Board challenges for 2022

Directors face a challenging 2022. The year begins with organisations facing a variety of threats to performance: disruption from the lingering effects of Covid-19 and Brexit; inflation driving up costs; shortages of workers; unpredictable supply chains; and increases in national insurance contributions from April.

Businesses in retail, leisure and hospitality face a difficult winter, with reductions in business rates relief likely from April also.

Board agendas will undoubtedly have a strong operational component, whether around how to remain competitive and profitable or how to restructure and survive, and maintaining their strategic focus will be a challenge. High performance standards, sustainability and good governance are essential if directors are to discharge their duty to promote long-term success.

Trust agenda

One of the most significant developments for boards this year will be the government’s objectives to restore public trust in big business and to safeguard better the interests of investors following scandals like Carillion. The proposals in the BEIS consultation white paper, Restoring Trust in Audit and Corporate Governance, address changes to the audit process and set out wide-ranging measures to strengthen the UK’s corporate governance framework, bringing more businesses under regulation and scrutiny.

The good news for directors is that reform will not be implemented quickly. For example, the central recommendation to establish a new independent and more powerful Audit, Reporting and Governance Authority is scheduled for 2023. BEIS has indicated that action in other areas is unlikely before September this year at the earliest.

Directors should use 2022 to address three challenges embedded in BEIS's white paper:

• Broader governance scope. The white paper seeks to expand the definition of public interest entities (PIEs) beyond listed companies. Potentially, this could include all major businesses of public importance: large private companies, AIM-listed companies, LLPs and large third-sector entities such as universities, charities and housing associations. This is important, as the work required by ‘new PIEs’ to comply with regulatory scrutiny will be extensive.
• Internal controls. Directors of PIEs face a tougher regulatory regime, including increased accountability for their internal controls. A statement in the annual report on control effectiveness will be required, with three options given in the white paper including a possible ‘SOX-light’ approach. The key requirement for directors is to match controls with business risks, thereby ensuring that time and resources are allocated to the risks that really matter.
• Safeguards against fraud. PIEs will have to report the steps taken to prevent and detect material fraud. The pandemic has seen a significant rise in fraud cases – many facilitated by technology, including cyberattacks, phishing attempts and ransomware. A recent Deloitte US poll shows 65% of business leaders identifying ransomware as the top threat to their organisations, while only 33% have prepared against attack. Directors should assess fraud risk and develop proactive prevention plans.

Towards net zero

COP26 represents a step forward in global efforts to address climate change. One of the central outcomes is a shift in momentum for business towards net-zero emissions, with the formation of the International Sustainability Standards Board a major milestone.

The message is clear. Very quickly, businesses will need to measure their carbon footprint, publish a detailed plan to move to net zero, and report progress to stakeholders appropriately or risk being left behind by the competition.

A raft of recent government sustainability policies and initiatives places the UK at the forefront of this rapid change. For example, Greening Finance: A Roadmap to Sustainable Investing introduces the regulatory standards that organisations across the economy will have to meet, including new sustainable disclosure requirements. The implications for business over the next three to four years are considerable.

There are immediate challenges for large businesses around reporting:

• In 2022, for the first time, listed companies with a December year-end must include a statement in their annual reports setting out whether they have made disclosures consistent with recommendations by the Taskforce on Climate-related Financial Disclosure.
• By 2023, most big firms and financial institutions will be required to disclose detailed plans for transitioning to a low-carbon future in line with the UK’s 2050 net-zero target.

These more detailed disclosures will be valued by investors, but they will also create challenges, causing ripple effects elsewhere in the supply chain through efforts to reduce scope 3 emissions.

The process of measuring, reporting and reducing greenhouse gas emissions is likely to be very challenging for many businesses. The Institute of Directors surveyed its members in October 2021. Out of more than 600 respondents, only 28% of organisations measure their carbon impact, 27% have a well-worked-out plan to reduce their carbon footprint and 16% have set a date for achieving net zero.

SME focus

It is not only global conglomerates and listed companies that face challenges meeting the COP26 initiatives but SMEs, too. The ‘Think Small First’ initiative, launched by ACCA and software provider Sage, calls on governments and big business to help SMEs to take effective climate action and enable them go carbon neutral. This initiative is crucial.

Organisations without serious, integrated plans to adapt to a low-carbon economy will be increasingly exposed, not only to criticism from their stakeholders but to further government regulations coming down the line.