Reinforcing risk culture and governance
THE Financial Executives Institute of the Philippines ( Finex) and its partnerinstitutions, like the Institute of Management Accountants, have hosted several free webinars in the past few months. These webinars offered key insights into how we could address developments in the ongoing coronavirus pandemic and the economic challenges the world is facing as a result.
This crisis, for one, has triggered the worst recession since World War 2. A 6- percent drop in gross domestic product is expected globally. Although markets seem to be coming back and money appears to be flowing back into them, it is possible that money from government stimulus packages around the world is finding its way into these markets.
This crisis is also eroding trust in institutions, including media because of all the fake news, and even in governments because of how some politicians mismanaged the crisis. There is also widespread fear about getting infected, and the uncertain future we face. This fear is stopping trade, not just locally, but also internationally.
What was brought to light during this crisis was that companies that embraced risk culture and governance were more resilient and had better chances of attained success. Once again, governance was proven as a key driver of performance.
Governance and board effectiveness rest on four pillars. The first — and this is where it all starts — would be its people. The recent Wirecard scandal that involved German executives, rogue managers at two top local banks and the accounting staff of Ernst and Young demonstrated once again that people could make or break a company. To be successful, a company needs not just qualified people, but also dedicated and committed ones who would focus on the right things.
The second would be its structures and processes. On our PDS board, we have committees that focus on the various risks we face, finance and audit issues, and organizational and personnel reviews. We also have a special information technology committee because our trading, depository and settlement platforms rely heavily on technology.
The third would be information architecture. This refers to the quality of information we are able to gather and share, both internally and externally. It also refers to reports we get through formal channels and the informal conversations we have with stakeholders. During the enhanced community quarantine, these gatherings have practically stopped. Zoom and Viber simply could not replace the quiet conversations that we relied on for information that we might have missed in formal reports.
The fourth and last would be group dynamics, or what is commonly referred to as “board culture.” Important values that need to be nurtured include responsibility, accountability, integrity and moral authority. Among peers in the board, it is important that we encourage independence, mutual respect, openness and constructive dissent, knowledge acceleration and continuous education. This pillar distinguishes between a simply good versus a great company.
In a study by Swiss business school IMD, there are several instances where boards fail and these have to be avoided. These include situations where one has broken relations within the board that leads to uncompromising positions that are fragmented and disruptive. They are marked by a lot of infighting. There could be a instance where everyone on the board, particularly a homogenous one, are either in group denial or in group think mode, and this could lead to indecisiveness. These are also sleepy or routine boards that do not address relevant issues. There are also instances where manipulative parties promote self- serving interests. Failures have also been noted on boards where directors either served for a lifetime or in a turnstile.
In the various studies presented during the webinars, they showed that successful companies that managed the crisis well featured two characteristics. First, they were prepared for the risks and opportunities. They were prepared mentally and physically in terms of their governance structure, as well as their infrastructure; to meet disruptions in their supply chains, the social impacts and the hardship.
According to a Deloitte study, 50 percent of their respondents were actually prepared and less than half were even aware that they had crisis playbooks. The 50 percent who were able to navigate through the crisis had a growth mindset that was open to learning. They adapted quickly and realized early that cash is king and that their customers would spend on just the essentials. They were customercentric and were committed to the adage that customers will spend if they solve their problem.
The second is their ability to adapt. These are companies that used their existing infrastructure to offer a different product or service that their customers needed. Take Grab, which shifted all their assets, including vans and motorcycles, to the delivery of goods and essential items, or KenjieTei, which, early in the crisis, used their commissary to supply vegetables and food ingredients.
We are also seeing cases of labor arbitrage, in which companies in losing industries, like airlines and tourism, are providing staff to those in the winner category. A prime example of this winner is Amazon, which reportedly increased its value by half a billion dollars over the last six months. Other successful companies developed new infrastructure to offer the same product or service. They expanded production and delivery capacity. They adapted products to create value through online channels. For these companies, digital transformation was quickly embraced and they have increased their innovation priority.
What also became clear in this crisis is that we have to develop a combination of agility, robustness and resiliency. The last one would be a challenge for many of us, because it could mean we may need to change our just-in-time mindset to just-in-case. It would mean redundancies and backups that we previously avoided. More than ever, governance would be a key driver of success in the future and will require more sophistication. Our commitments to sustainability and the environment would also be essential to preventing future outbreaks.