Companies should ‘sharpen focus’ on risk profile amidst major external events
Managements need to proactively identify, quantify, and respond to risks such as supply chain and geopolitical risks, says KPMG Singapore’s Head of Advisory (Consulting).
Irving Low, Head of Advisory (Consulting) for KPMG Singapore, has been with the company for nearly three decades, having worked in both the company’s London and Singapore offices. He is responsible for the Advisory businesses and practices across Management Consulting and Risk Consulting.
With his key area of practice being in corporate governance, Low has undertaken numerous corporate governance reviews for both public and private organisations in light of the renewed focus in this area. He has also been appointed to the Board of the Singapore Tyler Institute and to the Advisory Board for the School of Accountancy of the Singapore Management University, both in 2018. He is actively helping shape the future of the accounting profession in the country.
Low is also a member of the CPA Australia Sub-committee for the Public Sector.
As a judge in the Singapore International and National Business Awards, Singapore Business Review sat with Low to discuss the challenges and trends in corporate governance today. They also discussed how projects should use artificial intelligence and machine learning to solve everyday issues, as well as how these should encourage individuals and businesses to rapidly adopt innovative and more sustainable consumption patterns.
Can you tell us about your experiences in corporate governance? What are the biggest challenges companies face when it comes to corporate governance?
Although much has been said about the value of good corporate governance practices, some directors may still view this as a checkbox exercise.
Some challenges they may have today are:
Instilling a balanced risk culture within the organisation, given the nature, scale, and complexity of risks today, without being too conservative, and without stifling creativity and innovation. Boards are responsible for ensuring that their organisations have in place a robust risk management framework and policies to deal with the consequences of unforeseen events. They also need to ensure that management is communicating the agreed risk appetite and risk tolerance levels. But boards should also encourage their management to take calculated risks when necessary, and in doing so, create value for their organisation in the long run.
Building the right board. A recent study by KPMG showed that 55% of directors in Singapore and 59% of directors surveyed globally said that their boards would look different if they are to rebuild it to meet future needs. The same study also showed that directors in Singapore view the lack of qualified candidates as the greatest challenge to recruiting diverse board members. Indeed, assembling the right mix of directors, so that there are diverse views and robust discussions in the boardroom is a challenge. Again, this is a balancing act to ensure that the board has enough diversity without compromising performance. Besides directors who differ in demographic characteristics, having cognitively diverse directors (from different professional backgrounds) may also help boards to make better decisions.
Ensuring the independence of directors. Whilst long-tenured directors may add value from a knowledge continuity perspective, new directors can bring new ideas and views, and help to enhance the board dynamic inside the boardroom. Periodic board renewal and turnover also help to ensure that the relevant skills, knowledge, experience and behavioural norms are always in place.
How have the rules of corporate governance changed since the pandemic? Which stakeholders have been the most affected? How do you think this is going to change in the new normal?
The pandemic has certainly upended everything, including norms we used to hold true. Some examples that come to mind:
Most risks do not exist in silos, but instead, they form complex relationship networks. As such, even high-impact but low-probability risk scenarios cannot be disregarded. Companies had seen how that ‘just-in-time’ supply chain operations were throttled as a result of unexpected border closures, regional lockdowns, manufacturing plants shutdowns, and quarantine orders during the pandemic. The recent sanctions imposed by the international community on the Russian government and Russian companies will also result in customs and import restrictions, further exacerbating the supply chain pressures. As a result of the conflict, commodities prices have soared to their highest levels since 2008 and will remain elevated for months.
Such external events have highlighted the need for boards to sharpen their focus on the company’s risk profile, and to task management with building resilience before the next crisis. Boards and management need to proactively identify, quantify, and respond to risks such as supply chain and geopolitical risks.
Boards may need to help management plan for scenarios more intently and purposefully to ensure that sufficient measures are in place to minimise financial and operational hiccups. In times of increased volatility and limited historical precedence, analysing and preparing for multiple plausible scenarios can help organisations identify the corresponding business implications for each scenario and determine the best strategic actions. Regularly having tabletop exercises will build the organisational 'muscle memory' of crucial processes and communications when responding to a risk event.
Investors are increasingly using Environmental, Social, and Governance (ESG) factors to evaluate companies’ material risks and growth opportunities. Societal expectations of business have changed significantly. The way in which business leaders and companies took care of their staff during the COVID-19 pandemic were crucible moments, leaving an indelible impact on stakeholders.
Due to the war in Ukraine, companies have come under public and political pressure to make a definitive break from Russia, as a show of solidarity. Firms that moved quickly have earned reputational rewards for exiting Russia. However, this raised questions about the long-term implications of doing business, the responsibilities of companies in crisis settings, and corporate responsibility standards.
The precedent set by companies pulling operations out of Russia so swiftly means that boards and their management may need to always evaluate their relationships with government-controlled or government-owned entities and have a plan ready. They will also need to be more mindful about doing business in locations with human rights violations.
AGMs can happen virtually. We have seen many companies holding their AGMs virtually during the pandemic. Whilst these arrangements are more accessible and have boosted shareholder attendance rates, these meetings are also less interactive since shareholders are only able to participate and vote online. Some advocates have also raised concerns that such meetings are less transparent since there are restricted opportunities for “live” question-and-answer sessions. A 2020 research paper published by the Harvard Law School Forum on Corporate Governance showed that the average running time of virtual shareholder meetings is shorter by 18% than that of in-person meetings and the time spent answering questions by 14%. With more shareholders becoming familiar with remote meeting formats, it is likely that hybrid AGMs may become the new normal, instead of wholly virtual AGMs. Such hybrid AGMs will help companies better engage with a wider pool of shareholders.
Likewise, having quickly pivoted to remote work, many workers have grown accustomed to its convenience and flexibility and are keen to continue working remotely in some capacity. Whilst this has added efficiency and increased the happiness of staff, such arrangements also have their issues. For example, how do companies keep remote employees connected and foster collaboration? What policies should management adopt so as to offer a consistent employee experience? In addition, management needs to ensure that internal controls are robust since remote working arrangements expose the organisation to greater cyber security, data breaches and insider risks. Going forward, the hybrid workplace will stay. Boards will need to assess their management’s progress in this area, in terms of having the right talent strategies and nurturing an employee-centric, purpose-driven culture that is underpinned by ESG values.
In what ways can the government help regulate the processes and rules involved in corporate governance?
Good corporate governance ensures that the interests of all stakeholders are considered. Stock exchange regulators can help to monitor and step in where necessary or when progress seems to be slower. For example, investors and other stakeholders have lobbied for many years, for companies to increase gender and other diversity on their boards. Whilst some progress has been made, board diversity continues to increase slowly. In fact, the pace at which women are being appointed to boards of SGX's 100 largest companies has slowed, according to the Council for Board Diversity's data. SGX’s decision to mandate the disclosure of board diversity policies will improve gender diversity on publicly listed company boards, and this is similar to the approach taken by other jurisdictions, such as Nasdaq and Hong Kong Stock Exchange.
What recent developments have your clients been working on? Any trends that you have noticed or you would like to share with us?
The board’s focus on strategy, risk, talent and the workforce, and corporate purpose will be sharpened even more in the next few years. More directors will also be taking corporate governance practices seriously. These are due to the following trends:
Increased board diversity – in Singapore, SGX has mandated that companies disclose their board diversity policies. With more female directors, and younger directors joining the boardrooms, diverse views are likely to emerge. Whilst the younger directors may not have as rich and wide experience as the more experienced directors, they do represent the voices of the new consumers and employees.
Risk and oversight. COVID-19 has resulted in widespread supply chain disruptions and the ongoing Russia-Ukraine conflict has exacerbated supply chain pressures for many companies. The risk landscape is ever-changing, and the role of the board is critical in this aspect.
Stakeholder capitalism, which goes hand in hand with environmental, social, and corporate governance (ESG), has gained steam in the last few years. Increasingly, business leaders are asked to define a clear purpose for their organisations beyond generating profits. Employees are looking to work for an organisation that has true purpose and meaning, and one that operates with high ESG standards. This strong movement ensures that we all build back better and don’t go back to business-as-usual. Boards will be facing new expectations and accountability going forward. They will need to ensure that their management understands the needs of their stakeholders and that stakeholder interests are taken into consideration during the decision-making process.
As a judge in the Singapore International and National Business Awards, what projects or innovations are you expecting to find amongst the entries?
Singapore is ranked first in KPMG’s global ranking of leading technology innovation hubs outside of Silicon Valley/San Francisco in 2021. I am expecting to see projects that use artificial intelligence and/or machine learning to solve everyday issues. Hopefully, some of these projects are solutions that will also help encourage individuals and/or businesses to rapidly and broadly adopt innovative and more sustainable consumption patterns.