Americas board priorities 2023: How to build resiliency in uncertain times

Heading into 2023, several signals point to a global recession. These include the ongoing war in Ukraine; tightening financial conditions; and a synchronized economic slowdown in Europe, mainland China, numerous emerging markets, and the US.

The economy is cooling because of persistent inflation, rising borrowing costs, deteriorating private sector sentiment and rapidly slowing global economic activity. Continued cost pressures, weakening demand and elevated uncertainty are prompting some companies to make increasingly conservative talent and investment decisions.

In this environment, drivers of economic activity that were previously taken as a given will now warrant more attention from boards. To transform uncertainty into opportunity, boards will need to focus on five central tenets to support their companies through economic uncertainty.

1. Inflation

The supply-and-demand imbalance on the energy front, stemming from geopolitical tensions and climate change, is unlikely to be resolved soon. Increased volatility should be expected for energy, commodities and food price inflation.

While this may be a new experience for many US- and Canadian-based directors, others across Latin America undoubtedly have more relevant experience navigating inflation in their boardrooms. Regardless, boards should oversee how businesses are building pricing and supply strategies that are nimble enough to respond to more significant ebbs and flows in demand than in recent decades. They must also consider the role of cost management and productivity gains in companies’ inflation strategy.

2. Labor

While laying off excess labor has been a go-to for US companies for containing costs in times of economic slowdowns, today talent is not just more expensive, it is also perceived as more valuable. Business executives currently favor strategic hiring freezes, strategic layoffs, attrition and furloughs as cost-control measures rather than broad-based layoffs.

Boards will need to maintain a line of sight into the long-term talent agenda, as they oversee how productivity, training and efficiency gains can offset higher labor costs and keep an employee base engaged when rehiring is possible.

3. Cost of capital

The rapid and synchronized tightening of monetary policy globally has led to a surge in borrowing rates, a correction in equity prices, and significant foreign exchange movements. The rise in the cost of debt is driving a focus on optionality in meeting strategic goals, while the large fluctuations in equity valuations have created a wedge between buyers’ and sellers’ perceptions of the underlying value of an asset. Boards can partner with management to explore the business’s capital strategy plans.

4. Supply chain

The transition some companies made during the pandemic from just-in-time to “just-in-case” inventory management may not be sustainable, and some businesses may face a new strain as demand cools and inventory accumulates.

Geopolitical developments are also rapidly changing the business environment and redefining supply chain risks and opportunities, with companies exploring reshoring strategies as well. Boards can oversee how management is balancing supply chain risk and redundancy in an increasingly fragmented world.

5. Energy transition

The war in Ukraine’s impact on energy supply and energy security concerns, along with other climate impacts, is disrupting economic activity in real time and bringing a sense of urgency to the energy transition. While inflationary pressures might delay some plans, boards can work with management to consider whether this is an opportunity to accelerate the transition.

Moving forward

Boards have a critical remit to provide guidance to management across these tenets by pressure-testing plans and assessing multiple options for achieving strategic goals under volatile and uncertain micro- and macroeconomic circumstances.

Directors are well positioned to ask about what scenarios have been considered (even highly unlikely ones) and the potential impacts to financial performance, growth and strategy. Regardless of what scenario plays out, management needs an appropriate strategy — and balance sheet — for any economic conditions that lie ahead, and boards can help them plan for that uncertainty.

Robust portfolio strategy planning will not pause amid the macro risks. Despite rising interest rates, many companies are intent on transforming their organizations to stay ahead of disruption. And they’re holding steady in their investment strategies to build long-term optionality, resilience and value. An EY study of more than 750 CEOs in October 2022 found that a significant majority (64%) intend to increase capital investment vs. just 14% who plan to reduce.

Where companies are planning to invest

Across the Americas, investment in digital and technology capabilities is the main area where companies plan to increase spending. Nearly three-fourths of global executives (72%) surveyed for the EY 2022 Digital Investment Index said they must radically transform their operations during the next two years to compete effectively in their industry.

Placing environmental and social sustainability at the core of the business is also a priority for many companies seeking to create long-term value through cost-of capital optimization, mitigated operational disruptions and a stronger connection with customers and employees around the environmental, social and governance (ESG) agenda. Companies are additionally looking to invest in early-stage businesses to enhance their existing portfolio, access new talent or create new business platforms.

Companies in a strong financial position, or with a countercyclical product offering, may make the opportunistic choice to buy or partner with another organization to enhance long-term growth. In those cases, mergers and acquisitions (M&A) remain a critical option to boost capabilities in technology, talent and innovation as well as sustainability strategies, but companies are considering other levers as well.¹

Divestment may also play an integral role in driving strategy by freeing up capital to reinvest in core capabilities and growth areas. A thorough portfolio-focused review may show that even well-performing business units can be candidates to spin off if they no longer fit the long-term strategy, as they tie up capital that could be better deployed.

Facilitating successful growth strategies

Ensuring flexibility and preserving multiple options to meet strategic goals will be important, particularly given the rising cost of debt. Boards can play a key role in questioning the options management has considered and challenging the assumptions underlying those decisions. They can also drive conversations that help crystallize strategy and offer a clear view on each business’s market and underlying growth drivers, including:

• Demand
• Competitive advantage
• Alignment to the company’s vision
• Potential for long-term value creation from a financial, customer, people and societal standpoint

Finally, boards have an opportunity to guide management’s investor engagement approach as a fundamental part of long-term value creation strategies in today’s recessionary environment. A bear market leaves companies more exposed at a time when investors are less forgiving. At the same time, in the US, the new universal proxy rules may make it easier for investors to replace directors.

Boards can help challenge whether companies are doing enough to communicate proactively with shareholders, infusing the company’s strategy narrative with vital growth and innovation opportunity discussions.

Disruption through innovation is an imperative. Despite the economic downcycle, companies will need to proactively challenge their legacy business models, look for opportunities where they are vulnerable to competitors and create new capabilities that anticipate, adapt to and drive market shifts. Incumbents may need to leverage new technologies to begin self-initiated transformational change as they leverage the power of self-disruption from a position of strength.

Whatever economic and business conditions exist, boards play a critical oversight role in enabling innovation. They can help the executive team keep an even hand on the wheel and challenge leaders to think: How can the company deal with new external challenges not just by cutting costs or investing more, but by changing how the company does business?

Boards are uniquely positioned to raise provocative what-if questions around possible new products, services and revenue streams related to megatrends such as how the rise of Gen Z is reshaping consumer and employee trends. One way to jump-start the board and management dialogue on innovation is to use demographic, environmental or social changes as prompts for brainstorming potential strategic opportunities and risks. These “future-back” visioning exercises and scenario planning can build resilience by allowing for the possibility of uncertainty, challenging long-standing assumptions and identifying opportunities to redefine the future of the business through pre-emptive innovation.

Taking a long-term view on emerging technologies

Even as volatility reigns, the longer-term innovations and megatrends defining the future of business must not be overlooked. The world has entered a new era of data centricity that is supercharged by emerging technologies and where advanced data analytics continue to unlock the value of operational, customer and market data.

In addition, the next iteration of the internet is on the horizon. The metaverse promises a more immersive web experience powered by augmented and virtual reality, haptic touch feedback and hyper-realistic visualizations. New human-machine interfaces enable deeper engagement, providing new ways to socialize, conduct business, reach customers and design products and services. Boards must stay on top of these emerging technologies and their concepts to best support their companies.

These new technologies, and the human behaviors they drive, hold both promise and peril for our planet and our social systems. For example, technological innovation may lead to a new immersive virtual workplace of the future, the power to reduce unconscious bias, the potential to encourage healthier lifestyles, and lowered carbon emissions by replacing real-world presence and physical goods with non-polluting virtual experiences.

At the same time, emerging technologies may lead to spikes in carbon and energy costs driven by cryptocurrencies, and create profound risks related to data privacy, fraud, misinformation, polarization and disconnection, mental health and safety. Given growing social risks and urgent global climate objectives, better sustainability outcomes should be integral to the future vision and planning around new technologies and customer strategies. This is particularly worth emphasizing at a time when stakeholder expectations and demands are changing dramatically in light of environmental and social developments.

Keeping innovation in check

Boards play a crucial role in keeping these longer-term scenarios and technological disruptions in view for the management team, with a lens on potential long-term financial, human and environmental value creation. As pressure to quickly bring technology-enabled products and services to market continues to mount, directors can bring common sense to bear on any overexuberant ideas – keeping social and environmental sustainability front of mind.

Another key role for directors is to support innovation by enhancing their governance of the company’s R&D portfolio. An ideal project mix is 70% investing in incremental improvements for existing operations, 20% tapping opportunities in adjacent markets and 10% exploring disruptive new business models. Directors can ask for status updates on key technology investments and catalyze conversations on a range of potentially transformative investments and practices, including how the workplace culture enables the company’s innovation strategy.

Global macrotrends continue to shape the future of work and accelerate the need for companies to adapt to the changing talent landscape.

One key challenge is the structural shift underway in labor markets, as we experience the highest global talent shortage in more than a decade. Workers are reassessing and reprioritizing what they value most from an employer, and they’re willing to act deliberately to fulfill those desires: 68% of employers say that employee turnover has increased in the past 12 months. Strategies that worked to attract and retain workers in the past no longer meet the needs of younger workers, including their expectations for hybrid and flexible work.

Even with a cooling labor market, employees who hold highly skilled jobs that will drive the future will continue to hold more power. The groups expected to have the highest turnover are Gen Z and millennials, particularly those in the technology and hardware sector.

The specific demand for talent with technology skill sets is outpacing the supply, and inflation and wage growth are increasing the cost of competitive compensation. Companies will need to develop talent to encourage the right employees to grow with the organization. The board should question if the learning and knowledge approaches and investments in skill development are adequate.

Prioritizing culture and reward for employee retention

Keeping a pulse on employee sentiment and culture is critical. Employers and employees have different perceptions of the impact of hybrid, flexible or mobility work options on productivity and advancement potential. Indeed, 54% of respondents to the EY Global Workforce Survey state they would consider leaving their job post-pandemic if they are not afforded some form of flexibility experienced during the pandemic. Retaining talent may depend on whether companies have the right leadership for the current moment, which includes diverse, decisive, empathetic and human-centered leadership with a focus on innovation, fostering trust and modeling desired traits.

Talent retention may also hinge on employee compensation programs. Global uncertainty connected to inflation and labor costs is creating challenges for companies. However, if companies don’t address pay gaps between long-term employees and new hires — as well as pay inequity related to gender, race and ethnicity — then efforts toward improving culture, productivity, and diversity, equity and inclusion (DEI) could be neutralized by turnover.

Further, inflationary pressures, the broader acceptance of remote work and lower barriers to finding new jobs have accelerated a need for extensive changes to a rewards policy encompassing compensation, wellbeing, flexible benefits, time off and more.

Rethinking existing structures to address talent challenges

Expanding oversight priorities related to the talent agenda may call for boards to spend more time in dialogue with the chief human resources officer (or equivalent) and obtain a deeper view into employee demands and sentiment that goes beyond assessing the tone at the top.

Boards should assess the company’s strategy around total compensation, closing any skills gaps, and talent retention. They should also help management maintain a focus on long-term talent strategy needs, amid shorter-term cost management challenges. DEI can be integrated throughout these considerations to further enable innovation and drive performance and value across a wide range of indicators.

Boards may want to evaluate their committee structure and responsibilities. Many compensation committees now have responsibility for broader human capital management oversight, responsibilities, such as DEI, talent recruitment, development and retention, and other related matters. With the U.S. Securities and Exchange Commission (SEC) expected to propose new rules governing human capital disclosures, stakeholder scrutiny of the board’s governance in this area is set to increase.

The high level of cyber risks that companies face is multiplying. In 2022, this was marked by potential threats tied to the war in Ukraine and China-Western decoupling, as well as risks stemming from the continued expansion of digital transformation, flexible working and the rollout of disruptive technology.

Data privacy has been top of mind for many Brazilian executives following the passage of its far-reaching data protection law in 2020. In Mexico, there is limited cybersecurity legislation, but recent incidents are driving focus on the need for a stronger culture of information security.

In the US, more guidance on cyber oversight and disclosure is here or on its way. The U.S. Securities and Exchange Commission (SEC) also proposed new rules earlier in 2022, and the U.S. Congress recently passed far-reaching cybersecurity legislation.

With the stakes higher than ever and rising, the tone from directors at the top must continue to emphasize the importance of managing cybersecurity as an enterprise risk (not just an IT matter). They must also view it as a strategic opportunity to position companies as trusted business partners.

Setting that tone should include the board raising cyber risks in interactions with members of management beyond the chief information officer (CIO), or chief information security officer (CISO). They should be asking executives how cybersecurity is embedded from the start via a “trust by design” philosophy when designing new technology, products and business arrangements.

Boards can also help by understanding new or evolving threats, knowing the value of the company’s risk in monetary terms (including the efficacy of cyber insurance coverage), and keeping pace with leading cybersecurity risk management practices to ask better questions of management.

Implementing an effective cyber risk response strategy

Ultimately in today’s environment, cybersecurity risk management is about response preparedness and resilience. That means:

• Focusing on early detection
• Isolating critical assets
• Making continuity plans for operating in crisis mode
• Appropriately reporting to and working with authorities while managing litigation
• Communicating with employees, customers and investors

Cyber incident simulations and tabletop exercises with management and the board should be a priority. Well-designed incident simulations can stress-test the organization and improve readiness and recovery efforts by providing clarity of roles, protocols and escalation processes, which can include third parties (e.g., a public relations firm, forensic specialists) where needed.

Bringing in an independent outside party to provide a rigorous assessment of the company’s cyber risk management program is another key practice that can help expand knowledge bases, strengthen capabilities and identify blind spots in security and risk management.

There is wide variability in what goes into a third-party assessment, from something as simple as an inquiry only into certain business segments, to a more rigorous company-wide assessment that includes a significant amount of verification and testing. Boards should understand the level of assessment the company is getting and have direct interaction with the independent assessor.

Finally, boards can also play a role in overseeing enhanced disclosures that clarify for investors and other stakeholders the rigor of the board’s oversight of cybersecurity risks and its competency to provide such oversight. These disclosures are growing in importance as such matters come under increasing stakeholder scrutiny.

Going forward into 2023: enhancing the board’s effectiveness in a new era of uncertainty

In this new era of permanent uncertainty and volatility, success will be based on resiliency and sustainability, including the ability to sustain shocks, self-disrupt, and contribute to the solution of societal and environmental challenges. To meet the challenges ahead, boards will need to strengthen their effectiveness through continual assessment and improvement. The EY Center for Board Matters has developed a comprehensive approach and framework for understanding and enhancing board effectiveness.