Asia-Pacific board priorities 2023: How to create clarity amid ambiguity

The changing habits and demands of consumers and employees continue to be a talking point in the boardroom. Today, Gen Z makes up one-third of Asia-Pacific’s workforce. As the largest generational cohort in history, their ambitions and expectations as both consumers and employees are already shaping the future economy. In a country where inflation has been less of an issue, China’s consumers have moved from “affordability first” to “planet first.” Contrast that with Japan, where inflationary pressures remain and COVID-19 lockdowns in China have affected export demand: Japanese consumers have stayed focused on “affordability first.” Understanding the preferences and habits of the next generation of consumers and workforce will be key to maintaining a competitive advantage in 2023 and beyond. 

According to 83% of board members and CEOs in the EY 2021 Global Board Risk Survey, market disruptions have become more frequent and impactful. To keep pace, companies have begun to view transformation as a continuum. As such, M&A activity across Asia-Pacific reached an all-time high in 2021, a trend that was expected to continue in the second half of 2022 as Asia-Pacific CEOs and boards reframed their investment strategy for growth. Transformative dealmaking is expected to continue to play a key role — particularly as more consumers in the region come online (internet penetration now stands at 75%), and savvy consumers create pressure around environment, social and governance (ESG). Dealmaking in both these areas is on an upward trajectory. There continue to be record-breaking investments in digital transformation, as board members say major investors are putting even more scrutiny on their performance against ESG goals, a key element to accessing capital markets. Boards should continue to use their influence to support the creation of a compelling, fact-based narrative to bridge the gap between reality and perception. Although Asia-Pacific CEOs view sustainability as a critical part of their long-term value creation, 89% say they have encountered resistance from investors and shareholders about their sustainability transition strategy. 

Furthermore, the Asia-Pacific region is home to more family-run conglomerates than other regions, with many pursuing partial or full divestment to increase shareholder value and capital reallocation in a bid to set the company up for future growth. Where such divestment may once have been seen as a flaw, many executives and boards now recognize that sometimes selling their companies can be the best way to grow from a regional company to a global player. In fact, more than four out of five (83%) of Asia-based CEOs in the EY 2022 CEO Outlook Survey (pdf) say they intend to pursue cross-border M&A in the next 12 months, versus 37% of CEOs in North America and 71% in Europe. The Asia-Pacific region continues to show strength and resilience in attracting foreign direct investment. 

Strategic M&A has the potential to be truly transformative, but only if humans are at the center. Transformations are 2.6x more likely to succeed if both the rational and emotional elements of any large change are addressed. While the underlying success of a transformation is in the hands of the executive management, boards can play a critical role in supporting the emotional agility of their executive management teams — evidence shows this to be one of the key pillars underpinning a successful transformation. Not surprisingly, during periods of change, leaders and employees who feel supported, empowered and validated by self-aware executives are more likely to champion and buy in to complex transformations.

In parallel, there is an opportunity for the boardroom to play an important role in reshaping the employee experience — especially as we undergo global talent shortages and face divergent retention landscapes market by market. A recent study showed that more than 50% of employees in Indonesia and Singapore are likely to leave their employer in the next 12 months, in contrast to Japan where only 26% of employees are likely to leave, posing a challenging talent retention dynamic for organizations with a pan-Asian or global footprint. As such, delivering a workplace culture that enhances retention and belonging has become a strategic imperative and potential differentiator for organizations worldwide. 

That’s especially true in Asia, where, according to a forthcoming survey, boards discuss talent and culture more frequently than their European and North American peers, particularly as it relates to board composition and the skills required to lead. The survey also reveals that while boards acknowledge people and culture form part of their remit, more than half say their expertise is significantly underutilized. As a result, many are planning to expand the scope of their compensation committee. For example, just one-third of compensation committees currently oversee culture and employee engagement. Looking into the future, almost double this figure intend to devote time to this topic in the next two years. “Putting humans at the center has to be a strategic priority for the board and the CHRO, to better understand what employees across all demographics want,” notes Lay Keng Tan, EY Asia-Pacific People Advisory Services leader. “By doing so, the organization can be proactive and flexible in meeting those ever-changing needs.”

There are several issues that were top-of-mind in 2022 for Asia-Pacific boards, and remain highly relevant in 2023. However, they are now viewed as standard components of an organization’s ongoing strategic business agenda:

1. The climate crisis

Boards and their organizations have already begun to harness the potential for growth from the clean energy transition. Valued at US$1 trillion, the potential business opportunities arising from the ASEAN green economy alone are immense. With China becoming the leading manufacturer of electric vehicles, this is only set to grow. Capital allocation is now increasingly dependent on climate and ESG performance, with assurance of these disclosures on the rise, and regulators expected to soon mandate reporting. As a baseline, boards should proactively build their climate competency (e.g. in Singapore there is mandate for board directors to upskill) and understand the material impacts of climate change on their respective businesses.

The climate and nature crises are the defining issue of our time. While specific sectors —particularly automotive, energy and manufacturing, are more advanced in embedding climate action into the heart of their business strategy, all boards should already be addressing climate risk as a standing item on their agendas. Boards can champion sustainability metrics for integration into management performance, and govern how to further embed climate action into strategy to drive shareholder and stakeholder value. Investing in climate pays off: almost seven in 10 companies report capturing somewhat or significantly higher-than-expected financial value from their climate initiatives. “I’ve specifically recommended that management teams embed KPIs around climate change into their performance metrics,” says Ma. Aurora ‘Boots’ Geotina-Garcia, EY Alumni and board member of several listed companies “This practice is becoming much more common in companies whose boards I sit on.”

2. Cybersecurity

The past year has seen the ongoing evolution and sophistication of artificial intelligence, coupled with advanced cybersecurity tools, driven by the adoption of IoT. In parallel, a rise in cyber threats has led to data privacy concerns (including serious breaches of customer data in large public Australian companies), and heightened new regulation. But despite these developments, seldom do non-executive-level directors feel very confident in the board’s ability to understand the greatest cyber threats facing the organization or its level of investment in cybersecurity.

As such, it is imperative that directors continue to emphasize the importance of managing cybersecurity as an enterprise risk. Setting that tone should include the board raising cyber risks in its interactions with members of management beyond the chief information officer (CIO), or chief information security officer (CISO). Boards need to continually work with management to review the cybersecurity team’s talent profile and size to ensure cyber resiliency. Finally, boards should be challenging their management teams on the process by which cybersecurity is embedded from the start via a “trust by design” philosophy when designing new technology, products, and business and supplier arrangements.

3. Geostrategy

Recent commentary suggests there is likely to be a steady erosion of economic connectivity between China and other key economies, which could ultimately result in supply chain reorientation and diverging growth and investment opportunities. The ongoing war in Ukraine continues to create a tidal wave of economic and regional impacts. And the relationship between Chinese, US and European economies changes every day. Boards need a very clear idea about how issues may develop in relation to these dynamics. To gain a strategic advantage, boards should employ advanced scenario analysis as a way to ensure they fully comprehend the implications and opportunities associated with any geopolitical shifts, and are prepared to position their organizations to hold steady during the predicted turbulent times ahead.

Boards should also continue to guide management to proactively consider how geopolitical developments may affect their growth, supply chain, strategic partnering options, and stakeholder expectations especially as it relates to an increasingly “deglobalizing” agenda.

Questions for Asia-Pacific boards to ask

This article focuses on priorities for Asia-Pacific boards. The EY Center for Board Matters also focused on the Americas and EMEIA, providing insight into operating environments on a global scale.

While this overview provides the top priorities and key questions for boards, we are also interested in considering “what’s after what’s next”? How will these interconnected and complex issues play out in the world of board governance? How might our structures and the way we work need to fundamentally change to survive in a world we wish to live in 10, 50, 100 years into the future? We encourage you to join the conversation through social media using #boardmatters or by connecting with a member of our team.

Summary

Our analysis for 2022 Asia-Pacific boardroom priorities concluded that Asia-Pacific was a bright spot for investors and businesses alike, a perspective attributed mostly to global disruption and rising labor and production costs in other markets. The 2023 outlook remains favorable, but boards should remain vigilant to challenges looming on the horizon: the uncharacteristic slowdown of the Chinese economy, lowered growth forecasts (including slowing export growth due to recessionary pressures across Europe and the US), and the ever-evolving and increasing expectations of employees.