This Month's Findings
Directors’ list of concerns grew longer in May, with their rating of future conditions down another 2 percent. This comes after a 9 percent plummet in April, which sent the index below a rating of 6 or “good” for the first time.
Our May Director Confidence Index, a poll of 176 U.S. public company directors, conducted May 16-20 in partnership with the Diligent Institute, fell to 5.6/10. That’s a new low since we started the index in 2020 and is 22 percent worse than their outlook at this time one year ago.
Directors say supply chain issues are causing damaging effects to business and they don’t expect them to improve in the near term. Rising interest rates amid record high price increases will continue to cause obstacles for businesses, according to directors, especially as hiring remains a challenge.
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, the top terms being discussed in the last 14 days are “inflation,” “recession,” and “future,” in that order. Meanwhile, “geopolitical risk” has crept into the top three ESG topics being discussed, behind “economic risk” and “biorisk.”
“Inflation, the supply chain, employees expecting more flexibility and higher pay in the midst of rising costs. Money is getting expensive. Taxes are higher,” lists Lili Gil Valletta, independent director at Zumiez, in the consumer discretionary sector. She expects conditions to plummet over the next 12 months, rating the future environment as 4/10, down from her 7/10 rating of current conditions.
“There’s runaway fuel prices and the Fed is in position to continue to raise interest rates. We are also facing price escalation caused by the supply chain backlog,” says Adam Crescenzi, vice chair at Clough Global Closed End Funds. He adds that the war in Ukraine is another reason why he expects business conditions to deteriorate from 6/10 to 5/10.
Other directors also cite geopolitical issues to explain their rating, voicing troubles over the continued impacts of the war in Ukraine and volatility in China. They are concerned with domestic political instability as well as the federal government’s decisions regarding the economy and the regulatory environment.
Gary D Blackford, board chair at Avanos, a medical technology company, says his dismal 1/10 rating of both current and future conditions is fueled by, “Extremely excessive government regulation, a hostile business environment from the current Administration coupled with supply chain problems and persistent inflations.”
“Policies that are causing inflation in many key sectors of the economy and increased regulations are discouraging investment. More investment will be driven off-shore,” says James Treco, lead director at Tonix Pharmaceutical to explain his 4/10 rating of future business conditions.
Director sentiment surrounding current business conditions fell 7 percent in May, to 6.1/10, down from 6.6/10 last month. This is 12 percent below their rating of current conditions last year and the lowest the index has hit since January of 2021, before vaccines became widely available and Covid-19 mandates were at a high.
Director sentiment is aligned with that of CEOs, who are polled in a similar CEO Confidence Index by our sister publication, Chief Executive. CEOs’ read on future conditions fell 3 percent in May, after a 9 percent drop in April and now reads 5.9/6. This is the lowest rating in almost 6 years. Their rating of current business conditions fell by 3 percent, as well, to 6.4/10, in May. Both measures are still slightly more optimistic than directors’ but are losing ground at similar paces.
In May, more directors are now expecting conditions to improve, at 25 percent—compared to only 17 percent in April. Many directors now rate current conditions as lower than future conditions and other are hopeful for positive change, boosting their rating of future conditions.
“Shocks of war and higher prices [are] having a heavy impact, but I expect adjusting to those conditions will resolve themselves within the next 12 months,” an outside director in consumer staples who expects conditions to improve to 8/10 from 7/10 today.
Other directors who forecast improving conditions also share that inflation and rising costs will ease as the supply responds to increased demand for products and services.
Still, the majority of directors—55 percent—forecast worsening conditions due to supply constraints, inflation, rising energy costs and the high likelihood of a recession in the near or mid-term.
“There is exceptionally high inflation, continued supply chain challenges and shortages of key components, geopolitical tensions exacerbating these conditions, all of which increases the likelihood of a consumer recession later this year,” says one director at an industrial company, explaining why he expects conditions to further deteriorate.
Twenty percent of the directors we polled directors expect conditions to remain unchanged. Bill Korn, director at Jerash Holdings (US) Ltd., is not seeing the supply constraints many others are. “There is strong supply. Others may be constrained by availability, but both the company where I am CFO and the two where I am outside director have offshore offices, with plenty of availability of talented people,” echoing other directors’ assessments that things are better offshore. He rates both current and future business conditions as 9/10.
Dickerson Wright, chair at NV5 Global, in the utilities sector is at the optimistic end of the spectrum rating both future and current conditions 8/10. Why? He says, “There is expansion in energy and energy alternatives. Also there is an increased focus on infrastructure improvement.”
The Year Ahead
For the second consecutive month, the proportion of directors forecasting increases in profits and revenues fell in May. Now, 61 percent of directors forecast increases in profits, down 13 percent since April. 71 percent of director forecast an increase in revenues, down 4 percent since last month.
Both readings are in-line with those of CEOs, of whom 58 percent forecast increases in profits and 70 percent who say the same for revenues. May is the fourth consecutive month that the proportion of CEOs forecasting increases in profits and revenues fell.
The proportion of directors forecasting increases in capital expenditures fell by 25 percent in May, down from 45 percent in April to 34 percent. This proportion is far behind the proportion of CEOs and CFOs who plan the same, at 52 and 42 percent, respectively.
SEC Proposed Rule Change: Cyber Risks
The SEC recently proposed new cybersecurity disclosure rules for public companies. Under the new regulation, companies would be required to report material cyber incidents within four business days, disclose their cybersecurity governance practices and expertise, and provide periodic updates of previously reported cyber incidents.
Corporate Board Member asked public company board members participating in our May Director Confidence Index, conducted in partnership with the Diligent Institute May 16-20, to share their thoughts on the proposal. The general sentiment: Meh.
Directors don’t expect the proposal to bear too much impact on their organization. When asked to rate the effect of each dimension of the proposal, the data returned a balanced 2.8 out of 5 on a 5-point scale where 5 is “Great impact” and 1 is “Little to no impact.”
“We are prepared for any rule change,” said an independent healthcare director participating in our poll.
“We plan to discuss this at our next board meeting, but as a clothing manufacturer, cyber threats are not as severe for us as for some industries,” said Bill Korn, chairman of the audit committee at Jerash Holdings (US) Ltd.
“We already have a strong focus on cybersecurity,” said the audit chair of a software company.
Adopting a wait-and-see approach seems like the general consensus, with 63 percent of directors polled saying their board had discussed the proposal but much fewer having taken any other action to prepare.
Thirty percent said their board is looking to upskill current directors and executives on cybersecurity oversight and management as a result of the proposal, and 25 percent plan to bring in outside consultants to help them meet the proposed requirements.
Otherwise, 16 percent say they’ve done nothing to address the proposal. Perhaps the lack of a strong response isn’t surprising. After all, directors have been placing great focus on cybersecurity over the past decade. Data from our 2022 What Directors Think survey shows three-quarters of directors saying they are more concerned that their company will confront a cybersecurity/data breach crisis than any other crisis—and are therefore remaining hyper-vigilant in their oversight of cybersecurity.
“We already [do] most of this due to our previous experiences in this area,” said a survey respondent on the board of a healthcare company referring to the action items listed.
“We have engaged more with our cyber team and completed an audit,” said James Treco, lead director at Tonix Pharmaceutical.
“Companies that don’t take cybersecurity seriously are headed for trouble,” said a survey respondent whose board is planning to bring in consultants to help them meet the proposed requirements.
While very few (if any) scoff at the seriousness of cybersecurity, the idea of yet another one-size-fits-all regulation has many rolling their eyes and hoping it will go away.
“It’s overwhelming trying to keep up with the number of changes. Just crazy!” said Gary S. Olson, CEO and executive director at ESSA Bank & Trust. He says cybersecurity is just one of the SEC’s new requirements to which they are building a response.
“The proposed rules seem to be outside the SEC purpose. We already deal with many laws and regulations governing cyber and privacy practices. The proposed SEC rules will make the process more complex and more expensive, and not more effective,” said a participant in the survey who sits on the board of a financials company.
“It’s unnecessary and window dressing for the most part,” said another respondent.
“Well intentioned, but curious as to the continuing lack of clarity and comparability on material breach. The notion of creeping breach and materiality is also difficult. I truly hope that the SEC takes commentary received seriously,” said the audit chair of a company in the financials space.
Overall, directors say the proposal is, at best, oversimplified and that a nuanced approach would be more helpful.
“These rules are not necessary for all businesses. The greatest impact are retail concerns, and the rules should be tailored by industry,” said the chair and lead director of an energy company.
“The 4 day reporting is impractical in many cases given the time to assess potential impact and materiality,” said a director on the board of an industrials company.
“The SEC needs to be very specific in what constitutes board member cybersecurity expertise. When boards were required to add audit committee financial experts, the SEC offered a detailed checklist of experiences that qualified an individual. That would serve as a good model for cyber-related experience,” said the audit chair of a manufacturing company in the consumer discretionary sector.
Overall, when asked to rate their board’s level of expertise, education and knowledge of cybersecurity, relative to peers, directors gave themselves an on-par rating, at 3.2 out of 5, on a scale where 5 is “Ahead” and 1 is “Behind.”
“Being on par with other companies is not the standard we will need to meet. I believe all companies will need to become much better informed about cyber issues,” said Tonix Pharmaceutical’s Treco.
“If forced to quickly, we will struggle to find enough board members with relevant experience to truly make a difference,” said another director participating in the poll.
“It’s a fast-moving concern, and without specific talent/expertise at the employee level, there is no way an organization will be able to keep up,” said a director at a chemicals company.
- Board Practices |
- Corporate Sentiment |
- Cyber Risk |
- Digital Transformation |
- Director Confidence Index |
- Director Perspectives |
- Diversity, Equity and Inclusion |
- Economy |
- Environment, Social, Governance (ESG) |
- Executive Compensation |
- Executive Remuneration |
- Governance, Risk and Compliance (GRC) |
- Modern Governance |
- Shareholders activism |
- Stakeholders and Governance |
- Year in Review