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Board confidence hits new low

Tony Featherstone  |  04 Dec 2012Text size  Decrease  Increase  |  

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Tony Featherstone is a Morningstar contributor and a former managing editor of BRW and Shares magazines. This article was originally written for Investor Weekly, a Sterling publication.

 

Confidence in Australian boardrooms has hit a two-year low, amid turmoil in Europe and the United States, concerns about the strength of Asian economies, and weakening local business confidence. The latest Director Sentiment Index indicates a grim mood among boards.

The index tracks directors' views on a wide range of economic, regulatory and governance issues and gives an important snapshot of how they assess future conditions.

The second-half 2012 Director Sentiment Index, published by the Australian Institute of Company Directors (AICD), was based on the views of 540 directors and completed over the six weeks to 10 October.

Some qualification of key findings is needed. Only 12 per cent of respondents nominated a publicly listed Australian entity as their prime directorship; 53 per cent nominated a private or unlisted entity; and 33 per cent a not-for-profit enterprise.

This suggests a majority of respondents are from small and medium-sized enterprises, and partly explains the survey's dour findings.

The latest National Australia Bank monthly business survey, released last week, showed local business conditions in October hit a three-and-a-half year low, and suggested a worrisome outlook for smaller enterprises struggling with the high Australian dollar, rising costs and slowing demand.

The other qualification is the Director Sentiment Index's timing. Local business conditions appear to have deteriorated since early October, when the survey was completed, after fresh concerns about the European debt crisis and so-called US fiscal cliff.

The index might have shown an even bigger deterioration in director sentiment had it been conducted in mid-to-late October.

The index has fallen almost 40 per cent since its launch in early 2011. The first survey showed directors were mildly pessimistic (the index was 93.6). It fell to 60.9 in the second half of 2011 as the European debt crisis erupted, recovered to 72.5 in the first half of 2012, and tumbled to 56.3 in the second.

For the first time, all segments that make up the index fell. Director sentiment on economic indicators and business conditions has tumbled this year, and there was a noticeable increase in the number of directors who expect the Australian economy to weaken in 2013.

Directors also expect a lower official cash rate and lower Australian dollar over 2013, and fewer are optimistic on the sharemarket's 12-month prospects.

They continued to rank global economic uncertainty as the biggest current economic challenge, followed by the high value of the Australian dollar and low consumer confidence, which is improving but still having little effect on business optimism.