The Australian Institute of Company Directors (AICD) has released its first bi-annual Director Sentiment Index for 2019: Director Sentiment Index H1 2019.  The report is a survey of AICD member opinions and future intentions on a range of issues including the economy, government policy and governance regulations.  A high level overview of some of the key findings is below.

[Note: For a summary of the H2 2018 survey results see: Governance News 26/10/2019] 

Some Key Points

Climate change is a key a priority for directors

• 'Awake at night' issues? Consistent with previous surveys (H1 2018 and H2 2018), sustainability and long term growth prospects continue to be the main issue that keeps directors 'awake at night'.  Other concerns include: changing business models, legal and regulatory compliance, corporate culture and data security.  
• Climate change ranks is the third main economic challenge currently facing Australian business behind, global economic uncertainty and China's outlook.  
• (Suggested) top priorities for the government?
  • Climate Change, energy policy and taxation reform are the top priorities for the Federal government to address in the short term.  The importance of climate change has increased significantly since the last survey (12 points on H2 2018).
  • Climate Change was ranked as the top long term priority for the federal government to address, consistent with H2 2018.  This was followed by infrastructure, an aging population, energy policy and taxation reform.

Community expectation that the incoming Federal government will articulate a clear response to climate risk? The SMH quotes AICD CEO Angus Armour as commenting that the findings demonstrate there is a 'great deal of convergence' around climate risk across all sectors and called for the incoming Federal government to deliver certainty on the issue.  Mr Armour reportedly said, 'We’ve reached a point where a second-best option that was agreed on a bipartisan basis, that would carry forward the next five or 10 years, would still be better than no policy certainty at all.'

Regulation

• 'Red tape' is expected to increase: Directors continue to feel pessimistic regarding the level of 'red-tape' in the next 12 months, with 59% expecting it to increase (as compared with 51% in H2 2018 and 42% in H1 2018). 78% of directors identify corporate reporting requirements as the aspect of their business most affected by 'red tape' (as compared with 77% of directors in H2 2018 and 78% in H1 2018).  This was followed by workplace health/safety and preparing/paying taxes.  
• Directors are even less willing (as compared with H2 2018) to continue on boards/accept new board appointments: According to the survey, directors continue to feel pessimistic about the impact of legislation on director liability in H1 2019.  
  • 35% of directors feel that it has negatively affected their business decision making (as compared with 33% in H2 2018)
  • 43% feel it has negatively affected their willingness to continue on a board (as compared with 40% in H2 2018) 
  • 52% feel it has negative affected their willingness to accept new board appointments (as compared with 51% in H2 2018)

Culture

• Cultural change is a focus for the majority of boards: 91% of directors said their board is trying to effect cultural change within their organisation (as compared with 89% of directors in H2 2018).  36% said that their board was making a 'substantial effort' to effect cultural change within their organisation.
• Australian boards have a risk-adverse decision making culture: 70% of directors perceive there to be a risk averse decision making culture on Australian boards (as compared with 69% of directors in H2 2018).  30% of directors attribute this to excessive focus on compliance over performance, followed by pressure from shareholders for short terms returns (21%) and lack of genuine diversity in the board room (13%).  
• The top three steps for boards to take to rebuild/regain trust were identified as: demonstrating respect for customers/clients/communities (53%, up from 52% in H2 2018), trustworthiness of leadership (44% slightly down from 48% in H2 2018) and improving corporate culture (42% slightly down from 43% in H2 2018).  Increased 'genuine' stakeholder engagement (33%), and greater accountability in cases of misconduct (35%) were also identified as important steps.

Board diversity

• Consistent with the results of the H1 2018 and H2 2018 surveys, skills diversity remains a priority for boards: The effort made to increase the diversity of skills in board membership was more or less stable in H1 2019 with 72% of directors stating that their business is actively seeking to improve skills diversity (as compared with 74% of directors in H2 2018).  52% of directors said that their board is actively trying to increase gender diversity (as compared with 53% in H2 2018).  

Economic outlook

• Director confidence levels: Overall, director confidence has fallen to its lowest level in over two years, with overall director sentiment falling 21 points to minus 16.9 over the last six months. The AICD attributes this in the main to a fall in confidence about the health of the Australian, Asian, US and European economies over the next 12 months.
• Outlook for the Australian economy: Directors are pessimistic about the Australian economy as compared with the second half of 2018:
  • 23% perceive the economy to be strong and 31% perceive it to be weak at present (as compared with 39% perceiving the economy to be strong in H2 2018).  
  • The outlook for the next 12 months is also negative.  50% of directors expect the economy to be weak over the next 12 months (an increase on H2 2018 where 30% expected it to be strong over the next 12 month period).  
• Outlook at state level: NSW, VIC and ACT directors are the most optimistic about the health of their state economy at present.  NSW directors were the most optimistic with 50% viewing the NSW economy as either very strong (7%) or strong (43%).  QLD directors were the most pessimistic with 53% viewing the health of the QLD economy as very weak (14%) or weak (39%).  Directors across all states and territory are less optimistic than they were in H2 2018.  
• Global outlook: Directors are less optimistic about the health of major global economies over the next 12 months as compared with the second half of 2018.  The European economy is viewed the least favourably with 62% viewing it to be weak/very weak.  The Asian economy is viewed the most favourably with 36% viewing it as strong/very strong.  
• The key economic challenge facing Australian business in H1 2019 was identified as global economic uncertainty followed by China's outlook and climate change.  Energy policy was ranked fourth and low productivity growth ranked fifth.  By comparison, in H2 2018 rising global protectionism was ranked the primary challenge (this slipped to 11th place in H1 2019).  
• Business growth: Directors' optimism regarding past and future business growth has decreased since last year.  Less than half (44%) of directors now expect their business to grow in the coming year as compared with 53% in H2 2018.  
  About the survey: The survey was conducted with 927 AICD members over the period 28 February to 14 March 2019.   

[Sources: AICD media release 18/04/2019; Summary report; Full report: AICD Directors sentiment index: research findings first half 2019; The SMH 18/04/2019]