EY Capital Confidence Barometer April 2014 - October 2014
Cost control and growth top the boardroom agenda
Cost management is now a permanent feature amid a low-growth future.
For several years now, companies have been rewarded for cost-cutting and an aversion to risk. But cost reduction is no longer just an operational issue but also a strategic imperative, and often a key area of focus for activist shareholders.
Growth takes new directions, and innovation takes center stage.
In parallel to managing costs, companies are turning their attention to innovative organic growth, extending beyond their core revenue base.
Balanced focus on growth and cost reduction: The pressure remains for companies to grow, in spite of slower long-term GDP growth. But lessons learned from the global financial crisis mean that closer scrutiny of cost structures and operational efficiency is now the norm. What is emerging is a model whereby companies increasingly seek out new organic growth opportunities — but do so within a strong framework of operational efficiency and cost management.
Shareholder activism prompting action — and laser focus on costs: Nine out of 10 executives say issues raised by shareholders have shaped their boardroom agendas. Shareholder activists typically focus on organizations with high expense ratios; multiple, disparate and sometimes non-core operating units; and concerns around capital allocation.
In turn, boardrooms have responded by focusing on, respectively, operational efficiency and cost reduction; spinning off non-core units via strategic divestments; and returning capital through buybacks and dividends. The renewed focus on innovative cost management can be seen as a response to increasingly influential shareholder activism.
Companies begin to innovate and pursue higher-risk organic strategies: A secular shift to lower long-term global economic growth, coupled with competitive disruption, has prompted companies to consider higher-risk approaches to organic growth. We have seen a major increase in companies looking to change their mix of existing products and services.
In addition, research and development efforts have nearly tripled over the last six months, suggesting greater optimism that innovation can generate growth.