Australian CEOs defy economic outlook as confidence grows

Based on findings of the fifth annual KPMG Global CEO Outlook, published in Australia today, more than half (58 percent) of Australia’s CEOs are ‘very confident’ about their company’s prospects over the next three years.

Business confidence and growth outlook

This is a significant rise from just 22 percent in last year’s survey. Most of the others (38 percent) said they were ‘confident’ as they look ahead to 2022.

Their confidence extended to prospects for the country as a whole. Notably, 44 percent said they were very confident about growth prospects for Australia, compared to 20 percent in 2018. This was lower than the views of their global counterparts about their own countries, although the gap was reduced from last year. The KPMG global survey was carried out early in 2019.

Gary Wingrove, KPMG Australia CEO, said: “Despite the current economic uncertainty – as reflected by the RBA’s interest rate cut yesterday – Australian CEOs are still upbeat about their prospects. We surveyed them earlier this year, and while there has been a slowing in the economy since then, there is still a measured confidence among Australian business leaders looking ahead over the next three years.”

He added: “But to capitalise on that underlying confidence it’s essential that the government uses its fresh mandate to reinvigorate policies which will stimulate the economy. We can’t rely just on monetary policy. If the mooted tax cuts can get through the Senate that will boost consumer spending, while wider tax reform – although politically difficult – would help boost our international competitiveness. Productivity is still the key to business and wages growth and well targeted infrastructure spending will help. With 10-year bond yields at record lows, there has never been a time when it’s cheaper to deliver Infrastructure Australia’s long-list of priority projects.”

But Australian CEOs expressed much less confidence when considering the global economy compared to their overseas equivalents. Just 38 percent were either confident or very confident about growth prospects for the global economy over the next three years – compared to 63 percent of overseas CEOs. This was a sizeable fall from the 77 percent vote of confidence in the global economy’s prospects cited by Australian CEOs a year ago.

The number of Australian CEOs expressing confidence in their industry’s prospects also dropped compared to 2018. Just 22 percent were very confident about the next three years, a fall from 32 percent a year ago. Again this was a lower percentage than their overseas counterparts.

In terms of top-line revenue growth predictions, 38 percent of Australian CEOs believed their company would enjoy 2-5 percent growth, while nearly two-thirds (64 percent) thought it would be up to 2 percent. None of them tipped growth above 5 percent, as a small minority did last year. Overall, this was lower than overseas CEOs, nearly half (46 percent) of whom predicted growth of over 2 percent.

On headcount, 86 percent of Australian CEOs believed their people numbers would increase over the next three years: most by less than 5 percent, but 28 percent of respondents thought by 6-10 percent, with 2 percent believing their staff numbers would grow by more than 10 percent. This was slightly lower overall than overseas CEOs.

Nonetheless, like last year, Australian CEOs reported that their companies are proactively recruiting the talent and skills needed rather than waiting to see if they hit growth targets before hiring – unlike most overseas CEOs.

Threats and challenges

Environmental/climate change risk was the seen by Australian CEOs as the number one threat to their organisation’s growth (28 percent), up from second place last year. It was also in top place for global CEOs (21 percent).

It was one of several ESG (environmental, social and governance) themed findings:

  • The top answer for ‘what are you motivated by?’ for Australian CEOs was ‘making environmental and socio-economic impact’;
  • Two-thirds of Australian CEOs felt they were responsible for ensuring their companies’ ESG policies reflected their customers’ values;
  • Most CEOs agreed that ‘my organisation’s growth will be determined by our ability to anticipate and navigate the global shift to a low-carbon, clean-technology economy’.

    Australian-based Adrian King, Global Chair of Sustainability, Climate Change & ESG Services at KPMG, said: “I suspect the reason why climate change is number one risk for CEOs in Australia is that a lack of policy for a pathway to achieve our National contribution to the Paris target is not encouraging new investment in low emissions technologies in areas like energy, infrastructure and electric vehicles and so is creating market disruption. There is also a growing awareness of the exposure of business models to climate risks. More large companies need to engage in cllmate change scenario planning, as recommended by the Task-Force on Climate Related Financial Disclosures (TCFD).”

“Banks and investors are now tilting away from companies that are expected to have a significant climate risk exposure and are unable to demonstrate a comprehensive strategy to manage these risks. Directors are now aware of the two significant legal opinions that Climate Change is a material and foreseeable risk, which they must consider. There is also an increased regulatory risk due to ASIC, APRA, RBA and accounting standard-setters all issuing guidance on climate risk disclosures in the last 12 months. Business will itself have to drive progress on climate change, as it seems unlikely there will be any radical new government policy initiatives.”

He added: “In terms of ESG, locally and globally we are seeing a sea-change in investor interest in ESG questions – there is a clear competitive advantage available to companies that can clearly identify ESG issues and demonstrate how they are managing the risk and maximizing the opportunities presented. In Australia, separate KPMG analysis has shown that a majority of Funds Under Management are now categorised as ‘responsible investments’ – one which integrates ESG factors across the portfolio – and will therefore favour companies that demonstrate leading ESG performance.”

Other risks

Emerging/disruptive technologies was second biggest risk for Australian CEOs (22 percent) and globally. It was rated top threat in last year’s Australian findings, just ahead of climate change. In third place, on 16 percent, was operational risk, which doubled its response from last year.

Gary Wingrove observed: “I believe the rise in prominence of risk in these findings reflects a rise in profile of the risk management function in Australia. No doubt the backdrop of the Royal Commission has played a part here, and risk is having now to ‘re-imagine’ its role as counsel to CEOs.”

Overseas CEOs nominated ‘a return to territorialism’ in third place, as Australian respondents had a year ago. In terms of geo-political risk, Australian CEOs were more worried about the ongoing US/China trade war than Brexit – a reverse of overseas CEOs’ views. Australian CEOs were also notably more wary of expanding into markets that form part of the Belt & Road Initiative than their global counterparts.

Brendan Rynne, KPMG Australia Chief Economist, said: “It is not surprising Australian CEOs are very concerned about the ongoing US-China trade tensions – our own research has shown the potential damage this could cause us. Global supply chains, multi-country production processes and the importance of services exports all add to the complexity of how a trade war could play out in practice today. Our government will need to continue to steer a very careful path between our largest trading partner and our defence guarantor.” 

Disruption, agility and innovation

Australian CEOs seem to be increasingly coming to terms with the change of disruption. Nearly two-thirds said that rather than waiting to be disrupted by competitors, they were now disrupting their sector. This compared to one third last year. And just over a half (54 percent) said that lead times to achieve significant progress on transformation in their business could seem ‘overwhelming’ – last year that figure was 86 percent.

More Australian CEOs than global (44 percent to 31 percent) believed they would see significant return on their investments in digital transformation over the next 12 months. Overall 90 percent of all CEOs believed it would happen within 3 years. For artificial intelligence, 14 percent of Australian CEOs believed it would be within a year and 24 percent within 3 years – the majority thought 3-5 years. For robotic process automation, half thought they would see payback within 3 years.

Australian CEOs were prepared to spend in the digital arena – a third planned to upskill at least half of the entire workforce in digital skills, while two-thirds prioritised investment in capital technology ahead of workforce investment.

Brendan Rynne observed: ‘Recent research KPMG Economics has carried out shows that productivity – the key driver of wages growth – depends strongly on hi-tech investment. So it is an encouraging sign that Australian CEOs seem keen to invest in this area.”

A large majority (80 percent) of Australian CEOs agreed with the statement ‘acting with agility is the new currency of business – if we’re too slow we will be bankrupt’; and two thirds agreed that ‘our growth relies on our ability to challenge and disrupt any business norm’. There was an increase, from last year, in the number admitting that ‘we need to improve our innovation processes and execution’.

There was a large drop from last year in the proportion of CEOs saying their company had walked away from a potentially profitable third-party relationship if that firm did not fit well with their own culture and purpose. Two-thirds of CEOs said that only via an increase in the use of third-party relationships could their organisation achieve the agility it needed.

And on a ‘safe to fail’ culture, there was a large discrepancy between CEOs’ aims and realities. 80 percent said they wanted their employees to feel free to innovate without worrying about negative consequences if an initiative failed, yet only half that number actually felt their organisations had such a culture.

The resiliant CEO

The survey had some interesting findings on Australian CEOs’ personal experiences and views of their roles.

More than two-thirds believed they were responsible for ensuring seamless connection between the front, middle and back offices to improve customer and brand experience in a way their predecessors were not. A similar majority said they were personally leading the technology strategy and were actively transforming their leadership team to enhance the company’s resilience. A majority said their use of cloud technologies would increase in the next 3 years, although this was a smaller number than overseas. 

Two-thirds said that the average tenure of CEOs as 5 years meant they were under pressure to act with agility and were putting in place measures to ensure their vision was realised after they had left. 76 percent admitted that earlier in their career they had had a significant mis-step that they had been able to overcome.

Possibly with the Hayne report fresh in CEOs’ minds, two-thirds agreed that their companies could ‘significantly improve our understanding of our customers’. Half admitted that, to date, their investments to personalise the customer experience had not delivered the hoped-for growth benefits. Two-thirds said that protecting customer data was one of their most important responsibilities, to allow the business to grow the customer base in future.