Preparing for crisis

We are living through an era of crises. By addressing global economic trends, AI, talent challenges and the complexity running through these themes, board members can prepare their company for the next one.

Ryan McCarthy of our Board Leadership Centre explains how, below.

It is almost a cliché, but the world we live in has become increasingly complex. There are so many overlapping and interrelated crises that the word polycrisis has come back into usage. And it is easy to understand why: climate, geopolitics, biodiversity, war in Europe, housing, migration, the lingering impact of a pandemic. The list, sadly, goes on.

In such a complex world, the role of a board member for a company has become increasingly complex also. They must navigate the short-term opportunities and risks, while also look into the future to assess events that can materially impact, or potentially derail, their business.

No one predicted that a pandemic would shutter the economy. Likewise, few were forecasting a brutal invasion of Ukraine. But those two things happened and forced companies to change, to adapt, and to react.

That is why we are launching the KPMG Board Leadership Centre in Ireland, an initiative that aims to help board members navigate through all the complexity through the sharing of ideas, information, and insights.

Different companies operating in different sectors will all have differing risks. The black swan event that keeps a company director in a transport business awake at night is different to the fears that might grip a board member at a semi-state company.

However, there are a number of risks that relate to all businesses, common challenges that deserve consideration and detailed thought at the boardroom table. You can’t fully mitigate all risks, of course. But identifying them, and the scenarios planning out responses, will certainly help.

Here are five themes that board members of a PLC, a large private enterprise, or a semi-state, should consider.

1. The global economic outlook
2. Artificial intelligence
3. Workforce and talent
4. ESG
5. Complexity

When I talk to senior executives or board members, I am struck by a disconnect. On the one hand, most businesses are performing strongly, and reporting better numbers than in previous years. Cash flows and balance sheets are robust. However, all acknowledge the fragility of the global economic and political outlook.

That fragility needs to be factored into a company’s future planning; boards need to understand how these risks will impact their businesses. Do they understand the company’s banking facilities from a funding point of view, in the event of a further shock? Does it have a decent cash flow model? Does the company fully know how much money it has on hand?

They might seem like obvious questions. However, as executive teams and board members grapple with the day-to-day grind of running and scaling a business, sometimes the obvious questions get overlooked.

As we saw during the pandemic, companies that had answers to those questions at their fingertips fared better than those that did not.

Companies need to look at the geopolitical outlook — the rise of populism, the long tail risk of a Trump administration, geopolitical tensions in Asia – and truly model out how these events could impact their business.

AI has long been a buzzword, something that many companies and boards talk about but never really interrogate. But the advances in the past 12 months have been so striking to mean this has to change.

Industries are being disrupted. Work patterns are changing. Now, suddenly everyone has powerful AI technology and access to large learning models.

AI presents risks and opportunities as business models will have to adapt. However, it is crucial that board members know exactly what those risks and opportunities are. Companies might consider bringing in an external AI expert to give a briefing or hire a consultant to advise on the area. They need to ensure that the executives who report to the board are aware of developments in AI and how it could impact the company – for better or for worse.

Some companies may choose to become an early adopter; others might opt to hold back and see how it plays out. But to make that decision, you need to have the right knowledge and the appropriate information. The days of lip service around AI are over.

Covid reframed the workplace – and the relationship between employers and employees. The pandemic accelerated the rise of remote working by more than a generation. At the time, most people believed that flexible working opened up new markets, new opportunities, new ways of doing things. And, to a point, it has.

But it has also opened up new problems, and those problems are becoming more evident now as we adjust to the new normal. What does working from home and hybrid working mean for the culture of a company? What does it mean for your business if more than half of your people are offsite more than half of the time? What does it mean for the ability of your company to attract and retain the right people?

These are some of the issues that CEOs and board members that I am speaking to are dealing with. They want to ensure that their workforce are content, but they are also conscious of losing the DNA of the business if there is no human interaction. For example, how do you even organise a physical town hall meeting if most of the team is remote?

These changes mean companies need to reassess so many things – from how to measure the productivity and effectiveness of employees to the physical imprint of the office.

Individuals are the institution. Without them, the institution falls. Companies need to constantly monitor and react to the evolving situation, and boards need to ensure that this happens.

I think we have all seen the impact of climate change and the devastating impact it can have on everything and anything. The Fiscal Advisory Council warned this month that even if Ireland’s climate targets are met in full, there will be a range of substantial impacts on the public finances and on businesses.

For companies, it is not just a case of modelling out the impact of bad weather. It goes far deeper than that. If companies neglect their ESG responsibilities, it undermines the credibility of the organisation and will damage its relationship with its key stakeholders.

There is increasing regulation in the area. PLCs will soon have to report on ESG. Many private businesses will probably choose to do likewise to ensure that the company is seen at the vanguard of the area.

This is welcome, but the board must ensure that the same amount of rigour that goes into reporting of financial statements also goes into ESG reporting, as no company wants a qualified ESG opinion. As custodians of the business, this would send a bad signal about its ESG credentials to the market.

I began this piece talking about complexity, and it is fitting that I finish it on the same topic. If I was to bring up any economic outlook article from the past 20 years, it would probably reference complexity and entering uncharted waters.

But I think we are now truly seeing the impact of this complexity and the multitude of crises that I outlined earlier. Cyberattacks are becoming more common; most never make it into the public domain. Risks around data are rising. The energy markets are increasingly volatile. I could go on.

Companies are now battling on multiple fronts, and that is a hard thing to model out. But it is important that companies understand this complexity and factor it into the risk register. And once it is there, it is crucial that it is updated and revised as things change.

We are living through an era of crises, and board members need to be increasingly aware of what those crises are – and how they could impact their company.