How directors can prepare for 2024

As we enter a new year, we ask business leaders to reflect on the governance challenges of the past 12 months and what company directors can do to prepare for 2024. 

Australian boardrooms have faced some intense priority issues in 2023. From soaring inflation and geopolitical tensions to the rapid adoption of generative artificial intelligence (AI) and elevated social responsibility risks, the year has brought all kinds of fresh governance challenges — all while boards prepare for mandatory climate reporting. The question is, how are these challenges likely to evolve in 2024?

Turbulent economic tail

Of all the economic headwinds of 2023, the “uncomfortably high” rate of inflation has been the most significant, says EY Oceania chief economist Cherelle Murphy. A hangover from the stimulatory measures used to pull the economy out of the COVID-19-induced slowdown, soaring inflation has added to a minefield of cost pressures for businesses.

“Of course, it’s increased input costs,” says Murphy. “Wages have also been rising more strongly than in recent years.” In response, business leaders have sought “more value for money” in their decisions. “For some, it’s causing them to consider alternative suppliers for their products. Others are thinking carefully about labour allocation, whether technology can replace staff and whether they use permanent or casual labour.”

There are signs the central bank’s efforts to clamp down on inflation are taking effect but Murphy says it’s difficult for businesses to predict how long it will take, especially since the forces affecting the economy and inflation are still evolving. “Events that seem very far away, such as the terrible conflict in the Gaza Strip, are impacting us through the oil price, investor sentiment and business confidence,” she says. “And, of course, geopolitical tensions are causing more governance effort to be devoted to security and supply-chain diversification.

“We’re still seeing the economy respond to the tightening of monetary policy and underlying all that, we have other forces at play, such as the ageing of the population, which effectively means labour is going to be more expensive and harder to find.

“And we have an economy that is decarbonising. For some companies, that opens up opportunities and for others it means dealing with new regulation or different ways of producing.” Despite the economic uncertainty, Murphy says there is good news. “Fresh business possibilities are opening up and new organisations are being born. Anyone who expects the economy to go back to where it was prior to the pandemic is kidding themselves.”

Tensions abroad

Geopolitical risk has shot to its highest level in 30 years, according to governance, risk and compliance adviser Christopher Wright. “The period of peace and stability that followed the Cold War has definitely come to an end,” says Wright, who recently returned to Australia after 17 years in Europe and Asia, where he held senior leadership and governance roles, including as Austrade’s country manager in China.

“Conflict in the Middle East has obviously rocketed back up the ladder of our concerns and there’s no question the fallout from Russia’s invasion of Ukraine continues,” he says. “China and Australia seem to be moving back into familiar territory, although policy tensions remain. I think Australia is a little complacent about what’s happening in the ASEAN [Association of Southeast Asian Nations] countries in our near north.”

Wright expects tensions to escalate and urges companies that have not yet grappled with this risk to do so. For many, the most obvious risk is the unexpected “closure” of a country (whether due to civil disruption, war, new regulations or a change in government) and the resulting difficulties with supply chains and market access or threats to local property and personnel. Wright says the implications of economic sanctions — which have become “the go-to mechanism of major Western powers for enforcing foreign policy objectives” — are a less understood threat.

“It’s easy for Australian companies to get caught in a web of transactions where they may find themselves actually transacting with parties they are no longer able to do business with,” he cautions. “By breaching sanctions — or failing to comply in other areas such as corruption, bribery of foreign officials, anti-terrorism laws, competition law — you could do your business serious strategic damage.”

There are simple proactive steps directors can take to manage the geopolitical risks most relevant to their businesses. The best place to start, says Wright, is to source a calendar of geopolitical events planned for the next 12 months that could trigger tensions — such as international summits, elections and significant national commemorations — and map out the potential implications. The next step is to formalise a process by which the organisation is alerted to relevant risks in real time.

Harnessing generative AI

Cybersecurity has topped most business leaders’ technology risk list for more than a decade but in 2023 it was joined by the rapid popularisation of generative AI. “We’ve been talking about AI since the 1950s, but it’s reached a point in 2023 where it’s now intersecting deeply with our lives,” says Steven Worrall, managing director of Microsoft Australia and New Zealand.

The explosive spread was sparked by the release of ChatGPT, a natural language processing tool that uses generative AI (artificial intelligence that creates content such as text, images, music, audio and video). “Within six weeks, 100 million people had started using the service,” says Worrall.

While many see tremendous potential in generative AI, others remain deeply concerned with ensuring it is used responsibly, with due consideration to ethics, fairness and transparency.

“As an economy, we have much to do to address our productivity challenges and this technology can be a great lever of competitive advantage,” says Worrall, who spent more than two decades with IBM before joining Microsoft in 2014. “Certainly, boards are asking themselves: ‘How do we make sure we don’t get left behind, but do it in an ethical and responsible way in our community so we continue to have permission to do business?’”

Cheryl Hayman FAICD, a non-executive director on the boards of Ai-Media, Silk Logistics Holdings and Beston Global Food Company, cautions any organisation that thinks generative AI won’t affect their business. “AI is coming at us at a massive speed and all businesses are having to evolve more quickly than before to keep up,” she says. “There are still a lot of unknowns and fear, but it’s a real enabler and extremely exciting. At the same time, we have to be very careful that, in using AI, we’re not reproducing real-world bias and discrimination, fuelling division and threatening fundamental freedoms.”

To strike a balance, board directors must be agile, she says. “We need to be plugged in to relevant, trusted sources of information so we’re able to ask the right questions of management and have a lens by which to evaluate their answers.”

About 60 countries, including Australia, have developed national AI strategies, and some jurisdictions are working towards legislated frameworks to regulate its use, notably the EU AI Act and the US AI Bill of Rights. Worrall says similar regulations are likely to be introduced in Australia in the next year or so, which will cement generative AI, alongside cyber, as an area of “deep focus” for boards in coming years.

Applying a psychosocial lens

A fusion of broad-ranging national discourse, shifting expectations and legislative change has seen sustained elevation of psychosocial workplace risks in 2023. “The nature of conversations around workplace issues such as sexual harassment, psychological safety and mental wellbeing has definitely changed,” says employment lawyer and Remotely Legal founder Cheryl Chan FAICD. “In the past, this type of issue has typically been handled by HR, but they are now commonly elevated to executive teams and boardrooms — and from board subcommittees to the full board level.”