Challenges Become Opportunities: Corporate Boards and the New Operating Climate

June 18, 2021

The past twelve months have been difficult for boards directors across all sectors. Against a backdrop of disrupted supply chains, digital transformation and the sudden pivot to remote working, companies have also had to tackle the growing complexities of the modern business environment. As a result, established decision-making processes and governance models have been actively tested.

Given the unique nature of this environment, Tricor Group and the Financial Times Board Director Programme joined forces to conduct a comprehensive survey of board directors representing 771 global organizations across a broad spectrum of industries. Their mission was to map the key themes impacting corporate governance and gain insights into where directors see the opportunities, risks and future areas of focus. The findings are detailed in the 2021 Asia Pacific Board Director Barometer Report.

Boards Remain Robust

Boards have had to reimagine how they operate while swiftly managing active threats. Overall, APAC boards have responded well by improving efficiency and developing new-found agility. The general view is that this is no temporary interruption, and the transformation process triggered by the crisis will accelerate post-pandemic. Challenges remain, and the survey found that as businesses adjust to the altered environment, several key themes dominate the thought processes of corporate boards across the region.

A broad consensus has emerged among directors, and that is a need to increase their focus on business continuity and risk management while taking the lead in digital transformation. The survey also identified concerns about data security and a recognition that boards require training to help them meet those challenges.

A Test for Business Continuity

Areas such as Business Continuity Planning (BCP) and Governance, Risk Management and Compliance (GRC) are now sharply in focus.

Recent events have exposed significant gaps in preparedness, which is perhaps unsurprising given the scope of the issues facing companies. In Hong Kong, the crisis coincided with a period when a high number of first-time directors joined boards and new mandatory environmental, social and governance (ESG) reporting increased the need for more broad-ranging corporate disclosure. This composite possibly exacerbated an already stressed situation.

Despite the pressing nature of these concerns, a little over half (51%) of Hong Kong’s board directors were confident in their companies’ BCP handling during the pandemic – just above the global average of 48%. At the same time, almost 90% of board directors globally named BCP and GRC as critical strategic priorities.

This disconnect between intentions and preparedness is likely to increase third-party engagement and training as boards move to fill gaps in expertise and processes. Over the longer term, this should result in greater efficiency and agility.

Preparations for a Virtual World

The rapid shift to virtualization was one of the most discussed effects of the pandemic. As workplaces went digital, the percentage of meetings taking place online in APAC went from 5% pre-pandemic to more than 90%.

Most survey respondents foresee that a hybrid virtual/in-person model will prevail. In Hong Kong, the results were broadly in line with the global average, with 57% of board directors envisioning a compound model. However, 30% retained a strong preference for a return to in-person gatherings.

Hybrid models will undoubtedly make boards more responsive. The challenge lies in preparedness. Without the tools and training to ensure security and competence, boards will be unable to make full use of a hybrid model.

“The COVID-19 pandemic has forced companies to reconsider board engagement,” says Sunshine Farzan, Group Head of Marketing and Communications at Tricor Group. “New hybrid models offer the benefits of both in-person and virtualization, so boards get the best of both worlds.”

The Shift to Digital

Virtualization is just one branch of a broader digital shift. The wave of digitization will outlive COVID-19, but there are risks as well as benefits. Overall, boards in Asia Pacific and around the globe face a challenge in implementing digital governance.

Globally, over two-thirds of directors globally favour the use of online encrypted systems for board documents and operations, suggesting a broad understanding of the steps required to enhance cybersecurity and move to the next levels of digitization. About 80% of respondents globally also believe that boards – not IT departments – should take the lead in digital transformation.

But there is room for improvement in terms of digital transformation. In Hong Kong, 70% of directors said their boards are exploring new digital tools. This is slightly below the global average of 73%. While this number could reflect Hong Kong’s success in tackling the virus, it also indicates that a significant share of company heads have not adopted digital board portals and the digital governance tools needed to shift from surviving to thriving in a virtual world. For example, Google Drive and Google Meet proved to be among the most popular platforms for board directors in Hong Kong to use. Yet these tools are not tailored for hosting board operations.

Also of concern is that one in four boards are not taking action to bridge widening digital adoption gaps. While recent events have prompted boards to modernize, the gap in digital competencies at the board level is a concern, suggesting that more independent third-party expertise and training will be required to implement digital transformation effectively.

Heightened vulnerability

Alongside the boom in digitization has come an explosion in cyberattacks. The volume of records compromised by security breaches in 2020 jumped alarmingly by 141% to a colossal 37 billion, according to a 2021 report from security firm Risk Based Security. Yet according to cybersecurity firm Varonis, just 5% of organizations have the proper mechanisms in place to safeguard their digital operations from such attacks.

“Technology adoption is fraught with risk, and when it comes to issues like data protection and cybersecurity, companies often only get one chance to do it right,” said Tim Leung, Group Chief Technology Officer at Tricor Group.

The survey revealed that data security is a concern for 85% of Hong Kong directors, but only 43% had taken any action to improve security during the pandemic.

With rapid digitization offering a bounty of opportunity for cybercriminals, it is concerning that more boards did not take measures to secure and safeguard data assets, despite understanding the increased risk. The cybersecurity landscape has changed drastically, and boards cannot afford to be complacent.

There is likely to be a substantial uptick in corporate board activity around data protection, which will require specialized third-party expertise to identify suitable measures, implementation and training for directors to ensure security processes are in place.

A Need for Expertise

Boards face ever-greater scrutiny, stakeholder expectations and reputational risk. As the GRC landscape becomes more nuanced and pressures grow in both number and complexity, directors find that management experience alone is not enough if they are to remain compliant, assert strong governance, uphold fiduciary responsibilities and execute business transformation. Subsequently, the need for board training is more acute than ever.

The survey identified seven areas where board director competency is critical to operations:

  • Risk control
  • Compliance
  • Cybersecurity
  • ESG
  • Risk oversight
  • Audit & finance
  • Data privacy

Almost all respondents in APAC and globally acknowledged that training would be beneficial, yet only 50% were receiving ongoing instruction. Once again, there is a disparity between sentiment and action.

Notably, the survey identified strong resistance in APAC to employing third-party expertise to address gaps in crucial areas like BCP and GRC, digital transformation and ESG. This trend is likely to reverse as more boards grasp the opportunity to mark the pandemic as a defining moment. The volume of records compromised by security breaches in 2020 jumped sharply by 141% to a colossal 37 billion, according to a 2021 report from security firm Risk Based Security. Yet according to cybersecurity firm Varonis, only 5% of organizations have the proper safeguards in place to protect their digital operations for corporate governance improvement and digital innovation.

“A culture of continuous learning and comprehensive training programmes are key to nurturing both professional and personal development,” said Chris Moon, Asia Director at the Financial Times Board Director Programme Asia.

Complexity Generates Opportunity

There are two clear takeaways from the survey. Firstly, the board director’s is becoming increasingly complex and pressured as the business landscape undergoes a generational shift and demands intensify from stakeholders, regulators and society.

Secondly, boards need external expertise to navigate their way to success in this environment. It is evident from the survey that most board directly acknowledge both of these facts, but the gulf between sentiment and action leaves many companies at risk of falling behind.

The more businesses recognize the advantages of drawing on third-party expertise to solve these issues, the greater the chance that they will turn the pandemic crisis into a watershed moment of opportunity.

Note: The majority of respondents (87%) were in Asia-Pacific, and three-quarters of them have served on more than one board. The corporate breakdown was private (65%), non-profit (23%) and listed (16%). The demographic split was two-thirds male and one-third female.

 

 

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