Suits The C-Suite

SGV thought leadership on pressing issues faced by chief executives in today’s economic landscape. Articles are published every Monday in the Economy section of the BusinessWorld newspaper.
29 May 2023 Maria Kathrina S. Macaisa-Peña

Rethinking value: The evolution of consumer spending (Second Part)

Second of three partsPeople are buying less and/or buying better in various ways, a trend that is creating new consumption patterns. While consumption is still crucial for economic growth, companies will need to adapt as customers increasingly prefer experiences and digital goods over tangible items. To remain competitive, companies will need to know what is causing those changes, how they will affect their goods and services, and what future success will look like as redefined by evolving consumer needs.With consumer spending such a large source of economic growth, the consumer is truly king. While it has become widely accepted that consumption drives growth, two years of lockdowns have left a lasting impression on consumer preferences. According to the EY Future Consumer Index, which surveys over 21,000 consumers in 27 countries, many consumers have developed simpler, less consumerist values as a result of learning to live with less during the height of the pandemic. Whether by preference or circumstance, we’ve seen the Filipino consumer become more selective in where and how they spend their money. With consumers demonstrating a decreasing appetite for spending, businesses are faced with the opportunity to redefine the concept of growth and how to measure it.In the first part of this article, we discussed the drivers that could reshape consumption patterns and the significant changes in said patterns that are predicted to occur over the next few years. In this second part, we discuss the factors affecting drivers of growth and their implications for consumer companies.DRIVERS AFFECTING PERCEPTIONS OF GROWTHTraditionally, businesses are evaluated by how much they can increase their revenue and profit margins, while entire economies are measured by how much they can grow their GDP. This makes changes in consumer values and spending habits crucial to their success. The measurements used to gauge development and growth will inevitably change as the foundations of consumption change as well.Growth defines progress; strong GDP growth or increases in revenue both indicate that things are moving in the right direction, and when they are declining, they raise red flags. However, the importance of growth is being questioned, with increasing pressure to switch national development indicators from financial measurements to a “well-being economy,” which measures success by the well-being of the environment as well as consumers.Wealth and well-being have long been correlated with each another, and focusing on well-being instead of assuming that wealth itself delivers well-being creates a significant change in how economies develop. This is being increasingly reflected in the development of business strategies. Environmental, social, and governance (ESG) concerns are further influencing investment choices, and ESG goals are being reported more often alongside financial ones.The EY Future Consumer Index identified the following drivers that could reshape existing perceptions of growth and progress.Alternative business models. As resources become scarcer, investments are being driven to find alternatives. This will open up new opportunities, reducing related costs and delivering a new wave of goods and services as a result of rising technologies, data proliferation, alternate food sources, and renewable energy.Immersive virtual economies. As consumers spend more time and money online, alternative digital economies are emerging and becoming larger, more numerous, and more complex. This will open up new opportunities for the creation of value-utilizing digital assets or currencies that are transferable between the real world and the virtual one.Well-being economy. Alternative metrics that produce better social and environmental results are beginning to replace the emphasis on using financial growth and wealth to measure progress and development. There is also the previously mentioned increasing pressure to replace metrics like GDP with ones that instead focus on enhancing the well-being of the environment and the general populace.Social evaluation. Algorithms that monitor factors such as social conduct, consumer spending patterns, media consumption, and credit history can produce holistic and comprehensive ratings that reflect the social value of individuals and organizations. As these scores become more widely used, they may be used to determine who has access to financial, travel, and healthcare privileges.Converging public and private services. The gap between businesses and governments is narrowing as corporations use resources and infrastructure for functions previously performed by the public sector, such as taking back and recycling waste, providing healthcare or education, or using social media for emergency communications. Local fashion corporations in particular have employed ongoing recycling initiatives, incentivizing their customers to adopt more circular lifestyles.IMPLICATIONS FOR CONSUMER COMPANIESThe previously discussed factors show that simply measuring financial growth may not be sufficient anymore when it comes to measuring overall progress. For example, value creation will shift away from physical economies and toward virtual economies due to the scarcity of certain resources and the growing availability of others. Non-financial goals will take precedence over hard currency, pushing back the impact on time, people, and the environment.The well-being of our planet and its inhabitants will be combined with financial security and economic growth on national agendas. The demographic dividend that has sustained economic advancement for centuries will be undermined by declining population growth, while technology may result in shorter workweeks and the need for new welfare programs.In the last part of this article, we discuss how redefining success will reshape business as we know it and how companies can further understand changing consumer expectations.  This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Maria Kathrina S. Macaisa-Peña is a business consulting partner and the consumer products and retail sector leader of SGV & Co.

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22 May 2023 Maria Kathrina S. Macaisa-Peña

Rethinking value: The evolution of consumer spending (First Part)

First of three partsConsumer spending serves as the cornerstone of the world economy and society, and both businesses and governments depend on it. It currently accounts for more than half (60%) of the world’s GDP, according to the Global Economy, an online database that compiles over 500 indicators for more than 200 countries since 1960. In the Philippines, private consumption accounted for 75.4% of nominal GDP in December 2022.When consumers spend, the economy grows; when they do not, the economy shrinks — showing us how the consumer is truly king. Even during a recession, consumers always manage to find a way to spend their way back to growth, with methods employed for recovery nearly always centering on getting consumers to spend more money by lowering debt payments and raising wages.Two years of lockdowns in particular have left a lasting impression on consumer preferences. As much as 54% of consumers have noticed changes in their values and outlook on life, according to the EY Future Consumer Index, which surveys over 21,000 consumers in 27 countries. Many consumers have developed simpler, less consumerist values as a result of learning to live with less. An increasing number of reselling, renting, and repair services made possible by technological platforms and new business models also enable consumers to restrict their consumption without affecting their lives.The pursuit of economic growth is also receiving more criticism, with questions raised about the potential social and environmental consequences of economic expansion. Consumption is under pressure due to current macroeconomic instability, rising interest rates and continuously higher than average inflation rates. This in turn is reducing the appetite for consumers to spend their way out of a crisis, possibly redefining the concept of growth and how to measure it.CHANGING CONSUMER BEHAVIORFor many years, encouraging people to consume more has been the source of growth. The introduction of new products, seasonal fashion, bigger portions, and an abundance of options have previously increased consumer spending. However, with increasing signs of consumption fatigue, brands must reevaluate their value proposition to motivate consumers to consume better instead of consuming more.At the same time, consumption is not going anywhere; people still need to eat and drink, although they may purchase food and drink in various ways. Clothing and other necessities will still be in demand, though perhaps in less quantity. Even though consumer aspirations may be less centered on tangible objects, they will still have goals that depend on products and services.The Future Consumer Index identified five drivers that could reshape consumption patterns:Household evolution. With the increasing number of single-person and single-parent homes, household sizes are decreasing. According to a study funded by the World Health Organization and conducted by the Department of Health (DoH) and the University of the Philippines-National Institutes of Health, the number of solo parents in the Philippines is currently estimated at 14 million to 15 million. Longer life expectancies, alling fertility rates, and children staying at home longer also contribute to evolving household compositions, creating new consumption patterns in the types and volumes of products purchased.Experiences over products. Spending on material things will reach a saturation point as consumption rises, lowering the value of tangible commodities. Instead, consumers will start to spend their discretionary income on activities that enrich their lifestyles through experiences.Extended product lifecycles. Companies and customers are under increasing pressure to improve and repair items instead of replacing them. The frequency of new product introductions will decline as the concept of “planned obsolescence” gives way to the “right to repair,” and repair or enhancement services will create new revenue streams.Digital goods and services. With more time spent online, consumers find less need to own or use physical goods and services. While many essential needs will continue to be met physically, the growth of digital goods and services is expanding consumer spending and opening up new possibilities for innovation and value creation.Impact transparency. Consumer awareness of the broader effects of the goods and services they use — on both people and the planet — will only continue to increase. More readily available product information will affect the decisions they make.THE FUTURE OF CONSUMPTION PATTERNSSignificant changes in consumption patterns are predicted to occur over the next few years, according to learnings from the EY Future Consumer Index.Consumption of physical goods as a percentage of total consumption will drop. Less tangible consumables are seeing an increase in consumer preference. In particular, the total amount of physical products will decline as a result of consumers choosing experiences, digital products, and longer product life cycles.Asset-light lifestyles will change basket and product sizes. In a future world when being frugal is commended, less will be more. Everything will be available for rent or subscription, and fluctuating household sizes will determine how much people buy. Bulk purchasing will decline as the number of one-person homes rises, while the practice of purchasing better quality items instead of more and renting the remainder will increase as consumers reevaluate whether they really need certain products.Simplicity and transparency will enable consumer choices. Consumers will be able to cut through complexity with the help of artificial intelligence (AI), enabling purchase decisions to be defined by seamless convenience as much as price. However, consumers will also make decisions that consider the impact of those decisions on their values. They might not give as much thought to daily essentials as long as the items meet expectations in terms of price and use, but consumers will prefer to invest their time and money in the goods and services they genuinely value.In the second part of this article, we discuss the factors affecting drivers of growth and their implications for consumer companies. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Maria Kathrina S. Macaisa-Peña is a business consulting partner and the consumer products and retail sector leader of SGV & Co.

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15 May 2023 Randall C. Antonio

ChatGPT: A versatile AI model (Second Part)

Second of two partsWhen ChatGPT 3.5 was released last year, it made global headlines for its ability to perform tasks such as analyzing professional contracts and complex spreadsheets. ChatGPT is a rapidly evolving text-based artificial intelligence (AI) that facilitates “human” interactions via its natural language responses. Despite its nascency, ChatGPT has already solidified its presence in various industries. Its myriad of functions (e.g., content creation, data analysis, and code generation) can help organizations enhance their products and services, streamline work processes, and refine customer service.However, many are also deeply concerned about its use in business, education and various other sectors. In the first part of this article, we discussed the science behind Generative Pre-Trained Transformer (GPT), hot topics regarding its human aspect, its response biases, and potential business applications. In this second part, we discuss the practical ways ChatGPT can be used in business and the potential risks it presents.PRACTICAL BUSINESS USE CASESWith the ability of AI to automate several tasks, businesses can reduce their labor costs while simultaneously enhancing workflows. ChatGPT’s flexibility can support and possibly even enhance various corporate functions such as customer service, data analytics, sales and marketing, and finance.Customer service. Given its text-based nature, ChatGPT can leverage its ability to customize responses based on user prompts to facilitate a seamless user experience. The program’s versatility means that it can be incorporated into different platforms such as chatbots, e-mail, and SMS. ChatGPT can provide round-the-clock support, potentially becoming instrumental in the banking, healthcare and information technology (IT) industries. Small- and medium-sized enterprises (SMEs) can capitalize on AI by setting up a chatbot that can interface with customers without needing human moderation. Since the AI will continue to evolve through repeated customer interactions, the company can make use of the data for continuous improvement.Data analysis. ChatGPT has a wealth of information to draw on, potentially making it an asset for tasks such as market research, research and development, and financial forecasts. Businesses will be able to analyze data more efficiently given its comprehensive set of information. A practical example would be ChatGPT’s capacity to break down complex code and generate bug fixes.Sales and marketing. Sales and marketing are corporate functions that require a more personalized approach, and ChatGPT can address this by utilizing its natural language model to create bespoke solutions. Apart from generating SEO-friendly keywords to outlining drafts, ChatGPT can also produce personalized e-mails, blogs and video ideas.BUSINESS RISKSDespite ChatGPT’s potential for streamlining operations, it can pose risks for organizations. Given the nature of this AI and how it can evolve (i.e., it analyzes large data sets on the internet before generating a response based on the user prompt), security, accuracy and fairness are paramount concerns.A potential pitfall for the AI lies in its primary competency — that it can facilitate more “human-like” interactions since humans are prone to error and subject to different biases. Its very strength can prove to be its weakness, since the conveniences it affords can also facilitate the spread of disinformation, ethical issues and copyright disputes.Data accuracy. OpenAI, the company behind the program, acknowledged that the software produced erroneous and/or biased content. One of the program’s limitations is that its learning model was programmed in 2021, which means that it has little-to-no knowledge of developments since then. It is also worth mentioning that not all online information is accurate, proving to be a substantial constraint for ChatGPT. People have even claimed that the AI can “hallucinate” because it has populated user queries with false information, such as listing down incorrect credentials for public individuals.Cybersecurity and data privacy. Its online nature makes ChatGPT vulnerable to cybersecurity attacks that make it a potential risk to businesses. The program can endanger one’s privacy because it can sift through a vast range of data accessible online. Businesses will have to deliberate whether the technology’s benefits outweigh its potential security risks. They must also be vigilant when it comes to the security of both themselves as well as their clients.Bias. In the first part of the article, we discussed how ChatGPT has a category of answers that consists of subjective responses. This inherent bias may deter corporations from assimilating it into their established work systems. There was a case wherein ChatGPT was asked which airline passengers could pose a risk, and it asserted that individuals who traveled to North Korea, Afghanistan, Iraq and Syria were the more prominent dangers. The learning model is continuously evolving, but it still needs some form of arbitration to avoid ethics and bias-related issues.Ethics. In academia, there have been longstanding, divergent opinions when it comes to technological advancements, ranging from the archaic decision of whether smartphones should be allowed in class, to more current concerns, such as the ethics of using AI to accomplish assignments and/or examinations. The jury is still out as institutions have varied responses, with some universities mandating the return of in-person exams to safeguard against cheating, whereas others have started to delineate AI-specific guidelines. Plagiarism, however, remains a principal concern. The convenience of AI may exacerbate issues when it comes to the originality of work, whether in academia or corporations.Intellectual property and copyright. In light of ongoing discussions that ChatGPT can replace, or at the very least, assist with certain types of work, it is vital to understand the legal repercussions. With copyright protection, the US Copyright Office will not register work that was generated by an AI. In accordance with US law, AI-generated output will either be a claimless work available in the public domain or considered a derivative work of the tools that the AI was developed upon. This raises the question as to who the true owner is — the creators of ChatGPT or the user for whom the output was generated.AI IS HERE TO STAYAs one of many developing AIs, ChatGPT offers advantages and risks for personal users and organizations. It is also apparent that human intervention is necessary to truly leverage its benefits and mitigate its intrinsic shortcomings.With the current technological climate though, it seems that businesses will no longer be able to turn a blind eye to the program. Similarly, OpenAI is not the only company making headlines when it comes to artificial intelligence as other companies are racing to develop their own versions. One thing is clear — AI is here to stay.Technology is at the forefront of business change and learning how to leverage it is critical. ChatGPT has jolted the corporate landscape, presenting both challenges and opportunities for organizations. For companies considering the use of AI, it is vital to evaluate its role in their respective ecosystems. Ultimately, the biggest question is whether hypothetical returns will be enough to mitigate the potential risks. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Randall C. Antonio is a technology consulting partner of SGV & Co.

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08 May 2023 Randall C. Antonio

ChatGPT: A versatile AI model (First Part)

First of two partsIn November, ChatGPT 3.5 was released — and took the world by storm. ChatGPT touted its ability to create essays, write computer code, pass board exams, create business plans, and many other tasks such as, but not limited to, analyzing professional contracts and complex spreadsheets.The ChatGPT 3.5 architecture follows ChatGPT 3, which was launched in 2020 and is now being used by many large organizations such as Microsoft Corp., Google LLC, and, Inc. for chatbots, virtual assistants and other AI-powered applications.ChatGPT, or the Chat-Generative Pre-Trained Transformer algorithm, was developed by OpenAI. OpenAI is an artificial intelligence (AI) research laboratory based in the US established in late 2015. It aims to promote and develop friendly AI, running on the fifth most powerful supercomputer in the world.Close to six months after the launch of ChatGPT 3.5, OpenAI also launched ChatGPT 4. It promises to be even more powerful and versatile than its predecessor, improving on the weaknesses and limitations of ChatGPT 3 (which uses a relatively small database to train on). ChatGPT 4 uses a much larger 50 terabytes of high-quality training data through a combination of automatic and manual curation methods. This allows ChatGPT 4 to deliver better conversational AI applications, understand context, and generate more natural-sounding text. It is powerful enough to detect and respond to changes in tone and sentiment, and unlike ChatGPT 3, can also make images.THE SCIENCE BEHIND GPTGenerative Pre-Trained Transformer (GPT) is a type of large language model (LLM) neural network that can perform various and complex natural language processing tasks. It is a type of a deep learning algorithm that uses a transformer network (a sequence to sequence translator architecture used for language models and computer vision), specifically developed to train from large quantities of unlabeled text using unsupervised learning, analyzing patterns in the data set to generate human-like text in response to input.LLMs need access to large datasets of text called training data. Such data come from a variety of sources including books, articles, websites, academic papers, social media posts, blogs, news articles, and other online and offline text sources — without any explicit supervision or guidance on what to learn, except to automatically discover patterns and relationships in the data and use them. ChatGPT uses this data to generate more natural-sounding text.THE HUMAN ASPECTWhile there are many positive opportunities presented by ChatGPT, ongoing debates in the tech community center on the threats posed by the larger AI. ChatGPT is indeed revolutionary, but it also gave us a taste of the real risks and dangers.Some of these hot topics relating to the human aspect include social manipulation, job losses, social surveillance, gender and race biases, socio-economic inequality, weakening ethics and goodwill, financial crises, and a dangerous arms race of AI-powered weaponry.RESPONSE BIASESChatGPT responses can be categorized into those that are mathematically or scientifically accurate, i.e., the answer to 1 + 1, or that water is liquid at room temperature. The other category consists of subjective responses, i.e., whether red is a better color than maroon, or whether certain politicians are performing better than their predecessors.It is worth noting that there have been concerns about the potential biases in the training data sets used for language models like ChatGPT. Biases in the data can lead to biased outputs, which could have negative consequences in real-world applications. ChatGPT, just like humans, can still provide subjective, inaccurate, or wrong answers that are biased. When these biases cross ethical boundaries because of the quality and manual curation of the training data, this means that such biases can sometimes cause more societal harm than good.BUSINESS APPLICATIONSRest assured, ChatGPT (and AI) will be here to stay, continuing to evolve and advance at lightspeed. It will continue to highlight that the world we live in will be significantly different as early as next year. Many businesses are scrambling to understand both the implications and opportunities provided by ChatGPT to their organizations.ChatGPT as applied in business could, in a lot of ways, improve the bottom line, enhance efficiency, and transform customer experience while reducing costs. Some use case examples for ChatGPT are chatbots, content creation, code development, fraud and abnormality detection, language translation, voice assistants, and hyper-personalization for recommendation engines. There are also potentially vast opportunities, along with accompanying risks, in sectors such as education, creative services, professional services, content creation, and many others.Many more technically adept companies are already finding amazing use cases of ChatGPT and AI that end up disrupting traditional businesses.TRANSFORMING THE FUTURE THROUGH AIThere is no doubt that ChatGPT is still in its infancy stage, which simply means that there is much more to expect. Our lives will change, and the rapid rate of this change will be like no other compared to all human history. Just like electricity and water, ChatGPT is also expected to become a mainstream utility. It will be much faster, cheaper, more accurate, and eventually, some even say it will be sentient. It will become a necessary and unavoidable part of our daily lives.According to a report from Opus Research, 35% of consumers would like to see more enterprises incorporate AI tools like chatbots, whereas 48% of them are indifferent as to whether an AI or a human were to assist them. While not the majority, a considerable percentage of people are seeing the benefits of AI. As this technology only continues to get better, many jobs and traditional businesses will need to transform or be at risk of being displaced. Industries and processes will be disrupted, and new opportunities and applications will surface. The only question will be: are we ready for it?In the second part of this article, we discuss the practical ways ChatGPT can be used in business and the potential risks it presents. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Randall C. Antonio is a technology consulting partner of SGV & Co.

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01 May 2023 Rossana A. Fajardo

Reshaping the social contract

Since before the pandemic, the social contract defining the interaction between employers and employees has been changing. Rapid advancements in automation as well as the increasing significance of commitments to environmental, social, and governance (ESG) and diversity, equity, and inclusion (DE&I) have all contributed to this shift. The pandemic only furthered the shift by elevating elements such as employee wellbeing and organizational purpose.Employees today show a preference for companies that support their beliefs regarding social responsibility while providing flexibility and specialized opportunities for professional growth. They also want a fair compensation system that includes a transparent rewards and recognition program, which is understandable given the current economic landscape. According to the EY 2022 Work Reimagined Survey, the chance to increase their compensation is the main driver of job switching among employees.Companies are becoming more aware of these expectations and the need to address them. Two-thirds of CEO respondents from the latest EY CEO Outlook Survey agree that pandemic-related working habits are becoming more important for lowering staff attrition and attracting new talent. However, according to the EY 2022 Work Reimagined Survey, only one-third of companies are actively changing how they handle these practices, particularly those involving technology, flexible working, and real estate.The EY Center for Board Matters investigated how boards can help reshape the shifting social contract between employers and employees, sharing three ways that boards can support their organizations.LISTENING TO THE RAPIDLY EVOLVING WORKFORCEOrganizations all across the world are aware that Gen Z workers are responsible for a significant portion of the fundamental shifts in employee expectations. Whereas a greater emphasis on sustainability may have been “nice to have” for millennials, it is non-negotiable for Gen Z. Furthermore, this generation embraces and integrates technology into their way of life. As true digital natives, Gen Z is leading the charge in creating the products, customer experiences, and ways of working that are revolutionizing how we live and work. By 2025, Gen Z will account for 27% of the workforce, and employers will depend heavily on Gen Z to actively contribute to the future success of their companies.Boards can take steps to help their organizations realize this potential by collaborating with their Chief Human Resources Officer (CHRO) or a corresponding function to create a connection with younger workers. That entails encouraging relationships built on active listening, two-way dialogue, and a sense of purpose and value. This means finding ways to involve young professionals in decision-making instead of simply passively listening, and allow decision-making based on personal beliefs and preferences. In addition, the scope for collaboration and the resources available to support health and wellbeing must be emphasized. This group must be able to challenge the organization regarding transparency in its operations, its ESG and DE&I activities, and potential inconsistencies between the organization’s commitments and reality.While talent transformation is crucial, CEOs and their boards may want to consider elevating CHRO support to accomplish these essential changes. AN EMPLOYEE EXPERIENCE TAILORED FOR LONG-TERM SUCCESSIt is imperative to pay attention to the right signals and act upon them to make the changes necessary to successfully attract, engage, and retain talent. This requires boards to have a process for monitoring outside trends and their effects on talent. One approach to achieve this is to include external specialists on the board, such as behavioral psychologists or anthropologists.Another crucial step is collaborating to create an employee value proposition that satisfies the needs and preferences of a multigenerational workforce. This should reflect diversity in the fullest sense, including demographic diversity and inclusion, opportunity, and skills application. In order to acknowledge that talent is both a long-term issue and a short-term challenge, boards can also broaden the scope of the compensation committee. In the current labor market, salary plays a major part in influencing decisions. The organization’s compensation strategy must be able to support employee financial wellness in the short term to attract top talent in the long term.PRIORITIZING UPSKILLINGMore CEOs are concentrating on talent retention strategies rather than managing talent acquisition costs as a result of recessionary pressures. Prioritizing the continued usage of technology and upskilling employees is one way they can respond. Boards can collaborate with management in retaining talent by viewing talent development as a process of progressing individuals. Employers can encourage continuous growth by offering employees new opportunities once they reach the peak of a developmental curve, such as pursuing further education or training, which would facilitate the mastery of a new job or skill. However, as change happens more quickly, these developmental curves get shorter, and skills will need to be renewed sooner. Employers must change the way their learning processes deliver skills and experience in order to do it in a more flexible, timely, and engaging manner.RESHAPING SOCIAL CONTRACTS TO EFFECT POSITIVE CHANGEBoards are poised to affect how quickly and urgently firms refresh and reshape their social contracts with employees. They must, however, push management and themselves to use diverse thinking if they are to have the greatest impact on their talent agenda. By doing so effectively, organizations will be able to effect positive change and evolve for the future.On behalf of everyone at SGV, we would like to wish all those who work a Happy Labor Day! This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Rossana A. Fajardo is the EY ASEAN business consulting leader and the consulting service line leader of SGV & Co.

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24 April 2023 Czarina R. Miranda

The changing nature of workforce mobility

Given the volatility of the labor market, organizations are grappling with a talent-related conundrum — balancing their global talent investment while maintaining a degree of flexibility amid uncertainty. The pandemic introduced novel ways of working, bringing renewed expectations regarding technological innovation, workforce adaptability, and talent-related opportunities. Leaders today need solutions that allay risks and yield rewards to build and sustain value, measures that could enrich employee experience and facilitate cross-border growth.According to the recent EY 2023 Mobility Reimagined Survey, which shares insights from more than 1,000 global mobility professionals and employees recently posted on international assignments, workforce mobility has failed to reach its full potential. While lucrative workforce mobility programs are imperative for the global talent race, with respondents voicing that these programs facilitate growth for individuals and their organizations, the survey showed a discrepancy between mobility programs offered by organizations and talent demand.Among those surveyed, 92% believe that workforce mobility opportunities help organizations drive growth by supporting organizational goals while investing in top talent. However, most respondents were unsure as to whether organizations can handle the potential tax, immigration, and regulatory risks.ADAPTING TO A VOLATILE TALENT LANDSCAPEThe Organization for Economic Co-operation and Development projects gross domestic product growth to be 2.2% in 2023, which is symptomatic of lagging economic growth. Much like the situation under the pandemic, where employees gained more leverage due to the need to retain talent, this slow growth could prompt organizations to renew their priorities to adapt to continually changing conditions.Organizations can focus on retaining key employees to save on costs and establish hierarchical stability. One way would be to develop ways to build on the preexisting employee experience to enhance talent and improve skills and capabilities.The EY 2022 Work Reimagined Survey reveals that mobility professionals believe they significantly influence the talent landscape. As much as 88% believe that mobility is one way to manage global talent shortages, while 76% assert that mobility could affect organizational strategy and 74% think that mobility is fundamental to business continuity. The study also shows that employee priorities have evolved to focus on flexible work arrangements, expansive total rewards offerings, and overall career goals and values.An overwhelming majority of respondents (93%) believe international assignments are lucrative career-building opportunities, with other benefits that include career development, training, and intercultural exchange. Joint research from EY and Oxford University also shows that prioritizing employee concerns regarding workforce mobility results in organizational transformation, making it more important for organizations to view mobility as an integral component of talent strategy, not a siloed transaction.  WORKFORCE MOBILITY ACROSS FUNCTIONSThe study presents a disconnect in the strategic and operational identities of workforce mobility. While 42% of respondents believe mobility is highly centralized, mobility practitioners still have to coordinate with various stakeholders to accomplish tasks such as immigration compliance and technology enablement.The strategic potential of workforce mobility increases with the seniority of mobility professionals. More senior mobility professionals view their function to be influential towards business operations and strategy, and believe that a lack of visibility from other functions hinders them from capitalizing on mobility programs to achieve business objectives.This presents an opportunity for organizations to better determine their priorities regarding talent attraction and career development. The mobility function can transform to cover the organization’s overall strategy and business needs such as hybrid work arrangements and both short- and long-term relocation opportunities.MOBILE WORKFORCE DIGITALIZATIONThere is a greater need for technologies that help streamline employee workflows, such as task automation and the simplification of tax, relocation, and immigration procedures that come with cross-border work. Technology is therefore pivotal in transforming workforce mobility programs by alleviating traditional burdens while increasing employee productivity.Most respondents (92%) believe that digitizing processes is advantageous, whereas only 35% believe their organizations have started doing so for various mobility processes. The discrepancy is notable as most believe digitalization investments will increase in the next five years. Respondents agreed that mobility systems are fundamental, with 79% saying they have used two or more when relocating. Organizations with global operations often require multiple vendors to deliver services in select jurisdictions.Streamlining the user experience is especially important when working across borders, as the same tools should function regardless of location. Organizations will benefit from having complete visibility over specific legal, tax and regulatory processes to be aware of accompanying risks.MINIMIZING RISKSThe ever-changing work climate has made international work more complex, and organizations should focus on building capability pipelines to adapt as they scale. Additionally, geopolitical instability has driven organizations to place a premium on risk visibility. An overwhelming majority (97%) of CEO respondents from the EY CEO Outlook Pulse have shared that they have halted investment strategies due to geopolitical issues.While organizational leaders have started assimilating geopolitical risks into their strategic equation, mobility professionals are wary of their organizational capacity to handle risks. Only 29% of respondents believed that their organization could withstand changing geopolitical circumstances.Organizations must know where their professionals are at all times to safeguard against physical or cybersecurity threats and be knowledgeable of potential immigration, tax, or regulatory risks. Most respondents believed their organization have a policy or procedure concerning hybrid mobility (e.g., temporary and permanent remote work, cross-border work, and virtual assignments). However, less than half of the mobility professionals (47%) said the policies were consistent across borders, and an even smaller percentage (41%) believed that the policies tackled significant issues.LEVERAGING WORKFORCE MOBILITY FOR LONG-TERM GROWTHAmid the unsteady geopolitical climate and intense race for talent, mobility programs can facilitate long-term growth and sustainability. Capitalizing on cross-border work entails reimagining mobility programs to gain an advantage in the race for talent.In the Philippines, the pandemic has brought to the fore certain realizations for companies that would allow its workforce to be mobile, where applicable, driving hybrid or flexible work arrangements, virtual teaming, and cross-border work and services to address recruitment and retention concerns.However, not all organizations are mindful of the tax, immigration and other regulatory risks and issues that arise under these arrangements which impact both the company and its mobile employees. More often than not, employers are observed to be more reactive rather than proactive in addressing these risks. Much therefore has yet to be done for companies to create value that will help strengthen corporate strategy for cross-border expansion and facilitate a better employee mobile experience. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.Czarina R. Miranda is the People Advisory Services Leader of SGV & Co.

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17 April 2023 Lee Carlo B. Abadia

Future-proofing with the Metaverse

The Metaverse has been positioned as the next phase of the internet. It makes use of several innovations in technology, from extended reality (XR) to artificial intelligence (AI), to enable new digital experiences.With the increasing focus on how to appropriately regulate data and the use of AI, digital governance is becoming even more crucial. Similarly, in the future of the Metaverse, effective board oversight will be just as essential and serve as a significant difference between firms that thrive and those that struggle.As mentioned in my previous article, “The Metaverse beckons: Is it time to explore?” published in this column in June 2022, the Metaverse can be defined as a virtual world where people can take on digital identities. The key characteristics of the Metaverse include (1) Persistence: where your central digital identity is maintained even as you enter and leave the Metaverse; (2) Ownership: where everything you earn or purchase in the virtual world is certified and attributed to be truly yours; (3) Interoperability: where you can carry what you own and use it in other virtual places, and (4) Decentralization: where there is no central organization that dictates the rules of the space, and is instead defined by the users themselves.By understanding the opportunities as well as risks the Metaverse presents, boards can provide effective oversight and value creation.OPPORTUNITIES FROM THE METAVERSEA wide range of use cases, including entertainment, education, commerce, and even virtual prototyping, can be expected from the Metaverse. More immersive extensions of entertainment are already taking place in virtual worlds on gaming platforms like Fortnite and Roblox, such as a celebrity concert held on Roblox that received almost 37 million visits, according to Wired UK.The synergy between digital twins — defined as digital versions of their physical counterparts in the real world — and the Metaverse in the working world is exciting. Before making changes in the real world, a digital twin can be used to test new policies or corporate decisions online. Digital twins can assist with tasks that include product creation, urban planning, and even customer experience design when combined with the Metaverse immersion.Boards may assist their organizations in seeing the value of leveraging these platforms for internal learning requirements, particularly for Gen Z and younger frontline employees, in addition to external customer interaction. New hires can have the opportunity to tour their workplace before starting for a much more immersive virtual onboarding.POTENTIAL RISKSAs the Metaverse becomes mainstream, it can give rise to new risks. Similar to the risks today arising from the widespread use of the internet, increasing participation and commercialization of the Metaverse is likely to exacerbate existing issues, ranging from online safety to data privacy.It is imperative for boards to fully understand the risks magnified by the Metaverse and include the related technical and social risk subjects in the company risk management process, given broader ethical concerns regarding the use of technologies to influence human behavior. Privacy issues are the first ones to consider, particularly in how information will be used due to the variety of biometric and emotional data that is likely going to be collected through Metaverse hardware.Depending on the applications being used in the Metaverse, boards must concentrate on protecting the privacy of consumer and employee data.Boards must also be aware of security concerns in three key areas: devices, fraud, and identity. Attacks may target Metaverse hardware, such VR headsets, and use them to rob unknowing users of their private information. The Metaverse will also likely give rise to more sophisticated or advanced phishing and counterfeiting attacks, including stealing non-fungible tokens (NFTs) and scamming for wallet credentials. Moreover, there are issues of digital identity to consider, where compromised user identities can lead to digital identity theft.THREE ACTIONS THAT BOARDS CAN TAKE1. Determine applicability and long-term valueBoards will have to adopt a critical and measured perspective toward the Metaverse and its applicability to the organization. They need to evaluate whether they are engaging the Metaverse only as a response to a trend or if it truly offers a specific benefit that enables long-term value without compromising the core principles of the business. This will help influence if the enterprise risk management program of their organization will be concentrated on monitoring the achievement of strategic goals from investments in the Metaverse.As boards determine the Metaverse’s applicability, they must consider if they have the necessary expertise to manage the risks that arise from it to protect its value. They should look into enabling tools to help identify and quantify the resulting risk scenarios accordingly and facilitate management in developing responses to them. To complement this, boards should determine if the business has teams with enough age, identity, experience, and cognitive diversity to comprehend the technological, business, ethical, cultural, and legal aspects of the Metaverse use cases so that they can drive actions in improving the thoughtful adoption of it.2. Prioritize oversight based on purpose and riskThe board is responsible for applying due diligence and supporting technology investments to boost the organization’s strategy, purpose, and values. In line with this, they must understand the extent and purpose of why the Metaverse is being leveraged by the business. In the gaming industry for example, close oversight is necessary because investments in the Metaverse can be instrumental in delivering differentiated services or goods of a gaming company.In other cases, the Metaverse may only be used solely for marketing purposes, but there would still be associated risks — particularly if it can jeopardize the company’s reputation or legal standing. Another example would be the buying and selling of digital assets to facilitate Metaverse activity, in which boards need to understand the legal and accounting repercussions of these operations. Depending on the purpose and related risks, the level of oversight will need to be carefully considered. Regardless of this however, Boards have to consider if they will need additional investments in compliance, data privacy, and fraud prevention.3. Recognize laws and moral standards Boards can help management execute a Metaverse plan by making the business aware of any legal and compliance challenges and enabling them to address these. Furthermore, they can explore how businesses can collaborate with policymakers to develop workable laws and regulations that foster innovation while upholding human rights and providing value to relevant stakeholders.Boards should consider what “code of conduct” or ethics guidelines can be applied to foster the constructive cooperative engagement in the Metaverse world of the company and minimize its risks. In parallel, they must be conscious of any new governance models that may need to emerge from Metaverse activities and pivot on how these can be considered in their enterprise risk management program.SEIZING OPPORTUNITIES THROUGH THE METAVERSEWith the Metaverse bringing about exciting new ways to live and work through an immersive virtual world, boards must understand the strategic opportunities and risks associated with it to provide effective oversight. Only then can they effectively influence investment decisions, evaluate risks, and seize their future in the Metaverse. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co. Lee Carlo B. Abadia is a technology consulting principal of SGV & Co.

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10 April 2023 Maria Vivian C. Ruiz

Building resiliency during economic uncertainty (Second Part)

Second of two partsBoards play a critical role in helping management teams find ways to thrive in unpredictable circumstances as organizations today find themselves navigating a wide range of challenges. With so much uncertainty still present, boards must decide where to focus their attention. To better understand board priorities in 2023, EY conducted a study of more than 400 corporate board members across the Americas, including Argentina, Brazil, Canada, Chile, Colombia, Mexico, and the US. While the study focuses on western markets, the insights on the five top board priorities are also relevant for Philippine companies.In the first part of this article, we focused on two of the top board priorities, which were navigating difficult economic circumstances and rethinking capital strategy through investments in technology. This second part of the article will discuss the remaining three priorities, specifically on how boards can enable innovative technology transformation, champion a future-focused talent agenda, and establish cybersecurity as an enterprise risk and strategic opportunity.TECH TRANSFORMATION AND INNOVATIONBoards are crucial in helping to promote innovation, regardless of the state of the economy and the business environment. They can support the executive team in maintaining balance and push decision-makers to consider how the company can address new external challenges by innovating the business rather than investing or cutting costs.Boards are in a unique position to provide thought-provoking hypothetical questions about potential new products, services, and income streams related to megatrends, such as how the emergence of Gen Z is changing employee and consumer trends. Scenario planning can further build resilience by allowing for the potential of uncertainty, challenging long-held beliefs, and spotting possibilities to redefine the future of the company through proactive innovation.Despite the prevailing volatility, it is important to keep an eye on the longer-term developments that will shape the future of business. The value of operational, consumer, and market data is now being unlocked by advanced data analytics as the world enters a new era of data centricity powered by developing technologies. Deeper interaction is made possible by new human-machine interfaces, which also open up new avenues for communication, commerce, customer outreach, and the creation of goods and services. To best support their companies, boards must stay current on new technologies and their ideas.For our planet and social institutions, new technologies and the behaviors they encourage in people carry both promise and risk. On one hand, technological advancement can lead to a new immersive virtual workplace, the capacity to reduce unconscious bias, the potential to encourage healthier lifestyles, and lowered carbon emissions by substituting non-polluting virtual experiences for real-world presence and physical goods.However, emerging technologies can pose significant dangers for data privacy, fraud, false information, polarization and isolation, mental health, and energy costs. Better sustainability results need to be part of the future vision and strategy around new technologies and consumer strategies. This is especially significant at a time when stakeholder expectations and demands are drastically shifting in light of environmental and social developments.A FUTURE-FOCUSED TALENT AGENDAGlobal macrotrends are still influencing the future of work, making it more urgent for businesses to adjust to the shifting talent landscape. The structural shift in labor markets poses a formidable challenge as we suffer the highest global talent shortage in more than a decade. Employees are reevaluating and reordering the things they value most in an employer and are prepared to take action to satisfy those needs, with 68% of employers stating that employee turnover rose during the previous year. Previous methods used to attract and retain employees are no longer effective due to evolving employee needs, including the need for flexible and hybrid employment.Highly-skilled employees will continue to retain more power even as the labor market cools. Millennials and Gen Z, particularly those working in the hardware and technology industry, are where the highest turnover is anticipated. Technologically-skilled workers are also in high demand, with inflation driving up the cost of competitive remuneration as a result.It is crucial to monitor employee morale and workplace culture, as employers and employees have varied perspectives regarding the effects of hybrid, flexible, or mobile work options on productivity and career progression opportunities. If employees are not given the same level of flexibility provided during the pandemic, 54% of respondents to the EY Global Workforce Survey said they would consider resigning.The ability of a company to retain talent may depend on whether or not its leaders are decisive and human-centered, with an emphasis on innovation, building trust, and exhibiting desired attributes. In order to get a more comprehensive understanding of employee needs and sentiment beyond simply gauging the tone at the top, boards may need to spend more time in conversation with the chief human resources officer to champion a future-focused talent agenda. They also need to evaluate the company plan for overall compensation, filling of any skills gaps, and talent retention.CYBERSECURITY: A STRATEGIC OPPORTUNITYThe high degree of cyber risks that businesses confront are growing, with risks from ongoing digital transformation, flexible working, and the introduction of disruptive technologies having increased in 2022. Management must continue to stress the value of managing cybersecurity as an enterprise risk since the stakes are higher than ever, but should also see it as a chance to strategically position their companies as reliable business partners.The board should set the tone by discussing cyber threats with management outside of the chief information officer (CIO) or chief information security officer (CISO). When developing new technology, goods, and business arrangements, CEOs should be questioned about how cybersecurity is incorporated into the design process from the beginning using the “trust by design” idea. In order to better challenge management, boards should be familiar with new or growing risks, the financial worth of the company’s risk (including the effectiveness of cyber insurance coverage), and leading cybersecurity risk management techniques.Cybersecurity risk management in the current context is about response readiness and resilience. This means focusing on early detection, isolating important assets, preparing continuity plans to operate in a crisis, reporting to and working with authorities while managing litigation, and communicating with employees, customers, and investors.Holding cyber incident simulations with management and the board should be prioritized, as well as stress-testing the organization to improve readiness and recovery efforts by clarifying roles and escalation processes. Third parties, such as a public relations agency or forensic specialists, can be included as necessary.Finally, boards may oversee improved disclosures that make it clear to investors and other stakeholders how seriously they are taking cybersecurity threats and how qualified they are to do so. These disclosures are becoming more crucial as stakeholder scrutiny of these issues grows.BUILDING STRENGTH IN RESILIENCETo meet the challenges in this new era of constant uncertainty, resilience will be key to sustained success. Boards should work together with management to navigate uncertain economic conditions, rethink capital markets through investments in technology, pursue transformation and innovation, enable a future-focused talent agenda and elevate cybersecurity risk oversight.Through continuous collaboration with management, boards will be able to build strength in resilience to weather ongoing volatile economic conditions. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.Maria Vivian C. Ruiz is the vice chair and deputy managing partner of SGV & Co.

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03 April 2023 Maria Vivian C. Ruiz

Building resiliency during economic uncertainty (First Part)

First of two partsOrganizations today find themselves navigating a previously unheard-of range of challenges, including the ongoing pandemic, the effects of climate change, shifting regulatory requirements, and more. Boards play a critical role by helping management teams explore options and find ways to thrive in unpredictable circumstances, supervising plans to traverse this complex corporate climate, and by providing guidance on transformational investments.Resilience — the capacity to foresee, plan for, respond to, and adapt to a changing environment — is essential. Given the uncertainty in the market, deciding where the board should focus its time and attention is vital.To learn more about board priorities for 2023, EY conducted a study, Americas board priorities 2023: how to build resiliency in uncertain times, surveying more than 400 corporate board members across the Americas, including Argentina, Brazil, Canada, Chile, Colombia, Mexico, and the US. Given the distinctive difficulties businesses are facing in this area and their responsibility for financial oversight, it may not be so surprising that boards placed the highest priority upon economic conditions. Though the study focuses on western markets, the insights on the five top board priorities are also relevant for Philippine companies.DIFFICULT TIMES AHEADSeveral factors indicate the increasing possibility of a global recession in 2023. These include the ongoing conflict in Ukraine, stricter financial restrictions, and a simultaneous economic slowdown in the US, Europe, mainland China, and several emerging markets. Persistent inflation, rising borrowing costs, declining private sector sentiment, and the rapidly slowing global economy are all contributing to a potential global economic cooldown. Some businesses are choosing to exercise more caution in hiring people and undertaking investments due to ongoing cost challenges, deteriorating demand, and increased uncertainty.Drivers of economic activity that were once taken for granted will now require more attention from boards in the current business landscape.In the first part of this article, we will look at the first two top priorities identified in the report:1) Economic circumstances that companies have to focus on to support themselves through economic volatility (these include inflation, labor, capital costs, supply chain and energy switch) and2) How to rethink capital strategy through investment in technology.ECONOMIC CIRCUMSTANCESInflation. It is unlikely that the supply and demand mismatch in the energy sector, which is caused by geopolitical unrest and climate change, can be remedied very soon. Price inflation in energy, commodities, and food will likely continue to be volatile.Boards should monitor how companies are developing price and supply strategies that are flexible enough to react to demand fluctuations that have become more severe in recent years. The part that cost control and productivity improvements play in a company’s inflation strategy must also be considered.Labor. While laying off excess labor has historically been a tactic to control expenses during economic downturns, talent is now not only more expensive, but it is also more valued. Business executives currently prefer strategic hiring freezes, strategic layoffs, attrition, and furloughs over broad-based layoffs as cost-control methods.As they monitor how productivity, training, and efficiency benefits might offset increasing labor expenses and keep an employee base engaged when rehiring is possible, boards will need to keep an eye on the long-term talent agenda.Capital costs. The rapid and coordinated tightening of monetary policy around the world has resulted in an increase in borrowing costs, a decline in equity values, and major changes in foreign currency rates. The focus on optionality to meet strategic goals is increasing due to the rising cost of debt, and the wide variations in equity valuations have widened the gap between the perceptions of buyers and sellers of the true value of an asset. In order to address this, boards can collaborate with management to explore business capital strategy plans.Supply chain. The switch some firms made from just-in-time to “just-in-case” inventory management during the pandemic may likely be unsustainable, and some organizations may experience new challenges as demand slows down and inventory builds up.As businesses explore reshoring options, geopolitical developments are also quickly altering the business environment and redefining supply chain risks and opportunities. In an increasingly fragmented environment, boards should monitor how management can strike a balance between supply chain risk and redundancy.Energy switch. The impact of the war in Ukraine on energy security and supply, coupled with other climatic repercussions, is disrupting economic activity in real time and making the energy transition urgent. While inflationary pressures might postpone some plans, boards can also collaborate with management to determine whether this is a chance to accelerate that transition.CAPITAL STRATEGY AND TECH INVESTMENTMany businesses are committed to modernizing their operations, despite rising interest rates, in order to stay ahead of disruption. Additionally, they continue to maintain their investment plans in an effort to increase value, resilience, and long-term options. Nearly three-fourths of worldwide executives (72%) surveyed for the EY 2022 Digital Investment Index stated they must significantly transform their operations to remain competitive by investing in technology and digital capabilities.Many businesses are looking to build long-term value through cost-of-capital optimization, reduced operational disruption, creating stronger connections with customers and employees regarding the environmental, social, and governance (ESG) agenda, and putting environmental and social sustainability at the core of the business. Organizations are also interested in investing in early-stage companies to expand their current portfolio, obtain fresh talent, or build new business platforms.Mergers and acquisitions (M&A) continue to be a crucial alternative to improve capabilities in technology, talent, and innovation as well as sustainability plans. Divestment may also be a key strategy to free up capital to reinvest in core capabilities and growth areas.It will be crucial to maintain flexibility in order to achieve strategic objectives, especially with the rising cost of debt. Boards can play a significant role in addressing the assumptions that underlie management decisions and disputing possible options that management has explored. They can facilitate discussions that aid in strategy clarification and provide a clear view of the markets and underlying growth factors, such as demand, competitive advantage, alignment to company vision, and potential for long-term value.Finally, boards have the chance to direct management’s investor engagement strategy as a crucial component of long-term value creation initiatives in the current downturn. They will need to determine if their efforts to proactively communicate with shareholders are sufficient and ensure that potential innovation and growth opportunities are considered.The second part of this article will discuss the other three priorities, specifically on how boards can enable innovative technology transformation, champion a future-focused talent agenda, and establish cybersecurity as both an enterprise risk and strategic opportunity. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views reflected in this article are the views of the author and do not necessarily reflect the views of SGV, the global EY organization or its member firms.Maria Vivian C. Ruiz is the vice chair and deputy managing partner of SGV & Co.

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27 March 2023 Kristopher S. Catalan and Dwayne G. Ignacio

Effective internal controls: A vital enabler for private companies

Change is inevitable, and we know this now more than ever. The technological disruptions that were hastened by the exigencies of the pandemic have now become widely accepted and mainstream, with such changes continuing to grow more rapidly each day.The pace of change in organizations has also accelerated. As a response to risk events such as cybersecurity breaches and fraud, especially during the pandemic, organizations had to quickly reinforce controls to protect their assets and manage compliance, reputational and legal risks. Regulatory activities have increased over the last several years in response to these events, and recently, as a result of corporate failures from previous decades, have become a race to adopt a compliance-focused mindset.With the pandemic slowing down, some companies are now re-aligning risk management with changes in business models and emerging risks in the face of disruption and technological advancements. This is challenging for private companies, especially for small- and medium-sized enterprises (SMEs), which are recovering lost growth and managing transitions to more resilient business and operating models while simultaneously meeting new demands from internal and external stakeholders.Private companies have an opportunity to clarify or reinforce the roles and responsibilities within their internal control environment, stressing that management is responsible for internal controls. Enhancing internal controls by formalizing ad hoc practices, creating units or departments that will complement the monitoring functions of existing business units (such as the compliance department or risk management unit) or strengthening internal audit are some ways to respond to the emerging risks. Controls need to respond to the challenges of ever-changing business and regulatory landscapes. Private companies cannot just focus on growth today; they need to level up to ensure they protect their future.CREATING A WELL-DEFINED GOVERNANCE STRUCTUREClear reporting lines and a strong governance structure play important roles in any organization’s internal control environment. A well-defined governance structure provides an end-to-end view of stakeholder involvement by clearly assigning process ownership and accountabilities, identifying the roles and those responsible for responding to risks, and ensuring that controls are working. It also describes how performance ratings of the control owners are linked to the effectiveness of the controls for which they are responsible.Since maintaining a strong internal control environment normally involves people who work in various functions within the organization, the governance structure of a private company should be designed such that it enables effective coordination and communication across various business units. Having a well-defined governance structure in place also facilitates the timely reporting and analysis of any observations and findings on the effectiveness of controls. This in turn helps ensure that any weaknesses and deficiencies are identified, appropriate risk and impact assessments are performed, and remedial action is taken and implemented.PERIODIC REASSESSMENTWhen governance structures and internal controls are not regularly reassessed, private companies may struggle to keep up with the pace of disruption and change. With today’s dynamic operating environments, controls that worked in the past may no longer be as effective today.As complexity and disruption continue to rise in business, performing periodic reassessments enables private companies to evaluate whether the owners and management still have the appropriate level of oversight over business processes. It also helps private companies assess whether their current structure still fosters a culture of risk awareness and whether internal controls still work as effectively as intended. By periodically reassessing internal controls and their governance framework, private companies can also identify opportunities for improvement and optimization. This includes automating certain processes and controls as well as updating the controls mix in response to changes in the business.AGILE RESPONSEPrivate companies should stay on top of the changes in business, regulatory, tax and financial reporting requirements, and weigh any possible resulting risks to the organization. It is important that private companies have a process to identify these changes early and communicate them to those responsible for related processes and controls.By being proactive, private companies can timely assess the impact of changing regulatory requirements on various functions across the organization, such as governance, technology, people, policy, processes and controls. This also helps facilitate an appropriate interpretation of the changes and their application to the business, enabling management to evaluate whether the current internal control environment remains adequately equipped to respond to the changes.Private companies can stay abreast of these changes by regularly monitoring updates from organizations such as the Philippine Financial and Sustainability Reporting Standards Council (FSRSC) for accounting standard updates, the Securities and Exchange Commission (SEC), the Bureau of Internal Revenue (BIR) and other regulators for new developments and updated regulations. Private companies need to empower their C-suites, such as chief financial officers, chief risk officers or chief legal officers, to proactively discuss changes with the board and craft related action plans. When evaluating the impact that the changes have on the organization, private companies should also closely coordinate and work with their external advisors, experts and even external auditors to ensure that a holistic view of the impact is being considered.TALENT RETENTION AND UPSKILLINGThe success of sustaining an effective control environment also depends on the resources involved. Given the pace of change, private companies may need a workforce with a broad range of skills and competence. It is therefore important for private companies to consider whether current skillsets in the organization are sufficient in addressing its changing requirements. Given their growth strategies and the anticipated changes in their business, private companies should also consider whether these are the same skillsets they will need in the future to maintain an effective control environment.Any gaps in skills should be evaluated for their impact on the organization. Similarly, the organization should identify solutions that can address gaps, such as expanding the sources of talent and upskilling the current workforce through partnerships with training and learning providers.For private companies that are implementing new processes or migrating manual processes to technology-enabled solutions, it is important that, as part of the transition, the organization also evaluates whether the resources selected to monitor the scope and mix of internal controls continue to possess the necessary skills and competence.BUILDING CONFIDENCE IN INTERNAL CONTROLSThe ability to respond to the challenges of today and the future by identifying and managing risks early is a vital enabler of success for any business regardless of its stage of growth. Since businesses with strong and effective internal control environments are in a better position to timely identify and mitigate risk, it is increasingly important for private companies to build confidence in their internal control environment if they are to succeed in navigating business and industry disruptions. Having effective internal controls, especially on financial reporting, builds confidence in the information that management uses. Suffice it to say, timely and reliable financial information are crucial in making impactful business decisions.Investing now to manage the risks of the present and beyond is as crucial as spending to grow a business. In the long run, a strong and effective governance and internal control framework that is responsive to the changing business and regulatory environments will enable private companies to continually build and strengthen the right foundation to support their growth ambitions, comply with regulations, sustain long-term profitability and protect company value. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.Kristopher S. Catalan is an assurance partner and the EY private leader of SGV & Co., and Dwayne G. Ignacio is a manager from the Financial Accounting Advisory Services (FAAS) of SGV & Co.

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