The lingering COVID-19 pandemic impacts are a stark reminder for boards of the need to pivot quickly and manage expected unexpected risks through on-going scenario planning. The outbreak of severe acute respiratory syndrome (SARS) in 2003 triggered a global response, 1particularly in the context of managing risks impacting on strategic outcomes. We knew COVID 19 was coming but we were not prepared, even after almost two decades of the topic appearing at Risk Management Conferences attended by most of today’s board directors. 2Although the virus and its resultant impacts seem to be normalising after two years of our drastic responses to keep everyone safe;3 industries continue to have their business resilience tested.
What can be learned from our COVID experiences as we move into a wider set of uncertainties including rising inflation and interest rates, global supply chain disruptions, labour shortages and fundamental changes to the way many employees work.
Brad Banducci, CEO of the Woolworths Group explains the shortages of stock experienced by the supermarkets in early 2022 are due to “COVID-driven absences of 20%+ in our distribution centres and 10%+ in our stores.”4 Jakob Stausholm, CEO of the Rio Tinto Group said operating conditions “remained challenging” due to prolonged COVID-19 disruptions, impacting iron ore output in 2022.5 Alan Joyce, CEO of Qantas has implored the government that airline workers be allowed to return to work as the airline has 18 per cent of parts of its workforce out with COVID-19 for the April 2022 Easter holiday rush to travel, and continuing today with office staff working as ground crew.6,7
The experience of the global pandemic represents a crisis for boards today in supporting the company’s management to refocus the company’s strategy due to the lingering challenges of disrupted and strained supply chains, energy cost increases, talent and labour shortages, absent employees, financial strains, and operating challenges generally in a period of ever-increasing inflation and interest rate rises.
In the face of uncertainty, there is significant value in Boards performing more strategic scenario analysis. This type of analysis is used extensively to address major operating environment shifts and disruptions. The lingering pandemic aftereffects has heightened the need for all boards across all sectors to reframe their risk profiles and appetites and requiring them to analyse and plan in new ways.8This is critical for risk management, strategic decision making and corporate reporting through detailed assessment of going concerns and impairments, if appropriate.
New and unfamiliar scenarios unapologetically expose the gaps in boards not adequately demonstrating their oversight of their company’s response to these challenges in sustaining resilience.
Crisis also resets the competitive landscape, providing new opportunities for boards to adjust their corporate strategy and to get ahead of trends and increase distance from competitors, the time to act is now. Scenario analysis helps Boards to identify and analyze medium to longer term potential threats and opportunities, both market-wide and those that threaten their ongoing viability i.e., consider the alcohol manufacturers pivoting to making hand sanitizers.9Assessing the best, worst, and mid-case outcomes, Boards can better prepare for strategic disruption. Decision-makers may better anticipate the future and design future-proof, yet flexible strategies, with Boards working with management on re-focusing their strategy. Testing can also produce rich conversations with management and enhance the company’s risk culture be recalibrating the company’s risk profile.
In the superannuation sector, regular and comprehensive scenario or ‘stress’ testing is used to develop a robust approach to the formulation and implementation of investment strategies, as required by the Australian Prudential Regulation Authority (APRA).10This is accepted methodology for managing risks both foreseen and unforeseen, by assessing the entity’s resilience to severe but plausible downturns.
In the current disrupted operating environment severe but plausible is the new norm, strategic scenario analysis has never been more of an imperative. In APRA’s review of the implementation of the Banking Executive Accountability Regime (BEAR), APRA stressed the importance of regular scenario testing to facilitate a deeper understanding of accountabilities for entities. APRA noted that this allows for an examination of where handoffs, decision rights, joint accountabilities or gaps exist.11
Scenario testing and planning allows entities to see how accountability plays out in different hypothetical situations, and flag grey areas and overlaps between roles. In adverse situations, these clearly defined accountabilities are critical. Relevant scenario planning ensures Boards and management are better equipped when inevitably faced with the unexpected.
Key questions for Boards navigating governance during critical market-wide periods: Have you
In a climate where the unexpected is to be expected, sustaining strategic and operational business resilience demands of Boards together with management greater agility and preparedness than ever before to not just cope but thrive through the complex and unique scenarios presented to them. Although we hope the most disruptive challenges are behind us, daily events are a merciless reminder nothing can be taken for granted. Boards have tools, such the use of strategic scenario analysis, to allow them to take a proactive approach and response to deliver sustained resilience. Taking full advantage of the new opportunities through adopting these tools will benefit the company for its preparedness, stability and consistency, allowing decision-makers to gain against their competition.
Dr. Ulysses Chioatto is a governance expert and Principal Senior Governance Adviser in Deloitte’s Governance, Regulation and Conduct practice. Ulysses is the former Executive Director/Head of Australia for Institutional Shareholder Services.
Ulysses has advised Boards on their performance and has a passion for promoting and developing effective governance frameworks across a variety of sectors and industries. Deloitte have recently designed a new digital board performance tool which is to be launched in April 2022.
See APRA Prudential Standard SPS 530 - Investment Governance
See APRA Prudential Standard CPS 510 – Governance (paragraph 106)
See APRA Prudential Standard CPS 510 – Governance (paragraph 106)