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Strategic decision-making in a fast-changing world

By Kate Williamson

The future is hard to predict, and the current pace of change poses more questions than it answers. What impact will shifting global demographics and increasing longevity have on investment strategies, as insurance companies look to match longer-dated liabilities?

How can financial services firms embrace sustainability—both in terms of earnings and in tackling environmental challenges—while ensuring they still meet their return targets?

Good governance is essential for an organisation’s long-term survival, but how can boards balance responsible stewardship while ensuring they stay ahead of the innovation curve?

This month it emerged that Biohax, a Swedish company that implants microchips into employees, held discussions with several British legal and financial firms about fitting their employees with these devices.

At its core good governance means a group of individuals having control and accountability, and anything that detracts from that in a material manner sets a board on a dangerous course.

Dan Mellows, a director in Mazars’ risk assurance practice, says these developments indicate the challenge boards face in assessing the risks associated with new technology. “Much of the more vocal reaction to this has been dismissed somewhat irresponsibly as hysterical scaremongering.

“But how can a board truly gain the comfort it needs to ensure such initiatives are in the best interests of all stakeholders when in this instance, the scope for abuse of such technology is so undeniably vast?

“Perhaps it’s a case of being ‘damned if you do, damned if you don’t’ and clearly not an enviable position for those charged with governance.”

When it comes to governance, the adoption of technology and machine learning raises ethical questions. At its core good governance means a group of individuals having control and accountability, and anything that detracts from that in a material manner sets a board on a dangerous course.

Long-term questions are being asked of boards at a time when they face many near-term challenges. Everywhere boards look there are questions and challenges, both in the short and long term. Some are perhaps easier to understand than others.

Future crash

According to McKinsey, the combined global debt of governments, non-financial corporations and households has grown by $72trn since the end of 2007, making a future crash seem inevitable. Boards must ensure they have learned the lessons of the past and have the expertise, as well as the capital strength, to weather the next storm.

On the anniversary of the collapse of Lehman Brothers, former UK prime minister Gordon Brown warned that the UK is in danger of “sleepwalking into a future crisis”. The 2008 crash sparked a crisis in globalisation, and has led to a wave of nationalism, both in regulation and politics. There is a divergence in central banking policy around the world, with the US Federal Reserve tightening interest rates, while the ECB maintains its path of quantitative easing with low rates, creating a two-speed world economy.

President Trump has sparked trade wars with China, which could slam the brakes on global growth. Cyber-war with Russia is, to some extent, already upon us. Geopolitical uncertainty has arisen due to disruption to the rules-based international system where intervention has become the norm.

In the UK, uncertainty, Cabinet resignations and a leadership challenge over Brexit have placed the UK in political stalemate, making it impossible for businesses to plan when it comes to domestic and international operations. All of this takes place as global financial markets remain as intertwined as ever, creating a disconnect between politics and economic reality.

A decade on from the financial crisis and there is still a disconnect between banks and their stakeholders.

While no board can predict the future or hope to contend with all of these often-conflicting issues, there are measures boards can adopt. They must first and foremost set the culture and vision for the organisation and see beyond the noise of the prevailing political climate—a specified culture and vision should underpin a board’s strategic decision-making.

At the same time, the importance of specialised sub-committees has never been greater. Risk and technology committees can analyse specific problems and feed their findings into the boardroom. Boards can and should do more to ensure they have the right balance of talent. They need highly specialised individuals as well as those with broader industry knowledge.

Achieving this balance does not come without its own difficulties, as Mellows points out: “Maintaining a lean, efficient and effective board becomes increasingly challenging when such breadth and depth of specialist knowledge is required to demonstrate sound governance over all aspects of an organisation, including drives to innovate in the digital age.”

Constructive relationships

A decade on from the financial crisis and there is still a disconnect between banks and their stakeholders. For boards to anticipate the future, they must engage more directly with their customers and foster a more constructive relationship with regulators and politicians—one of cooperation, rather than advocacy.

The asset management industry must navigate a period of uncertainty that threatens to disrupt its business model forever. While the industry has largely benefited from buoyant global markets, with assets under management growing 13% in 2017, structural pressures continue, and a market downturn will expose those firms that have not taken measures to reduce costs.

The growth of passive investing has been a big theme in the industry and that will continue to challenge pricing models among active fund managers. Added to this, the industry is starting to polarise, with a handful of global investment powerhouses capturing an ever-greater portion of fees.

Risk management should be on the board agenda in a holistic sense. Boards must be sure the executive team has the right strategy that balances control with opportunity and ensures that finite capital resources are allocated to areas where they are most needed. They must strike the right balance between adaptive and fundamental innovation. That means understanding where innovation can serve the interests of the business, rather than betting the business on innovation and suffering the symptoms of “change fatigue”.

The boards of the future should reflect the times with a diversity of voices, enabling agility and adaptability, while ensuring strong leadership that can provide and deliver a long-term vision.

This article is an excerpt from the Special Report – Future-Proofing Financial Services . You can read the full report here

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