Finding Stability and Opportunity Amid Economic Uncertainty

By Jim DeLoach


ESG Finance Online Article

Growth across the global economy is slowing. With the growth rate projected to shrink in 2022 and 2023 by half of what it was in 2021, business conditions have likewise declined. As months go by, projections continue to worsen. Well-known factors could further exacerbate the picture, such as the war in Ukraine, any conflict beyond Ukrainian borders, further escalation of Russian sanctions, and rising food and energy prices as a result of the global crisis.

Currently, global inflation is expected to rise to 6.7 percent in 2022, well above the 2.9 percent average experienced between 2010 and 2020. Spiraling inflation has swung the pendulum to faster-than-expected monetary tightening by developed country central banks. For example, in the United States, the Federal Reserve has signaled targeted interest rates of 3.4 percent by the end of 2022, the highest level in 14 years. 

Economies across North America, the United Kingdom, the European Union, Latin America, Africa, and more are on recession watch. According to one poll, many economists believe that the United States will fall into recession in 2023. That could fuel the risk of consumer and mortgage defaults.

The picture is not wholly negative. Corporate balance sheets generally remain strong. US corporate bankruptcies in 2022 are off to their slowest start in years. As the economy slows and the flow of easy money dries up, there are signs that supply and demand in a strong labor market are drawing closer to alignment.

The bottom line is that global markets may be facing a bumpy ride and potential economic downturn over the next 18 to 24 months. Amid the uncertainty, one thing is clear, a mind-set bent on emphasizing short-termism with an excessive focus on near-term results and smaller scale, low-cost, quick impact projects can result in lost opportunities due to a lack of focus on values, strategy, fundamentals, and long-term value creation. With the economic outlook constantly changing as if a moving target, directors need to embrace change and set a tone of focus and confidence when looking to the future.

To that end, boards should have grounded, strategic conversations with management, emphasizing a commitment to values and preserving reputation and brand image. This will hopefully lead to actionable steps that support forward-looking leadership that will engender confidence. The seven questions below provide a basis for such discussions.

How do we visualize our business from a competitive positioning standpoint, looking out two to three years, given current and expected market realities? This conversation is about understanding the distinctive advantages of the company’s brand that should be exploited. Anticipating actions competitors are most likely to take can inform strategies for positioning the brand as a leader during the market recovery.

Are we sufficiently focused on the customer experience? Companies should assess whether fundamental adjustments are needed to product mix, sourcing strategies, and pricing as customer behaviors shift in response to rising prices and product shortages. Obstacles and distractions to achieving a fulfilling customer experience as reflected in data obtained from customer-facing processes should be eliminated. Front-line employees should be empowered to enhance responsiveness.

Have we sharpened our focus on the recruitment and retention of talent? Regardless of senior management’s bias toward where work should be located, the organization should pay close attention to remote and hybrid work realities in the marketplace. This is a time to focus on retaining “A” player talent, upgrading executive capabilities, and boosting executive bench strength.

Have we reimagined our supply chain to minimize disruptions in the future from another pandemic or regional conflict? Disruption and congestion risk considerations should be equated with the traditional quality, cost, and time factors that have shaped supply chains in the past. Public health responses to battling pandemic spikes in different countries, the Ukrainian war, and the focus on achieving net-zero carbon targets have altered the fundamentals underlying globalization. Emphasis on resiliency is giving rise to such supply options as friend-shoring, near-shoring, and reshoring. 

What digital acceleration and innovation opportunities should we pursue at this time, with emphasis on product development, to strengthen customer engagement, flexibility, and relationships? Sufficient agenda time should be allotted to cover innovation strategy and culture while encouraging open discussion on direction and progress with management. Such discussions should be supported with appropriate metrics. Digital technologies such as artificial intelligence factor strongly into innovation initiatives. Open innovation options should be considered to unlock fresh opportunities. As initiatives are pursued, companies should pay heed to cybersecurity, the increased risk to data, and the implied brand promise around trust. The importance of the chief technology officer is elevated in these innovative times.

Are we establishing the proper tone at the top on sustainability matters and achieving alignment through appropriate performance expectations and reward systems linked to the sustainability strategy? Environmental, social, and governance (ESG) matters offer the highest level of strategic thinking in the boardroom. They cannot be put aside as the belt tightens. In the United States, 576 ESG-related shareholder proposals were submitted through April 12, 2022, a 15 percent increase from the prior year. Directors should resist getting frustrated with the details and nuances. The big picture is what matters. Sustainability matters should be integrated with strategic discussions, and close attention should be given to strategic communications around these topics, both internally and externally. One research study reports that less than 10 percent of companies have fully integrated their business, technology, and sustainability strategies.

If a severe economic contraction occurs, do we have an up-to-date, vetted, proactive contingency plan to enhance our agility when circumstances warrant its implementation? Such plans should sequence, prioritize, and group actionable steps by function and operating unit to establish clear ownership, authorities, and accountabilities. They should be supported by key metrics to be managed against specified targets. The plan should provide for actions in different scenarios such as revenue declines of specified levels or interest rates exceeding specified thresholds. As it focuses on margin and balance sheet management, the plan should allow for investments in the future by sustaining key on-strategy investments during the downturn to retain key talent, preserve market image and branding, and foster a strong recovery when the economy bounces back. Directors should review and approve the plan.

The above thinking will help directors and management focus on the fundamentals during these interesting, uncertain times. The resulting action plans should be monitored by the board and refreshed as market conditions change. Reconfiguring the board’s skills and experience in light of the major changes taking place in the economy and around the world is another consideration.

Jim DeLoach
Jim DeLoach is managing director of Protiviti. DeLoach is the author of several books and a frequent contributor to NACD Directorship Online.