Scenario Planning: How Effective Boards Are Navigating Economic Uncertainty

Authors

Byron Loflin

James Beasley

Published

Mar 9, 2023 11:32AM EST

The 2020 global pandemic caught most of the world by surprise, including corporate leaders, economists, presidents, and legislators. The Nasdaq Board Advisory team leaders have suggestions for how corporate boards could have been better prepared. Now boards have an opportunity to learn from experiences uncovered in the past decade and leverage those lessons learned to ensure they are better prepared amid current economic uncertainty and into the future.

Prior to the pandemic, the Board Advisory team had been supporting boards through enterprise risk management scenario planning, continuity planning, and wargaming type discussions; but not all boards were proactive in examining ‘what if’ possibilities emphasized by an enterprise risk management approach to corporate governance.

“The pandemic was a wakeup call,” said Byron Loflin, Global Head of Board Advisory at Nasdaq. “There was already a trend towards higher expectations of directors among the investment community. Since the economic crisis of 2009, there has been an emerging expectation and emphasis on a more holistic approach to being an effective from sources like the investment community, regulators, and even boards themselves.”

With the current macroeconomic environment, companies are facing new challenges and their boards are trying to figure out how to best navigate the complex landscape including rising interest rates, rising inflation, market volatility, ongoing concerns about energy prices and shortages, supply chain issues, and geopolitical tensions. “Conversations around these topics can differ greatly based on where and with whom they are being had,” according to James Beasley, Head of Board Advisory for Europe, Middle East & Africa at Nasdaq.

“Something might be an existential crisis for an organization in one particular region or for one type of company but might be just one of various risks for another,” noted Beasley. For example, in Europe, the energy crisis has loomed large in boardroom conversations, particularly at companies with heavy physical footprints. Some boards are concerned about how they can keep the lights on. In countries and regions less impacted by energy supply issues, other challenges like inflation or geopolitical tensions may be higher up the list. The potential impact of these challenges on each company is as unique as the company itself, but skilled and diligent directors are focused on looking ahead, visualizing risk, and challenging assumptions.

While boards across the globe may be focusing on different risks associated with the current economic environment, there are similar actions boards can take to be effective. According to Loflin and Beasley, effective boards:

Decipher between when it’s time to survive and when it’s time to thrive. During the pandemic, boards focused on survival. But today, the most effective boards see opportunity alongside risk in the context of the company’s purpose and long-term strategy. Seasoned directors have seen inflation and recessionary tensions before, and the best ones build on past experiences—those good and bad.

Understand non-financial risk alongside financial risk. Companies can set appetite, tolerances, and metrics for financial risks that enable them to be quantified and understood. By contrast, non-financial risks, like supply chain risk or cyber risk, challenge that traditional approach as they are less quantifiable. The Board Advisory team is observing companies try to change the way they think about risk with a focus on qualitative insights to better understand non-financial risk, including more opinion, guidance, and direction from risk functions.

Look at the ‘big picture.’ Faced with material change and a multitude of challenges, boards can become ‘snow blind,’ overlooking other less obvious—but no less important—issues. The challenge for boards is to put their heads above the parapet, taking the time to look around and consider the ‘big picture’ as much as possible. Doing so successfully depends on the diligence and experienced insight from directors, the Chair’s leadership bringing out the best from each director, and the openness and transparency of those they rely upon.

Engage directors with diverse experiences and backgrounds. Diversity of thought and diversity of experience should be the goal for all boards. Different perspectives, reference points, and ways of looking at a problem lead to better decision-making. In a rapidly evolving economic and socio-political landscape, good decisions are more important than ever and could mark the difference between success and failure.

Are forward-looking. Boards that stand out are those actively questioning what they might be missing or not talking about, what today’s decisions might mean down the line, or what further guidance they might need to come to decisions. Preparedness is key. Boards should endeavor to understand trends, direction of travel, and potential consequences from the perspective of strategy, performance, and risk. Anecdotes, experiences, and opinion from directors, managers, and advisors are key in helping boards learn from the past to thrive in the future. Don’t be afraid to ask, “what if?”.

What do “what if” scenarios look like?

Practicing tabletop exercises with ‘what if’ scenarios is a form of crisis planning in which members of the board and management team engage together in exercises that simulate issues the company could potentially face. The point of the exercise is to enable directors to broaden their views of the company’s risks and opportunities to better anticipate scenarios and possible responses.

To prepare, boards may consider asking questions like:

What’s changing for our customers?
What’s changing with our vendors?
What’s changing in the marketplace in which the company competes?
What’s impacting our capital position and liquidity?
What’s changing in the global financial marketplace and how do those changes impact the company?
What could possibly happen to slow down the supply chains impacting top-line revenue?
What global geopolitical flashpoints could impact the business and supply chains?
Using the 2020 pandemic as an example, what are other possible disruptive scenarios?
Who are the key people that are playing the central roles in making things happen? What are the key scenarios that are affecting them and, therefore, the company?

In uncertain and challenging times, the more consistency, self-reflection, and robustness in the company’s—and the board’s—corporate governance arrangements, the better. The Nasdaq Board Advisory team partners with boards to administer evaluations that provide transparency into board composition, so directors can operate as effectively as possible and work together at peak performance.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.