Navigating unprecedented risks: Insights from the Diligent and Governance Institute of Australia roundtable discussion
On May 8, 2024, in Melbourne, Victoria, Diligent and the Governance Institute of Australia (GIA) hosted a roundtable discussion on the unprecedented risk landscape facing corporate directors. We brought together 25 corporate directors from leading Australian companies and heard insightful opening remarks from Dottie Schindlinger, Executive Director of the Diligent Institute, Diligent’s corporate governance research think tank. Schindlinger shared key findings from the“2024 What Directors Think” (WDT) report.
In this report we explore the expansive roundtable discussion and draw insights from other more recent Diligent Institute reports and findings. We look to take the pulse of corporate governance discussion and highlight the geographical trends and differences indicated in the discussions and data we have seen.
Understanding the global risk landscape
The “2024 What Directors Think” (WDT) report drew comprehensive analysis from a survey of 300 U.S. public company directors. It identified the most significant external factors that negatively impacted company performance over the previous year. Top negative impacts as identified in the survey included interest rates, inflation, and labour market challenges.
Conversely, technological advancements, particularly in generative Artificial Intelligence (AI), and an increase in consumer demand were seen as the primary positive influences. U.S. directors we surveyed on their priorities for 2024, these included adding market share, streamlining operations, and attracting and retaining talent, with CEO and senior executive succession planning being a critical topic for upcoming board meetings. Notably, AI and cybersecurity emerged as the hardest areas to oversee, highlighting the growing complexity and importance of technological governance.
Source: What Directors Think, 2024; Corporate Board Member, BDO and Diligent Institute collaboration
Source: What Directors Think, 2024; Corporate Board Member, BDO and Diligent Institute collaboration
For over two decades,Corporate Board Member’s annual survey; What Directors Think, in collaboration with the Diligent Institute for the past 4 years, has asked the question: “If you were charged with setting the agenda for your next board meeting, which of the following topics would you include as the most pressing to discuss?”
This year’s findings offered a revealing glimpse into the evolving priorities of corporate directors. Traditionally, capital allocation, mergers, and acquisitions (M&A), and other core business issues have dominated board agendas. This year was no exception. However, an intriguing shift emerged: CEO and senior executive succession planning ranked as the second most pressing issue for the first time. This change reflects a post-pandemic realization among directors of the necessity for a deeper talent pool for top positions, especially as many Baby Boomer executives near retirement and younger generations are still developing the requisite leadership skills.
Cybersecurity remains a high priority too, reflecting its critical importance in today’s digital landscape. New to the board agenda this year is AI, appearing in seventh spot, signaling its growing awareness in corporate governance, its transformative potential and the challenges it presents. Other issues being actively monitored offer further insights into Board priorities. These issues include regulatory concerns, the economy, and cybersecurity as other top priorities. It's worth noting geopolitical concerns, particularly regarding China, would likely rank higher if the report were run more recently. In our survey geopolitical issues, including those related to China, place third on the monitoring list.
Oversight challenges
In this year’s survey, AI topped the list of the areas Directors find most challenging to oversee, narrowly edging out cybersecurity. Cybersecurity has remained near the top position for the past five years, underscoring the consistent pressure directors feel to prioritize digital security. The survey results reveal a significant alignment among Directors to prioritise AI and cybersecurity on board agendas. Boards view them as critical risks, while simultaneously finding them among the most challenging items to oversee.
Another interesting finding was the rising concern over talent below the C-suite, and corporate culture, both of which have claimed the third and fourth positions respectively for the first time. This shift underscores the impact of labor market pressures on board priorities. In a related report fromDiligent Institute and BitSight, titled cybersecurity, audit and the board, we found that how boards oversee risks like cybersecurity will directly affect companies' cybersecurity ratings and performance. This research suggests that companies where an audit committee, or a dedicated specialised risk committee, oversee cybersecurity may see better outcomes relative to companies that leave oversight to the board alone.
Findings from Cybersecurity, audit, and the board: How does board oversight impact cybersecurity performance?, A Diligent Institute and Bitsight collaboration
The data does show however, that Australia has one of the World’s highest prevalences of specialised risk committees, with approximately 9 out of 10 companies on the ASX 300 with such committees. Not surprisingly then, Australia’s ASX 300 also scores the third highest average cyber security rating. This underscores the report's finding that having the right governance structures can significantly improve a company's cybersecurity posture, potentially reducing an organisation’s reliance solely on the board’s oversight.
Findings from Cybersecurity, audit, and the board: How does board oversight impact cybersecurity performance?, A Diligent Institute and Bitsight collaboration
Findings from Cybersecurity, audit, and the board: How does board oversight impact cybersecurity performance?, A Diligent Institute and Bitsight collaboration
Australian directors’ risk priorities
Director’s attending the Diligent and GIA roundtable were asked to reflect on these insights, and the ensuing discussion explored which of these key risks resonated most with Australian corporate Directors. The consensus was clear among attendees: Cybersecurity and data privacy are paramount concerns for local directors. The evolving regulatory landscape and the pervasive threat of data breaches present significant challenges for Australian companies and their customers.
Additionally, Australian Directors mentioned the implications of AI, especially relating to authentication and identity verification, as emerging areas of focus.Geopolitical tensions, supply chain disruptions, and macroeconomic uncertainties further compound the external risks faced by Australian directors. These factors affect access to capital, market stability, and resource availability. Meanwhile, talent and labor shortages pose a significant risk internally for organisations, influenced by the post-COVID environment and shifting generational expectations. Corporate culture, director tenure, health, safety, and ESG (Environmental, Social, and Governance) considerations are also top priorities, impacting governance processes and the organization’s social license to operate.
Director roundtable attendees most pressing issues for Australian companies in 2024
| Cybersecurity & Data Privacy | Artificial Intelligence |
|---|---|
| Geopolitics | Supply Chains |
| Talent and Labour Shortages | Corporate Culture |
| Director Tenure & Succession Planning | ESG |
| Health & Safety |
In dissecting ‘What Directors Think’ of Australian governance trends, governance leaders expressed surprise at the average length of time Directors spend on boards.Long tenure can affect the ability of boards to remain impartial; for non-executive Directors, or independent directors, it is important they retain objectivity in boardroom discussions, something that may decrease over the length of their tenure. Many governance experts have documented how having longer tenured Directors can negatively impact the diversity and inclusivity of boards, diminishing progress made in these areas. It was agreed amongst attendees the need for a constant board member refresh to increase the knowledge base, retain independence and improve the overall diversity of the board.
Strategies for Enterprise Alignment on Risk
Attendees also discussed the need to achieve alignment across the enterprise on key risk areas as part of a successful risk strategy, which begins with the board’s proactive engagement at the highest levels. Directors must establish clear KPIs, monitor them rigorously, and ensure regular reporting and review by the board or its sub-committees. Boardsare also listening more to shareholder concerns and actioning broader ESG goals and sustainability objectives, tracking their impact and value creation through these lenses.To navigate the complex risk landscape effectively, boards must ask tough, insightful questions and acknowledge the growing need to educate themselves and take more ownership overall. This includes ensuring that risk committees are chaired by knowledgeable and skilled individuals.
The attendees also addressed the importance of cultural alignment, particularly in the context of remote and diverse teams, which requiresa focused effort to maintain without compromising inclusion and diverse perspectives.Effective communication and collaboration were identified as being essential for building a successful company culture. Boards were encouraged to invite practitioners, such as Chief Risk Officers (CROs), to present directly at meetings, to foster open lines of communication across an organisation and break down silos. The Boards were also identified as playing a critical role in reviewing data with a detailed eye, ensuring it is comparable, verifiable, timely, and understandable. The board's ability to oversee is only as good as the data they have in front of them, and it is their responsibility to ensure the data they have meets these standards. It was agreed that the Board Chairperson has a pivotal role to play here too, along with the Company Secretary, in engaging Directors with the right data, encouraging discussions and pushing them beyond their personal expertise.
Data needs for effective risk oversight
It was widely agreed that for a Board member to oversee risks effectively they require relevant, reliable, and timely data that aligns with business goals, sustainability drivers and strategic priorities. Boards must strike a balance between operational and strategic discussions based on the data at their disposal. The board Chairperson must facilitate engagement and challenge directors to ask pertinent questions and explore the most pressing topics and risks for the organisation.
It is important the board can consistently prioritise key risk areas, as not all risks are equal, and adequate time must be spent on the most important risks. Where possible Boards should be leveraging technology to aggregate and analyse the most beneficial data, ensure the data they have is up to date, and promote collaboration with other board members and committees. As always, however, it is important to mitigate any new risks or vulnerabilities that may arise from the adoption of new technologies.
Conclusion
Our Melbourne roundtable in partnership between Diligent and GIA, underscored the critical need for Australian corporate directors to remain focused when navigating the increasingly complex and evolving risk landscape. By fostering alignment across the enterprise, engaging in rigorous oversight, and utilizing robust data, boards can effectively manage risks and drive sustainable value creation. This proactive approach, grounded in strategic insight and informed by global perspectives, will be essential for Australian companies to thrive in an increasingly uncertain world. It is up to Boards to lead their organisations into the future with all the right tools, insights, data and processes needed to succeed.
