EMEIA board priorities 2023: how to shape tomorrow’s board agenda today

To understand today’s challenges and their impact on the board’s priorities, EY teams explored the most pressing issues facing boards. The EMEIA board priorities 2023 (pdf) were informed by conversations with board members, as well as conversations with networks of nonexecutive directors. It also draws on insights provided by EY professionals, including the EY Center for Board Matters.

The research highlighted the following as specific areas of focus for boards in 2023:

• Navigating uniquely challenging geopolitical and economic conditions
• Rethinking capital allocation strategy to support the company’s net-zero ambitions
• Enacting sustainability transformation and corporate reporting
• Enabling innovation and technology transformation
• Championing a future-oriented talent agenda

Recommended actions

To provide effective support to their companies as they navigate challenging economic conditions, boards should:

• Ask themselves whether they are paying enough attention to geopolitical risks, as well as the related economic and financial consequences. Are they asking the right questions of management and are they keeping an up-to-date risk register that lists all the major risks facing the organization, including those related to economic, geopolitical, supply chain, cyber and sanctions compliance?
• Question management around what the business is doing to manage its costs. Geopolitical developments are likely to push up costs for companies. Companies should therefore aim to limit their cost increases through strategies such as restructuring their supply chains, enhancing their cross-border operating model effectiveness, and improving energy efficiency.
• Educate themselves on geopolitics. To provide effective oversight around economic and geopolitical risks and opportunities, board members need education and training that allows them to effectively analyze events. It is open to them to seek advice from external specialists in economics, geopolitics or supply chains. Boards also need the company to provide them with accurate and up-to-date information on developments in different markets across the world.
• Reconsider the board composition and structure to ensure that economic and geopolitical developments are effectively monitored. This responsibility could be delegated to the risk committee, for example, or to a director with specialist expertise.
• Ensure that management perceives the current geopolitical volatility as a source of opportunity as well as risk. The shift toward national self-sufficiency will challenge traditional global business markets. Nevertheless, it also creates new opportunities. The board should work with management to explore potential growth and investment opportunities in the company’s home country markets, as well in allied markets. 

Key developments

Companies must play an active role in the battle against climate change – or face being held to account by their stakeholders. Globally, over 11,000 businesses and other organizations have now committed to net-zero targets, with the aim of achieving net-zero carbon emissions by 2050 at the latest.²

Nevertheless, as the 2022 EY Global Climate Risk Barometer shows, they are struggling to turn their ambitions into actions. Only 61% of companies we analyzed had disclosed either a transition plan or a specific net-zero or decarbonization strategy.

For many companies, the challenge is understanding how they can transform their business models to be more sustainable while avoiding value destruction (for example, reputational damage caused by fines or greenwashing). To ensure their long-term prosperity, they need to create additional value through the launch of new and sustainable products and services, while conserving money and resources – what is referred to as “value-led sustainability.”

Businesses do increasingly regard sustainability as an opportunity – as highlighted by the EY Europe Attractiveness Survey 2022.³ Respondents wish to be situated in countries where funding for sustainability initiatives is available and where the regulatory landscape supports sustainability practices.

Investors also see the opportunity presented by the transition to the net-zero economy and are keen to play their part in funding it. Overall, the transition to a net-zero economy is estimated to require US$125 trillion in investment globally by 2050.⁴ According to research by Bloomberg Intelligence, ESG assets already represent more than a third of the total assets under management (AUM) and may hit US$53 trillion by 2025.⁵

While the transition to a lower-carbon economy presents opportunities, investors are equally conscious that it also threatens their returns from traditional assets. For that reason, they are very keen to receive robust information that will inform their capital allocation and price risk. Initiatives such as the implementation of the EU’s new Corporate Sustainability Reporting Directive (CSRD) will help with this (see chapter 3).

Companies and investors need to work together to ensure that capital is channeled toward those investments that are likely to have the greatest impact on achieving net-zero ambitions. Comparable, reliable and transparent sustainability reporting will help both boards and their investors get a more accurate picture of which investments are doing so. Boards should leverage new incentives or funding schemes, such as the EU Green Deal or the new US Inflation Reduction Act, as well as reallocate existing capital to the right projects. These actions should bring investors and companies closer to common ground on the trade-off between short-term earnings and long-term value creation.

The EY Global Corporate Reporting and Institutional Investor Survey found that 78% of investors thought companies should make investments that address ESG issues relevant to their business, even if it reduces profits in the short term. Yet just 55% of finance leaders took the same view, probably because they don’t believe investors, or they don’t agree with them. Furthermore, over half of large companies surveyed for the research (those with revenues of more than $10 billion a year) said they face short-term earnings pressure from investors, which impedes their longer-term investments in sustainability.⁶

Recommended actions

To effectively monitor capital allocation strategy in support of the company’s net-zero ambitions, boards should:

• Understand how capital allocation decisions are made within the business and have a mechanism for monitoring whether those decisions are consistent with the company delivering on its net-zero targets.
• Challenge management on specific capital allocation decisions – for example, returning capital to shareholders when the company is behind on progress toward its net-zero commitments.
• Engage with target investors and long-term shareholders around the company’s sustainability strategy and ESG story, as well as its sustainability reporting. Through the insights they get from this engagement, boards will better understand investor expectations and can also ensure that the company produces the fair, balanced, meaningful and understandable reporting that will inform investor decision-making.
• Be aware that ESG ratings can also act as a barrier to external investment. They should ensure that the company has the capacity to effectively oversee ESG application and scoring processes by rating agencies on an ongoing basis (e.g., evaluating and choosing rating agencies, monitoring changes to rating processes, tracking the evolution of data standards and handling submissions).
• Remember that governance is itself an important component of ESG scores. To help the company secure the highest possible ESG rating, the board should follow leading governance practices in terms of its structure and composition, values and culture, approach to reporting and overall risk monitoring, including monitoring of cyber threats. 

Key developments

Sustainability transformation is arguably the greatest challenge facing companies today. It is therefore the greatest challenge facing their boards. Governance is key to ensuring that companies invest in developing sustainable products and services, avoid value destruction (through noncompliance fines, reputational damage and stranded assets), and take society and the environment into account when making decisions.

While sustainability transformation is a business imperative, it is also a huge, far-reaching and complex endeavor. As well as requiring significant investment, it demands that sustainability principles – and targets – are fully integrated into every aspect of a company’s operations, governance and decision-making, from board level down. Yet today, most companies are a long way off.

To support companies in achieving their sustainability objectives, it is essential that boards design remuneration policies for management teams that ensure long-term, sustainable value creation and preservation, in line with the company’s overall strategy. The principles of these remuneration policies should also be reflected in the policies for employees at other levels of the organization. Policies should reflect both financial and nonfinancial criteria. For many boards, there are challenges around aligning short-term compensation in remuneration packages with long-term sustainability goals – which is why it may be prudent to seek specialist advice on this area.⁷

The EY 2022 Long-Term Value and Corporate Governance Survey Europe highlighted that there can be significant differences of opinion within leadership teams on how to balance short-term considerations with long-term investments and sustainable growth. Yet these differences of opinion can be beneficial: Companies that are more likely to be driving financial value and progress in relation to sustainability are more likely to report strongly divided views.

Audit committees will need to ensure that the necessary controls and processes are in place to support the provision of high-quality sustainability information. They will also need to ensure the integrity of new metrics and protect the company against any risks to trust and credibility, such as accusations of greenwashing. Audit committees should also facilitate connectivity between financial reporting and sustainability disclosures so that there is a connection between financial reporting and areas like nature- or climate-related risks. Additionally, audit committees will need to monitor any external assurance⁸ of the company’s annual and consolidated sustainability reporting and inform the board of the outcome.⁹

Recommended actions

To provide effective oversight around sustainability transformation and corporate reporting, boards should:

• Establish a board operating model that makes sustainability oversight systematic and intrinsic while building the competence needed to make informed and bold decisions. It may be necessary to create a dedicated sustainability strategy committee to ensure that sufficient focus is given to sustainability and that sustainability is not detached from strategy.
• Work with management to ensure that corporate strategy in general aligns with the goals of the Paris Agreement to limit global warming to well below two degrees Celsius compared with pre-industrial levels. What targets and objectives are being set to promote value creation, as well as avoid value destruction?
• Ensure that biodiversity, natural capital, and significant social issues – such as diversity, equity and inclusion – are incorporated into the mainstream risk register, but also be very clear as to which of these issues is material to the corporate strategy.
• Establish effective remuneration structures that influence behavior and drive accountability for the achievement of sustainability objectives. Metrics should be aligned with the company’s overall strategy and be relevant to both the short and long term. Alongside executive remuneration, examine other opportunities to roll out ESG-focused reward programs across the wider company to build a sustainability culture.
• Ensure an authentic approach to sustainability reporting to deliver material, trusted and credible insight to shareholders and stakeholders. This will involve putting in place robust governance processes and controls to monitor and manage the vast range of sustainability matters covered by the CSRD – most of which will not be accounted for in existing internal control frameworks. Data will be another priority since effective sustainability reporting relies on the availability of a wide range of trusted data. The board should understand who is responsible for developing and overseeing the preparation of the data and metrics that will be used. Also, how will sustainability performance be linked with financial performance?
• Review board expertise on sustainability-related matters and look to address any competence gaps. There may be creative ways to bring additional diverse skills and experience into the board’s decision-making, e.g., shadow boards, advisory boards, expert advisors, drawing more on management, and refreshing board composition.
• Engage with their auditor or independent assurance providers, if different, to understand how they will approach the assurance of sustainability information and the likely form of their report. Also, how will the different reporting, assurance and audit opinions (financial and sustainability) interlink? 

Key developments

The COVID-19 pandemic further accelerated the digitalization of the global economy, which was already well underway before the pandemic struck. Today, technology transformation continues at pace as companies respond to the uncertain business environment, new technological advances and evolving customer expectations.

Investment in innovation and technology transformation is crucial if companies are to achieve their net-zero and other sustainability-related objectives. Technology-enabled products and services will enable them to transform their business models, while digital tools will also help them to plan for different climate scenarios, manage their sustainability-related data more effectively, and track their progress against targets.

Over the past three years, companies have invested heavily in digitalization initiatives (thanks in part to specific programs in the European Union¹⁰). In fact, the EY-Parthenon 2022 Digital Investment Index found that companies had increased their investment in digital transformation by 65% since 2020. Furthermore, executives planned to allocate 5.8% of their revenues to digital, compared with 3.5% only two years before, as they reacted to mounting pressure to quickly bring technology-enabled products and services to market and achieve efficiencies.¹¹

Boards should also be aware that digital transformation brings a constant stream of new risks for them to monitor. It can prove difficult and costly for companies to keep up with changes in technology, as well as best practices for protecting both their business and the valuable data that it holds. A technology roadmap is a useful way for a company to align its ongoing expenditure on technology and innovation with its long-term, strategic business objectives.

A further challenge relates to skills and talent, since the successful deployment of new technology often requires companies to bring in external expertise, either in the form of new hires or external advisors. Yet the EU is wrestling with an acknowledged digital skills shortage, with around 42% of Europeans lacking basic digital skills, including 37% of those in the workforce.¹² Companies also need to equip their existing workforce with the skills and knowledge they need to make good use of the tools they have been provided with. If people can’t – or won’t – use their new tools, it is impossible for a technology transformation to succeed.

The regulatory environment presents some significant risks in relation to technology. Already the General Data Protection Regulation (GDPR) imposes some strong requirements on companies in relation to data protection and privacy within the EU and the European Economic Area. Companies that fail to comply with the GDPR face fines of up to €20 million or 4% of the global turnover. Data protection breaches also present significant reputational risks.

Furthermore, regulators are becoming increasingly concerned that companies may be using emerging technologies – such as AI – in unethical ways that are not necessarily beneficial to society as a whole. To ensure that AI is human-centric and trustworthy, the EU has proposed the AI Act, a common regulatory and legal framework for using AI technology.

Finally, cyber risk is a constant and pervasive threat to companies – a threat that has further escalated since the outbreak of the war in Ukraine in February 2022. A report by the European Union Agency for Cybersecurity (ENISA) described the war as having “reshaped the threat landscape” and highlighted some “significant increases in hacktivist activity.” It also noted that there had been a significant rise in distributed denial-of-service attacks and that the use of malware is once again on the rise, following a decline during the pandemic.¹³

Unfortunately, as the World Economic Forum’s Cybersecurity Outlook 2023 highlights, adding emerging technology to legacy IT systems “increases the complexity of organizations’ digital environments and therefore their cybersecurity risk.”¹⁴ Furthermore, the ongoing shortage of cyber talent puts companies at a disadvantage when it comes to boosting their cyber resilience.

While they continue to invest heavily in digital transformation projects, companies often struggle to measure the impact of their investment. The EY-Parthenon 2022 Digital Investment Index found that three out of five companies didn’t know how much they spent in digital operating or capital expenditures in the previous year, or what value it yielded in incremental revenues, reduced cost or working capital. This index found that EMEIA boards are highly aware of the importance of digital transformation and cyber, with 69% saying they would like to increase time and effort on it.

Recommended actions

To provide effective monitoring around innovation and technology transformation, boards should:

• Understand management’s strategy for innovation and technology transformation, as well as the planned investment allocation and how the proposed technology investments will support the company’s ability to deliver value creation over the long term. How is digital innovation and experimentation being encouraged as part of the company’s strategy to achieve sustainable growth?
• Request a line of sight into the company’s workforce strategy to establish how the company is planning to source specialist digital and cyber talent, upskill its existing workforce, and address any specific knowledge and skills gaps. The board should look to establish whether sufficient investment is planned for recruitment and training.
• Meet regularly with the company’s chief technology officer (CTO) and chief information security officer (CISO). Through regular discussions with the CTO and CISO, the board will gain a better understanding of how the company is using technology and what challenges it needs to overcome to achieve the best possible return on its technology investment.
• Ensure that the board structure supports the effective monitoring of innovation and technology transformation, as well as of cyber threats and other IT-related risks. It may be necessary to recruit a board member with specialist expertise.
• Evaluate the effectiveness of the cybersecurity function on a regular basis and ask to see the company’s cyber incident response plan (a set of guidelines intended to help staff detect, respond to and recover from an incident). To gain a full awareness of all the cyber threats their company is facing, boards might also ask management to commission a cyber risk assessment. 

Companies risk their future competitiveness if they fail to respond to the changing expectations of their people, do not “walk the talk” on sustainability issues, and do not invest in futureproofing their workforce. Similarly, they cannot afford to neglect the crucial issue of culture, since it has a strong influence on an organization’s decision-making, resilience, risk appetite, and ability to attract and retain talent.

Recommended actions

To fulfill their oversight responsibility for talent, boards should:

• Be clear on the organization’s sense of purpose and understand how that impacts its ability to attract and retain talent. By working with the CEO, boards can assess the extent to which the company should take a stand on certain social and environmental topics in order to compete effectively in the recruitment market. Authenticity is key.
• Champion the development of future-oriented talent strategies that will enable their companies to overcome short-term skills gaps. These talent strategies should consider how the company will acquire key competencies – for example, in technology and sustainability. Where and how will these competencies be developed?
• Ask management how the company’s existing workforce model can evolve to incorporate talent from nontraditional sources. Opportunities could include developing older employees or bringing them back as freelance workers, making greater use of gig workers, tapping diverse talent pools that the business has not previously tried to tap (for example, neurodivergent talent) and making use of nearshoring or managed services. When speaking to management, boards should question whether existing talent policies need revising to accommodate new approaches.
• Work with management to ensure robust talent- and culture-related metrics are in place and are regularly reported to provide real-time insights into how the company is performing against its people-related targets. To maintain the trust of employees and other stakeholders, it is vital that the organization is transparent about its performance against stated ESG objectives.
• Build strategic relationships with Chief Human Resources Officers (CHROs), ensure they have an elevated status and well-resourced team, and support them to create a human-centered culture that prioritizes authentic engagement with employees.¹⁶
• Gain an understanding of the expectations of Gen Z¹⁷ – the youngest generation in the workforce – and how their expectations are likely to reshape the workplace over the coming years.
• Discuss culture regularly in board meetings. As part of their discussions, boards can consider how their organization’s culture might need to change to support the achievement of its long-term strategy, particularly its social and environmental goals.

The following EY professionals contributed to this article: Fanny Bachelet (chapter 5); Reto Isenegger (chapter 2); Martijn de Jong (overall); Christian Kohl (overall); Famke Krumbmüller (chapter 1); Jan Niewold (chapter 3); Charlotte Söderlund (chapter 3); Katharina Weghmann (chapter 5).