CFO Signals™: 2Q 2021 has been saved
CFO Signals™: 2Q 2021
Like the second quarter of 2021 itself, the 2Q21 CFO Signals™ survey reveals both signs of optimism and concerns for the future. In addition to seeking perceptions of regional economies and expectations for key metrics, we asked about the actions companies are taking with respect to transformation (albeit, not every company is undertaking one) and diversity, equity, and inclusion (DEI). Following are some key takeaways:
Increasing own-company optimism: Compared to three months ago, more than half of CFOs (59%) feel somewhat more optimistic about their companies’ financial prospects, and 16% are significantly more optimistic—both slight upticks from 1Q21.
Mixed views of the North American economy: Seventy-five percent of CFOs view conditions in the current North American economy as good or very good, a leap from 29% in 1Q21, and 62% believe they will be better or much better a year out, a decline from 73% in 1Q21.
Higher expectations for growth in key metrics: CFOs project year-over-year revenue growth at 9.6%, earnings at 13.6%, dividends at 4%, capital spending at 12.4%, and domestic hiring and wages/salaries at 4.1% and 3.4%, respectively.
Capital markets: Eighty-six percent of CFOs regard equities as overvalued, up slightly from 83% in 1Q21. Both debt and equity financing remain attractive.
Visible concerns over talent, the economy, and inflation: CFOs’ most worrisome internal concern is talent—returning employees back to work on-site, as well as recruiting and retaining them. Economic stability and inflation take the lead for CFOs’ top external concern.
Intense focus on transformation; more demands for finance: A majority of CFOs indicate a range of transformations underway: digitalization of functions, supply chain optimization, integrated business planning, moving to a hybrid work model, and reducing CO2e emissions to name a few.
DEI: Formalization of programs and policies, identification of DEI leaders, and establishment of clear goals* and metrics are among steps being taken to advance DEI. Some organizations are holding leaders—including CFOs and their teams—accountable for achieving objectives, including by linking them to compensation and incentives.
Assessments of the business environment and capital markets
How do you regard the status of the North American, European, and Chinese economies? Three-quarters (75%) of CFOs rate the current North American economy as good or very good, with 3% rating it is bad. The percentage of those expecting better conditions in a year declined from 73% in 1Q21 to 62%—still a high percentage expecting improvement a year out. CFOs in Technology, Media, and Entertainment (T/M/E) (88%) and Technology (69%) were the most positive about North America’s future outlook. Of the industries expecting conditions to be worse a year out, Energy/Resources was highest (22%), followed by T/M/E (13%) and Retail/Wholesale (11%).
CFOs’ assessments for Europe’s economy improved, rising to 19% for current conditions and 46% for future conditions, both up from the prior quarter. Their perceptions of China’s current economy increased from the prior quarter’s 57% to 62%. CFOs dimmed their outlook for future conditions, however, from 64% in 1Q21 to 53%.
What is your perception of the capital markets? Ninety-two percent of CFOs say debt financing is attractive, just above the 91% who considered it attractive in 1Q21. Equity financing’s attractiveness rose to 56% overall—again slightly above the 55% who rated it as attractive in the prior quarter. Eighty-six percent of CFOs viewed US equity markets as overvalued, up from 83% in the prior quarter. The sentiment was generally consistent across industries, bookended by 74% of Technology CFOs viewing US equities as overvalued on one end and 94% of Financial Services CFOs on the other.
How do you expect your key operating metrics to change over the next 12 months? CFOs’ year-over-year growth expectations rose across the board from last quarter:
- Revenue growth expectations increased from 8.5% in 1Q21 to 9.6%.
- Earnings growth expectations shifted from 12.8% in 1Q21 to 13.6%.
- Capital spending growth saw improvement from 10.2% in 1Q21 to 12.4%.
- Dividend growth inched up from 3.3% in 1Q21 to 4.0%.
- Domestic hiring rose from 2.7% in 1Q21 to 4.1%.
- Domestic wages/salaries increased from 3.1% in 1Q21 to 3.4%.
Compared to three months ago, how do you feel about your company’s financial prospects? The optimism index rose from last quarter’s +64 to +70, with 75% of CFOs expressing rising optimism, above 67% in 1Q21. CFOs in the Technology (92%) and Retail/Wholesale (88%) industries were the most positive. The lowest levels of optimism were reported by CFOs in the Energy/Resources (44%), Healthcare/Pharma (55%), and Financial Services (69%) industries.
Is this a good time to be taking greater risks? Sixty-five percent of CFOs indicated now is a good time to be taking greater risks, slightly lower than last quarter’s 66%. Across all industries, the proportion of CFOs saying this is a good time to be taking greater risks outweighed that who said it is not a good time. Technology (83%), Services (78%), and Manufacturing (70%) CFOs were more positive about risk-taking. Financial Services (45%), and Energy/Resources, Retail/Wholesale, and Healthcare/Pharma (all 44%) were the most opposed.
What internal risk worries you the most? Talent ranks as CFOs’ chief concern from a number of perspectives: retaining, recruiting, skills development, capacity, and availability. There was pronounced concern over employees’ willingness to return work in the office and transitioning them back to work successfully—unique concerns in the wake of the pandemic.
Execution and growth, including keeping pace with demand, was another major internal risk many CFOs expressed. For some CFOs, that concern went hand in hand with concerns over their transformation initiatives and change management—the third most often cited internal risk, tying with return to work. Although less often cited, maintaining a company’s culture, including in a hybrid work environment, appeared among CFOs’ concerns as well.
What external risk worries you the most? Economic stability and inflation were cited most frequently by CFOs, and by more than one-third of the respondents. That was followed by concerns over changes in government policies, particularly with regard to taxation, trade, and to a lesser extent ESG pressures. A resurgence in COVID-19, the possibility of new variants, and their potential setback to plans to return to work also were among CFOs’ top three broad concerns. That was followed by geopolitical events, including social unrest, and supply chain challenges—which are affecting nearly all industries amid the shortage of chips and other major components. Cybersecurity was the least-often mentioned external risk, but nonetheless, a critical concern.
2Q21 Questions on Special Topics: Transformation and Diversity, Equity, and Inclusion
Transformation amid the pandemic
What is the most important enterprise transformation your company is currently undertaking or plans to undertake? The responses of the 131** CFOs who answered this question fell into two broad categories: 1) technology/systems upgrades, mentioned by 40%, and 2) strategy/model/offering shifts, indicated by 35% of CFOs. The next two most important enterprise transformations related to growth/integration/divestitures (25% of CFOs) and process efficiency/redesign (21%). Eleven percent mentioned people/organization transformation, and 9% indicated finance capability upgrades, mostly with respect to ERP implementations.
What are the primary drivers of the transformation? (Select the top-two drivers.**) CFOs reported changing customer demands (47%) and disruptive technologies (40%) as the top-two catalysts for companies’ transformation. About one-fifth of CFOs (21%) cited investor demands for higher performance as a top-two driver, primarily in T/M/E, Energy/Resources, Financial Services, and Manufacturing. Another 14% indicated competitor actions, 12% industry convergence, and 7% the COVID-19 pandemic. Nearly one-quarter (24%) reported other reasons, including the desire to scale, meet carbon emission reduction targets, address supply availability, and be opportunistic. In one case, a change in leadership was a top-two driver for transformation.
What is your primary role as CFO in the transformation? For those CFOs whose companies are undertaking a transformation, 42% said their primary role is co-leader and 16% leader. Nineteen percent of CFOs cited serving as sponsor and enabler each, while 4% indicate other roles, such as serving as a monitor of the transformation’s progress.
As a result of the transformation, what new/expanded services and capabilities will finance have to provide going forward? CFOs were most likely to indicate better support for decisions and operations, similar to when we surveyed CFOs on this topic in 1Q20. Nearly three-quarters (72%) of CFOs said their finance teams need to provide stronger decision support, while 31% indicated better operations support. Nearly one-quarter of CFOs (24%) noted finance is expected to be more efficient, and 16% said finance is being asked to provide better business knowledge.
Diversity, equity, and inclusion (DEI)
How would you characterize your company’s approach to diversity, equity, and inclusion? Nearly three-fourths (72%) of CFOs noted their companies have a formal DEI strategy, up from 67% when we asked a similar question in 1Q19, and 61% indicated their DEI practices are embedded in their talent brand/strategy, compared to 49% in 1Q19. In contrast, 30% of CFOs indicated companies’ DEI practices are a substantial component of their customer brand/strategy—about the same as in 1Q19. Sixty percent of CFOs noted their companies have or plan to have a defined budget for DEI in the next year. Nearly half (48%) said their companies report out on DEI representation metrics to investors and other stakeholders, and 50% noted DEI goals* are linked to performance evaluations.
How many people report directly to you—by non-minority and minority, and how many direct reports will likely be CFO-ready within three years? Men continue to dominate the ranks of CFOs’ direct reports; however, the average number of women direct reports has increased since 1Q19, from 2.38 to 4.09. The average number of minorities among CFOs’ direct report rose as well, from 1.05 to 2.85. Regarding CFO-readiness within three years, an average of .89 of minority direct reports will be ready, compared to an average of 2.09 non-minority direct reports. The average number of women who will be CFO-ready in three years grew from .40 in 1Q19 to 1.23.
What is the one thing your company plans to do to make the greatest impact on advancing DEI? Many companies not only intend to take steps to advance DEI, but have implemented plans and policies, and others have recruited executives to develop and execute their DEI strategy. Others are creating scorecards, and some are linking compensation and incentives to those goals*. CFOs’ responses also denoted the importance of communications, education, and advocacy—for leadership, as well as staff. A few CFOs indicated their companies are advocating for social justice, funding social equity programs, and supporting historically Black colleges and universities.
What is the one thing you plan to do to make the greatest impact on advancing DEI? CFOs’ responses centered on strengthening recruiting, hiring, and development practices to diversify their teams, and the broader organization in some cases. Some CFOs are expanding their involvement in interviews, not only for direct report positions but others, including at the regional levels. Others are requiring both a diverse slate of candidates and a diverse slate of interviewers. Setting goals* and metrics was the next most-often cited tactic. Several CFOs mentioned taking a greater leadership role and modeling inclusive leadership.
*Goals are not quotas.
** As some CFOs mentioned more than one transformation and others did not respond if their companies were not undertaking a transformation, percentages do not equal to 100%.