Manufacturing markets and policies continue to shift around tariffs, so companies are working to adapt. As companies consider adaptations, boards have an important role.
“Here's the thing that’s really important for board members: They have a fiduciary responsibility to a company — not to manage the company, but to govern and advise it,” said Grant Thornton Growth Advisory Principal Jonathan Eaton. “To advise their companies and hold management teams accountable right now, the first thing that board members need to do is to understand the potential impacts of tariffs and how those might manifest.”
Those impacts might be new and evolving, but the board’s role in leading through change is not. “This is just the latest ‘black swan’ event,” Eaton said. “There will be more black swan events, and good leadership with proactive risk mitigation will stay focused on business continuity and supply chain resilience. You should always be thinking about failure modes — things that could hurt the business — and this is one of them.”
“Tariffs have always been around,” Eaton said. “They're just higher now than they used to be. The disciplines and procedures that people should be following now are things that they should always have been doing. It's just that these tariffs have forced people to think strategically about their businesses, how to stay profitable and how to achieve their goals.”
To maintain business continuity and profitability, manufacturers need to protect four business pillars. Boards can help leaders keep those pillars in perspective.
Four pillars
Eaton said boards need to be watching four pillars that support a manufacturer’s business:
- Revenue
- Profitability
- Brand
- Go-to-market strategy
“Any of those things can be disrupted, and those are the conversations that board members need to be having with management teams,” Eaton said. The current tariff environment could trigger trade disruption because of issues with suppliers that can't meet commitments, costs that the company feels it cannot pass on to customers, a potential loss of customers and a range of other impacts.
These impacts can be significant, and manufacturers might feel compelled to take drastic action to avoid them. However, boards can help ensure that decisions remain aligned with long-term strategies. “If you are one of the companies considering building a new plant and incurring hundreds of millions of dollars in investment or expense, that's a pretty big play,” Eaton said. “It is never one that I would advise making simply because there's a tariff. I would do it because it is the strategic, most relevant, most important thing the company could do. Board members can bring that voice of reason to bear,” Eaton said.
It's important that manufacturers continue to align their decisions with their long-term strategy while protecting the four pillars of revenue, profitability, brand and go-to-market strategy. This balance of priorities can be difficult to maintain.
“With all of the current distractions, some companies are afraid to think any further out than one year — and they are losing sight of their long-term strategy,” said Grant Thornton Manufacturing Industry National Leader Kelly Schindler. “Boards need to make sure that isn’t the state of their company leaders.”
“The companies that are planning and acting will be the ones to come out on top — not the ones stuck in the ‘wait-and-see’ mode,” Schindler said.
Board members can offer broad perspectives and ask important questions that help leaders align plans and actions with long-term strategies.
Perspectives and questions
Many board members serve on multiple boards, and have held executive roles at other companies. This gives them a breadth of experience that is important to share in the perspectives they offer and the questions that they ask.
“Board members have a net new perspective that the management team won't have, and they need to be bold in sharing that,” Eaton said. Board members can consider how they’ve seen other companies handling key issues, what they’ve learned from professional organizations and insights from their broader networks. “Board members can also encourage leaders to seek outside perspectives on key issues, making sure that they are open to other ideas and experiences,” Schindler said. “It can be dangerous to assume you have everything covered.”
Board members can ask management teams important questions — and challenge answers that are incomplete or unsatisfactory. For instance:
- Have you identified the tariff-related risks and potential impacts to the four pillars of revenue, profitability, brand and go-to-market strategy?
- Have you quantified the impacts?
“If the answer to those first two questions is ‘no,’ then we have a different problem,” Eaton said. “If the answer is ‘yes,’ or ‘we're trying,’ then ask them how they're doing that, and what actions they are taking. That is also where a board member can be assertive, because many of them have been in the C-suite and should have a broad business perspective about how to handle the risks.” Schindler added, “Do not accept a response that simply says, ‘everything is under control.’”
As manufacturers address new impacts of tariffs, board members can also push leaders to engage ideas and explore options.
Engage ideas
“The thing that I tell management teams — and board members need to hear this too, because they need to hold management teams accountable to do it — is that they need to not only understand the impact of a tariff, but ideate on the opportunities to handle it,” Eaton said.
It’s important to ensure that manufacturing leaders are gathering data and performing scenario analysis as they evaluate which options best meet their unique needs. “Let the management team manage, but help companies think about how to use this as an opportunity to grow or pivot — or to be the things that they're not and that they need to be, should be, could be, or want to be,” Eaton said.
“Board members need to be knowledgeable about the recipe for success,” he added. “They need to, in their fiduciary responsibility, go to the management team with that recipe and say, ‘This is the best way to think about this.’” That recipe can include options drawn from a board member’s own experience, or from creative solutions at other organizations.
Explore options
“Manufacturers have many, many options,” Eaton said, including legal entity optimization, international tax strategies, transfer pricing, alternative suppliers, product alteration, reshoring or nearshoring of supply chains, tolling agreements, free trade zones, bonded warehousing and rationalizing product strategies. “All of those things are viable ideas. The reality is that there's no right or wrong answer for every company, because the answer is different for every company. There could be multiple versions of the answer, depending on the business unit, product, division, geography or channel that they're selling through.” Schindler agreed, “Every company’s options will also vary depending on their long-term strategies.”
When a manufacturer weighs the options that will best fit its business, it must conduct a balancing act. Leaders need to consider facilities, suppliers, distributors, partners, products and more. That can be challenging to comprehend, but it can also mean there are hidden opportunities.
“Many midmarket manufacturers are using contract facilities, and there's a vast network of contract manufacturers and distributors, depending the product category,” Eaton said. “One strategy is to look at alternative sources in countries that are friendly to current trade agreements.”
“There are a lot of things that you can do with a transfer pricing strategy,” Eaton offered. “In our transfer pricing practice, they’ve had some great success helping companies with those conversations. Another example is to use lobbying organizations. Work with the National Association of Manufacturers and others who have paid lobbyists to try to get tariff exemptions. Another option is to differentiate the product or packaging.” Eaton explained that small changes can sometimes affect how a product is classified or how it goes to market — meaning that a manufacturer can open doors it hadn’t considered before.
Board members should also use their perspectives, questions and networks to initiate important conversations that manufacturers might not have considered before.
“We had to prompt people to do this: There are excellent trade law attorneys out there who understand this at a much deeper level than in-house counsel does,” Eaton said. “A board member would be wise to understand who those attorneys are, and what industries they serve, being quick to recommend someone if they see that a company is not mature in its thinking or seems to be making risky decisions on the application of tariffs.”
“Another one is to use brokers,” Eaton said. “Customs brokers will prepare the calculation — they’ll even pay the tariff for you and then you reimburse them, or they will arrange for payment. It's not a guarantee that their calculation is free of error, but this is what they do all day, every day. They know the codes, and they know what passes and what doesn't. It is wise to be willing to use those folks, from an import perspective.”
“Being a board member, you should ask management teams what resources they are using, or how they are handling these issues, then be quick to make recommendations,” Eaton said.
Evolution
Reflecting on the companies that have not weathered past changes, Eaton noted that the most common reason is the failure to adapt. “I think that the role of a board member is to recognize that this is a time for companies to adapt. It's also a time for companies to think strategically about ways that they can evolve, what the options are for doing so, and how to challenge management in a constructive way.”
“It’s a healthy relationship between the board and company leaders when there is a good amount of prodding and challenging,” Schindler said. “I believe the board is responsible for challenging company leadership and not accepting status quo. Don’t take ‘We’ve got it covered’ for an answer.”
Eaton added, “Boards can't solve the problem for management, but they can be a resource or a sounding board by offering different perspectives and asking the right questions. They can get leadership teams together and talk about the risks. Which ones are you going to absorb? Which ones do you want to underwrite? Which ones do you want to mitigate? How are you going to mitigate them? That's really what has to happen.”
“Here's the reality. If there's a tariff, it's going to be paid,” Eaton said. “It's a matter of whether the supplier is going to pay it, the importer is going to pay it, or whether they are going to pass it on to the customer — or a combination. But it's going to be paid.”
“You need to have the right management disciplines in place, and they should already be there, so that a board member can challenge management teams to follow those. Then, help them, teach them, show them, mentor them to make decisions that are robust and meaningful,” Eaton said. Ultimately, this tariff environment is another manufacturer challenge that boards should feel empowered, and responsible, to help companies address with their expertise and insight.
Contacts:
Jonathan Eaton
Principal, Business Consulting
Grant Thornton Advisors LLC
Jonathan is a Principal in the Operations & Performance practice.
Charlotte, North Carolina
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