- Strategic foresight is a crucial component of responsible corporate governance
By Michiel Jonker, Director: Advisory Services, Grant Thornton
Corporate governance professionals have been claiming for decades that the constant pressure from shareholders to deliver ever-increasing growth and performance every year could result in management misconduct.
This has led to corporate governance frameworks, such as the various King Codes on Good Governance, becoming increasingly important over the recent decades. In addition, a multitude of different audits that provide different levels of assurance to boards, executive management and shareholders were also implemented.
Following the Enron scandal in 2001, there was increased pressure on company board members, as well as audit and risk management professionals, to step up their game. However, judging by recent local and global headlines, this was not enough, and those tasked with providing assurance still seemingly missed crucial red flags.
How do we still miss the warning signs?
With so many governance principles and practices embedded in organisations by now, the question is whether the risk management frameworks are to be blamed, and if the audit and risk professionals are part of the problem?
It is imperative that shareholders, board members, executive management, as well as audit and risk professionals share responsibility and accountability for good corporate governance.
However, the intense pressure to deliver consistently improving performances over a short period is probably one of the most significant causes of corporate misconduct. In order to pull the proverbial rabbit out of the hat every quarter, are we surprised if executive management falls into the trap of manipulating performance reporting and company financials? We have to realise that it is not always possible to perform miracles over the short term, and this ‘short-termism’ is not good for the organisation’s long-term survival prospects either.
This is yet another illustration of the importance of a long-term strategic vision for any successful organisation. Corporate foresight is knowledge or insight gained by looking into the future – so to speak – by connecting the ‘dots of change on the horizon’, according to futurist Keen van Heijden. According to van Heijden, corporate foresight “is the ability to recognise the signs of change that inevitably affect every organisation, to understand their significance and how the organisation should adapt accordingly”.
Long-term focus rewards shareholders
These ‘dots’ on the horizon are future events and conditions which present both opportunities and risks to a business, disguised as weak signals, emerging issues and trends in the industry and contextual environments.
Recent research has shown that businesses with corporate foresight practices in place, perform better over the long term. Professor René Rohrbeck, from the School of Business and Social Sciences at Aarhus University, Denmark, and Menes Kum, from the University of Münster, Germany, published an academic article in December 2017, stating that the right level of future preparedness boosts a firm’s ability to attain superior long-term performance.
The research revealed that vigilant firms – those where strategic foresight practices match their need for strategic foresight and have the right level of future preparedness – had a 33% higher profitability and a 200% higher market capitalisation growth – for those listed on the stock exchange – when compared to the sample average.
The firms with future preparedness deficiencies had to accept a discount of 37% to 44% in terms of profitability, and - 49% to -108% in terms of market capitalisation, when compared to vigilant firms.
The study also found that many of the vigilant organisations had dedicated futures research functions, interacting with traditional functions such as marketing, strategy and research and development.
This is irrefutable proof that corporate foresight practices, focusing on the medium and long term, have to become part and parcel of corporate governance and risk management frameworks and practices. It is the only way we will build sustainable businesses that are strong enough to withstand future shocks.
Changing organisational behaviour
In terms of the current corporate environment, there are changes that every company can make to aid ‘long-termism’ in the firm. In any complex system it is important to identify the leverage points offering the most effective and efficient change. While we cannot control people’s psychological undercurrents, we can in a systemic manner remove the impetus for negative behaviour.
As shareholders and stakeholders, we can require of executive management to balance their short-, medium- and long-term horizons, and incentivise them accordingly, by allocating a higher percentage bonus and other incentives for the achievement of medium to long-term strategic objectives. In this way, the pressure would shift from achieving unrealistic short-term objectives to more sustainable and realistic growth over the long term. It would also serve to guarantee the long-term viability of the business, and incentivise executive management to commit themselves to the long-term success of the organisation.
Strategic foresight development is a critical phase which should be placed right at the beginning of traditional strategy planning, and have a continuous presence in any business. Smaller organisations would do well to consult a futurist on an ad hoc basis, as the competitive and contextual environments are continuously changing and developing. Corporate foresight and future readiness practices have to be a crucial component of good governance and risk management frameworks, for those businesses that wish to succeed in future generations.