Risk Management Issues

Boards of directors face a myriad of challenging governance issues. In this article, we explore the five biggest governance challenges boards will need to navigate in the years ahead. 

Key Points:

• Directors must have a continuous curiosity and understanding of all aspects of a company's core business and the reasonably foreseeable financial and non-financial risks it faces.
• Cyber resilience, data integrity, climate mitigation, tech skills and AI, shareholder activism, and gender diversity are among the top governance issues for 2024.
• Boards must be proactive in addressing deficiencies in risk management plans and ensuring management has the necessary capabilities to tackle these challenges.

How Can Boards Improve Cyber Resilience and Data Integrity?

Cyber resilience and data integrity pose the greatest risks to corporations and require intensive director oversight. ASIC's Cyber Pulse Survey revealed significant gaps in companies' preparedness for cyber attacks, with 44% not managing third party or supply chain risks, 58% having limited ability to protect confidential information, a third lacking a cyber incident response plan, and one in five not adopting a cybersecurity standard. 

Boards must force management to address any deficiencies in cyber risk plans and, if necessary, replace managers who are incapable of addressing those deficiencies.

What Should Boards Consider Regarding Climate Mitigation? 

Mandatory climate reporting for Australia's largest companies is set to commence from 1 July 2024, marking a profound change in corporate reporting and imposing additional obligations on directors with regard to climate change risk. Large entities will have to report annually on climate-related risks for scope 1, 2, and 3 carbon emissions, and boards will need to ensure management has developed an appropriate climate governance strategy, including metrics, targets, transition planning, and risk management. 

These reforms will require a significant capability uplift inside companies and on boards, with advisers and auditors playing a crucial role in ensuring that climate disclosures are accurate, effective, and meet the standards. ASIC has made it clear that while they will help companies correct issues, they will also enforce compliance when needed.

How Can Boards Navigate Tech Skills and AI Challenges?

Australia has a poor track record for implementing large-scale technology projects, with details of tech disasters often hidden from shareholders. Boards sometimes struggle to effectively manage digital transformation projects, which can end up with changes in scope, extended deadlines, and considerably higher costs than originally stated. 

As companies transition to an AI-enabled world, boards will need to think hard about the ethical issues that come with the implementation of vanilla AI and the more powerful generative AI. Some directors may also need to lift their tech skills, with a minimum expectation of a lifetime in tech, ideally including time writing software code, for any "tech director" considered for the board's skills mix.

What Should Boards Do to Prepare for Shareholder Activism?   

Shareholder activism campaigns can be highly disruptive for boards, especially when coupled with a crumbling share price. Directors need to anticipate trouble and prepare a playbook for value creation that includes a well thought-through communications strategy. Simply employing corporate advisers to pull down the shutters or reinforce the battlements is not enough. 

The key lesson from recent shareholder activism campaigns is that shareholders with relatively small ownership stakes can marshal forces with sufficient power to disrupt and unseat entire boards. Boards must be proactive in addressing the need for structural or strategic change.

How Can Boards Improve Gender Diversity?

The slow pace of advancement of women in the management ranks of listed companies outside the top 100 is an embarrassment. After a decade of stagnation or regression in gender diversity, it is time for boards to get serious in 2024, especially at the 75% of ASX 300 companies that do not have gender-balanced executive teams and the 28 ASX 300 companies with no women in their top executive teams. 

There are reasons for optimism, including increased activism by industry funds pushing for a minimum of 30% women on ASX 300 boards, the Workplace Gender Equality Agency's move to publicly publish employers' reported gender pay gaps, and heightened awareness of the importance of providing safe workplaces driven by the Australian Human Rights Commission's new investigative powers to enforce a positive duty to eliminate sexual harassment and other unlawful conduct.

In Summary 

Boards must be proactive in addressing risks and deficiencies, ensuring management has the necessary capabilities, and fostering a culture of continuous curiosity and understanding of the company's core business and the risks it faces. By tackling issues such as cyber resilience, climate mitigation, tech skills and AI, shareholder activism, and gender diversity head-on, boards can position their companies for success.