“The landscape in which CFOs have to operate in today is unprecedented. The risks are greater than at any time in my working life. There is a combination of economic, domestic, political and geopolitical challenges and tensions, and it is difficult to predict how they will work together and what impact they will have on businesses,” says Dr John Hewson, Former Opposition Leader & Professor Crawford School ANU.

Dr Hewson is a keynote speaker at the marcus evans CFO Summit 2018, in Queensland, Australia.

Why is today’s world complex? 

For example, many relationships we used to take for granted seem to have broken down. Economists used to believe that if you flooded the world with liquidity you would soon have inflation, but the world has been flooded with liquidity yet it has led to deflation and inflation below target ranges. Central banks have extremely large balance sheets and do not know how to unwind these balance sheets without compounding already “skitzy” bond and stock markets. Having pushed interest rates down to near zero, they do not have much capacity to respond to another crisis or stimulate an economy. There is no historical experience that matches what they are going through. The bottom line is, despite so much money being pushed into most economies, economic growth has been weak, wage growth is flat in most countries and inflation is below target. A very difficult environment for CFOs.

And of course globally there is a very strong anti traditional government and political party movement, which manifests itself in different ways such as anti free trade, globalisation and immigration. These are big challenges and there is no clear sense of direction.

How will these influence Australian businesses? How should CFOs respond? 

Budget repair is still a major challenge, especially with the significant spending commitments by both sides of politics carrying well into the 2020s in education, health, defence, NDIS and infrastructure. There is very real pressure for genuine broad-based tax reform, not just a cut in company tax. The Reserve Bank in Australia cannot raise interest rates as household debt is extremely high.

CFOs should start doing some scenarios, including a scenario where growth, wages and inflation stay flat, leaving them exposed to international developments, commodity crises and a slower Chinese growth, which would weaken the demand for traditional commodities.

Each CFO knows his or her industry best and there will always be unique factors to take into account. Certain services and brand or brain based manufacturing will grow, but traditional manufacturing will continue to decline. CFOs should do best case, worst case and medium case scenarios, look at broader economic trends and adjust scenarios for their own industry.

What opportunities will this open up for them? How can they ensure their organisation is in a position to take advantage of opportunities?

In Australia we have seen that stock market performance and earnings numbers have generally been driven more by cost savings and technologies, than by growing the top line. As the cost of capital is low, you would expect companies to invest but demand has been weak. Large companies that made a profit either distributed those profits to share horders or bought back their shares. Those are the type of decisions CFOs need to make. How much should they put back into the business or into employing new people? Should they buy back shares? Will a corporate tax cut, which has been promised by the Australian government but there are some doubts if they can afford to deliver it, encourage businesses to invest or increase dividends?

Many companies are restructuring and weaker companies are getting picked up by stronger ones. CFOs need to keep an eye on whether they can expand by acquisition or merger, or carve a competitive niche of their own. The challenge is that CFOs cannot look to the past and ask themselves what they can do in such an environment.

Any final comments?

Companies need to look at their carbon footprint. I was on the board of a printing company years ago, and by restructuring our power use, transport and logistics, we saved about 30 percent of our cost base.

There is a risk that climate change could induce another global financial crisis. The risk of extreme weather events is significant and we do not know how governments will respond to that and at what pace technologies will move towards renewable sources of energy. Companies need to look at how they would position themselves in the context of what is a global, accelerating trend to reduce carbon emissions. By 2050 the world needs to get to zero emissions, so a lot of transformation still needs to happen. This presents opportunities that can go straight to the bottom line.

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