Wide strategic view will narrow chances of corporate mischief
Corporate governance professionals have been claiming for decades that the constant pressure from shareholders to deliver ever-increasing growth and performance every year could result in management misconduct.
This has led to corporate governance frameworks, such as the King codes on good governance, becoming increasingly important.
In addition, a multitude of audits that provide different levels of assurance to boards, executive management and shareholders have been implemented over the years.
After the Enron scandal in 2001, there was increased pressure on company board members, as well as audit and risk management professionals, to step up their game. However, judging by recent local and global headlines, this was not enough, and those tasked with providing assurance still missed crucial red flags.
How do we miss the warning signs? Are the risk management frameworks to blame? Are the audit and risk professionals part of the overall problem?
It is imperative that shareholders, board members and executive management — as well as audit and risk professionals — share responsibility and accountability for good corporate governance.
However, the intense pressure to deliver consistently improving performances over a short period is probably one of the most significant causes of corporate misconduct. We have to realise it is not always possible to perform miracles over the short term, and this short-termism is not good for the firm’s long-term survival prospects either.
This is yet another illustration of the importance of a long-term strategic vision for any successful organisation. Corporate foresight is insight gained by looking into the future, so to speak, by connecting the “dots of change on the horizon”, according to futurist Keen van Heijden. It is “the ability to recognise the signs of change that inevitably affect every organisation, to understand their significance and how the organisation should adapt accordingly”.
These dots on the horizon are future events and conditions that present opportunities and risks to a business, disguised as weak signals, emerging issues and trends in the industry and contextual environments.
Recent research has shown that businesses with corporate foresight practices in place perform better over the long term. Prof René Rohrbeck of the School of Business and Social Sciences at Aarhus University, Denmark, and Menes Kum of the University of Münster, Germany, published an academic article in December stating that the right level of future preparedness boosts a firm’s ability to attain superior long-term performance.
The research revealed that vigilant firms – those where strategic foresight practices match their need for strategic foresight and have the right level of future preparedness – have a 33% higher profitability and a 200% higher market capitalisation growth (for those listed on the stock exchange) when compared with the sample average.
Companies with deficiencies in future preparedness had a discount of 37% to 44% in terms of profitability and -49% to -108% in terms of market capitalisation, when compared with vigilant firms. The study also found that many of the vigilant organisations had dedicated futures research functions that interacted with traditional functions such as marketing, strategy and research and development.
IT IS NOT ALWAYS POSSIBLE TO PERFORM MIRACLES OVER THE SHORT TERM, AND THIS SHORT-TERMISM IS NOT GOOD FOR THE FIRM
This is irrefutable proof that corporate foresight practices, focusing on the medium and long term, have to become part of corporate governance and risk management frameworks and practices. It is the only way we will build sustainable businesses that can withstand future shocks.
In terms of the current corporate environment, there are changes every company can make to aid “longtermism”. In any complex system it is important to identify the leverage points offering the most effective and efficient change. While we cannot control people’s psychological undercurrents, we can remove the impetus for negative behaviour.
As shareholders and stakeholders, we can require executive management to balance its short-, mediumand long-term horizons and incentivise them accordingly by allocating a higher percentage bonus and other incentives for the achievement of medium- to long-term strategic objectives.
In this way, the pressure would shift from achieving unrealistic short-term objectives to more sustainable and realistic growth over the long term.
It would also serve to guarantee the long-term viability of the business and incentivise executive management to commit themselves to the long-term success of the organisation.