Three key issues keeping CEOs awake

Summary: If you were wondering what top executives are most concerned about right now, it's all about adapting to change.

Key take-out: 2018 could be a make-or-break year for many Australian companies on multiple fronts. The pressure on CEOs to adapt to changing market conditions will be greater than ever.

The key issues that tend to keep investors awake at night relate to the performance of their investments, the prospect of losing money, and the ability to generate long-term positive returns.

They are also high on the lists of top company executives, and so they should be as a matter of course, but what are the real burning issues keeping CEOs and business leaders awake as we head towards 2018?

If you picked public trust and corporate regulation among the top concerns of Australia's corporate kingpins, you would be warm, but certainly not hot.

1. Digital and innovation

The biggest priority on the agendas of business leaders for resolution in 2018 is around digital disruption and innovation.

That's according to a just-released survey of 200 Australian CEOs and company executives from small, medium and large corporations, who see digital disruption and innovation as both a major threat as well as an opportunity.

“Whether you're the leader of a small or medium enterprise, or a senior executive at a major corporation, your organisation's capacity to innovate in the digital space is your main concern,” says KPMG Australia CEO, Gary Wingrove.

The ability of organisations to create a culture of innovation, especially in the digital space, should also be a key focal point for investors.

“Today the nation's business leaders understand that disruption looms around every corner,” Wingrove says. “As 2018 approaches they are now clear about what they need to respond and seize opportunity: a culture of innovation. While no one can confidently predict the exact disruptions that lie ahead, the organisations that get their innovation culture right will be the ones who can harness change to their benefit.”

2. Cost competitiveness another top policy issue

Senior business leaders are also concerned at Australia's ability to compete on the world stage, especially in terms of what we produce as a nation and the cost of production.

KPMG analysis of the Australian manufacturing sector has found that, on an international basis, the hourly cost of labour is totally uncompetitive relative to the final value achieved on the product produced.

“Analysis of Australia's productivity levels in this report shows we are underperforming from a productive output perspective compared to countries with similar standards of living,” says Grant Wardell-Johnson, a lead tax partner at KPMG. “This validates the concerns regarding labour cost competitiveness raised by our survey respondents.

“Traditionally, while Australia has had a high cost of labour, it has had a below average cost of electricity for industrial users. Unfortunately, this favourable cost-competitive position has been eroded over the past two years as domestic prices of electricity and gas have soared.”

Wardell-Johnson says disadvantages in cost competitiveness can be ameliorated through a country's corporate tax system, as long as it is more competitive than in other jurisdictions.

“Unfortunately, our survey respondents also suggested that instead of helping, Australia's corporate tax system actually acts as a further impost on their ability to earn internationally competitive returns,” he says.

3. The high cost of energy

Executives are also burning the midnight oil over the issue of energy cost, reliability and policy uncertainty, with the bottom-line pressure on companies set to continue in the short-to-medium term.

“The year ahead will require organisations to assess their energy procurement strategies and seek power agreements that enable them to lock in prices with sufficient contract flexibility to take advantage of any potential easing from the back-end of 2019,” says KPMG Australia chairman Alison Kitchen.

“In the event of power outages, the cost to businesses could be significant. If businesses do not have adequate contingency plans they could go under, with small and medium size businesses the most vulnerable.”

“The coming year will see many trials that will scale into larger implementation across a wide range of technologies. And we need to start establishing an orderly transition to more renewables in our generation mix,” she said.

Kitchen says that in 2018, Australia needs to break out of the holding pattern of recent years.

“We need to see a year of genuine action.”