Know your number
The net-zero, carbon-offset approach is running out of road, says Dr Rod Carr.
Recognising which of the myriad issues facing directors should be in our annual top five is always a challenge. Directors need to be across many things as they steer their organisations. The list is long and growing and includes global forces such as the covid-19 pandemic still surging around the world, the climate emergency, transformative technologies, and ever-shifting societal and community expectations.
As we enter 2022, it is almost certain that the pace will pick up as we experience global and local change, challenge and developments. On the horizon for legislative change is a “little bill” which could have a profound impact. The Companies (Directors Duties) Amendment Bill seeks to clarify current practice and provide guidance on directors’ duties. The Bill outlines that a director, in acting as the mind and will of the company, may take actions based on considerations that go beyond the financial bottom line. In the Bill these considerations are open-ended but may include matters such as the principles of Te Tiriti o Waitangi, environmental impacts, good corporate ethics, being a good employer, and acting in the interests of the wider community. [See page 56 for a word from the Bill’s sponsor.]
This year, as we adapt to a rapidly changing environment, the top five issues for 2022 focus on what we believe will be the immediate imperatives.
Core areas such as cybersecurity, and health and safety have featured in the top five in previous years and are no less important now. It goes without saying that these should, by now, be part of business as usual for directors and on the board agenda.
And while we have focused on immediate issues, boards also need to be thinking longer-term and imagining the future.
This year, take time to envision 2040 – it’s (only) 18 years away. We have selected this date because it will mark a significant milestone for Aotearoa New Zealand, the bicentenary of Te Tiriti o Waitangi.
Many boards are already looking beyond this decade and in te ao Māori applying an inter-generational lens to the future. While 2040 isn’t quite a generation gap (c25 years) the rate of societal, technological and scientific advancement will make it feel like another world when we get there. New business models will have come and gone, artificial intelligence (AI) will be entrenched in all facets of life and business.
When envisioning 2040, rather than asking, “where are we going?” ask, “where can we go?”
In the 2021 Director Sentiment Survey, 71% of directors said they expect technology will transform how their board is operating by 2030 (eg, using real time, interactive data in the boardroom and artificial intelligence). Fast forward another 10 years and change will be that much greater. However, directors will still need to cast their minds forward to understand the short-term, medium-term and long-term challenges their organisations face and provide stewardship, strategic leadership and strong governance.
“We are, after all, the greatest problem solvers to have ever existed on Earth. If working apart, we are a force powerful enough to destabilise our planet. Surely working together, we are powerful enough to save it.” – Sir David Attenborough at COP26
Boards have a very real opportunity to be a powerful force in taking action on climate-related issues and reducing the environmental impact of their organisations. This year the 2021 Director Sentiment Survey saw a rise to 48% of boards saying they were engaged and proactive on climate change risks, which is up from 35% in 2020. Although engagement is increasing, there’s still some way to go for many boards as we reach a critical juncture on the road to creating a sustainable future.
“This decade is make or break for the planet.”
The 26th meeting of the Conference of the Parties (COP26) in Glasgow saw a raft of ambitious announcements, new targets, and pledges to try to reach net zero emissions by the middle of the century. But frustration with dramatic gestures and talk, is raging – epitomised by Greta Thunberg’s “No more blah, blah, blah!”
In signing New Zealand up to new targets (which received the full ambit of reactions) the Minister of Climate Change, Hon James Shaw warned that “This decade is make or break for the planet. To stand a chance of limiting global warming to 1.5˚C, the science shows we now have about eight years left to almost halve global greenhouse gas emissions.”
Government announcements included a new Nationally Determined Contribution (NDC) target to reduce net greenhouse emissions 50% below 2005 levels by 2030, driven by the Emissions Reduction Plan (ERP) due out in 2022. This will be supplemented by paying for reductions in other countries, especially in the Pacific. New Zealand also signed up to the methane pledge, with the goal of reducing methane by 30% by the end of the decade.
At COP26 Mark Carney (former head of the Bank of England) announced the United Nations Glasgow Financial Alliance for Net Zero, a coalition of global investors, banks and insurers controlling US$130 trillion in assets, which would commit to net zero emissions in their investments by 2050. Another ambitious target, but one that will also drive more climate disclosures and scrutiny.
A sustainable financial system is critical to accelerating progress to net zero. In August 2021 Toitū Tahua, the Centre for Sustainable Finance was launched to implement the Aotearoa Circle’s Sustainable Finance Forum Roadmap for Action, and advance a sustainable financial system that incorporates environmental, social and economic considerations in financial decisions.
Climate and broader sustainability reporting is here and on the road to becoming standard business practice.
The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 ushers in mandatory climate-related reporting. The External Reporting Board (XRB) is establishing the reporting framework based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) on governance, risk management, strategy, metrics and targets. The XRB has already started consultation on a new standard with phase one focusing on governance and risk management.
Climate-related disclosures will be mandatory for large listed companies with a market capitalisation of more than $60m; large licensed insurers, registered banks, credit unions, building societies and managers of investment schemes with more than $1b in assets; and some Crown financial institutions (via letters of expectation). Subject to parliamentary approval, these entities could be required to make disclosures in 2024.
Reporting under the standard is primarily for investors but the XRB acknowledges the wider stakeholder interest. The XRB’s new mandate also extends to issuing guidance on ESG matters. As part of the guidance the XRB has initiated a project considering Te Ao Māori in the context of reporting in Aotearoa New Zealand.
The XRB is already well underway with developing a standard, which it has plans to introduce quite quickly. This poses an extra challenge for reporting in New Zealand, as we will need to ensure we are aligned with global developments.
At COP26, there was another step towards harmonising the global approach to sustainability and ESG reporting with the introduction of the new International Sustainability Standards Board (ISSB). The new board will consolidate the Climate Disclosure Standards Board and the Value Reporting Foundation (VRF, which houses the Integrated Reporting Framework and the SASB Standards). The initial focus of the ISSB will be working on the prototype climate standard and is expected to extend into other ESG areas.
Although the standard will initially only apply to select entities (eg, larger entities in the financial sector) we can expect wider application, including as requirements filter through supply chains, and sustainability reporting becomes the norm alongside financial reporting.
The advancement of climate-related disclosures will also drive more ESG disclosures from organisations. The true value of this reporting will be realised when it goes beyond compliance and is used to drive strategic thinking and decision making across organisations, and realises the goal of reducing emissions.
Pointers for 2022:
Travel is expected to remain challenging and supply chains will continue to be unpredictable as the world seeks to revive global connections in 2022.
Are you planning a holiday in 2022? Have you actually booked it? The same risks that impact decisions on whether or not to visit Disneyland will be in play for all decisions on business travel in 2022.
While it is likely that New Zealand and the rest of the world will start to relax border restrictions, the prospect of localised covid-19 outbreaks will probably result in cancelled flights and temporary restrictions on returning to New Zealand. If you are planning to send your staff overseas you’ll need a plan to get them home if things change. You’ll need to be always on watch to stay up to date with the rules around vaccine certificates, rapid testing and self-isolation for travellers.
Looking at travel through a health and safety lens and understanding the risks in real time will be key. Because things will change quickly if local surges in the virus occur or new variants take hold in different parts of the world.
There is no global standard for things like vaccine certification or when borders may close. So every potential trip will raise its own health and safety issues.
It’s a high priority area for directors – 54% of respondents to the Director Sentiment Survey 2021 put border restrictions in the top three impediments to national economic performance.
Supply chain issues will be one of the major headaches facing New Zealand businesses in 2022. The Ministry of Foreign Affairs and Trade describes the pressure on global supply chains as “intense”. When New Zealand runs out of fireworks and struggles to import enough presents for Christmas, the supply problem has grown pretty big.
This isn’t necessarily reflected in our trade totals. Statistics New Zealand says both imports and exports of goods were up in September 2021 compared with a year earlier. But shortages are being reported in construction goods, consumer goods and a rising trend in shipping costs has caused price inflation in seemingly random ranges of products. Ironically in the midst of a housing crisis, building companies have run out of some raw materials.
Supply chain dysfunction – evident in high costs, slow shipping times and clogged ports around the world – will continue to be an issue through 2022. Seventeen percent of respondents to the Director Sentiment Survey 2021 identified supply chain issues as the single biggest threat to their organisations.
Boards may need to look at their reliance on “just in time” materials, materials in high demand or key products in their portfolio and adjust their strategy accordingly.
Keeping in touch with your colleagues, suppliers, buyers and friends overseas will help alleviate the risk of unexpected issues creating intractable problems. Maintaining contact will also keep you up to date with the rules, risks and mood in parts of the world that are important to your organisation.
It's also important to recognise that other countries’ experiences of the pandemic are different to our experience in New Zealand. And different to each other.
Boards should leverage their international connections to keep abreast of risks that may emerge, and reduce the impact of problems as they arise.
Pointers for 2022:
An employee-centric approach will be required as organisations seek to retain key staff and attract new talent.
The government was, as we went to print, introducing changes to the MIQ system and talking about a mix of testing, vaccination certification and self-isolation requirements for new arrivals. Expect some, or all, of this to be in the travel mix for 2022.
Once most of New Zealand’s population is vaccinated, it is likely we will be able to bring new employees in from overseas again without gambling on the MIQ lottery. Plan for it, but don’t rely on it as the timing remains hard to predict.
It’s been dubbed the “Great Resignation”. Employees, globally, are looking for new opportunities. In New Zealand, a study by Auckland University of Technology found two clear trends were emerging in 2021. The percentage of employees with “high turnover intentions” rose to 46% in April 2021, up from 35% in May 2020. The percentage of employees with no thought of leaving their current roles dropped to 9% in April 2021, down from 19% in May 2020.
There are many reasons that people resign, but burnout remains a common factor. The opportunity for a pay increase or a step up the career ladder at a new organisation may tempt some. People may feel the organisational culture and benefits at another organisation suit them better, or that the work they would be doing is more meaningful.
Strategies for the attraction and retention of talent need to recognise these truths. People leave a role, or choose to join a new organisation, for combinations of reasons. It may not be enough to hit most of the right notes, you need to try and hit all of them.
Of course, the Great Resignation may offer opportunities for organisations to bring in overseas talent if they have a good offering, once border restrictions loosen.
As the saying goes, people don’t quit a job, they quit a boss.
If you want to retain your best employees, ensure your managers are up to scratch. Research from the US (see “The Great Resignation and the employee-manager disconnect” at nacdonline.org) suggests employees want support from their managers (being accessible and helpful), understanding from their managers (listening to their staff and paying attention to their needs) and recognition (acknowledging good work and effort).
Boards should set the expectation that management take an employee-centric approach. And make sure remote working policies reflect employee expectations and needs, where they are applicable.
Labour quality and capability was a significant concern for respondents to our Director Sentiment Survey 2021, with 57% (up from 32% in 2020) selecting it as one of the top three impediments to national economic performance (followed by the related issues of border restrictions at 54% and the effectiveness of vaccinations at 37%).
When asked about the single biggest risk facing their organisations, labour quality and capability was top with 30% of respondents (up from 14% in 2020) identifying it as the main risk. Employee engagement, performance and retention has been discussed by 88% of boards over the past 12 months.
Fair pay. Better working conditions. A sense of pride in work. Career advancement opportunities. A feeling that their employer cares for them. Support in their roles, understanding of their needs and recognition for the work they do. That’s what employees want.
Those are the factors most likely to help your organisation retain employees in the face of the Great Resignation and find new staff in the midst of a talent shortage.
Boards have a key role in many important elements of organisation culture including defining and sharing an organisation’s purpose and ensuring it is clearly communicated, building a sustainable business model and overseeing and guiding the organisation’s remuneration and reward policy to ensure they are competitive with the market. Training and development pathways are also important ways to help build skills, opportunity and advancement.
Don’t get caught out in the Great Resignation – turn it to your advantage.
Pointers for 2022:
Courage and commitment, purpose and values, and culture and inclusion underpin board leadership and set the tone for an organisation.
Boards play a critical role in driving the economic success and wellbeing of New Zealand. Strong and effective governance doesn’t come easily and needs constant attention to enable continuous improvement and to support trust and confidence in business and our institutions.
The place of business in society has changed and boards are having to consider investor and public expectations on sustainability, ESG matters and maintaining a social licence to operate. In the 2021 Director Sentiment Survey 90% of respondents said their board considers stakeholder interests are very important to their business. And over half (54%) of respondents thought the board should speak out on social issues beyond the business of the organisation (eg, income inequality, housing, trust and racism).
Ethical failures destroy organisational value, and corporate and personal reputations. Societal expectations of boards and executive leaders go beyond legal compliance to expecting high standards of ethical behaviour, care and diligence.
"Boards that can manage complexity are better placed to lead thriving organisations. But it’s not easy. Ethical dilemmas can mean balancing competing values, and rights and obligations."
How pervasive is ethical leadership? According to you it is almost a 50/50 split with just over half (52%) of respondents in the 2021 Director Sentiment Survey confident that their boards, staff, business partners and supply chains are familiar with and adhere to the organisation’s ethical standards. Conversely, 85% of respondents said their boards were regularly discussing the organisation’s brand and reputation.
Leadership requires courage and commitment. A strong ethical focus needs to be seen coming from the top to be embedded in an organisation. Boards have a key role in setting the tone for the organisation including by defining and leading the organisation’s ethical framework, purpose, values and culture. And the board’s own culture and character underpins trustworthy leadership.
Boards that can manage complexity are better placed to lead thriving organisations. But it’s not easy. Ethical dilemmas can mean balancing competing values, and rights and obligations. Many boards will have faced challenging dilemmas around covid-19 vaccination policies and the effect they will have on staff, customers, suppliers and also on their business model, strategy and brand.
The board represents the power of the collective by bringing together a range of skills, expertise, diverse perspectives, challenge and wisdom. Each director brings their own individual perspectives, skills, strengths and modus operandi. Traditional requirements such as financial and legal literacy have been joined by a need for health and safety, cyber, digital and climate literacy. In addition, soft skills, emotional agility, cultural awareness and competency are all gaining increasing recognition.
Learning and development are critical components of board character and enable continuous improvement to help ensure collective capability is future fit.
Strong and effective board culture is also characterised by effective relationships between directors - and also with management. Inclusion and respect in the boardroom enables contribution from all players (directors and management) and better decision-making to drive performance and organisational sustainability.
Board and management composition are both critical. Succession planning should receive regular and robust attention, and be aligned with expectations of future needs. Developing a skills matrix setting out the skills, experience and other attributes your organisation needs will support a strategic approach to appointments and the development of capability on the board and in the management team.
In the 2021 Director Sentiment Survey 70% of respondents said their boards were regularly discussing board composition and renewal. Less than two thirds were discussing CEO succession (58%) and key staff succession (60%). Succession planning needs regular attention. This is even more critical in a complex and ever changing operating environment.
Pointers for 2022:
Boards can expect to see increasing activity from regulators in 2022 with extending remits, better resources, and increased enforcement powers.
In 2021, regulatory actions against companies and directors were on the rise and are expected to escalate in 2022 driven by a focus on governance culture and conduct, privacy, health and safety, and anti-money laundering/countering the financing of terrorism (AML/CFT) breaches, and expanding out to include new legislative regimes.
In 2022 the Financial Markets Authority (FMA) will continue to concentrate on two main priorities: governance and culture, and deterrence of misconduct. It now expects organisations to have appropriate governance, incentive structures, sales and advice processes and systems to manage conduct risk and is prepared to take increasingly strong action against weaknesses in these areas.
Non-compliance with New Zealand's AML/CFT rules will remain a focus, building on the FMA's increased enforcement in these areas over the past three years.
In addition, the FMA’s remit (and resourcing) is set to expand over the next 3-4 years with the introduction of three new legislative regimes: the conduct of financial institutions, changes to insurance contract law and climate related disclosures.
Other developments to note include the introduction of a criminal offence for people engaged in cartel conduct, the new “fit and proper” person test for directors and senior managers of lenders under the Credit Contracts and Consumer Finance Act 2003 (to be met from 1 October 2021), and the new duties for directors of deposit takers under the proposed new Deposit Takers Act. Expect regulators such as the Commerce Commission and the Reserve Bank of New Zealand to increase their monitoring and enforcement activities in 2022.
We expect regulators will also keep an eye on increasing number of mergers and acquisitions. 2021 has been a busy year for mergers and acquisitions and market commentators predict this will continue into 2022.
Boards will also need to continue to prioritise the health, safety and wellbeing of their workers. 2021 saw an increase in focus on officer due diligence duties under the Health and Safety at Work Act 2015 (HSWA). One of the most significant cases currently before the courts relates to the Whakaari/White Island eruption, where 13 parties have been prosecuted, including the three directors of the company owning the island.
"Several high profile privacy breaches in 2021, including the Waikato hospital cybersecurity incident, highlighted the significant issues an organisation can face following a privacy breach."
In October, the first sentencing of a director under HSWA emphasised the risks for directors if they fail to exercise due diligence to ensure their companies comply with their health and safety obligations. 2021 also saw the first prosecution of a New Zealand employer for a health and safety incident that occurred outside New Zealand (Maritime New Zealand v Genera Limited) highlighting that boards are also responsible for the health and safety of any employees working overseas.
The new Privacy Act came into force in 2020, introducing some key changes including mandatory privacy breach notifications, compliance notices and new criminal offences. Several high-profile privacy breaches in 2021, including the Waikato hospital cybersecurity incident, highlighted the significant issues an organisation can face following a privacy breach. To date the Privacy Commissioner has only issued one compliance notice (against the Reserve Bank following a cyber-attack in December 2020) but boards can expect to see more enforcement in the future. While we haven’t seen any prosecutions (yet) for the new criminal offences, the Privacy Commissioner noted in a presentation in October that there has been a 272% increase in the number of notifiable privacy breaches reported since the new Act, compared to the 10 months preceding the Act. Other privacy challenges for boards include covid-19, the use of tracer apps and vaccine mandates, emerging technologies such as facial recognition, AI, deep fakes and drones.
While we can expect to see increased activity from regulators in 2022, we also expect to see more shareholder activism. Class actions (with the support of litigation funders) have been increasing in recent years and we expect this trend to continue in 2022, especially after the recent decision in Southern Response Earthquake Services Limited v Ross, where a landmark decision of the Supreme Court determined class actions could be bought on an “opt out” basis. The Law Commission is currently conducting a review on class actions and litigation funding, with a preliminary view that a general class actions regime should be introduced in New Zealand and that litigation funding should be regulated.
Pointers for 2022: