Global inflation is surging. Three months ago the wholesale price inflation touched 8 per cent in Europe, 10 per cent in the US, 15 per cent in India, and 5 per cent in the UAE. It nearly doubled in 37 of 44 leading economies, according to Pew Research.
Energy prices and agriculture products seem to be leading the spike – and both are commodities that will work their way into coming price hikes for manufactured goods. According to PwC, inflation is the top-of-mind item in the agenda for every meeting for most corporate boards in the US. This means board meetings with managements commiserating about the present, and worrying about the future.
As a director, you should realise that your board (as well as your management) would need to relearn skills and behaviours that most advanced economies haven’t demanded since the early 1980s, when both inflation and interest rates soared. Few execs were around 40 years of age some 45 years ago when inflation was at double-digit rates last. You may want to do some research on what companies did then (right and wrong) to cope up with inflation in terms of strategy, pricing, finance, growth, compensation and hiring.
While the majority of board directors are not economists, they need to still understand how the economy works and how government policies of rising price inflation impacts the business of the enterprises they serve. Boards are supposed to provide the guidance to the management for the future. So, inflation-readiness is a key competence directors must have today.
Board members must closely study the impact on the company from nt inflation figures, and projections for the next year. What are your most significant cost dangers from your suppliers, and what are you doing to diversify your supplier base? What inputs would see the greatest inflation hits, and how are you hedging/managing them?
Look for numbers on whether transitory inflation can (or should) be built into pricing. What are the projections for your margins under various inflation/cost/pricing scenarios?
Do you need to raise prices? Modify products and services? Push lines up to higher margin premium models? Who are your most price-sensitive customers?
Private and venture firms need to look closely at the capital impacts of inflated times. Are you pruning your capital? How much of your capital is variable versus fixed?
The enterprise business should be doing more than hunkering down, so the board must also ask about active inflation-coping moves. What are we doing on credit issues – should we borrow now, before interest rates jump further?
Are we using more active balance-sheet management, and monitoring our cash and credit situations? Perhaps we should hold our transformation plans, or spending on digitization?
Inflated, uncertain times could be the moment to press ahead with investments (before they grow even more expensive), as well as hiring of talent. For the latter, The Great Resignation” may quickly become the great ‘stay-put and keep safe’.
Ask how inflation is hitting the company talent acquisition and retention, and how compensation and benefits should keep up.
Smart boards should be asking management for their plans under various inflation scenarios. How will we make capital reallocation decisions, and adjust them as interest rate changes occur? But they should also expect the team to flex the muscles they have built over the past two years in dealing with uncertainty.
There are so many unknowns board members can’t control. Assure yourselves not just on plans, but management’s early warning skills on inflation and capital issues that require a quick reset. Could the alternate supply and transport sources you had to hustle up for Covid now offer new pricing opportunities?
Should we continue to let those employees who are more productive working from anywhere to WFH? Research says introverted men and women who have domestic and office duties perform much better in WFH mode.
No matter what your expertise is in, be cognizant of the leading and lagging economic indicators. A persistent inflation has major impacts on all stakeholders and asking pertinent questions is an important agenda item for all board members.
