The volatility and uncertainty in the political environment are being felt across the globe. The unrest is causing boards to feel unsettled and unsure as to how best to respond to it. Corporate board directors are struggling to keep pace with a host of issues, including shareholder pressures, reputational risk, financial disclosures, ESG (environmental and social governance), technology disruption and governance, just to name a few. The latest issue boards are adding to the mix is political uncertainty.
Why Is Political Uncertainty Demanding Board Director Attention?
In a recent survey by Diligent Institute of high-profile, non-executive directors, C-suite professionals and other directors with significant and international board experience about the topics that were demanding their attention the most, political uncertainty is the clear, rising star.
The directors and executives explained that up until the last several years, there’s been a strong movement toward globalism and liberalization. It wasn’t that those things were positive or negative things, necessarily. Rather the predictability was a positive that directors could count on. Certainty goes hand in hand with predictability, and that makes for an easier playing field for board directors.
Two major unexpected events occurred in recent years that caused a big wake-up call for board directors that sparked a great deal of political uncertainty. In the United States, it was the election of Donald Trump. In the United Kingdom, it was the exit from the European Union, which is also called Brexit.
In the United States, most businesses assumed that a Democrat would win the 2016 election and that business would go on as usual after President Obama left office. As the election results were finalized, it became clear that Donald Trump had won the election. The results of the election created a great deal of uncertainty, making it difficult for businesses to predict the effect on the marketplace. With an initial upturn in the market, things looked positive for a while. However, change was bound to occur, and uncertainty set in as board directors tried to gain insight into Trump’s presidential style. The new Republican president gave rise to new fears over the influence of populism and the role that it might play in the future in the United States and in other places.
Around the same time that Trump was elected, Brexit occurred. The event was so unprecedented that it left the business community in the United Kingdom feeling sideswiped. Businesses in the country had tried to tell the people that there was a strong chance that it would occur, but they had such little trust in companies that they ignored the warning.
Both these events made business leaders lose their ability to predict the course of business. Suddenly, the tried-and-true business models that companies had come to rely on for so long were being challenged.
At the same time, stakeholders are also moving in a direction where they want companies to assure them that they’re acting ethically and in ways that are social and environmentally responsible. Stakeholders want businesses to add a sense of social purpose to their business models.
When we factor in the stakeholder model of business with the new presidency in the United States and Brexit in the United Kingdom, it opens the door to new political questions and implications. Board directors are more in the public limelight than ever before. They can’t simply hide when disaster hits.
Social media is adding to the problem of political uncertainty. Social media brings the speed of communication with it and that’s a good thing for board directors when news is good. Bad news raises political issues faster, requiring a faster response from the board. Fake messages on social media complicate things even further.
New leaders respond differently to issues and they respond at a different pace. President Obama made many decisions by executive order, whereas President Trump has taken more of a regulatory approach. President Obama was typically thoughtful about the messages he released on social media, whereas President Trump has often been emotional and reactionary.
What Makes Political Uncertainty Different Than Other Types of Risk?
Over time, the divisiveness between the right and left has only gotten stronger and it hasn’t been good for business overall. The divisiveness has had an impact on the business models that companies are comfortable using. Also, it has created much legislative gridlock.
With any drastic change in leadership, there’s no way to know whether the new leader will foster or hinder business growth. Whereas business leaders once felt that they could go to Washington, DC, and have reasonable discussions with legislators, they’re finding that lawmakers are more focused on upcoming elections. The uncertainty around knowing whether legislators will take their concerns seriously makes it an unsettling environment for businesses to make progress in.
These are many of the reasons that boards find it challenging to make difficult decisions. Some boards deal with the uncertainty as they would deal with other risks. They plan for it, hoping that there won’t be a need for their plans. In some cases, they may withhold capital as a reserve. In other cases, boards mitigate it or insure for it depending on the type of risk they’re facing.
To some degree, economic and political uncertainty are tied together. This scenario can have a trickle-down effect on consumers and how they feel about their own finances and spending habits.
The current climate requires boards to clarify their roles in risk management, ensure they have the proper expertise on the board to deal with it, bring in outside experts to deal with it and wield political influence, wherever they feel they can get the most traction.
In addition, boards need to stay at the top of their game by improving board refreshment, doing board evaluations and improving their onboarding practices.
Since the geopolitical landscape is having such a huge impact on board decision making, it’s more important than ever for boards to focus on recruitment, succession planning and board refreshment to ensure that they have the proper expertise on the board to deal with political uncertainty.
In the United, States, Diligent Corporation has joined forces with the National Association of Corporate Directors (NACD) to promote modern governance with the Nom Gov digital application. The tool provides access to real-time critical data that improves board effectiveness and their ability to make data-driven decisions. Nom Gov enhances succession planning by offering board directors an extensive, global and diverse database of director and executive profiles. This digital solution makes it possible to view the board’s skills and expertise in relation to others within the industry to assess its strengths and weaknesses.
While there’s no indication that the political uncertainty will decrease at any time in the near future, boards don’t have to navigate dark territory aimlessly. Diligent Nom Gov is designed to help boards be prepared for any crisis, now and in the future, so that their companies progress no matter what is happening in the marketplace.