Since the financial crisis, uncertainty in regulatory activity has been the sole constant factor. Dodd-Frank, resulting activity from agencies such as the Securities and Exchange Commission (SEC), Public Company Accounting Oversight Board (PCAOB), and Federal Reserve, healthcare reform legislation, the JOBS Act, and now debates over the debt ceiling have kept those in the boardroom on their toes. Further, rarely have established economic indicators served as heralds of the market’s health—and this quarter proves no different. The metrics tell different stories: Executives think the economy is improving, but fewer mid-sized companies expect to increase capital spending. Consumer confidence fell nearly 10 points in March, but CEO confidence rose nearly 8 points in the first quarter. Similar to executives, directors are demonstrating optimism in the strength of the markets: the NACD Board Confidence Index (BCI) jumped almost 10 points in Q1 to an overall score of 61.
From one perspective, this improved confidence from both directors and executives may represent that business leaders have grown accustomed to the certainty of uncertainty. Despite insecurity caused by regulatory and geopolitical activity, the markets have shown slow but steady growth, which directors and executives seem more willing to bet on.
Looking at historical trends in director confidence, however, this first quarter jolt might not be much more than a blip. Consistently, the BCI score is most optimistic in the first quarter of the year. Throughout the rest of the year though, that optimism tends to dwindle and typically fails to reach that initial level. In 2011, Q1’s score of 64.9 lost more than one-quarter of its original value by Q3. In 2012, a similar trend occurred: the Q1 score of 60.6 dropped significantly, and each remaining quarter failed to regain such a level of confidence. In fact, in both 2011 and 2012 first quarter confidence was at least five points higher than the ensuing year’s average.
Interestingly, boardroom uncertainty may have manifested in a different metric—confidence in one’s own industry relative to the general economy. The first quarter of 2013 marks the first time that NACD’s BCI measure for overall board confidence in the market was substantially higher than the score for directors’ industries: 61 vs. 58, respectively. Since 2011, directors have scored their industry an average of 5.75 points higher than the overall index.
Although one could predict that this year will follow the observed trend of first quarter confidence dwindling through the rest of the year, several metrics show that boards may buck this trend. Setting it apart from prior first quarters, in Q1 2013, 36 percent more directors indicated their companies expected to expand their workforces in the next quarter. In comparison, those projecting to hire in Q1 2012 and Q1 2011 represented 14 percent and 16 percent declines from the previous quarters, respectively. Additionally, when asked about economic conditions in one year, directors responded with a relatively confident score of 65. The second quarter of 2013 will confirm whether this optimism is short or long term.
Kenneth Daly
Peter R. Gleason
Alexandra R. Lajoux
Henry Stoever
