Ask the Experts: Avoiding Hazards

What is the greatest emerging threat that boards and executives should prepare for today? This is the question that we posed to experts in the governance and compensation world in our fall 2022 issue of C-Suite Magazine. This Ask the Experts segment featured: John Rodi , Leader at 毕马威 Board Leadership Center, Representatives from Teneo , Nishesh Kumar Managing Director at J.P. Morgan Asset Management , and Brian V. Breheny Partner Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates .

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If we have learned anything from the last few years, it’s that the combination of crises or improbable events happening at the same time is much more challenging than individual risks. The first half of this year is a telling example of how quickly things can change. Companies were already grappling with the effects of the pandemic, employee well-being, supply chain disruptions, increased cybersecurity threats, economic volatility and politically polarizing events in the United States and around the world. Then, at the start of 2022, things changed again, dramatically—with the Russia-Ukraine war, the spike in inflation and recession risk, and a slew of proposed climate-related regulations, for starters.

As we know, even the most robust scenario planning and crisis readiness aren’t foolproof. In addition to reassessing whether the company’s crisis and risk management processes have been effective during these last few years and identifying areas for improvement, all of this highlights the critical importance of reassessing board and committee risk-oversight responsibilities and allocation, and making sure that the board and management are focusing on the “right” risks. It sounds obvious, but the board has to help management think things through from all angles, and that’s becoming even more challenging given the confluence of events since 2019 and the uncertainty ahead.

Boards and directors, along with executives, currently face unprecedented pressure to opine publicly on external issues. Although corporate silence has been the conventional approach to matters of policy, inaction in the current environment has greater potential to alienate key stakeholders, particularly employees, and to invite a negative reaction. This is the result of macrotrends, including the rise of stakeholder capitalism; generational shifts with millennials and Gen Z placing greater focus on corporate values in making employment, investing and purchasing decisions; and the perception that a contentious political environment has shifted the responsibility for progress to corporations.

This year alone, directors, executives and even institutional investors have been pressed to speak on the war in Ukraine, the overturning of Roe v. Wade and controversial anti-LGBTQ legislation, among other matters. And there will likely be no shortage of issues in the future. In order to help directors and executives navigate this new terrain, we have provided key considerations for determining how and when to speak out on an issue:

? Plan ahead. Understand emerging issues that may affect your company before they come to a head, including potential new legislation or issues that have been left off of the media’s radar. Have a holding statement at the ready and a plan to communicate internally and externally, especially through social media.

? Map it to the business. Holistically assess how this issue impacts the business in order to prioritize which issues to engage. How does the issue affect your company’s license to operate, its ability to generate revenues or its bottom line with respect to potential new costs? How does the issue affect your company’s competitive advantage? And which stakeholders will be most impacted by the issue and how?

? Know your stakeholders. Understanding which stakeholders will be impacted is key to determining a response, particularly as increasing employee activism raises the stakes. AccountAbility Stakeholder Engagement Standards, a WEF-certified standard-setting organization, provides a framework to prioritize issues based on the characteristics of the stakeholders impacted, including relationship with the company, knowledge of the issue and willingness to engage.

? Play the tape forward. Once a statement has been developed, consider the potential consequences. Who could be perceived as the winners and losers based on the company’s comments? Will commenting on a potentially controversial topic create an expectation that your company will regularly comment on hot topics in the future??

? Connect to your values. Consider how a statement (or remaining silent) aligns with your company’s values, stated policies and prior statements. Focusing on values (e.g., employees’ right to healthcare, etc.) rather than a specific policy can ensure consistency across messaging. As the overseers of a company, boards play a critical role in this process. Thoughtful planning between directors, executives and counsel is key when considering how and when a company will respond to external issues.

Enterprise risk management is entering an era of emerging risks that are best characterized as unknowable unknowns. How boards manage the impact of these emerging risks on their supply chain and talent pool will have significant bearing on the company’s ability to deliver sustainable value, and will quite possibly determine the long-term winners.

Previous decades were marked by well entrenched trends of globalization, proliferation of technology and expansion of labor pools. Boards and management had to evaluate company strategy and manage risks against this stable backdrop. Their focus was understandably on clear and present risks, like those of current economic conditions, technology disruptions, new entrants or new customer preferences.

Recent events could prove to unravel these established trends as we move from globalization to regionalization, energy abundance to insecurity and unreliability and expanding labor pools to shrinking talent pools that have more options for who they want to work for and how they want to deliver their services. Furthermore, these changes are happening as another paradigm shift is becoming well established in important markets: a focus on ESG and sustainability. As we move from the familiar to unfamiliar, boards will now be expected to ensure that business strategy can work even as these unknowable unknowns unfold.

Against this new backdrop we see supply-chain management rising toward the top of emerging risks. While the aforementioned risks, such as changing customer preferences, technology disruptors, etc., are not likely to fade, what may have previously been perceived as assured long-term delivery models, whether goods or services, may no longer be secure as new government unpredictable policies and preferences unfold across the globe. Importantly, the risks to delivering for customers are not just limited to hard goods but also to labor, as this changing environment could produce a response in labor mobility and collective organization that is unexpected.

Managing unknowable unknown risks will require a different mindset of boards and management—one that is willing to spend more time and resources on emerging issues whose effects will likely be evident beyond their tenures. Building agility and resilience into their delivery models will require an understanding of the shifting balance between globalization and localization, an appreciation of changing labor market dynamics, frequent scenario analysis and tracking, and a view on interconnectedness of ESG risks, such as that of climate change on supply chains. Though these are unknowable unknowns, those who emerge as winners won’t get there by accident.?

Boards and executives face many emerging threats. The recent focus by regulators and investors on the steps that companies are taking to prepare for the impact of climate change has pushed this topic to among the most important threats companies are facing today. All companies, regardless of their industry or size, are grappling with potentially significant physical and transitional risks associated with climate change. Investors are increasingly demanding more robust disclosure and corporate actions in response to these threats.

Regulators are following suit with more prescriptive disclosure rules and enforcement actions. For example, the SEC has proposed extensive and prescriptive rules that would require companies to disclose, among other things, climate-related risks and how the company’s board oversees and management assesses and manages such risks, as well as climate-related financial metrics in audited financial statements. The SEC’s recently updated regulatory agenda indicates that the proposed climate-related disclosure rules would be adopted by the end of 2022. If adopted substantially as proposed, those rules are expected to increase compliance cost significantly for all public companies and private companies going public.

Additional SEC disclosure requirements will likely increase private litigation risk, as any new required disclosures, along with other statements regarding climate issues, will be subject to additional scrutiny for potential actionable misstatements or omissions. For instance, if a company experiences adverse effects from climate change and a corresponding drop in stock price, private lawsuits may follow. We have already seen these “greenwashing” lawsuits being filed—alleging, among other things, that companies have made false statements about ESG-related matters as a way to appear more environmentally friendly.

On the enforcement front, in March 2021, the SEC established a task force within its Division of Enforcement whose mandate is to identify gaps in existing SEC disclosure requirements regarding climate and other ESG matters. One year later, the SEC brought its first ESG-related enforcement action against a public company for allegedly making false and misleading ESG claims in its disclosures. Moreover, recent SEC enforcement cases on cybersecurity breaches involved fairly familiar types of disclosure violations, such as equivocal statements that a breach may have occurred when one was known to have occurred, or allegations that a company unreasonably delayed revealing a cyber incident.

Against this backdrop, companies are investing significant time and resources to prepare for the new disclosure requirements and address emerging risks. Many companies are considering whether they have the staff to handle these additional requirements. Boards are also evaluating whether they are prepared to effectively oversee, and for executives to effectively assess and manage, the company’s climate change risks, opportunities and strategies. To that end, each board will need to ensure that it has access to adequate external and internal resources to handle climate change threats. This does not mean, however, that each board must have a “climate expert” director. Rather, boards need to continue to fulfill their oversight role over these new emerging risks.?

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