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The 27th Quarterly C-Suite Survey:
Cash Reserves, Debt, Interest Rates and
CEO Compensation
June 18th, 2012



Sponsored by:

Published and
broadcast by:
Introduction

 This is the 27th edition of the C-Suite Quarterly survey, conducted on
  behalf of KPMG; published and broadcast by the Globe and Mail’s
  Report on Business and BNN. Previous quarters’ surveys are available
  at GandalfGroup.ca .
 This quarter’s survey and this presentation focus on:
       Companies’ savings or cash reserves
       Debt levels
       Access to financing
       Interest rates
       CEO compensation
       Exporting, the dollar and emerging markets
 Methodology: telephone interviews were conducted with 156 C-Suite
   executives from ROB1000 companies between May 17th and June 5th 2012.
   The margin of error for this study is +/- 7.85% 19 times out of 20.


                                                                           2
Summary of Key Findings
 Based on renewed optimism about the US economy, business expectations for
  Canada’s economy are improved this quarter.
 There are still a number of dark clouds that executives see, but none darker
  than Europe which is preoccupying the Canadian business community.
   These concerns particularly manifest themselves in concern about another credit crisis
    where debt financing is unavailable.
 Concern about those risks has business sitting on healthy balance sheets,
  hoarding for a rainy day.
 There is considerable concern about the impact rising interest rates would
  have, and most in Ontario are opposed to any move by the Bank of Canada to
  raise rates even a point.
 Most business leaders think that CEO’s compensation cannot be justified by
  improvements in shareholder value, and see growing income disparity as a
  negative development in society.
 Most Canadian businesses do not have and think they do not need a strategy
  for emerging markets.



                                                                                             3
The Economic Outlook

 The outlook of executives for the US economy has improved slightly
  since last quarter; confidence in growth is now back to the same level
  as June of last year, recovering from a pessimistic September 2011.
 The C-Suite’s evaluation of the Canadian economy at the current time
  continues a year long trend of steady incremental improvement. Four
  in five executives said the economy is in moderate growth.
 The outlook of executives for the Canadian economy is effectively
  unchanged from last quarter with the vast majority expecting the
  economy to grow only moderately over the next 12 months.
  In the past we have typically seen a 15 point difference between Western and
   Ontarian executives, but this quarter finds the two sets of executives on the
   same page.




                                                                                   4
Current Growth Levels In The
                                                               Canadian Economy
      “Which of the following do you think best describes the Canadian economy at the current time -
                      strong growth, moderate growth, moderate decline, strong decline?”


May/Jun. '12     1                                       81                                 14            3
     Feb. '12    1                                   77                                15         1 7
     Dec. '11                                       75                                  25                    1
     Sept. '11   3                                  68                               29                       1
Nov/Dec. '10     1                                            89                                  9           1
    Sept. '10    1                                        84                                     16
May/Jun. '10             10                                         85                                    5
    Mar. '10         5                                             90                                     41
    Dec. '09     1                                  75                                  23                    1
                                                                                                              1
    Sept. '09                                  67                                 31                       2
May/June '09                  17                                    71                           11           2
     Feb. '09    2                                  73                                  25
    Nov. '08             13                                         78                                8       1

             0                       20            40          60              80                         100
     Strong growth                 Moderate growth    Moderate decline      Strong decline                  DK

                                                                                                                  5
Projections For The Canadian
                                                              Economy
    “What are your expectations for the Canadian economy over the next 12 months, strong growth,
                           moderate growth, moderate decline, strong decline?”


May/Jun. '12 1                                     81                                 15            11
    Feb. '12 4                                      81                                 12                   3
     Dec. '11                             69                                     29                         2
    Sept. '11 1                               74                                  24                         1
    Jun. '11 2                                           93                                         5
     Mar. '11       3                                     93                                        4
Nov/Dec. '10        3                                    89                                     8            1
    Sept. '10        1                              85                                     14
May/Jun. '10        3                                    89                                     7            1
    Mar. '10            7                                     92                                        1
    Dec. '09            2                               89                                  8                1
    Sept. '09        1                             84                                  12           1 2
May/Jun. '09                         55                                   42                        3 1
                0               20             40                  60       80                      100

   Strong growth            Moderate growth        Moderate decline     Strong decline              DK

                                                                                                                 6
The US Economy
                                                                   Over The Next Year
    “What are your expectations for the U.S. economy over the next 12 months, strong growth,
                        moderate growth, moderate decline, strong decline?”


May/Jun. '12    1                           71                                  26         11
     Feb. '12   3                           66                               26           13
     Dec. '11   1                 50                                  45                  22
    Sept. '11              33                                 59                          8 1
     Jun. '11   1                           70                                  27         11
     Mar. '11   3                                78                                  16    12
Nov/Dec. '10    1                      60                                  37              1
    Sept. '10   1                 49                                 45                   51
May/Jun. '10    2                           68                                  29             2
    Mar. '10    2                            75                                   21       1
    Dec. '09    1                       65                                 27             5 2
    Sept. '09                           68                                   27           32
May/Jun. '09                       55                                   42                 31

             0             20           40          60                    80           100
    Strong growth       Moderate growth    Moderate decline             Strong decline    DK


                                                                                                   7
Companies’ Expectations

 We have found for many quarters now that executives with Canada’s
  top companies have a more positive outlook for their companies than
  for the economy.
  Although resources executives have tended to be more confident of their
   company’s growth relative to other sectors, this quarter sees resources
   executives approximately as confident about their company’s growth as
   manufacturing executives.
  Previously about half of resources executives predicted strong growth for
   their companies. The past few months have seen that drop to about one in
   three.
  Western executives remain much more confident of growth for their
   companies than executives in the Rest of Canada.




                                                                               8
Expectations: Company
 “What are your expectations for your company over the next 12 months, strong growth,
                    moderate growth, moderate decline, strong decline?”


          Total           27                               66                          6 1




          West                 36                               56                     8

Rest of Canada          20                               74                             5 1




    Resources                31                            58                      9       2

      Services          21                                76                            2

Manufacturing                30                               64                        6

                  0            20           40            60            80              100
   Strong growth           Moderate growth            Moderate decline           DK/NR

                                                                                               9
External Impacts On The Canadian
                                                  Economy
 Growing optimism about the Canadian economy results from
  executives thinking that a strengthening US economy outweighs a
  Europe-in-crisis.
 Most executives are modestly concerned about weakness in the US, a
  slow down in China, and high levels of household debt.
 Many are also concerned about a renewed credit crunch, labour
  shortages, and the high value of the Canadian dollar.
  The majority of Western and resource executives are concerned about labour
   shortages, while just over one third of those in Ontario and in manufacturing
   are concerned.
  Only one in ten business leaders is highly concerned about a rise in Canadian
   interest rates.
 Overwhelming all of those concerns is optimism about the
  US, Less than a year ago most Canadian business people saw
  recession and many were “very concerned”; now most see
  growth.
                                                                               10
Where Do The Threats Lay?

“I’m going to read a list of market forces and economic factors and I’d like you to tell me how
    concerned you are about each. When it comes to ____, are you very concerned, somewhat
                        concerned, not very concerned, not at all concerned?”

          European political instability                   49                    40                  9 2
                       The US economy               17                     62                   19        2
  High levels of household debt among…              14                56                   21        10
             Slowing Chinese economy                15                54                   21        10
Ability of companies to access financing            15           40                   38              71
 The possibility of higher interest rates       9               44               29              18
                      Labour shortages              17           35             28              20
       The value of the Canadian dollar              18          32             29              20        1
                          US retail sales       5           43                  37               13 2
              Canada's housing market           5           42                  35              17        1
                   Canadian retail sales        9           34                  43               12 3

                                            0                              50                         100
   Very concerned                                   Somewhat concerned               Not very concerned
   Not at all concerned                             Don't know
                                                                                                              11
Tracking Concerns Over US
                                                           Economy
“I’m going to read a list of market forces and economic factors and I’d like you to tell me how
   concerned you are about each. When it comes to the US economy, are you very concerned,
                 somewhat concerned, not very concerned, not at all concerned?”




                               17                62                19    2
          May/Jun. '12



                                      43                   48           73
               Sept. '11



                                 27                   58            12 31
                Mar. '11


                           0                    50                    100

  Very concerned                    Somewhat concerned               Not very concerned
  Not at all concerned              Don't know

                                                                                                  12
Debt Levels and Financing

 Most leading Canadian businesses will need to borrow money over the
  next year, and the balance of risk is seen as shifting back toward
  restricted credit.
  Two thirds of those that said they are not holding cash said they would access
   debt financing, while less than half of those that are holding onto cash said
   the same.
  Executives were more likely to say they expect equity financing, rather than
   debt financing, to become more difficult over the next year compared to last.
 The majority of executives said their companies were not close to the
  maximum limit of loan covenants.




                                                                                13
Accessing Financing

“Please tell me with a yes or no answer if your company is likely to access financing through any
                   of the following means in the next 12 months?” (% saying yes)




                                                                              59
                                       Debt



                                                                     39
                                     Equity



                                                         14
   Do not plan on accessing financing



 Acquisitions and Mergers (incl. joint               4                        21% said don’t know.
            partnerships)


                                              0                     50                    100


                                                                                                     14
Accessing Financing

 “Are you anticipating that it will be less difficult or more difficult for you to raise money from
_____ over the next year, compared to the last twelve months? Will it be much more difficult,
   somewhat more difficult, somewhat less difficult or much less difficult or no different?”




                           25               37                     34          31
       Debt




                      16          21                    47                13    3
     Equity




              0             20         40          60           80          100
    Less difficult          No different         More difficult          N/A         Don't know

                                                                                                      15
Accessing Debt Financing

“Are you anticipating that it will be less difficult or more difficult for you to raise money from
banks or other debt financing over the next year, compared to the last twelve months? Will
  it be much more difficult, somewhat more difficult, somewhat less difficult or much less
                                    difficult or no different?”


                                Total       4   21              37             24        10 3 1



  Support keeping interest rates            3   19         29             32             14 3
        at current level
                              Oppose        6    22                  44             17    5 41



       Concerned about ability to        2 10         35                  34             15 31
           access financing
                     Not concerned          8         37                  41              11 3

                                        0                        50                        100
       Much less difficult                                      Somewhat less difficult
       No different                                             Somewhat more difficult
       Much more difficult                                      N/A
                                                                                                     16
Accessing Equity Financing

“Are you anticipating that it will be less difficult or more difficult for you to raise money from
 equity markets over the next year, compared to the last twelve months? Will it be much
 more difficult, somewhat more difficult, somewhat less difficult or much less difficult or no
                                            different?”


                             Total    3 13             21             26             21    13        3



                       Resources      2 14        6          33                      38         8

                          Service        5 10           33                 21        10   16    5

                 Manufacturing        3      18             24             24        9    18    3


      Concerned about ability         1 11        14             30                  32        9 3
        to access financing
                 Not concerned           6   17              30                 21    5   19     2

                                     0                                50                        100
      Much less difficult                                             Somewhat less difficult
      No different                                                    Somewhat more difficult
      Much more difficult                                             N/A
                                                                                                         17
Accessing Equity Financing

“Are you anticipating that it will be less difficult or more difficult for you to raise money from
 equity markets over the next year, compared to the last twelve months? Will it be much
 more difficult, somewhat more difficult, somewhat less difficult or much less difficult or no
                                            different?”




              May/June          3 13     21       26         21    13     3
                2012




                                2 12     28            39          17     3
                   Sep-11



                            0                   50                  100
    Much less difficult                                     Somewhat less difficult
    No different                                            Somewhat more difficult
    Much more difficult                                     N/A
    Don't know
                                                                                                     18
Accessing Financing

       “Is your company close to or at the maximum limit of its loan covenants?”




                            56           10 3     27     5




             0                   50                100



Not close to limit     Close to limit       At the maximum            N/A      Don't know

                                                                                            19
Company Cash Reserves

 Almost half of Canada’s biggest companies - 45% - are holding on to
  cash reserves rather than investing that money in capital, human
  resources or otherwise, as policy makers are urging them to do.
 Mostly, they are doing so to give themselves a buffer against the risks
  they see out there.




                                                                        20
Holding onto Cash Reserves

“Recently, it’s been noted that companies have been choosing to hold on to cash reserves, rather
                        than reinvesting or distributing it. Would you say this:”




                       16        29                  54




               0                      50                     100
                         Strongly applies to your company
                         Somewhat applies to your company
                         Does not apply at all to your company

                                                                                                   21
Reasons for Holding onto Cash
                                                                 Reserves
   “Why is your company choosing to hold on to cash reserves rather than deploying or investing
                                               them?”




                                                                                      46
             Uncertainty in the economy



Need to conserve/ reserve profit/ capital                               27
             for the future


                                                              14
      Need it for future/ current growth



                                                          8
          Obtaining financing is difficult


                                              0               20             40            60


                                                                                                  22
How Cash Reserves Will Be Deployed

   “How is your company likely to deploy the money it has been holding on to?”



                                                                                 23
          (Re)investing in growth
                                                                     16
              Capital investments

        Mergers and acquisitions                                14

Putting money back into company                            7
           (general)

                         Dividends                     6

                              R&D                      6

             Do not plan to spend                  5
                                                                Other responses less than 3%.
                                               4                   28% said don’t know.
                  Debt retirement

                                      0                    10        20               30


                                                                                           23
The Role and Importance Of
                                           Emerging Markets
 Most leading Canadian business executives do not think that it is
  critical that their company be globally competitive, nor do they think
  an emerging markets strategy would be strongly beneficial.
 Again this shows the divide between the exporting Western companies
  that are focused on global markets and the manufacturing or service
  sectors in Ontario that are locked into North America.
  Many manufacturers are undertaking emerging markets strategies, but think
   the Canadian dollar is working against them in global markets.




                                                                           24
Global Competitiveness

  “How important is global competitiveness to your company’s business plans? Is it:”




                       36           29         22     12 1




           0                   50                   100
Very important                  Somewhat important                Not very important
Not at all important            Don't know

                                                                                       25
Emerging Markets

“The Government of Canada and others have said trade policy and Canadian companies have to put
a greater focus on emerging markets. Is an emerging markets strategy something that would have a
                            positive or negative impact on _______?”




                                         28               53            13 31 3
      The Canadian economy




                                         26        26             45         11 1
                Your company




                                 0                   50                   100

      Strongly positive               Somewhat positive                No impact
      Somewhat negative               Strongly negative                Don't know

                                                                                                   26
Emerging Markets

“The Government of Canada and others have said trade policy and Canadian companies have to put
a greater focus on emerging markets. Is an emerging markets strategy something that would have a
                         positive or negative impact on your company?”


                  Total            26               26                        45          11 1



                  West                  39                    27                    32     2

               Ontario        14             21                         58               44



            Resources               34                   27                        36     2

       Manufacturing               24               30                        39         33

              Services        17              22                         57               22

                          0             20         40              60          80        100

      Strongly positive                      Somewhat positive                      No impact
      Somewhat negative                      Strongly negative                      Don't know

                                                                                                   27
Exportation

“I'm going to read some statements about exporting. For each, please tell me if you strongly agree,
                      somewhat agree, somewhat disagree, or strongly disagree.”
     The high value of the Canadian dollar makes it difficult for companies to move on
                                 an emerging markets strategy.


              Total         22                      46                   24         6 1



              West          20                   45                    23          11 2

           Ontario             26                        46                  23         42



        Resources           19                      50                  17         13    2

   Manufacturing                    42                        33              24

          Services        14                   50                        31             32

                      0             20        40              60        80              100

     Strongly agree                      Somewhat agree                  Somewhat disagree
     Strongly disagree                   Don't know

                                                                                                  28
Exportation

  “I'm going to read some statements about exporting. For each, please tell me if you strongly agree,
                        somewhat agree, somewhat disagree, or strongly disagree.”




  Canadian companies have become too
                                                      23                 58              14 4
   complacent in relying on the US for
                exports


 The high value of the Canadian dollar
                                                     22             46              24     61
makes it difficult for companies to move
       on an emerging markets


 Fear of the unknown is keeping many
                                                     20            44             24      7 5
Canadian companies from expanding or
     selling into offshore markets

                                               0                     50                   100


       Strongly agree                    Somewhat agree                       Somewhat disagree
       Strongly disagree                 Don't know

                                                                                                        29
Emerging Markets

               “Does your company have a strategy in place to access these markets?”




                                39                                61
May/Jun. '12



                                42                               49                    9
    Feb. '12



                           31                               59                         10
     Dec.'11



                                39                               58                         3
    Sept.'11


               0             20            40            60             80             100
                    Yes                      No                       Don't know

                                                                                                30
Emerging Market Initiatives

  “What are key initiatives your company is undertaking as part of your strategy to access emerging
            markets?” [Among those who have an emerging markets strategy n=61]



   Began/ continue operations in emerging                                                        39
                  markets

                                                                    16
 Partnering with foreign markets/ ventures



Strategic planning/ analysis of expenditures
                                                                  15


      Product/ service development for the                        15
                     market


  Customer/ client demand and satisfaction
                                                   3



                                Don't know                   11


                                               0       10           20          30          40

                                                                                                      31
The Bank Of Canada and Interest
                                                       Rates
 There is significant resistance in the business community, especially in
  Ontario, to even a one point increase in interest rates.
 Most Ontario executives are prepared to tolerate higher inflation in
  exchange for keeping rates where they are.
 Those who think the economy has a little wind in its sails are
  attributing that to current low interest rates.
 The majority of executives in the resources industry support raising
  interest rates, while only about one third of those in manufacturing
  and services said the same.
 Ontario executives overwhelmingly said that keeping the dollar at a
  level where Canadian exporters can compete is important, while fewer
  (two-thirds) from the West said the same.
 When setting rates, executives want the BOC to be considering a
  number of, sometimes contradictory, objectives, but most want the
  Bank to place more emphasis on encouraging growth than on fighting
  inflation.

                                                                         32
Government Action on Borrowing

   “Would you strongly support, somewhat support, somewhat oppose or strongly oppose the
Government of Canada imposing new rules to tighten lending standards used by the banks to loan
                                         money?”




                          13       37          33       14 3




                   0                 50               100

      Strongly support                  Somewhat support               Somewhat oppose
      Strongly oppose                   Don't know

                                                                                                 33
Bank of Canada Actions

 “Would you strongly support, somewhat support, somewhat oppose or strongly oppose the Bank of
                                   Canada doing the following?”




  Warning Canadians about the dangers                     49                  41     4 41
and risk inherent in high borrowing levels

     Raising interest rates by as much as
    necessary to keep inflation below two          13          40          29       16 2
                   percent

 Leaving interest rates at the current level       12      36              36        15 1
    even if that means rising inflation


     Raising interest rates by one percent         7      38             35         18 1


                                               0                    50                100


        Strongly support               Somewhat support                  Somewhat oppose
        Strongly oppose                Don't know

                                                                                                 34
Considerations for Setting Interest
                                                             Rates
“How important should the following considerations be when the Bank of Canada is setting interesting
                                                rates?”



Preventing an interest rate shock that                     55                     39          41
     causes mortgage defaults


         Stimulating economic growth                  38                     57               42



             Keeping inflation in check            29                   56                  12 21


   Keeping the dollar at a level where                38                40             13     9
    Canadian exporters can compete


   Not damaging consumer spending                20                56                  18     7


                                           0                       50                        100

       Very important                   Somewhat important               Not very important
       Not at all important             Don't know

                                                                                                    35
Interest Rates and Consumer
                                                      Spending

 Most executives agreed that the level of household debt in Canada
  represents a serious threat to the economy. Yet most also agreed that
  the economy needs more consumer spending, not less.
 Most Canadian business leaders think the success of their business is
  not strongly linked to domestic consumer spending. Western and
  resources executives were overwhelmingly likely to agree that their
  business is not materially affected by Canadian consumer spending.




                                                                      36
Conflicting Economic Needs

“I’m going to read you a few statements about consumer spending and debt. For each, please tell me if
               you strongly agree, somewhat agree, somewhat disagree, or strongly disagree.”




 The level of household debt in Canada
                                                  13              60                 21       32
   represents a serious threat to the
                economy


   Our economy needs more consumer                 15             51                27        34
           spending, not less



Your business is not materially affected                35             27      16        21    1
  by Canadian consumer spending.


                                              0                     50                    100

        Strongly agree                    Somewhat agree                    Somewhat disagree
        Strongly disagree                 Don't know

                                                                                                    37
CEO Compensation

 Half of executives believe that the growing wage disparity between
  executives and average workers has a negative impact on society.
  Those that said it has a positive impact were mostly from the West, and those
   in resources were the least likely to say it has a negative impact, relative to the
   other sectors.
 Executives are more likely to think growing CEO compensation has a
  negative impact on shareholder value than think it is a benefit.




                                                                                     38
CEO Compensation

“The 100 highest paid CEOs of TSX listed companies earned just over $8 million on average in 2010,
 or 180 times the average worker's salary. In 1995 average pay of Canada's top 50 CEOs was only 85
                times that of the average worker. Does this growing disparity have:”

              Total       6              33                      54               7


              West            11              38                      47           5
    Rest of Canada    2            30                        61                   7


         Resources            9               42                      41          8
           Services       3        24                       66                    7
    Manufacturing         3             33                       58               6


   Expect strong              14               38                      45          2
  company growth
  Moderate growth         3         30                      57                   10

                      0             20              40     60               80    100
 A positive impact on society                            No impact on society
 A negative impact on society                            Don't know
                                                                                                 39
CEO Compensation

“And what impact has the upward trend in CEO compensation had on returns to shareholders? Is it:”




                              19               43                  32          6




                    0                         50                         100
 A positive impact on shareholder returns           No impact on shareholder returns
 A negative impact on shareholder returns           Don't know

                                                                                                40
CEO Compensation

 Most believe that the disparity will not continue to grow - most expect
  the ratio between CEO and average workers’ salaries will decrease or
  stay the same.
 Indeed, almost no executives believe Canadian CEO’s are underpaid.
 A minority believe that CEO’s are overpaid.
 Roughly half said they think Canadian CEOs are paid about what their
  performance is worth.
   Executives outside of the west were twice as likely to say CEOs are paid more
    than they are worth, as western executives.
   Executives who expect strong growth were less likely to agree that CEO’s are
    paid more than their worth, compared to executives who expect moderate
    growth for their companies.




                                                                                41
CEO Compensation

“In the next five years, do you foresee this disparity between CEO's and average workforce salaries:”




                                  28                 39                  33




                     0                          50                            100

   Continuing to grow                  Staying at the same ratio                    Decreasing

                                                                                                        42
Why would CEO pay disparity
                                                        increase?
         “You said you foresee wage disparity continuing to grow, why do you say that?”



       Due to societal/ economic trends                  35


               Good CEO too important               21

   Society/ public does not have enough             21
                  control
 Boards not doing their job, continue to            16
          support high wages
Due to public/ shareholder/ government          7
                pressure

                                    Greed       7

    Cannot see them justifying anything         7
                  higher

                              Don't know      2

                                            0                      50                     100


                                                                                                43
Why would CEO pay disparity
                                                            decrease?
                “You said you foresee wage disparity decreasing, why do you say that?”




      Due to public/ shareholder/ government                   52
                      pressure

Boards not doing their job, continue to support           15
                 high wages


              Due to societal/ economic trends        10


  Society/ public does not have enough control        4


                Change not strongly supported         2


    Cannot see them justifying anything higher        2


                                                  0                  50                  100


                                                                                               44
CEO Compensation

                              “Do you think Canadian CEOs are paid:”


             Total              33                        49                4    13




             West         21                             68                      2    9


    Rest of Canada                   44                        37           7        13




   Expect strong         14                         67                      10        10
  company growth

  Moderate growth                 39                          44            3        15

                     0           20           40           60          80                 100

More than their performance is worth                About what their performance is worth
Less than their performance is worth?               Don't know

                                                                                                45
High Income Surtax

 Most executives oppose the new 2% surtax on annual incomes above
  $500k, introduced in Ontario, while one third support it.
 Support nearly matched opposition among those that said that the
  CEO wage disparity has a negative impact on society.
 Most executives who said the CEO/worker wage disparity will continue
  to grow support the surtax.




                                                                     46
High Income Surtax

“Recently the Ontario Liberal government amended its budget to add a 2% surtax on annual incomes
  over $500,000. It is a temporary deficit reduction measure. Would you say you strongly support,
              somewhat support, somewhat oppose or strongly oppose this measure?”



                                       Total           14             24         17                  41        4


                                    Ontario        7             30              18                  44         2


       CEO compensation has a negative…                20                  26             21              30   2
                                 No impact         6         21            12                   60              2


CEO wage disparity to grow in next 5 yrs.                   26                  33             12         28    2
                                Same ratio             15        11        20                   48             7
                                  Decrease         4             31             19                   44         2

                                               0                                     50                        100

    Strongly support                 Somewhat support                                     Somewhat oppose
    Strongly oppose                  Don't know
                                                                                                                     47

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The 27th Quarterly C Suite Survey

  • 1. The 27th Quarterly C-Suite Survey: Cash Reserves, Debt, Interest Rates and CEO Compensation June 18th, 2012 Sponsored by: Published and broadcast by:
  • 2. Introduction  This is the 27th edition of the C-Suite Quarterly survey, conducted on behalf of KPMG; published and broadcast by the Globe and Mail’s Report on Business and BNN. Previous quarters’ surveys are available at GandalfGroup.ca .  This quarter’s survey and this presentation focus on:  Companies’ savings or cash reserves  Debt levels  Access to financing  Interest rates  CEO compensation  Exporting, the dollar and emerging markets  Methodology: telephone interviews were conducted with 156 C-Suite executives from ROB1000 companies between May 17th and June 5th 2012. The margin of error for this study is +/- 7.85% 19 times out of 20. 2
  • 3. Summary of Key Findings  Based on renewed optimism about the US economy, business expectations for Canada’s economy are improved this quarter.  There are still a number of dark clouds that executives see, but none darker than Europe which is preoccupying the Canadian business community.  These concerns particularly manifest themselves in concern about another credit crisis where debt financing is unavailable.  Concern about those risks has business sitting on healthy balance sheets, hoarding for a rainy day.  There is considerable concern about the impact rising interest rates would have, and most in Ontario are opposed to any move by the Bank of Canada to raise rates even a point.  Most business leaders think that CEO’s compensation cannot be justified by improvements in shareholder value, and see growing income disparity as a negative development in society.  Most Canadian businesses do not have and think they do not need a strategy for emerging markets. 3
  • 4. The Economic Outlook  The outlook of executives for the US economy has improved slightly since last quarter; confidence in growth is now back to the same level as June of last year, recovering from a pessimistic September 2011.  The C-Suite’s evaluation of the Canadian economy at the current time continues a year long trend of steady incremental improvement. Four in five executives said the economy is in moderate growth.  The outlook of executives for the Canadian economy is effectively unchanged from last quarter with the vast majority expecting the economy to grow only moderately over the next 12 months.  In the past we have typically seen a 15 point difference between Western and Ontarian executives, but this quarter finds the two sets of executives on the same page. 4
  • 5. Current Growth Levels In The Canadian Economy “Which of the following do you think best describes the Canadian economy at the current time - strong growth, moderate growth, moderate decline, strong decline?” May/Jun. '12 1 81 14 3 Feb. '12 1 77 15 1 7 Dec. '11 75 25 1 Sept. '11 3 68 29 1 Nov/Dec. '10 1 89 9 1 Sept. '10 1 84 16 May/Jun. '10 10 85 5 Mar. '10 5 90 41 Dec. '09 1 75 23 1 1 Sept. '09 67 31 2 May/June '09 17 71 11 2 Feb. '09 2 73 25 Nov. '08 13 78 8 1 0 20 40 60 80 100 Strong growth Moderate growth Moderate decline Strong decline DK 5
  • 6. Projections For The Canadian Economy “What are your expectations for the Canadian economy over the next 12 months, strong growth, moderate growth, moderate decline, strong decline?” May/Jun. '12 1 81 15 11 Feb. '12 4 81 12 3 Dec. '11 69 29 2 Sept. '11 1 74 24 1 Jun. '11 2 93 5 Mar. '11 3 93 4 Nov/Dec. '10 3 89 8 1 Sept. '10 1 85 14 May/Jun. '10 3 89 7 1 Mar. '10 7 92 1 Dec. '09 2 89 8 1 Sept. '09 1 84 12 1 2 May/Jun. '09 55 42 3 1 0 20 40 60 80 100 Strong growth Moderate growth Moderate decline Strong decline DK 6
  • 7. The US Economy Over The Next Year “What are your expectations for the U.S. economy over the next 12 months, strong growth, moderate growth, moderate decline, strong decline?” May/Jun. '12 1 71 26 11 Feb. '12 3 66 26 13 Dec. '11 1 50 45 22 Sept. '11 33 59 8 1 Jun. '11 1 70 27 11 Mar. '11 3 78 16 12 Nov/Dec. '10 1 60 37 1 Sept. '10 1 49 45 51 May/Jun. '10 2 68 29 2 Mar. '10 2 75 21 1 Dec. '09 1 65 27 5 2 Sept. '09 68 27 32 May/Jun. '09 55 42 31 0 20 40 60 80 100 Strong growth Moderate growth Moderate decline Strong decline DK 7
  • 8. Companies’ Expectations  We have found for many quarters now that executives with Canada’s top companies have a more positive outlook for their companies than for the economy.  Although resources executives have tended to be more confident of their company’s growth relative to other sectors, this quarter sees resources executives approximately as confident about their company’s growth as manufacturing executives.  Previously about half of resources executives predicted strong growth for their companies. The past few months have seen that drop to about one in three.  Western executives remain much more confident of growth for their companies than executives in the Rest of Canada. 8
  • 9. Expectations: Company “What are your expectations for your company over the next 12 months, strong growth, moderate growth, moderate decline, strong decline?” Total 27 66 6 1 West 36 56 8 Rest of Canada 20 74 5 1 Resources 31 58 9 2 Services 21 76 2 Manufacturing 30 64 6 0 20 40 60 80 100 Strong growth Moderate growth Moderate decline DK/NR 9
  • 10. External Impacts On The Canadian Economy  Growing optimism about the Canadian economy results from executives thinking that a strengthening US economy outweighs a Europe-in-crisis.  Most executives are modestly concerned about weakness in the US, a slow down in China, and high levels of household debt.  Many are also concerned about a renewed credit crunch, labour shortages, and the high value of the Canadian dollar.  The majority of Western and resource executives are concerned about labour shortages, while just over one third of those in Ontario and in manufacturing are concerned.  Only one in ten business leaders is highly concerned about a rise in Canadian interest rates.  Overwhelming all of those concerns is optimism about the US, Less than a year ago most Canadian business people saw recession and many were “very concerned”; now most see growth. 10
  • 11. Where Do The Threats Lay? “I’m going to read a list of market forces and economic factors and I’d like you to tell me how concerned you are about each. When it comes to ____, are you very concerned, somewhat concerned, not very concerned, not at all concerned?” European political instability 49 40 9 2 The US economy 17 62 19 2 High levels of household debt among… 14 56 21 10 Slowing Chinese economy 15 54 21 10 Ability of companies to access financing 15 40 38 71 The possibility of higher interest rates 9 44 29 18 Labour shortages 17 35 28 20 The value of the Canadian dollar 18 32 29 20 1 US retail sales 5 43 37 13 2 Canada's housing market 5 42 35 17 1 Canadian retail sales 9 34 43 12 3 0 50 100 Very concerned Somewhat concerned Not very concerned Not at all concerned Don't know 11
  • 12. Tracking Concerns Over US Economy “I’m going to read a list of market forces and economic factors and I’d like you to tell me how concerned you are about each. When it comes to the US economy, are you very concerned, somewhat concerned, not very concerned, not at all concerned?” 17 62 19 2 May/Jun. '12 43 48 73 Sept. '11 27 58 12 31 Mar. '11 0 50 100 Very concerned Somewhat concerned Not very concerned Not at all concerned Don't know 12
  • 13. Debt Levels and Financing  Most leading Canadian businesses will need to borrow money over the next year, and the balance of risk is seen as shifting back toward restricted credit.  Two thirds of those that said they are not holding cash said they would access debt financing, while less than half of those that are holding onto cash said the same.  Executives were more likely to say they expect equity financing, rather than debt financing, to become more difficult over the next year compared to last.  The majority of executives said their companies were not close to the maximum limit of loan covenants. 13
  • 14. Accessing Financing “Please tell me with a yes or no answer if your company is likely to access financing through any of the following means in the next 12 months?” (% saying yes) 59 Debt 39 Equity 14 Do not plan on accessing financing Acquisitions and Mergers (incl. joint 4 21% said don’t know. partnerships) 0 50 100 14
  • 15. Accessing Financing “Are you anticipating that it will be less difficult or more difficult for you to raise money from _____ over the next year, compared to the last twelve months? Will it be much more difficult, somewhat more difficult, somewhat less difficult or much less difficult or no different?” 25 37 34 31 Debt 16 21 47 13 3 Equity 0 20 40 60 80 100 Less difficult No different More difficult N/A Don't know 15
  • 16. Accessing Debt Financing “Are you anticipating that it will be less difficult or more difficult for you to raise money from banks or other debt financing over the next year, compared to the last twelve months? Will it be much more difficult, somewhat more difficult, somewhat less difficult or much less difficult or no different?” Total 4 21 37 24 10 3 1 Support keeping interest rates 3 19 29 32 14 3 at current level Oppose 6 22 44 17 5 41 Concerned about ability to 2 10 35 34 15 31 access financing Not concerned 8 37 41 11 3 0 50 100 Much less difficult Somewhat less difficult No different Somewhat more difficult Much more difficult N/A 16
  • 17. Accessing Equity Financing “Are you anticipating that it will be less difficult or more difficult for you to raise money from equity markets over the next year, compared to the last twelve months? Will it be much more difficult, somewhat more difficult, somewhat less difficult or much less difficult or no different?” Total 3 13 21 26 21 13 3 Resources 2 14 6 33 38 8 Service 5 10 33 21 10 16 5 Manufacturing 3 18 24 24 9 18 3 Concerned about ability 1 11 14 30 32 9 3 to access financing Not concerned 6 17 30 21 5 19 2 0 50 100 Much less difficult Somewhat less difficult No different Somewhat more difficult Much more difficult N/A 17
  • 18. Accessing Equity Financing “Are you anticipating that it will be less difficult or more difficult for you to raise money from equity markets over the next year, compared to the last twelve months? Will it be much more difficult, somewhat more difficult, somewhat less difficult or much less difficult or no different?” May/June 3 13 21 26 21 13 3 2012 2 12 28 39 17 3 Sep-11 0 50 100 Much less difficult Somewhat less difficult No different Somewhat more difficult Much more difficult N/A Don't know 18
  • 19. Accessing Financing “Is your company close to or at the maximum limit of its loan covenants?” 56 10 3 27 5 0 50 100 Not close to limit Close to limit At the maximum N/A Don't know 19
  • 20. Company Cash Reserves  Almost half of Canada’s biggest companies - 45% - are holding on to cash reserves rather than investing that money in capital, human resources or otherwise, as policy makers are urging them to do.  Mostly, they are doing so to give themselves a buffer against the risks they see out there. 20
  • 21. Holding onto Cash Reserves “Recently, it’s been noted that companies have been choosing to hold on to cash reserves, rather than reinvesting or distributing it. Would you say this:” 16 29 54 0 50 100 Strongly applies to your company Somewhat applies to your company Does not apply at all to your company 21
  • 22. Reasons for Holding onto Cash Reserves “Why is your company choosing to hold on to cash reserves rather than deploying or investing them?” 46 Uncertainty in the economy Need to conserve/ reserve profit/ capital 27 for the future 14 Need it for future/ current growth 8 Obtaining financing is difficult 0 20 40 60 22
  • 23. How Cash Reserves Will Be Deployed “How is your company likely to deploy the money it has been holding on to?” 23 (Re)investing in growth 16 Capital investments Mergers and acquisitions 14 Putting money back into company 7 (general) Dividends 6 R&D 6 Do not plan to spend 5 Other responses less than 3%. 4 28% said don’t know. Debt retirement 0 10 20 30 23
  • 24. The Role and Importance Of Emerging Markets  Most leading Canadian business executives do not think that it is critical that their company be globally competitive, nor do they think an emerging markets strategy would be strongly beneficial.  Again this shows the divide between the exporting Western companies that are focused on global markets and the manufacturing or service sectors in Ontario that are locked into North America.  Many manufacturers are undertaking emerging markets strategies, but think the Canadian dollar is working against them in global markets. 24
  • 25. Global Competitiveness “How important is global competitiveness to your company’s business plans? Is it:” 36 29 22 12 1 0 50 100 Very important Somewhat important Not very important Not at all important Don't know 25
  • 26. Emerging Markets “The Government of Canada and others have said trade policy and Canadian companies have to put a greater focus on emerging markets. Is an emerging markets strategy something that would have a positive or negative impact on _______?” 28 53 13 31 3 The Canadian economy 26 26 45 11 1 Your company 0 50 100 Strongly positive Somewhat positive No impact Somewhat negative Strongly negative Don't know 26
  • 27. Emerging Markets “The Government of Canada and others have said trade policy and Canadian companies have to put a greater focus on emerging markets. Is an emerging markets strategy something that would have a positive or negative impact on your company?” Total 26 26 45 11 1 West 39 27 32 2 Ontario 14 21 58 44 Resources 34 27 36 2 Manufacturing 24 30 39 33 Services 17 22 57 22 0 20 40 60 80 100 Strongly positive Somewhat positive No impact Somewhat negative Strongly negative Don't know 27
  • 28. Exportation “I'm going to read some statements about exporting. For each, please tell me if you strongly agree, somewhat agree, somewhat disagree, or strongly disagree.” The high value of the Canadian dollar makes it difficult for companies to move on an emerging markets strategy. Total 22 46 24 6 1 West 20 45 23 11 2 Ontario 26 46 23 42 Resources 19 50 17 13 2 Manufacturing 42 33 24 Services 14 50 31 32 0 20 40 60 80 100 Strongly agree Somewhat agree Somewhat disagree Strongly disagree Don't know 28
  • 29. Exportation “I'm going to read some statements about exporting. For each, please tell me if you strongly agree, somewhat agree, somewhat disagree, or strongly disagree.” Canadian companies have become too 23 58 14 4 complacent in relying on the US for exports The high value of the Canadian dollar 22 46 24 61 makes it difficult for companies to move on an emerging markets Fear of the unknown is keeping many 20 44 24 7 5 Canadian companies from expanding or selling into offshore markets 0 50 100 Strongly agree Somewhat agree Somewhat disagree Strongly disagree Don't know 29
  • 30. Emerging Markets “Does your company have a strategy in place to access these markets?” 39 61 May/Jun. '12 42 49 9 Feb. '12 31 59 10 Dec.'11 39 58 3 Sept.'11 0 20 40 60 80 100 Yes No Don't know 30
  • 31. Emerging Market Initiatives “What are key initiatives your company is undertaking as part of your strategy to access emerging markets?” [Among those who have an emerging markets strategy n=61] Began/ continue operations in emerging 39 markets 16 Partnering with foreign markets/ ventures Strategic planning/ analysis of expenditures 15 Product/ service development for the 15 market Customer/ client demand and satisfaction 3 Don't know 11 0 10 20 30 40 31
  • 32. The Bank Of Canada and Interest Rates  There is significant resistance in the business community, especially in Ontario, to even a one point increase in interest rates.  Most Ontario executives are prepared to tolerate higher inflation in exchange for keeping rates where they are.  Those who think the economy has a little wind in its sails are attributing that to current low interest rates.  The majority of executives in the resources industry support raising interest rates, while only about one third of those in manufacturing and services said the same.  Ontario executives overwhelmingly said that keeping the dollar at a level where Canadian exporters can compete is important, while fewer (two-thirds) from the West said the same.  When setting rates, executives want the BOC to be considering a number of, sometimes contradictory, objectives, but most want the Bank to place more emphasis on encouraging growth than on fighting inflation. 32
  • 33. Government Action on Borrowing “Would you strongly support, somewhat support, somewhat oppose or strongly oppose the Government of Canada imposing new rules to tighten lending standards used by the banks to loan money?” 13 37 33 14 3 0 50 100 Strongly support Somewhat support Somewhat oppose Strongly oppose Don't know 33
  • 34. Bank of Canada Actions “Would you strongly support, somewhat support, somewhat oppose or strongly oppose the Bank of Canada doing the following?” Warning Canadians about the dangers 49 41 4 41 and risk inherent in high borrowing levels Raising interest rates by as much as necessary to keep inflation below two 13 40 29 16 2 percent Leaving interest rates at the current level 12 36 36 15 1 even if that means rising inflation Raising interest rates by one percent 7 38 35 18 1 0 50 100 Strongly support Somewhat support Somewhat oppose Strongly oppose Don't know 34
  • 35. Considerations for Setting Interest Rates “How important should the following considerations be when the Bank of Canada is setting interesting rates?” Preventing an interest rate shock that 55 39 41 causes mortgage defaults Stimulating economic growth 38 57 42 Keeping inflation in check 29 56 12 21 Keeping the dollar at a level where 38 40 13 9 Canadian exporters can compete Not damaging consumer spending 20 56 18 7 0 50 100 Very important Somewhat important Not very important Not at all important Don't know 35
  • 36. Interest Rates and Consumer Spending  Most executives agreed that the level of household debt in Canada represents a serious threat to the economy. Yet most also agreed that the economy needs more consumer spending, not less.  Most Canadian business leaders think the success of their business is not strongly linked to domestic consumer spending. Western and resources executives were overwhelmingly likely to agree that their business is not materially affected by Canadian consumer spending. 36
  • 37. Conflicting Economic Needs “I’m going to read you a few statements about consumer spending and debt. For each, please tell me if you strongly agree, somewhat agree, somewhat disagree, or strongly disagree.” The level of household debt in Canada 13 60 21 32 represents a serious threat to the economy Our economy needs more consumer 15 51 27 34 spending, not less Your business is not materially affected 35 27 16 21 1 by Canadian consumer spending. 0 50 100 Strongly agree Somewhat agree Somewhat disagree Strongly disagree Don't know 37
  • 38. CEO Compensation  Half of executives believe that the growing wage disparity between executives and average workers has a negative impact on society.  Those that said it has a positive impact were mostly from the West, and those in resources were the least likely to say it has a negative impact, relative to the other sectors.  Executives are more likely to think growing CEO compensation has a negative impact on shareholder value than think it is a benefit. 38
  • 39. CEO Compensation “The 100 highest paid CEOs of TSX listed companies earned just over $8 million on average in 2010, or 180 times the average worker's salary. In 1995 average pay of Canada's top 50 CEOs was only 85 times that of the average worker. Does this growing disparity have:” Total 6 33 54 7 West 11 38 47 5 Rest of Canada 2 30 61 7 Resources 9 42 41 8 Services 3 24 66 7 Manufacturing 3 33 58 6 Expect strong 14 38 45 2 company growth Moderate growth 3 30 57 10 0 20 40 60 80 100 A positive impact on society No impact on society A negative impact on society Don't know 39
  • 40. CEO Compensation “And what impact has the upward trend in CEO compensation had on returns to shareholders? Is it:” 19 43 32 6 0 50 100 A positive impact on shareholder returns No impact on shareholder returns A negative impact on shareholder returns Don't know 40
  • 41. CEO Compensation  Most believe that the disparity will not continue to grow - most expect the ratio between CEO and average workers’ salaries will decrease or stay the same.  Indeed, almost no executives believe Canadian CEO’s are underpaid.  A minority believe that CEO’s are overpaid.  Roughly half said they think Canadian CEOs are paid about what their performance is worth.  Executives outside of the west were twice as likely to say CEOs are paid more than they are worth, as western executives.  Executives who expect strong growth were less likely to agree that CEO’s are paid more than their worth, compared to executives who expect moderate growth for their companies. 41
  • 42. CEO Compensation “In the next five years, do you foresee this disparity between CEO's and average workforce salaries:” 28 39 33 0 50 100 Continuing to grow Staying at the same ratio Decreasing 42
  • 43. Why would CEO pay disparity increase? “You said you foresee wage disparity continuing to grow, why do you say that?” Due to societal/ economic trends 35 Good CEO too important 21 Society/ public does not have enough 21 control Boards not doing their job, continue to 16 support high wages Due to public/ shareholder/ government 7 pressure Greed 7 Cannot see them justifying anything 7 higher Don't know 2 0 50 100 43
  • 44. Why would CEO pay disparity decrease? “You said you foresee wage disparity decreasing, why do you say that?” Due to public/ shareholder/ government 52 pressure Boards not doing their job, continue to support 15 high wages Due to societal/ economic trends 10 Society/ public does not have enough control 4 Change not strongly supported 2 Cannot see them justifying anything higher 2 0 50 100 44
  • 45. CEO Compensation “Do you think Canadian CEOs are paid:” Total 33 49 4 13 West 21 68 2 9 Rest of Canada 44 37 7 13 Expect strong 14 67 10 10 company growth Moderate growth 39 44 3 15 0 20 40 60 80 100 More than their performance is worth About what their performance is worth Less than their performance is worth? Don't know 45
  • 46. High Income Surtax  Most executives oppose the new 2% surtax on annual incomes above $500k, introduced in Ontario, while one third support it.  Support nearly matched opposition among those that said that the CEO wage disparity has a negative impact on society.  Most executives who said the CEO/worker wage disparity will continue to grow support the surtax. 46
  • 47. High Income Surtax “Recently the Ontario Liberal government amended its budget to add a 2% surtax on annual incomes over $500,000. It is a temporary deficit reduction measure. Would you say you strongly support, somewhat support, somewhat oppose or strongly oppose this measure?” Total 14 24 17 41 4 Ontario 7 30 18 44 2 CEO compensation has a negative… 20 26 21 30 2 No impact 6 21 12 60 2 CEO wage disparity to grow in next 5 yrs. 26 33 12 28 2 Same ratio 15 11 20 48 7 Decrease 4 31 19 44 2 0 50 100 Strongly support Somewhat support Somewhat oppose Strongly oppose Don't know 47