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It’s an Awfully Long Block, CFOs Say

Finance executives say economy still hasn't turned the corner. Plus: Finger-wagging at executive-pay goes global.
Lisa YoonSeptember 26, 2002

As we reported last week, the latest CFO Global Confidence Survey revealed that finance chiefs are a lot less sanguine about the economic future than they were in June.

If you need a second opinion about the prognosis, another quarterly survey — this one by the Financial Executives Institute (FEI) and Duke University’s Fuqua School of Business — found that CFOs are indeed decidedly more downbeat in their outlook than they were last quarter.

In the September installment of FEI’s “CFO Outlook Survey,” financial executives were divided about the rest of 2002’s economic prospects. More than one-third (37 percent) of those surveyed are less optimistic about the U.S. economy this quarter than they were last quarter, while back in June, only 21 percent said they were less optimistic than in the previous quarter. Even more striking is that in June, almost half — 47 percent — felt more optimistic compared to the quarter before. This quarter, less than one-third (31 percent) were as upbeat. Thirty-two percent said they felt about the same as they did last quarter.

Consumer confidence and spending is what worries CFOs the most, according to the survey. Given a list of nine potential risk factors affecting the U.S. economy, 42 percent said that they were most concerned about consumer confidence and consumer spending. Other top cited risk factors were global unrest and the risk of terrorism (combined response 20 percent); lack of capital spending (13 percent); and the stock market decline (12 percent).

With such grave concerns on their minds, it’s no surprise that finance chiefs report that their companies are reining in their spending. Sixty percent of CFOs said that they were spending cautiously while another 14 percent say their company is holding off altogether. One in five companies is spending at a normal rate, and only five percent are spending ambitiously.

Why the tight fists? More than half (51 percent) of survey respondents say that uncertainty about the economy is the top factor reason for belt-tightening, while 24 percent cited tough capital markets as the primary reason for conservative capital spending.

Tech spending will also be moderate, with an increase of only 1.1 percent expected in the fourth quarter, according to FEI’s survey. This, down from last quarter’s projection 1.9-percent quarterly increase. Spending on advertising and marketing is even more meager, expected to grow by only 0.7 percent next quarter compared to this quarter’s spending.

On the other hand, most finance executives think a double-dip recession is unlikely. Respondents put the likelihood of a double-dip at 35 percent.

Of course, that’s just the prognosis for this quarter.

ICGN: Executive Pay Due for Reforms

Speaking of second opinions: corporate governance activists on the other side of the pond are chiming in with oft-repeated views on executive compensation.

In July, the International Corporate Governance Network met in Milan for its eighth annual conference. Considering how closely it followed WorldCom’s accounting-fraud bombshell, it may also have been the largest water-cooler discussion of the year.

The results of that gathering have just been released. Like the Conference Board’s Blue Ribbon Committee, which came out with its own governance report last week, the ICGN is recommending greater diligence on the part of compensation committees and the expensing of options. The group is endorsed the International Accounting Standards Board’s efforts to regulate options accounting as expenses. They also believe options should be issued regularly, instead of in on batch, and have longer vesting periods, preferably at least three years.

The key proposal: all companies should submit their compensation committee reports to an annual vote. No such requirement currently exists, though the practice will become mandatory in the U.K. in 2003. While acknowledging that such a rule is unlikely to fly in every market (in the U.S., for instance, “it may be a step too far,” according to ICGN chairman Alastair Ross Goobey, ex-chief of U.K. fund manager Hermes), the point is transparency.

When top executives get paid handsomely regardless of performance, it’s “an exploitation of us as shareholders,” said John Biggs, chairman and CEO of TIAA-CREF.