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- Boards are reassessing long-held assumptions around globalisation, just-in-time supply chains and lean operating models as the ongoing Middle East conflict highlights the fragility of globally supply chains.
- Directors say risk is becoming harder to predict, driving a stronger focus on resilience, redundancy and deeper supply chain visibility.
- Government and business leaders warn that managing disruption now requires closer coordination and new board-level skills, including cyber expertise.
Directors are being told that even sophisticated stress testing and scenario planning may not capture the next wave of disruption as geopolitical instability accelerates the end of the stable globalisation that shaped corporate strategy for two decades – making agility a defining requirement for boards.
At a recent AICD virtual event, chaired by the institute’s CEO and MD Mark Rigotti, senior directors and security officials said boards are confronting a more fragmented and volatile operating environment, forcing a rethink of long-held assumptions around free trade, just-in-time delivery and lean procurement models.
While the ongoing conflict in the Middle East has not yet caused fuel shortages in Australia, it is driving significant price shocks across the economy. Rising costs are flowing through diesel, transport, fertiliser and plastics, with broad impacts on organisations and increasing pressure on boards to strengthen oversight of supply chain resilience.
Speakers including Origin Energy and Woolworths Group chair Scott Perkins, Port of Melbourne and Atlas Arteria chair Debbie Goodin FAICD, and Department of Home Affairs National Security head Hamish Hansford, warned the world is entering an era marked by growing security fragility and heightened strategic surprise.
“It feels increasingly like one-off events are becoming business as usual,” said Perkins, arguing that the operating model underpinning corporate Australia for the past two decades is now clearly no longer fit for purpose.
“[For two decades] we could rely on free trade. We could rely on and shift our business models to just-in-time,” he said. “With geopolitics, there’s always been issues, but they didn’t materially impact on the day-to-day. Today, the underpinnings of all that are changing.”
Perkins said boards needed to go back to “square one” on many long-held assumptions, especially as added pressures like cyber and climate risks compound geopolitical uncertainty. That includes rethinking core operating decisions such as supplier concentration, inventory levels and redundancy options for key digital infrastructure.
“Should we have one cloud supplier, or two or three? What does just-in-time mean when shipping and geopolitical issues might disrupt reliable supply? Should we diversify our suppliers? How much working capital do we need to have? How much resilience do we need in physical infrastructure for climate risk?”
But Perkins cautioned boards needed to accept the next crisis might emerge from an entirely different direction, noting while there are limits to what planning can achieve, boards can still position themselves to respond effectively.
“No matter how much work you do on emerging risk, I guarantee we’ll never get it completely right,” he said, pointing to the sudden strategic importance of the Strait of Hormuz. “Now we all know how to spell Hormuz.”
Looking forward, he said, “If we’ve got the right underpinnings, the right kind of risk teams, the right kind of understanding and the right kind of resilience, then we’ll do the best we can.”
Reflecting on the heightened risk environment facing the businesses she chairs, Goodin said boards across her portfolio were undertaking more detailed scenario analysis than at any point in recent years.
“Each of my companies are working through really detailed planning around each of the scenarios we are potentially facing.”
She added that growing complexity was pushing boards to interrogate operational assumptions at a far more granular level, particularly within supply chains.
“It’s really important you go one level down, two levels down, three levels down,” she said. “You have to be granular in looking at supply chains, because it’s easy to jump quickly to one issue, but there can be a small dependency deep in the chain that can bring you unstuck.”
Goodin explained concentration risk could take many forms, including geography, suppliers, specific products or even labour forces, and needed to be explicitly mapped and understood before disruption occurred.
She also pointed to the importance of geography-specific risk assessments, noting different operating environments carry materially different exposures.
In manufacturing, she said, risks varied significantly across locations such as Sri Lanka, Thailand and Malaysia – from fuel and freight access to labour stability and even potential food security pressures affecting workforces.
“Pull out the playbook and then tailor that to the situation in front of you,” she advised, adding boards also needed to think ahead to potential “black swan” events and confront harder questions about structural resilience in their organisations.
“What is the cost of resilience? What is the cost of having redundancy in our system? Therefore, what should we be building into our business models?”
The growing complexity of these risks, said Goodin, has also increased the importance of closer coordination with the government.
Hansford agreed, saying the federal government has developed a uniquely close dialogue with business over the past two decades, helping to shape Australia’s critical infrastructure framework and build a strong network of relationships. He said those channels are now being actively used to manage emerging fuel and supply chain pressures.
“I’ve never seen the government so embedded in a crisis since COVID,” he said. “We come to the discussion of any strategic shock or crises with a really strong set of relationships… These relationships have underpinned how we respond as an economy to a whole range of different threats.”
He said the fuel supply response, including government intervention and investment in storage capacity, illustrated how quickly state support could be mobilised when required. But he noted that long-term resilience could not rely on government intervention alone, especially since the government does not have a single, complete master view of the economy on its own.
“We can bring a high level of analysis about interdependencies, particularly when we look across the economy, how exposed we are in different sectors and how we might think about it, but you [business] will always have a view about what your major inputs and supplies are – and how secure they are,” said Hansford.
Ultimately, noted Perkins in closing the conversation, continuously assessing risk and updating models would become “business as usual” at Woolworths Group and Origin Energy.
“The bank manager will increasingly ask the questions: ‘What’s your supply chain resilience? What’s your climate resilience?’ So these things will just be embedded into business systems,” he added.
Goodin agreed, emphasising the need to continually test and adapt that “playbook” as conditions evolve, while also underscoring the importance of regularly reassessing the skills and capabilities required in the boardroom.
“Cybersecurity risk management is now a skill we require on our board. That was not on the skills matrix 10 years ago.”
Tips for smaller companies
Perkins outlined a three-step approach for smaller businesses, framing risk as a strategic rather than compliance-driven discussion:
Focus on material risks
The first step is to focus on the risks that are material to the business.
Avoid a box-ticking risk function
Secondly, the risk function – whatever scale a business can afford and needs – should not be a bureaucratic, box-ticking exercise. Instead, it should be driven by business leaders and owners. Perkins said when risk is done well, it becomes a strategic discussion and can surface issues not always captured in a typical top-down strategy process, creating real business value.
Assess “freeboard” in the business
Thirdly, businesses need to ask whether they have enough “freeboard” to cope with shocks. Perkins defined this as the resilience of the business, including capital structure, reliance on stable markets, use of hedging and insurance, and exposure to supply chain concentration risks such as reliance on single suppliers or single geographies.
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