macrotrends

Each year at this time we see hundreds of articles offering analysis of the trends to watch for the year ahead. In today’s business climate, you can bet most of these will reference one or more emerging technologies poised to disrupt enterprises and consumers. But merely being aware of exciting technologies and their potential impact is useless unless you can link them to the governance, strategic and risk-management roles that directors undertake daily. Rather than focus on the actual technologies, here are five cross-cutting trends to track during the next year. Monitoring them will help you and your board better navigate the opportunities and challenges of emerging technologies.

Things to watch for:

  • Development of new policies/strategies by federal and state governments.
  • A shift from lobbying to collaborative policy development among multinational firms.
  • The influence of international regimes such as GDPR — and the fines they impose — on Australian businesses.

New rules, new duties

Since the Cambridge Analytica scandal in April 2018, an array of global technology companies have faced public and employer concerns around their approach to data privacy, extremist content, the treatment of workers and myriad other issues. Accordingly, in 2019, legislators and regulators were more focused than ever on enforcing laws and designing new controls to hold tech companies to account.

As a result, penalties for technology-related breaches are growing by orders of magnitude for companies from all sectors. In October 2018, Facebook was fined £500,000 by the UK government for failing to protect user data. In July 2019, the UK Information Commissioner’s Office announced penalties of £99m for Marriot International and £183m for British Airways, highlighting the cost of infringing the EU’s General Data Protection Regulation (GDPR) rules. The same month, the US Federal Trade Commission announced Facebook would pay US$5b to settle a probe related to the inappropriate sharing of data.

One of the most important themes for directors to be aware of for 2020, therefore, will be the ways in which governments respond to both public concerns and competitive dynamics related to new technologies — whether this is privacy, cybersecurity or new government procurement rules. For directors, this means ensuring your board is monitoring the policy environment related to new technologies and anticipating possible risks for corporate liability. But perhaps even more important is looking for opportunities to leverage new policies for competitive advantage. For example, by creating more trusted relationships with customers.

In Australia, expect policymaking related to technology to accelerate at all levels of government as jurisdictions play catch-up to new international norms. For example, the Department of Industry, Innovation and Science may well release a standalone national AI strategy in 2020 aimed at building the country’s competitive edge in machine learning while ensuring fairness and transparency in its use.

Things to watch for:

  • New business models focused on dramatically shifting customer experiences.v
  • Unexpected partnerships by competitors or leaders in adjacent industries.
  • Scenarios and strategies that take new technologies for granted and look at second-order effects.

New systems beat new technologies

Emerging technologies don’t change the world by themselves. It’s their evolution from new capabilities to entirely new systems that is revolutionary. Take the spinning jenny — a multiple-spindle machine for spinning wool or cotton. The thread it created was initially weaker than that spun by hand, and on its own it couldn’t hope to compete with the quality of production from artisanal workers. But when integrated into factories — supported by new flows of capital, new power sources, access to new types of workers and links to new markets — the jenny, the spinning mule and a host of related inventions collectively revolutionised the textile manufacturing sector and began a major social and economic transformation across 18th-century Europe.

The shift from developing single technologies to building transformative systems is well underway today with businesses and governments focusing much more on systematically building emerging technologies into new and exciting capabilities at scale.

Mobility systems are a good place to look for change of this type in the coming year. Ride sharing has already transformed the mobility landscape for passenger vehicles and 2020 looks to be the year benefits of machine learning algorithms and use of connected smart devices in public spaces begin to be truly felt by Australian commuters.

This is happening in China, where Alibaba’s efforts at managing road networks in major cities using AI (City Brain) has resulted in a 17 per cent increase of public bus use and halved emergency vehicle response times in Hangzhou. In its first foreign project, City Brain has reportedly shaved 15 minutes off the average commute in Kuala Lumpur.

Closer to home, the NSW government’s success at leveraging open data around public transport systems in Sydney — which allows commuters to remotely monitor how full carriages are — is another example of authorities investing in public technology goods that support greater system-level efficiency.

Another important shift will be from pilots to full launches. Following an 18-month world-first trial in Canberra, Project Wing (part of the US-based X, founded by Google parent company Alphabet) successfully demonstrated that Australians are pleased to receive their latte, burrito or filled prescription by autonomous drone, lowered on a wire to their driveway. In 2019 the Civil Aviation Safety Authority cleared Wing Aviation to operate ongoing drone deliveries in selected suburbs in Canberra and Queensland.

For directors, this prospect of entire systems changing presents a major strategy challenge. It requires being extreme when assessing corporate strategies against different plausible scenarios for future market structures and being more creative. And, given that new systems require new value chains, it will warrant exploring interesting new partnerships among parties you’d not normally expect to see collaborating.

Things to watch for:

  • Employee and investor activism around climate change.
  • Fraudulent claims of sustainable practices along your value chain.
  • Opportunities to leverage the “circular economy” for greater material efficiency.

Solving for sustainability

Australian companies are remarkably sanguine about the world’s changing climate. This is likely to shift in 2020 as the costs bite into corporate reputations, profits and perhaps even pose an existential threat.

Take the January 2019 bankruptcy of American utility Pacific Gas & Electric (PG&E) as an example. It could well be the first climate-change bankruptcy in modern history, thanks to the financial burden of PG&E being declared the cause of California’s deadliest, most destructive wildfire, the 2018 Camp Fire. PG&E’s infrastructure and technology systems weren’t adapted for the fact that the state’s hottest and driest summers on record have all occurred in the past 20 years.

In the AICD Director Sentiment Index in the second half of 2019, Australian directors nominated climate change as the third biggest economic challenge facing Australian business — and 44 per cent thought climate change should be a federal government priority in the short term.

In 2020, this mood can only increase as public pressure, financial risks and legal threats become far more significant for firms.

Thanks in part to the rising visibility of climate champions such as Greta Thunberg, the changing climate has become the primary environmental concern for people across 28 countries polled by IPSOS in February–March, including Australia (44 per cent).

As rising public pressure turns into widespread action, boards will have no choice but to pay attention.

Sustainability is not just an increasingly popular concern. The Reserve Bank of Australia called out risks from climate change in its October 2019 Financial Stability Review, arguing that physical exposure, the cost of transition and reputational risks significantly threaten the Australian financial sector.

This comes on top of the legal risks that have been telegraphed for both firms and directors. Referencing the landmark 2016 Hutley legal opinion (on directors’ duties in relation to climate change under Australian law), the RBA report noted: “[Australian] Firms also face legal risks if directors fail to address the potential exposure of their firms to climate-related risks”.

New legal risks linked to environmental impact are part of a global trend: the London School of Economics Grantham Research Institute on Climate Change and the Environment found plaintiffs have turned to the courts to litigate for climate action in 28 countries to date, posing a significant financial and reputational risk to firms regardless of the success of the case.

Aside from risk concerns, there may be opportunities in rethinking business models. Thus, greater board focus on sustainability seems warranted for the year ahead. A focus on more sustainable business operations will have a critical bearing on all kinds of technology-related choices for firms — from source material used for packaging to the carbon cost of your delivery network.

In addition, boards need to be aware emerging technologies can be huge consumers of energy. All of this implies directors should make sure to address climate and environmental risks in all aspects of corporate governance — including in forward-looking technology strategy.

Things to watch for:

  • Further bans on technology firms between Australia, China, the EU and US.
  • The potential re-entry of Huawei into European 5G markets.
  • The rise of highly integrated platform ecosystems such as Tencent’s WeChat ecosystem or Alibaba’s e-commerce ecosystem outside of China.

Increasingly fractious geopolitics of technology

A fourth trend that crosses technological domains is how differing approaches to technological development among the world’s major powers is threatening to divide the world in ways that could unwind many of the aspects of globalisation that consumers and companies take for granted.

As foreign policy expert Dhruva Jaishankar has written, three different models of technology development, commercialisation and data use have emerged in China, the US and Europe. Broadly-speaking, the European Union privileges consumer rights over enterprise efficiency, as best evidenced by the advent of the GDPR, and is stepping up its investment in public research funding and innovation grants such as the €94.1b Horizon Europe research and innovation proposal. The US has given more latitude to fast-growing firms, even where these seem to create new market distortions or threaten consumer rights. And China has developed a new form of state-backed technological competition where citizen data is widely shared between the government and private companies. These factors, when combined with a locally competitive, yet globally protected digital market and significant financial resources, has lead to Chinese firms such as Alibaba, Huawei, Tencent and JD.com being able to compete successfully with US and European tech giants.

This diversity of approach has already led to geopolitical tensions and trade disputes. Following the Australian government’s ban of Huawei in August 2018, the US government put Huawei under an export ban in May 2019, effectively excluding it from US telecommunication networks. In October 2019, some of the world’s leading facial-recognition companies, all of which are Chinese, were added to the list by the US Department of Commerce.

China has responded to the bans with diplomatic overtures, making robust appeals directly to companies and has reportedly considered banning rare earth exports to the US. Early in 2019, there were fears that delays around Australian coal imports to Chinese ports were linked to the Huawei ban.

Meanwhile, European companies are doubling down on regulating the technology sector. Following a skirmish with Google over how publishers could be compensated for use of their material in search results, France has pushed for the European Commission to regulate large digital platforms as “systemic” players, in ways similar to influential financial organisations.

For directors, global technology tussles might seem just one more reason for boards to pay attention to geopolitics. But rather than seeing technology as one more pawn on the chessboard of trade wars, directors might reflect on the inverse — that trade agreements are being used to try to control the future of technological systems in ways that pose significant risks to the Australian economy.

Beyond the threat of disruption these can cause to Australian companies, such attempts may ultimately backfire by simply slowing the rate of technology adoption where it is most needed. On this point, as 2020 begins, it’s worthwhile diving into Kai-Fu Lee’s book, AI Super Powers, which puts forward a compelling case for the ways in which Chinese and US companies are competing on artificial intelligence — and the advantages China has on the application side.

Things to watch for:

  • Excuses you will give to your fellow directors why you don’t need any additional training.
  • Corporate upskilling strategies that focus almost entirely on mid-level high-performers, but miss top executives and frontline staff.
  • The rise of employee-curated training content.

Skills shifts become personal for directors

Boards and directors will be under even greater pressure to understand how emerging technologies affect both organisations and markets. While in past years it was possible to delegate technology issues to your CTO or resident tech nerd, the trends, the AICD Driving Innovation: The boardroom gap report highlights that understanding the dynamics of technology and its impact on corporate governance and business strategy will be a job for all board members.

For directors, this means taking very personally the fact that new technologies are changing the demand for skills at all levels of organisations.

The World Economic Forum’s The Future of Jobs Report 2018 argued that 42 per cent of core skills will be different for any given role by the year 2022. Over the same period, the report found that to be effective, every employee will require an additional 101 days of reskilling.

Boards and directors will need to ensure they step up their investment in knowledge partners, advisers, training courses and experiences — because directors, on average, will require 101 additional days of reskilling during the next three years.

If you break this down, it means that you, personally, should plan for approximately 20 five-day weeks of training between now and 2022.

Given your current commitments, what has to change to fit six or seven weeks of full-time Skill development into your to-do calendar for 2020?

Nicholas Davis is former head of Society and Innovation at the World Economic Forum and co-author of Shaping the Fourth Industrial Revolution. He is managing partner of Geneva-based consultancy SWIFT Partners, professor of practice at Thunderbird School of Global Management and an adjunct professor at Swinburne University.

Read, reflect and realise

As you prepare to head back into the boardroom at the beginning of 2020, keep these five trends in mind. And if you’re interested in expanding your thinking about these topics, consider diving into one or more of the following resources:

On your risk radar?

Michael Hawker AM FAICD is a former investment banker and a director of companies such as Macquarie Group, Rugby World Cup and Bupa ANZ Group. The former chair of the George Institute for Global Health lists five macrotrends he regards as critical global risks. By Jane Southward.

Technology

The global trend affecting every business, big or small, is the impact of technology. It has changed the breadth of the market. Over time, markets have been where you could walk to, where you could ride to, where you could get a train to, and where you could fly to. But now we can go anywhere in the world. So the market has completely changed and is global. Almost any product anywhere in the world can get delivered anywhere else in the world.

Geopolitical risk

The world has gone global before governance systems have gone global. The political framework is still local and broadly geographically based. Very few, if any, OECD governments are discussing with their citizens what they need to do to make their country successful in the changing nature of global competition. Politicians are typically just reacting to the impact global competition is having on their country. Therefore, they are reacting to the political fallout through populist policy formulation, leaving many people whose jobs are changing or being lost without an understanding of why.

Our communities are becoming divided into those who love the change and embrace it — and those who don’t. Many people do not understand what the hell is going on with their lives and are basically trying to stop it. That’s what’s driving the political landscape in the US. It is also happening in the UK and Australia.

For the past 40 years, the world has been primarily governed under one dominant global power providing the opportunity for capital and for people to move and travel freely around the world.

We have had global structures since WWII — such as the G20, United Nations and World Health Organisation — enhancing global communication.

Global power is now shifting with the re-emergence of economically stronger trading blocks with different political systems, such as China, the EU and Russia. Many governments are no longer providing the strong support to these forums that they historically did.

In my view, this change in political landscape has been totally driven by those that benefit from the globalisation and digitisation of global markets, and those that don’t. There are a lot of people saying, “I don’t like this change. It is driving me nuts. I don’t understand what is going on so I’m just going to stop it.

Population growth

Understanding demographics by country is hugely important. World population is 7.7 billion; in 1900 there were 1.6 billion people. The world’s population is still growing, which is driving economic growth. However, understanding where the working populations are growing, coupled with productivity improvement, will give you significant insight into the impact on each country’s relative economic metrics.

It is worth understanding the average age of each country’s working population and its forecast trend. India has an average age of about 28; China’s is about 37. Russia’s working population has fallen by approximately 20 per cent during the past 10 years. This makes it difficult for them to continue to drive economic growth. Western Europe has had the benefit of consolidating with Eastern Europe, increasing its population growth with considerable improvement in their productivity.

Japan has an ageing population — a median age of 47 — and a commensurate shrinking labour force with little or no immigration, thus their high use of robotics to drive up productivity. Understanding country demographic trends helps to predict medium economic outcomes.

Climate change

If world experts indicate there is a 95 per cent probability of a risk occurring, you are negligent if you ignore their advice. Currently, scientific experts believe there is more than a 95 per cent probability that the growth in humanity is the cause of climate change.

Irrespective of whether you believe it or not, most governments and vast numbers of people across the world do. So you’ve just got to deal with it, as it has a massive impact on the cost of living, energy costs, product content, product recycling, supply chains and value of assets. Business adaptation to climate change is a massive challenge, but also a significant new opportunity.

The economic cycle

I would say we are towards the end of the economic cycle. All economic bubbles are driven by asset prices being inflated way above their real value. We are at a point where asset prices are inflated, relative to history. In my view, since the GFC, central banks are trying to push their intervention and support for the markets as far as they can and for as long as they can. So we might have another two years before we get to a downturn or it might happen tomorrow.

Thinking back to my trading days, I always got nervous when people came back from their Northern Hemisphere summer holidays, in September, saying, “Jeepers, this is not looking great — the market is going down.”

Michael Hawker AM FAICD spoke at an Australian Transformation and Turnaround Association forum in September.