Corporate Governance

Board Leadership And Governance

Board Leadership And Governance: The Complete Guide in Inflationary Times

Board Leadership And Governance [Full Guidelines]

Inflation is a reality in today’s economy. The Board of Directors needs to understand that the cost of goods and services continues to rise, putting pressure on businesses. As a result, it is more important than ever for organizations to have effective board leadership and governance structures.

A well-run board can help a company navigate these challenging inflationary waters and emerge more robust. This guide will discuss the critical components of effective board leadership and governance structure.

Finally, we will address the unique challenges multinational organizations face regarding board leadership and governance. With this information, you will be armed with the knowledge you need to build an effective board that can weather any economic storm. 

Let’s get started!

According to the Organization for Economic Co-operation and Development (OECD), in a report titled “Economic and Social Impacts and Policy Implications of the War in Ukraine,” published in March 2022.

Key summary points of the report

  • The most significant consequence of the conflict in Ukraine is the loss of human life and the humanitarian catastrophe that has resulted from it. There are, however, several critical economic repercussions as well.
  • Before the war outbreak, it forecasted most major global macroeconomic indicators to return to normalcy over the 2022-23 period following the COVID-19 pandemic.
2021 Economic Growgh in COVID-19 Pandemic | Board Leadership And Governance
  • In 2023, global growth is expected to resume at rates comparable to those seen in the immediate pre-pandemic era.
  • Most OECD countries were anticipated to return to full employment by 2023, and inflation was expected to converge on policy objectives later and from higher levels than in most nations.
  • Despite their modest size in terms of output, Russia and Ukraine are significant producers and exporters of critical food items, minerals, and energy. The war has already caused significant economic and financial disruptions, particularly in commodity markets, where the price of oil, gas, and wheat has considerably risen.
  • Since the start of the war, the price swings in commodities and financial markets may cut global GDP growth by more than one percentage point in the first year, with a severe recession in Russia and a rise in worldwide consumer price inflation of about 2.5 percent points.
Board Leadership And Governance
GDP GROWTH | Board Leadership And Governance
  • Suppose such well-designed and targeted monetary aid is available. May lessen the adverse consequences on growth caused by severe fiscal tightening with only a little extra push to inflation. It might pay for through windfall gains taxation in some countries.
  • Faced with a new, potentially long-lasting, and severe shock, monetary policy should stick to establishing well-anchored inflation expectations. Most central banks should continue their initial plans, except those most severely impacted economies that may require a pause to assess the crisis.
  • Many governments will have to cushion the shock of rising energy costs, diversify energy supplies, and improve efficiency in the near term. Higher food production in OECD nations, avoiding trade protectionism, and multilateral logistics support will assist those most affected by a disruption to Russian and Ukrainian supply.
  • The conflict has highlighted the need to reduce energy imports from Russia. Policymakers should reconsider the effectiveness of the market structure to guarantee energy security and create incentives to assist with the green shift in a publicly funded manner.

Inflation and Stock Prices: What’s the Relationship?

Understanding how inflation affects stock prices is crucial to understanding the relationship between inflation and interest rates.

Generally speaking, when inflation is on the rise, interest rates will also increase. When money becomes more expensive to borrow, businesses have less money to reinvest in growth—often leading to a decrease in stock prices.

While several factors can affect stock prices, inflation is one of the most important. When inflation is on the rise, it can harm stock prices. For this reason, businesses need to have an effective board in place that can provide guidance and oversight during these challenging times. With the right panel in place, your company can weather any economic storm.

GBAC Recommends Fundamental Questions Board Chairs Need to Ask Management About Inflation?

  • What is our organization’s Long-Term strategy for managing inflation?
  • How will the pricing of our top cash cow products be affected by inflation?
  • What are the ESG risks associated with inflation?
  • How is our organization planning to respond to rising costs?
  • What are the potential implications of inflation on our balance sheet?
  • How might our borrowing costs for M&A deals change in an inflationary environment?
  • Can we lower borrowing costs from alternative sources selling debt in international global capital markets?

Organization for Economic Co-operation and Development (OECD) published another great report titled The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis.

Supporting the recovery

The stock market is an essential component of a company’s survival and success. The stock market has helped firms raise the required cash to overcome short-term setbacks in 2020, with already-listed non-financial firms raising a record. Since 2005, more than 30 000 corporations have withdrawn from stock exchanges worldwide, or 75% of all listed firms today.

OECD Capital Market Series Datasheet | Board Leadership And Governance
Board Leadership And Governance
OECD Capital Market Series Datasheet | Board Leadership And Governance

These deletions have resulted in a net decrease in listed firms because they have not been linked with new listings. 

On the other hand, several sophisticated markets have seen a structural drop in smaller growth firm listings, limiting even more of these firms from easy access. 

These trends have raised concerns about structural weaknesses in the stock market ecosystem.

  • First, the shift from retail direct investments to large institutional investors has been biased towards large, listed companies. The average share of institutional ownership in large listed companies is significantly higher than their own in smaller companies. 
  • Second, the structure of investment banking activity is an essential factor behind high listing costs, as high underwriting fees and stock price discounts have discouraged companies from going public.
  • Third, the systematic acquisition of smaller growth companies – especially by large technology companies – may also contribute to the drying up of the IPO pipeline of smaller independent companies that could potentially increase competition and challenge the status quo.

Corporate governance frameworks.

  • The COVID-19 crisis strains many organizations’ ability to fulfill numerous legal and regulatory standards. Governments around the globe have responded.
  • It has added momentum to discussions on various long-term project plans that may necessitate corporate governance changes and regulations post-COVID.
  • The pandemic’s aftermath calls for enhancements in risk and crisis management frameworks and related topics such as audit quality, stock price manipulation, and insider trading. 
  • To improve or clarify the regulatory frameworks. Some organizations have implemented improper bonus practices following the crisis, such as changing bonus pay structures after the fact. 

These measures also necessitate further examination that there has been an increase in corporate ownership concentration at the global stock market level. Over the last 15 years, institutional investors have grown their assets under management by magnitude while the number of listed firms in many developed equity markets.

  • The opposite trends have increased the money spent on fewer enterprises, with ownership re-concentration to big institutions. 
  • The three most prominent institutional investors in the United States, for example, presently own a combined average of 23.5% of the equity in listed businesses. The concentration of ownership in other sectors demonstrates the significance of corporate group structures. For example, in several Asian countries, private enterprises and holding companies control more than 30% of a publicly listed firm’s equity capital.
  • The increase in corporate concentration can be attributed to public sector ownership. Globally, governments and sovereign wealth funds control USD 10.7 trillion of listed equity, which amounts to 10% of global market capitalization.

Environmental, social and governance risks.

Many investors are paying greater attention to ESG factors when making their investment and voting decisions, thanks to the COVID-19 epidemic. When managing their savings and assets, policymakers and regulators must ensure that investors access consistent, comparable, and trustworthy material information, particularly climate-related data.

It would also assist the company sector in keeping up with rising expectations surrounding recognizing and appropriately balancing the interests of all stakeholders and their contributions to a firm’s

The non-financial corporate sector.

Due to varying levels of financial soundness entering the scenario following the 2008 economic crisis, worldwide corporate bond markets saw a significant and long-lasting rise in issuance, doubling from a yearly average of USD 890 billion between 2000-2007 to USD 1.87 trillion between 2008-2020.

This trend was highlighted by the COVID-19 epidemic, which saw a record USD 2.9 trillion in non-financial firm securities issuances resulting in an all-time high of USD 14.8 trillion in outstanding non-financial corporate bonds.

The COVID-19 crisis has similarly impacted not all businesses.

Before the COVID-19 crisis, however, concerns about excessive risk-taking in specific sectors of the corporate sector were growing. One example is the usage of corporate bond markets to finance share buybacks by high-risk non-investment grade corporations.

Since 2000, the share of corporate bond offering documents that mention share buybacks or dividends as one of the intended purposes has risen from 2% to 11.

The corporate bond market has shown several structural limits due to quick progress. First, recurring active issuers have taken the place of those who come to the corporate bond market only once.

The proportion of first-time issuers will be less than 27% in 2020, which is the lowest it has ever been in conjunction with the 2008 financial crisis, demonstrating that having a long-standing relationship with the corporate bond market gives firms an edge in obtaining new capital post covid.

The substantial rise in BBB-rated bonds – the lowest investment grade rating – before the COVID-19 outbreak was accompanied by a declining proportion of This, in conjunction with the fact that bonds just above non-investment grade status have the lowest 1-notch downgrade probability, adds to the Downgrades of BBB issuers are generally associated with the appearance of further problems.

However, they are reluctant to lower BBB ratings because of concerns about overrating stability. The ability of credit ratings to accurately inform investors about the risks.

Now that we have discussed the board’s role and how inflation affects stock prices, let’s look at how to build an effective board. 

The first step in creating an effective board is to understand the role of the board and the different types of board committees that exist. The board’s primary responsibility is to provide oversight and guidance to management on behalf of the shareholders.

Different Board Committees

The first step is to understand the different types of board committees that exist. The board’s primary responsibility is to provide oversight and guidance to management on behalf of the stakeholders’ capitalism. 

There are several different board committees, each with its specific purpose.

The most common type of committee is the executive committee, which is responsible for overseeing the company’s day-to-day operations.

Other types of committees include the audit committee, which is responsible for overseeing the financial reporting process, and the compensation committee, responsible for setting executive pay levels. 

The nomination and Governance Committee is responsible for overseeing the board’s composition and ensuring that it has the right skills and experience.

The last type of committee is the strategic planning committee, which is responsible for developing and overseeing the implementation of the company’s long-term strategy. 

In recent years,

ESG Committee has overseen Environmental and Sustainability committees that have been created to manage a company’s environmental and social impact.

Technology Committee has been added to oversee information technology strategic investments oversee cyber and Data Governance issues. Ethical use of Artificial Intelligence and use of Big Data. Transition to Cloud Governance.

The most important thing to remember is that each committee has its specific purpose. Now that we have discussed the different types, each of these committees plays an essential role in ensuring that the board is effective in its oversight function.

Board of directors and long-term strategy, we will provide some tips on how to recruit directors, conduct evaluations, and create a succession plan.

It is essential to look for individuals with the right skills and experience when recruiting directors. The ideal candidate should have a deep understanding of the business and be able to provide valuable insights and guidance. It is also essential to ensure that the board is diverse in skills, experience, and perspectives.

When conducting board evaluations, the board’s Chair must solicit areas of improvement and skills shortages on a one-on-one basis with each board member. The total assessment results should be shared with the entire boardroom, focusing on improvement points for hiring the following board candidates.

Constructive discussion on areas of improvement and skills needed in the boardroom instead creates friction among the board members.

However, it will help identify areas where the board is effective and advances can be made. Succession planning is also essential for ensuring that the board is effective.

Supply Chain Disruptions

It is vital to have a plan for how the board will function if leadership changes occur. With these tips, you will be well on your way to building an effective board that can provide guidance and oversight during challenging times.

Environmental, social, and governance factors and inflation hitting sales

What is Environmental, Social, and Governance (ESG)?

Environmental, social, and governance (ESG) factors are non-financial factors that can evaluate a company’s performance.

ESG factors can include things like a company’s carbon footprint, its policies on employee diversity, or its approach to human rights.

Envolving Market Value | Board Leadership And Governance

In recent years, there has been an increasing focus on ESG factors by investors and rating agencies because ESG factors can have a material impact on a company’s financial performance.

Especially in a down-turn economy, companies with higher ESG scores and ratings will be forecasted to outlast lower ESG scored companies which the pandemic highlighted.

For example, a company with poor environmental practices could be subject to heavy fines and lose customers to higher sustainability standards, techniques, and policy alternatives.

For discussing and learning more about International Boardroom best practices, visit globalboardadvisors.com and earn a GBAC ESG Course certification. 

If you want to get this full article as a pdf file, Please click here!

Thank you!

Yusuf Azizullah (Founder & CEO)

GBAC & Boardroomeducation

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