REVIEW OF FINANCIAL MARKETS
possible future black swans is to be operationally ready to mitigate an event, should disaster strike. Thus, it would be possible for companies to mitigate most of the severe consequences of black swan events. Scenario planning – plausible,
divergent, and internally consistent views of the future – is a useful tool to anticipate how the future could unfold. And when combined with strategic options thinking and strategic early warning, it helps companies remain competitive in a changing, complex, and uncertain environment.7
The benefit of
anticipating grey rhinos is to avoid being blindsided because of changes in the external environment or in the strategy of both current and future competitors. Proper succession planning and board
diversity are ways to avoid complacency from ignoring white elephants.10
White
elephants, when ignored, pose a potential existential threat to the company. Consider the cost of cybersecurity, which was expected to inflict damage in the amount of US$6tn in 2021,11
stakeholders that ESG risks are taken seriously by the board and top management. This may lower the underlying cost of capital and improve a company’s stock price. It may also make the company more attractive to customers, suppliers, and employees – in general, it makes it easier for a company to conduct its business.
2. It demonstrates that ESG risks are inherent to the company’s strategy and are part of its culture and values system.
3. The general perception is that what is good for society is not good for the shareholder. Linking executive compensation to ESG targets, and how ESG risks are managed, pushes management to think differently about ESG and explore joint gains.
// TYING EXECUTIVE COMPENSATION TO ESG OUTCOMES COULD IMPROVE LONG-TERM PERFORMANCE //
informed decisions. The risk of unconscious bias – the potential prejudice against a particular group or decision – is largely reduced in more diverse boards where the various issues, risks, and societal perspectives are constructively debated before a decision is made. Similarly, more diverse boards tend to suffer less from over-confidence and confirmation bias. Several
studies illustrate that gender diversity leads to improved
or 7% of global GDP. Ignoring or
not providing appropriate board oversight of cybersecurity could lead to significant financial and reputational losses and even bankruptcy. The US National Association of Corporate Directors argues that cybersecurity is an enterprise-wide risk management issue, not just an IT issue, and should thus be dealt with by the board.12 Table 1 (p.66) summarises the various
strategic foresight concepts and their potential strategic response.
D. THEY ARE OUTCOMES DRIVEN (AS OPPOSED TO COMPLIANCE DRIVEN) A company’s longevity is intrinsically linked to how seriously the board addresses ESG risks. Given that corporate governance is concerned with contributing to the sustainable long-term success of the company, it could be argued that tying executive compensation to ESG targets and outcomes will significantly contribute to achieving this objective. There are several benefits of tying
executive compensation to how ESG risks are managed:
1. It sends a strong message to the investor community and other
CISI.ORG/REVIEW
4. Compensation provides an important incentive for executives to do the right thing and manage the company for the benefit of all its stakeholders, including society at large.
There are other ways to achieve this, but linking executive compensation to desired ESG targets and outcomes will incentivise company executives to balance and grow all five capital stocks – natural, manufactured, human, social, and financial.
E. THEY ARE TRULY DIVERSE13 Board diversity needs to be seriously considered in succession planning. Diverse boards, when well designed, are better at risk oversight, including ESG oversight. Although diversity comes in many forms, typically the following four are considered: gender, ethnic, experience, and age diversity. Boards need to make judgements
with the objective to contribute to the sustainable long-term success of the company. During the era of 4IR, a critical aspect for the board while discharging its duties is to provide risk oversight, including oversight of the potential unintentional consequences that artificial intelligence (AI) may have on exacerbating racial and gender inequity. Cognitive biases often impair a leader’s ability to make rational and
business performance, less extreme risk-taking, and enhanced governance. Ethnic diversity at board level has contributed to more consideration of the wider societal aspects in and the implications of strategic decisions. Similarly, younger board members tend to challenge decisions that would adversely affect future generations, therefore ensuring that risk-taking is better aligned with the company’s risk appetite. This in turn contributes to improved long-term performance. Companies should promote truly
diverse boards in terms of gender, ethnicity, thought, age, and even neurodiversity, to contribute to the company’s sustainable long-term performance and ensure that critical risk, such as AI, does not exacerbate racial and gender inequity.
F. THEY ARE INCREASINGLY ASSISTED BY AI The UK 2006 Companies Act states that at least one board member needs to be a natural person. This gives company boards the opportunity to appoint directors that are not natural persons, such as an AI-powered robot.14 At its most basic level, this could be an expert system, a basic form of AI, that helps directors make better judgements in the same way that physicians have used expert systems to arrive at more accurate diagnoses and even suggest treatments. Typically, an expert system performs well in its area of expertise, which is usually very narrow. More advanced AI-powered decision support systems, commonly referred to as
67
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78
