As we enter a new year, we ask business leaders to reflect on the governance challenges of the past 12 months and what company directors can do to prepare for 2024.
Australian boardrooms have faced some intense priority issues in 2023. From soaring inflation and geopolitical tensions to the rapid adoption of generative artificial intelligence (AI) and elevated social responsibility risks, the year has brought all kinds of fresh governance challenges — all while boards prepare for mandatory climate reporting. The question is, how are these challenges likely to evolve in 2024?
Turbulent economic tail
Of all the economic headwinds of 2023, the “uncomfortably high” rate of inflation has been the most significant, says EY Oceania chief economist Cherelle Murphy. A hangover from the stimulatory measures used to pull the economy out of the COVID-19-induced slowdown, soaring inflation has added to a minefield of cost pressures for businesses.
“Of course, it’s increased input costs,” says Murphy. “Wages have also been rising more strongly than in recent years.” In response, business leaders have sought “more value for money” in their decisions. “For some, it’s causing them to consider alternative suppliers for their products. Others are thinking carefully about labour allocation, whether technology can replace staff and whether they use permanent or casual labour.”
There are signs the central bank’s efforts to clamp down on inflation are taking effect but Murphy says it’s difficult for businesses to predict how long it will take, especially since the forces affecting the economy and inflation are still evolving. “Events that seem very far away, such as the terrible conflict in the Gaza Strip, are impacting us through the oil price, investor sentiment and business confidence,” she says. “And, of course, geopolitical tensions are causing more governance effort to be devoted to security and supply-chain diversification.
“We’re still seeing the economy respond to the tightening of monetary policy and underlying all that, we have other forces at play, such as the ageing of the population, which effectively means labour is going to be more expensive and harder to find.
“And we have an economy that is decarbonising. For some companies, that opens up opportunities and for others it means dealing with new regulation or different ways of producing.” Despite the economic uncertainty, Murphy says there is good news. “Fresh business possibilities are opening up and new organisations are being born. Anyone who expects the economy to go back to where it was prior to the pandemic is kidding themselves.”
Geopolitical risk has shot to its highest level in 30 years, according to governance, risk and compliance adviser Christopher Wright. “The period of peace and stability that followed the Cold War has definitely come to an end,” says Wright, who recently returned to Australia after 17 years in Europe and Asia, where he held senior leadership and governance roles, including as Austrade’s country manager in China.
“Conflict in the Middle East has obviously rocketed back up the ladder of our concerns and there’s no question the fallout from Russia’s invasion of Ukraine continues,” he says. “China and Australia seem to be moving back into familiar territory, although policy tensions remain. I think Australia is a little complacent about what’s happening in the ASEAN [Association of Southeast Asian Nations] countries in our near north.”
Wright expects tensions to escalate and urges companies that have not yet grappled with this risk to do so. For many, the most obvious risk is the unexpected “closure” of a country (whether due to civil disruption, war, new regulations or a change in government) and the resulting difficulties with supply chains and market access or threats to local property and personnel. Wright says the implications of economic sanctions — which have become “the go-to mechanism of major Western powers for enforcing foreign policy objectives” — are a less understood threat.
“It’s easy for Australian companies to get caught in a web of transactions where they may find themselves actually transacting with parties they are no longer able to do business with,” he cautions. “By breaching sanctions — or failing to comply in other areas such as corruption, bribery of foreign officials, anti-terrorism laws, competition law — you could do your business serious strategic damage.”
There are simple proactive steps directors can take to manage the geopolitical risks most relevant to their businesses. The best place to start, says Wright, is to source a calendar of geopolitical events planned for the next 12 months that could trigger tensions — such as international summits, elections and significant national commemorations — and map out the potential implications. The next step is to formalise a process by which the organisation is alerted to relevant risks in real time.
Harnessing generative AI
Cybersecurity has topped most business leaders’ technology risk list for more than a decade but in 2023 it was joined by the rapid popularisation of generative AI. “We’ve been talking about AI since the 1950s, but it’s reached a point in 2023 where it’s now intersecting deeply with our lives,” says Steven Worrall, managing director of Microsoft Australia and New Zealand.
The explosive spread was sparked by the release of ChatGPT, a natural language processing tool that uses generative AI (artificial intelligence that creates content such as text, images, music, audio and video). “Within six weeks, 100 million people had started using the service,” says Worrall.
While many see tremendous potential in generative AI, others remain deeply concerned with ensuring it is used responsibly, with due consideration to ethics, fairness and transparency.
“As an economy, we have much to do to address our productivity challenges and this technology can be a great lever of competitive advantage,” says Worrall, who spent more than two decades with IBM before joining Microsoft in 2014. “Certainly, boards are asking themselves: ‘How do we make sure we don’t get left behind, but do it in an ethical and responsible way in our community so we continue to have permission to do business?’”
Cheryl Hayman FAICD, a non-executive director on the boards of Ai-Media, Silk Logistics Holdings and Beston Global Food Company, cautions any organisation that thinks generative AI won’t affect their business. “AI is coming at us at a massive speed and all businesses are having to evolve more quickly than before to keep up,” she says. “There are still a lot of unknowns and fear, but it’s a real enabler and extremely exciting. At the same time, we have to be very careful that, in using AI, we’re not reproducing real-world bias and discrimination, fuelling division and threatening fundamental freedoms.”
To strike a balance, board directors must be agile, she says. “We need to be plugged in to relevant, trusted sources of information so we’re able to ask the right questions of management and have a lens by which to evaluate their answers.”
About 60 countries, including Australia, have developed national AI strategies, and some jurisdictions are working towards legislated frameworks to regulate its use, notably the EU AI Act and the US AI Bill of Rights. Worrall says similar regulations are likely to be introduced in Australia in the next year or so, which will cement generative AI, alongside cyber, as an area of “deep focus” for boards in coming years.
Applying a psychosocial lens
A fusion of broad-ranging national discourse, shifting expectations and legislative change has seen sustained elevation of psychosocial workplace risks in 2023. “The nature of conversations around workplace issues such as sexual harassment, psychological safety and mental wellbeing has definitely changed,” says employment lawyer and Remotely Legal founder Cheryl Chan FAICD. “In the past, this type of issue has typically been handled by HR, but they are now commonly elevated to executive teams and boardrooms — and from board subcommittees to the full board level.”
Changing the game
The Accenture Life Trends 2024 report identifies five global shifts that could change the way people interact with organisations, brands and systems in the coming year.
1. Where’s the love?: Necessary business cuts have shunted buyer satisfaction down the priority list — and customers are noticing. Quality or size reductions, declining service and unwelcome subscriptions are creating a sense that brands are ignoring their promises. Where companies see actions for survival, some customers see greed.
2. The great interface shift: Generative AI is upgrading people’s experiences of the internet, shifting it from transactional to personal. Brands will use this to shape hyper-relevant products and services. Smart ones will go into responsive brand development.
3. Meh-diocrity: In a world where algorithms sit between creativity and audience, savvy businesses will see opportunity. Originality will stand out — as will investing in creative talent.
4. Error 429: More than 40 per cent of frequent tech users say technology has complicated their life as much as it has simplified it. Many consumers are setting screen time limits, blocking notifications and removing apps. Organisations must be thoughtful about technology, offering greater choice in how people interact with it.
5. Decade of deconstruction: Traditional life paths are being reconsidered. Some 48 per cent of people plan less than 12 months ahead — or don’t plan at all — and the value placed on traditional markers of success, such as marriage, keeps dropping. To remain relevant, brands must support unique paths.
The fulcrum for this shift has been a push for a more inclusive workplace culture, the result of a raft of reviews conducted over recent years, most notably the Australian Human Rights Commission (AHRC) Respect@Work: Sexual Harassment National Inquiry Report. The ensuing legislative amendments to the Sex Discrimination Act mean that, from 12 December 2023, the AHRC has tools to monitor, assess and enforce compliance of the positive duty to eliminate workplace sex-based discrimination and harassment (see page 60 for more details).
“As a consequence, rather than being reactive, more boards are now proactively asking questions about what’s being done to eliminate these issues,” says Chan, a non-executive director on multiple boards. “In the past, the approach was likely to be, ‘Let’s deal with this complaint quickly and get rid of it quietly.’ Now, there’s a greater tendency to ask: ‘Is this an isolated incident or is there a broader cultural issue we need to consider here?’”
Stefanie Loader, a non-executive director and chair at organisations including the Forestry Corporation of NSW, Sunrise Energy Metals, St Barbara Limited and CatholicCare Wilcannia- Forbes, says boards that are leading in this area are those that consistently prod management teams, asking: “What more can be done?”
“This drives deeper analysis and more nuanced actions,” she says, “whether that be appointing internal psychologists or training frontline team leaders to equip them to confidently identify and manage psychosocial risks.”
Boards are also seeking more comprehensive reporting, supplementing simple complaint measures with “leading and lagging” indicators of culture, such as gender equality, turnover and statistics on internal counselling services.
“Some organisations are scaling up complaint investigation processes,” explains Chan. “They’re bringing in independent external teams or setting up new internal teams outside HR, and upskilling investigators to take a ‘trauma-informed’ approach, using a human lens rather than purely a risk lens.”
Loader says that while boards have made “massive” progress in tackling “low-hanging fruit” over the past two years, the next challenge is to keep up the pressure with collaborative learning. “It’s going to get harder in the next few years to continue to have as much impact, so we’re going to have to start learning more from each other’s successes and failures,” she says. “There are already industry-level forums where case studies are being shared, but the more we can share between industries, the better off we’ll all be.”
Inflection for the “S” of ESG
While the environmental, social and governance (ESG) emphasis of many businesses remained squarely on the “E” in light of looming mandatory climate reporting requirements, “S” also rose to the fore during the year. A new round of social leadership issues was triggered by the debate encircling companies’ involvement in October’s Voice to Parliament referendum. The majority of the top 20 businesses listed on the ASX publicly backed the campaign to vote “yes”. But many businesses that did show their support came under fire from some shareholders and commentators, who held the view that companies shouldn’t get involved in social issues. Other stakeholders have called for corporate leadership on issues of importance to the community.
“We are at an inflection point around the issue of companies and social responsibility,” says Audette Exel AO MAICD, a non-executive director of Westpac, and chair and founder of international development organisation and corporate advice firm Adara Group. “There is both push and pull happening. On the one hand, the data is in: companies that consider social responsibility will, over time, likely create a better outcome for their investors” as well as a better chance of sustainability.
“At the same time, we’re seeing backlash, in the US particularly, against so-called ‘woke capitalism’ agendas. We’re also seeing much stronger requirements around reporting on ESG matters, particularly on environmental issues, which raises the very real legal and regulatory risk around greenwashing.” Exel believes businesses must take into account matters that affect their customers, investors, staff and communities, as well as the countries they operate in.
At the October Whitehaven Coal AGM, chair Mark Vaile AO emphasised shareholder value when reflecting on energy transition acquisitions. “The decision was taken to acquire these assets as it is compelling for shareholders and is strategically aligned with the board’s objectives, including the requirement to support long-term, attractive shareholder returns and serve the interests of all shareholders, rather than a few.”
Findings from the latest AICD Director Sentiment Index
Company directors are becoming increasingly concerned about business conditions and the state of the economy, according to the most recent Director Sentiment Index (DSI).
Undertaken before the interest rate increase on 7 November, the DSI shows growing pessimism in Australian boardrooms, with sentiment down to its lowest level since the pandemic in late 2020.
Labour shortages and the cost of living are seen as the major challenges facing Australian businesses, followed by inflation and rising interest rates. Concern about productivity has risen rapidly, with productivity growth now in the top four economic challenges identified by directors, doubling from 16 per cent in the first half of 2023 to 32 per cent.
Sentiment is down in all five of the categories covered in the DSI, including Economic Outlook, which has continued to trend lower since peaking at +38 in late 2021, to -6 in this survey.
Sentiment about the state of the domestic economy has dropped 22 points, but it remains positive at +14, along with sentiment about the economy in Asia (excluding China) which is at +39, and in the US (+4).
China has suffered the most significant shift in perception of current economic conditions, plunging 59 points, from +21 in the first half of 2023. Although still negative (-37) the European economy recorded the biggest increase in perception of economic health, up 21 points.
Housing affordability and supply is seen as the top short-term issue for the Australian government to address, followed closely by energy policy and productivity.
Climate change remains the main long-term priority, while cybercrime continues to be the no.1 issue keeping directors awake at night.
In addition, the DSI shows:
69 per cent believe further interest rate rises would cause a mortgage crisis
44 per cent believe the Reserve Bank of Australia’s monetary policy is negatively impacting their business
42 per cent believe it’s likely the economy will be in recession within the next 12 months
59 per cent believe compliance and regulation is affecting board risk appetite
88 per cent agree there is a skills shortage in the Australian workforce
33 per cent agree that AI/ automation could resolve current skills shortages
40 per cent believe the current state of the Australian dollar is negatively affecting their business.
This article first appeared under the headline '2024’ in the December 2023 / January 2024 issue of Company Director magazine.
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