CFOs of major companies took their time to come to well-balanced decisions. They were under pressure at the time: major decisions often related to the very existence of their companies, and potential mistakes could have a knock-on effect. The most important decisions focused mainly on the short term.
These are the results of a new survey into corporate decision-making, conducted by the Intelligence Unit of The Economist magazine, commissioned by ING Commercial Banking.
A total of 327 CFOs and treasurers of European companies were polled to study the type of decisions confronting financial decision-makers during the economic downturn, and how they were handled.
Because of the high stakes involved, CFOs took more time to decide than in more prosperous economic times. Intense discussion and an openness to contrary views characterized the debate, and, due to the increased sense of urgency, extreme measures were readily considered.
Short-term solutions at the expense of the long term
Most decisions taken during the downturn, focused on the short term. The most important revolved around cost-cutting measures, such as postponing investments.
"A lot of companies took measures to free up money during this period," says Annerie Vreugdenhil, head of corporate clients at ING Commercial Banking. "For instance, we took over the debtor financing for a number of companies. This freed up liquidity, which prevented them from coming too close to their banking covenants. There were also instances where we improved international cash management, in order to free up cash."
A large majority of respondents said that this dominance of short-term thinking was not positive for longer term planning. However, a minority of those polled claim they did take strategic decisions with a longer term view. Investments in financial planning software and the transformation of business units were mentioned as examples of this.
"When the capital markets opened up again after a slow period, some companies seized the opportunity to place shares or bonds for long term financing. It was also a good opportunity for them to diversify their financing," observes Vreugdenhil.
Planning instruments
CFOs indicated that tools for financial planning were more effective during the downturn and that investments in this type of software were often successful. Advanced planning methods can help managers anticipate trends earlier, and thus take action more effectively. The most useful tools were scenario planning, financial planning and vulnerability analyses.
Experience played a role in the decision-making process. A majority of those polled who had encountered a previous recession, said this experience helped them, particularly psychologically, making them more self-confident. Of those polled, 42 percent had no experience of previous recessions.
Better decisions
The benefit of experience is demonstrated by the fact that half the respondents indicated that decisions would have turned out better had they been taken sooner. However, many managers said that they based their decisions on the best information available at the time and that taking action sooner would not have been possible.
Many interviewees said that the decision-making process could be improved with the aid of better data and planning methods. This would create an even deeper understanding of a company's financial situation. Besides this, improved internal communications and collaboration was seen as helping better decision making.
"It's a good thing that CFOs and treasurers are not inclined to take hasty decisions under pressure," says Vreugdenhil. "But because it is difficult to look ahead in uncertain times, there is the risk that necessary changes may be made too late. The longer you wait, the bigger the chance that you will be forced to take far-reaching measures. That's why it is essential to have good financial information systems in place, so that you know where you stand. We have seen this with clients we have been in close touch with, over measures that offer solutions for the short term, but also support the long term strategy. In these instances, the financial position of a company was analysed so thoroughly that they got a clear picture of where their most important opportunities and risks were. As becomes clear in the course of the research, they were open to different views. Clients usually recognized themselves in the analysis and indicated that this gave them extra insights that allowed them to take effective measures."
Important lessons and conclusions
The Economist Intelligence Unit concludes that CFOs and treasurers need to remain focused on the long term in difficult times. It also highlights the importance of strong personal ties within the management team, and of collaboration to tackle problems jointly. The importance of investments in forecasting systems and financial planning software is also identified as a vital source of insight and guidance for critical decisions. In addition, the researchers point out that it is essential to focus on the process of decision-making, as opposed to only considering the outcome. The benefit of hindsight will always focus on the outcome, but rarely pays enough attention to the importance of the correct process.
