Strategy, growth, red tape focus for Australian corporates

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Strategy, growth, red tape focus for Australian corporates – but eyes need to be on cyber risk

Deloitte 2015 Directors’ Cut survey

2 September 2015: Managing strategy and focusing on growth in times of economic and political uncertainty will occupy the minds of corporate CEOs and boards over the next 12-24 months – but cyber security needs to also be top of mind – according to Deloitte’s fifth biennial Directors’ Cut survey.

Fifty board Chairs and CEOs of ASX 200 companies were interviewed on the issues, challenges and opportunities faced by Australian boards and executives.

Their views on rule-making and red tape were also a focus of the survey, following the release last year of Deloitte’s latest Building the Lucky Country series report, Get out of your own way: unleashing productivity.

It identified:

  • A $250 billion annual economic cost for Australia of administering and complying with the rules and regulations set by both governments and businesses; and
  • A $155 billion annual cost for the private sector to administer and comply with the rules it imposes on itself (double the cost of government red tape compliance).

Directors’ Cut findings include:

  • Regulation: 67% of CEOs and Chairs say regulation is increasing, and 65% of respondents believe corporates are wrapped up in red tape
  • Strategy: 60% say that boards make sufficient time to deal with strategic issues (but that regulation still requires a lot of attention)
  • Cyber risk: 54% of respondents say their boards understand cyber risk, but 37% were neutral on the question
  • Innovation: 56% of respondents believe their organisation has an effective innovation program in place, and 68% believe compliance is not stifling innovation
  • Growth: 63% of CEOs and Chairs are looking to enter Asian markets for growth.

Deloitte Managing Partner Assurance and Advisory, Richard Deutsch, said: “There is a tendency in corporate Australia to focus on government red tape as a drag on productivity, and our discussions with Chairs and CEOs have substantiated this.

“But with the evidence that internal bureaucracy is as much, if not more of an issue, they also acknowledge that external regulation isn’t necessarily a burning platform for them. The real issue for many is corporate red tape.”

Red tape and compliance

There was a feeling among CEOs that, while governments talked about simplification, regulation was still increasing, and there was a lack of harmonisation. They are also willing to look elsewhere to achieve their business objectives as Australia is seen as inflexible, with complex approval processes for construction projects, high costs, and powerful unions.

Chairs acknowledged that internal red tape had been partly driven by their risk committees asking for more information as they were more aware of their liabilities as directors.

“Governments can certainly do a lot to streamline the regulatory environment. It may be stringent in some areas, but it’s also accompanied by positives for business such as low sovereign risk and a stable political environment,” Deutsch said.

“Boards need to operate in this environment, and many Chairs and their CEOs feel constrained by what they see as a burden. But it’s critical that they don’t lose sight of the more strategic issues confronting their organisations rather than being overwhelmed by compliance.

“Where organisations are in control of their own destiny is managing their own corporate red tape, as an abundance of internal rules, procedures and requirements can hamper the growth drivers of innovation, creativity and productivity.

“Good boards don’t see regulation as an excuse for inaction or to create more rules.”

Strategy, risk…and cyber

Deutsch said: “Strategy, growth and innovation are all core focus areas for the boardroom. But the Chairs and CEOs we spoke to make the point that regulation requires a lot of attention, and that compliance can distract from the focus on strategy.

“There is also a concern that red tape and compliance can lead a board to lose sight of business risks, and that increased scrutiny has impacted the risk appetites of many companies.

“As companies seek to manage and reduce risk, they often use new rules as the best tool to do so. But the obverse of this is the constraint internal red tape has on productivity.”

With most organisations focussed on prevention as opposed to detection, and the average cost of a data breach per Australian organisation currently more than $2.5 million per year (and rising), he added that cyber risks are evolving faster than organisations can react.

“Information security is currently one of the most pressing issues facing governments and business, and it is certainly a strong focus area for the Australian Securities and Investments Commission,” he said.

“Financial losses, intellectual property theft, reputational damage, fraud and legal exposure are all at risk when it comes to cyber, and information security, vigilance and resilience all need to get the full attention of executives and company boards.

“Surprisingly then, while 54% of our respondents were confident they understood the risks, nearly 40% were neutral on the question of how well cyber risks were being managed.

Shareholder activism, proxy advisers

Rather than being seen as a negative, CEOs and Chairs view increased shareholder activism as a generally positive development – as long as it represents all shareholders, not just special-interest groups.

“The views were based on shareholders having the right to be informed, that activism made directors more diligent, and that it could provide a viewpoint that might lead to better business results,” Deutsch said.

The overall view of proxy advisers, however, was a negative one – that they often have too much power, and can be self-serving.

Looking ahead

Strategy and growth, as well as operating in an environment characterised by continued economic and political uncertainty, emerged as the leading concerns for the coming 12–24 months, followed by regulation.

“The focus for Chairs and CEOs remains on maintaining results in the short term, while trying to take a strategic approach to the longer term,” Deutsch said.

“The hunt for investments that will produce decent returns is also a dominant concern given the low interest rate environment globally.”

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