Topics: Risk Management
Topics: Risk Management
June 17, 2020
June 17, 2020
It is never too early to begin thinking about and preparing for what tomorrow might bring. The onslaught of socioeconomic shocks caused by the COVID-19 pandemic has prompted a great deal of speculation about the longer-term impacts on globalization. Amid uncertainty about the duration of the crisis—and how long it will take to find and implement effective solutions for testing, treating, and preventing the disease—there is an undercurrent of fear that the worst is yet to come. Although efforts are underway to reopen the economy and get businesses from Main Street to Wall Street back to work, the possibility of a second wave of COVID-19 infections tempers optimism.
Directors and experts interviewed by NACD in March and April had no shortage of opinions on the long-term impact of the pandemic on globalization or the spread of products, technology, information, and jobs across national borders and cultures. Let’s begin with some basic truths gleaned from interviews.
China overtook the United States in global manufacturing output in 2010. According to data published by the United Nations Statistics Division, China accounted for 28 percent of global manufacturing output in 2018, putting the country more than 10 percentage points ahead of the United States, and earning the distinction of being the manufacturer not just to Apple and other well-known brands, but to the world itself.
A director of one large multinational technology company, speaking during a virtual NACD chapter meeting, described how that board asked management for a diagram that laid out in detail the company’s supply chain and the origin of each part. Boards that lack an end-to-end view of the corporate supply chain may be at a disadvantage in their oversight of risk, she said. Disruption to second- and third-tier suppliers—those that supply materials or parts to others—could bring production to a halt if delivery of a certain component or material is delayed or vanishes altogether, creating openings for existing or new competitors.
In its annual assessment of top global risks, published in January, the political risk consultancy Eurasia Group warned that globalization—which it cites as the foundation for the wealth and opportunity that characterized the latter half of the 20th century—is under siege due to the increasing polarization between countries. In a matter of weeks, the spread of coronavirus came to a head, highlighting and exacerbating preexisting tensions.
According to a copy of the report that was revised and reissued in March to account for the impact of COVID-19, “The public health emergency has also deepened the geopolitical recession, as the US shows little interest in quarterbacking an international response, and China aims to take advantage of the vacuum. More broadly, the pandemic has forced all nations to look inward, speeding both this recession and the process of deglobalization.”
D.J. Peterson, the president of Longview Global Advisors, noted in a recent telephone conversation with NACD Directorship that in addition to geopolitical strains, companies should expect increased regulatory activity aimed at employee safety. The accounting scandals of the 1980s ushered in the Sarbanes-Oxley Act of 2002 and the financial crisis led to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2008, empowering the audit and compensation committees, respectively. Peterson predicts that lawmakers will target health security for reform as a result of COVID-19, with ramifications for boards and most likely for nominating and governance committees.
“Obviously, this is going to be politicized—domestically and internationally,” Peterson said. “What boards are going to see are issues around health security, and [governments and politicians] using health security to push anti-Chinese rhetoric. Governments and activists will use this to pursue lots of different agendas. We’ve seen this in China as well—government using the pandemic to shut down disclosure, to shut down newspapers.”
While environmental, social, and governance (ESG) issues have been on board agendas for some time, stakeholders and investors had been focused more on the ‘E.’ According to Peterson, the pandemic is going to put the ‘S’ front and center for some time. “If companies don’t get that ‘S’ right, down the road the potential legal liabilities will be huge,” he said. “The board needs to be asking management: Do our workers feel safe?”
In addition to reticence caused by personal health concerns, individual countries may adopt or continue to impose border controls, or require health certifications to enter the country—what Peterson called “security theater.”
“What this crisis has done is elevate protection. The new baseline will be to protect employees, customers, and stakeholders. If the CEO and the leadership team can’t create a safe environment, you’re dead in the water. No safety means no customers,” he said. And although much still seems uncertain as COVID-19 continues to course through communities all over the world, for Peterson, one thing is already apparent: “We’ll never go back to how we were before.”
NACD: Tools and resources to help guide you in unpredictable times.