It’s an age-old question: how can you grow if you don’t invest? It comes to mind in light of recent survey results from Ernst & Young that show companies are focused on growing but seem to be eschewing the investments that would spark long-term growth.
In EY’s latest CFO Capital Confidence Barometer, 55 percent of the 376 global finance chiefs surveyed say their companies are focused on growth. In addition, 60 percent of them believe the global economy is improving (up from 26 percent a year ago), and 44 percent of CFOs say they plan to focus on investing capital over the next year (as opposed to concentrating on raising, preserving or optimizing capital).
But the way CFOs plan to invest capital is decidedly conservative, according to the survey. Only 28 percent of CFOs expect to pursue an acquisition, for example, compared with 23 percent last year. And most plan to forgo investments in new products, services or research & development in favor of gaining share in existing products or markets, according to EY. Fifty-four percent said they are considering new geographies or product sectors, but more (61 percent) plan to stay with existing offerings and look to grow at the expense of competitors.
Richard Jeanneret, vice chair of transaction and advisory services at EY Americas, says the focus on existing markets makes sense. “With emerging economies growing at a much slower rate and being more volatile, it’s more natural to think that you’re going to focus on markets that you know best,” Jeanneret says. “Those CFOs want to invest more in economies they better understand.”
Are CFOs avoiding almost everything that would allow their companies to grow? “I wouldn’t say that they’re avoiding everything,” says Tom McGrath, senior vice chair of accounts at EY Americas. “You’ve got to make some choices. As you move from this period to higher levels of certainty, there’s more opportunity. The CFO has to optimize return on capital and balance that with risk mitigation.”
“I think today’s CFOs are paid to be a little more cautious [compared with] prior to the financial crisis,” adds Jeanneret. “There’s still a great hangover from the financial crisis. The CFO is one of the inherent risk managers in an organization. It’s a ‘show me first’ mindset. So there will probably not be hockey stick returns.”
How long can CFOs stay this conservative? Growing via market share gains is difficult to sustain, the EY report points out. “The long-term ramifications of reduced R&D outlays, combined with dampened transaction activity, may be cause for concern,” says the report.