Boardroom economics: Good practices, things to avoid





It is no news to anybody that we are experiencing some fundamental economic changes.

Many non-executive directors are old enough to have memories, possibly of varying clarity, of going through this before. But others do not, especially the younger executives.

Dr Proctor Nyemba

The elderly executives can recall interest rates of above 1 percent (last seen over 15 years ago), rapidly increasing inflation (previously accompanied by kipper ties), energy shortages (hence, the older generation still keeps a stock of candles at the back of a cupboard somewhere) and large-scale industrial unrest.

With such varying experience of disruptions like these, how should boards respond?

Good practices to consider

It is important to understand the implications of higher inflation rates for the business model. Each organisation will be affected differently depending on the inputs, competition and the extent of price regulation. And it will also vary across products, services or different areas of activity. But certainly everybody will feel the impact.

Things to avoid

Slipping into overly detailed analysis. The board will need to stay up at the strategic level,  but it will be easy to get sucked into discussion on assumptions and interdependencies across many factors in the model. No one knows exactly how it is going to turn out; the important thing is to be prepared for a range of possibilities.

Good practices to consider

Get a clear picture of the wage cost pressures specific to the organisation. When you put this together with labour market tightness, the strategic implications are potentially far-reaching: costs, pricing, recruitment, staff turnover, production capacity, industrial relations and staff welfare, among other things.

Things to avoid

Assuming that the financial and people pressures are the ones that management should and will deal with, these pressures are going to be very difficult to manage, and the board needs to be clear on the possible short-term consequences and the implications for the business model going into the future. Can you just assume the pricing strategy can take the strain?

Good practices to consider

Understand how increasing interest rates will affect the present and future interest costs and covenant maintenance, and what impact there might be on lenders’ willingness to refinance and at what cost.

Put that together with the strategic issues around holding cash in an environment where, in real terms, the value of money is being eroded, and asset prices are on uncertain trajectories.

Things to avoid

Waiting to think through the consequences until management have started putting up the red flags, by which time it might be too late to shift in the direction of a better balance sheet structure. The factors at play are complex and unpredictable, but that is all the more reason to engage with management at an early stage and help think through things together.

Good practices to consider

Think through what will be happening across key external relationships.

That might mean understanding better the business or production life cycle of key suppliers, so that the main effects on them, and, therefore, on us, are foreseen.

And, of course, the pressures on major customers need to be understood, too, as the knock-on effects will be felt at some point.

Things to avoid

Staring only at the company’s own navel.  Some suppliers will struggle from the effects of rising interest rates and increasing inflation.  How will their reliability and pricing strategies be affected? What contingency plans are there if important suppliers fail or restrict deliveries?

Good practices to consider

Think through the impact on stakeholders.  They, too, are affected by the changing circumstances, and this is likely to provoke changes in their expectations of you. Reputational risks can also change suddenly if the press sees an opportunity to portray your company as profiteering from others’ distress.

The “S” in ESG comes more to the fore in tough times, so the board needs a clear view on what it sees as its responsibilities, strategic interests and reputational risk exposure.

Things to avoid

Assuming that those stakeholders who are suffering will muddle through, there will not be any substantive impact on our business or activity.

Depending on your sector and customer base, that is pretty unlikely. Of course, the board cannot make a call on the precise impact.

But it should be checking on management’s thinking. As well as making sure management have formulated a response around the social impact and our social responsibilities. – Sunday Mail




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