2022

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.
17 January 2022 Roderick M. Vega

Accelerating the integrity agenda (First Part)

(First of two parts)Played out against a landscape of evolving social expectations from businesses under current conditions, corporate integrity is foundational to fostering trust among the various stakeholders in an organization. The importance of corporate integrity has also grown in the immediate aftermath of the pandemic, as revealed by the EY Global Integrity Report 2022.Conducted between June and September 2021 by global market research agency Ipsos MORI, the EY Global Integrity Report 2022 surveyed 4,762 board members, managers and employees from large organizations in a wide spectrum of industries, including financial services, government and public sector, consumer products, manufacturing, life sciences, professional services and others from 54 countries in North and South America, the Far East, Western and Eastern Europe, and the Middle East, India and Africa. The report shows that 97% of the respondents indicated that they value corporate integrity. Companies are also intensifying their reinforcement of integrity through training and communication; 37% of respondent companies now have a statement of organizational values in place, 46% are investing in integrity training, and 53% have a code of conduct in place.While the report did not include respondents from the Philippines, we believe that the insights from the report offer much food for thought for local business leaders who place great emphasis on corporate governance and integrity.Respondents are placing greater responsibilities on their corporate leaders, with as much as 68% expecting CEOs to tackle societal problems unaddressed by government and 65% saying that CEOs should be accountable to both the public and shareholders. These rising expectations have led to organizations being asked to more formally report on the non-financial aspects of their operations. These include not just philanthropic or corporate social responsibility (CSR) programs that fall outside their core businesses, but also environmental, social and governance (ESG) measures that determine how the core business impacts the community and the planet.The report also shows that organizations are struggling to close the gap between what they say and what they do. As organizations start taking steps to rebuild the economy, rewriting processes for digital transformation and recalibrating how and where work is performed, an opportunity to close the gap between reality and rhetoric presents itself. Integrity in business does not merely refer to ticking boxes in compliance and risk management; it is about securing the organization, its reputation, and its assets — all of which drive sustainable, long-term value.The EY Global Integrity Report 2022 provides insights on accelerating the integrity agenda, and in the first part of this article, we detail how companies must define and embed integrity into their culture. EMBEDDING INTEGRITY INTO THE CULTUREBecause ethical dilemmas are different for various organizations and situations, no two companies will have the same definition of integrity, nor will they utilize the same mechanisms to instill integrity into their organizations. It then becomes imperative for integrity to be a fundamental component of corporate strategy in any organization.The report reveals that only 33% of its respondents believe that integrity means behaving with ethical standards. Meanwhile, 50% define it as complying with codes of conduct, laws and regulations. Somewhat alarmingly, the results also show that of the 442 board members, 15% were more likely to falsify financial records as their employees, and 17% were more likely to ignore unethical conduct by third parties. This makes it unsurprising for 58% board members to be fairly or very concerned if their decisions were to come under public scrutiny, compared to only 37% of employees.Though it should be noted that this is only a single snapshot of board behavior, which can vary considerably by country, region and industry, the data showed a significant change in emerging markets: the propensity of board members to act unethically increased from 34% to 41% between 2020 and 2022. There are also differences in how management and staff see integrity values within their organization: 77% of board members and senior managers are confident that employees within their organizations can report wrongful acts without fearing negative consequences, yet 20% of employees disagree with this. This year’s report even revealed a drop in survey respondents who reported misconduct, from 23% in 2020 to 19% in 2022.A large majority of surveyed companies at 93% also have codes of conduct, with a mix of training and whistleblowing policies in place. However, even though 59% of the respondents say that they do have “training for employees,” 15% of those employees are either unaware that these measures exist or claim that they do not exist. This shows that although organizations are investing in more training and communication programs to instill integrity, the messaging may not be effective. Though 60% of board members say that their organization frequently communicated about the importance of integrity within the past 18 months, only 30% of employees remember these communications.These findings reveal the danger that organizations are relegating their integrity agenda to box-ticking without giving real attention to deepening their integrity culture, which rests on actual behavior and organizational intent.The pandemic has only increased the challenge as well, with 54% of board members saying that the pandemic is making it more difficult to conduct business with integrity. Disruptions have added to the challenge of corporate survival, while increased digitization, which moved more of a company’s operations to the cloud, has further tested risk management processes. The risk landscape itself has become more disrupted, with another report, the EY Global Board Risk Survey 2021, saying that 87% of more than 500 board directors around the world think that market disruptions are now more frequent, while 83% say they are more impactful. The 2021 EY Global Information Security Survey also found that many businesses have sidestepped cybersecurity processes to facilitate flexible and remote working in the wake of COVID-19.Because of an increased focus on surviving the disruptions and uncertainty caused by the pandemic, companies have let go of non-essential activities — possibly including integrity agenda. Leaders will have to rethink of procedures for a post-pandemic era with a pivot to full digitization and a distributed workforce.In the second part of this two-part article, we will discuss how companies can create an optimal environment that encourages integrity, and how the integrity agenda can be innovated and transformed to minimize external threats while protecting 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 opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.Roderick M. Vega is a partner and the Forensic and Integrity Services leader (FIS) of SGV & Co. 

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10 January 2022 Smith C. Lim

Accelerating growth in the post-pandemic world

As the pandemic continues to impact businesses across global economies, it has also fueled a reset in strategy for many organizations who now place focus on thriving instead of merely surviving. More than half of the respondents surveyed in the latest EY Global Capital Confidence Barometer, which gathered insights from more than 2,400 C-Suite executives globally, even expect a recovery in profitability that matches pre-pandemic levels by 2022. Most of these executives share satisfaction with their performance in response to the pandemic in comparison to their competitors, with more than half of the Southeast Asian respondents (which include Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) believing that their organizations outperformed their competitors in engaging with local communities, operational stability, and digital performance.However, this progress does not change the reality that disruption will continue at an accelerated pace not seen before the pandemic. Startups are rewriting the rules of the game, challenging business models in all industries as products and services enter markets much faster.This makes it imperative for companies to continuously review how they can future-proof their strategy and business fundamentals. They must also critically review their portfolio to determine if it will remain relevant and profitable in the long term. A constant strategic and portfolio review process will allow companies to identify areas of growth at the earliest opportunity, as well as more quickly address areas of underperformance. To take advantage of opportunities to drive transformation for success beyond the crisis, executives will need to make bold moves and act with urgency.DIVESTING UNDERPERFORMING ASSETSThe act of divesting distressed and underperforming assets is a conventional trend during a crisis — and it should also be expected to continue beyond the pandemic. It should be noted, however, that if it does not fit with an organization’s strategy, then even a strong-performing business might be tying down capital that can be better deployed in investments that deliver higher impact.While business unit management bias is understandable, it can obscure the holistic view of the business that the review process should yield. Top-down assessments by the management and board can sometimes conflict with a bottom-up review process, especially when it comes to assessing synergies and the value of business units as stand-alone entities or potential divestitures. Companies will need to consider their divestiture by identifying assets at the risk of disruption as well as those that are facing future growth challenges.MAKING TRANSFORMATIVE, STRATEGIC ACQUISITIONSThe survey revealed that over half of the Southeast Asian respondents at 56% seek to actively pursue mergers and acquisitions (M&A) in the next 12 months. This beats the average of 44% in the previous 11 years, and has been the highest number since 2012. Some of the drivers that increased this appetite for M&A include issues relating to regulations, the strengthening of technology, tariffs and trade flows, talent and new capabilities, and growth into adjacent business sectors or activities.Most of the deals that survey respondents intend to pursue this year target the acquisition of specific capabilities as well as bolt-on deals, where smaller companies are acquired and added to an existing business. Many Southeast Asian corporate M&A deals tend to have bolt-on characteristics due to them being easier to execute. However, it remains to be seen if these smaller acquisitions will be sufficient for companies seeking growth in an environment that may look very different in the wake of the pandemic. Some companies also attempted roll ups, which consolidates multiple small companies so that the resulting larger entity can take advantage of economies of scale, but it should be noted that these transactions hold a much greater risk and a higher degree of difficulty to execute.The success of the M&A approach depends on several factors. This includes ensuring that the acquisition is part of the business strategy, adequately considering and mitigating transaction risks, having a deep and well-structured analysis of the market and target, and securing correct financing of the acquisition. The extent of a detailed value-creation thesis with proper ownership and implementation actions will also make a difference between success and failure.SUSTAINABILITY AS A CORE CONSIDERATIONManagement and the board will also need to be strong stewards of the community as companies acquire and grow, making environmental, social and governance (ESG) considerations an important component of the corporate acquisition playbook.Companies will need to update their ESG and acquisition frameworks to reflect various topics, with examples that include sustainable practices, environmental compliance, and operating with integrity from the perspective of all stakeholders.TRANSFORMING AND TRANSACTING TO EMERGE STRONGERIt has been established that companies capable of transforming and transacting in previous crises have emerged stronger than their competitors. This means that embracing transformation accelerated by the right acquisitions will be key now and beyond the pandemic.In this time of rapid disruption, boards must ask themselves whether their business strategy helps maintain market leadership and growth, and if their current portfolio strategy is sound or needs to be reshaped through divestments and investments. By taking advantage of the right M&A opportunities, organization will be able to drive long-term success beyond the COVID-19 crisis. 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.Smith C. Lim is a strategy and transactions partner of SGV & Co.

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03 January 2022 Wilson P. Tan

Transformative Leadership in the year of recovery

For many business leaders, the beginning of this new year will be a time to reflect on the lessons of the past two years and to resolve to take steps to improve their respective organizations. If the global pandemic has taught us anything, it is the need to ensure that our enterprises are strong enough to survive major upheavals and agile enough to adapt and evolve into healthier ones primed for future success.This is where “future-back” thinking becomes useful. Future-back thinking is all about having a clear purpose and a clear vision of what you want your organization to become and then working backwards and planning for the steps and strategies that will lead to that vision and help make it a reality. It’s strategizing for the transformation of your business as it moves toward reaching its potential.This thinking is even more critical for large, established enterprises, where transformation happens much more slowly and is likely to meet resistance. Every business needs to transform in order to thrive because change and disruption are inevitable.This becomes even more critical given the encouraging signs of recovery we are beginning to see in our country and economy. While there is a sense of cautious optimism and rising hope that the worst is behind us, leaders understand that obstacles will still arise. However, they also know that there can be no true success without challenges to overcome.Given the exigencies of our times and the challenges to come in what we all hope will be the year of recovery, we believe that the need for transformative leadership becomes even more urgent and important than ever. Transformative leadership is a framework that focuses on three value-driving pillars: people, technology, and innovation.HUMANS@CENTERAuthor and leadership guru Simon Sinek once said, “Business is about people. If you don’t know people, you don’t know business.” Your business would not exist without people, especially the two most important ones: your customers or clients and your employees. Your strategies and long-term vision should have them both at their center. Every decision, every technology implementation, and every product and service must be viewed through the human lens.Understanding your customer or client is paramount in delivering products and services that will delight them and create compelling value propositions. This is at the core of business success, but it is also critical to recognize the need to adapt to your audience constantly. As society shifts and trends emerge, having the pulse of your base and having a solid understanding of where they are going is essential for planning for the future.Meanwhile, understanding your own people is just as important. They are more motivated to perform when they see that leadership values them and sees them as humans with real needs instead of replaceable workers. Enacting organizational transformation becomes easier when we always consider the impact on our people and act accordingly. One such transformation that is necessary for businesses to be future-proof but has a high impact on people’s everyday work is new technology implementation.TECHNOLOGY@SPEEDTechnology can be a great disruptor, but it can also be a great equalizer. Nowadays, technology is a necessity for businesses to be competitive, and because markets can shift quickly and dramatically, rapid technology adoption is an important step that allows your organization to continue creating value for and meeting the ever-evolving needs of customers and clients.However, as we continue to move forward into a very interconnected world, the issue of trust becomes that much more important as well. Information security and integrity are now at the forefront of conversations regarding technology in business. Speedy implementation without enough attention given to safeguards means taking on undue risk. The balancing act between ease of access and security will need vigilance and constant adjustment.Internally, successfully leveraging and implementing technology requires upskilling and/or reskilling your people. One of the common causes of resistance to this kind of change is the need to learn new things which can be disruptive and gets in the way of people getting their work done.I am sure that many readers are old enough to remember businesses having to drag their operations kicking and screaming into the internet age. However, as technology never stops evolving, so should we never stop thinking of how we can make it work for us and make us better. As leaders, technology transformation for your organization can be very tricky and will need you to be patient, understanding, encouraging, and communicative. This is part of making sure your business adopts a culture of growth and innovation.INNOVATION@SCALEFor an organization to continuously thrive into the future despite shifts and disruptions, it must have a mindset of impatience and dissatisfaction, and a willingness or even an ardent desire to always seek new and better ways to operate and deliver what customers and clients need.On the human side of this, leaders should seek to embed the transformative mindset into company culture. Make it intrinsic in how people think and operate and empower them to experiment and take appropriate risks. With innovative thinking as part of company culture, strong resistance to transformation is far less likely.On the technology side, adoption and implementation should make business sense. Innovation should not be practiced simply for innovation’s sake. Thoughtfully scaling technology transformation allows you to learn and adjust as you go. In this way, the human impact is better managed and leveraging new technological capabilities is more effective.TRANSFORMING FOR THE FUTUREThe three pillars of people, technology, and innovation each are drivers that create long-term value for stakeholders. Together they comprise the transformative leadership framework that guides the necessary approach, planning, and strategies to ensure that an organization is built for the future and resilient enough to survive and thrive future disruptions — such as the Great Resignation.Anthony Klotz, a professor of Texas A&M University, proposed the concept of the Great Resignation. This idea predicts a large portion of the workforce leaving their jobs once the pandemic ends, as it is established that how work is organized and conducted will not return to how it was before the pandemic started. This makes it even more critical for leaders to adopt these value-driving pillars not just to simply retain its employees, but to even potentially bring about a potential resurgence in the constant war for talent. In essence, we believe that by applying the transformative leadership framework to their organizations, business leaders can shift their focus from worrying about the Great Resignation and instead proactively build trust and confidence in order to drive a Great Resurgence in the business. 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.Wilson P. Tan is the country managing partner of SGV & Co.

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