Chief financial officers representing many of North America's largest and most influential companies expressed dampening prospects and expectations about the future status of their own companies and the North American economy, according to Deloitte's CFO Signals™ survey for the third quarter.
After two strong quarters to start 2017, CFOs' assessments of the current status of the North American economy remain high in the third quarter, with 64 percent saying current conditions are good compared with 65 percent last quarter. However, perceptions of its future health declined significantly as only 45 percent expect better conditions in a year, compared with 58 percent last quarter. CFOs' assessments of the European and Chinese economies continue to show improvement with 29 percent of CFOs saying current conditions in Europe are good — the highest level in four years and up from 17 percent last quarter — and 32 percent saying conditions in China are good, up from 28 percent last quarter.
CFOs' confidence in their own companies' prospects showed its largest decline since the first quarter of 2015, with net optimism declining 15 points since last quarter. Forty-five percent express higher optimism, while 16 percent cite lower optimism.
"Considering the multiyear highs in sentiment recorded in the first quarter of this year and continued strength in the second quarter, the downturn in CFOs' sentiment and expectations this quarter may indicate that lingering political, talent and geopolitical concerns are beginning to take their toll," said Sandy Cockrell III, national managing partner of the U.S. CFO Program, Deloitte LLP.
Each quarter, CFOs are surveyed about their most worrisome external and internal risks. This quarter, U.S. political turmoil, geopolitical risks and global economic concerns top the list of the most worrisome external risks. Talent concerns have been near the top of CFOs' most worrisome internal risks for several years. They easily top the list again this quarter, joined by escalating concerns about technology disruption and managing technological change.
All four business outlook metrics, tracked by this survey for 30 consecutive quarters, remain strong. Revenue growth expectations rose from 5.6 percent last quarter to 5.7 percent, above the two-year average. Earnings growth expectations declined from 8.7 percent last quarter to 7.9 percent, but remain above the two-year average.
Capital investment growth expectations fell once again from 9 percent last quarter to 7.3 percent, but remain among five-year highs.
Eighty-three percent of CFOs say debt financing is attractive, down slightly from 85% last quarter. Attractiveness of equity financing rose for public company CFOs (from 42% to 48%) and decreased for private company CFOs (from 46% to 35%). Finally, bolstered by expectations from CFOs in Canada and Mexico, domestic hiring expectations spiked from 2.1 percent last quarter to 2.6 percent this quarter.
Meanwhile, the business focus on offense versus defense remains high, with 60 percent of surveyed CFOs biased toward revenue growth over cost reduction and 56 percent biased toward investing cash over returning it to shareholders. Fifty-six percent of CFOs say this is a good time to take greater risk, down slightly from the previous two quarters' survey-high of 60 percent. Sixty-two percent of CFOs favor current geographies over new ones, and 61 percent, a survey-high, are biased toward organic growth over inorganic growth.
"It is encouraging that CFOs remain quite optimistic about their companies' prospects despite the growing economic, political, geopolitical and talent concerns they have been voicing over the past few quarters," said Greg Dickinson, managing director, Deloitte LLP, who leads the North American CFO Signals survey. "As companies come to grips with the aftermath of multiple devastating hurricanes and earthquakes — all of which occurred after the survey period — and continue to watch geopolitical conflicts and U.S. policy developments unfold, it will be interesting to see how their expectations will adjust."
This quarter's survey asked CFOs a series of questions about governance and succession. When CFOs were asked what would most likely precipitate a change in either their role or company, just over three-quarters cite either a CEO role or an expanded CFO role. Slightly more than half name a CEO role in their top three, and nearly 45 percent name an expanded CFO role.
On average, CFOs have seven direct reports, one of whom is a woman. Half of the CFOs surveyed note having at least one direct report who will be CFO-ready within a year, and 30 percent say they have at least one direct report who has already been identified as CFO-ready by their board.
"The proportion of CFOs reporting one or fewer women as direct reports — versus those reporting two or more — was higher this quarter than when we asked the same question in the first quarter of 2014," said Carol Larson, senior audit partner, Deloitte & Touche LLP, and champion for Women in Finance for Deloitte's CFO Program. "Research has shown that companies that include women in top leadership roles perform better across the board. The findings in this quarter's report underscore the need to continue the discussion on inclusion and diversity and the benefits to business performance."
When asked to characterize their companies' progress in applying emerging technologies to finance — including cloud computing, robotic process automation (RPA), visualization, cognitive/AI, in-memory and blockchain — more than half of surveyed CFOs say they have not yet moved beyond the pilot stage. Also, only 11 percent say they have achieved the most important benefits afforded by these technologies. Process automation via robotics and cloud-based services is relatively popular among those who cite substantial implementation of emerging technologies, and analytics enhancements are also relatively common. Thirty percent of CFOs say they are moving beyond pilots to fundamentally transform the finance function. For those who have not progressed as far, gaps in technology familiarity and high costs appear to be significant barriers. Only 42 percent of CFOs say their team is familiar with the types and potential applications of emerging technologies. Thirty-seven percent say costs have been a barrier.
To see additional results from Deloitte's third-quarter 2017 CFO Signals survey, including CFOs' assessments of markets and risk, finance's use of emerging technologies and detailed findings by industry, download a copy of the report at: www.deloitte.com/us/cfosignals2017Q3.