Disruption/inability to innovate and compete
Just over half (51%) identified disruption/inability to innovate and compete as one of the biggest threats to strategic success. In many ways, these conversations mirrored the conversations around talent management and culture as strategy enablers. Investors emphasized the strategic importance of a workforce and culture that enables innovation and the adaptability needed to compete — including establishing that leaders at the executive and board levels are attuned to external trends and recognize the risk of doing the right thing for too long.
Environmental issues/climate change
Nearly half (48%) of investors chose environmental issues/climate change as a key threat. Most focused their comments on climate change, characterizing it as an increasingly urgent, systemic risk and noting the recent manifestation of physical climate risks that are accelerating at a rapid rate and complicating risk management.
Some commented on the impacts of the wildfires in Australia and California, noting growing risks to business infrastructure, operations and supply chains amid more extreme weather events and the related need for careful repricing of climate risk in the insurance and real estate markets. Investors want to see companies communicate their consideration, assessment and management of these climate issues and risks, and how their actions or inactions around climate change are viewed by management and the board in the context of corporate strategy, reputation and long‑term value.
Investors concerned about the business threat of climate change stressed their view that climate risk reaches far beyond the traditionally exposed industries (citing, for example, scrutiny around how banks are financing emissions-intensive industries, or the potential ripple effects of a carbon tax across airlines, hotels and companies transporting fuel), and that to avoid the most catastrophic effects of climate change and capitalize on related long‑term opportunity, companies need to take strategic action now.
Thirty‑nine percent of investors cited cybersecurity/data privacy as a top threat to portfolio companies. Investors generally commented that every company in every industry has exposure to these risks, and that as consumer preferences and business efficiency demands are leading to an ever more digitized and electronically connected world, the risks continue to multiply. They also noted the increasing number and types of threats to business assets, operations, and customer and public trust.
Some investors stressed that since the threat of a breach cannot be eliminated, they are particularly interested in resiliency, including how (and how quickly) companies are preparing for, detecting, and mitigating cybersecurity incidents and how they are working to prevent attacks that can impair the business. Some said they are asking about specific practices, such as whether the company has had an independent assessment of its cybersecurity program.
Tying with cybersecurity/data privacy for third place, 39% cited geopolitical issues as a top threat. Most related comments were generally high‑level, with investors noting uncertainty regarding what will come out of Washington, Brexit, China other political hotspots and the resulting impacts. A few investors tied geopolitical uncertainty to regulatory uncertainty, which they characterized as prohibitive to innovation and long‑term strategy because companies may lack the confidence to make significant capital expenditures or investments in research and development. Investors want to understand how companies are managing these issues and whether boards have confidence in their understanding and oversight of these issues.
Key board takeaways
- Understand that historical value drivers like scale, scope and efficiency have given way to digital technology’s power to upend entire industries, and the power of human capital and other intangible assets to drive competitive advantage.
- Keep a stronger pulse on disrupters, have ongoing strategic discussions with management, and bring in outside perspectives to challenge internal bias and stay on top of external trends.
- Do scenario analyses and stress testing of key assumptions to inform strategy and strengthen resiliency.
- Strengthen critical cybersecurity risk preparedness through cyber breach simulations and independent assessments.