When it comes to inflation, the future is uncertain; in the meanwhile, corporations and their boards are unsure what they can do to manage it.
In a recent interview, the leader of one of the most powerful directors organisations in the United States stated that inflation is now the top concern for boards.
Given the current state of the economy, this concern is understandable. So, why are boards concerned, and, more importantly, what can they do about it?
What is the current inflation forecast?
For context, consider the IMF's assessment of worldwide inflation:
Inflation is presently higher than it has been in decades.
It is expected to more than double this year, rising from 4.4% in 2021 to 8.8% in 2022.
It is anticipated to fall to 6.5% in 2023 and 4.1% in 2024.
In summary, short-term stress will persist before giving way to longer-term relief. As a result, for the time being, businesses will have to adjust to higher pricing.
Why are corporate boards concerned about inflation?
In a recent McDermott Will & Emery podcast, Kimberly Simpson, COO of the National Association of Corporate Directors (NACD), stated, "Inflation is the second biggest item on the board agenda right now for private companies."
"...surprisingly, it's in the same spot for public companies." So it's on everyone's mind," she continued. "There are numerous concerns about the performance of the company."
So, what is the primary reason that boards are concerned about inflation?
It's primarily because they have no control over it. Factors well beyond the reach of ordinary enterprises are fueling the inflation crisis. Even the world's most powerful firms could only hope to have a small impact on it.
Boards conduct their work with the mindset that it is preferable to be proactive rather than reactive. Unfortunately, the only thing they can really aspire for is to be reactive.
The epidemic, Ukraine's war, the supply chain issue, and workforce shortages have all conspired to create a situation that businesses must simply deal with.
It's difficult, and it's already proved catastrophic for businesses all around the world. The companies in concern are mostly tiny, but boards of larger corporations will be sceptical of these developments.
What can corporate boards do to combat inflation?
Understand your market and your organisation. As with any other period of volatile markets, the most important instruments at the disposal of a board are information and communication.
Understand your market
In the same podcast interview, NACD COO Kimberley Simpson admitted that, while the inflation situation appears to be new and unusual currently, it has precedents.
Furthermore, many board members will have dealt with similar problems in the past.
This is a critical component of market knowledge and will aid in forecasting what is to come.
As a board member, you should be aware of current events. Week after week, make sure to keep an eye on global, business, and political news to catch anything that could affect your company's operations.
Good for you if you have previous experience with inflation problems! Make use of it and share your knowledge with your coworkers.
Understand your firm
Knowing your company is the other part of an important inflation-protection strategy for boards.
As a director, you should be in constant communication with management, therefore this advice should be second nature to you. However, it is still useful to emphasise its significance.
Management information allows you to portray the most realistic picture of your firm. Pay attention to what they're saying. What is effective? What makes something unsustainable? What may they require to survive the storm?
If they aren't asking you these questions, you should.
Inflation is here to stay, albeit it may become less of a burden in the long run. Finally, predicting this trend is difficult because many contributing components have undetermined end dates.
Meanwhile, your responsibilities as a director are as follows:
Accept that you can't fight inflation; you can only work around it.
Maintain continual communication with the markets and your management team. This is where you will get long-term information.
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