- King IV may improve business sustainability
Focus on opportunity alongside risk will add balance
The recommended practice from the King IV Code on Corporate Governance to suggest that Risk Governance should include a focus on opportunities and the associated risks in strategy development, will go some way towards developing even more sustainable and successful businesses into the future.
Carla Clamp, Director: Advisory Services at Grant Thornton believes this move, which will highlight the potential positive and negative effects which this approach will have on the achievement of objectives, will add balance to the way companies view their business objectives overall and how they report on their activities and outlook.
“At the moment there is still a strong focus on ‘downside’ risk identification and risk management strategies, and while this is important information for shareholders, it often leads to short-term thinking as company management teams consume themselves with navigating their short- to medium-term challenges, without the reciprocal focus on the opportunities for the business in the longer term” she says.
This is exacerbated by short-term reporting timelines and the desire to manage shareholder expectations.
Clamp believes the focus on the longer term is an important measure in order to drive sustainability in the corporate culture.
“Ultimately, a good corporate citizen recognises that their business is not just there for the next one, two or five years, and commits to building a strong foundation for the next 20 or 30 years. This requires a shift from thinking defensively about managing potential problems, to a focus on actively creating the future for the company.”
She adds that when reporting on opportunities and risk, this does not mean companies need to give away their trade secrets. “This change is more about encouraging management teams to think about opportunities in order to get ahead of the curve.”
Grant Thornton Director: Advisory Services, Michiel Jonker, concurs. He believes this development is especially important given the South African context at the moment.
“We are in a recession, while the growth trajectory for the rest of the world is also quite flat. A ‘siloed’ focus on risk management, while businesses are struggling, will not bring about the expansion our economy desperately needs.”
He says it has become crucial for all businesses to regularly scan the environment for opportunities.
“This should not be limited to the immediate business or industry environment, but it should include broader developments – regardless of how far afield or removed they seem. This is the only way companies can really spot trends, emerging issues and weak signals,” he says.
While many businesses may believe they have a sound strategy, Jonker argues that this very rarely encompasses all the factors that may influence an organisation’s future.
“When company directors update their strategies, they usually make incremental improvements on what they have done in the previous year. This will not bring about meaningful change in their future, as businesses too often accept the industry norm,” he says. “Proper long-term foresight involves taking a step away from the current situation of the business and industry, and looking beyond a five-year horizon. This would enable leadership teams to spot those trends and signals that cut across various industries to ultimately disrupt the way they are used to operating.”
Jonker laments, however, that unfortunately this does not seem to be a priority for the majority of South African businesses.
“Our quarterly International Business Report research for the second quarter of 2017 to end June this year indicated that over half of companies in South Africa (53%) believe disruption and innovation will have little impact on their operations. This is a major concern, as it means local businesses are not sufficiently prepared for significant industry change.”
“A good example is 3D printing – while many may still think of it as a technology gimmick, it can bring substantial change to industries, ranging from manufacturing to medical services,” says Jonker. “Some applications of 3D printing have already moved outside of Gartner’s ‘Trough of Disillusionment’. Businesses will only be able to plan for these changes if they change their mind-set from risk management to thinking about a wide range of opportunities regularly. This involves removing the blinkers from leaders’ eyes and acknowledging changes that seem to go against the company’s business model or core product. For example, the CEO of Shell recently said his next car will be electric, in recognition of the way the world is moving away from fossil-fuel dependency.”
He concludes: “Over the past ten years, companies have become much more transparent in communicating their risks to stakeholders, which has helped them plan for the immediate future. However, the only way to ensure sustainability for the next generation and build businesses in our uncertain world, is by paying equal attention to identifying and pursuing opportunities.”