Supply Chain Problems Stretch Board Oversight Capacity

2022-06-04 02:25:14 By : Ms. Linda Zeng

Lack of board supply chain oversight can capsize a company’s financial performance.

Organizational supply chain management is the latest, if entirely unwanted, oversight responsibility for the overstretched corporate board.

From clogged ports and truck driver shortages to extreme weather, a multitude of disparate factors continue to create major breakdowns in critical organizational supply chains. Once considered only a transitory concern, supply chain disruption lingers as a major operational, financial and inflationary risk during the worldwide pandemic. And if not properly addressed at the leadership level, oversight responsibility for it can become a significant flash point within the board/management dynamic.

The roots of the supply chain problem are relatively well established. Pandemic-related factors created labor shortages, demand miscalculations, inventory shortfalls, freight transport bottlenecks, production cuts and temporary plant shutdowns. Individually and collectively, these disruptions prompted cross-industry ripple effects that exacerbated access to critical technology, commodities and raw materials necessary to the production of goods and staples.

Federal Reserve projections on the temporary nature of supply chain disruption have proven, like its initial observations on inflation, to be overly optimistic. Supply chain issues continue across industry sectors, contributing significantly to inflationary pressure, and diminishing corporate financial performance and product development and innovation. It’s to the point where even movie theaters are projecting shortages of popcorn and other concession items.

So with apologies to the Fed, supply chain disruption hasn’t gone away. And it won’t, as long as the global economy continues to struggle with the lingering effects of the pandemic, public health restrictions, and overall economic recovery. With that can come price increases and delays that constrain corporate profit margins - while increasing prices that companies and their consumers ultimately pay for goods. Those are factors that legitimize supply chain disruption as a true enterprise risk, demanding board attention.

And therein lies the “governance rub”; whether such attention would be perceived as an unnecessary board intrusion into a topic normally reserved for management. Many organizations have deep hierarchical tiers devoted to matters of operations, procurement, demand planning, and supply chain issues. Senior leadership teams increasingly include executives with organizational responsibility for logistics, distribution and supply management. They’re likely to have it well covered, and might not understand the board’s need for monitoring. Don’t worry, we’ve got this. It’s pretty technical, but it’s what we do.

On the other hand, most boards are attuned to enterprise risk issues, and their related oversight duties. Directors understand that what constitutes an “enterprise risk” is an evolving, not static, concept. They read the same news reports on supply chain disruption as does management. They experience it in their own personal lives. And they’re increasingly sensitive to its impact on the company. They’re going to want to have regular updates from management; they won’t be satisfied with a passive role. This is scary stuff; the stakes are really high. We need to know what’s going on in order to do our jobs. Do you mind?

In this regard, supply chain disruption is symptomatic of a rising source of tension in the board/executive leadership dynamic: a blurring of the distinction between the roles of governance and management caused by the pandemic-fueled expansion of board oversight responsibilities. As boards are prompted by courts, regulators and activists to adopt a broader interpretation of their duties, it’s only natural to expect them to bump into what has the traditionally been considered the domain of management. And not be greeted with open arms when they do.

When that occurs, it’s time to talk. The ability of the company to identify and respond to emerging enterprise risks depends upon a consensus between the board and management as to where they each line up on the matter: an allocation of responsibility grounded in mutual respect for their respective duties and expertise. That’s especially the case with something so fundamental to the company as access to production-essential supplies. New challenges often require new approaches to tasks and job descriptions.

Such a board/management discussion should be the byproduct of leadership vision, not in reaction to crisis. Get ahead of the issue; both the board and management can often “see it coming.” We’re talking about something that could lead to a permanent erosion of a company’s customer base. So agree on the risk, identify duties; develop responses.

After all, we want to know about the popcorn shortage before we go to the theater—so we can bring our own “stash” rather than waiting to find out there’s a problem until we get to the concession stand.