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An effective way to increase supply-chain resilience is to understand the impact a crisis could have, well before it happens. Over the past two decades, global supply chains have become the norm. However, procurement and supply-chain professionals have faced a series of ever-more-frequent global and regional challenges in recent years, from natural disasters to escalating trade tensions between major economic blocs. As a result, there has been a shift of focus to the challenge of mitigating risk and assessing the resilience of supply chains. The COVID-19 pandemic has raised the topic of supply-chain resilience and rebalancing to boardroom level. Even brief, 30-day disruptions caused by supply-chain vulnerabilities can result in 3 to 5 percent EBITDA margin gaps. As companies look for ways to reduce their exposure to supply-chain risks, we estimate that up to $1 trillion in trade flows in the industrial sector could be rebalanced, and a few countries have the potential to become major destinations of relocated production. Furthermore, advances in technology—and the large-scale adoption of automation and digitization—have reduced the focus on labor cost, further increasing the need for companies to test their supply chains holistically for cost, speed, and risk.
On April 2, China’s Luckin Coffee announced that some of its employees, including the chief operating officer, had fabricated over $300 million in reported revenues. On April 21, the Securities and Exchange Commission and the U.S. Public Company Accounting Oversight Board alerted investors that firms based in “emerging markets, including China,” often do not satisfy the auditing standards normally met by firms traded on U.S. exchanges. In May 2020, the Nasdaq Stock Market ordered Luckin to delist and proposed stricter listing requirements for firms based in markets that restrict U.S. regulators’ access to information. Concurrently, the U.S. Senate enacted, and the House of Representatives is now considering, legislation to bar firms from U.S. exchanges if they do not comply with certain audit oversight requirements.
From oversight to foresight: boards must adopt a futurist mindset to reduce the risk of missing out on the next big thing. How will we emerge from this current pandemic in a way that we can be proud of? How will we help protect our organizations while supporting a strategic shift to creating long-term value? Will we look back and be confident that we took adequate time to truly look forward and reframe the future? These are some of the questions that undoubtedly are occupying board members’ minds right now. While management contend with resiliency throughout this critical time, boards need to adopt a “futurist” mindset in order to ensure organizational sustainability in the long-term. In other words, they need to recognize and respond to how society is shifting in a post-pandemic world. Some of these shifts were already happening but have now been accelerated. As an example, technologies such as artificial intelligence (AI) and the internet of things were already transforming everything from consumer behavior to the nature of work before COVID-19 arrived. [...] Of the eight megatrends (decarbonization, techonomic cold war, behavioral economy, synthetic media, future of thinking, work and life unbounded, microbiomes and synthetic biology), the EY Global Center for Board Matters has identified four that have the most impact and applicability across boardrooms in every industry, geography or governance model. These are:
(1) Decarbonization
(2) Behavioral economy
(3) Future of thinking
(4) Work and life unbounded
When the European Union first suggested a tax on financial transactions a decade ago, the idea was savaged by banking lobbyists and nixed by many of the bloc’s members. The U.K. said it was “madness.” The initial ambition to raise up to 35 billion euros ($40.6 billion) a year was reduced to a mere 3.5 billion euros, with only 10 countries agreeing to take part. As of last year, the project was barely alive. But the pressure of how to pay for the Covid-19 pandemic has resurrected the scheme, and the absence of the Brexiting Brits has helped. As the EU’s 27 members move forward with a 750-billion euro recovery fund to prop up those nations worst affected by the virus, they’ve given their blessing “in principle” to new EU-wide tax powers to beef up Brussels’s finances. A levy on financial transactions — as well as ones on digital services, carbon and plastic — will be considered. This is a statement of intent from France and Germany, the EU’s dominant powers and backers of the financial levy, on reshaping Europe after Brexit. Tax policy is very much the preserve of national governments, and is jealously guarded as a result. Back in 2013, the U.K. was so rattled by the idea of a financial transactions tax — where a fraction of a percent is levied on bank trades — it tried to sue to stop it. Still, we’re a long way from a truly pan-European “Robin Hood” or Tobin tax. [...] Even the vanguard of countries leading the charge are pushing a levy that looks more symbolic than severe. The latest proposed incarnation resembles a stamp duty, charging about 0.2% for buying shares issued by listed companies with a market capitalization of 1 billion euros and above. Any lobbying push against this tax might get a sympathetic hearing, given that France and Germany are at the same time softening financial regulation under the MiFID II scheme to encourage trading and investment.
We began discussing this publication in January 2020, before global pandemic and social unrest became central topics of everyday conversation. The impact of COVID-19 is devastating at the individual, local, national, and global level. It has created huge immediate changes to how and where people interact, and how business is done. For many organizations, it has also thrust the future of work (FOW) to the forefront, as management and workers grapple with changes today and prepare for a different and uncertain tomorrow. In many ways, the current environment has illuminated possibilities and opportunities that many organizations previously shied away from, but that are now accelerating the pace of change as management meets the challenges of now in preparation for now and the future. While organizations continue to work through the near- and long-term effects of the pandemic, one of our initial observations is that companies leaning in on their future of work agenda appear to be better positioned to weather the impacts of this global disruption. These companies have strategized and planned for the what, who, where, and how of a shifting work landscape, proactively expanding their future of work portfolio over time, providing options for ongoing “forever” virtual work options, addressing and bolstering immediate needs for technology and connectivity, and implementing new ways of looking at jobs and interactions with the organizational ecosystem.
The frequency with which companies fail—seemingly without any warning signs—has grown in recent years, with Wirecard the latest example. Auditing needs reform. A massive shakeup of the UK’s audit industry is on the cards. The Big Four, which audit all of the FTSE 100 and 21 of the FTSE 250, have been told by the accounting regulator to separate their auditing practices by 2024. It follows the collapse of Wirecard, a payments firm which recently admitted that €1.9 billion of the cash on its books may not exist. But change has been a long time coming. The frequency with which companies fail—seemingly without any warning signs—has grown in recent years and Wirecard is merely the latest example. Carillion, BHS, Thomas Cook, Patisserie Valerie, and many other companies were given clean bills of financial health by their auditors before collapsing. eparating the Big Four’s auditing arms from the rest of their business is a welcome development. We believe that these many failings highlight how the auditing industry is not fit for purpose. The perception of the public is that it is the job of auditors to go over a company’s books and make sure everything is in order. Surely they should be able to spot a looming disaster or better raise concerns about the direction a company is travelling in? Yet so often they fail.
Boards must focus on long-term value, culture and talent to drive organizational transformation in a post-COVID-19 world.
There is no question that the COVID-19 crisis has fundamentally changed the way businesses operate. Expect the unexpected is the new mantra, yet some changes appear inevitable: a greater number of employees will work from home more frequently, supply chains will be reorganized to maximize agility and flexibility, and technology will feature more prominently. Customer behavior will also shift. The experience of COVID-19 will reset the relationship between customers and business, with many more customers demanding that the businesses they purchase from play a role in addressing key societal challenges. The rise of social capital – the networks around companies and their shared norms, values and understanding – which was evident before COVID-19 shook the world, is now firmly on the agenda. There are numerous ways boards can assist their organizations address these areas, but three that provide the foundation for the support structure boards must deliver are: (1) Defining – and living – a strong purpose that drives long-term value, (2) Instilling a culture of continuous change and (3) Developing a future-fit workforce.
Canadian soldiers were slowly fighting their way up the Italian peninsula, with the Normandy landings a year distant, when Ottawa last amassed debt at the rate it is now. That year, 1943, Canada’s borrowing accelerated, part of a six-year spree to fight fascism that resulted in the national debt more than tripling. But over the three decades after the end of the Second World War, those massive debts shrank in relation to the economy. Pent-up demand, the start of the baby boom and the relative strength of manufacturing all helped the Canadian economy expand at a rapid clip year after year, and in the process, made the large debts of 1946 comparatively smaller. Some economists, and media analyses, have pointed to Canada’s fiscal record in the postwar period as a reason not to be greatly concerned about the large and growing bills to fight the coronavirus. But a look back through Ottawa’s finances in the 1940s and 1950s shows that many of the factors that allowed the debt burden to fall so rapidly are either absent in today’s economy, or pulling in the opposite direction. Even with sustained economic good fortune, years of fiscal discipline were needed to tame the debt. [...] Both economists say there is one similarity, at least, between Canada’s fiscal situation eight decades ago, and the present: low interest rates.
The objective of this study is to examine empirically the impact of good corporate governance on financial performance of United Kingdom non‐financial listed firms. Agency theory and stewardship theory serve as the bases of a conceptual model. Five corporate governance mechanisms are examined on two financial performance indicators, return on assets and Tobin's Q, employing cross‐sectional regression methodology. The conclusion drawn from empirical test so performed on 252 firms listed on London Stock Exchange for the year 2014 indicates a positive or a negative relationship, but also sometimes no effect, of corporate governance mechanisms impact on financial performance. The implications are discussed. Thereby, so distinguishing effects due to causes, we present a proof that, when the right corporate governance mechanisms are chosen, the finances of a firm can be improved. The results of this research should have some implication on academia and policy makers thoughts.
What is the job of a company’s chief executive officer and, more generally, its management team? This classic question of economics seems bland on the surface, yet it has made an appearance in the 2020 presidential race. How political leaders answer it may determine the future of American corporations and of much social policy as well. If you open any standard economics textbook, such as one of mine, you will be told that a firm’s objective is to maximize profit. That goal is sometimes described as maximizing shareholder value, which is roughly the same thing because the value of a firm’s shares depends on its current and future profitability. Given the vast range of economic and political problems the world faces, this approach is often said to be too narrow. And in a recent interview, former Vice President Joseph R. Biden Jr., the presumptive Democratic nominee for president, joined in the criticism. “It’s way past time we put an end to the era of shareholder capitalism, the idea the only responsibility a corporation has is with shareholders,” he said. “That’s simply not true. It’s an absolute farce. They have a responsibility to their workers, their community, to their country.” Mr. Biden echoed a stand taken last year by the Business Roundtable, a lobbying group. In a new “Statement on the Purpose of a Corporation,” 181 chief executives belonging to the organization committed themselves “to lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.”
Officially issued digital currencies could help usher in negative interest rates. America’s federal reserve recognised the disruptive potential of electronic money long ago. “This is a service which it is expected will be more and more availed of as the ease and economy of using it are understood,” its New York arm declared in a report. The year was 1917, and the Fed had just started allowing banks to transfer funds by telegram free of any interest charge. More than a century on, central banks are grappling with another technological revolution: the rise of mobile payments and the turn away from cash. Just as in the early 20th century, when central banks created telegraph transfer networks, they are now coming to the view that they must design their own digital-payment networks in order to retain control of their monetary systems. One idea gaining favour is to issue a so-called central-bank digital currency (cbdc), which would exist only as electrons on a computer chip, rather than a coin or bill. Roughly 80% of central banks are doing some kind of cbdc work, from research to trials, according to one survey. Although still early, it is a trend that could give rise to tantalising new possibilities for monetary policy.
On 21 July, EU leaders agreed on a €1.8 trillion package that should boost the recovery after the COVID-19 crisis, but also contribute to the advancement of key EU societal objectives, starting with the climate transition. In this blog post we assess the green ambitions of the package and evaluate its consistency with the European Green Deal. After 91 hours of negotiations, EU leaders agreed on 21 July on a €1.8 trillion package that will contribute to the EU’s economic reboot after the COVID-19 fallout, as well as to the advancement of the key EU societal goals, starting with the climate transition. The package combines €1,074.3 billion for the EU budgets for 2021-27 (ie, the so-called Multiannual Financial Framework, or MFF) and €750 billion for the new EU Recovery Instrument called Next Generation EU (NGEU). This is sizeable, and also represents a major step forward for the EU given the first-time use of EU borrowing to fund grants. Over the last months, both President von der Leyen and President Michel pledged to focus this package on the Von der Layen’s Commission “top priority”: the climate transition. In this blogpost, we assess the green ambitions of the agreed package and evaluate its consistency with the European Green Deal. [...] Final verdict: It is fair to say that the package does not betray the European Green Deal. It is now up to individual EU countries to submit national recovery plans that are really green, and to the European Commission to duly monitor them. In general, this is the greenest recovery plan the world has seen so far.
The economic consequences of the COVID-19 pandemic have upended countless budgets for 2020 and rendered long-term forecasts speculative at best. By now, most companies providing financial guidance have withdrawn it. Uncertainty abounds. All the while, investors, proxy advisors, and other constituencies continue to demand pay-for-performance. Media and critics of executive compensation are culling through filings in search of companies taking actions that could be perceived as friendly to executives at the expense of stakeholders that may run counter to a strict pay-for-performance philosophy. Common modifications that may be taken in the current market to set more reasonable financial goals for long-term incentives (e.g., three consecutive one-year goals or use of discretion) risk being criticized by investors if outcomes do not surpass the goals set before the full impact of COVID-19 was apparent. In the absence of a reliable goal-setting process, compensation committees facing pressure to demonstrate pay-for-performance may increasingly turn to relative total shareholder return[1] (RTSR). Before 2020, the use of RTSR as a performance metric was usually part of the conversation. Today, in part due to the difficulty to forecast reasonable financial goals, a discussion of long-term incentive metrics is remiss without consideration of RTSR. RTSR requires no goal setting, is simple to adopt, provides a defensible link to shareholder value, and has historically been accepted by shareholders and proxy advisors.
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There’s no one right way to organize R&D. But a set of core design principles can provide the flexibility R&D organizations need to outpace competitors. Across engineered industries, the explosion in software has increased product complexity by an order of magnitude. Along with rapidly evolving technologies, fast-changing consumer preferences, accelerated product cycles, and the practical realities of globalized operations and markets, R&D departments are under unprecedented strain. As product variation grows and product portfolios expand, updating existing products compounds the already heavy load R&D organizations bear. Yet amid these 21st-century challenges, R&D units are still following 20th-century models of organization—models not designed for today’s need for speed and the expanding web of interdependencies among all of the moving parts. The traditional component-based approach to R&D is no longer sensible in an era when digital and electronic systems are so thoroughly integrated with hardware. Still many companies struggle to shift toward an approach that focuses more on the function the customer wants, rather than the components that make the desired function work.
ISS and Glass Lewis have arrogated to themselves the power to make law, promulgating a civil code of astounding breadth and detail, ruling over decisions on board composition, director qualifications, term limits, majority voting standards, executive compensation, capital structure, poison pills, staggered boards, the advisability of mergers, spin-offs and recapitalizations, and, increasingly, ESG policies ranging from animal welfare to climate change, diversity, data security and political activities. They enforce this civil code by advising their clients, institutional investors with huge, varied and increasingly concentrated holdings across the economy, to vote against proposals or against directors if any aspect of the new civil code is disobeyed. The vote of these clients is often decisive, and the implications of the votes – especially when considered in the aggregate – have far-reaching consequences for the operation and performance of US public corporations.
This paper investigates if and how a peer’s bankruptcy affects financial reporting by other firms within the industry. Prior research documents that the bankruptcy filing of a peer firm has a negative capital market effects on other firms within the industry (lower stock market value and higher cost of debt). We argue that firms within an industry experiencing peer bankruptcies may modify their financial reporting to mitigate such negative capital market effects. Using a large sample from 1980 to 2018, we find that firms exhibit more conservatism in financial reporting following a peer firm bankruptcy filing. The result is robust to the exclusion of distressed industries, the 2000 dot-com crash period, and the 2008 financial crisis period. The results are insignificant for placebo bankruptcies one and two years before the actual bankruptcies. Further analysis shows that the spillover effects are more pronounced for firms in low concentrated industries, for firms that undertake new equity or debt financing, and for firms with a higher percentage of independent directors.
CEO succession planning is one of the most important responsibilities of a corporate board, and one of the most challenging. In the best of circumstances, directors are working thoughtfully to anticipate the future, develop potential successor candidates over several years, and to ultimately have one of them step into the top spot. In emergencies or other unexpected circumstances, there is a great sense of uncertainty as to whether the board is selecting the best leader, or just the best leader available right now. It is an expensive question to answer. By one estimate, replacing a ill-chosen or short-tenured CEO leads to a loss of $1.7 billion in shareholder value in addition to a loss of organizational confidence and momentum. [...] These are the six questions boards should be asking:
(1) Is our emergency successor still right for this environment? [...]
(2) Is our CEO role specification still right? [...]
(3) Do we have the right people in our near-term succession pipeline, and are they prepared? [...]
(4) Do you need to reevaluate external talent options? [...]
(5) Do you have the right team in place?
(6) Is your board ready, aligned and able to have these discussions?
While diversity on boards of directors has been a high-profile issue for many years, and public companies have made notable progress in diversifying their boards over the past two decades, public companies now face increased pressure to move beyond verbal commitments and incremental progress. Investors, proxy advisors, and activists are demanding data-driven, measurable changes. They are leveraging litigation, legislation, shareholder proposals, and direct engagement to push companies to increase their commitment to diversity, to disclose their diversity data, and to make significant financial investments in diversity initiatives. Both gender and racial diversity are in the spotlight now. A recent lawsuit by a shareholder of Oracle Corporation has opened a new line of attack on companies that have been slow to diversify their board membership and executive leadership team. The complaint alleges that Oracle’s failure to appoint racially diverse directors and officers—while making public statements avowing a commitment to racial diversity—constitutes securities fraud. The premise of the lawsuit, and the relief sought, are likely to provoke significant debate and some degree of change, regardless of the outcome of the litigation.
On July 10, the Securities and Exchange Commission (SEC) proposed a 35-fold increase – from $100 million to $3.5 billion – in the threshold for requiring institutional investment managers to publicly report their equity holdings on Form 13F.[1] This is a remarkable development at a time when issuers and large sectors of the market are demanding more, not less, transparency from investment managers, particularly activist hedge funds. [...] Form 13F reports offer public companies an important and practical way to identify and engage with many of their shareholders.[3] The reports are particularly useful for smaller issuers that may not be able to afford more costly stock-surveillance programs. Without the reports, issuers would be left to rely on Schedule 13D and 13G reports filed by beneficial owners of 5 percent or more of their stock.
Canada’s Big Six banks face growing loan losses as government support programs wind down and loan-deferral and interest-rate relief programs for consumers come to a halt. Banks have been gearing up for big losses from loan defaults that could arise from the COVID-19 pandemic’s economic hit, as millions of Canadians lost their jobs and businesses shut down to comply with physical distancing measures. Canada’s big banks have already booked about $11-billion of provisions for credit losses in anticipation of projected losses from an array of debt, such as credit cards, credit lines, mortgages and other loans. Despite the economic plunge, consumers have so far remained largely current with their debt obligations. Personal insolvencies are below average and credit payments have remained stable. That stability has been made possible by extensive government programs, such as the Canada Emergency Response Benefit for people out of work and a wage subsidy provided to hard-hit businesses to keep staff working. The CERB, however, is set to expire in the fall and the wage subsidy is set to end in December.
Activist investing in the U.K. has been getting into its stride
these last few years. The number of companies publicly
subjected to activist demands hit record levels in 2018 and
2019. Special meeting requisitions for board representation
trended above the average for the past three years. U.S.
activists publicly targeted a record number of companies in
2018 and continued to be a vociferous presence throughout
2019. Of course, that has largely ground to a halt with the
impact of COVID-19. As companies rushed to protect their
employees and customers and indefinite lockdowns caused
financial projections to be thrown out of the window, activist
investors retreated. The number of companies publicly
targeted by activists fell from 32 in the first five months of
2019 to 14 in the same period in 2020. [...] In 2019, the U.K. overtakes Canada to become the fourth-busiest market for activism in the world after the U.S., Australia, and Japan
Many chief executive officers at U.S. companies are paid too much -- and investors aren’t holding corporate boards accountable, a senior official at the country’s largest public pension fund said. The too-generous compensation happens despite talk that executive pay is linked to performance, said Simiso Nzima, head of corporate governance at the $389-billion California Public Employees’ Retirement System, which has taken action on the issue: In the first half of the year, it cast votes against pay plans at 1,165 firms, or 52% of portfolio companies that held votes. The numbers are rare in the world of asset management, where big investors rarely dissent on such matters. Its voting record makes Calpers one of the most adversarial institutional investors when it comes to executive compensation. [...] The pension also voted against 2,716 directors who sit on compensation committees and are responsible for setting executive pay. “You have to believe they know they’re overpaying but not doing anything about it, or that they don’t realize it and someone has to tell them,” Nzima said in an interview. While the say-on-pay vote is merely advisory, votes against directors can be embarrassing and be fodder for activist investors seeking to argue that the company’s leadership is out of touch with shareholders. The fund also engages with companies on topics like climate change and boardroom diversity.
As the coronavirus began shuttering the global economy in March, critical parts of U.S. financial markets edged toward collapse. The shock was huge and unexpected, but the vulnerabilities were well known, the legacy of risk-taking outside of regulatory reach. To head off a devastating downward spiral, the Federal Reserve came to Wall Street’s rescue for the second time in a dozen years. As investors sold a vast array of holdings and rushed to the comparative safety of cash, the Fed pledged to become a buyer of last resort to restore calm to critical markets. That backstop bailed out many people and investment firms, including a class of hedge funds that had been caught on the wrong side of a trade with ample risks. The story of that trade — how it went wrong and how it was salvaged — offers a cautionary tale about important issues Congress did not address in the 2010 Dodd-Frank financial law and the Trump administration’s hands-off approach to regulation. [...] Tougher regulation in the formal banking sector has pushed risk-taking to the shadowy corners of Wall Street — areas that Dodd-Frank left largely untouched. [...] Hedge funds are one risk left unaddressed. Some regulators had warned for years that a certain type of hedge fund — so-called relative value funds — could struggle in a stressed market. Officials also warned that they could not tell how big a risk such funds posed because they did not have enough information about their trades and how much money they were borrowing.
Brooks Brothers recently joined a long line of American businesses filing for bankruptcy amid the pandemic. This news didn’t come as a huge surprise, since sales at the 200-year-old retailer were already challenged by relaxing corporate dress codes prior to the COVID-19 outbreak. In early July, Montreal-based DavidsTea—which was also struggling with declining sales before the coronavirus crisis—was added to Canada’s list of pandemic-related business failures after it applied for protection from creditors under the Companies’ Creditors Arrangement Act. As the health crisis persists, of course, even ventures that were thriving before social distancing measures disrupted the global economy are failing. And the numbers could significantly increase if a second wave of COVID-19 catches us all off guard. That’s the bad news. The good news is that corporate managers don’t have to play defense, since many of the business failures in question are partly due to a failure to innovate. In other words, instead of spending all their time and energy reacting to the chaos created by the pandemic, managers can go on the offensive. In a recent IBJ Insight entitled “Building Corporate Resilience,” Ivey Business School Professor David Loree examined how organizations can better prepare themselves for unexpected challenges by ritualizing ingenuity, or bricolage—the ability to improvise a solution to a problem by making do with whatever is at hand. This article explores how companies can make themselves more competitive by understanding how crises open the door to innovation, then offers advice on how to foster innovation in good times and bad.
In a new paper, “Protecting Contract’s Hidden Parties,” I argue that harm to third parties from supply chains offers a compelling reason for requiring human rights due diligence in supply chains. Many scholars have turned to fiduciary duties or negligence theories to create incentives for companies to consider non-shareholder interests. My article shares this objective but takes a different path by examining a corporation’s duties to others in its role as a contracting party. This analysis can help to address human rights violations in supply chains and may also have implications for third-party harms arising in other types of contracts. Labor and human rights violations by major companies are legion. [...] In order to address these and other human rights violations, the United Nations Guiding Principles on Business and Human Rights (UNGPs) recommends that businesses have a “human rights due diligence process to identify, prevent, mitigate and account for how they address their impacts on human rights.”[4] However, not all businesses implement these principles.
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