6 minute read 15 Oct 2020
Junk boat crossing Hong Kong harbor

Three priorities for APAC boards to rebuild stronger

Authors
Sharon Sutherland

EY Global Center for Board Matters Leader and Asia-Pacific Networks Leader

Global mindset. Power through diversity. Art lover. Intellectually curious. Traveler. Legacy matters. Passionate about learning initiatives.

Patrick Winter

EY Asia-Pacific Area Managing Partner

Focused on promoting Asia-Pacific innovation and technology. Committed to client service by driving EY cross-border collaboration. Passionate about inclusive long-term growth. Husband and father.

6 minute read 15 Oct 2020

Organizations in Asia-Pacific have a unique opportunity to set the tone for new ways of doing business. Their boards can drive the change.

In brief
  • As boards steer their organizations in a post-pandemic world, boards in Asia-Pacific are well placed to take the lead in driving a positive impact on society.
  • COVID-19 has shown that taking action towards a low-carbon economy is essential for the sustainability of organizations in the long-term.
  • Scenario planning is a critical tool for boards to better position their organization for quickly predicting and adapting to a post-crisis future.

Recently, the EY Global Center for Board Matters wrote about how boards can use the EY Megatrends to develop the “futurist” mindset that will keep their organizations sustainable in the long-term.

Boards are fully in focus as society shifts in a post-pandemic world, and organizations in Asia-Pacific have a significant opportunity to lead from the front. Patrick Winter, EY APAC Area Managing Partner asserts that, “For businesses and investors looking for bright spots in this challenging global economic environment – Asia-Pacific and its leading economic engines offer the greatest reasons for optimism.” They experienced COVID-19 first, and their governments and broader communities took swift, decisive action to manage the crisis in a systemic and highly coordinated way. As such, they’re now in a leading position to re-set the tone for how organizations adapt their operations to make a positive impact on society for years to come.

For businesses and investors looking for bright spots in this challenging global economic environment – Asia-Pacific and its leading economic engines offer the greatest reasons for optimism.
Patrick D. Winter
EY Asia-Pacific Area Managing Partner

Boards will play a bigger role than ever in steering their organizations along this new path. They will do this by overseeing the effective management of the risks the pandemic has exposed, but also by helping to repair social contracts and address societal challenges. Yet, our Global Board Risk Survey identified that only 43% of board members in Asia-Pacific felt their organization was “more than somewhat effective” in managing atypical and emerging risks, compared to 58% for traditional risks. This indicates that board members have a way to go in supporting their organizations through the process.

With this in mind, we’ve identified three issues we believe should be top of mind among board members in the region. While these priorities complement the ones identified for boards in the US and EMEIA, they also reflect the unique blend of challenges and opportunities facing boards in Asia-Pacific more specifically.

1. Leading the drive to combat climate change

Evidence shows climate change takes a particularly big toll on APAC markets. Which is likely why in the 2019 EY CEO Imperative survey more CEOs in Asia-Pacific (40%) cited it as a top global challenge than any of their counterparts in the Americas or Europe. In the same survey, investors globally ranked climate change as the joint number one issue along with national/corporate security. However, more important than the ranking perhaps is their expectation that CEOs respond appropriately.

COVID-19 pandemic has upped the ante by unveiling unsustainable business practices. It’s also shown that climate action is integral to becoming a resilient, responsible organization that puts long-term impact over short-term gain. And many governments, including China, Japan, South Korea and New Zealand, have announced plans to use their economic recovery to stimulate low-carbon industries in their respective nations.

Investors are also raising the stakes: according to the 2020 EY Global Institutional Investor survey (pdf), they’re evaluating ESG disclosures more rigorously. At the same time, they’re factoring in disclosures made as part of the Task Force on Climate-related Financial Disclosures (TCFD) framework.

With the backing of investors and government, board members in Asia-Pacific are in a prime position to advocate for their organizations to reduce their carbon footprint.

But the 2019 EY Global Climate Risk Disclosure Barometer shows that Australia was the only market in Asia-Pacific to make the list of top performers. Meanwhile, China, Indonesia and Malaysia continued to rank among the lowest performers, signaling across all markets that there’s an opportunity to improve.

To do this, boards in Asia-Pacific should be encouraging management to do two things:

  1. Analyze the risks and opportunities resulting from climate change and the transition to a decarbonized future. 
  2. Communicate these more comprehensively through TCFD reporting.

The sooner management understands climate risks and opportunities, the sooner it can take action to transform the business to suit a low-carbon economy – and create a competitive advantage.

  • Questions for boards to ask

    • Do we understand the role our organization plays in the transition to a green recovery, beyond direct action?
    • Do we have the knowledge, skills, structures and processes to guide our management teams in taking action on climate change? If yes, how are they incentivized? If no, what are we doing to address this?
    • How can we help management identify effective, non-financial KPIs that measure our progress on setting and taking action on climate targets, and reflect the recommendations outlined by the Task Force on Climate-related Financial Disclosures?

2. The trifecta – Getting the trust, digital and risk equation right

If digital transformation wasn’t a strategic priority before COVID-19, it is now. Organizations have been forced to rely almost entirely on their digital infrastructure to communicate and function. To be competitive after the crisis, they’ll have to fully focus on becoming digital-first.

Yet while 39% of board members globally ranked technology disruption as a top-two strategic opportunity, only 29% of APAC board members did.

Organizations in China are particularly vulnerable to the trade risks of the Techonomic Cold War (see the EY Megatrends). Of the 586 companies on the Hurun Global Unicorn List of billion-dollar tech start-ups, 79% are in the US and China (233 and 227 respectively). The approximate total value of the companies on the list is $1.9 trillion and growing in China every year. China’s “Made in China 2025” initiative, for instance, aims to promote domestic manufacturing across a range of high-technology sectors, from aerospace to robotics – an ambition that would increasingly put it in direct competition with the US. In response, the US has banned specific foreign (mostly Chinese) companies.

As digital adoption deepens, many businesses are investigating ways to embed emerging technologies across core elements of their ecosystem – all in a global climate of increasing vulnerability to cyber-attack. The stakes are high: when systems fail, customers, shareholders and regulators hold executives and boards accountable for the resulting financial and reputational cost.

Asia-Pacific is far more adept at accommodating the transformative nature of new technologies, as some markets have faced decades of rapid change, while for others, rapid change is underway.
Patrick D. Winter
EY Asia-Pacific Area Managing Partner

The key to success will be boards that support their executives in building digital trust across recently deployed emerging technologies, such as blockchain, intelligent automation and artificial intelligence. Patrick Winter believes “Asia-Pacific is far more adept at accommodating the transformative nature of new technologies, as some markets have faced decades of rapid change, while for others, rapid change is underway.” Boards will need to understand what these emerging technologies mean for their organization; the risks they bring, and the role of the Audit Committee in managing those risks.

  • Questions for boards to ask

    • Are we confident our emerging technologies can work at scale? Do we regularly see metrics for emerging technology projects and initiatives?
    • Are digital and data issues such as cybersecurity, data privacy, ethical and disinformation risks discussed regularly at board meetings?
    • If yes, how do we make sure we have the expertise to oversee these risks by way of subject matters experts or a standalone sub-committee?
    • If no, what are we doing to address this critical gap in board oversight?

3. Planning for a wider range of business transformation scenarios

In March 2020, when we published the EY Global Capital Confidence Barometer (CCB), organizations in Asia-Pacific were already feeling the impacts of COVID-19. What’s more, 55% were expecting a U-shaped recovery that would extend well into 2021.

As a result, respondents were being extra-cautious by revisiting financial plans, renegotiating contracts and monitoring how direct cost increases would affect their margins. But at the same time, many planned to take advantage of lower valuations and a rise in distressed assets coming to market, either to support their transformation agenda or to build resilience. According to the CCB, 52% of Asia-Pacific respondents said they intended to pursue M&A transactions in the next 12 months.

2020 Global Corporate Divestment Study

Companies are pursuing divestments to rebalance portfolios as they face tough capital decisions and rising activism.

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This demonstrates the appetite within APAC organizations to balance the need for caution with opportunities for sustainable, inorganic growth through targeted acquisitions. Boards can reinforce this by continuing to influence management to protect the organization’s assets while taking calculated risks that offer the best chance of seizing a competitive advantage. That can include asking challenging questions like: “Are we doing enough to be a sustainable, digital-first organization?”

Divestments have also become an attractive option to fund much-needed investment in technology. In the latest EY divestment study, 56% of Asia-Pacific companies say they are now more likely to divest for this purpose, a sharp increase on the 31% that said the same before the COVID-19 crisis.

Finally, but critically, boards should not only discuss strategy on an ongoing basis, but also use scenario planning: a much talked-about but lesser-used tool for a much wider range of possibilities. Doing so will not only make sure their modelling remains relevant and up to date – it’ll better position the organization to quickly predict and adapt to a post-crisis future.

  • Questions for boards to ask

    • How do we allocate time within our strategy discussions to plan for different economic scenarios and outcomes, in a range of time frames? How often are these scenarios tested?
    • How frequently do we oversee and challenge how the organization allocates its capital and other resources, to make sure we protect our assets, optimize operations and deliver on long-term strategies for growth? 
    • Do we have a tolerance framework that we use to assess our performance and progress?

Summary

Every decision that leaders make charts them on a course for the future, and to adapt to that future, boards will need a well-thought-out plan. Focusing on pressing priorities like enterprise risk resulting from climate change impacts, technological disruption and capital allocation will allow business leaders to navigate around uncertainty and harness business transformation opportunities.

About this article

Authors
Sharon Sutherland

EY Global Center for Board Matters Leader and Asia-Pacific Networks Leader

Global mindset. Power through diversity. Art lover. Intellectually curious. Traveler. Legacy matters. Passionate about learning initiatives.

Patrick Winter

EY Asia-Pacific Area Managing Partner

Focused on promoting Asia-Pacific innovation and technology. Committed to client service by driving EY cross-border collaboration. Passionate about inclusive long-term growth. Husband and father.