Director Sentiment Index 2H17: General optimism but low policy expectations

The latest Director Sentiment Index showed sentiment among directors at a record high, but they remain pessimistic about the prospects for reform in Canberra.

Directors’ optimism about Australian and foreign economies, business growth and corporate culture improvement contrasted sharply with directors’ expectations of progress on reform in Canberra, according to the AICD’s latest Director Sentiment Index (DSI).

The Australian Institute of Company Directors’ bi-annual DSI shows that directors are more confident than at any time in seven years since the Index started. The DSI showed 57 per cent of directors expect their business to expand over the coming year, continuing an upward trend over the past two years.

But their expectations of what can be delivered by parliament to bolster growth remain low. The DSI survey for the second half of 2017 was undertaken before the political turbulence produced by both the High Court decision which saw five federal politicians ruled invalidly elected and three further resignations as of 15 November. Foreshadowing the distraction the citizenship crisis could produce for policy development, 81 per cent of the 973 directors surveyed felt that the Senate’s composition was negatively affecting business confidence.

The DSI showed 83 per cent of company directors believe the current public policy debate in Australia is poor. Further, 48 per cent view the Federal Government’s performance as having had a negative effect on their business decision making. Issues keeping directors up at night started with 43 per cent losing sleep over “sustainability and long term growth prospects”, 26 percent nominating “structural change/changing business models” and 22 per cent nominating “business reputation in the community”.

However, directors saw an improvement in the effect of the Federal Government’s performance on business decision making and consumer confidence in the second half of 2017, despite remaining pessimistic. Directors are still pessimistic about the Federal Government’s understanding of business, with 48 per cent disagreeing that the current Federal Government understands business in the second half of 2017 and 16 per cent neither agreeing or disagreeing. This downward trend has been consistent since the latter half of 2015. What should the government be doing?

Directors identified a number of priorities legislators should be focusing on, with 42 per cent of directors advising the government to pursue significant industrial relations reform following an electoral mandate. With the possibility of an election looming, the policies directors believe a new government should focus on include 40 per cent support for reforming individual workplace arrangements and enterprise bargaining, 38 per cent support to reform the modern award system and 32 per cent support to reform penalty rates.

Directors nominated a number of ways to lift national productivity, with 46 percent saying the government focus on short-termism should be reduced, 33 per cent calling for more infrastructure spending, and 28 per cent calling for better standards of education. The DSI found 52 per cent of directors rate renewable energy sources as the top area of importance for infrastructure investment, followed by regional infrastructure and roads.

However, directors are worried that where the government does legislate it may be unproductive, with 42 per cent expecting an increase in red-tape in the next 12 months. The DSI found 32 per cent of directors called for broad-based tax reform. The top three priorities for reform in any future comprehensive review of the current taxation system should be personal income tax, company tax and multinational tax arrangements.

Looking inwards

When asked to reflect on areas of self-improvement for Australian business, 51 per cent of directors said they believed Australian business needed to make significant gains in focusing on long-term planning/reporting and accountability for corporate misconduct. The DSI showed 45 percent of directors said business need to focus on corporate culture, and 42 per cent said business needed improve on understanding and explaining the contribution of business to the broader community.

On culture, some organisations were already making headway, according to the DSI. The DSI found 92 per cent of directors are making efforts to improve culture in their organisation. “The top three elements they are using to improve are capturing data on key cultural indicators, followed by communicating the ethical position of board and business generally, and then ensuring culture is a regular feature on the board and audit committee meeting agenda.” Other measures identified included: ensuring directors have broader interaction across the organisation, ensuring directors have relationships with key employees to gather insights about the company’s culture and issues and ensuring the board engages external stakeholders.

Boards also dialled up efforts to increase the diversity of skills in board membership compared with the first half of 2017, 77 per cent saying they were actively seeking to improve in this area. Some 53 per cent of directors said they were actively seeking to improve gender diversity.