Governing for incremental recovery

Thursday, 04 June 2020

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John Macpherson
Partner, Control Risks
    Current

    Success in 2020 will be defined by how organisations operate in a heightened and prolonged state of market uncertainty. The objective is not to return to normal but rather to, as much as possible, stabilise and incrementally redefine a steady state of business. 


    In leading their organisation through incremental recovery, boards should focus on pressure-testing scenarios, recalibrating their organisation’s risk appetite and resetting supply-chain strategy for the short-to-medium term.

    As Australia emerges from lockdown, governments, business, media, economists and strategists are shifting the narrative to focus on recovery. While management teams focus on the easing of government restrictions, the impact of temporary stimulus packages and how to implement the gradual re-opening of workplaces, boards are turning their attention to strategy and structure in a post-COVID-19 world. But the long-term economic, social and political impact of this pandemic remains unknown and boards are being challenged to lead their organisation’s recovery with little certainty.

    While it’s a relief to start focusing on recovery – to begin to reimagine a world of high growth, newfound digital efficiency and the return of global travel – leadership teams need to approach with caution. Progress in the months ahead will likely be incremental. For some, perhaps more realistically, it will be disjointed and painstakingly slow.

    Prolonged disruption ahead

    Risk analysists 1 are predicting a period of prolonged disruption until the end of 2020, and likely into Q1 2021. Movements across borders will continue to be restricted. Regional and global supply chain and logistics challenges will remain the status quo for an indeterminate period. The economy will almost certainly enter a global recession and the extension of various government schemes will be necessary to keep the economic and societal impact of high unemployment and low consumer spending in check. It is likely we will see deteriorating security environments in the developing world, impacting supply chains and assets.

    There is no such thing as a ‘return to normal’

    It is now generally accepted that we cannot expect the rapid v-shaped return to high growth that characterized the post-SARS period, where the virus did not have nearly the global impact of COVID-19. The best-case scenario to be planning for now is one of ‘uneven global rebound’. This is what we most likely will see in the months ahead:

    • Developed markets bring the pandemic under control, albeit at different times. Authorities will move to rapidly isolate and contain localised outbreaks to avoid a return to more widespread lockdowns. Ongoing disruption triggered by local border, workplace and school closures will be the norm.
    • A gradual global easing of travel and movement restrictions with the creation of ‘green corridors’, most likely between Australia and New Zealand, Singapore, Hong Kong and other ‘safe’ destinations. Government-to-government negotiations for international travel will scrutinise infection rates, abilities to test and contact trace, and set expectations for reciprocity – but also be prone to politication.
    • A slow and (mostly) controlled return to businesses re-opening. However, differences in demand through the recovery curve will result in excessive unfilled capacity in some sectors and undercapacity in others.
    • Elevated geo-political and security risks in developing markets. For businesses that rely on stability in global trade, or those more likely to feel the impact of geo-political shocks, particularly with China, 2020 will remain unpredictable and challenging.
    • Global GDP is expected to begin to rebound in Q4. Some sectors will rebound faster and stronger than others.
    • Federal and state governments around the world continue to be faced with the enormous challenge of balancing risk to the economy versus risk to public health. There is likely to be reluctance in many corners of the world to return to lockdown and further exacerbate the economic downturn. This will mean a continuation of inconsistent government messaging and policy, which will impact consumer and employee confidence.

    The worst case scenarios are less likely but should not be discounted: second and third waves of pandemic infection, a delay in the development and distribution of an effective vaccine, corresponding waves of further large scale lock down, supply chain disruption, and geo-political and security challenges.

    Three areas of board focus for incremental recovery

    When the world does recover, it is unlikely to be business as usual. We will be recovering from a period of extreme operational, financial and societal change, uncertainty and upheaval. Businesses that will accelerate their recovery will be those that can rapidly analyse, adapt and remain agile in the post-COVID-19 landscape.

    Success in 2020 will be defined by how organisations operate in a heightened and prolonged state of market uncertainty. The objective is not to return to normal but rather to, as much as possible, stabilise and incrementally redefine a steady state of business amidst continuing global disruption. In leading their organisation through this incremental recovery, boards should focus on pressure-testing scenarios, recalibrating their organisation’s risk appetite and resetting supply-chain strategy for the short-to-medium term.

    1. Align clear actions to scenario planning and monitoring

    The ability to remain agile and adapt to rapid changes in the next six-to-nine months relies on the strength of the organisation’s scenario planning and the ability to monitor and forecast changing conditions. Boards need to ensure there are dedicated resources and advanced planning in place, which align with clear trigger points and actions. Without stepping into the role of management, reviewing and war-gaming operational plans will be an especially critical role for the board this year. Recovery and resumption planning should take a risk-based approach and directors should ensure their management:

    • Operationalise scenario planning into the following four priority areas: clients and customer demand; operations, including the re-opening of facilities, offices and supply chain; employees; and investors and stakeholders. For each priority area, the scenarios and actions that need to be planned over the next six-to-nine months should be identified. Include scenario plans that consider the best case (prolonged disruption) but also the worst case (second and third waves of pandemic infection throughout 2021). Aligning actions with financial forecasts and closely monitoring trends in demand and cost control is going to be a key component of this phase.
    • In order to maintain proactive agility, it is important to have access to data analytics that can help forecast risk velocity and trends (both business/financial and pandemic).
    • Have detailed risk mitigation measures in place in order to get ahead of the curve and create certainty and control. Use state government guidelines on re-opening facilities and hazard assessments as a minimum requirement upon which to build best practice. Test the assumptions behind plans. Assume the organisation will continue to operate at reduced capacity for the remainder of the year, that there will be COVID-19 cases amongst employees, and that there’ll be divergent reactions from stakeholders.
    • Understand that the tone from the top needs to reflect a culture of reciprocal duties and responsibilities. The organisation should demonstrate that it will take care of employees and play an important role in containment and contact tracing within local communicates. Employees, in return, must respect new guidelines and behaviors that may seem inconvenient and uncomfortable.

    2. Get ahead of the changing risk landscape

    The next six-to-nine months is going to change risk environments and expose hidden vulnerabilities that will delay recovery. One of the early lessons from COVID-19 is the need for a more agile and data driven risk management process that allows organisations to rapidly adapt risk mitigation measures and response plans. Here are some of the challenges to the risk landscape that are likely to impact organisational risk frameworks:

    • A potential increase in disgruntled employees and third parties. Organisational restructures may lead to cutting back staff, rolling back supplier contracts and potentially reorganising supply chains. This internal disruption will be compounded by an uncertain external economic and public health environment and may require careful planning and risk mitigation.
    • Exposure to cybersecurity vulnerabilities. The current risk landscape has seen a significant increase in phishing, ransomware and malware attacks targeting the vulnerabilities inherent in a sudden shift to remote working. Increased training and awareness to ensure best practice cyber mitigation measures are in place may prevent a scenario of wide-scale system outage, especially as the organisation returns to full operations.
    • A potential increase in compliance, fraud and disputes. It is not uncommon to experience an increase in fraud in an economic downturn but the added pressure to recover sales as quickly as possible, the prevalence of conflicts of interest in supply chains and the shortage of critical supplies and services are likely to exacerbate the current risk. Combined with the logistical challenges of on-site access, 2020 will be a challenging time for compliance and legal teams who may not have local resources in place.

    Prudent boards will be actively reviewing risk registers now, rather than waiting for the annual cycle of internal audit. Establishing a specific COVID-19 risk register that outlines vulnerabilities in the core categories of financial, legal, operational, people, security and continuity risks and receiving regular updates on monitoring, trends and risk mitigation measures in place, will ensure the board is effectively discharging its risk management obligations.

    3. Restore supply chains in the short and medium term

    Directors may be tempted to begin looking at a long-term strategic restructure of their organisation now, particularly when it comes to supply chains. For many organisations this may already have been on the radar with the advent of the US-China trade war, but COVID-19 has sharply focused attention on the challenges of a global just-in-time way of operating. Boards may need to reset key performance indicators for supply chain management, with resilience becoming a key metric alongside efficiency.

    Notwithstanding this, there is an immediate challenge for the next six-to-nine months to focus on continued supply and logistics throughout long periods of unpredictable disruption. The first order of business for boards reevaluating supply chains is to manage the short term. Decision making needs to be based on real-time data, including infection trends and forecasts for further restrictions. Modelling logistics and supply chain constraints against future disruption scenarios, and taking a proactive stance on supply and distribution for 2020, will ensure survival long enough to be able to engage in the longer term strategic considerations of localising supply, entering new markets and releasing unprofitable parts of the organisation.

    The value of an ‘in-flight’ review.

    Finally, throughout the next six-to-nine months many organisations will be capturing lessons and incorporating them into continuous improvement planning. Given the prolonged nature of the COVID-19 crisis, there is tremendous value in conducting in-flight reviews now, in order to course correct and apply ongoing improvements to optimise recovery and position the organisation for true resilience.

    From recovery to resilience

    As the first step to a full recovery, boards should be focused on the incremental resumption of business and finding that steady state of operations amongst ongoing uncertainty and disruption. In a normal crisis this would be an operational priority that would be delegated to management. However, given the scale and complexity of COVID-19 this step demands the full and active attention of the board.

    Once this incremental recovery is in full swing, the board’s role in accelerating a full recovery will set the agenda for long-term strategic planning that includes defining the organisation post-COVID-19, changing routes to market, developing a clear digital strategy, redefining competitive threats and understanding current regulatory impacts.

    However, the COVID-19 crisis should also compel boards to focus on resilience as a key metric of performance and valuation. COVID-19 has arguably exposed a critical failing in the current approach to risk management. Corporate risk registers largely stopped rating pandemic as a risk scenario and most of the world was underprepared for the complexity and impact of the current crisis. Preparing for worst case scenarios – unpredictable and unforeseen ‘black swans’ – is a marker of organisational resilience. And with the next round of black swan events potentially in areas such as cybersecurity, climate change, geopolitical tensions with China or activist investor groups, boards that thrive in recovery post-COVID-19 will be those that take the opportunity to build a truly resilient culture within their organisations.

    1 Control Risks, 2020, COVID-19: Taking the first steps to recovery, 14 April, [website], https://www.controlrisks.com/covid-19/covid-19-taking-the-first-steps-to-recovery, (accessed 2 June 2020).

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    Disclaimer
    This document is part of a Director Tool series published by the Australian Institute of Company Directors. This series has been designed to provide general background information and as a starting point for undertaking a board-related activity. It is not designed to replace a detailed review of the subject matter. The material in this document does not constitute legal, accounting or other professional advice. While reasonable care has been taken in its preparation, the Australian Institute of Company Directors does not make any express or implied representations or warranties as to the completeness, currency, reliability or accuracy of the material in this document. This document should not be used or relied upon as a substitute for professional advice or as a basis for formulating business decisions. To the extent permitted by law, the Australian Institute of Company Directors excludes all liability for any loss or damage arising out of the use of the material in this document. Any links to third-party websites are provided for convenience only and do not represent endorsement, sponsorship or approval of those third parties, or any products and/or services offered by third parties, or any comment on the accuracy or currency of the information included in third party websites. The opinions of those quoted do not necessarily represent the view of the Australian Institute of Company Directors.

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