Inflation is surging globally. Two months ago the wholesale price inflation touched 8 per cent in Europe, 10 per cent in the US and 15 per cent in India.
According to PwC, inflation is the “top of mind” in their recent board surveys. It is on the agenda for every meeting every time for most boards in the US. So, what does your board need to do about assuring company’s readiness for an inflated future?
As a director, you should realise that your board (as well as your management) would need to relearn skills that have not been in vogue since the early 1980s, when both inflation and interest rates soared.
You may want to do some research on what companies did then (right and wrong) to cope with inflation in terms of strategy, pricing, finance, growth, compensation and hiring.
While the majority of directors are not economists, they need to still understand how the economy works and how government policies of rising price inflation and falling rupee impact their enterprises. Inflation-readiness is a key competence directors must have today.
Since most directors know inflation’s impact on household budgets, a bigger concern for them is how long it would last.
At what point will the current sales growth backfire with increased prices and added burden of GST on food items? Will there be a backlash for spurious products when retail outlets start selling loose tea and milk to avoid the 5 per cent GST?
Some of the questions that board members need to ask include: What are the most significant cost dangers from suppliers, and how to diversify the supplier base? What inputs would see the greatest inflation hits, and how are you hedging them? What are the projections for margins under various inflation/cost/pricing scenarios?
Do prices need to be raised? Do products and services need to be modified? Should there be a push towards higher margin premium models? Who are your most price-sensitive customers? Private and venture firms need to look closely at the capital impacts of inflation — is there a need to prune capital; will you need a down round to raise more; what is the mix of variable and fixed capital?
The board should discuss the company’s credit needs, capex and digitisation plans (should they be put on hold?) and monitor cash flows.
These uncertain times of high inflation could be the moment to press ahead with investments (before they grow even more expensive), as well as hiring of talent. For the latter, the “great resignation” may quickly become the great “stay-put and keep safe.
Capex, hiring plans
Smart boards should be asking managements for their plans under various inflation scenarios: How will we make capital reallocation decisions, and adjust them as interest rate changes occur? There are so many unknowns board members can’t control.
Assure yourselves not just on plans, but management’s early warning skills on inflation and capital issues that require a quick reset. Could the alternative supply and transport sources you had to hustle up for Covid now offer new pricing opportunities?
Should we continue to let those employees who are more productive working from anywhere to work from home? (Research says introverted men and women who have domestic and office duties perform much better in the WFH mode.)
No matter what your expertise is, be cognisant of the leading and lagging economic indicators. Inflation is a reality and it may be here to stay for a while no matter what the government or RBI say.
A persistent inflation has a major impact on all stakeholders and asking pertinent questions is an important agenda item for all board members.
Muneer is co-founder of the non-profit Medici Institute; Ward is global board advisor, coach and publisher