This is the first of a three-part series looking at the global economy and uncertainty in 2016. In our next post, we will focus on geopolitics and its implications for business strategy and decision making.
The United Kingdom’s vote on June 23 to leave the European Union highlights the uncertainty and volatility that companies face this year. (See my “Why Brexit Really Matters” article in Forbes.) Indeed, the sharp fall in global equities and currency markets on June 24 accentuates the rude awakening. But should the investment and business communities have been surprised? Most polling in the run-up to the vote suggested the leave campaign could prevail. Companies are now scrambling to implement their contingency plans…or to create them. Currency shifts will be the most immediate shock to manage.
According to NACD members, the greatest concern they foresee in 2016 is the global economic slowdown and how this will affect their company. This issue outranks other concerns, such as the changing industry landscape or cybersecurity. When looking at the board’s activities, NACD members say that the most important area for improvement is the board’s ability to test management assumptions underlying corporate strategy.
The Brexit vote highlights the strategic challenges directors face in today’s volatile world: How can directors make sense of increasingly uncertain economic conditions and what can they do to pressure test the validity of management’s assumptions about future growth?
A slow-growth world
Companies are facing strong headwinds in a slow-growth world. In April, the International Monetary Fund (IMF) downgraded its outlook for global growth this year to 3.2 percent—barring any system shocks. This is about the same rate as last year. The IMF downgraded the outlook for most major economies as well (see chart).
In June, the Organisation for Economic Co-operation and Development (OECD) fretted that the global economy is “stuck in a low-growth trap.” Shortly thereafter, the World Bank issued a more negative forecast, saying global growth would come in at only 2.4 percent this year, down substantially from the 2.9 percent pace it had projected just several months before.
Of significance, there are few positive country narratives. The United States is a relatively bright spot, with the IMF expecting 2.4 percent U.S. growth in 2016—the same as last year, but lower than the IMF had forecast in October 2015. The Business Roundtable recently downgraded their expectations for U.S. growth from 2.2 percent to 2.1 percent, based on concerns over impediments to trade and immigration. And, as most Americans feel, U.S. growth is neither robust nor equally enjoyed.
Europe looked like it might have been turning the corner: Business and consumer sentiment had improved, productivity had increased, and GDP growth strengthened significantly. But growth across the eurozone in 2016 is expected to come in at just 1.4–1.6 percent—barring a sustained Brexit shock.
Over the past decade or so, many companies have globalized and bet heavily on emerging markets (EMs)—sometimes dubbed “rapid growth markets.” This strategy could be easily justified by management when EM growth rates consistently outstripped those of the United States and Europe by five percentage points or more.
But these markets have been underperforming in recent years and their outlook has been consistently downgraded. This year, the World Bank expects emerging markets to grow by just 3.5 percent—about two percentage points below their average growth over the past decade.
Moreover, EM performance will continue to be uneven and uncertain thanks to poor governance—as exemplified by a massive corruption crisis that has gripped Brazil’s business and political communities. India continues to be a top performer at 7.5 percent growth, but the reform-oriented government there has made little headway tackling the myriad of bureaucratic impediments to investing and doing business there.
And while China is still doing relatively well—with its growth expected to be in the 6.5–7.0 percent range this year—this performance has come thanks to renewed stimulus and the expansion of debt, which raises more questions about the sustainability of China’s trajectory. At the same time, Western companies conducting business in China are facing increasing political and regulatory headwinds, not to mention a much more competitive business environment.
An uncertain outlook
Not only are we in a slow-growth world but we are also in an era of significant uncertainty about the future. The IMF in April described global economic activity as “increasingly fragile” and the World Bank warned in June that “the balance of risks to global growth forecasts has tilted further to the downside.”
Uncertainty is rooted in the fact that traditional cyclical drivers such as business capital investment and consumer spending seem to have lost their oomph. In short, in our chronically slow-growth world, businesses don’t want to invest and consumers don’t want to spend. Moreover, productivity, profits, wages, and trade growth are stagnant as well, and many economists believe that income inequality is exacerbating the slow-growth problem.
On top of this, the growing influence of geopolitical risks—the Brexit vote, the upcoming U.S. presidential election, refugee migration, and China—are adding new and hard-to-quantify variables to the outlook.
Given this context, the severe market volatility seen during the summer of 2015 and in January 2016 points to profound uncertainties about the future and to how easily perceptions and the markets can get shaken in our slow-growth world. A resurgence of sustained global market volatility triggered by the Brexit vote has the potential to derail global growth.
Pressure test management’s assumptions
In this uncertain and volatile world, directors should be testing management’s assumptions about growth—now and in the future.
Start by confirming the baseline: Does management’s view of macroeconomic growth for 2016 in the company’s key markets align with the market consensus?
Get your own perspective. As noted above, we rely on the views of multilateral organizations—such as the IMF, World Bank, and OECD—for a global perspective. Their economic outlooks are easily accessible and widely viewed as a reputable baseline around which to test assumptions.
The OECD has put together a handy one-page summary chart focused on advanced economies that a director can take to a board meeting as a reference. The World Bank has an easy-to-navigate website for exploring regional and country economic outlooks. Central banks also are a good source of country-level data.
Ask questions about management’s assumptions:
What data sources does management rely on?
Does management’s view differ materially from what others are saying?
What assumptions support a divergent outlook?
How does management account for political risks?
Next, test management’s view of the future. Economists have had to significantly downgrade their expectations of U.S. and global growth and the economic headwinds are not expected to diminish over the next several years.
Has management adjusted its growth projections downwards as well?
What is management’s two- to three-year view of China and other emerging markets?
Do the company’s plans reflect a slow-growth environment going forward?
Given widespread uncertainty and the risk of volatility, management should be able to present a range of alternative market scenarios.
Does management have an economic disruption scenario?
How has management sought to make the company more resilient to the uncertainty and volatility in the global market?
Many directors we have spoken with have highlighted the challenge of managing near-term foreign exchange risks.
What steps has the company taken to hedge against swings in key currencies?
If management says the company is going to significantly outperform its peers or the macro economy—especially in emerging markets—that is a yellow flag that should signal you to dig deeper and ask more questions.
NACD’s Global Board Leaders’ Summit in September, themed around the issue of convergence, will have dedicated sessions on global economic and political disruption, featuring subject-matter experts and seasoned directors.
We sometimes all wish we could go back in time to advise ourselves on how to approach a new challenge or community given the knowledge and experience we have today. For the 2015 NACD Directorship 100 (D100), each honoree was asked to do just that. D100 directors were asked to provide a short, written response to this question: “What is the best advice you would give to a first-time director?” The D100 editorial team received responses from most honorees and they ranged from pithy maxims to stories about the challenges of staying independent.
A portion of the responses from the Class of 2015 D100 directors follows. Profiles of D100 honorees can be found in the November/December issue of NACD Directorship magazine.
Gary E. Anderson
Chemical Financial Corp., Eastman Chemical Co.
“I found that the best way to [contribute] was to frame appropriate questions dealing with the topic at hand. It doesn’t matter what the issue is, whether on corporate strategy, short-term tactics, succession planning, compensation, or risk management. The use of appropriate questioning also can work at home with the family!”
Avnet, Southwest Airlines
“I fully embrace the Southwest Airlines and Avnet way of doing business: treat your people well and they will be equipped and motivated to treat your customers extraordinarily well, and that will produce distinguished rewards for your shareholders. Everyone is important, in every nook and cranny of the business, and every decision at the board level should involve the question, ‘How will this affect our people, our principles, and our culture?’”
“Know your shareholders. What are their expectations? Is the company meeting them?
“Know your colleagues. Diversity of views, backgrounds, and experience enriches the company bottom line. Learn where your colleague’s views differ from yours. Understand why. Have courage and join them in candid discussion.
“Know your management team. Do they live their values? Are they delivering results?
“Be involved in NACD, as governance is a learned skill and doing it right keeps our private enterprise system strong.”
Betsy D. Holden
Diageo PLC, Time Inc., Western Union Co.
“The best advice that I received as a new director was, first of all, choose wisely. Select an industry and company that you are really interested in, a management team that you believe in, and a board where your skills and experiences are relevant and will add value.
“Secondly, what really differentiates the best directors is how they interact with management and the other directors. Good directors are confident and courageous, and challenge management in a positive, constructive way…They understand that chemistry is the intangible that drives board effectiveness and they really listen to and treat other directors with respect.”
Nancy J. Karch
Genworth Financial, Kate Spade & Co., Kimberly- Clark Corp., MasterCard
“Some of the best advice I received as a new director was to accept that this role is different than anything I had ever done, and to have patience to learn the ropes. [A director] is an advisor, a member of a peer team, a leader on governance matters, a decision maker on some matters—[it’s] a mix unlike anything else. Plus, as in any job change, one is entering a new culture, and in the case of a board, both a company and a board culture. So be patient.”
Bemis Co., Delphi Automotive
“The best advice I received was pertinent to me both as a director and as a chair/CEO. That is: ‘Tim, be yourself, remember that is what got you here.’ [That advice] caused me to think about hard work, integrity, ethics, and striving to make the proper decisions.
“It also reminded me that as my career evolved from working summer jobs in automotive plants to the boardroom of BorgWarner, I listened to, learned from, and developed relationships with people from all levels of society. This has become a valuable tool in the boardroom. Each time ‘a sticky issue’ is discussed, I remember to think back to my previous experiences and express what I think is the proper approach.”
Sarah E. Raiss
Canadian Oil Sands, Commercial Metals Co., Loblaw Cos., Vermillion Energy
“The best advice I received came from a very seasoned director. He said that I should find a person or two on the board that I could best relate to and either ask them to be my ‘board buddy’ or just make them my ‘board buddy’ without even asking. This person would help me understand current board dynamics, help me understand the history as necessary, and provide feedback on the value I brought to the board. I have used this technique on every board to which I am appointed, [and it] has allowed me to be more productive and a valuable contributor more quickly. I am most appreciative of my ‘buddies.’”
Molina Healthcare, Park Ohio Holdings Corp.
“Three people gave me great advice when I decided to accept board positions at Molina Healthcare and Park Ohio. The first was Mary Molina, the company’s chair. It was simple but profound: ‘Remember the mission. It is the cornerstone of our corporate culture.’
“The second came from Ed Crawford, chair and CEO of Park Ohio. He said, ‘Act with integrity at all times and have the courage to do the right thing.’
“The third was from my husband, Bruce Kulp, former general counsel of Ford Europe. He counseled me to listen, get as much information as possible, trust in the power of common sense, and to always think strategically.
“Lastly, the people you deal with in management and the board are human. They have families. They have good days and bad days. Kindness is powerful, even in the boardroom.”
Olympia J. Snowe
Aetna, T. Rowe Price Group
“One of the key components of executing critical judgment is ensuring an ongoing evaluation of how the company’s short term goals enhance its strategy for creating long-term value. That requires early and extensive director engagement in the shaping of the strategy, greater understanding and knowledge of business operations, and constant assessment and management of the risk.
“In this era of deeper investor involvement, it is more essential than ever for boards to communicate to shareholders the extent to which the independent directors are vigorously exercising their due diligence towards maximizing the value of the enterprise.”
Ronald D. Sugar
Air Lease Corp., Amgen, Apple, Chevron Corp.
“Select your boards carefully…You should be mindful of geography, meeting schedules, and be prepared to put in whatever time is necessary. And when trouble comes, you must be committed to see things through—whatever it takes.
“In well-run companies, board meetings enter a predictable rhythm, and are fairly routine. It has been said that in routine times, the quality of a board doesn’t really matter—until suddenly those moments when it matters enormously. Such ‘moments’ might include a significant market shift, a technology disruption, a planned (or unplanned) management succession, a serious regulatory or litigation threat, an environmental or safety crisis, a significant acquisition, a hedge fund activist campaign, or a hostile takeover attempt. In those moments, the board’s collective wisdom, perspective, and mature judgement can make—or break—a company.”
David A. Wilson
Barnes & Noble Education, CoreSite Realty Corp.
“The best advice came from the counsel I engaged for [a] special committee. He noted the fiduciary duties of directors formed a foundation but not the entire structure. The greatest challenge I will ever confront as an independent director, he said, is ‘independence.’ He was speaking not of the independence necessary to meet SEC and NYSE thresholds. Rather, he spoke of the independence of mind, thought and action.
“What our attorney never told me was how challenging it may be to hold fast when you are in the minority, but how critical it is to our governance system that you do.
“Polonius may have been a pompous fool, but I still find value in these words: ‘This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man.’—William Shakespeare, Hamlet, Act 1 Scene III.’”
Review the full list of D100 honorees at NACDonline.org/Magazine, and take a few moments to consider who you might nominate for inclusion in our tenth anniversary list. A call for nominees will be issued to all NACD members in early 2016.
The word hacker carries many connotations, most of them negative. But is it possible that hacking can be a force for good? During his keynote speech at the 2015 NACD Global Board Leaders’ Summit, technologist, author, and self-described hacker Josh Klein offered a fast-paced dive into the misconceptions that directors and executives may be perpetuating without even recognizing their error.
“Disruptive trends in technology, culture, and business are converging,” Klein observed before exploring four areas in which this convergence is creating unprecedented opportunities.
Code. In 2006, the cost to develop a website was exorbitant by any standard. Today, thanks to the multitude of free web-development tools now on the market, the cost is next to nothing. In Klein’s words, “It’s getting cheaper and cheaper to validate your business concept.” This fact alone will grow the pool of competition exponentially, because anyone who knows enough code to use these tools and has a marketable business plan can start a company. Anyone from legitimate start-up entrepreneurs to criminal masterminds can code a site, which means that companies must anticipate and plan for competition of varying legality and ethical standing.
Culture. “Tech doesn’t spring from the ether,” Klein pointed out. “It emerges from the attitudes and desires of users.” Information can be shared and spread almost instantaneously, increasing the likelihood that a company will at some point receive undesirable attention. According to Klein, technology creates a meritocracy via democratic exposure of reputation. But instead of trying to hide negative feedback, companies should get ahead of the problem and own it as best they can. He cited AirBnB as one example of how digital technologies have created marketplace meritocracies. Responding to an incident in which an AirBnB guest caused significant damage to a host’s home, the company rolled out a million-dollar host guarantee policy. This move both acknowledged the problems with the company’s old business processes and affirmed its commitment to improving those systems and protecting AirBnB hosts.
Competition. With the rise in sources of competition, businesses that rest on their laurels and become complacent about their success are putting themselves in a dangerous position. Looking out over the audience, Klein underscored the obvious: “We’re all sitting here, and the innovation may be happening someplace else.”
Future Context. To many of us it seems that everyone is connected by the Internet, but only about one-third of the world’s population is online. Klein observed that the remaining two-thirds may be illiterate and may not have bank accounts; they do, however, participate in the black market, which is currently valued at $10 trillion and accounts for $1 in every $7 exchanged, making it the second largest market on the planet. Companies must anticipate how these demographic shifts will create new business demands and transform the face of e-commerce.
Klein ended by entreating his audience not to panic but instead to begin experimenting, learning, evolving, and to do this all as quickly as possible. “Do it now, because if you’re not, someone else is.”