Five issues directors can’t ignore in 2020
The Institute of Directors (IoD) has released its Top Five Issues for Directors in 2020. An increasingly complex governance landscape means there is an array of issues for directors to deal with. But IoD chief executive Kirsten Patterson says it is vital that boards pay particular attention to five areas: climate action, purpose, data and privacy, reputation and trust, and board leadership/stewardship.
“Whether they are in the private sector, State-sector or not-for-profit, boards need to ensure their organisations are focused on and equipped to deal with these issues. And the IoD will be doing all we can to help provide directors with what they need in terms of thinking, resources and tools,” says Mrs Patterson.
“Directors make decisions that can change the world – today and for the future — our future. These decisions impact organisations, communities and Aotearoa. The World Bank ranks New Zealand as the best out of 190 economies for ease of doing business. Transparency International has consistently ranked New Zealand highly for low levels of corruption. Our country is regarded as a beautiful and desirable place to visit. Our reputation internationally is important and how we govern our organisations is key. I believe that good governance is more important now than ever.
“As we set ourselves up at the starting line of 2020, it’s a good time for directors to reflect on where we will put our efforts, what we will achieve and what our goals are. While all aspects of good governance must come into play, we urge directors to prioritise these five issues.
1. Climate action
The recent IoD/ASB 2019 Director Sentiment Survey shows a lift in the number of boards that said they were engaged and proactive on climate change, but it was still only 35%, up from 29% in 2018.
“Boards need to do more here,” Mrs Patterson says. “The rise of climate action and stakeholder activity has elevated climate and the impacts of climate change to very top of organisations. It is no longer optional - action is becoming an expected requirement,” she emphasised.
In October 2019, the Aotearoa Circle’s Sustainable Finance Forum published a legal opinion stating directors have legal obligations in relation to climate risk.
The government is considering adopting mandatory climate-related disclosures (on a comply or explain basis) for listed issuers, banks, general insurers, asset owners and asset managers. Although mandatory assurance is not proposed at this stage, reporting would be required in annual reports.
2. Governing for purpose
‘Purpose’ as a critical aspect of governance is not a new concept. Determining purpose is the first pillar of the IoD’s Four Pillars of Governance Best Practice. Recently, however, ‘purpose’ has been receiving increased attention as the effectiveness of capitalism and corporate governance are questioned.
As a result, in the decade since the Global Financial Crisis, corporate governance regimes around the world have been reformed. The pendulum has swung away from shareholder primacy towards giving more recognition and weight to stakeholder interests.
“With this shift, purpose beyond profit will be key to remaining competitive,” says Felicity Caird, IoD General Manager, Governance Leadership Centre.
“The issue now is not whether an organisation should account for stakeholder interests but, rather, the extent to which it should,” adds Ms Caird.
3. Data and privacy
More than a third of New Zealand businesses have been subject to a cyberattack in the past 12 months according to Aura’s Cyber Security Market Research Report 2019.
However, the IoD’s 2019 Director Sentiment Survey, found only 50% of boards reported discussing cyber risk and were confident that their organisation had capacity to respond to a cyberattack or incident. Also of concern is only 41% said their boards were getting comprehensive reporting from management about data risks and incidents, down from 47% in 2018.
The survey also found that only 33% of directors felt their board had the right capability to lead their organisation’s digital future, a statistic that has been stagnant since 2016.
“This is a concern. These days, cyber-attacks and data breaches are a matter of ‘when’ not ‘if’ they happen,” Mrs Patterson says. “There is no question boards need to develop their own and their organisations digital capability to handle these issues,” she adds.
New Zealand will have a new Privacy Act in 2020. The new act is focussed on modernising the privacy landscape and will introduce mandatory privacy breach reporting.
“Boards need to prepare now and ensure their organisation knows how to treat data and privacy,” says Mrs Patterson.
4. Reputation and trust
Trust and accountability reign when very public failures and scandals that have rightly or wrongly rocked reputations.
A number of reviews in New Zealand and Australia around organisational culture and conduct put some organisations in the spotlight. And executive pay and allowances were also on the radar.
“These are reminders that protecting the organisations’ reputation and brand should be up there on the board risk register,” says Mrs Patterson.
“Boards should expect increased attention on these matters and must be prepared to be held to account on them,” says Mrs Patterson.
5. Board leadership/stewardship
Directors are leaders. They have an important role in transforming organisations, which in turn help build communities and drive the nation’s prosperity and wellbeing.
“Serving on a board gives directors an opportunity to make a difference and have positive impact,” says Ms Caird. However, the need for directors to be across so many things has meant they are increasingly spending more time on board work.
The IoD’s 2019 Directors’ Fees Report showed a 10% increase in time spent on board work since 2018. The 2019 Director Sentiment Survey also showed time spent on risk oversight (for 71% of directors) and on compliance activities (for 80% of directors) had increased over the past 12 months.
“To effectively lead, boards need the right balance in terms of time spent on risk and compliance on one hand, and sufficient focus on strategy, opportunities and innovation on the other,” says Ms Caird.
Given the dynamic and complex operating environment, Ms Caird says board leadership and stewardship require continuous improvement which includes regularly evaluating board performance and capability, ensuring director development and having robust succession planning.
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