Director Confidence Index – April 2022

| Corporate Board Member

This Month's Findings

America’s boardrooms remain deeply pessimistic about the future of the economy, with a sizable and growing majority now convinced that the U.S. is on track for a recession in the months to come.

Our April Director Confidence Index, a poll of 133 U.S. public company directors, conducted April 18-22 in partnership with the Diligent Institute, plummeted 9 percent between March and April.

Directors say they are concerned about the impacts of record-high inflation above all else. The vast majority now predict business conditions to get worse over the course of the next year, at 61 percent. Directors are wary of the federal government’s ability to lead the nation away from this path as businesses continue to face issues in the global supply chain and a race for talent.

Our leading indicator is now at 5.7, as measured on a 10-point scale where 10 is Excellent and 1 is Poor. This is the second month in a row that directors’ rating has reached a record low and the first time our indicator has dipped below the rating of 6, or “good.”

A growing number of directors are also voicing their dissatisfaction with the current Administration, citing stifling regulations and lack of leadership from both the White House and the Fed. Directors remain concerned over the ongoing war in Ukraine, its effect on supply chains and the economy, and the uncertainty over how it will all end.

These findings continue to align with Diligent Institute’s Corporate Sentiment Tracker, an AI-powered tool which tracks the issues corporate leaders are speaking about most frequently in the news and whether they’re speaking about those issues in a positive or a negative way. At the time this report is being written, overall corporate leader sentiment is at 60% positive and the top term in the last 14 days is “inflation.”

The “current policies of the Biden administration are resulting in unprecedented pressure on the underpinnings of the nation’s economy and consumer spending,” says Chris Clemente, Chairman & CEO at Comstock Holding Companies, Inc., a real estate company. “Record high oil & gas prices are directly correlated to President Biden’s lurch to the left and are contributing to the record setting inflation.” Clemente expects conditions to deteriorate further, down to a 5/10 from his 7/10 rating of current conditions. “While intentions may be noble, i.e., a green economy, trying to force a desired outcome through burdensome regulations without any concern for the impact on average people is foolish.”

Others agree that leadership in Washington in lacking but maintain that conditions will at least remain stable.

“The US debt level, inflation, leadership vacuum in DC, direction of Fed (more lack of leadership), lack of focus of electorate are all elements in my forecast,” says Stephen Kasnet, board chair at Two Harbors Investments, who rates both current and future conditions a 7/10.

A director at a semiconductor company rates both current and future conditions as a 4/10, explaining, “My forecast is driven by these elements: 1. High interest rates, 2. War in Ukraine, 3. Supply chain hang-ups and shortages, 4. An administration that is misguided and interfering with business and 5. Linger effects of the COVID virus.”

Directors’ sentiment surrounding the current business environment dropped slightly this month, down less than 1 percent, hovering at a 6.6 out of 10. This is 5 percent below their rating of current conditions one year ago, in April 2021.

The findings closely mirror the montly survey by our sister publication, Chief Executive. CEOs they polled rate current business conditions as a 6.6/10 for the month of April, down 3 percent from March and 6 percent below their rating of current conditions one year ago. CEOs’ forecast for the future of business conditions plummeted at the same rate as directors, down 9 percent month over month. Their rating is now 6.1/10, still 7 percent above that of directors and within “good” territory. Nonetheless CEOs’ optimism is at its lowest level since the fall of 2016 amid the Clinton v. Trump election. CEOs share many of the same worries as directors, voicing concerns over inflation, supply chains and the threat of a Fed-induced recession.

Also in April, the proportion of CEOs forecasting business conditions to deteriorate shot up to 50 percent, from only 38 percent in March. Directors followed suit and now a whopping 61 percent of directors expect conditions to deteriorate, up from 44 percent in March.

“Excessive inflation and its impact on consumer households and their ability to meet debt obligations while putting food on the table and gas in their tanks,” says one director in banking. He lists the reasons why he rates current conditions as a 7/10 but expects them to plummet to a 4/10 over the next 12 months, “Rising interest rates and their impact on the housing market.  I am fearful of an economic recession within the next 12 to 18 months.”

One director of an office supply manufacturing company says, “Recovering demand in many sectors and markets is being impacted by supply chain challenges, geopolitical worries, inflation impacts and rising interest rates which will likely further temper global economic activity.” He expects conditions to drop from a 7/10 now to a 6/10 in the future.

Only 17 percent of directors expect conditions to improve, while 23 percent expect the business environment to remain the same.

The hopeful directors say that inflation has hit its peak and that the war in Ukraine will resolve the next year. With that comes stabilization in the supply chain and less uncertainty overall, improving business conditions.

“I believe we have reached peak inflation. Unemployment rates are low. The Ukrainian war should be over within 12 months.  There do not seem to be the same supply chain snarls today.  The economy remains strong.  As inflation moderates, war ends, supply chain becomes more robust, the business climate should be better in 12 months,” says the director of a bank. He expects conditions will improve by one point to an 8/10 12 months from now.

The Year Ahead

The proportion of directors forecasting increases in profits and revenues both dropped this month, down 8 and 15 percent, respectively. In April, 70 of directors expect increases in profits over the next 12 months and 74 percent expect the same for revenues. These are the lowest proportions expecting increases since Q3 of 2020, at the height of the Covid-19 crisis.

The proportion of directors forecasting increases in capital expenditures fell by 17 percent in April, to 45 percent. This is the lowest proportion of directors forecasting increases to capital expenditures since January of 2021.

A Quarter of Directors Yet to Act on SEC Climate Proposal

25 percent of directors have not yet taken any steps regarding the SEC’s new proposal
on climate change disclosures. Overall, they rate the impact it would have as a 2.85/5,
with only a 10 percentage point difference between the proportions of those who think its
impact could be significant versus none at all.

At the end of March, the SEC proposed rules that would require public companies to disclose extensive climate-related information in their SEC filings. Between April 18 and 26, Corporate Board Member, in partnership with Diligent Institute, surveyed 133 public company directors about the proposal, their actions and potential compliance failures.

Overall, directors believe that the SEC’s climate proposal, if approved, would have an impact level of 2.85 upon their organization, on a scale of 1 to 5, where 5 is great impact and 1 is little or no impact. The plurality of directors (38 percent) ranked the level of impact as a 3/5. Overall, 36 percent of directors believe that the proposal would have little or no impact (a rating of 1 or 2) versus 26 percent who believe that it would have a great impact (4 or 5).

The level of impact that the SEC climate rule could have varies by industry. Directors in real estate/REIT rank the level of impact as a 3.5/5—the highest out of all industries, just above energy and consumer staples, which both rank the level of impact as 3.4/5. Directors in IT expect the proposal to have a level of impact of 2.3/5—the lowest of the bunch.

A lead director at a storage company says, “We’re concerned with the SEC action and studying it to see how we might have to comply.” He ranks its level of impact as a 5/5.

“SEC proposal is intrusive, beyond its charter and not the function to force companies to implement political policies,” says a director at a pharmaceutical company.

Still, some directors expect the proposal on climate change disclosures to have little impact.

“I believe that thoughtful Boards and management teams have been addressing ESG for some time. However, the SEC rules on climate change will hopefully be another step on the important path to driving consistent, comparative data across companies at least on the important ESG topic of climate change,” says Jonathan Foster, director at Lear corp. He ranks the impact as a 2/5.

Regardless of their opinion on the impact of the proposed SEC rule, 57 percent of all directors have at least discussed the proposal at the board level. Still, a quarter of directors have not taken any action on the matter, highlighting the difference in urgency across sectors and companies.

When discussing the SEC’s climate proposal, 17 percent of directors say that the board is considering bringing in outside experts to aid in conversations and 12 percent say that the company is restructuring around specific aspects of the rule. 19 percent of directors say that the company may appoint a senior executive to specifically oversee the area of environmental reporting and compliance.

Some directors that listed “other” as their choice say that they are waiting to see what the proposed rule’s effects could be and will take the appropriate action if and when the rule is in
place. Others say they have previously taken all appropriate steps and are now ready to comply with SEC’s proposed rule on climate change disclosures if and when it takes effect.

The importance of the matter also varies by industry. Compliance may mean something different to those in energy compared to those in financials. In the industrials sector, zero percent of directors say that they haven’t acted in light of the SEC proposal, meaning that all respondents in industrials have at least discussed the proposed rule, are restructuring their strategy or appointing someone to oversee climate compliance and reporting. In fact, 79
percent of directors in industrials say that the board has discussed the SEC’s proposed rule on climate disclosures—the highest of all industries.

56 percent of directors in the materials sector say that they have not acted in light of the proposed rule—the highest out of all sectors. 38 percent of directors in IT also have yet to act on the matter, the second highest proportion of the bunch.

Given the fact that directors in energy rate the expected impact level of the rule to be a 3.4 (the second highest rating), it is no surprise that only 11 percent of them have not yet acted regarding the proposal. 22 percent of directors in the energy sector selected other, with one director responding that “the company has already taken most of these actions.”

In fact, our research shows that environmental disclosures and regulations are a growing area of concern when thinking about potential compliance failures for 43 percent of directors overall—compared to only 19 percent who say that it is not a significant concern.

Of course, cybersecurity/data privacy is an increasing concern for the largest proportion of directors, at 67 percent.

On the other hand, 62 percent of directors say that corporate ethics is not a significant concern when thinking about potential compliance failures. And 45 percent of directors say the same about workplace health and safety.

Concerns over potential compliance failures vary slightly by industry. When it comes to environmental disclosures and regulations as a potential compliance failure, 67 percent of directors in the consumer discretionary and materials sectors identify it as an increasing concern compared to only 25 percent in IT and 26 percent in financials.

Conversely, corporate ethics is an increasing concern for only 11 percent of directors in the energy sector, in all other sectors, zero percent of directors agree.

About the Author

Corporate Board Member

Corporate Board Member, a division of Chief Executive Group, has been the market leader in board education for 20 years. The quarterly publication provides public company board members, CEOs, general counsel and corporate secretaries decision-making tools to address the wide range of corporate governance, risk oversight and shareholder engagement issues facing their boards. Corporate Board Member further extends its thought leadership through online resources, webinars, timely research, conferences and peer-driven roundtables. The company maintains the most comprehensive database of directors and officers of publicly traded companies listed with NYSE, NYSE Amex and Nasdaq. Learn more at BoardMember.com.