Governance During Inflationary Periods - Mark A. Pfister
Five Board Focus Areas to Win the Inflation Challenge
Following a strong economic recovery after the close of the COVID-19 pandemic lockdown period, the price of goods and services in many developed nations have seen glaring increases. This inflation has been painfully noticeable to both consumer and supplier sectors due to pre-pandemic scenarios where, on average, inflation had risen much more slowly in pre-pandemic years.
Consumers, presumably catching up on needed purchases, along with persisting stock and supply chain challenges created an environment of scarcity as pandemic effects continue to impact the global supply chain. Massive money printing, seemingly endless government spending, receptiveness to increasing debt loads, and geopolitical disruptions such as the invasion of Ukraine by Russia at the end of February 2022 have also played major roles in the current predicament.
INFLATION: general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.
Interestingly, when the inflation topic enters the boardroom, it is often followed by uncertainty and speculation. Although Directors understand that inflation equates to rising prices, this is commonly where the integrative effects of inflation across the enterprise and industry commonly stall. This has to change. If not already in progress, Boards need to ensure immediately that the “what if” scenario planning and risk response options are in place. Proper Board governance during inflationary periods helps organizations not only navigate the inflation instance, but also exit the period in a stronger long-term position.
For leaders tasked with governance, the indicators and effects of inflation are hard to miss:
- Scarcity of Goods: supply chain disruptions along with lowered inventories
- Eroded Purchasing Power: money buys less and materials cost more
- Interest Rate Increases: when inflation rises, so do interest rates — interest rates are the main inflation-fighting tool of a central bank
- Consumers Redirect Spending: consumers focus on needs, not wants
- Labor Costs Go Up: organizations can struggle to find employees + raise wages in hopes of attracting and retaining employees
- Employee Turnover Increases: as employee buying power goes down due to inflation’s effect on prices, employees search for higher-paying jobs
- Impeded Investments: as borrowing money becomes more expensive during inflationary times, it can become harder for a business to invest in its future
- Foreign-Exchange Effects: uneven distribution of inflation between regions and countries can exacerbate inflation effects
These challenges don’t necessarily effect every organization equally, but can become more severe for all organizations when higher levels of inflation are encountered.
During extended periods of inflation, organizations encounter increasing costs for the production inputs they require along with the possible need for customer price increases. This is a delicate balance as organizations experiencing increased costs must deeply strategize consumer pricing changes — will consumers be willing to pay more? Are there alternate consumer outlets? Will competitors out-strategize you? Is this an opportunity to squeeze competitors by “investing” in price increase avoidance?
As a starting point, Boards should ensure they expand their governance purview before and during periods of inflation. Some important topics to include and closely monitor in your governance repertoire include:
- Focus on Employee Retention: During inflationary periods, it is quite easy for operations to direct a majority of focus towards consumers and unintentionally neglect the organization’s employees. When aiming to control organization costs and productivity, increased efforts associated with replacement hiring and training are extremely disruptive. Even slight hiccups with newbies in the organization will not be as acceptable or tolerable to clients recently digesting increased costs from your organization. This can create a nightmare scenario for those charged with governance. Keep this important monitoring point near the top of your inflation governance checklist.
- Deeply Understand Your Current Market: Inflation commonly affects entire industries and markets, so what is your organization’s differentiator(s) as it relates to price and value? Probe deeply into areas that will confidently validate the organization’s strategy along with competitor comparisons. Inflationary periods should trigger hyperactivity in market, industry, and competitor research. If you are not seeing the data to backup the planned direction, stop and regroup.
- Capitalizing On Demand: Is your organization keeping in mind that they are not the only ones concerned about inflation? Your consumers may actually be more concerned! Look for proactive measures being instituted in your organization’s approach to marketing and client incentives/retention — including powerful reasoning for consumers to continue as your customer and incentives to buy now prior to future price increases.
- Ensure a Clear & Fair Pricing Strategy: This may be the most sensitive strategic discussion you engage in at the governance level during inflationary periods and will likely require a phased approach. As a Director, don’t underestimate this exercise and be sure to look for indicators that the organization is clear on how they plan on articulating the “why” of a price increase to consumers. This is key to retaining loyal consumers.
- Alignment of Your Brand’s Values: Nothing tests your organization’s Values more so than instances of delivering tough messages to your clients. Price hikes, lessening quantity, or reducing quality are indeed “those” instances. Honesty and authenticity are paramount in this messaging. As a Director, do you hear this in the organization’s planned public-facing positioning? Does the message resonate? Is it logical? All too often a great strategy is stymied by poor messaging and presentation. Ensure that the messaging strategy is directly aligned to the organization’s lived Values.
Directors must also remember that not everything regarding inflation is cause for doom and gloom — many economists believe a healthy and growing economy requires a low but positive level of price inflation. This “Goldilocks zone” is typically targeted towards a 2% annual inflation rate to achieve strong economic growth without much risk of rising unemployment. Having the responsibility of governance for an organization, Directors must also pay close attention to inflation trending:
- If the rate of inflation is trending below the 2% target, this predicts a stagnating economy
- If the rate of inflation is trending above the 2% target, inflation effects can become unpredictable (i.e. emotional and cautious consumer behaviors)
Be the leader, Director, and Board that fully understands the organization’s long-term response to inflationary periods (and deflationary periods) inherently addresses risks to the organization’s livelihood. It’s definitely included in a Director’s role and responsibilities.
Is your organization successfully navigating this inflationary period?
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Mark A. Pfister
Non-Executive Director | CEO | Chief Board Consultant | Corporate Strategist |Board Macro-Influencer | Speaker | Author
About the Author: With a strong focus in Strategy, Governance, and Technology/Cybersecurity, Mark A. Pfister is CEO & Chief Board Consultant of M. A. Pfister Strategy Group, an executive advisory firm that serves as a strategic advisory council for executives and Boards in the public, private, and nonprofit sectors. He is also Chairman & CEO of Integral Board Group, a specialized Board services and consulting company.
Mr. Pfister is a ‘Board Macro-Influencer’ and his success has been repeated across a wide range of business situations and environments. He prides himself on being a coach and mentor to senior executives and directors. In Board Director circles, Mr. Pfister has earned the nickname ‘The Board Architect’…………. << read full bio here >>
