FINANCIAL REPORTING & IR

Global markets continue to be tested by enormous challenges today – a pandemic, inflationary pressures and geopolitical tensions. While the current economic climate is top-of-mind for business leaders, it is encouraging that many companies remain confident in their resilience and to see their relative optimism on their growth prospects. Drawing on the perspectives of 1,325 global CEOs across 11 markets, KPMG’s 2022 Global CEO Outlook survey (conducted ahead of the Russian government's invasion of Ukraine), provides insight into their three-year outlook on the business and economic landscapes.

Economic outlook

Despite geopolitical and economic challenges, global economic confidence over the next three years has rebounded from early 2022, rising to 71%. However, CEOs expect challenges in the shorter term. Nearly nine in 10 (86%) believe a recession will happen over the next 12 months, but three out of five (58%) feel it will be mild and short and 76% say they have plans to deal with it. Despite short-term recession fears, the increased confidence CEOs have for the longer term indicates they feel well prepared to navigate their businesses through turbulent times. When asked about their confidence in the resiliency of the global economy over the next six months – a period likely to be fraught with uncertainty and constant change – 73% still had a positive outlook, up 13% from February 2022. 

While CEOs may be resilient, they’re also realistic about the challenges ahead. In fact, 73% of CEOs believe a recession will upend anticipated growth over the next three years, and three-quarters (75%) also believe a recession will make post-pandemic recovery harder. Fully 71% of CEOs predict a recession will impact company earnings by up to 10% over the next 12 months.

CEOs are keeping technology risk front of mind in the short and long term. Disruptive technology has emerged as the top risk and greatest threat to organizational growth over the next three years. And while pandemic fatigue and economic factors like rising interest rates and inflation are top of mind over the next six months, emerging and disruptive technology is a close third. In the face of these risks, CEOs prioritize digital investment – 72% agree they have an aggressive digital investment strategy intended to secure first-mover or fast-follower status.

Furthermore, advancing digitalization and connectivity across the business is tied (with attracting and retaining talent) as the top operational priority to achieve growth over the next three years. 

Digital transformation in uncertainty

The anticipated recession is pushing businesses to reconsider their strategies over the short term. Four out of five CEOs note that their businesses are pausing or reducing their digital transformation strategies to prepare for the anticipated recession (40% have paused or reduced, and 37% plan to pause or reduce over the next six months). At the same time, 70% say they need to be quicker to shift investment to digital opportunities and divest in those areas where they face digital obsolescence.

Increasingly, CEOs view partnerships as an important means to continue the pace of their digital transformation (71%, compared to 59% in February 2022). CEOs also say building strategic alliances with third parties is the most crucial strategy to help them reach their growth objectives over the next three years. It has become more important for businesses to partner with companies (e.g. start-ups, fintech and more) that can help them, bringing agility and resilience to growth. In order to bring everything together and drive a successful transformation, CEOs need the right partners – and the ability to connect it all.

While other risks may now feature as top concerns for global CEOs, the cyber environment is evolving quickly, and 77% see information security as a strategic function and potential competitive advantage. In addition, geopolitical uncertainty is increasing worries over corporate cyberattacks for many CEOs (73%) compared to previous years (61% in 2021). In fact, three out of four CEOs (76%) say that protecting their partner ecosystem and supply chain is just as important as building their own organization’s cyber defenses.

Growing experience of the challenges of cybersecurity is also giving CEOs a clearer picture of how prepared – or underprepared – they may be. More CEOs recognize they’re underprepared for a cyberattack, with 24% admitting so in 2022, compared to 13% in 2021. This year, 56% of CEOs feel they’re prepared, about level with last year. And nearly three-quarters (72%) say their organization has a plan in place to deal with a ransomware attack, compared to 65% in 2021. The rapid increase in cyberattacks, coupled with the increasing difficulty of detecting attacks on time, call for automation and innovation in dealing with cyber incidents.

Fostering workplace resilience

The employee value proposition to attract and retain the necessary talent is tied as the top operational priority in achieving three-year growth objectives (25%, up from 19% in 2021). Also, two-thirds of CEOs (71%) agree that the ability to retain talent, given the pressures of inflation/rising cost of living, is paramount, as are the long-term impacts on organizations as a result of the pandemic and geopolitical tensions.

A business’s ESG approach is increasingly seen as a differentiator in attracting and retaining talent. Among the CEOs who mentioned they saw significant demand for greater ESG transparency and reporting, 26% noted the biggest push is from employees and new hires. They also note that one of the primary downsides to not meeting ESG expectations is recruitment challenges (22%), right behind the ability to raise financing.

With a recession looming, there’s a significant short-term emphasis on hiring freezes and headcount reductions: 39% of CEOs have already implemented a hiring freeze, and 46% are considering downsizing their workforce over the next six months. When CEOs take a longer-term view, 79% expect their organization’s headcount to increase over the next three years, and CEOs are still investing in their existing workforce, with half currently focused on boosting productivity.

Hybrid/remote working has had a positive impact on hiring, collaboration and productivity in the past two years. Still, many multinational organizations are launching return-to-office plans to usher in a ‘return to normal,’ and 65% of CEOs envision in-office as the go-to work environment in three years (with 28% saying hybrid and 7% fully remote).

Great ESG expectations

Global CEOs are acknowledging the importance of environmental, social and governance (ESG) initiatives for their businesses. CEOs (45%) increasingly agree that ESG programs improve financial performance, an increase from 37% one year ago. ESG has gone from ‘nice to have’ to integral to long-term financial success. For instance:

• 69% see stakeholder demand for increased reporting and transparency on ESG issues up significantly (from 58% in August 2021);
• 72% of CEOs say stakeholder scrutiny of ESG will continue to accelerate (up from 62% in August 2021); and
• 17% of CEOs indicate stakeholder skepticism around greenwashing is increasing (up from 8% in August 2021).

CEOs say they will be looking to invest significantly, with 62% indicating at least 6% of revenue will go towards programs that enable their organization to become more sustainable. They identified several key drivers:

• Proactivity on social issues (34%);
• More transparency (26%);
• Inclusion, Diversity and Equity (ID&E) strategy (21%); and
• Net-zero strategy (19%).

Changing regulations and other pressing global economic matters are CEOs’ biggest challenges in delivering their ESG strategies. As CEOs strive to maintain optimism and take steps to insulate their businesses from an upcoming recession, indicators point to ESG progress suffering as a result, following the trend of CEOs reassessing initiatives in many other areas of the business (e.g. transformation and staffing). Our survey shows that recession-proofing businesses may come at the expense of furthering ESG efforts. As economic uncertainty continues, 50% are pausing or reconsidering their existing or planned ESG efforts over the next six months, and 34% have already done so.

Conclusion

The Global CEO survey captures the key issues for many CEOs today. The survey also reveals that these issues change rapidly, with new risk factors identified by many CEOs. Investor relations professionals play an essential role in helping their organizations communicate to shareholders and other constituencies how their organizations are addressing and navigating these complex issues. 

Keith Leung, CPA, CA is a Senior Manager, Accounting Advisory Services, and Rob Brouwer, FCPA, CPA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.