Finding the forward-looking CEOs
The current environment is not easy for investors to navigate. From geopolitical conflicts and supply chain disruptions to rising inflation and higher interest rates, the challenges that corporates – and their CEOs – are facing are understandably raising some concern.
But amid this disruptive landscape lie opportunities. Opportunities investors can capture by managing short-term volatility and investing in quality.
For Willem Sels, Global Chief Investment Officer at HSBC Global Private Banking and Wealth, a progressive leader is one key characteristic of a quality company. It will also have a strong market position to protect profit margins and handle inflation, and a solid balance sheet so it can borrow to invest or acquire.
“We need management that is imaginative enough to think about solutions,” Sels says, “and which will look forward to understand the changes that are happening in the world and foresee how they need to adapt.”
These forward-looking CEOs will then be equipped to react to change, weather external shocks and keep pace with the structural trends shaping our world.
Strategies to adapt to disruption
Technology will be key to how companies create new sources of value. It is already facilitating the creation of new, innovative businesses, while existing businesses have been able improve efficiency and automate.
When corporates invest in digital technologies, it gives employees the tools they need, and enables connectivity, interactivity, transferability and integration for the companies themselves.
It also ties into the sustainability trend: when it comes to addressing their carbon footprint, progressive leaders will have seen the direction of travel long ago and got ahead of the game. “Polluting is no longer going to be for free”, says Sels, and organisations can no longer shy away from an issue that is increasingly important to their customers and stakeholders.
For example, the US Senate has just passed its biggest ever energy bill, setting aside almost USD370 billion to fund clean energy.1 The Inflation Reduction Act aims to boost investment in wind and solar technologies and incentivise consumers to buy electric cars and energy-efficient appliances. For the leaders of companies doing business in the US, it means sharpening their focus on their own environmental impact and how to reduce it.
COP26 set the stage for global decarbonisation, and forward-thinking leaders will already be building this into their business models. It’s these innovative CEOs that investors will need to back if they are to have resilient portfolios in future.
ESG analysis should therefore be seen as an additional lens through which to examine companies, says Sels.
If you get to know a company and its labour processes, its management style and so on, it is going to help you understand the company and have a better forecast in terms of profitability and long-term strategy. So ESG is not just a nice to have and a feelgood factor, it is very much a tool for us that complements financial analysis.
Why we need ‘visionaries’
Aside from digital transformation and the sustainability revolution, there are other big changes and disruptive trends happening that leaders need to factor into their long-term plans. CEOs will be asking themselves questions like:
- Will the tightness in the labour force last?
- How can I build up my company’s reputation to attract the best talent as competition increases?
- Should we build a new factory closer to home?
“All of these things require years of effort, so you need to anticipate those changes or react very quickly and then stick to that and invest to gain and maintain a competitive edge,” says Sels.
For instance, post-pandemic, geopolitical conflicts are disrupting supply chains, and the rising cost of fuel and transportation are filtering down to the cost of goods. How are companies adapting to that? One way is nearshoring, that is, bringing manufacturing “back home or next door”.
“You can’t build a factory in six months, so as a CEO you have to think about those longer-term challenges, and supply chain reorientation and sustainability are certainly part of those,” says Sels.
Fiona McKay, founder and managing director of Lightbulb Leadership Solutions, agrees that the best CEOs will be “visionaries, who can see and anticipate and back themselves to shape organisations that meet the needs of a changing world.” They will also need to engage all their stakeholders in their plans if they are to achieve their goals, which means getting investors, customers, employees and the wider community on board.
“We need CEOs to be pioneers – really brave visionaries of the future who are prepared to take us into new territories,” she says. “The only way we can back those innovative leaders is if their vision is compelling enough to make it that everybody is an equal shareholder on that journey. And you can be a great innovator as a CEO, but if you haven't got that piece of the puzzle, you will fail.”
A people-first approach
An organisation’s human capital is crucial too: research shows that a diverse labour force will have diversity of thought, making them more adaptable and less prone to mistakes. McKinsey found that companies in the top quartile for gender diversity on executive teams, for example, were 25 per cent more likely to achieve above-average profitability than companies in the fourth quartile2.
Leaders should also be prepared to upskill their employees to meet the challenges of a fast-changing world.
“A people-first approach to leadership is obviously the right thing to do, but it’s also good business, because we are in an environment where unemployment is very low and therefore the balance of power is shifting somewhat towards the workforce,” notes Sels.
A focus on human capital is “absolutely critical”, agrees McKay. But it’s not just about managing headcount – CEOs must try to see through their colleagues’ eyes to understand their own lived experience. That includes everyone from the support services team to the C-suite.
“What is life like for them currently, how can we make it better, and how can we join that up for a wider value proposition?” she asks. Companies that did this during the pandemic and treated their employees with flexibility, honesty and empathy will likely be rewarded with greater loyalty and a stronger reputation.
With external shocks fundamentally changing the world around us, investors will be seeking strategies to adapt to disruption. Part of this strategy is identifying quality companies: future-proof businesses led by innovative, forward-thinking management that will survive and prosper in any environment.
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1 Climate bill could slash US emissions by 40 per cent after historic Senate vote, The Guardian, 7 August 2022 ↩
2 Diversity wins: How inclusion matters, McKinsey & Company, May 2020 ↩