Corporate Board Member’s Director Confidence Index, conducted in partnership with Diligent Institute, finally revived after seven months of decline, up 1.6 percent in January. Directors now rate the future of business conditions a 6.5—measured on a 10-point scale where 10 is Excellent. Although the January rating still falls 13 percent below the April 2021 high, this uptick could signal renewed hope amongst U.S. corporate directors that today’s troubles will not persist into the future.
The 163 U.S. public company board members, polled January 24 to 28, share that they are still concerned with current business conditions and show it in their rating, which dropped 4 percent this month to 6.4 out of 10, now falling behind their rating for future conditions. Labor and supply worries coupled with inflation are driving their confidence in today’s environment down, while projections that these issues will be resolved are propelling their forecast.
“Challenges with the workforce (filling open positions), stress on the healthcare system, slow supply chain and inflation are all weighing on the economy in 2022 Q1,” says Gary LeDonne, independent director at MVB financial. He expects that conditions will improve from a 5 to a 7 and goes on to explain, “These issues will take some time to fully resolve.”
LeDonne is among 41 percent of directors who expect conditions to improve over the next 12 months. Others agree and predict that supply chain issues should resolve, at least to an extent, and expect further recovery from the pandemic.
“Continued recovery with Covid-19 pandemic in the rear-view mirror, inflation dropping significantly, and supply-chain issues mostly resolved are driving my forecast,” says a lead director for a semiconductors company who expects conditions to improve from 7 to 9 over the next year.
Stephen Sleigh, director at Amalgamated Financial Corp, says, “Pent up demand, return to office, easing of supply chain induced price increases,” explaining what is motivating his forecast that conditions will improve from a 7 to an 8. His sentiment echoes that of many CEOs, who, when polled in January by our sister publication, Chief Executive, shared that their positivity is bolstered by persistent and unwavering demand, even in the face of another wave of Covid-19.
CEOs’ forecast for business conditions one year from now jumped 7 percent in January to 7 out of 10 on our scale, but despite the high hopes of many, 25 percent of CEOs still expect conditions to deteriorate. 35 percent of directors expect conditions to stay the same, although that proportion dropped by a third since December, when a whopping 51 percent of directors expected conditions to deteriorate.
Inflation is top-of-mind for these directors, who are concerned government management of inflation, along with anti-business policies, labor shortages and supply chains disruptions will slow down the economy even if Covid-19 doesn’t. They also cite worries over global economic conditions and instability in politics.
An outside director at an IT company focused on things like automation and propulsion, says, “Labor and material disruptions will continue to drag the economy lower. Assuming Covid shifts to endemic, unwinding covid circuit breakers will take time and still slow the economy. The Feds interest rate policy will surely slow things down.” He expects conditions to further deteriorate, dropping his rating from a 9 currently to a 7 by January 2023.
“Pandemic hangover which will take years to wash out. Global supply chain issues which have no short-term solutions. China/Taiwan issues which could devastate the global semiconductor market. The prospect of high inflation. The prospect of significantly higher interest rates. The high likelihood of a near-term severe market correction. Severe global political uncertainty. Significant domestic political turmoil,” lists another director at an IT company focused on networking products, as reasons why expects conditions to drop to a 3 over the next 12 months, down from a 6.
“I am quite concerned about inflation and the anti-business rhetoric coming out of Washington, DC, both politically and regulatory-wise. I am also concerned about the weakening US position globally due to a perception of weak U.S. leadership,” says the director of an energy and utility company on why she rates future conditions as a 5, down from 6 currently.
An outside director from a food and beverage company shares, “Uncertainty of the return to normal supply chain and continued global covid conditions drive my ratings. Also, uncertainty in the labor market will continue to affect some industries.” She expects conditions to deteriorate slightly, from a 7 to 6, mainly due to uncertainty.
Many directors share her concerns over uncertainty and point to difficulties in forecasting when conditions weighing on the economy, politics and business are so volatile and vague.
A director in industrials says, “uncertainty with inflation, distribution channels and Covid are driving my forecast.” She rates both future conditions as a 6 out of 10.
An outside director in healthcare IT, who also rates current and future conditions as a 6 out of 10, explains his reasoning, “My concerns are over inconsistencies in how capitalism is practiced today with issues such as global climate change, increasing wealth and income gaps, and a value system that is not in concert with the realities of challenges facing the globe. Short-termism is an increasingly dangerous disease when the needs of society require longer term judgment, sense of responsibility and understanding.” He is a part of the 25 percent of directors who forecasted that conditions will not change in the next 12 months.
When last polled in December, only 17 percent of directors expected conditions to remain the same, compared to 25 percent now. 51 percent expected conditions to deteriorate the month prior—that proportion is down 33 percent since last month, and now only 34 percent of directors expect conditions to worsen. The proportion expecting improvement shot up in January by 38 percent, now at 41 percent of directors.
The Year Ahead
The proportion of directors expecting revenues increases over the next 12 months declined by 1 percent this month, down to 84 percent. The proportion of directors forecasting increases in profits jumped by 4.7 percent to 77 percent this month—8 percent higher than the proportion of CEOs who forecasted the same at the beginning of January.
The same proportion of both directors and CEOs expect an increase in capital expenditures, at 61 percent each. This is 16 percent more directors than the previous month and a 7 percent increase in the proportion of CEOs who expected the same. Only 50 percent of CFOs, however, expect to increase their capital expenditures, unchanged since the month prior.
When it comes to discussing the risks and opportunities associated with environmental issues, directors feel relatively well-prepared for changes in capital allocation—43 percent of directors say they have an approved plan for their company in this area, and another 26 percent have already executed on a plan. Similarly, 32 percent of directors said that have an approved plan to address the areas of physical risk for their company, while 26 percent have executed on a plan.
Twenty-six percent of directors also say that investments in growing “green”’ business/product lines is not an area of risk or opportunity for their company. Only 7 percent of directors say that changes and disruptions to the workforce are not a risk or opportunity for their company compared to 22 percent who say the same when referring to upskilling or rehiring talent for climate change expertise.
When directors were asked about the timeline for their strategies regarding the risks and opportunities of environmental issues, 67 percent of directors said that they have already enacted their strategy regarding capital allocation—only 2 percent of directors said that they do not have a strategy in this area. Regarding their plans for volatility in financial markets, 57 percent have already enacted their strategy with another 26 percent planning to within the next 6 months.
31 percent of directors say their strategy on upskilling talent for climate change expertise has been enacted, with another 19 percent planning to enact their strategy within 6 months. Another 19 percent say they do not have a strategy in this area. As for changes and disruptions to the workforce, 47 percent of directors say that their company has already enacted a strategy, with another 25 planning to do so within the next 6 months.
About the Director Confidence Index
The Director Confidence Index is a monthly survey of public company board members on the state of the overall economy, the outlook for business and other topical issues impacting public companies. Conducted in collaboration between Corporate Board Member and Diligent Institute, the Index benchmarks confidence among the governance community and is a forward-looking indicator of market movements and corporate strategies.
About Corporate Board Member
Corporate Board Member, a division of Chief Executive Group, has been the market leader in board education for 20 years. The quarterly publication provides public company board members, CEOs, general counsel and corporate secretaries decision-making tools to address the wide range of corporate governance, risk oversight and shareholder engagement issues facing their boards. Corporate Board Member further extends its thought leadership through online resources, webinars, timely research, conferences and peer-driven roundtables. The company maintains the most comprehensive database of directors and officers of publicly traded companies listed with NYSE, NYSE Amex and Nasdaq.
About the Diligent Institute
Diligent Institute is the corporate governance research arm and think tank of Diligent Corporation. The Institute produces publicly available cutting-edge research on corporate governance practices by directors, for directors, with a global perspective. Learn more at diligentinstitute.com.