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.
Organizations face risk on multiple levels and from an enormous range of factors. And being seen as a “high-risk” company certainly impacts valuation. Of the many concerns for risk managers today, two of the biggest are global economic uncertainty and information technology.
Cyber attacks that lead to data theft threaten not only the valuable information a company might possess, but the trust and confidence of its investors as well. Just ask Sony, Epsilon and RSA Securities, who all recently suffered data breaches.
Because of these new oversight and risk management demands and higher stakes for corporate boards, NACD is offering two separate sessions discussing risk assessment and management at this year’s NACD Board Leadership Conference in Washington, DC from October 2-4.
The Reshaping the Risk Agenda session features expert speakers who will explore possible blind spots in risk assessment and the implementation of early warning systems, as well as the importance of scenario planning. A major focus of the panel’s discussion will be the board’s role in overseeing risk versus avoiding risk in the current economic environment.”
This year’s conference also offers a Risk Board Committee Forum where professionals from the leading global management consulting firm Oliver Wyman will discuss methods for improving oversight processes and examine the links between strategy and risk. A special focus of this forum discussion will include the board’s role in overseeing IT risk.
NACD understands that the best way to mitigate risk is through education and learning from people who have already been on the front lines battling these issues—and winning. That is why we want you to be there to share your experience and hear from your peers.
Confidence in the economy is a broad topic to discuss. Just as one area starts to show positive growth, the world is shaken by a different downturn or disaster. In an article last month in the New York Times, economist Paul Krugman discussed the increased complexity of the current economy, compared to the months following the most recent financial crisis. In late 2008, the world’s collective attention was on the falling stock market. Today, there are many areas contributing to overall economic confidence: inflation, employment, oil prices and so forth. As Krugman notes, “we’re living in a world that is characterized not so much by the sum of all fears as by some of all fears.”
NACD’s most recent Board Confidence Index (BCI) reflects this conflicted view. In Q2 2011, the Index fell from 64.9 to 63.1, the first time it has dropped since its creation in the autumn of 2010. When asked to characterize the current state of the economy compared to one year ago, directors registered a confidence index of 68, a decrease of five full points since Q1 2011. Directors also feel less confident in the progress made in the short run—looking at changes in conditions over the past quarter, confidence dropped to 59 from 61.
However, the slight decline in confidence is countered with a more optimistic view for the coming months. Just this week, Federal Reserve Chairman Ben Bernanke projected increased growth for the next six months in remarks following the Central Bank’s Beige Book release. According to Bernanke, policymakers will be focused on the labor markets. According to the Q2 2011 BCI, the boardroom agrees. Despite slowed growth, nearly half of corporate directors (43%) plan to expand the workforce in the upcoming quarter. In addition to hiring practices, directors are generally more confident regarding the future. Expectations for the next year stand at an assured 67.
Recently released data from The Conference Board (TCB) echoes the caution seen in the boardroom. Despite higher predictions, TCB’s Consumer Confidence Index fell to 60.8 from a revised 66 in April. Unsurprisingly, American consumers are troubled by the current combination of increased costs for food, the increased cost of oil and the depressed real estate market.
The Board Confidence Index is conducted by NACD in conjunction with Heidrick & Struggles and Pearl Meyer & Partners. Q3 2011 results can be expected in September.