The future is unclear when it comes to inflation; in the meantime, it leaves firms and their boards in the dark about what they can do to manage it.
In a recent interview, the head of one of the most influential directors organisations in the US said that inflation was now a top worry for boards.
This worry is understandable, given the chaotic business times we live in. So, why are boards worried and crucially, what can they do about it?
What’s the current inflation outlook?
For context, here’s the IMF’s view on the global inflation situation:
- Inflation is higher now than it has been for several decades
- It is forecast to double this year, from 4.4% in 2021 to 8.8% in 2022
- It is then expected to decrease to 6.5% in 2023 and 4.1% in 2024
In short: short-term pressure will continue before giving way to longer-term relief. So, for now, companies will have to adapt to rising prices.
Why are boards worried about inflation?
“Inflation is the second biggest item on the board agenda right now for private companies,” Kimberly Simpson, COO of the National Association of Corporate Directors (NACD), said in a recent McDermott Will & Emery podcast.
“… shockingly, it’s in exactly the same spot for public companies. So it is top of mind for everyone,” she continued. “There are so many concerns around company performance.”
So, what’s the main reason why boards are so worried about inflation?
Primarily, it’s because they can’t control it. The inflation crisis is fuelled by factors vastly out of reach for ordinary businesses. Even the most prominent corporations worldwide could only hope to have negligible influence on it.
Boards approach their work with the view that it’s better to be proactive than reactive. Unfortunately, being reactive is the only thing they can realistically hope to achieve.
The pandemic, the war in Ukraine, the supply chain crisis, and labour shortages have all combined to produce a situation that businesses simply have to weather.
It’s tough, and it has already proven fatal for companies across the globe. For the most part, the companies in question are small, but boards of bigger ones won’t look at these trends with much confidence.
What can boards do about inflation?
Know your market and know your company. As with any other period of turbulent markets, the most essential tools at a board’s disposal are information and communication.
Know your market
In the same podcast interview, NACD COO Kimberley Simpson acknowledged that while the inflation crisis may seem unique and different now, similar analogues have occurred in the past.
Moreover, many board members will have experience dealing with such crises.
This is one of the core elements of knowing the market and will help anticipate what’s to come.
As a board member, you should stay on top of developments. Week after week, ensure you monitor world, business, and political news, so you can catch anything that’s likely to make a difference to your company’s operations.
If you have experience in past inflation crises, good! Use it, and share your knowledge with your colleagues.
Know your company
Knowing your company is the other half of an essential inflation-protection programme for boards.
As a director, you should already be in regular contact with management, so this advice should be familiar. However, it’s still helpful to stress its importance.
Information from management enables you to paint the most accurate picture of your company. Listen to what they are saying. What is working? What is unsustainable? What might they need to weather the storm?
If they’re not telling you these questions, ask them yourself.
Inflation is here to stay, although, in the longer term, it may become less of a burden. Ultimately, it’s hard to predict this trend because many contributing factors have unknown end dates.
In the meantime, your jobs as a director are:
- Accept that you cannot combat inflation; only work around it.
- Keep in constant contact with the markets and your management team. This is where you will find sustainable information.