Nov 3rd 2010
Chief financial officers are slowly but surely easing from the recession, and are finding new opportunities to hire, despite unemployment levels remaining historically high.
Many companies are focused on retaining their existing talent, and are taking measures to do so. As their overall optimism rises, an increasing number of CFOs are showing interest in making acquisitions, demonstrating progress from the previous year, according to a recent survey of CFOs conducted by Financial Executives International (FEI) and Baruch College’s Zicklin School of Business.
CFOs are showing steady signs of increased confidence. Following last quarter’s sudden decline, the Q3 CFO Optimism Index for the U.S. economy bounced back to rise nearly two points (to 55.2 from 53.6), and the outlook for CFOs’ own companies showed a comparable increase (69.1 in Q3 from 67.4 in Q2), according to the Q3 2010 CFO Outlook Survey.
Earlier this year, CFOs accurately predicted that the U.S. unemployment rate would continue to remain high over the following six to 12 months. While CFOs this quarter continue to forecast high unemployment nationwide (on average predicting at least 9 percent through October 2011), hiring prospects at their own companies paint a rosier picture. More than half (56 percent) plan to hire additional employees within the next six months, and overall they anticipate a four percent increase in hiring over the next six months.
This quarter’s survey also revealed that, coming out of the recession and following the staff reductions experienced by many, retention of remaining talent is a priority for 80 percent of CFOs. Training and development slightly outranked compensation as the top tactic for retaining talent (47 percent and 45 percent, respectively), and were followed by improvements to office atmosphere and team building (both 35 percent), and ensuring opportunities for career advancements (30 percent).
“The increase in CFOs’ confidence in October is promising news, especially compared with the alarming dip the index experienced in the second quarter,” said John Elliott, Dean of the Zicklin School of Business at Baruch College. “Though they remain bearish on the national unemployment situation for the long-term, more than half of the CFOs indicate plans to hire in the next six months. Hopefully these plans will turn into action that will affect U.S. unemployment rates favorably.”
While this quarter’s survey inquired about CFOs’ attitudes toward hiring, unemployment, and retention, it also explored their perspectives on the future of their own careers. The survey revealed that many plan to work beyond the traditional retirement age, and are in favor of increasing the retirement age. Forty-one percent of CFOs anticipate that they will work past age 65 out of desire, and 31 percent will do so out of need; 3 percent of them already are working beyond 65. With regard to the idea of an overall increase to the traditional U.S. retirement age, 59 percent would be in favor, with three years being the average desired increase among those respondents who specified an age.
CFOs’ extended tenures also might impact their mixed approach to succession plans for their own positions. In a time where succession plans have become increasingly important to key stakeholders, less than a third (30 percent) of CFOs currently have a plan in place. While 40 percent of the remaining CFOs believe a plan should be created, another 31 percent do not see the need for one at all.
Increased interest in M&A; targets largely domestic
CFOs are demonstrating relatively healthy balance sheets, and see opportunities to boost their merger and acquisition activity in the short term. On average, the capitalization of respondents’ balance sheets is comprised of 65 percent equity and 33 percent in long-term debt obligations, and banks are their most commonly used source for accessing capital.
Over the next 12 months, they are predicting increases in net earnings (13 percent), capital spending (11 percent) and revenue (8 percent), though their projected increases in these areas are slightly lower when compared with Q2. Their inflation concerns remain relatively low, with nearly 60 percent citing concerns as only a one or two on a scale of one through five (with one being not concerned).
When comparing M&A plans relative to the previous quarter, over a third (34 percent) of respondents to the Q3 survey said their company’s interest in making acquisitions has increased. Only 3 percent of CFOs said their interest in M&A had decreased, significantly lower than Q2 2009 when the percentage of respondents with decreased M&A interest was 19 percent.
While most respondents (73 percent) see no change in their company’s interest as an acquisition target, there are nearly one-fourth that said interest had increased (23 percent). This number is up over Q2 2009, when only 16 percent indicated that interest as an acquisition target had increased. Sixty-seven percent of respondents also specified a particular region for acquisitions, but nearly all of them are limiting their targets to North America (92 percent). Asia (19 percent) and Europe (17 percent) came in a distant second and third place as targeted regions.
“While M&A activity has been lower in recent years, we see the increased interest in acquisitions by a third of our CFOs as a strong indicator of where businesses are trending,” said Marie Hollein, president and CEO of FEI. “CFOs are often at the forefront of these transactions and they appear to be able to leverage the cash on their balance sheets for further expansion. Their preference for largely domestic targets is natural as many of the respondents’ companies are private, but a certain section of them are also starting to examine markets across the globe.”
CFOs weigh in on accounting standards
International Financial Reporting Standards (IFRS) remains a hot button issue among CFOs, and the findings from this quarter’s survey demonstrate that amid the chatter, there is still some uncertainty on the timing, and anticipated impact of, global convergence. When asked about their confidence as to whether a global adoption of IFRS is obtainable, most CFOs (81 percent) feel that it is achievable, but they remain unsure when this would happen. Another 16 percent do not think IFRS will ever be adopted.
In relation to IFRS, 48 percent of respondents identified themselves as private companies that prefer U.S. Generally Accepted Accounting Principles (GAAP), nearly a fifth (19 percent) are private companies that prefer a separate set of standards, and 13 percent are private companies contemplating IFRS for small to mid-size enterprises (SMEs). Additionally, 15 percent of respondents were public companies that prefer U.S. GAAP over IFRS, and the remaining 6 percent stated that they were public companies that will adopt IFRS if the SEC permits.
CFOs have also not yet gauged the impact of the recent decision by the Financial Accounting Foundation to add two new board seats to the Financial Accounting Standards Board. Most are unsure if it will have any impact on the adoption of IFRS (41 percent), and about a fifth (19 percent) anticipate no impact. CFOs overall remain confident that the FASB additions will not lessen the quality (65 percent) or rate (59 percent) of U.S. accounting standard setting.
Full survey results and historical data comparisons are available at www.financialexecutives.org or from Nicole Madison at [email protected]. The study also is available online at the Financial Executives Research Foundation bookstore and on the Baruch College home page at www.baruch.cuny.edu.
Overview of the Survey:
This quarter, the CFO Outlook Survey, conducted by Financial Executives International and Baruch College’s Zicklin School of Business, interviewed 249 corporate CFOs electronically from October 6-14. CFOs from both public and private companies and from a broad range of industries, revenues and geographic areas, including some off-shore companies, are represented. Survey respondents are members of Financial Executives International. Financial Executives International has been conducting surveys gauging the country’s economic outlook from the perspective of CFOs for more than 11 years.
Financial Executives International is an advocate for the views of corporate financial management. Its 15,000 members hold policy-making positions as chief financial officers, treasurers and controllers at companies from every major industry. FEI enhances member professional development through peer networking, career management services, conferences, teleconferences and publications. Members participate in the activities of 85 chapters, 74 in the U.S. and 11 in Canada. FEI is headquartered in Morristown, NJ, with additional offices in Washington, DC, and Toronto.
Baruch College is a senior college of the City University of New York. The Zicklin School of Business at Baruch College is the largest and most diverse AACSB accredited collegiate school of business in the nation. Baruch has a long tradition of producing accounting and finance graduates who become leaders as CPAs and CFOs.