CFO Signals™: 4Q 2021

A dimmer outlook for North America and China’s economies with expectations for higher inflation and costs

What North America’s top finance executives are thinking—and doing.

New opportunities are certainly evident in the results of our fourth-quarter CFO Signals™ survey. For example, 79% of surveyed CFOs noted they will allocate or reallocate capital to new business investments, and 67% plan to pursue M&A and new ventures in 2022. A vast majority (92%) also see opportunities in embedding technologies and automation into their organizations’ operations. Still, other survey results point to guarded views about future economic conditions in regional economies.

Highlights this quarter include:

  • CFOs’ views of regional economies one year out: CFOs appeared gloomier—albeit to varying degrees—about the economies of North America, Europe, China, Asia excluding China, and South America. Forty-five percent view North America’s economy as better a year ahead, compared to 54% in 3Q21, while 27% indicated China’s economy would be better in 12 months, down from 55% in 3Q21. Europe, Asia other than China, and South America also saw tempered CFOs’ outlooks for their economies a year out, compared to 3Q21.
  • Own-company financial prospects and year-over-year (YOY) growth expectations: Nearly half of CFOs feel more optimistic than they did three months ago, but that’s a drop from the prior quarter’s 66%. Moreover, the percentage of CFOs feeling less optimistic grew to 13.8% from 7% in 3Q21. That might explain the decline in those who say now is a good time to take greater risks, from 65% in 3Q21 to 57%.
  • Chief risk concerns: Perhaps not surprising, surveyed CFOs cited talent/labor and retention; inflation; supply chain shortages; changes in government policies; and COVID-19 variants as their top concerns.
  • CFOs’ priorities and expectations for 2022: Talent/labor, financial performance, and growth are CFOs’ top three priorities for 2022, with talent/labor outpacing “growth” nearly two to one in terms of the frequency cited. Financial performance fell in the middle.
  • C-suite relationships: CFOs’ relationships with others in the C-suite are critical to their success and effectiveness. When CFOs were asked to rank C-suite relationships in terms of importance to their personal success, CFOs ranked relationships with the Chief Executive Officer, Business Unit leaders or presidents, and the Chief Operations Officer as the top three.

Here’s how survey respondents answered other specific questions this quarter:

Assessments of the business environment and capital markets

How do you regard the current and future status of the following economies—North America, Europe, China, Asia (other than China), and South America? When assessing the current status of the five regional economies, 72% of CFOs ranked North America as good or very good, down from 78% in 3Q21. Twenty-nine percent of CFOs noted China’s current economy as good or very good, a decline from 52% in the prior quarter. CFOs raised their sentiment toward Europe’s economy, with 33% citing it as good or very good, up from 27% in 3Q21, and 32% of CFOs consider the economy of Asia, excluding China, to be good or very good, while 9% said the same for South America’s economy.

Considering the regional economies 12 months out, CFOs were generally less positive. Forty-five percent of CFOs expect North America’s economy to be better or much better a year from now, down from 54% in the prior quarter. Forty percent of CFOs believe Europe’s economy will be better in 12 months, a decline from 48% in 3Q21. CFOs’ assessment of China’s economy a year out also declined, with 28% expecting it to be better or much better, compared to 55% in the prior quarter. More than one-third of CFOs (37%) expect Asia’s economy, excluding China, to improve in 12 months, down from 53% in 3Q21. Just 12% of CFOs expect South America’s economy to improve in the same time period.

What is your perception of the capital markets? Eighty-eight percent of CFOs indicated US equity markets are overvalued, up from 82%, in the prior quarter. For 88% of CFOs, debt financing was attractive, down slightly from 92% in the 3Q21 survey. Equity financing’s attractiveness dipped to 51% from 55% in the prior quarter.

CFOs’ expectations for growth

How do you expect your key operating metrics to change over the next 12 months? CFOs lowered their expectations for year-over-year growth for revenue, earnings, and dividends, compared to the prior quarter. Meanwhile, CFOs raised their YOY growth expectations for capital spending, domestic hiring, and domestic wages and salaries from the prior quarter:

Compared to three months ago, how do you feel about your company’s financial prospects? Nearly half (49%) of CFOs indicated they are somewhat or significantly more optimistic about their companies’ financial prospects. That is a notable decline from 66% in the prior quarter. Energy/Resources industry CFOs were the most optimistic (75%), up from 50% in 3Q21, followed by Retail/Wholesale (64%), Services (63%), Technology (54%), and Financial Services (52%). While no one expressed significantly less optimism, some CFOs were somewhat less optimistic, including those in Manufacturing (28%), Technology (23%), and Healthcare/Pharma (20%).

What internal and external risks worry you the most? Talent/labor continues to be CFOs’ leading internal risk, especially with respect to hiring, retention, attrition, burnout, employee well-being, and development. Related to talent were wage inflation and return-to-work challenges, including the hybrid work model. CFOs also expressed concern over strategy execution, technology and the pace of digitalization and innovation, cost containment, and management capacity, among other issues.

With respect to external risks, CFOs ranked inflation, including wage inflation, and supply chain issues as their top external concerns, with half of respondents citing inflation and almost one-third mentioning supply chain. The next highest category was policies and regulation, including changes in fiscal policies and government reform measures. Geopolitical worries, COVID-19 (with an emphasis on new variants and vaccine mandates), and cybersecurity risks followed.

What are your expectations related to monetary and tax policies?

Federal funds interest rate—how much might it rise?
As the Federal Reserve signals plans to increase the interest rate for US federal funds, CFOs weighed in on the range of the increase and the timing. Eight percent of CFOs see the range somewhere between .05% and .25%. More than one-third (37%) expect it to land between .26% and .50%. Slightly more (38%) believe the target interest rate will range between .51% and 1.0%. Another 15% of CFOs expect it to end up somewhere between 1.1% to 2.0%, and 3% expect the rate increase could be higher—between 2.1% and 3.0%.

When might the increase take place?
As far as when the interest rate increase might occur, nearly one-fourth of CFOs (23%) indicated the first quarter of 2022. Almost half of CFOs (46%) projected the increase to take place in the second quarter of the new year, while 23% estimated the rise in the interest rate to take effect in the third quarter of 2022. A smaller percentage of CFOs—8%—expect the rate increase to take place in the fourth quarter of 2022.

Impact of the global tax agreement on companies’ offshoring arrangements
Last July, 136 countries signed a global tax agreement that would set a minimum corporate tax rate of 15% as part of negotiations spearheaded by the Organisation for Economic Co-operation and Development.

When CFOs were asked how the agreement might impact their companies’ offshoring arrangements, 96% of 124 respondents said the agreement would have no impact on current offshoring arrangements, and no changes would be made as a result of the agreement. Two percent of CFOs said they would increase offshoring as a result of the agreement. Another 2% said they would decrease offshoring arrangements.

What are CFOs’ priorities for 2022?

CFOs staked out their top three priorities for 2022: Talent/labor (by a wide margin), financial performance, and growth. These top three priorities, taken together with their fourth pick, strategy setting, underscore CFOs’ expanding breadth of responsibilities, as discussed in the 3Q21 CFO Signals survey.

Talent/labor: Reflecting on the challenges of return-to-work—hybrid or otherwise—and the Great Resignation, the number of times CFOs cited talent/labor and related issues heavily outweighed other priorities for 2022. “Retention, retention, retention” was a resounding refrain, including through wages and incentives. Some CFOs also noted the importance of attracting new talent (and the right talent) and developing and upskilling current talent.

Financial performance: CFOs are laser focused on improving their companies’ bottom lines, and they plan to use a range of levers, such as increasing margins; improving pricing, including to navigate inflation; managing profitability; sharpening EBITDA; increasing efficiencies; and hitting transformational milestones.

Growth: This priority was the third most frequently mentioned by CFOs, with an emphasis on generating more revenue, increasing sales, optimizing the capital structure to finance growth strategies, investing in growth opportunities, and supporting new product launches. CFOs also noted a focus on pursuing both organic and inorganic opportunities—within their organization’s risk appetite.

Other priorities CFOs mentioned frequently included:

  • Strategy setting, including positioning their organizations for the post-pandemic environment;
  • Cost management, particularly in light of CFOs’ expectations for higher costs of various inputs, such as talent, oil/fuel, other supplies, and inflation;
  • Capital allocation, especially to be opportunistic to fund strategy; and
  • IT infrastructure with a focus on improvement and modernization.

CFOs noted a few more specific priorities, such as preparing for new regulations, including ESG accounting and disclosures; enhancing processes and operations; undertaking transformation, both within finance and enterprise-wide; and increasing the use of data analytics and AI.

What are your expectations for the North American macroeconomic environment in 2022?

For the most part, CFOs agree that demand will pick up, particularly in consumer spending and business investment. They also believe that input costs—from talent/labor, oil/fuel prices, materials, supply chain, and inflation—will increase. CFOs (97%) were especially in agreement with the statement that talent/labor costs will substantially increase in 2022.

Demand: The majority of CFOs expect consumer spending (55%) and business investment (63%) to increase in 2022; 39% of CFOs believe individual investment will increase.

Input costs: Overwhelmingly, CFOs (97%) agree that talent/labor costs will increase substantially in 2022. Sixty-two percent of CFOs expect oil/fuel prices to increase beyond 2021 levels, and nearly three-fourths of CFOs say materials costs will substantially increase in 2022. More than half (59%) of CFOs indicate that inflation will be substantially higher by the end of 2022, and 63% believe that supply chain costs will increase in 2022.

What are your expectations for your company in 2022?

CFOs indicate a number of actions they plan to take in 2022 with respect to capital, growth, and operations.

Capital: Half of CFOs say they will repurchase shares in 2022; 37% report they will take on new debt; and 22% expect to reduce or pay down a significant proportion of their bonds/debt. More than three-fourths of CFOs report plans to allocate/reallocate capital to new business investments.

Growth: Almost three-quarters (72%) of CFOs indicate their range of products/services will expand in 2022. More than half (58%) say their organizations will raise their focus on new markets inside North America, while 40% expect to raise their focus on new markets outside North America. More than three-fourths (76%) of CFOs indicate their organizations will raise prices for a substantial portion of their products/services to offset inflation. In addition, 67% of CFOs say their organizations plan to pursue M&A and joint venture opportunities.

Operations: Ninety-two percent of CFOs indicate their organizations will have more automation and technologies embedded in operations, and 34% expect to increase outsourcing of operations. Forty-one percent of CFOs expect their organizations to have a smaller real estate footprint, while 88% say their organizations will use a hybrid work model consisting of on-site and work from home in 2022. More than half (52%) of CFOs indicate their organizations will require employees to be vaccinated against COVID-19 to work on-site, with the exception for medical or religious reasons, and 57% will require frequent COVID-19 testing of employees who are not vaccinated.

The importance of C-suite roles to CFOs’ personal success

CFOs’ relationships with others in the C-suite are critical to their success and effectiveness as their companies’ Chief Financial Officer. When CFOs were asked to rank C-suite relationships in terms of importance to their personal success, CFOs ranked the top five as follows:

  • Chief Executive Officer
  • Business Unit leaders or presidents
  • Chief Operations Officer
  • Chief Information/Technology Officer
  • Board directors, including the Audit Committee

The above roles were followed by:

  • Chief Talent/HR Officer or equivalent
  • Chief Strategy Officer
  • Chief Legal Counsel or equivalent
  • Chief Marketing Officer

Some CFOs cited other types of roles that are important to their personal success, including others within the finance organization, Division CFOs, the Chief Accounting Officer, and SVP-Regulatory.

The C-suite roles that have the most impact on CFOs’ companies
CFOs also cited the Chief Executive Officer, Business Unit leaders or presidents, the Chief Operations Officer, and the Chief Information/Technology Officer as the top four roles having the greatest impact on their companies, from either a financial or nonfinancial standpoint. The Chief Talent Officer/HR equivalent was ranked fifth.

Other roles selected were Chief Strategy Officer (sixth), Board directors, including Audit Committee (seventh), Chief Marketing Officer (eighth), and Chief Legal Counsel or equivalent (ninth). In addition, CFOs mentioned leaders in sales, research & development, business development, investor relations, and other functions as having the most impact on their companies.

Approximate number of hours per month CFOs spend with the other C-suite roles individually
CFOs indicated they spend the most time per month with their CEO (25.4 hours on average), followed by 18.3 hours on average with Business Unit leaders or presidents. On average, they spend 16.5 hours with their Chief Operations Officer and 12.3 hours with their Chief Legal Counsel or equivalent.

CFOs noted they spend an average of 11 hours per month with each of their Chief Information/ Technology Officer and Chief Talent/HR Officer or equivalent. On average, they spend 10.3 hours a month with the Chief Strategy Officer, 7.7 hours with the Chief Marketing Officer, and 5.1 hours with Board directors, including the Audit Committee.

The one relationship CFOs would like to improve most to be more effective
One-quarter of CFOs indicated they would like to improve their relationship with the Business Unit leaders or presidents most, followed by 21% of CFOs who selected the CEO as the relationship they would like to improve most. Sixteen percent of CFOs indicated the Chief Information/Technology Officer, and 12% identified the Chief Operations Officer as the relationship they would like to improve most. Another 8% indicated Board directors, including the Audit Committee. Four percent of CFOs each selected the Chief Strategy Officer, Chief Legal Counsel or equivalent, Chief Talent/HR Officer or equivalent, and Chief Marketing Officer.

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