As corporate finance professionals brace for a fresh set of twists and turns, 2023 is looking like it’s going to be just as disruptive as each of the previous three years. That’s an incredible, seemingly impossible, standard to reach, but with a coming economic downturn, new financial regulations in virtually every jurisdiction, and an emerging hotbed of ESG complexity to navigate, there won’t be much of an easing-in period for executives returning from their holiday breaks.
Vigilance will be the silver bullet in 2023, but that’s a far easier word to say than it is a strategy to execute. C-suites will have to navigate some sharp turns on the road ahead. Here’s what they’ll have to contend with as the New Year gets underway:
Bracing for Recession
While economists still can’t agree on the timing or exact probability of a full-fledge recession, it is a safe bet that many of the economic challenges we’ve seen throughout the second half of 2022 will continue into the New Year. While the very mention of the word recession is enough to make leadership recoil, as we’ve seen time and time again, the presence of a crisis can also create an opportunity.
Since 2020, corporations have weathered the COVID-19 pandemic, a fractured political climate, and social upheaval at home and abroad. How did they do it? They stayed agile. Having a flexible, cloud-based digital infrastructure was key to survival for companies that suddenly needed to move their entire workforces to remote operations. Firms that had data siloed for years finally explored ways to streamline their processes. Companies that shied away from social issues found themselves pivoting on a dime to take on social justice and DE&I initiatives. The ones that were successful relied on information, made data-driven decisions, and acted quickly.
It will obviously take more than a solid tech backbone to survive and thrive in a recession, but as corporations find ways to ease the burden on their workforce, explore ways to avoid hiring freezes and layoffs, and find opportune moments for capital investments, the spirit of the lessons learned in the last three years should be their guide. And to be as agile as they needed to be post-COVID, they’ll need to be well-informed with the organizational agility to act quickly.
Regulatory Roulette
As corporations contend with how to offer more to their clients with potentially fewer resources, they also find themselves under a siege of new legislation.
The Inflation Reduction Act requires companies that report over $1 billion in book income to pay a 15 percent minimum tax rate on that income. Some firms may already be meeting that requirement, but those with over $1 billion in earnings that may have taken certain credits or deductions that lower their tax rate below 15 percent of their book income may be subject to additional tax liabilities.
What’s more, the Financial Accounting Standards Board (FASB) has once again put corporate tax transparency at the top of its administrative agenda. Earlier this month, they proposed that public and private companies be required to break out the amount of income taxes they pay at not only the federal and state level, but also the amount they pay in each foreign jurisdiction in which they operate. This information would need to be filed quarterly and annually.
The administrative requirements associated with these proposals presents a heavy lift for corporate finance departments. The granularity needed to provide detailed, country-by-country reporting ratchets up the complexity level in the tax department in a way that many corporations may not be ready to address. Ready or not, though, compliance will be key, and firms will have to be proactive to make sure they’re in line.
Green is the New Black
A focal point of some of this regulatory push is the environmental, social, and corporate governance (ESG) initiatives that are integral to many corporations’ future strategies. In the last decade, C-suites have put ESG efforts front-and-center in their business strategies. But, a once-immature market of investing has now come of age, and with it, a whole new set of reporting requirements.
A new crackdown on “greenwashers” will increasingly require corporations to provide quantitative evidence of their ESG efforts, while the European Union reached an agreement to impose a tax on imports based on the greenhouse gases emitted to make them, and a proposal by the US Department of Defense, NASA and the General Services Administration last month would require federal contractors to disclose and reduce their CO2 emissions as well as climate financial risks. The Wild West era of ESG reporting is out, and a whole truckload of new sheriffs have come to town, each with their own varying set of rules.
While ESG may still be seen as a niche area of focus in some smaller circles, it’s ubiquitous in virtually every corporate portfolio. Finance departments around the globe will have to get creative on solutions to monitor new legislation, understand the small nuances of each law, and make sure they’re able to meet these standards.
The Steady Survive
Even as corporate finance professionals try to get ahead of this volatility, 2023 is sure to bring us surprises that no forecaster saw coming. While the challenges outlined here may be a sampling of what’s to come, we can be certain this won’t be an exhaustive list.
That’s why having the right mindset – and technology – to stay nimble, execute under duress, and remain even-keeled in the face of adversity will have to be at the heart of every C-suite strategy for the foreseeable future.