Business leaders may consider cuts to M&A, ESG budgets

By Bryan Strickland

CFOs and CEOs facing financial issues may first look to cut expenditures on mergers and acquisitions (M&A) and environmental, social, and governance (ESG), according to research by Gartner Inc.

The consulting firm recently surveyed 128 CFOs and CEOs across several US industries, asking them to identify the top two areas they would consider targeting first for budget cuts if the economic landscape forces them to action.

Investments in M&A was cited most (41%), followed closely by "investments for improved sustainability and reduced environmental impact" (39%).

The idea of cutting M&A makes sense following a record-setting 2021.

"Deal-making is always directly linked to confidence in the market," Lucille Jones, a deals intelligence analyst in Refinitiv's Investing and Advisory division, recently told FM magazine. "With the exception of real estate, we've seen declines in every sector from last year, both by the number and value of deals."

Randeep Rathindran, vice president, research in the Gartner Finance practice noted that record M&A activity in 2021 combined with rising interest rates make M&A a natural target for cuts. By contrast, recent momentum toward more robust ESG reporting makes it somewhat of a surprising second choice, although the voluntary nature of ESG disclosures could explain its ranking.

Rathindran said in a Gartner news release: "It's more surprising to see sustainability so close to the chopping block because CEOs rated it as a top strategic priority for the first time in 2022, and ESG disclosures are increasingly becoming enshrined in legislation."

Rathindran also offered an explanation for a seeming anomaly in the survey's findings. The CFOs and CEOs most often cited workforce and talent development as the last area they would cut (46%), yet "investments in workforce and talent development" (at 33%) trailed only M&A and ESG among areas that business leaders would target first for cuts.

"This is likely due to differences by industry, because companies in service-based industries are most likely to reduce their investments due to the high proportion of labor costs," Rathindran said. "Meanwhile, product-based industries protect these investments as a source of advantage, helping them to maximize human capital."

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.

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