Tag Archive: Economic Risk

Six Economic Factors Boards Need to Address Now

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Dambisa Moyo

Dambisa Moyo is a renowned global economist, author, and board director. She is a preeminent thinker who advises key decision makers in strategic investment and public policy, as well as a trusted advisor on macroeconomics, geopolitics, technology, and millennial themes. Moyo currently sits on the boards of Barclays Bank and Chevron Corp. She will speak at NACD’s 2018 Global Board Leaders’ Summit on “Harnessing the Future” with Shelly Palmer. NACD’s Summit programming will feature a plethora of speakers who will focus on exciting future trends to keep board members ahead of the field.

We caught up with Moyo as she prepares for her keynote at Summit and for the release of her  book, Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth—and How to Fix It (Basic Books, 2018). Moyo shared her thoughts on the major economic issues that boards are overlooking, emphasizing why they should be addressed sooner rather than later. Highlights from the conversation follow.

What is one major economic issue that boards are currently overlooking that should be addressed sooner rather than later?

This quote is usually attributed to Mark Twain: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” I think that is really a powerful statement. Too often we understand risk as being a constant, immediate and short-term. When it comes to risk, we need to take a fundamental step back. We need to look at the bigger picture to think about how we approach risk over the long-term.

Ask yourself, “What are the things we are not seeing today that we will look back on and wish we saw coming?” Board members 10 or 15 years ago were making very rational bets assuming that we were going to be in a globalized economy and in a stable democracy where there would be no populism, but that has turned out not to be the case. We didn’t anticipate issues such as populism, trade risk, tariffs, and protectionism.

  1. Technology and the risk of a jobless underclass Moving forward, the risk of creating a jobless underclass as a result of increasing automation and technological advances is considerable. Tech holds benefits in terms of reducing costs for companies, but where will revenue come from if no one is working and a large number of people live in a jobless underclass?
  2. Demographic shifts Our planet will hold 11 billion people by 2100. How do we navigate the challenges around aging populations and shifting consumer demands? Where should we transact our business and how should we transact our business? Companies need to think about this not only in terms of business but also in terms of hiring human capital. We have to focus on the quality and quantity of the world’s population and then figure out where our talent pool lies.
  3. Income inequality It has become clear that issues around pay have come to the fore. The issues of pay inequality between the genders, and between the company CEO and the company’s median or lowest-paid employees are now top of mind. Companies are now being required to address some of these income-inequality issues, which means that in the public’s mind the board’s governance responsibility has broadened from the idea that companies are just there to maximize shareholder value.
  4. Natural resource scarcity Natural resource scarcity has come to the forefront due to the imbalance between increasing urbanization and demand for products and the shrinking supply of arable land, potable water, energy, and minerals. This dynamic could create a lot of inflation. How do we navigate that?
  5. Debt Debt is at an all-time high. Virtually every class of debt is at a historical high: government debt, household debt, credit card debt, auto loans and student debt. Is that sustainable? The US Congressional Budget Office notes that US debt and deficits are a big risk and caution that they are unsustainable. It’s a big risk for companies because they have to decide if they should borrow at a low interest rate and what the debt burden will do to their customer base.
  6. Productivity Productivity should be increasing in a world where we do things more efficiently thanks to technology, but unfortunately we are actually seeing productivity decline around the world. There are real questions about what the implications might be for companies and growth around a decline in productivity.

Your new book, Edge of Chaos, will inform directors’ understanding of the current economic climate. Which topic would have the greatest impact on their oversight duties?

For corporate board members the most important issue is myopia. This is economic short-termism in both the corporate and political space. A lot of the issues threatening the global economy are long-term, intergenerational, structural problems in the economy. These harken back to my list of six economic problems. These are all long-term problems.

One of the biggest challenges that we face is that policymakers are paid and rewarded for short-term thinking. Policymakers are constantly facing reelection and that means they’re thinking very short-term in terms of how they deal with issues. Companies face a challenge because they are focused on reporting quarterly earnings and their investors are very keen to see the short-term returns. This is a hurdle that we need to reevaluate.

The mismatch between long-term economic challenges and short-term political myopia needs to be bridged. My book offers 10 ways to get through that. I also highlight some of the biggest consequences of short-termism that we’ve seen in the corporate space. For example, CEO and CFO tenures have shortened and the holding period by portfolio managers has shortened a lot. There have also been issues around the life span of companies. A company in the 1930s had a life span of around 100 years. It’s now only about 16 to 17 years before a company is bought and sold. All of these things lead to how companies should think about their overall strategy and how they fund themselves.

Don’t miss out on Moyo’s keynote, at the 2018 Global Board Leaders’ Summit, happening September 29 through October 2 in Washington, DC. There will be plenty of opportunities at Summit to discuss the future of the economy, globalization, and much more. Register now to attend.

Preparing an Organization for an Economic Downturn

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Jim DeLoach

Jim DeLoach

There is no better time to prepare for an economic downturn than when times are good. With the memory of the severity of the 2007–2008 financial crisis still fresh in the minds of many directors and executives, how should companies prepare for a downturn in the cool of the day, rather than reacting in crisis mode?

Most business plans do not currently anticipate economic downturns; however, a contingency plan makes good business sense because it positions companies to act decisively when recessionary storm clouds loom on the horizon.

Organizations develop contingency plans to address market opportunities should they arise and document specific action steps that are triggered if certain events occur. Such events might include natural disasters, cybersecurity breaches, terrorist attacks, fire, fraud, theft, or embezzlement. These perils may never occur, but the plan nonetheless stands ready with a response team organized to implement it.

The focus of this discussion is how to prepare for an economic recession that causes revenues to decline below a predefined threshold. It is virtually irrefutable that a recession will occur, which is why it’s wise to create a contingency plan to (a) mitigate the financial impact of a severe economic downturn on earnings and share price and (b) position the company to gain market share during the recovery.

In preparing a contingency plan to accomplish these two objectives, action steps are sequenced, prioritized, and grouped by corporate function and operating unit so that ownership of each step is clear. Targeted cost savings in the current and subsequent projection years should also accompany each action step. Key plan elements for most companies include.

  • Headcount and hiring changes. Distressed operating environments present a time for shepherding the talent most critical to retain. Focused retention, objectively determined workforce reductions, and changing hiring practices are often important components of a contingency plan.
  • Compensation, benefit, and incentive plan adjust­ments. Temporary revisions to compensation, benefit, and incentive plans may be necessary to stabilize the firm’s financial condition. Vetting the economic realities of a declining top line and the need for adjustments to the reward system with key personnel before a downturn creates a broader support base for the plan when it is implemented.
  • Asset divestitures. Manage­ment should categorize the company’s assets—underperforming versus high-performing, strategic versus nonstrategic—so that a plan can be developed for each asset category. The plan should consider the timing and the immediate and long-term financial impact of asset sales, and the need for such sales as signs of extreme economic scenarios appear. Timing can be a critical factor due to the difficulty of selling assets in a depressed market. Sale-leaseback transactions for certain facilities are also an option for raising capital.
  • Selling, general and administrative (SG&A) expense cutbacks. SG&A offers many cost reduction opportunities. In the context of a contingency plan, the objec­tive is to adjust the cost structure to support stabilization and preservation of the enterprise.
  • Consider other options. Other steps a company can take include:
    • Hedge raw material costs and lock in sales prices, thereby stabilizing margins — at least for a time;
    • Consider outsourcing non-core activities that are not strategic to the business, if it will reduce costs such as certain human resources support, accounting, manufacturing and transportation activities;
    • Focus marketing on sustaining brand awareness during a recession;
    • Discontinue underperforming operations; and
    • Address the impact of upstream and downstream interconnectivity within the value chain, e.g., what steps would the company take if a major supplier were to go under due to the downturn?
  • Hierarchy for cost-savings initiatives. Management should outline a comprehensive menu of prioritized cost-savings initiatives that could be implemented either in part or in its entirety, depending on the severity of the downturn.
  • Communications plan. In times of economic uncertainty, timely and open communications are vital to preserving morale so that employees know where they stand, and how they and the organization can get through the crisis. Straight talk and transparency are important because, from an employee perspective, no news does not necessarily mean good news.

An effective plan should determine the metrics to be managed against the enterprise’s specified targets such as net operating income percentage, gross margin percentage, acceptable variance from budget, earnings per share, minimum cash reserves, and maximum debt levels. With targets identified, a financial forecast over an appropriate period should be prepared to establish a baseline. Considering different scenarios—revenue declines of, say, 10 and 20 percent— the costs and expected benefits from the various elements mentioned above should be considered to ascertain specific actions management should take under the circumstances.

Once completed, the plan should be reviewed with and approved by the board. The company then resumes its growth strategy with full knowledge that the contingency plan is ready when the time comes—and, unfortunately, it will come. A vetted, actionable contingency plan saves precious time during a crisis because there is a broader base of support for its execution. Preparedness leads to decisiveness under fire.

Management should review the plan on a regular basis to ensure it remains current and apprise the board of any significant changes made to the plan. Going forward, management should monitor the external and internal economic indicators appropriate to the company, and periodically review the analysis with the board. Once the plan is initiated, a project management office should be designated to drive its imple­mentation. The project management office monitors the achievement of the assigned initiatives and provides status reports to senior executives and the board.

Developing a response plan under sunny skies rather than when the recessionary storm breaks  would demonstrate a board’s due care and sound business judgment in discharging its oversight respon­sibilities to address a credible threat. Further, entering a distressed operating environment without a thoughtful, compre­hensive plan can lead to hasty decisions, inefficiencies and costly delays. An organization’s stakeholders deserve better.

Directors Assess Long-Term Election Implications

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This is the second post in a series addressing the short- and long-term impacts of the 2016 presidential election. Read the first post here.

Directors gathered to discuss the impact of the recent presidential election on November 16, 2016 with audit and risk professionals from accounting firm EisnerAmper. While immediate-term changes were pressing on the minds of directors, they also discussed strategies to address societal and business challenges that coalesced around the following topics.

Can Corporations Bring Back Modern Manufacturing Jobs?

Directors were skeptical that the type of manufacturing jobs that have fueled American economic growth since the end of the second World War would ever return—and asserted that changes in trade agreements may directly impact the ability to create jobs.

peter-bible

Peter Bible

EisnerAmper Chief Risk Officer Peter Bible outlined how the developing administration of President-elect Donald Trump could affect the ability of American companies to export their goods. The Trans-Pacific Partnership (TPP) “is basically on hold now” said Bible. “He wants tariffs on China and Mexico, wants to renegotiate NAFTA, and reconsider the U.S.’s involvement in international trade agreement.” Bible also pointed out that the president can act unilaterally on trade agreements, thus negating congressional checks on trade decisions.

Jill Wittels, chair at eMagin Corp., voiced concern about the pace at which companies could replace factories to offset the impact of tariffs and build more jobs for Americans. “Imposing currency restrictions and tariffs on goods coming in from China, South America, or other parts of Asia would be highly disruptive,” Wittels said. “You don’t instantly create replacement factories in the U.S. at a comparable cost.”

robert-klatell

Robert Klatell

Robert Klatell, chair of TTM Technologies, concurred. “Realistically speaking, there is not that much flexibility. We cannot create in the United States the scale of manufacturing that exists in China,” Klatell said. “We don’t have the people or the capital to do it. We’ve rarely had a government willing to support manufacturing the same way that China has in the past 10 to 15 years.”

William Leidsdorf, director at Icahn Enterprises, offered a different viewpoint. “I think you have to look at how Congress may change or water down the president’s decisions,” Leidsdorf said. Trump “is a businessman. He’s a pretty good negotiator. He’s going to go in [to the presidency] and say he’ll do a lot of things and then negotiate.”

Educating the Workforce

Re-educating the American workforce has been a ubiquitous topic at roundtables co-hosted by NACD throughout 2016. This event was no exception.

sharon-manewitz

Sharon Manewitz

A vigorous discussion about the modern workforce was ignited when Carol Robbins, principal of financial services strategic advisory group CER Consulting, cited the invention of a garment-sewing robot as a groundbreaking technology likely to replace countless garment manufacturing workers around the world. Sharon Manewitz, principal and executive director at Manewitz Weiker Associates, a firm that consults with struggling companies, responded: “But who will make the robots? Will they be made here? We need corporate America to help educational institutions change the nature of education in America” to meet the demands of a knowledge-based economy.

The ability of the workforce to be retrained for modern jobs, and how automation will continue to disappear unskilled and lower-skilled positions, was discussed at length. Klatell, however, looked to the future. “Some people won’t make the transition, so we should be focusing on their children,” Klatell argued. “Hopefully, we can get their kids through school with a more meaningful education to make them more employable.”

Laurie Shahon, president of Wilton Capital Group, placed a board lens on some companies’ struggle to fill open positions in certain fields. “Human capital is an issue boards have to deal with,” Shahon said. “We see jobs available in financial services and other industries, but they can’t be filled because there aren’t sufficient qualified people to fill them. The board can and should present alternate cases in its strategy planning to address these changes.”

Deregulation Fallout

If Trump makes good on his campaign promises, deregulation is expected under the new administration and the forthcoming Republican majority congress. How long, though, can directors anticipate deregulated policies to last? Bible pointed out that the current administration might attempt to press through lingering Dodd-Frank provisions. However, he warned that deregulation could cause disruption. “These things are deeply rooted, with a lot of capital behind them,” Bible said. “You can’t just say ‘poof—gone.’ It’s impossible.” Practices that companies have implemented as a result of post-financial crisis legislation [such as the Dodd-Frank Act of 2012] are likely not to disappear as governance best practices because companies invested time, energy, and money to comply with them.

Meanwhile, directors in the room considered what impact deregulation might have on enforcement of the Foreign Corrupt Practices Act (FCPA) and other international business policies by the Department of Justice. Andrea Bonime-Blanc, founder of GEC Risk Advisory, reminded attendees that enforcement of the FCPA, the False Claims Act, and other laws has been on the rise lately. “People are asking, ‘What’s going to happen with FCPA enforcement?’” Bonime-Blanc asked. “Companies can’t just say ‘oh, let’s stop worrying about bribery.’”

Bible responded: “I believe that the FCPA will continue to be enforced as a worldwide standard, and that the new administration’s focus is going to be on executive compensation and on market regulation. I don’t think there will be an increase or a decrease in enforcement.” If anything, Bible indicated that directors should be concerned about the risk of tax repatriation from companies that have moved their headquarters offshore. “Is everyone familiar with how the overseas tax issue works?” Bible asked. “There is $2.6 trillion in money offshore, and $500 billion of that is held by tech companies. There are drives to get that money back into the U.S. economy that can be done without addressing the entire tax structure.”

Don’t Give Up on Culture of Inclusion

The social unrest incited or revealed by the vitriolic presidential election was discussed in the context of the culture of inclusion and tolerance that their companies have invested in building for decades. Aside of the moral imperative felt by many attendees, the disruption of hard-won corporate culture by internal or external actors could present a reputation risk to the company.

Wittels noted that a popular American shoe company had been endorsed by an incendiary website littered with forms of hate speech after a senior manager at the shoe company stated that it felt the country was moving in the right direction under the incoming president. While the company released statements strongly stating its commitment to principles of inclusion, “there are comments about boycott,” Wittels said. “This is a real reputational risk, and a risk with consumers, that could instantly in this communication age go viral and affect the bottom line.”

Klatell returned to the question of the board’s responsibility to ensure that the CEO, his direct reports, and management across the organization are responsible for maintaining a culture of respect, dignity, and inclusion. In the face of employees who may be looking to throw principles of inclusion out of the door, Klatell said: “I’d hope that most companies would stand up and say ‘No, this is what we stand for, and this is how we behave.’”

To see the full list of participants, please click here