CXO Research Insights + Vision© Newsletter: January 2022: Supply Chains Reset, ESG Actions, Delaware Legal Outsourcing Losses

Forward-looking ideas from leading research for executives

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In January’s 2022 Issue, CXO Research Insights + Vision© Newsletter offers executives actionable insights for three short 2/3-minute topics:

  1. New Supply Chain Model: Apply a new Post-Covid global supply chain model now for resilience; 
  2. ESG Reporting Making Sense: Navigating the complex and confusing ESG frameworks and standards to make reporting compliance practical;
  3. Delaware M&A Law: Why outsourcing to elite top mega-law firms for corporate Delaware lawsuits often fail – here’s a better course of action. _____________________________________________________________________________________________________________________________________________

2022 Supply Chains Survival: CEO’s Farewell “Just-in-Time” and “Just-in-Case.”

Today, CXOs require a fresh look at your global supply chain and throw out outdated global “Just-In-Time” as well as 2021 newer “Just-In-Case” models. Although “Just-in-Case” is much better than “Just-In-Time,” it does not address the long-term corporate resilience view and reduces risks in global sourcing materials and inventories.

As predicted in early 2020, “Global Supply Chains – So Last Century Thinking” indicates a main global supply chain “Just-In-Time” model that continues to offer too much corporate risk. In 2021, most corporations’ global “Just-in-Time” supply chains had Covid-related outages from materials, parts, and supplies to ongoing customer shortages. 

In 2021, over 50% of multinational supply chain executive trailblazers moved areas of the supply chain out of China and used dual sources for the above reasons.

“55% (use) dual sources of raw materials – in last 12 months – in manufacturing supply chains.”

 McKinsey & Company, 2021

Corporations should move to a worldwide “Supply-From-Regions” model to mitigate these global supply chain risks.

Why?

First, China’s export trade to the US comes from two main areas/ports, such as Xi’an and Tianjin; businesses should develop appropriate regional and local supply operations to offset disruption in any one source. Corporations are primarily dependent on Chinese suppliers. China has zero-tolerance enforcement for Covid cases using entire city and port lockdowns that can last several weeks at a time that can cripple corporate global supply chains. Since China applied its vaccine on about 1.28B of the population, where research shows a 30% efficacy and less over time, there should be numerous more city/port lockdowns going out to 2023 and beyond.

Second, Covid-related supply chain risks continue to accelerate given Chinese and US shipping bottlenecks at ports, limited high-cost ship transportation oligopolies, and container costs.

Third, many corporations do not control the end-to-end supply chain to avoid operational risk. Most firms’ critical supply chain control challenge is high capital costs, lack of in-house talent, and limited rapid internal innovation support. Few successful companies have both capital and talent to pull this effort off, such as Tesla, which built and controlled the entire supply chain. If this is not an option, the corporation should work with suppliers for joint or shared global and regional manufacturing scheduling and availability systems for planning orders and supply integration.

Lastly, corporate supply chain executives modified 2020-2021 predictive forecasting systems with inventory/supply ordering models to meet the 2021 Covid supply-demand model for the pandemic. There are still many Covid panic 2020-2021 supply chain forecasting systems for orders that don’t meet the current post-Covid orders/supplies. This supply chain order crisis is driving firms to cut the number of SKUs, giving them more sourcing flexibility. These outcomes should lead long-term to shifts within industries in terms of volume specialists becoming more successful versus variety specialists. Thus, it will require more planning, ops changes, and lead time to reverse course leaving end-of-the-supply chain businesses/consumers without the present shortage of business/store inventories/supplies for manufacturing resulting in empty products/shelves for the end consumers. 

As We Advance

CXOs require rethinking not “Just-In-Case” safety resources risks on short-term, on-crisis points but thinking long-term to develop a global supply chain that encompasses vital regional locations and local suppliers. This position supports the McKinsey 2021 survey by 90% of supply chain managers expect to shift this in the future.

Soon, the manufacturing industry will give rise to a new class of “expert manufacturing volume specialists” with higher precision instead of generalists that run current supply-chain models/scheduling.

Corporations using high-efficiency and cost-reduction models with China suppliers must focus on dual and multi-sourcing regions everywhere. Alternative regional hub sources to consider Asia-Pac such as Vietnam, Indonesia, and the Philippines; Middle East – India; EU such as the Czech Republic; and the Americas –  Mexico, Canada, and Brazil. Importantly, corporations should consider local area sources everywhere possible for their supply chains.

CXO Takeaways

  • Reset global supply chains for its forecasting models/apps systems, including AI/ML and RPA data algorithms for Post-Covid
  • Use continuous supply-demand modeling to keep key regional/local sources in-play 
  • Engage CEO to reshape global supply chains to increase, if possible, more areas of end-to-end control 
  • Re-evaluate new Asia-Pac, EU, India, and Americas strategic partnerships
  • Rethink the regional and local – Americas sources with alternate shipping ports, trains, and waterways such as the Atlantic.

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ESG Compliance Nightmare: CXO Playbook Reset

Today’s corporations and governments are working faster and harder than ever to craft and adopt a long-term Environmental, Sustainability, and Governance (ESG) plan with accountability to be good global citizens in a rapidly changing and riskier ecological world. Corporate ESG planning, executing, and reporting efforts must take a long-term strategic playbook journey. CXO’s focus is on “E” – environmental and sustainability critical concerns – for new standards and global frameworks for performance reporting. 

In 2022, ESG sustainability and compliance will continue to evolve rapidly, which is critical at the corporate board for vision, intent, and goals. The CEO and CXO leadership team throughout the enterprise and its partners, suppliers, and customers must be aligned, trained, and capable of executing and reporting its results for compliance to ESG impact. There is increased scrutiny and societal pressure on global regulators, investors, the workforce, and other stakeholders, including supply chain suppliers and customers.

Sustainability is no longer an afterthought in corporate strategy; it’s becoming embedded into every part of the organization” 

– Bethany Patten, Senior Associate Director, Sustainability Initiative at MIT.

Corporate Transparency Everywhere

Investors, regulators, and consumers pay attention to corporate ESG values, goals, performance in measurable outcomes, and reporting. It becomes a reputational risk if your ESG plan has vague goals without courses of action, metrics and lacks meaningful outcomes without baselines to improve impact results. Corporate quarterly and annual reporting must be accurate and verifiable data for expected outcomes and disclosure risks. Furthermore, it could be a substantial corporate financial risk for investor lawsuits and regulatory fines and penalties. These areas could include:

  • SEC negligence finding in disclosures in 10K and 10Q Reporting
  • Stock fraud by misrepresentation of ESG reporting
  • Environmental regulators’ compliance
  • ESG investment asset manager lawsuits

ESG Frameworks and Standards Are Confusing So Apply Easier Integrated Approach

CXO teams apply confusing and similar ESG frameworks to track and report new nonfinancial data for evolving compliance and changes in global and US ESG standards as appropriate. Here’s what to know:

  • Understand UN’s Principles for Responsible Investment (PRI) that suggested six sustainable investment principles for investors and aligns to GRI for 17 Sustainable Development Goals (SDG).
  • Apply the Task Force on Climate-related Financial Disclosures (TCFD) framework for disclosing climate-related financial risks to corporations, investors, bankers/lenders, insurers, and other key stakeholders to help better assess and price those risks/ opportunities. TCFD-based reporting is mandatory for all asset owners and managers signed on to the UN’s PRI. It allows consolidated reporting for other compliance frameworks.
  • Use the Sustainability Accounting Standards Board (SASB) standards of 77 ESG metrics. It will enable ESG reporting standards to track and communicate sustainability actions mostly financially material to investors (aka Value Reporting Foundation) for sustainability issues and reporting impact on corporate financial performance. Note: SASB should be compliant and used for TCFD recommendations during your disclosure processes/reporting.
  • Understand Carbon Disclosure Project (CDP), a UK/nonprofit framework specific to climate-related issues by governments and companies’ members. The CDP collects standardized information from companies via the CDP checklist on climate change and natural resources such as water and soft commodities. Note: The CDP checklist can be helpful in consolidated ESG reporting, if appropriate. So use the CDP in your ESG TCFD reporting.
  • Apply the Climate Disclosure Standards Board (CDSB) framework to report environmental and climate change-related information. It includes physical (i.e., extreme weather events) and transitory long-term risks on business revenue impact in TCFD reporting, such as annual corporate financial reporting including 10-K filings and integrated ESG reporting. Note: New CDSB versions expand their reporting to include critical social and water issues. 
  • Integrate the Global Reporting Initiative (GRI) for 34 new economic, environmental, and social topic-specific standards for corporate reporting on critical material issues to corporate investors and key stakeholders into your ESG TCFD and annual reporting.

New Regulations – More Are In-Play

SEC’s Division of Examinations issued its 2021 priorities which it indicated continue to focus on ESG matters, including whether examined firms’ practices match their website’s ESG information and 10-K disclosures. Note: Disclosures and statements of a corporation’s ESG principles and reporting programs require implementing an efficient and unified evidence-based way to track, measure, attest, and report on their ESG goals, initiatives, and results. These upcoming efforts require tracking for courses of action:

  • 2021 COP26 creates International Sustainability Standards Board (ISSB) to develop a “comprehensive baseline of sustainability-related disclosure standards.”
  • 2021 EU’s European Green Deal (EGD) has standards for asset managers and large corporations.
  • 2021 Presidential Executive Order (PEO) is on climate-related financial risk. Soon, ESG will need to be benchmarked, measured, disclosed, tracked over time, and assured. SEC should follow up with new corporate ESG guidance.
  • 2021 Corporate Governance Improvement and Investor Protection Act (CGIIPA), if passed by Senate, would require the SEC to mandate the corporate disclosure of standardized ESG metrics from securities issuers. Note: SEC’s ESG proposal is afoot.

Leverage Integrated Risk Management (IRM) Solutions

Leading enterprise IRM with ESG solutions, such as ARCHER Suite, LogicManagerand Fusion Risk Management offer a rich ESG solution for compliance, regulations, data capture, measurement, and automated metrics and reporting standards. With all the new and upcoming ESG regulations and changes, CXOs should leverage the enterprise IRM solutions to comply and manage their corporate ESG risks and annual reporting. Note: Other solutions and integration most likely be required, such as existing data analytics, SAS apps, and integration with big data, ERP, among others.

CXO Takeaways

  • Appoint CXO-Integrated Risk oversight executive for Enterprise ESG Committee
  • Cross-walk proposed/new ESG regulations to your IRM software for compliance readiness and gap mitigations, including end-to-end supply chains impacts and vendor(s)
  • Integrate new compliance nonfinancial data into IRM software for risk reporting and ESG action plans
  • Perform a thorough scrub of your ESG sections on website(s), 10K, and 10Q reporting for risk of misrepresentation of data/messaging.

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Delaware Law: Why Corporate M&A Legal Outsourcing to Top Firms Lose?

Top-flight legal firms across the US with new clients have been crashing and burning in Delaware corporate lawsuit cases in the last several years. This trend involves Mergers and Acquisitions (M&A) cases. Corporate legal executives are shopping for outsourcing critical M&A litigation to elite legal firms. 

Delaware is the state hub for most US and foreign registered corporations for its solid and fair business courts and business regulations. Notably, many Delaware Tier 1 and 2 smaller law firms specialize in corporate matters such as M&A in Wilmington.

Why? 

CXOs are looking for aggressive top-flight legal firms from significant cities to unload these firms with any quality supporting documentation upon the small, specialized Delaware courtrooms.

Delaware’s Court of Chancery has prominent judges, such as Travis Laster, that carefully review each case for any improper, fraudulent, wrong documents submitted as evidence. He examines all documents. 

Lesson One. 

Lawyers’ conduct with Loews’ case ruling was without objective analysis, in bad faith, and its legal intent presented—for example, Baker Botts LLP, 2018 lost. Note, Delaware Supreme Court is an option.

Lesson Two. 

Lawyers for Anbang’s agreement of luxury hotels sale to Mire petitioned to cancel the sale due to the pandemic and failed to meet required closing disclosure. For example, Gibson, Dunn & Crutcher LLP, 2020 lost the case with Anbang’s fraudulent documentation.

Lesson Three.

 Lawyers provided outside support work for Cigna’s signed merger with Anthem by launching a covert communications campaign with the Tenco PR firm allegedly to damage the merger agreement’s image. For example, Wachtell, Lipton, Rosen, & Katz Law Firm 2020 lost Cigna’s $1.8B forfeited termination claims.

CEOs require a more profound rationale for the right legal outsourced firms to be engaged. CXO should consider M&A outsourcing in Delaware first! These out-of-state law firms have top talent, legal depth, and skills for corporate outsourcing but may be overkill with disappointing results. However, the Delaware M&A lawsuit outcomes could be better at a more reasonable outsourcing cost with a local firm.

CEOs Takeaways:

  • Probe rationale for outsourcing to an elite law firm to handle Delaware M&A agreement disputes
  • Apply Wilmington-DE Legal Outsourcing First policy
  • Evaluate appropriate Wilmington Tier 1 or 2 law firms with solid M&A experience and good objective courtroom lawyering

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Copyright @ 2022, STEVE HAWALD CEO CIO ADVISORY LLC and CXO Research Insights + Vision© Newsletter©. DISCLAIMER: This article is entirely my opinion without financial payments and does not hold any investments in Archer, LogicManager, and Fusion Risk Management. The peer review was by Tom Austin.

Disclosure

The views and opinions in this analysis are my own and do not represent positions or opinions of The Analyst Syndicate. Read more on the Disclosure Policy.