A profound shift

Boardroom April/ May 2017 issue

Segments of the developed world are pushing back against the status quo and the effects are rippling through the global economy. Boards have a leadership role and must set the tone for a healthy organisation, which includes recognising the broader part their organisation plays in society. Boardroom talks to ASB Chief Economist Nick Tuffley about the changing world, and leading UK economist John Kay offers comment on the challenges businesses face in proving legitimacy in these challenging times.

Events of the past 12 months have refocused the way companies view global risks. Some of these– Brexit, the election of Donald Trump and rise of populism in Europe – signal to directors that further challenges may be faced. The World Economic Forums’ Global Risks Report highlights geopolitical turmoil, suggesting that with populism and nationalism on the rise businesses may also face navigating a protectionist environment of tariffs and sanctions in 2017.

The 2017 Edelman Trust Barometer says business has much to fear in the present context. Findings from this global research show nearly one in two of people agree that free trade agreements hurt a country’s workers, while 72% favour government protection of jobs and local industries, even if it means a slower-growth economy.

As the people responsible for guiding their organisations through ups and downs, directors need to be aware of public sentiment and how it could shape public policy and impact the way they do business. In a global marketplace it is not only the sentiment and policies of New Zealand that matter.

Nick Tuffley explains that what we are seeing on the political stage in the United States and United Kingdom are symptoms of a wider ideological shift, as some parts of society move forward while others seem to stagnate.

“Globally we are going through profound shifts in how people have been viewing the status quo way which economies around the world have been operating since the foundations were set after WWII,” Tuffley says.

John Kay says the economic element to the discontent being voiced in many regions around the world is exaggerated. Economic measures are only a small part of the solution he says. A major challenge for business in particular, and their role moving forward, is to demonstrate legitimacy. It is correct that globalisation has led to a loss of low skilled manufacturing jobs, but these are not coming back. Returning to how things once were is not a solution.

Feeling left behind

“Look at the impact of globalisation and free trade. The freer movement of people and capital, and rapid growth in global trade has done a lot over the last few decades in reducing extreme poverty around the globe,” Tuffley says.

Directors should be aware that business is seen in many cases as adding to inequality rather than playing a role in addressing it.

Countries like China have embraced capitalist principles Tuffley adds, and growing trade has had a significant impact in lifting incomes in developing economies. The beneficiaries have overwhelming been Asia. Voting populations in other regions of the world are now raising concerns that the benefits of the current system are bypassing them and creating greater gaps between the elite and everyone else.

As an economist Tuffley is a firm believer that the benefits from free trade outweigh the costs. But, he argues, we can’t forget the costs and need to make sure we focus on the broad social issues raised by groups like Brexit and Trump voters. There is genuine worry and fear around particular issues. The future of work is a concern for many; jobs are changing quickly aided by rapid advancements in technology and the impact of globalisation on many industries. The skillsets of today might not be relevant next year.

As directors, we are charged with focussing on the long-term and must the thinking to help businesses adapt.

Tuffley says we need to address the impacts on the labour market, but more broadly issues around equality – particularly equality of opportunity.

Directors of business can take a more active role in the challenges society is currently facing – they are likely to have an ongoing impact on the sustainability and longevity of business. Directors cannot rely on the actions of government alone to address broader social issues, Tuffley says.

“We need to recognise that it’s not just about government – it’s about businesses and individuals as well.”

Further, Kay argues that economic factors alone did not lead to the current situation.

“Globalisation, the central economic development of recent times, has produced winners and losers. Consumers benefited from cheap Chinese goods, financiers profited from the explosion of capital flows. But low-skilled manufacturing jobs disappeared to Asia and bankers’ bonuses failed to trickle down. Now the losers have demonstrated their resentment, in a surge of support for populist movements.

“The hubris that legitimised greed and proclaimed the primacy of shareholder value led to the global financial crisis of 2008 and, more generally, undermined the legitimacy of capitalist organisation.”

Re-establishing legitimacy will be a major challenge for business, Kay says. This is demonstrated in the reported loss of trust in business and business leaders. This lack of trust should concern directors, as it impacts on the role of business in society.

Re-building trust and establishing legitimacy

In New Zealand the most recent ‘Who do we trust?’ survey (produced by Victoria University) showed 43% of respondents have little or no trust at all in corporations/large businesses. Internationally populations in general mistrust their institutions and are rejecting established authority.

The Edelman Trust Barometer shows that globally trust in institutions – government, business, NGOs and media – is declining. Media and government now fall in the ‘distrusted’ spectrum, while business and NGOs are on the verge – just 52% of the general population trust business. The head of Edelman calls on business, as an institution that retains some trust, to prove that it is possible to act in the interest of shareholders and society alike.

Directors are aware of the importance of listening to the voices of those wide than their shareholders. An overwhelming 86% of respondents to the IoD Director Sentiment survey said stakeholder interests are very important to their business. This is a global theme as businesses focus on long-term sustainability and the impact this has on society and the environment. Directors do need to consider how stakeholders understand the work their organisation does and the part it plays, if any, in addressing broader social issues.

The Edelman finding aligns with Kay’s view that a major challenge for business will be demonstrating legitimacy. Kay argues that ESG (environment, social, governance) type agenda, which emphasises environmental concerns, diversity, and formal process for example, is almost completely the opposite of what is demanded from business.

“These are the concerns are of the liberal elite whom the populists resent. The business agenda to meet this challenge is much more about supporting communities, restoring identity and re-establishing long term trust relationships.”

The findings from Edelman suggest similar. To rebuild trust, institutions including business must step outside of their traditional roles and “work toward a new, more integrated operating model that puts people — and the addressing of their fears — at the centre of everything they do.

“We have moved beyond the point of trust being simply a key factor in product purchase or selection of employment opportunity; it is now the deciding factor in whether a society can function. As trust in institutions erodes, the basic assumptions of fairness, shared values and equal opportunity traditionally upheld by ‘the system’ are no longer taken for granted.”

Big picture issues are not foreign to boards. Directors ultimately take responsibility for seeing the bigger picture and positioning their organisations for the long-term. Further, they play a role in raising awareness of broader issues, generating debate and putting pressure and urgency on something to be done and can advocate for the issues they feel strongly about.

Recognising the link between the fears held by the public and actions undertaken by business is a starting point to re-establishing trust and legitimacy. For example, the culture of an organisation and treatment of employees are areas of public concern highlighted by the Edelman survey. This is something boards can have a direct impact on as the long-term leaders of culture within their organisations.

Understanding where New Zealand sits in terms of sentiment towards business and government in comparison to other parts of the world is important. While geographically isolated, we cannot assume that the stable political environment we have enjoyed and ability to publically debate important policy issues will continue. Directors should consider the global landscape and recognise that they play an important role in guiding New Zealand in a direction that is beneficial to our society as a whole.

Ultimately our organisations - government, NGO, SME, publically-listed and so on – are part of a larger whole and do not operate in silos. They are part of New Zealand’s tomorrow. The directors of New Zealand organisations have a role in shaping the future.

The global risk landscape

The Global Risk Report provides insights in global risks. Key highlights from the report include geopolitical turmoil and new technologies. Here are some ways to use the report in your organisation:

Generate conversation: Encourage leaders from operations and other areas to think how a specific trend may affect the business over the next several years. To do this you could:

• Distill the report down to how it relates to your business
  • Use it in different forums to provide context for leaders to consider how and when certain trends may affect their areas.
  • Make discussion of the report part of your regular risk governance process

Assess time frames: Encourage business leader to think about the time frame in which a particular trend may need to be addressed. The impact from some issues – water scarcity for example – may feel as it is years away when in fact your organisation could be affected much sooner.

(source: Marsh Directors’ Risk Survey Report 2016)