could be pressure on both boards and executives to take on greater risk in the pursuit of diminished growth opportunities,” she says.
For many Australian companies, the growth opportunities that do exist are centred on Asia – most notably China and India – and the imperative to optimise these opportunities presents its own set of challenges, says Gaines. “Due to its proximity, Australia has a unique opportunity to benefit from the growth in Asia, particularly China and India. The potential benefits to industries such as travel and hospitality, agribusiness and resources are significant. Ensuring that companies are positioned to benefit from this opportunity is a key challenge for directors as it pertains to understanding the market, building relationships, managing risk and allocating resources,” she says.
Cultural issues are also worrying directors, especially their companies’ need to attract and retain the right people, and show them a culture to which they want to belong. “I can see the war for talent escalating across all sectors, with an ever-increasing need for skills and capabilities such as dynamic leadership, innovation and invention, digital, and data analytics,” says Kramer.
“We need to develop these skills at an earlier level and on greater scale in our education sector and within companies themselves. Until we have them in abundance, the cost of acquiring and retaining this key talent will continue to increase.”
Ensuring that boards plan for succession and retain talent is not a new challenge, however globalisation has heightened the awareness of the executive talent available in Australia, says Gaines. In turn, this has encouraged executive talent to move more readily between countries and industries. Directors must ensure that a company’s remuneration principles are designed to “attract and retain talent, provide for managed succession and meet the expectations of key stakeholders,” she says.
Directors can play a big role in establishing and maintaining a company’s customer-centred culture, says Sandra Hook GAICD, a director of technology companies RXP Services Limited, MedAdvisor Limited and IVE Group Limited – and that is a major challenge for directors in the current environment. “It’s building a culture, not just a company: the focus is always on the customer. Directors can help the CEO create the enablers who will deliver that missionary zeal among our people.”
Listed companies, in particular, need to understand the growing sense of disconnection between shareholders and companies, says Thorley. “We spend a huge amount of time engaging with shareholders: companies have to do more of that, and do it better.
“There have been a lot of scandals, and the shareholders have got to believe you – you’ve got to be transparent, and honest, and if you get something wrong you’ve got to come out and say you got it wrong, because, globally, the gap between the shareholders and company management is widening. Directors have a very important role to play in this regard,” she says.
This sense of disconnection, and a widening gap, can be seen in both business and politics: Kramer describes it as “anti-establishmentism.” She says there is a growing mistrust of the “establishment,” and big business in particular.
“This sense of mistrust can create challenges for business in many ways over the coming years, especially if governments and regulators feel compelled to react to public sentiment. Therefore, as business leaders, we need to win back public trust and work to maintain our social licence by focusing on sustainable business practices, and investing for jobs and growth,” she says.