The Australian Institute of Company Directors (AICD) has released its second bi-annual Director Sentiment Index for 2022. The report is based on the results of a survey of 1500 directors on a range of issues including the economy, government policy and regulation.

A high level overview of some of the key findings is below.

Director sentiment has fallen to a two year low

• Overall director sentiment fell to -8.5% (from +10.8% in H1 2022), the lowest point in two years. The AICD attributes this to 'increased pessimism about global economic conditions' in addition to 'softer business conditions domestically'.

Directors are downbeat about the global economic outlook

• Directors' outlook for US, European, Asian and Chinese economies is negative.
• Directors are most pessimistic about the European economic outlook, with just 11% of directors viewing it as strong currently. Looking ahead, 56% of directors consider that Europe will be a weak economic position over the next 12 months (the lowest rating of all the major economies surveyed).
• Directors' views on China's economic outlook have undergone a shift since the last survey (H1 2022). Just 35% of directors now view China's economy as strong (vs 63% in the previous survey) and 30% consider it will remain strong over the next year (vs 59% in the last survey).

A (relatively) rosier view of the outlook for Australia...

Directors are more positive about Australia's economic outlook (though less so than in the previous survey). 54% of directors overall view Australia's current economic outlook as strong, with 42% viewing it as likely to remain strong over the next 12 months.

Drilling down to state level:

• Confidence in state and territory economies fell (compared with the H1 2022 survey).
• Directors are most confident about the WA economy, with 89% of directors viewing it as currently strong, and 74% confident that this will remain the case over the next 12 months.

Key challenges facing Australian businesses

• Directors nominated: 1) labour shortages (60%); 2) inflation and rising interest rates (49%); and 3) supply chain challenges (33%) as the top economic challenges currently facing their businesses.
• Global economic uncertainty which ranked as the second greatest challenge facing directors in the last survey ranked fourth with 28% of directors nominating it as a top challenge (down from 55% in H1 2022).
• The level of concern about COVID-19 continued to decrease. COVID-19 ranked as the second biggest challenge facing directors in the H2 2021 survey and fourth in the H1 2022 survey but was only nominated as an economic challenge by 4% of directors this time around. The report suggests this is an indication that directors no longer see COVID-19 as an emergency.

Directors want to see the government prioritise action on the labour shortage

• 75% of directors indicated that their organisation has been impacted by the current labour shortage and addressing the issue ranked as the top issue they would like to see the government address in the short term (3 years).
• The report points to a lack of skilled migrants as a chief driver. According to the survey, most directors (83%) consider that skilled migration is not keeping up with business demand and will impact growth. A
• AICD Managing Director and CEO Mark Rigotti has called on the government to boost skilled migration to address the issue. Mr Rigotti said:

'Increasing skilled migration and boosting education and training should be at the heart of our economic response post COVID. The skills crisis is both a pressing near-term problem for directors and will also be a key driver of productivity and therefore growth in the longer term. The lack of skilled labour impacts the ability of organisations to combat current challenges including cyber security, the transition to net zero and digital transformation.'

Separately, Chief Executive Women has previously put forward 'unlocking women's economic participation' as an alternate solution to the same issue.

Directors also want the government to prioritise tackling climate change

• Directors nominated tackling climate risk as the key priority that they consider the government should address in the longer term (10-20 years) and among the top three priorities the government should address in the short term (next 3 years).
• As flagged, addressing the skills shortage ranked as the top short term priority for government, followed by tackling climate change. Energy policy ranked as the third most important short term priorities for government.
• In terms of other longer-term priorities, directors nominated the ageing population and international competitiveness as the key priorities (after climate change).

Climate governance and reporting

• Despite the high level of support for government prioritising action on the issue, less than half of directors (46%) consider climate change to be a material risk for their organisation (31% consider climate change is not a material risk to their organisation).
• Asked to nominate the three biggest barriers facing their organisation from a climate governance perspective, directors nominated the following as the top three issues: 1) uncertainty around the consistency of government commitment (45%); 2) lack of clarity on how to move forward with 2030 targets (41%); and time and resources (37%).
• On the issue of 2030 targets, the report found that director views on the government's recently legislated 2030 emissions reduction target – a 43% reduction from 2005 levels by 2030 - were divided: 28% of directors consider the new target to be too low, 23% consider it to be too high and 37% view it as 'about right'. Despite the level of concern around how to 'move forward' with 2030 targets, the level of concern around 'legislative overreach putting untenable pressure on business' and/or the potential impact of the government's 2030 target on investment is relatively low.
• On the issue of climate reporting, 45% of directors consider that the likely shift to mandatory climate reporting in Australia will impact their organisation. Of this group, 43% consider their organisation is unprepared for such a shift.

Data security is a key concern for directors

• Asked what issues 'keep them awake at night' directors nominated cybercrime and data security as their top concern, which is perhaps unsurprising given the timing of the survey (the survey was conducted over the 15-27 September 2022 period. The  Optus data breach was first reported by the company on the 22 September 2022).
• Primarily, director concerns centred around the scale/complexity of the issue, the difficulty in understanding it and being equipped to deal with increasingly sophisticated cyberattacks as well as the associated costs.
• The survey also highlights that most directors (over 60% in each case): consider that their board is aware of their cyber and regulatory obligations; consider their organisation communicates its cyber strategy to staff and rolls out staff training on the issue; and conducts regular cyber threat assessments.
• The survey found that 60% of directors consider that their board has sufficient oversight of cyber threats to their organisation (with 23% disagreeing that this was the case, and 17% neutral on the issue). Interestingly, from an oversight perspective, just 32% of directors indicated that their organisation has a board level committee with a cyber-specific focus.

Progress on national reconciliation

• The survey highlights that a majority of directors (63%) see national reconciliation with First Nations people as a national governance priority. However, only 35% of directors indicated that their organisation has a strategy/plan to address or contribute to the reconciliation process with First Nations peoples and just 17% of those whose organisations do not have a plan in place, intend to implement one.

Increasing board diversity remains a focus for boards

• Overall, the survey found that 27% of directors consider the current level of diversity on Australian boards to be 'satisfactory' (56% of respondents disagreed).
• Most boards are looking to increase diversity in the boardroom with the primary focus on increasing skills diversity (72% of boards are looking to boost skills diversity, though the survey is silent on which skills boards are most focused on increasing); gender diversity (50% of boards); and age and ethnicity (both 27%).