By Emma D'Arpino
Newswise — Which economic and financial metrics do CFOs use to assess the strength of the stock market, business climate and the economy? And is the current market a good environment to add risk to your balance sheet?
These were some of the questions that CFOs from leading companies based in the Washington, D.C., region discussed at the Strategic CFO Roundtable hosted by the University of Virginia Darden School of Business Institute for Business in Society at the new UVA Darden Sands Family Grounds in Arlington, Virginia, this spring.
The CFOs began by discussing their economic outlook. Amid recent tax policy changes and market fluctuations in response to President Trump’s announcement of trade tariffs on steel and aluminum imports, the CFOs revealed high levels of optimism for the U.S. economy and for their own companies.
While one CFO said the tax policy bill passed by Congress and signed into law resulted in a “meaningfully lower” tax rate that was “good news for investors and shareholders,” another CFO said that good news might not extend to more jobs in the economy.
“The number of people we hire is based on the demand for our products. Maybe if there was some overall economic growth because of the tax rate and it created more demand for our products, we would hire more people,” the CFO said.
In response to a survey on their views of the economy, and consistent with their overall optimism, almost all of the respondents anticipate an improved income statement, balance sheet and cash balance for the next four quarters.
As the discussion moved on to market activity — the Top of Mind topic for the roundtable — the finance executives shared their views on common metrics used to assess market and economic strength. All of the CFOs said they used GDP growth to gauge the market’s strength, and most also cited the Federal Reserve’s actions or stated strategy as an indicator they consider. However, none of the CFOs reported stock market volatility as a metric they used, which respondents in the survey said is currently at an average level.
In conversation about whether the market environment is suitable to add risks to the balance sheet, more than 75 percent of the respondents believed the market conditions to be good for risk taking, with one roundtable member stating, “We see this as a good time to do bigger things.”
Turning their attention to M&A, most members felt that the high level of M&A activity over the past five years would continue.
“I think M&A is going to continue to be strong, because the private equity firms are pretty healthy. When you look at companies, they’re looking for ways to grow and money is still, historically, pretty cheap,” a CFO said.
“Unless we have something to send the market off track,” the member added.
With regard to IPO activity, the roundtable members believed the number of IPOs were inflated by the amount of spin-offs still happening. They felt a more informative view would be to look at net exit dollars versus numbers of IPOs.
In addition to the discussion on market metrics, the CFOs provided their take on market actions, reactions and opportunities, including current obstacles to corporate growth. Although the Trump administration is reducing federal regulations, several roundtable members said there are still continuing regulatory challenges.
“There are so many things that are designed to be shareholder-friendly — more visibility into the financial statements, more transparency, segment reporting, all the things you have to disclose, proxy access rights and all the new accounting regulations designed to bring more clarity,” a CFO said. “All these things are supposed to be shareholder friendly, but they add costs to companies and they discourage companies from going public.”
Additional insights from this CFO Roundtable are available in the report, “Views from the C-Suite.” The next roundtable will convene in September 2018.
Darden Professor Ken Eades and The ILEX Group Managing Principal and General Counsel Jane-Scott Cantus, an Institute for Business in Society Fellow, founded the Strategic CFO Roundtable in 2008. In 2013, the Strategic CFO Roundtable was adopted as a key initiative of the Darden School’s Institute for Business in Society.
The Darden Institute for Business in Society Strategic CFO Roundtable is an invitation-only peer-to-peer forum for leading chief financial officers in the Washington, D.C. metropolitan area founded in 2008. These roundtables provide a confidential forum for corporate financial leaders representing the varied industries of the Washington, D.C. metropolitan area to discuss and debate global and U.S. economies as well as corporate financial strategies and performance. Each session focuses on a Top of Mind (ToM) topic, a specific issue of current importance to the members.
The University of Virginia Darden School of Business delivers the world’s best business education experience to prepare entrepreneurial, global and responsible leaders through its MBA, Ph.D. and Executive Education programs. Darden’s top-ranked faculty is renowned for teaching excellence and advances practical business knowledge through research. Darden was established in 1955 at the University of Virginia, a top public university founded by Thomas Jefferson in 1819 in Charlottesville, Virginia.