Recession shocks firms into cautious approach to risk

Published on Sunday 22 November 2009 21:03

A DECADE of business conservatism is set to be ushered in by the credit crunch and recession, according to employers' lobby group, the CBI.

In a report published today, it says the recession and financial shocks have become "catalysts for a new era" in areas such as financing, employment and relationships with suppliers.

"Financial engineering is yesterday's story," Richard Lambert, the CBI's director-general, says in the report, The Shape of Business – The Next Ten Years, ahead of the group's annual conference today.

"The new world will be less about complex financial transactions, more about collaboration, partnership and longer-term relationships with a wide group of stakeholders," he adds.

This contrasts with the 20 years leading up to the crash, when financial assets had multiplied "at a dizzying pace", and "the more you borrowed, it seemed, the richer you became". The CBI report says businesses did not see credit terms falling back to pre-crunch levels "and, having become wary of higher debt levels, firms will look to alternatives to debt-driven growth".

Lambert says the report is backed by a CBI survey conducted with business services firm Deloitte of chief executives, chairman and finance directors at 500 member companies from 22 October to 17 November.

The survey indicates that Britain "may be at the start of a new era for businesses, in which attitudes to finance and corporate leadership are changed for a generation by the shock of the past two years".

Lambert says there is a recognition that "a less risky pathway to growth" is needed – trading lower corporate short-term returns for more sustainable longer-term rewards.

The survey reveals a shift in attitudes among Britain's leading business people towards financing and supply chains in particular, Lambert says.

More than half – 55 per cent – said that they would now only tolerate a lower level of risk from borrowings. Within that group, 70 per cent said that an economic recovery would not reverse their position.

Two-thirds (68 per cent) expected "no improvement in credit availability in 2010 and are reshaping their business financing". Half of those polled said they would use less bank debt, 44 per cent said they would rely more on equity finance and 26 per cent said they would make more use of bond issuance.

The CBI's director-general says the survey showed strong concerns about supply chain "fragility" and the possibility of a "domino effect" of supply chain failures.

In response, one in three executives interviewed said they would be increasing their number of suppliers. About one in five said they would be offering finance to key suppliers.

Lambert adds: "Why not make it easier for companies to raise money locally, perhaps through new regional banking and investment institutions, rather than having to rely on a few very big players in London and Edinburgh?"