What I’m Reading – Jeff Galt
In this week’s recommendation, the auditing profession is under the spotlight, revealing a need for directors to dig into the numbers.
The Institute of Directors and ASB are pleased to release the Director Sentiment Survey 2023 report.
The report provides a valuable snapshot of how directors are feeling about their operational and strategic environments, as well as the broader economy.
Asked to name the most significant impediments to national economic performance, 44.5% of respondents to the Director Sentiment Survey 2023 pointed to inflation and the cost of living, knocking last year’s leading issue, labour capacity and capability, into second place at 42.5%.
Produced by the Institute of Directors (IoD) in association with ASB, the survey takes the pulse of New Zealand’s governance community to identify issues and challenges.
“Inflation and the cost of living is a new measure this year, but it’s not surprising to see it debut in the top spot,” says IoD Chief Executive Kirsten (KP) Patterson CMInstD.
“We are seeing a combination of international and domestic inflation pressures that appear stubbornly resistant, despite the Reserve Bank [RBNZ] holding interest rates high. Many organisations will be feeling the hit from the higher interest rates, just like many households are, and this is likely underpinning directors’ views on the economy.”
ASB Chief Economist Nick Tuffley says directors should remain cautious despite the lower-than-expected Q3 inflation results, because high inflation is likely to persist for some time.
“The outlook has not yet changed substantially from when this survey was undertaken in August. Inflation is likely to remain above the RBNZ's 1-3% inflation target for most, if not all, of 2024. Before the RBNZ will start cutting interest rates, it needs to be sure that inflation will continue tracking downward to below the 3% target and stay down. The bank will retain restrictive interest rate settings for as long as that takes.”
The survey suggests short-term economic pressures are dominating board discussions to the near exclusion of longer-term governance goals.
“In this regard, there continues to be misalignment between the pull of short-term pressures and directors needing to take a long-term strategic perspective,” says Patterson.
“That is appropriate in the current economic circumstances because directors have a responsibility to guide their organisations through times of financial stress. Long-term goals are important, but they can only be achieved if short-term hurdles are overcome.”
However, the survey also reveals progress on a number of longer-term governance issues.
There was a positive shift in the percentage of respondents who said their boards regularly discuss cyber risk and are confident their organisation has the capacity to respond to a cyber attack or incident (62.3%, up from 53.5% in 2022).
On the back of governance hitting the headlines for all the wrong reasons over the past 12 months, there was significant improvement in managing conflict of interests (87%, up from 57.6% in 2022) and enabling a culture of inclusivity at 86.6% (well up from 73.3% in 2022).
“Rapidly developing challenges such as climate change and cyber risk are becoming more firmly embedded into risk management frameworks,” Patterson says.
“Directors know that strategy, purpose, innovation and capitalising on opportunities matter – and they have an eye to this, but these may not take the front seat for the next year or two.”
Directors remain deeply pessimistic about the New Zealand economy. An outright majority of 55.8% expect economic conditions to deteriorate over the coming year. Only 28.3% anticipate an improvement.
“While confidence in the broader New Zealand economy remains weak, there has been some modest improvement since the 2022 survey’s historic lows,” says Tuffley. “In 2022, a record 68.1% of directors thought the economy would deteriorate, so there is slightly less pessimism today.”
Improved sentiment was evident in relation to supply chain disruption, with only 6.1% citing it as a concern, down from 36.2% last year.
“That reflects the trend we’ve seen in data over the last 12 months, with shipping delays, port congestion and freight costs all falling sharply,” Tuffley says.
Similarly, changes to immigration settings and subsequent high levels of net migration look to have relieved some previous anxieties about immigration policies. Immigration policy was cited as a significant issue by just 6.5% of directors, down from 33.9% in 2022.
Asked to select the single biggest risk facing their organisations, directors were concerned about the same headwinds they cited at a national level, only with the order reversed – labour capacity and capability challenges (20.6%), followed by the cost of living and inflation (13.5%).
New this year, and possibly boosted by the 2023 General Election, directors said the third most relevant risk to their organisations was political and policy uncertainty (13%).
“As we await news of the policy direction of the new government, that uncertainty will persist. It will be interesting to see how the incoming government can impact sentiment when the ongoing economic pressures look likely to remain with us for some time,” Patterson says.
This was the 10th annual survey of IoD members and had 1,112 responses (around a tenth of the IoD’s membership).
The Director Sentiment Survey is brought to you by the Institute of Directors and ASB.
We hope you find this year’s Director Sentiment Survey report insightful. We would love to hear your thoughts. Please get in touch if you have any questions or would like to discuss the report.
This is the 10th year we have conducted the Director Sentiment Survey, and they are all online if you want to look at historic findings.