This is the third of a three-part series looking at the global economy and uncertainty in 2016 and 2017. In the first post, the challenges of slow growth in developed and emerging markets was addressed. The second postexplored how political entrepreneurs such as Donald Trump have exploited voter anger over limited economic opportunity and the perceived inability of institutions and elites to solve problems. To dive deeper into election implications, join DJ Peterson and David Kistenbroker, Global Co-Head, White Collar and Securities Litigation, Dechert LLP, for a webinar on December 15, 2016. Members may register to attend here.
On November 8, American voters extended a series of striking political surprises and rebukes that in 2016 began with the June referendum on Brexit and in October Colombians’ rejection of a peace deal with rebel forces. Looking forward, the success of Donald Trump raises questions about what will happen next in Europe when voters go to the polls in Italy, the Netherlands, France, and Germany in the coming months. Populism, nationalism, anti-globalism, and authoritarianism seem to be on the rise and time-honored principles and institutions are being weakened as a result.
In the corporate boardroom, disruption usually is thought of in terms of innovation, technology, and the competitive landscape—it is looked at as both opportunity and risk. And while board members are sometimes challenged to address economic disruption in business, political disruption is even more difficult to grasp and manage. Are board members asking the right questions? Are we creating the right scenarios?
Not surprisingly, NACD’s member surveys, as a well as discussions at the 2016 NACD Global Board Leaders’ Summit, reveal that a top concern of board members and corporate executives is how to navigate the tremendous economic and political uncertainty in the world today. A breakdown of broad-based consensus on free trade is a related concern.
Several megatrends driving the political disruption we are seeing include:
diminishing economic opportunities for the middle and working class;
a sense that urban elites—in government, the media, and business—are distant and not very concerned about the “average person”;
social media, which tends to play up societal challenges and divides;
and political entrepreneurs who look to capitalize on these trends of unrest.
This has played out on the trade issue. While lower barriers to international movement of goods and services help boost growth, the benefits are diffused throughout an economy while job loses often attributed to trade deals (wrongly or rightly) are concentrated in working class communities—making political mobilization easier. Social media, meanwhile, has helped reduce a complex policy issue to caricatures.
How might these trends impact long-term business and economic success in the United States in the coming years? Expectations are that the new Trump administration, together with the Republican-controlled Congress, will repeal a host of Obama-era laws and regulations, cut and simplify corporate taxes, and appoint business-friendly judges to the courts. These moves would be a boon for many sectors.
But Donald Trump’s populist appeal has also been derived from his willingness to blame countries for having unfair trade advantages; to publicly name and shame firms for sending manufacturing abroad; to criticize large mergers for concentrating economic power; and to target executives for opposing him. We don’t expect such appeals to end once Trump is power. He is likely to use such tactics from the bully pulpit of the presidency to bolster his position and “tell it like it is” personal brand.
Economic populism is one area where activists on the left are likely to be cheered by Donald Trump’s presidency. They certainly have been willing to name and shame companies for actions that they see as out of line with public interests.
This is where board oversight is important.
Directors can pressure test management’s assumptions about the political implications of their actions. Directors should urge management to consider what the political risk implication of the company’s actions are. For example, how will decisions about outsourcing operations, finding tax advantages overseas, or cutting job-training programs and hiring foreign workers be perceived? Will they land the company in the headlines?
Directors can ask management questions about strategy as well:
How are we identifying trends and disruptions that may affect the business?
Are we integrating political assessments into risk management—regarding, for example, currency, regulation, or supply chain strategy?
Are political risks considered as part of our strategic planning processes?
Are we considering a range of scenarios and market impacts for a country or an issue?
How are we monitoring and reassessing developments? Do we have good information?
Focusing the board lens on the bigger picture, in today’s populist, volatile political world, companies can no longer merely defend themselves against risks and criticize government policies and social activists. Rather, public-private cooperation is needed now more than ever.
At the 2016 NACD Global Board Leaders’ Summit, participants heard about conscious capitalism—shorthand for the many ways companies can make money by doing good for societies they are embedded in. Many proactive business leaders are looking for opportunities to be a part of the solution to the challenges spurning the disruption—from raising hourly wages to hiring and training refugees, to investing in underserved communities and making healthier products. Fostering long-termism is another way that companies can contribute to this aspect of the movement.
Many such initiatives are the results of a CEO’s passion and they often get relegated to the corporate social responsibility portfolio. It’s not hard to name firms and executives that get kudos for one socially responsible initiative but come under withering criticism for major failings in other aspects of their business.
For conscious capitalism to be a meaningful response to recent geopolitical disruption, incentives and priorities must be changed throughout the organization. This is stimulating a rethinking of corporate governance—the core values, norms, and rules that drive corporate behavior. Directors can help ensure long-term, conscientious response to populist pressures on businesses by asking: What is our ultimate mission? What are we doing to help solve today’s problems? How do we maintain and enhance our social and political license to operate?
DJ Peterson founded Longview Global Advisors in 2013. Longview Global Advisors is a consultancy that works with clients on a range of tasks that include strategic planning, market intelligence, thought leadership, and executive positioning. Business leaders and investors turn to Longview Global Advisors for a relevant worldview, and Peterson helps them monitor and make sense of the political, economic, and social trends they care about.
One of Steve Jobs’ last initiatives before his death in October 2011 was a personal pitch to the Cupertino City Council of his vision for a state-of-the-art research and development facility shaped like a spaceship, an integrated 21st century campus surrounded by green space, designed with a commitment to energy efficiency, environmental sustainability, and generous amenities for employees. The updated plans in December 2011 stated: “This new development will provide a serene and secure environment reflecting Apple’s values of innovation, ease of use and beauty.”
About the same time these new campus plans were being developed, Apple was linked with a very different work environment—that of Foxconn Technology Group, the biggest maker of Apple iPhones and iPads. A workers’ rights controversy at Foxconn had dogged both companies for a few years due to worker suicides and factory explosions. Photos of Foxconn’s dormitories and factories at the time show netting outside the windows to catch suicide-jumpers—an image clearly not aligned with a “serene and secure environment reflecting Apple’s values.”
As Bloomberg journalist Tom Randall noted in “Inside Apple’s Foxconn Factories,” “the relationship between the two companies shows how the reputation of global brands is increasingly tethered to the emerging-market companies they do business with.” This is especially true when it comes to the place where the work is done, whether it’s at an address controlled by the corporation or one of its suppliers.
Following the suicides, Apple published a set of standards spelling out how factory workers should be treated and it also moved some of its production work. It’s a continuous process. As Apple noted in response to a December 2014 BBC Panorama News program about Apple’s ongoing challenge to protect Chinese factory workers, Apple stated: “We are aware of no other company doing as much as Apple to ensure fair and safe working conditions. We work with suppliers to address shortfalls, and we see continuous and significant improvement, but we know our work is never done.”
Where the work gets done—planning, making, selling, and servicing the company’s core bundle of products and services—is the workplace. It can be physical space the company owns or leases; it can be cyberspace, where work is done from anywhere, anytime; and, as noted above, it can also be the physical space used by key vendors to whom various stages of the work have been outsourced. It is often a large asset: in 2014, AT&T’s domestic real estate portfolio was 240 million square feet while RadioShack had 4,400 company retail outlets before it declared Chapter 11 bankruptcy in February 2015. In addition, investment in the workplace can approach that of labor and information technology, yet boards often pay little attention to it until there is a crisis.
The workplace is changing, as seen in Harvard Business Review’s October 2014 cover story, “Why we Hate Our Offices and How to Build a Workspace We Can Love,” devoting three articles on 21st century workspaces and the impacts of technology and culture on how and where we work, how we feel about our workspace, and how it impacts our productivity.
Two industry thought leaders described workplace strategy (WPS) more than a decade ago as “a bundle of occupancy, connectivity, and support services to enable those who do the work to get it done.” Michael Joroff from MIT and Michael Bell of the Gartner Group wrote then: “In this definition, all activities are designed to help the workforce accomplish its mission in physical space and cyberspace.”
Directors need to understand the risks to the business if there is no WPS or if the latter is not aligned with enterprise priorities and opportunities. WPS needs to be agile enough to keep pace with ever-changing business requirements and risks. Here are questions directors can ask senior management:
Does the company have a WPS? The fact that a company leases or owns real estate and facilities does not mean it has a strategy. WPS requires an analysis of the supply of and demand for space wherever work is done throughout the enterprise and across divisions, departments, subsidiaries and state, national, and international boundaries, combined with plans to address the gaps or oversupply of space consistent with enterprise goals. The demand side of the equation is the current and forecasted hiring plans for employees and contractors. The supply side is the existing inventory of work space to accommodate that demand, with the added complexity of alternative ways of working from almost anywhere anytime.
The risks of not having a WPS include:
Wasted costs from sub-optimizing the enterprise portfolio of workplace assets. For example, owning vacant real estate with no known or forecasted demand and/or potentially securing and building out new work space for a line of business when those costs could have been avoided by using under-utilized space from another business unit
Lost sales and market share. WPS can become an obstacle to getting the product or service to the customer if workplace is not available when and where it is needed or if it is not adaptable to enable evolving work processes
Impact on talent attraction and retention. Workplace can impact employee satisfaction, especially if it is disconnected from enterprise values that commit to provide a productive and satisfying work environment or if it is in a labor market that cannot meet the business requirements for specific skills
How can WPS support enterprise goals? WPS is becoming part of big data. Collecting, maintaining, and analyzing the data requires collaboration across myriad services including finance and accounting, human resources, information technology, and data analytics, sourcing/supply chain management, real estate and facilities, sales and marketing, and operations. Which group leads WPS varies by company so a report to the board on WPS might come from any of these groups. A WPS report includes trends in the total costs of occupancy with a breakdown by subsidiary, division, or line of business, and by region and real estate asset utilization, which include trends such as vacancy, the amount of square footage, and total workplace costs allocated per employee compared to industry benchmarks.
A good WPS includes performance metrics that flow from enterprise goals. WPS tactics and metrics should support enterprise goals such as cost containment, scaling business for high-growth initiatives, enterprise risk management, corporate social responsibility, sustainability, employee satisfaction, and retention goals.
WPS has long been a part of risk management—disaster preparedness from floods and blizzards, for example—but outsourcing has expanded the risks by including the working conditions of the workplace of one’s global vendors as well as cyber-risks of the supply chain. Consider these reputational risks:
Your product is manufactured in a Bangladeshi building that collapses and kills 900 workers inside
Your point-of-sale machines are breached by attackers whose first step is the theft of credentials of one of your vendors and ends with the theft on a massive scale of your customers’ personally identifiable information and credit card and debit card data.
Part of the update to the board should include an overview of workplace-related supply chain risks. It also includes an explanation of the governance structure that specifies how WPS decisions are made, executed, reinforced, and challenged in the company–at the enterprise level? At the line of business level? Who owns and is accountable for these decisions that can have a major impact on the business?
How agile is our WPS? Business is being disrupted at an accelerating pace. Whether it’s the impact of online shopping on a brick-and-mortar retailer or a merger, acquisition, or disposition of a business unit, directors should consider if the company’s WPS is flexible to enable a rapid response to sudden, unexpected risks and opportunities. Real estate is illiquid. There are ways to make a workplace more agile, but flexibility comes at a cost premium. The premium may be worth it compared to the impact to the business of not having space when you need it or of locating in a “low cost” place where the company cannot hire enough people qualified to meet the business requirements, or being stuck with millions of square feet of vacant space that can only be disposed of at pennies on the dollar. Service providers can help identify risks in the enterprise workplace portfolio and ways to mitigate these risks that align with your company’s goals and needs for agility.
Strategic questions to ask about WPS include:
How much are we spending on Workplace and how much should we spend?
How agile does our Workplace need to be given our competitive environment?
Does our Workplace reflect the values and strategy of the enterprise and align with corporate goals?
How do we know if the Workplace of our key suppliers aligns with our WPS and enterprise values?
A Reflection of Culture
The workplace is a reflection of corporate values and priorities. A headquarters campus, a retail store, a manufacturing plant, a call center, and the cleanliness and safety of an amusement park are all reflections of the culture, personality, and values of the founder or CEO. Office or facilities space is an indicator of the attention paid from the top down to where and how the work of the company gets done.
Here’s a thought experiment:
Recall Merrill Lynch CEO John Thain’s $1.2 Million office renovation in 2008. Because his private office sported luxury items that included a $38,000 commode and $87,000 rug, the CEO’s workplace became an embarrassing emblem of banking industry excess as global financial markets were crashing. The workplace renovation caused so much negative publicity that Thain soon agreed to pay back the shareholders
Now, think of your boardroom as the workplace of your board.
What does your board workplace convey about corporate values to your stakeholders?
Is the board’s workplace aligned with the priorities of the enterprise?
What do you know about the workplace of your key suppliers?
To go back to the example of Apple’s supply chain and the implications for a workplace, a March 27, 2015 article by Eric Pfenner in TheWall Street Journal hints at another way to outsource that has the potential to change the discussion about workplace. In “Japanese Robot Maker Fanuc& Reveals Some of Its Secrets—Company helps make iPhones and Teslas”, Pfenner reported that Fanuc’s giant Robodrill machine tools are used to help shape the aluminum cases for smartphones from Apple, Xiaomi, and other brands.
The efficiency of Fanuc’s robots is breathtaking. “One 86,000 square foot factory in Oshino, making industrial robots, is staffed by only four people at a time,” Pfenner writes. “In another factory, robots can assemble an industrial motor in 40 seconds.” As more industries accelerate the automation of work processes, reputation risk shifts from workplace conditions to workforce and impact on jobs. What WPS most closely aligns with your company’s goals and values?
In today’s evolving world of off-shoring, on-shoring, near-shoring, and right-sourcing, executives and the board would do well to think about the workplace as that bundle of occupancy, connectivity, and support services that enable those who do the work to get it done efficiently and effectively—wherever, whenever, however and-increasingly-whoever is doing the work on behalf of the company—and oversee that their company’s WPS enables enterprise goals and reflects the company’s values.
Margaret Latshaw’s experience includes seven years as an officer at Bank of America and at H&R Block and 10 years as a director on the board of a private real estate company. She is an advisory board member of the real estate center at the University of Missouri-Kansas City and an NACD Fellow since 2013. She currently advises on corporate real estate and business strategy. Contact her at email@example.com.
Protiviti and North Carolina State University’s Enterprise Risk Management Initiative conducted a global survey involving 275 board members and executives across multiple industries, one of the top 10 risks cited was that resistance to change may restrict an entity’s ability to make necessary adjustments to its business model and core operations. This finding is important because change is inevitable and necessary. If organizations fail to continuously improve their products, services, processes, and capabilities, they will ultimately encounter serious performance gaps relative to more adaptive competitors.
Change creates opportunities to enhance the organization and threatsthat impair enterprise value. It can also challenge the fundamental assumptions underlying a company’s strategy and business model. Organizations must embrace change, and, in this era of continuous and disruptive change, early movers are the ones most likely to survive and prosper.
Identifying Incremental Change
Correctly diagnosing the opportunity or issue precipitating the need for change is the most important aspect of this process. If managers are confident in the diagnosis, they can then allocate the appropriate resources to address the needed change.
Changes in the business environment come in small and large doses. Small doses usually result in incremental improvements in business processes. These improvements may address new laws and regulations, contracts and internal policies that create additional corporate requirements. Alternatively, they may focus on improving customer and employee satisfaction levels. Whatever the drivers, it leads to continuous improvement in processes that achieve business objectives.
It is also important to focus on larger, root causes of change, the situations that are likely to lead to undesired consequences or outcomes. Root causes include external factors such as emerging technological trends or opportunities to improve products and services. They can also be internal issues such as poorly written policies, process failures, or inadequate training.
Performing a root cause analysis can identify the factors that drive undesirable performance. Once an opportunity or issue is fully understood and defined, relevant data is gathered and evaluated, possible underlying causes are identified and systematically reduced, multiple interrelated causes are considered, and corrective actions are formulated to eliminate those root causes. Actual results are then monitored over time, and the technique is applied again until acceptable results are achieved.
Identifying Disruptive Change
Today, managers face disruptive changes to business models and even entire industries. Whereas disruptive innovations may have once taken a decade or more to transform an industry, research shows that this timeframe is compressing and continues to shrink, leaving very little time for businesses to react. Sustaining a business model in the face of digitally enabled competition requires constant innovation to stay ahead of the change curve.
There are powerful forces reshaping our world, forcing leaders to rethink the assumptions underlying decisions relating to consumption, resources, labor, capital, competition and more. According to No Ordinary Disruption: The Four Global Forces Breaking All Trends, there are four great disruptive global forces that, collectively, are shaping a radically different world:
The shifting locus of economic activity to emerging markets. Nearly half of global gross domestic product growth between 2010 and 2025 will come from 440 cities in emerging markets, 95 percent of which are not currently well known to the Western business world, e.g., places like Surat, India, Foshan, China and Porto Alegre, Brazil, each of which is expected to contribute more to global growth between now and 2025 than Madrid, Milan or Zurich.
Acceleration in scope, scale, and economic impact of technology. The growth in processing power and connectivity through technology has been exponential. There is also the concurrent data revolution, which delivers unprecedented amounts of information to consumers and businesses in increasingly convenient ways, spawning new ways of analyzing data, doing business and fulfilling customers.
Changing demographics. The human race is aging as fertility falls as life expectancy rises. In 2013, about 60 percent of the world’s population lived in countries with fertility rates below those needed to replace each generation. The consequences of this trend include stagnant growth in a consumer-driven economy, dramatic escalation of the war for talent, and the prospect of a smaller working population supporting a larger, aging population.
The world is becoming more connected through trade and movements in capital, people, and information flows. Interconnectedness matters because it is changing the competitive landscape. Well-established incumbents must prepare for entrants from anywhere, build new global ecosystems and become more agile.
To stay ahead of the disruption curve, business leaders must quickly discern the vital signs of change and the related implications to their business model. To do that, they must do these four things well:
Understand the critical assumptions underlying the business model.
Apply contrarian analysis to evaluate plausible and extreme events or combinations of events that could invalidate one or more critical assumptions.
Conduct competitive intelligence activities focused on the vital signs.
Distill timely information about assumptions, scenario analyses and intelligence-gathering, and report insights obtained to decision-makers.
The implications of transformative market trends can be highly disruptive to established business models. In this environment of constant change, the status quo has no future and is constantly “on the clock.” Executives and directors need confidence that they have the insights necessary to recognize the effects and implications of the profound sea change unfolding before them.
Acting on Change
Having time to act is a precious asset and is available only when performance issues, market opportunities and emerging risks, and an understanding of their implications to the enterprise’s business model are anticipated and evaluated in the cool of day rather than the heat of the moment.
Unfortunately, time to act can be squandered. Decision makers need to innovatively act on their knowledge of emerging opportunities or risks; otherwise, their knowledge is useless. To ensure timely reaction, management must:
Foster an organizational culture that facilitates sourcing the root causes of subpar performance and consideration of the impact of changing market realities on critical business model assumptions. Empowering process owners and stakeholders can drive continuous improvement of business processes when subpar performance and/or trending metrics signal change. With respect to changes in the marketplace, continuous conversations around business areas, alignment of incentive compensation with short- and long-term performance goals, senior management involvement, and an active board help shape a culture that encourages understanding of the reasons for and implications of change.
Incent managers to translate root cause analysis into actionable revisions to strategic business plans and to process improvements. Incentives skewed to maximize revenues without fostering sensitivity to changing market realities can create serious organizational blind spots.
Seek organizational resiliency. When companies don’t respond to disruptive change, it’s usually because they don’t have a single version of the truth of what’s happening in a rapidly changing business environment. This dysfunction can arise from incentives that do not encourage resiliency and from management being out of touch with the customer and uncommitted to managing by fact.
Facing change with confidence means accelerating the decision-making process regarding actions to address recognized performance issues, market opportunities and emerging risks. What separates winners and losers in managing disruptive change is the ability to recognize the vital signs and act on them with confidence.
Managing the Change Process
Improving products, services, processes, and implementing new strategic initiatives requires focused and disciplined approaches consistent with the organization’s structure, culture, and operating philosophy. To accomplish this, executive management must have buy-in from a committed chief executive officer and must demonstrate unwavering support for undertaking action plans that create and sustain momentum for change. With executive management’s assistance, the change implementation team must develop a business case that clarifies why change is must happen, focus on the “big picture” with a compelling shared vision, set realistic goals, develop a clear plan of action, and make periodic use of management checkpoints.
In addition, key stakeholders—such as line-of-business leaders, operating personnel and process owners who will be most affected by the change—must own the implementation of change. Their buy-in is obtained first through evidence of executive management support. They also need to be convinced that their interests and the interests of the enterprise in effecting the change are inextricably linked.
Once the support of key leaders throughout the organization is obtained, the implementation team should establish accountability for results; focus on the human side of the change effort; align organizational, process and individual performance measures; and align the change process with the firm’s culture.
If the above practices for enabling change are executed effectively, they lead to sustainable change with confidence of achieving expected results.
Questions for Boards
The following are some suggested questions that boards may consider, based on the risks inherent in the entity’s operations.
When framing the real opportunity or issue precipitating change, is the board comfortable that management considers the business context, understands root causes, and manages by fact? Does management mitigate the effects of bias on the fact-gathering and analytical processes leading to identification of the real change opportunity or issue?
Does management recognize and anticipate the root causes of unacceptable performance? Does the organization monitor the vital signs of new market opportunities and emerging risks arising from disruptive market forces? Does management act on knowledge of needs to change in a timely manner?
Once there is commitment to act, does the organization have an effective change enablement process that drives its key personnel from awareness to buy-in to ownership to give management and the board the confidence that the change is sustainable?
Jim DeLoach is a managing director with Protiviti, a global consulting firm.