Revealed: The six things that have directors worried

Company directors are feeling better – a smidgeon better – according to the findings of a survey published today.

The overall sentiment is pessimistic – it’s just not as pessimistic as it was in the second half of 2011, according to the findings of the Director Sentiment Index (DSI), released by the Australian Institute of Company Directors (AICD).

The survey covers the first half of 2012, and is the third one conducted by Ipsos MediaCT for the AICD.

Business growth declined for many in July-December 2011, with 40% of directors claiming the growth of their business had weakened in the past six months. There is increased optimism about the future, with nearly half of directors expecting their business to grow in the coming year.

So what else is worrying the 554 directors who participated in the survey? (The first three are the top worries on the minds of directors, but the order thereafter departs from the survey findings.)

1. Global economic uncertainty

This is the top issue on the minds of most directors (42%).

Added as a question this year, directors indicated that they are slightly less pessimistic about the Asian and American economies, and our own, compared to the findings of the second-half 2011 survey.

However, the steps taken to relieve the debt crisis in European countries such as Greece and Spain have not alleviated their concerns. Directors rated the European economy at 1.5 – where one is weak and five is strong – now, and over the next 12 months.

2. The strong Australian dollar

The high Australian dollar is also weighing on the minds of many directors, with 38% indicating it is among the three main issues facing the economy.

Manufacturing and education are two of the sectors hard hit by the high exchange rate. Fourteen companies in these sectors participated in the survey.

It was one of only two key indicators that directors expect to decline in the coming year. The other was availability of credit for asset and working capital purchases.

The survey found that directors expect the $AUD exchange rate to be subdued or lower, at an average of 103 US cents, with estimates clustering around $US1, 105 US cents and 110 US cents. The actual rate during survey fieldwork was 107 US cents.

3. Industrial relations

Directors are getting increasingly worried about the impact of industrial relations on their business operations.

They are worried that regulation of workplace health and safety (OH&S) and industrial relations is more likely to increase than they expected in the second half of 2011 survey results.

Directors expect the level of wages growth in the coming year to be higher than the previous survey – an average of 3.64%, with estimates clustering around 3%, 4% and 5%. The actual growth for the most recent year to the survey fieldwork was 3.7%.

The survey did not question directors about the specifics of their industrial relations concerns, Steve Burrell AICD’s general manager of communications, told a press conference today.

4. The Federal Government’s obsession with delivering a budget surplus

Company directors are really worried about the Treasurer Wayne Swan whacking the brakes on the economy. Nearly 60% of directors disagree with the Federal Government that it is vital to achieve a budget surplus in 2012/13.

The fiscal contraction needed to achieve this goal would be the largest one for 40 years, Burrell says. “If you have an economy that is weak in parts – and the reserve bank is cutting rates, suggesting that is its view – such a reversal is a bold step.”

Businesses find the government’s strategy hard to understand, John Colvin, AICD’s chief executive, told the press conference. “Businesses wouldn’t pay off all their debt if that meant that other areas of their business are exposed. While they expect a government to go to surplus, they are asking, should you do it now?”

Directors believe a surplus would damage economy recovery, Colvin says.

5. Lack of spending on infrastructure

A whopping 90% of directors think the government needs to spend more on infrastructure, although the issue has slipped down the list (10^th) of the top concerns about the economy, with only 13% naming low infrastructure spending.

Infrastructure and credit are seen as the lifeblood of the economy, with 55% say the spending is way too low, and only 8% saying it is about right. Two per cent think it is way too high.

Roads and telecommunications are the main priorities, directors say, and the need to spend on green energy sources (46 respondents) ranks well above the need for nuclear (30) and coal (12) infrastructure. There was a big jump in the number of participants who thought airport spending was among the top five priorities – from 19 six months ago to 29 in this survey.

6. The carbon tax (and red tape generally)

Fears about the carbon tax slid down the list in this survey, but Colvin says this is just because other concerns ascended. “In line with second half 2011 results, more than 60% of directors believe that the announcement and legislation of the carbon tax will impact their business negatively,” he says.

Most directors still believe that energy costs, non-energy costs and domestic prices will be negatively impacted by the announced carbon tax, but to a lesser extent in this survey than the least one.

Nearly half the directors think they would be better off if the carbon tax is abolished (the policy of the Coalition, should it win government).

Almost 85% of directors maintain the belief that their business is making some effort to reduce its carbon footprint. Good news.

This article first appeared on Leading Company.