The current macroeconomic environment is sending many in the C-suite to the bunkers—hunkering down and minimizing risk. We are hearing more groupthink: a safety-in-numbers mentality of laying low. But that can be the exact opposite mindset to adopt.
Yes, it takes courage for CEOs to champion investments during volatile times, but history shows that fortune favors the bold. The key is for CEOs to emphasize the long-term benefits of being proactive rather than timid to get stakeholders on board. While others play it safe, here are three actionable steps corner office leaders can execute to keep their companies on the path to future growth and ahead of their competition.
Transact to transform
Evidence shows that a downturn is not the time to be cautious, especially for CEOs whose companies have a strong enough balance sheet to act. Just look at the Great Recession in 2008: an EY analysis of nearly 300 publicly listed technology companies showed top quartile performers continued to spend on research and development (R&D), including through mergers and acquisitions (M&A), allowing them to accelerate quickly out of the recession. Bottom-quartile tech performers were more than 70% more likely to cut R&D expenses and other capital investments.
Those that avoided the temptation of groupthink were richly rewarded. The consequences for those that didn’t was higher turnover in management and reduced earnings. We saw similar trends in a variety of sectors, demonstrating that bold actions materially benefited their companies, even if those actions sacrificed liquidity in the short term.
To be sure, there are many differences today vs. 2008, but the past makes it clear to stakeholders that now can be the time to use M&A and other types of corporate investments to transform their company and keep up with the pace of innovation—especially while timid executives sit on the sidelines.
Companies can use strategic acquisitions to unlock new revenue streams, including adding technology like AI to enhance offerings and attract new customers or to bolster operations such as finance, accounting, supply chain, and logistics. Acquisitions can also help companies enter new markets that provide long-term growth, even as more cautious competitors exit.
Regularly review the portfolio to identify opportunities for innovation
As technology becomes an increasing part of all businesses and trade and geopolitical forces shift, customer needs and the competitive landscape continue to change rapidly. The business of just a few years ago might not be the same business the company will be in during the coming years.
Rather than accepting business as usual, contrarian CEOs can encourage regular portfolio reviews with an eye toward long-term strategic growth. They can help identify gaps to fill via investment, keeping one eye on today’s needs but leaning into the future state of the business. These reviews will also help identify any non-core assets that can be divested.
Forward-thinking CEOs recognize that their stakeholders are focused on investments and divestments. Capital strategy and availability were among the top board priorities in an EY Center for Board Matters survey of more than 400 corporate board members across the Americas earlier this year.
Divesting corporate assets no longer core to their business frees up cash to improve today’s balance sheet, creates a return on capital, and boosts margins. It can also fund acquisitions and other future-focused investments. An EY analysis shows companies that carve out the most non-core assets create greater shareholder value than those who remain idle.
Regardless of the type of transaction, CEOs need to be able to show the board, investors, employees, and other stakeholders how the investments fit with the company’s long-term strategy, which leads us to the third tactic.
Communicate with purpose to align with internal stakeholders
CEOs, along with the board, are the stewards of the organization’s purpose. Leading CEOs link investments to addressing the external elements of that purpose—such as environmental, social, and governance practices. Communicating how potential investments align with the company’s purpose early and often can help overcome cautious groupthink. This can also help promote internal transformation so that the company’s culture and operations reflect its stance and objectives on global challenges.
It is also essential to align success metrics for the investment beyond the return on investment. There are less-standard measures for investments to align with the organization’s purpose, including brand value and customer engagement.
Select and develop metrics that express both the financial and purpose-driven results, review progress regularly, communicate successes widely, and course correct if needed.
Keep one eye on now and one on the future
Overall, during times of heightened uncertainty, CEOs need to fight the urge to overly focus on the immediate and continue to have one eye toward growth. The frenzied pace of transformation doesn’t slow down just because the economy does. Those that look beyond the current fog will be the best positioned to generate long-term value.
The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.
Barak Ravid is the EY-Parthenon Americas leader. With over 25 years of experience, Barak advises CEOs and business leaders on M&A transactions, including a range of topics from growth strategy development and due diligence, to portfolio management and divestment planning and execution.