IMHO: AI expertise on boards: real growth or skills inflation?
An increased number of AI experts on boards raises questions about the realities of board composition and the dynamics of skills inflation.
Boards and directors are facing myriad challenges and many of these challenges will only increase in scale and importance.
Recognising many of the issues facing directors is not difficult; settling on a top five is. Climate change, for example, will obviously be at the top of the list, but just identifying risk is no longer acceptable. It is the measures you have in place and the changes you are making that are now expected of organisations.
There are so many factors shaping a to-do list, including global forces such as the Covid-19 pandemic still surging around the world; the ongoing and significant impact of climate change; the short and long-term implications of transformative technologies; and the ever-shifting and increasing consumer and community expectations.
This then leads into consideration of diversity and inclusion, and equity issues that are increasingly tied up with many organisation’s social licence to operate.
Our ‘Top 5’ does not aim to be comprehensive. It is instead a useful starting point for 2023 because it highlights areas that need immediate attention and action; and the issues boards should discuss during the year and how, and the reasons for having those discussions.
It is intended to help directors add value to their organisations by thinking ‘over the horizon’, anticipating developments and supporting management to be responsive to the changing operating environment.
This list gives directors and their boards a sense of where potential opportunities and future strategic challenges may arise. Considering these issues in 2023 will help to minimise surprises, support good decision-making and help boards and management prepare for the future (in ways that can be anticipated now).
It pools and interprets information from different sources, including our 2022 IoD/ ASB Director Sentiment Survey, and the monitoring of global trends and emerging governance issues.
For 2023, we have identified the ‘Top 5’ as:
Urgent action towards a low-emission economy, reporting progress and integrating decision-making
More than half of directors see climate change (along with water and resource management) as a critical future trend. In the 2022 Director Sentiment Survey, respondents ranked this second only to the related issue of customer expectations as a key trend requiring board attention.
New Zealand’s climate-related disclosures regime, which comes into force for banks and some large financial institutions in 2023, will tighten up and codify reporting requirements. This will help companies avoid “greenwashing” and indicate the direction of travel to the boards of organisations that are not currently affected by the regulatory requirements.
This focus is not going away and will strengthen over time. There will also be growing attention to the environment, specifically in relation to reporting and risk management. The global Taskforce on Nature Related Disclosures (TNFD) has released a beta reporting framework that looks at how to identify, assess, manage and disclose nature-related dependencies, impacts, risks and opportunities. The New Zealand External Reporting Board (XRB) also has a legislative mandate to develop non-mandatory sustainability reporting standards.
The XRB climate-related disclosures standards signal the issues that boards should consider to support progress towards a low-emissions economy and climate resilient organisations, even if they are not necessarily subject to the mandatory climate-related disclosure requirements, including:
What actions should boards take?
From organisations to people; from profit to shared value; from “me” to “we”
He tangata, he tangata, he tangata (it is the people, it is the people, it is the people) is going to be a key focus. Sustainable value creation requires that the interests of your people and stakeholders are considered and addressed. The shared value approach aims to strengthen organisational sustainability and, ultimately, benefit society. Organisations that are perceived to be socially irresponsible can suffer acute losses in customer and stakeholder support, and in value.
In our 2022 Director Sentiment Survey, 55% of directors saw labour quality and capability as the most significant issue the economy and the country were facing.
The labour market is very tight. Levels of employment are the highest they have been in more than a decade. Similarly, unemployment levels at around 3% are the lowest in a generation. Tighter immigration settings seem set to persist for the foreseeable future, potentially affecting the supply of labour.
“Sharing value” with staff to retain them and to attract new people is vital. Boards can lead their organisations through strategy development and support for management that ensures value is shared by employees, and staff are treated well and seen as an asset, rather than a cost.
Lessons from past economic and societal shocks suggest there is value in retaining talent, as far as possible, even in the face of severe financial and economic downturns (e.g. the 2008 Global Financial Crisis and the pandemic).
More specifically, issues of authentic organisational purpose, fair pay, gender and other pay gaps, health and safety performance, workforce diversity and attention to modern slavery (in addition to other supply chain issues) loom large in a constrained labour market.
To ensure that shared value, including people and talent, are front of mind, ask:
What actions should boards take?
Managing inflationary pressures, high interest rates and economic uncertainty
The world will be a volatile and uncertain place in 2023. Market disruptions are continuing locally and internationally, there is the prospect of a global recession, the outcome of the Russia-Ukraine conflict remains uncertain, major powers are retreating from international trade and there is ongoing volatility in foreign exchange markets.
These developments have the potential to tighten the government’s fiscal position. For not-for-profit organisations, this could impact funding streams from government, alongside uncertainty of funding from other sources, including philanthropy and community grant funders.
Only 18% of respondents in our 2022 Director Sentiment Survey expect New Zealand’s economic performance to improve over the next 12 months, while 68% expect it to decline. More than a third of directors expect global tensions, supply chain issues and labour shortages to have a notable impact on their organisation and almost half think these factors will “somewhat” impact their organisations.
Boards can help by ensuring their organisation have sufficient runway in the event of adverse developments. This may mean taking a conservative view and being prepared for shocks.
Balance sheets need to be strong in these circumstances. Specifically, higher cash holdings can help smooth the ups and downs in funding, and costs that may arise. The flexibility cash gives can also help financial sustainability over the medium term.
Any consideration of reducing staff to shore up cash reserves needs considerable care and attention. In that context, “shared value” needs to be considered and experience suggests a long-term view is needed.
What actions should boards take?
Securing the cyber future now and into tomorrow
Boards need to lead their organisations to deal with short-term and ongoing cyber security threats. CERT New Zealand says there is no such thing as a “quiet time” for cyber security. Boards need to lead into the future and through organisational transformation, with changes also likely to the way the board operates.
Cyber security is a significant focus internationally, notably in the United States. The unstable international environment and growing threats from countries, and other players, means there are significant cyber threats in New Zealand. Despite this, in our 2022 Director Sentiment Survey, directors reported ongoing declines in their boards discussing cyber risk and being confident their organisation has the capacity to respond to a cyberattack or incident (54% in 2022, down from 60% in 2021).
Taking a longer-term view, New Zealand boards do not appear to be giving attention to digital developments, including artificial intelligence, the metaverse, cryptocurrencies and decentralised autonomous organisations.
Yet many of these digital developments are already with us and have the potential to have profound impacts. New Zealand boards are increasing their capability to help their organisations navigate this digital reality, but this is from a low base. Around 30% of directors in our 2017 Director Sentiment Survey said their boards had this capability, rising to 37% in the 2022 survey. Despite this, two-thirds of New Zealand directors in the 2022 survey believe there will be technological transformation of their board practices by 2030.
Many organisations have adopted virtual meetings options for boards and shareholder engagement. There is likely to be greater uptake of using interactive data to drive critical conversations, along with the use of virtual and augmented reality options for meetings. This will require boards to be agile and develop their digital capability to ensure governance practices keep up with broader technological trends.
What actions should boards take?
Lead with courage, develop trust and build dynamic capabilities
The pace of change and the uncertainty inherent in the other ‘Top 5’ issues means boards have to be increasingly agile, innovative and quick in their decision-making.
The responses to the pandemic forced this, to some degree, and many thought that permanent changes would occur in the ways boards operate. A 2021 international survey for the Global Network of Directors Institutes (GNDI) found 89% of directors had been able to effectively govern through the pandemic to that point and 34% were planning to alter their operating model.
In our 2022 Director Sentiment Survey, 40% of New Zealand directors believed board operations would change because of external pressures.
OliverWyman’s 2021 analysis of board agility points to four characteristics:
What actions should boards take?