Last fall, NACD introduced the Board Confidence Index to capture the opinion from the boardroom on economic conditions and other key performance indicators. Produced in collaboration with Heidrick & Struggles and Pearl Meyer & Partners, the Board Confidence Index is a pioneering effort to measure corporate directors’ confidence in the economy and in business, as well as the outlook for their respective businesses and industries, in contrast to purely consumer or CEO-focused confidence measures.
Making Progress?
The overall NACD Board Confidence Index rose to 64.4 in Q4 2010. This marks an improvement from the last BCI (Q3 2010), which hovered on the brink at 56.6. We believe this jump reflects a shift in the boardroom from a hesitant view of the economy to a view of restrained optimism. As the Index score is a composite, breaking down the elements tells a larger story.
“The results are exactly what I would have expected overall,” said David Swinford, president and CEO of Pearl Meyer & Partners. “People have become more confident over the past year, in large part because of the continued increase in economic activity and increased stock market prices that have largely alleviated the fears of a double-dip recession. At the same time, people are more confident further out, largely because they’re getting validation of economists’ original prediction that the recovery would be at best a slow, steady process.”
Directors were asked to characterize the current state of the economy compared to one year ago. In the final quarter of 2010, when looking back over the past year, directors perceived improvement, but less so than perceived in the third quarter of Q3 2010—a retrospective score of 69 in Q4 vs. 77 in Q3. Directors feel dramatically better about the change in conditions over the last quarter—a score of 59 in Q4 compared to a subpar 42 in Q3.
The politico-economic environment has been anything but stable. In the third quarter, the SEC worked furiously to put rules enacted by the Dodd- Frank financial reform legislation on the table. In rapid succession, proposed rules were issued on proxy voting and transparency, proxy access, “say on pay” and new whistleblower programs. These rules, not yet finalized in the fourth quarter, still loomed large over the boardroom. The political climate presented an extra layer of ambiguity for Corporate America. The Republican victory in the November midterm elections is expected to bring a different tone to 2011 legislative activity. Furthermore, the current Administration’s debate over a corporate tax overhaul has left many business leaders hesitant to act.
Looking Forward
Not surprisingly, the results of this quarter’s Board Confidence Index reflect this uncertainty for the short term. Looking ahead, directors are most confident about the state of the economy in the next year. When asked, 72.5 percent of respondents indicated they expected economic conditions to be moderately better a year from now. This longterm optimism, however, is tempered by short-term uncertainty. Directors are not nearly as confident for the upcoming quarter as they are for the upcoming year—more than half believe conditions will remain the same in the next three months. Looking ahead to the next quarter, or looking at the past quarter, respondents reflected nearly the same moderate attitude.
The data reflects companies’ increased willingness to shed recessionary habits, says Heidrick & Struggles Vice Chairman Theodore L. Dysart. “Companies have been watching their pennies add up to dollars. The gains they made from last year’s operating cycle are really going to bear fruit as we enter 2011.”
Contrary to the third quarter, directors feel slightly more optimistic about their own industries in relation to the general economy. Forty-nine percent of respondents indicated their industry would fare moderately better in the upcoming year. “People are more confident in their own industry than in others. You know your own environment pretty well and the further away from your center of your universe, the less confident you are about it,” Swinford observed. “There’s a much higher appreciation for the potential impact of the unknowns than there used to be.”
Directors from the information technology and utilities industries were most likely to believe their industries will fare better in the upcoming year than the general economy. Interestingly, those representing the healthcare sector were most likely to feel their industry would do “moderately worse” in the upcoming year. Directors from the materials and telecommunications industries generally believed their industries would perform in the same fashion as the markets.
The Board Confidence Index also offers a breakdown of respondents by industry size. The largest companies ($10B and over) were the most confident about the long-term future state of the economy. Larger companies ($5B to $10B) were less optimistic about the future state of their primary industries.
Beyond Confidence
In addition to measuring directors’ level of confidence toward the economy, the survey also asked respondents several questions regarding the hiring practices of their primary company. Most respondents indicated a fairly stagnant job market over the past year. In 2010, 37.8 percent of directors indicated their company’s net hiring was the same—suggesting they brought on as many employees as had left the company. However, 34.9 percent of respondents said their company’s hiring resulted in a net gain, while 27.3 percent resulted in a net loss.
“There has been a maniacal focus on driving out costs and operating as efficiently as possible, as opposed to just throwing people at a problem,” observes Dysart. “Boards have pushed their management teams to be very cost conscious, and the hiring practices currently reflect that.”
The largest companies ($10B and over) were most likely to hire in 2010. Fifty percent indicated their hiring practices resulted in a net gain, while 19 percent cut back their workforce.
Looking forward to hiring practices in 2011, responses further supported the theory of potential growth. Slightly under half of directors (48%) forecast their company will retain the same amount of employees in the next year. A substantial amount, 40 percent, forecast their company will expand their current workforce. Just 11 percent plan to pare their current number of employees.
Survey results show a company’s hiring in 2010 tends to dictate its practices in 2011. Of the respondents who neither expanded nor contracted their workforce in 2010, 60 percent plan to retain the same amount in 2011; 77 percent of directors whose companies’ hiring practices resulted in a net gain in 2010 plan to further expand their workforces in 2011. The companies that plan to add workers in 2011 are most likely to be from the financial or information technology industries.
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Hi,
Does the report reflect the public sector governance or the private sector?
Richard Gudoi Gid’Agui MSc.AUDIT;MBA,CIA,CFE,CFSA