What are the main concerns of chief financial officers today? Where do they see risks and opportunities? For 21 years, Duke University’s Fuqua School of Business has been conducting quarterly global surveys of senior finance executives to find out just that.
John Graham, the finance professor at Fuqua who leads the research, sat down with Kimberly S. Johnson, the editor of The Wall Street Journal’s CFO Journal, to discuss the latest survey’s findings. Edited excerpts follow.
DR. GRAHAM: There are two primary reasons that the university does this. First, it is important to understand the perspective of the business community from sort of an objective third-party perspective rather than from a lobbying group. Second, it turns out that the CFO forecasts are very accurate.
It’s an anonymous survey in which we ask CFOs questions about capital spending, hiring plans and wage increases. These are numbers that are in all of their business plans, and they all know them well. We aggregate them. And as long as the business plans come relatively true, it’s a great prediction of the future. In fact, it has been historically more accurate than economists’ forecasts of the future.
MS. JOHNSON: Let’s compare the current outlook around capital expenditures to where things were a year ago. CFOs expect only 2.2% growth in capex spending over the next 12 months. That’s rather weak. What does that signal to you?
DR. GRAHAM: Obviously capital spending kind of pulled us out of the recession, and then we went through a period where capex plans were starting to decline. Then, over the past year, we actually saw capex plans start to pick up, and I think that was on the basis of a new administration and the pro-business policies many thought would come into play.
This past quarter, as you just mentioned, capex fell back down to 2%.
So, yes, I agree it’s weak. Right now there’s a lot of uncertainty about what exactly these pro-business policies are, when will they go into place, and what the details will be.
I think we’re back into a more of a hold pattern at a low level for capex.
MS. JOHNSON: What were some of the other surprises you found in the survey this quarter?
DR. GRAHAM: There were two really big surprises. One was about employment. We just talked about weak capex. GDP growth was relatively weak in the first quarter, too, yet the employment plan keeps getting stronger and stronger. Companies want to hire. This moderately strong employment growth is something that we’re hearing companies hope to continue into the next year. That’s notable given other signs of weakness.
But secondly, each quarter we ask CFOs to rank what their top concerns are. The No. 1 concern this quarter is hiring and retaining qualified employees. We’ve been doing the surveys 21 years, 85 quarters now. That’s the first time that’s been the No. 1 concern.
MS. JOHNSON: Why do you think that is?
DR. GRAHAM: There are two issues. One, the labor market is getting tighter. The unemployment rate’s getting lower. And two, the skills mismatch hasn’t been solved and may be even getting a little bit worse. There are some people looking for jobs, but the types of jobs companies are looking to fill simply aren’t matching.
MS. JOHNSON: We’re living in uncertain times. CFOs and companies overall are concerned about finding people with the right skills. Would it be correct to assume that CFOs are facing more uncertainty than usual right now?
DR. GRAHAM: We put some questions in the survey specifically focused on uncertainty. From the headlines you get a sense that there is so much uncertainty right now, so the question is, how is that affecting how companies are running their businesses? This is a global survey, though we’re focusing on the 357 responses from the U.S. today.
About 36% of companies said that, yes, we are facing more uncertainty than usual and we’re taking action because of it.
But what surprised me a lot was 58% of companies said this is pretty much a normal amount of uncertainty for them right now.
MS. JOHNSON: Things don’t seem normal these days. Are journalists too headline sensitive or is it that CFOs have a higher tolerance for uncertainty?
DR. GRAHAM: Ultimately the goal of a business and a CFO is to produce a quality product and deliver it to the customer. What the numbers here are telling us is that as long as companies can still deliver a high-quality product to customers reliably, then all of what I would call “headline volatility” doesn’t affect their day-to-day operations. Apparently, 58% of companies feel like they’re able to do that.
MS. JOHNSON: In terms of investment, you asked a question in the survey about hurdle rates, or the cutoff rate of return an investment must be expected to produce to be approved. About 90% of companies set their hurdle rate at about 4% above their weighted cost of capital. Is that in line with previous years?
DR. GRAHAM: It is very much in line. You have your weighted average cost of capital, and then companies typically set this hurdle rate 4 or 5 percentage points, on average, above the weighted average cost of capital.
What’s really interesting is the hurdle rate since the early ‘80s hasn’t really changed much, while the cost of capital has been coming down. The buffer, if you will, has sort of been getting larger.
Trying to understand why that hurdle rate has stayed so stubbornly high is a question we may want to explore on another day, but what we focused on in this survey was whether projects that clear the somewhat high hurdle rate get done.
It turns out that companies do pursue a lot of these projects with these great promised returns, but not all of them.
MS. JOHNSON: About three-quarters of companies don’t pursue all of them, right?
DR. GRAHAM: Exactly. It’s a strength that there are these projects up there promising these great returns, but 77% of companies say they don’t pursue all of these projects. And as a professor, you kind of go, “Well, why is that? What are the reasons?”
And the No. 1 factor—and this is another interesting thing that came out of the survey—why companies in the U.S. don’t pursue all of these projects is a constraint on management time and expertise. That suggests that maybe there is a shortage of top management talent, which gets back into the tight labor market we talked about earlier.
And then, also, companies are working full tilt. You can’t do all of the projects, so you do the ones in your core strength.