A brighter outlook

The Director Sentiment Index First Half 2017 shows director confidence in the economy and business conditions has improved over the last six months. Angela Faherty reports.

Director sentiment has risen to its highest point since 2011 largely due to increased confidence about the health of global economies.

According to the latest Australian Institute of Company Directors’ (AICD) Director Sentiment Index for the first half of 2017, directors have become less pessimistic about the health of the Australian and US economies over the next 12 months. Importantly, directors are also increasingly optimistic about the Asian economy.

The uptick in optimism is a move away from the concern highlighted in the previous survey, which reflected global uncertainty and concern relating to the election of President Donald Trump in the US.

Yet despite Trump’s successful ascendency to power, director confidence in the US economy over the next 12 months rose to 29 per cent, which is unsurprising given the record low result of six per cent in the second half of 2016.

The outlook for the Asian economy experienced the strongest turnaround with only 13 per cent of directors expecting a weak outlook compared to 63 per cent in the second half of 2016. By contrast, the European economy continues to be viewed very pessimistically by directors.

Domestic focus

Decreased concern about the health of world economies was reflected in the list of main economic challenges facing Australia. The percentage of directors rating global economic uncertainty and a China slowdown as the main economic challenges fell 13 and 11 points respectively.

Locally, the survey showed that directors were feeling particularly bullish about domestic economic and business conditions. The Index found that directors expect an increase in inflation, wages and the cash rate in the next 12 months, while expectations regarding the ASX All Ordinaries index have remained stable – almost 50 per cent of directors expect the index to rise in the next 12 months.

Sentiment about investment levels and staff hires also reached the highest point since 2011, with confidence relating to these two measures increasing 10 points and nine points respectively since the second half of 2016 – the highest point in five years.

A further boost in confidence can be seen in how directors’ view the growth of their primary business over the next 12 months. This has reached its highest ever levels, increasing 12 points in the latest survey. Furthermore, 57 per cent of directors expect their business to grow over the next 12 months.

However, despite the uptick in director confidence, many remain concerned about the level of public policy debate in Australia with 86 per cent of directors believing the current quality of debate is poor.

Similarly, directors are increasingly pessimistic about the effect of the federal government’s current performance, with 81 per cent perceiving a negative effect on consumer confidence. More than 50 per cent of directors view the current federal government’s performance as having a negative effect on their business decision-making.

The latest index highlighted taxation reform, energy policy and infrastructure investment as the top three issues directors believe the federal government should address in the short term.

An ineffective tax system was cited by 29 per cent of survey respondents as the biggest economic challenge currently facing Australian business in the first half of 2017, up from 23 per cent in the previous survey. Energy policy featured for the first time in the Index’ s history and was cited as the second biggest economic challenge.

Housing affordability should also be a key area of focus for the government, directors said, with tighter controls on foreign purchases, a boost to housing supply through streamlined construction approvals and reform of negative gearing arrangements highlighted as the three top measures governments should prioritise.

Board and director issues

In terms of decision-making in the boardroom, the Index found that governance regulations and legal and compliance issues are leading to a risk-averse culture in Australian boardrooms, according to nearly 70 per cent of those surveyed.

The current annual general meeting (AGM) system also came under attack, with only 25 per cent of directors of the opinion that the current AGM system is working well. In contrast, 42 per cent of those surveyed believe the current system is dysfunctional.

When asked what is most likely to keep directors awake at night, sustainability and long-term growth prospects was cited as the top concern by 42 per cent of respondents.

Structural change and changing business models was the second key concern (28 per cent) and legal and regulatory compliance was cited as the third most likely issue to keep them awake at night by 21 per cent of survey respondents.

Business reputation (20 per cent), corporate culture (20 per cent) and cyber crime (19 per cent) were also cited as areas of concern.

In addition, half of directors (50 per cent) feel that the current governance regulations under the Corporations Act are too onerous, with 43 per cent believing they are about right. In contrast, only six per cent believe the regulations to be too weak, while one per cent think they are far too weak.