Drivers of Change NAVIGATING THE FUTURE

Drivers of Change NAVIGATING THE FUTURE

DISCLAIMERThis paper was prepared by the Chartered Professional Accountants of Canada (CPA Canada) as non-authoritative guidance.

CPA Canada and the authors do not accept any responsibility or liability that might occur directly or indirectly as a consequence of the use, application or reliance on this material.

© 2017 Chartered Professional Accountants of Canada

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Foreword: Shaping the Future of the Profession Today

The Canadian accounting profession has undergone a substantial transforma-tion. The Chartered Professional Accountants of Canada (CPA Canada) was formed through the unification of the Certified General Accountants Association of Canada, the Canadian Institute of Chartered Accountants and the Society of Management Accountants of Canada into one unified body. The objective of merging the three legacy accounting bodies was to position the Canadian profession for the future by ensuring its relevance, global competitiveness and influence. But what would that future look like?

To address this question, CPA Canada undertook a thoughtful, forward-looking and fulsome examination of emerging global trends affecting Canadian orga-nizations. We initiated a series of conversations held across Canada with senior leadership of the profession as well as representatives from business, govern-ment and academia to gain their insights and perspectives on the challenges and opportunities for CPAs and organizations they support. We also conducted an extensive literature review of world-leading organizations exploring global trends, such as the World Economic Forum.

This paper is the product of the multi-year process of outreach and research. The Drivers of Change: Navigating the Future report is intended as a resource to inform and educate our members and other leaders in business, not-for-profits and government on the global trends. The purpose of the report is to spur the necessary dialogue so organizations can better understand and respond to evolving global trends and their implications. At a time when the world itself is in constant flux, organizations need to be more adaptable than ever before. It is going to require innovation in order to become more resilient

2 Drivers of Change: Navigating the Future

and sustainable. CPAs and other leaders need to develop organizations that are not only nimble and able to react but are also able to initiate change in anticipation of what’s coming.

We as a profession are not just preparing for the rest of this year or next year or even five years from now. We are leveraging these learnings to prepare for the year 2030 and beyond. We need to challenge our traditional beliefs. In order to be relevant and successful in the long-term, our profession has to go beyond the historical perspective and mitigating risk, and become more future-oriented and proactive in identifying and taking advantage of opportunities.

The reality is that the organizations of the future and the role of CPAs in those organizations will be very different. This report does not purport to have the answers to what that future will be. It is our hope that it is a starting point for bigger discussions and better questions that will lead to more resilient, adaptive, innovative and sustainable enterprises.

Gordon Beal, CPA, CA, M.EdVice-PresidentResearch, Guidance and SupportCPA Canada

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Introduction: The 21st Century CPA Mindset

Tightening trade borders, the end of high oil prices, slow economic growth, climate change, the Internet of Things, big data, cyber threats, an aging popula-tion and global geopolitical unrest — welcome to the 21st century, where the only constant is change. Being resilient and having the ability to recover when faced with change is critical. There is simply no room for complacency in any sphere of life. This is especially true for the accounting profession, which touches all industries and sectors.

With that backdrop, the Chartered Professional Accountants of Canada (CPA Canada) has developed the Drivers of Change: Navigating the Future report for leaders in business, not-for-profits and government. The purpose of the report is to provide a resource to help you start the necessary dialogue in your organization to better understand and respond to global trends and their implications. The ultimate objective is to encourage organizational learning and to help you navigate your way forward in this volatile time.

Organizational learning is the system-wide process of creating, retaining and sharing knowledge as a collective so that it can be used by everyone in the organization to understand and respond to change. Organizational learning leads to adaptive behaviour where organizations are able to make modifica-tions for different conditions and changes coming their way.

Being able to adapt in this rapidly changing world is critical to success. That’s why leading organizations are not just embracing change — they are change-makers, always evolving in order to turn today’s challenges into opportunities and competitive advantage. Rather than merely reacting, they are proactive and

4 Drivers of Change: Navigating the Future

initiating change by being innovative. This does not mean they are adopting change for the sake of change. Instead, they are remaining nimble to near-term changes while taking a long-term outlook. They are shifting and transforming with the goal of achieving ongoing improvement and success well into the future, whatever that future might look like.

CPAs are in a unique position to provide leadership for organizations in this rapidly changing world. The discipline, integrity and critical thinking that define the profession are the very traits necessary to lead transformational change initiatives.

The following pages outline the drivers of change CPA Canada believes will have an impact on Canadian organizations. The categories for the drivers are leveraged from the World Economic Forum, which for the past 12 years has tracked and highlighted the most significant long-term risks and trends worldwide.1 • Economic• Environmental• Technological• Societal• Geopolitical

The drivers are interconnected and complex, with numerous factors within each driver crossing over and impacting others. It is impossible to consider any driver in isolation. For organizations to be sustainable, they need to understand the environment in which they operate and consider changes coming their way.

For each of these drivers this paper presents sample questions to encourage organizational learning and resources to provide more information. The ques-tions and resources are not exhaustive, rather they are meant to stimulate discussion. Not all drivers will have the same impact on your organization. Prioritize the drivers that are most relevant and then use the Questions and Resources to start the conversation with your teams and in the process become a resilient, adaptive, innovative and sustainable enterprise.

1 www.weforum.org/reports/the-global-risks-report-2017

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Drivers of Change

EconomicUncertainty is the norm as trade deals are being renegotiated in light of a growing nationalist climate in the U.S. and Europe. President Donald Trump made good on his campaign promise and pulled the U.S. out of the Trans-Pacific Partnership. He also signed an executive order to renegotiate the North American Free Trade Agreement, which could have a significant impact on Canada. At the same time, the world awaits news of what Brexit will mean for trade with the United Kingdom. How will tightening borders impact a world economy that has never fully recovered from the financial crisis of 2008, where slow growth has become the norm?

An International Monetary Fund (IMF) survey2 reveals that growth in advanced economies is projected to remain at about 2% as a result of weak demand and low productivity. In comparison, the global growth rate was about 5% in 2007 before the financial crisis.3 “Lower growth means less room for error,” says Mau-rice Obstfeld, IMF Economic Counsellor and Director of Research. “Persistent slow growth has scarring effects that themselves reduce potential output and with it, demand and investment.”

The IMF survey cites the oil price decline as a factor in the modest overall economic performance in oil-exporting countries. In Canada, according to a report by the Canadian Energy Research Institute, economic growth could be

2 www.imf.org/en/News/Articles/2015/09/28/04/53/sonew041216a

3 www.imf.org/external/pubs/ft/weo/2008/update/03/index.htm

6 Drivers of Change: Navigating the Future

on average 23% lower if low oil prices persist over the next seven years.4 The Toronto Stock Exchange is heavily dependent on oil and gas and energy ser-vices.5 Low oil prices have had a negative impact on the Canadian dollar.6

Beyond low oil prices, the Bank of Canada in its most recent Monetary Policy Report7 states that rising personal debt levels could lead to weaker-than-expected household spending. According to Statistics Canada, the average Canadian household owes $1.68 for every dollar in disposable income.8 This is close to the peak reached in the United States before its housing market col-lapsed.9 For the first time in its history, the Canada Mortgage and Housing Corporation (CMHC) has issued a red level warning for the entire Canadian housing market.10 This is the result of inflated home prices, which have risen ahead of economic fundamentals such as personal disposable income and pop-ulation growth, resulting in overvaluation in many Canadian housing markets.11

Canada’s competitiveness ranking has dropped from 13 to 15, according to the 2016/17 ranking of 138 economies by the World Economic Forum (WEF), which defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of an economy, which in turn sets the level of prosperity that the country can achieve.” The WEF attributes Canada’s drop in competitiveness to a continuing downward trend in innovation, busi-ness sophistication and infrastructure.12

OpportunitiesThe WEF competitiveness ranking also shows that Canada is among the top 10 countries in health, primary education, labour market efficiency and finan-cial market development. With that strong foundation, the federal government is directing investment to fund innovation, technology start-ups, research,

4 http://resources.ceri.ca/PDF/Pubs/Studies/Study_156_Full_Report.pdf

5 www.tsx.com/listings/listing-with-us/sector-and-product-profiles/energy-and-energy-services

6 www.bankofcanada.ca/2015/01/drilling-down-understanding-oil-prices

7 www.bankofcanada.ca/2017/01/mpr-2017-01-18

8 www.cbc.ca/news/business/debt-income-ratio-record-1.3763343

9 www.macleans.ca/economy/economicanalysis/ canadas-housing-market-looks-a-lot-like-the-u-s-did-in-2006

10 www.theglobeandmail.com/real-estate/the-market/cmhc-to-issue-first-red-warning-for-canadas-housing-market/article32386112

11 www.cmhc-schl.gc.ca/en/corp/nero/nere/2016/2016-10-26-1200.cfm

12 www3.weforum.org/docs/GCR2016-2017/05FullReport/TheGlobalCompetitivenessReport2016-2017_FINAL.pdf

7 Drivers of Change

environmental sustainability and infrastructure.13 The objective is to help diver-sify the economy beyond resource-based growth by moving in a deliberate way to a knowledge economy14 where information drives economic growth.

This move to the knowledge economy is also altering the nature of work and the skill sets needed to create value and increase productivity. As a result, there is growing demand for highly skilled workers trained in four key disci-plines: Science, Technology, Engineering and Mathematics (STEM).15 These are the skills that will drive the knowledge economy forward.

The knowledge economy has led to innovative business models. For example, fintech companies are making their presence known in the financial services sector around the world, using algorithms to increase efficiency and drive down costs. In a speech to the G20, Mark Carney, Governor of the Bank of England and Chair of the Financial Stability Board, stated that fintech will give consum-ers more choice, better-targeted services and lower prices. Banks will become more productive, with greater efficiency and stronger operational resilience.16 It’s now up to traditional banks to get competitive. Are they willing and able to let go of old business models and innovate or do they risk being left behind?

Questions to encourage organizational learning• How does your organization encourage long-term thinking?• How do you manage strategic uncertainties within your organization’s

decision making process?• If commodity prices continue to fall, what impact will this have on your

organization?• How will your organization adapt in an economy of continued slow

growth? • How do you embed innovation into your organization’s strategy? • What are the skills necessary to lead innovation in your organization? • How do you define productivity in your organization? What metrics would

be meaningful in order to assess organizational efficiency and effective-ness (e.g. employee productivity)? How could you use those metrics to drive better outcomes?

13 www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf

14 According to the Organisation for Economic Co-operation and Development, “knowledge-based econo-mies” are economies which are directly based on the production, distribution and use of knowledge and information www.oecd.org/sti/sci-tech/1913021.pdf

15 www.scienceadvice.ca/uploads/ENG/AssessmentsPublicationsNewsReleases/STEM/STEMFullReportEn.pdf

16 www.fsb.org/wp-content/uploads/The-Promise-of-FinTech-%E2%80%93-Something-New-Under-the -Sun.pdf

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Resources • International Monetary Fund, World Economic Outlook Reports:

www.imf.org/external/ns/cs.aspx?id=29• World Economic Forum, Global Risks Report: http://reports.weforum.org/

global-risks-2017/part-1-global-risks-2017• World Economic Forum, Global Competitiveness Report: http://reports.

weforum.org/global-competitiveness-index• Bank of Canada Outlook Survey: www.bankofcanada.ca/publications/bos/• Google, “Eight Pillars of Innovation”: www.thinkwithgoogle.com/articles/

8-pillars-of-innovation.html• McKinsey, “Transformation with a Capital T”: www.mckinsey.com/business-

functions/mckinsey-recovery-and-transformation-services/our-insights/transformation-with-a-capital-t?cid=other-nsl-mkq-mck-oth-1612

• CPA Canada, Developing robust strategy for uncertain times: Parts I & II: www.cpacanada.ca/en/business-and-accounting-resources/strategy-risk-and-governance/strategy-development-and-implementation/publications/developing-robust-strategy-parts-1-and-2

• CPA Canada, Strategies for Creating Shareholder Value in a Low-Growth Environment: www.cpacanada.ca/en/business-and-accounting-resources/finance/corporate-finance-transactions/publications/strategies-for-creating-shareholder-value

• CPA Canada and FEI Canada, The State of Enterprise Risk Management in Canada: www.cpacanada.ca/en/business-and-accounting-resources/strategy-risk-and-governance/enterprise-risk-management/publications/the-state-of-enterprise-risk-management-in-canada

Environmental The 2017 WEF Global Risks Report ranks climate change as one of the top three trends that will shape global developments over the next 10 years. For the first time in the 12-year history of the WEF Global Risks Report, all five environ-mental risks17 are assessed as being above average for impact and likelihood. According to the 2017 WEF Global Risks Perception Survey, the most frequently cited environmental risks are “water crises” and the “failure of climate change mitigation and adaptation.” Environmental risks are pervasive and closely

17 The World Economic Forum’s five global environmental risks are extreme weather events, failure of climate change mitigation and adaptation, major biodiversity loss and ecosystem collapse, major natural catastrophes and man-made environmental catastrophes. http://reports.weforum.org/global-risks-2017/appendices/appendix-a-description-of-global-risks-trends-and-emerging-technologies-2017

9 Drivers of Change

interconnected with the other drivers. For example, changing weather patterns or water crises can prompt or intensify geopolitical and societal risks such as domestic or regional conflict and involuntary migration.18

A report from the National Round Table on the Environment and the Economy stated: Climate change can put businesses’ reputations, legal responsibilities, regulatory obligations, financial reporting, operations, and supply chains at stake. Businesses’ risk profiles and, in some cases, their strategic positioning can be directly affected by global and local changes in temperature, the frequency and severity of extreme weather conditions, and the availability of water and other natural resources.19

In a speech to the Finance and Sustainability Initiative, Deputy Governor of the Bank of Canada Timothy Lane stated, “Climate change and actions to address it will have material and pervasive effects on Canada’s economy and financial system.” Government research estimates that Canada could face annual costs of between $21 billion and $43 billion by the 2050s if steps are not taken to address climate change.20

Climate change together with rising human consumption is putting pressure on the world’s natural capital, which is defined as the world’s finite stock of natural assets including plants, animals, soil, fossil fuels and air.21 Continuing to consume natural resources without giving nature the opportunity to replenish them puts global ecosystems at risk.22 For example, according to the World Wildlife Fund, rivers, lakes and aquifers are drying up and more than half the world’s wetlands have disappeared. Agriculture consumes more water than any other source and also wastes much of the water through inefficiencies. By 2025, two-thirds of the world’s population may face water shortages.23

OpportunitiesGovernments (through public policy), consumers (through their purchasing decisions and advocacy) and a growing number of clean tech entrepreneurs are creating a shift to low-carbon economies. In Paris in 2015, 195 countries committed to combating climate change by reducing GHG emissions. On Octo-ber 5, 2016, Canada, along with the European Union, India and Nepal, formally

18 http://reports.weforum.org/global-risks-2017/part-1-global-risks-2017

19 http://nrt-trn.ca/business-primer-chapter-1-introduction

20 www.bankofcanada.ca/2017/03/thermometer-rising-climate-change-canada-economic-future

21 http://naturalcapitalforum.com/about

22 www.footprintnetwork.org/content/documents/2016_Living_Planet_Report_Lo.pdf

23 www.worldwildlife.org/threats/water-scarcity

10 Drivers of Change: Navigating the Future

ratified the Paris Agreement, which came into force on November 4, 2016. The Paris Agreement highlights the vital role of business and investors in driving progress toward meeting international goals. It has been described as the way forward to a low-carbon economy, one that can only happen with innovation.24

Canada’s federal government has focused significant attention on climate change issues, the transition to a low-carbon economy and associated poli-cies and regulations. The threat of climate change is identified as one of the Canadian government’s top priorities, as demonstrated in the Pan-Canadian Framework on Clean Growth and Climate Change, a plan to meet Canada’s emission reduction target under the Paris Agreement. A major pillar of the Pan-Canadian Framework is the federal government’s commitment to establish a national carbon price across all Canadian provinces and territories, starting at $10 per tonne in 2018 and increasing by $10 per tonne each year until 2022. Businesses will need to understand and respond to developing regulations in order to prosper in a clean economy.

The federal government has earmarked $380 million over three years to support equity financing of clean tech firms, $400 million over five years to support clean tech projects across Canada and $570 million over three years to provide working capital to clean tech businesses.25

FIGURE 1

$380 million forequity financing

of clean tech firms$400 million to support

clean tech projects

$570 million to provideworking capital to

clean tech businesses

All stakeholders can play a role to address climate change. There are business opportunities for organizations ready to innovate in order to mitigate the nega-tive impacts of climate change with a focus on the long term. For example, Annette Verschuren, the former CEO of Home Depot Canada, spearheaded

24 www.nature.org/ourinitiatives/urgentissues/global-warming-climate-change/ the-paris-agreement-what-does-it-mean.xml?redirect=https-301

25 www.cbc.ca/news/canada/ottawa/federal-budget-2017-ottawa-1.4035656

11 Drivers of Change

a move to environmental sustainability by introducing Home Depot’s Eco Options line of products. In 2012, she launched NRStor Inc., a Toronto-based energy storage project focused on accelerating the development and con-struction of industry-leading renewable energy storage technologies.

Questions to encourage organizational learning• How can you adapt your business model to better conserve natural

resources or reduce your reliance on them? • What contingency and scenario planning have you undertaken to

strengthen your response to uncertain factors such as increased extreme weather and scarcity of natural resources?

• What environmental issues matter most to your key stakeholders (e.g. employees, customers, suppliers, etc.)?

• How has environmental responsibility been incorporated into your business strategy?

• What process do you have in place or could you develop to assess your organization’s efforts to reduce its environmental impact?

• How is your organization considering the environment in the context of long-term value creation?

Resources • World Economic Forum, Environment Resources: www.weforum.org/

agenda/archive/environment • United Nations Framework Convention on Climate Change, Paris Agree-

ment on Climate Change: http://newsroom.unfccc.int/unfccc-newsroom/finale-cop21

• Government of Canada, Canada’s Mid-Century Long-Term Low-Greenhouse Gas Development Strategy: http://unfccc.int/files/focus/long-term_strategies/application/pdf/canadas_mid-century_long-term_strategy.pdf

• Government of Canada, The Pan-Canadian Framework on Clean Growth and Climate Change: www.canada.ca/en/services/environment/weather/climatechange/pan-canadian-framework.html

• CPA Canada, Climate Change Resources: www.cpacanada.ca/climatechange• CPA Canada, Sustainability Resources: www.cpacanada.ca/en/

business-and-accounting-resources/other-general-business-topics/sustainability

12 Drivers of Change: Navigating the Future

TechnologicalOne-armed robots are taking over repetitive tasks in manufacturing facilities that make everything from airplanes and automobiles to washers and dryers. Self-driving cars have been tested by Uber and drones have delivered pizza for Domino’s. Digital fabrication means 3-D printers are producing component parts for British fighter jets, prosthetic devices and even living tissue. Billions of people are connected by electronic devices. Quantum computing is poised to enable exponential leaps in computing power, and the push to develop artificial intelligence (AI) has intensified.

Klaus Schwab, the founder and executive chairman of the World Economic Forum, has written extensively about the dawning of the Fourth Industrial Revolution, “a convergence of technologies that is blurring the lines between the physical, digital and biological in ways that promise to disrupt almost every industry in every country.”

Consider these facts from the WEF Global Competitiveness Report 2016-2017:

Breakthroughs are happening and proliferating at an unprecedented pace — from sensors to blockchain to human-brain interfaces. Technol-ogy-enabled platforms in the “sharing” or “on-demand” economies are upending business models and forcing countries to rethink how they formulate economic policies. The number of industrial robots in the world is roughly doubling every five years… driven especially by demand from automotive parts suppliers and the electrical/electronics industry.

As the Internet of Things becomes mainstream, the number of connected devices will almost triple by 2020, from 13.4 billion to 38.5 billion, and the proportion of products sold via e-commerce will more than double, from 6% in 2014 to 12.8% by 2019. The combination of automation and digitalization is revolutionizing manufacturing and services alike, as well as blurring the lines between them. This process is increasing efficiency, optimizing logistics, and making prices more transparent and competition starker.... More and more, technological forces are pushing companies to either innovate or disappear: 88% of firms in the 1955 Fortune 500 were not on the 2014 list, and the rate of turnover is accelerating.

As with previous industrial revolutions, the transition to the Fourth Industrial Revolution will not be trouble-free. Automation will lead to job loss. Accord-ing to a report from the Brookfield Institute for Innovation + Entrepreneurship at Ryerson University,26 42% of Canadian jobs are at risk of being replaced by technology in the next two decades. The report also suggests there is a 94%

26 http://brookfieldinstitute.ca/research-analysis/automation

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probability that the traditional work done by accountants and auditors will be automated. The key, according to Schwab, will be for political and business leaders to think disruptively and strategically.

Beyond lost jobs, rising cyber dependence has also led to increased cyber-attacks. Many businesses around the world state that cyberattacks are among the most high-impact risks they face.27 According to Symantec’s 2016 Internet Security Threat Report, in 2015, more than half a billion personal records were stolen or lost. Symantec discovered more than 430 million new unique pieces of malware, up 36% from the year before. Ransomware, a type of malware that takes control of computer systems and demands a ransom to return control to the user, increased 35%. Smartphones are an increasingly attractive target for cyber attackers. Mobile and digital market research firm Juniper Research predicts that the rapid digitization of consumers’ lives and enterprise records will increase the cost of data breaches to $2.1 trillion globally by 2019, almost four times the estimated cost of breaches in 2015.28

FIGURE 2

500,000,000+500,000,000+more than half a billion personal records were stolen or lost

more than 430 million new pieces of malware

ransomwareincreased 35%

35%36%

27 www.agcs.allianz.com/insights/white-papers-and-case-studies/allianz-risk-barometer-2017

28 www.juniperresearch.com/press/press-releases/cybercrime-cost-businesses-over-2trillion

14 Drivers of Change: Navigating the Future

OpportunitiesIn this cyber-connected world, barriers to entry for many businesses are few. It is relatively simple to do more and make more money with fewer people. The power of big data29 helps to make this possible.

Massive amounts of data are being produced and collected due to the inter-connectedness of devices via the Internet (Internet of Things), social media, cloud and mobile computing. It’s expected there will be a 4,300% increase in the amount of data we produce annually by 2020.30 Furthermore, organiza-tions that are able to analyze and use that data in a meaningful way will be able to anticipate trends through predictive analytics. This will allow them to strengthen their relationships with stakeholders and gain insights on how and what to innovate in order to secure their position in the marketplace.

Toronto-based Geographic Information System (GIS) solutions provider Esri Canada is doing just that. GIS is a computer system that captures, stores, manages, analyzes and displays spatial data on a map. The company, founded in 1984, has evolved from digitizing maps to developing software that allows municipalities to model water and electrical networks, and mobile apps that allow users to collect data from the field. Its most recent product, Insights for GIS, draws on the power of big data to allow people to make, share, combine and analyze maps to gain new insights.

Questions to encourage organizational learning• How are you using social networks to learn about trends, collaborate with

suppliers and stay connected to your customers?• How could your organization become the innovator rather than risk being

disrupted by new technological advances? • What aspect of your business could you better exploit with technology?

(e.g. using technology to create new products and services, new market space, etc.)

• How does your organization prevent and handle cyberattacks? What protocols do you have in place to secure your assets?

• What would a business continuity planning process encompass in your organization? For example, have you identified your most valuable assets, which ones are most at risk and what the impact would be if these assets were stolen or lost?

• How is your organization using big data? Are you employing predictive analytics to anticipate future trends?

29 Gartner Inc., a leading information technology research and advisory company defines big data as: “high-volume, high-velocity and/or high-variety information assets that demand cost-effective, inno-vative forms of information processing that enable enhanced insight, decision making, and process automation.” www.gartner.com/it-glossary/big-data

30 http://h20195.www2.hpe.com/V3/getpdf.aspx/4aa6-5419enw

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Resources • World Economic Forum, The Fourth Industrial Revolution:

www.weforum.org/agenda/2016/01/the-fourth-industrial-revolution- what-it-means-and-how-to-respond

• World Economic Forum, The Future of Jobs: http://reports.weforum.org/future-of-jobs-2016/drivers-of-change

• Symantec, Internet Security Threat Report: www.symantec.com/content/dam/symantec/docs/reports/istr-21-2016-en.pdf

• Gartner, Top 10 Strategic Technology Trends: www.gartner.com/smarterwithgartner/gartners-top-10-technology-trends-2017

• CPA Canada, Introduction to Blockchain Technology: www.cpacanada.ca/en/business-and-accounting-resources/ other-general-business-topics/information-management-and-technology/publications/introduction-to-blockchain-technology

• CPA Canada, Effective IT Risk Management for Small Businesses: www.cpacanada.ca/en/business-and-accounting-resources/ other-general-business-topics/information-management-and-technology/publications/it-risk-management-for-small-businesses

• CPA Canada, Information Security Insights From and For Canadian SMEs: www.cpacanada.ca/en/business-and-accounting-resources/other-general-business-topics/information-management-and-technology/publications/canadian-sme-information-security-practices-study

• CPA Canada, Cyber Security Opportunities for Smaller Accounting Firms: www.cpacanada.ca/en/business-and-accounting-resources/ other-general-business-topics/information-management-and-technology/publications/cybersecurity-opportunities-for-small-accounting-firms

SocietalDemographic and socio-economic trends are among the most significant move-ments shaping the future. Population growth, an increasingly aging population, migration and urbanization will fundamentally influence countries’ infrastructure, health and education systems.

The United Nations projects the world’s population will increase from about 7.4 billion in 201631 to 11.2 billion by the year 2100.32 Canada’s own population has grown 5% since the last census in 2011 to 35 million people. This is the high-est rate of growth among G7 countries, with two-thirds of that growth coming from immigration.33

31 www.prb.org/pdf16/prb-wpds2016-web-2016.pdf

32 www.un.org/en/development/desa/publications/world-population-prospects-2015-revision.html

33 www.cbc.ca/news/politics/grenier-2016-census-population-1.3970314

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A demographic transition is also taking hold. The number of people aged 60 and older continues to increase substantially in most countries and that growth is expected to accelerate. Between 2015 and 2030, the number of people in the world aged 60 years or over is projected to grow by 56% to 1.4 billion, and by 2050, this group will be nearly 2.1 billion.34 Statistics Canada forecasts that by 2036, the number of seniors aged 65 or over will represent between 23% and 25% of the total population.35 A larger, older population puts strains on infrastructure and healthcare. This in turn presents fiscal pressures to fund social supports at a time when economic growth is projected to be modest.

FIGURE 3

Number of People 60 Years of Age or Older

(in billions)

0.5

0.0

1.0

1.5

2.0

2.5

205020302015

It’s not just the aging population that’s rapidly accelerating. Globally, the United Nations reports there are about 1.8 billion young people between the ages of 10 and 24 — an all-time high.36 In Canada, the Indigenous population is the youngest and fastest growing. According to the National Household Survey, the Aboriginal population increased by 232,385 people, or 20.1%, between 2006 and 2011, compared with 5.2% for the non-Aboriginal popu-lation.37 Aboriginal children (aged 14 and under) and Aboriginal youth (aged 15 to 24) represented 46.2% of the total Aboriginal population, whereas non-Aboriginal children and youth accounted for 29.4% of the total non-Aboriginal

34 www.un.org/en/development/desa/population/publications/pdf/ageing/WPA2015_Report.pdf

35 www.statcan.gc.ca/pub/91-520-x/2010001/aftertoc-aprestdm1-eng.htm

36 www.un.org/youthenvoy/2015/04/10-things-didnt-know-worlds-population

37 www12.statcan.gc.ca/nhs-enm/2011/as-sa/99-011-x/99-011-x2011001-eng.cfm

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population.38 A report by the National Aboriginal Economic Development Board (NAEDB) states that the Indigenous labour force is underused and that Canada’s GDP would grow by $27.7 billion if Indigenous people were full participants in the economy.39

OpportunitiesWe live in an era of great human mobility. Migration driven by choice and increasingly by conflict can be a positive force if supported by the right policies. The 2015 United Nations High Commissioner for Refugees (UNHCR) Global Trends report revealed that 65.3 million people, or one person in 113, were displaced from their homes by conflict and persecution in 2015. This is the highest level ever recorded.40

Immigration is one of the key reasons for Canada’s population growth. Statis-tics Canada projects immigration will continue to be a key driver of population growth in the coming years. Without it, Canada’s population growth could be close to zero in 20 years, as the population continues to age and fertility rates are projected to remain low.41 According to the Organisation for Economic Co-operation and Development (OECD) International Migration Outlook report42 “medium and longer term effects of migration on public finance, economic growth and the labour market are generally positive”. The report also noted more than 50% of Canadian immigrants are highly educated.

The U.S. administration’s decision to tighten borders to immigrants and refugees is an opportunity for Canada to further strengthen its standing as a destination of choice for newcomers. Canadian organizations can tap into the expertise and unique cultural understanding of a truly global workforce. In order to do this, they will have to ensure their corporate cultures are inclu-sive and provide work environments that encourage collaboration.

Canadian organizations should also make talent management a key part of their growth and innovation strategy and create opportunities for older and younger generations to share knowledge. Millennials now represent the largest

38 Aboriginal children aged 14 and under made up 28% of the total Aboriginal population, whereas non-Aboriginal children aged 14 and under represented 16.5% of the total non-Aboriginal population. Aboriginal youth aged 15 to 24 represented 18.2% of the total Aboriginal population, whereas non-Aboriginal youth accounted for 12.9% of the total non-Aboriginal population. www12.statcan.gc.ca/nhs-enm/2011/as-sa/ 99-011-x/99-011-x2011001-eng.cfm

39 http://naedb-cndea.com/reports/naedb_report_reconciliation_27_7_billion.pdf

40 www.unhcr.org/afr/news/latest/2016/6/5763b65a4/global-forced-displacement-hits-record-high.html

41 www.statcan.gc.ca/pub/11-630-x/11-630-x2014001-eng.htm

42 www.keepeek.com/Digital-Asset-Management/oecd/social-issues-migration-health/international-migration-outlook-2016_migr_outlook-2016-en#page1

18 Drivers of Change: Navigating the Future

cohort in the Canadian workforce.43 They have grown up with the rise of tech-nology and globalization. In a report for RBC, economist Laura Cooper writes: “Millennials’ deep engagement with technology is fueling disruption across a number of sectors … and their tech habits are launching new industries.”44

Another untapped source of talent is the Indigenous community. According to a report by the NAEDB, the employment rate among Indigenous people in 2011 was 9.1% below the non-Indigenous rate. The NAEDB suggests the Indigenous labour force could help address Canada’s productivity gap and the economic pressures of an aging population. For this to happen, businesses would have to ensure equal opportunity and training.45

The developing world’s growing middle class is another significant societal and economic driver and potential source of opportunity for Canadian businesses able to anticipate and meet the needs of this new market. The middle class is expected to more than double in size, from 1.8 billion in 2009 to 4.9 billion by 2030.46 Members of this growing middle class live in cities, making urbaniza-tion a substantial societal driver. According to the United Nations, more than half of the world’s population currently live in cities and towns.47 Research from McKinsey suggests that the urban world’s purchasing power, along with invest-ment in infrastructure and industry, could inject up to $30 trillion in the global economy by 2025.48 Canadian organizations should take a close look at these societal trends with an eye to the long-term opportunity they represent.

Questions to encourage organizational learning• What is your organization’s recruitment plan to hire new immigrants and

ensure their education and training needs are met?• Have you considered the Indigenous community as a source of talent?

How can you ensure your employment and training policies are able to access, attract and retain diverse talent?

• How are you gaining insights from your multicultural workforce? For exam-ple, are there opportunities for growth through entering new developing markets?

• What impact will a growing middle class in developing countries have on your organization? Can it be an opportunity for growth?

43 www.canadianbusiness.com/innovation/the-millennial-majority-workforce

44 www.rbc.com/economics/economic-reports/pdf/other-reports/Millennials-October%202016.pdf

45 http://naedb-cndea.com/reports/naedb_report_reconciliation_27_7_billion.pdf

46 http://oecdobserver.org/news/fullstory.php/aid/3681/An_emerging_middle_class.html

47 www.un.org/en/development/desa/news/population/world-urbanization-prospects-2014.html

48 www.mckinsey.com/global-themes/urbanization/urban-world-cities-and-the-rise-of-the-consuming-class

19 Drivers of Change

• How would you define your corporate culture? What measures can you put in place to ensure it is inclusive and everyone has the tools needed to succeed?

• How can you encourage collaboration in a multicultural and multigenera-tional workforce?

• What skills does your organization need? How can you train your existing staff and help create a pipeline of future employees from colleges and universities?

Resources• United Nations, The World Population Prospects: www.un.org/en/

development/desa/publications/world-population-prospects-2015 -revision.html

• United Nations Population Fund, Urbanization: www.unfpa.org/urbanization• Organisation for Economic Co-operation and Development, International

Migration Outlook: www.oecd-ilibrary.org/social-issues-migration-health/international-migration-outlook_1999124x

• Statistics Canada, Population and Demography: www5.statcan.gc.ca/subject-sujet/theme-theme.action?pid=3867&lang=eng&more=0

• McKinsey, “Urban World: Cities and the Rise of the Consum-ing Class”: www.mckinsey.com/global-themes/urbanization/urban-world-cities-and-the-rise-of-the-consuming-class

• CPA Canada, Why Diversity Matters: www.cpacanada.ca/en/connecting-and-news/news/professional-news/2016/february/why-diversity-matters

GeopoliticalTwo concepts are at the core of geopolitics: power and territory. At the World Economic Forum summit in Davos, Switzerland in January 2017, one of the biggest themes was uncertainty. What will a Trump presidency and an America First policy mean for globalization? Is the UK still open for business now that Brexit is going into effect?49 In terms of global security, terrorism, interstate conflicts and large-scale involuntary migration are among top concerns.50

It is important for Canadian organizations to appreciate the political climate, regulations and laws in each of the jurisdictions in which they operate and to have appropriate measures in place to address threats to security and opera-tions both at home and abroad. Threats can include terrorist attacks, cyber

49 www.weforum.org/agenda/2017/01/the-biggest-stories-from-davos-2017

50 www3.weforum.org/docs/GRR17_Report_web.pdf

20 Drivers of Change: Navigating the Future

surveillance programs, state-sponsored cyber espionage and foreign policy sanctions that may restrict access to raw materials and/or trade between nations.

In his article titled “Why Your Company Needs a Foreign Policy” in the Har-vard Business Review, author John Chipman offers a succinct account of the destabilizing forces at play: Geopolitics is back — just witness the recent Brexit decision, which will dramatically change the future shape of the EU as much as the UK’s relationship to it — and not just in Europe. A more confident China has taken measures to assert its territorial claims in the East and South China Seas. In the Middle East, advances by Islamic State of Iraq and the Levant (ISIL) and its declaration of a caliphate have threatened the territorial integrity of several states. ISIL’s advances in Libya and the activities of other terrorist groups in West Africa have further destabilized governance across large territories there. The internal politics of Africa and Latin America, too, are often mercurial.

The potential consequences of external political developments regarding secu-rity and conflicts must be taken into account by any organization engaged in the global economy. This is especially important in light of growing nationalism that is causing more countries to focus inward as they deal with slow-growth economies, high unemployment and growing numbers of immigrants from the Middle East and North Africa.

OpportunitiesCanadian organizations can learn from the examples of governments that have opted to look outward rather than inward. One country that demonstrates a positive way forward is New Zealand. The World Bank rated it the easiest place on earth to do business. Why? A decades-long focus on brokering free trade agreements, a visa system designed to attract skilled immigrants and attention to diversifying its economy by building its service industry to com-plement its main exports of dairy and meat.51

In a recent speech, Governor of the Bank of Canada Stephen Poloz said, “Canada’s economic progress has been driven by its historical preference for openness to people, capital and trade”. He also urges open borders as “responding to tough economic times by turning inward rarely succeeds.”52 By looking outward, Canadian organizations can seek new opportunities. For example, Brexit has demonstrated that where there is uncertainty, there is

51 www.cnbc.com/2016/10/25/new-zealand-beats-singapore-as-easiest-place-for-business-world-bank -says.html

52 www.bankofcanada.ca/2017/03/canada-150-takes-world-raise-nation/

21 Drivers of Change

also opportunity. If the traditional routes for investment within Europe slowed, Canada could emerge as an attractive investment location. Conversely, there may be opportunities for Canada to invest in potentially weakened economies.

This is an approach taken by Mark Rose, chair and CEO of Avison Young, a Canadian commercial real estate services firm. The company has grown from 11 offices in Canada to 78 offices in 71 markets around the world. Rose had this to say after the Brexit referendum in an article in the National Post: “Is Brexit financially a good thing for the UK, EU and the global markets in the short term? At this point, no one knows. What we do know is that the smart money, as it always does, will look into the path that will derive the highest profit. If fear continues to keep pricing down in the UK and Europe, we will buy faster. It is no different than the way we looked at North America in 2008. We are equally excited about launching additional European opera-tions while uncertainty exists.”53

Questions to encourage organizational learning• How reliant is your organization on trade relations with other countries

and are there new opportunities for growth? • How is your organization staying on top of Canada’s foreign policy and

that of the jurisdictions in which you do business?• What is your organization’s plan to manage geopolitical risk? For example,

what impact would sanctions have on your supply chain and how would you address any such risk?

• How are you assessing local in-country risk?• How does your approach to safety take into account geopolitical threats

to security?

Resources• Harvard Business Review, “Why Your Company Needs a Foreign Policy”:

https://hbr.org/2016/09/why-your-company-needs-a-foreign-policy • McKinsey, “Geostrategic Risks on the Rise”: www.mckinsey.com/

business-functions/strategy-and-corporate-finance/our-insights/geostrategic-risks-on-the-rise

• Export Development Canada, Trade Confidence Index: www.edc.ca/EN/ Knowledge-Centre/Economic-Analysis-and-Research/Pages/ trade-confidence-index.aspx

• Global Affairs Canada, Foreign Policy: www.international.gc.ca/sanctions/index.aspx?lang=eng

53 http://business.financialpost.com/entrepreneur/growth-strategies/brexit-represents-opportunity -for-real-estate-firm-avison-young

22 Drivers of Change: Navigating the Future

ConclusionIn today’s global business environment, the only constant is change. For orga-nizations to navigate the future and create sustainable long-term value, they need to be resilient, adaptive and innovative.

CPAs are in a unique position to help organizations embrace change and thrive. They work in all sectors and industries and are trained to think critically and strategically to assess risks and opportunities. CPAs can help organizations successfully learn and adapt in a rapidly changing world. They can provide leadership in economic, environmental and social matters in driving sustainable long-term organizational success.

By outlining the drivers of change that will impact Canadian organizations, CPA Canada has provided a starting point to help organizations in these fast-moving times. Start the conversation with your teams. Use this report as a resource to help you anticipate the challenges that are coming and, where possible, turn them into opportunities.

23

Appendix: Questions to Encourage Organizational Learning

Economic• How does your organization encourage long-term thinking?• How do you manage strategic uncertainties within your organization’s

decision making process?• If commodity prices continue to fall, what impact will this have on your

organization?• How will your organization adapt in an economy of continued slow growth? • How do you embed innovation into your organization’s strategy? • What are the skills necessary to lead innovation in your organization? • How do you define productivity in your organization? What metrics would

be meaningful in order to assess organizational efficiency and effectiveness (e.g. employee productivity)? How could you use those metrics to drive better outcomes?

Environmental• How can you adapt your business model to better conserve natural

resources or reduce your reliance on them? • What contingency and scenario planning have you undertaken to

strengthen your response to uncertain factors such as increased extreme weather and scarcity of natural resources?

• What environmental issues matter most to your key stakeholders (e.g. employees, customers, suppliers, etc.)?

• How has environmental responsibility been incorporated into your business strategy?

• What process do you have in place or could you develop to assess your organization’s efforts to reduce its environmental impact?

• How is your organization considering the environment in the context of long-term value creation?

Technological• How are you using social networks to learn about trends, collaborate with

suppliers and stay connected to your customers?• How could your organization become the innovator rather than risk being

disrupted by new technological advances? • What aspect of your business could you better exploit with technology?

(e.g. using technology to create new products and services, new market space, etc.)

24 Drivers of Change: Navigating the Future

• How does your organization prevent and handle cyberattacks? What protocols do you have in place to secure your assets?

• What would a business continuity planning process encompass in your organization? For example, have you identified your most valuable assets, which ones are most at risk and what the impact would be if these assets were stolen or lost?

• How is your organization using big data? Are you employing predictive analytics to anticipate future trends?

Societal• What is your organization’s recruitment plan to hire new immigrants and

ensure their education and training needs are met?• Have you considered the Indigenous community as a source of talent?

How can you ensure your employment and training policies are able to access, attract and retain diverse talent?

• How are you gaining insights from your multicultural workforce? For exam-ple, are there opportunities for growth through entering new developing markets?

• What impact will a growing middle class in developing countries have on your organization? Can it be an opportunity for growth?

• How would you define your corporate culture? What measures can you put in place to ensure it is inclusive and everyone has the tools needed to succeed?

• How can you encourage collaboration in a multicultural and multigenera-tional workforce?

• What skills does your organization need? How can you train your existing staff and help create a pipeline of future employees from colleges and universities?

Geopolitical• How reliant is your organization on trade relations with other countries

and are there new opportunities for growth? • How is your organization staying on top of Canada’s foreign policy and

that of the jurisdictions in which you do business?• What is your organization’s plan to manage geopolitical risk? For example,

what impact would sanctions have on your supply chain and how would you address any such risk?

• How are you assessing local in-country risk?• How does your approach to safety take into account geopolitical threats

to security?

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