Director Confidence Index – June 2022

| Corporate Board Member

This Month's Findings

Will the Fed stick the landing? Directors don’t seem to think so.

Corporate Board Member’s latest reading of director confidence in future business conditions, measured on a 10-point scale where 10 is Excellent and 1 is Poor, fell to 5.2 in June. That is a 6 percent month-over-month decline, a 19 percent drop since the start of the year and a 26 percent loss from its June 2021 level. The Index is now 30 percent off its April 2021 high.

Director confidence in current business conditions also fell in June, down 5 percent since prior month and 21 percent off its June 2021 level. The only time the Index has been this low was in the fall of 2020, prior to the announcement of a vaccine for Covid-19.

The Director Confidence Index poll of 185 U.S. public company board members, conducted June 13-16 in partnership with the Diligent Institute, shows optimism in business conditions on a steady decline, with inflation as the primary driver. Polled directors say they’re concerned over the Fed and Washington’s ability to contain these record-high inflation levels, despite the latest three-quarter point interest rate hike—and the potential for a string of aggressive jumps before the end of the year.

The poll fielded through the Fed’s June 15 hike announcement and dropped 5 percent on the news, from 5.4 to 5.2, with some board members saying they doubt the Fed’s ability to successfully tamper inflation and help the country avoid a recession.

“Rising interest environment in the face of high inflationary pressure will broadly dampen demand,” said a director on the board of an oil and energy company, who doesn’t expect economic conditions to begin improving until 12-18 months from now.

“Inflation [is] putting significant pressures on business model, and increasing interest rates [are] reducing the capacity to invest in CapEx/expansion,” said a board member at a home healthcare company.

“[We’re] Just seeing the beginning of responses to inflation. I expect additional responses globally that will raise borrowing costs and slow down growth in the near term,” said an audit committee member at a Nasdaq-listed company.

“High energy cost and inflation will lead to increased demand destruction. Transportation costs have cut deeply into margins in our sector (mining) and broadly impacts most sectors,” said an independent director at an NYSE-listed mining company.

“The Producer Price Index is so high, it will take a long time to bring down prices,” said Thomas Chorman, chair of the nom/gov committee at Standex International Corp and a member of both its audit and comp committees. “Current administration has no idea of how to solve the problem because they don’t admit there is a problem.”

A director who chairs the audit committee at an energy company also cited Washington as a barrier to recovery: “Inflation and the effect on tens of millions of Americans, the Ukraine War and its effect on energy and food supply/prices; and the Biden Administration’s total incompetence,” he said, listing the reasons why he expects business conditions to have deteriorated to a 3 out of 10 by this time next year.

“[There’s] ineffective governmental leadership that unnecessarily restricts business,” said the director of an infrastructure company. “A recession is coming.”

On that issue, however, directors are split: Forty percent project the U.S. economy will experience a full-on recession over the next 3 to 6 months, but 50 percent say they don’t expect the slowdown to cross that line.

“In the Fed’s attempts to tamper inflation, there is a strong likelihood overshooting the mark and causing the country to slip into a recession. The worst outcome would be stagflation where you continue to have high inflation with a recession. That doesn’t need to happen but is a possibility,” said a director in the healthcare industry.

“Inflation [is] leading to recession with no constructive policy response from the administration,” said the comp chair of a chemical company, who forecasts a slowdown—not a recession—for the remainder of the year.

“Stagflation is possible given slow QT by the Fed and massive U.S. debt that will require inflationary dollars to sustain,” said the director of a Nasdaq-listed company. “Utopian green energy projects have created deficit of hydrocarbons needed to run real economies, [and] China’s political climate reduces historical growth hedge for western countries.”

“[There’s a] high risk of economic recession, which will further negatively affect ability to finance innovation and pipeline progress,” said Paul Lammers, MD, lead independent director at Salarius Pharmaceuticals, a cancer-focused biotechnology company.

These findings and comments all 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. Currently, the Tracker’s positivity score is at 54 percent, and the top terms being discussed in the past 14 days were “inflation” and “recession.”


A Host of Concerns

Despite the focus on inflation, companies are simultaneously tackling a wide range of other issues. Directors say there is a continued struggle with supply chain delays, ongoing labor shortages and rising costs in all aspect of business.

And the concerns don’t stop there. The war in Ukraine also continues to weigh on business, along with China’s approach to Covid. Add to that market volatility, record-high fuel prices and a midterm on the horizon, and many directors—much like CEOs earlier this month—say it’s tough to be optimistic about the months ahead.

“We’re in for a rough road overall over the next 2-3 years given this current economic environment and nearer term prospects. There’s a big hole to climb out of,” said the lead director of a drink company, who nevertheless only forecasts a slowdown instead of a recession.

Not everyone pictures a gloomy future, though. Nearly a quarter (21 percent) of directors we polled expect the economic picture to improve by this time next year. While that proportion is down 4 percentage points since May, fewer directors now expect things to worsen (52 percent in June vs. 55 percent in May).

“I don’t see higher interest rates dramatically curtailing demand, so I see a continuation of business as usual. Rates are still at historically low levels,” said a respondent in the healthcare industry.

“Businesses are still generally healthy. Controlling inflation and getting supply chain issues under control will be critical to continue keeping businesses healthy,” said a seasoned director who serves on the board of multiple large multinationals.

“I believe the Fed’s effort to tamp down inflation will start to work,” said an independent director on the board of a bank holding company.

“I think inflation will gradually dissipate, and it is the biggest deterrent to positive business growth and conditions,” said another director in the financial industry.


The Year Ahead

Overall, fewer directors are expecting profits and revenues to rise in the months ahead. In June, 56 percent of board members said they expected their company’s profitability (EBITDA) to be up by this time in 2023, down 7 percent from 61 percent in May, and -27 percent from where it started the year at 77 percent. This is, by far, the lowest proportion on record.

Similarly, the number forecasting increasing revenues dropped to 63 percent in June, down 12 percent month-over-month and down 25 percent year-to-date.

And the proportion of directors forecasting increases in capital expenditures followed suit, down to 32 percent, adding another 3 percent decline to the previous month’s 25 percent drop. Only 32 percent of directors now plan for increases in capital expenditures over the course of the next 12 months. That number is down 47 percent since January.

Overseeing Employee Welfare Amid Mounting Shareholder Pressure

Amid ongoing talent challenges and shareholder pressure, recent research shows great majority of directors now oversee employee welfare as part of the overall strategy.

Corporate Board Member research has repeatedly found diverging views among directors about the boards’ role in overseeing ESG matters. Yet a June survey finds consensus on at least one “S” component: nine directors out of 10 say in this environment, the issue of worker welfare (encompassing both physical safety and mental wellbeing below the C-Suite) should, indeed, be escalated to a board-level discussion.

“Employees are the single most important input for most companies. Why shouldn’t due attention be paid to this asset at the board level?” said Edith Green, chair of the nom/gov committee at Sanderson Farms. “That attention should be in ways to help the workforce in their personal wellbeing, which translates into loyal, willing and able inputs into business processes.”

“Employee welfare/wellbeing should be a board topic in conjunction with overall business opportunities and risk. [It’s] part of assessing CEO and C-Suite performance,” said one of the respondents. “Safety of employees metrics should be visible to the board on quarterly or annual basis, depending on company status on this topic.”

“Safety, both physical and mental, is a critical factor in determining healthy employee engagement and culture. If you don’t prioritize whether your employees have a safe workplace, how can employees think you care about them about other things?” said the lead director of two publicly traded financial companies.

Nearly 200 U.S. public company directors participating in the poll conducted by Corporate Board Member and the Diligent Institute June 13-16 shared their boards’ practices regarding the oversight of employee welfare. Fifty-three percent of directors surveyed say the issue is part of their overarching full-board discussion on human capital, while 39 percent say they have made it a committee responsibility.

“We have a board committee to address these HR issues on a regular schedule and report to the full board every board meeting,” said the lead director of an IT company, who adds that overseeing HR issues has also become an important part of the acquisition strategy. “We see a large movement of small to medium-sized companies having to sell. It will be driven by both the economy and by the demands of employee direct involvement in these types of issues. We make a big issue out of our approach to these issues on every acquisition opportunity we get involved in.”

Full board or committee, there is a long subset of issues being discussed. Among the most common are compensation plans (including profit-sharing and performance assessments), and inclusion and equity.

Some of these issues are, of course, more sector-relevant. For instance, only 24 percent of directors at financial services company say their board discusses worker safety, compared to 90 and 88 percent of those at companies in the materials and energy sectors—as to be expected. But there are still large gaps for issues that affect workers of all sectors. For instance, only 18 percent of directors in the financials space discuss mental health programs or absenteeism rates, and only a quarter of directors at energy companies discuss voluntary turnover rates.

“I think that for some companies (insert industries) that worker physical and mental welfare might be an appropriate focus for boards. However, as a board member of financial services companies which are not heavily involved in retail, I don’t think it is as big of a concern. Not that these issues aren’t important, but we don’t have issues like workers getting injured on a production line etc.,” said the committee chair of a financial company.

The challenge, perhaps, is getting everyone to agree about the importance of these issues on the board’s agenda.

“We provide competitive compensation and benefits to employees in exchange for work. We do not get involved in their personal issues,” said a REIT director participating in the survey. “If they need to see a doctor, they have health insurance that can help with the cost. Otherwise, no. We are not a social services organization. It’s time to stop pampering the buttercups.”

“Culture and talent management are important topics for board oversight. Employee welfare and wellbeing is a subset, and I believe that if culture and talent management are strongly positive then employee welfare and wellbeing (to the extent it relates to work life) is covered,” said a director who serves on three public company boards.

Intensifying Shareholder Pressure

The issue of the board’s role in worker safety was brought into focus recently when New York City’s pension fund, New York state’s pension fund and the office of the Illinois state treasurer teamed up to vote against the re-election of two Amazon directors, stating that the board had failed to adequately oversee the health and safety of its workers.

In the end, the votes didn’t get the support needed to pass, and directors say they’re not all that concerned about this wave of activism. This may explain why, when asked to rate their level of concern, only 13 percent of directors polled gave it a 4 or 5 rating, on a 5-point scale where 5 was “significant concern.” The weighted average fell at 3 out of 5, with 44 percent giving it a 3 and 33 percent giving it a 2/5.

“Boards are continuing to be distracted by alleged shareholders or representatives of shareholders with their own hidden agendas to defocus the company’s resources, increase operating costs and reduce shareholder value by their own self cultural interests,” said the lead director of a healthcare company. “This defocus and misdirection culture on every aspect of the C-Suite and boards is counterproductive and liable for failure to comply to the obligations of being a C-Suite and/or board member’s fiduciary duties to the real shareholders ownership.”

“The forcing of ESG agenda[s] on companies and boards by index funds is wrong. Index funds are hired to invest to match the appropriate index not to pursue the views of their management. I will no longer invest my own money in index funds run by Blackrock and Larry Fink,” said Michael Child, who serves on the board of IPG Photonics Corporation.

“Activists are pushing boards to spend time on unproductive subjects. The result will be wasted resources and lower shareholder value,” said the audit committee chair of a manufacturing company.

“I wonder whether oversight groups will be happy with companies whose profits decline significantly because of the time and attention devoted to non-work-related activities or whether they just ‘want it all’,” said a director who serves on multiple healthcare boards.

“Safety and other HR decisions are impacted by Institutional Shareholder Services and Glass Lewis, as they provide feedback to large asset managers; one of ours is in the top 3. The resulting pressure for an ESG scores results in decisions that compromise results,” said a respondent on the board of a mining company.

“Please don’t create more engagement by boards,” said a multi-board director. “Management needs to run the company, not boards.”

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