December 9, 2021

	I. Omicron and Supply Chain Shake Credit Quality in November, Kamakura Report Shows
	II. How to Get the Ear of Your CEO—And What to Say When You Have It

	III. Relief May Be Coming for Supply Bottlenecks and Inflation
	IV. New Orders, Production and Employment Grow as Supplier Deliveries Slow Further

November’s Kamakura Troubled Company Index points to weakened credit quality and increased volatility, partly due to ongoing supply-chain bottlenecks and the new Omicron variant. Last month’s level for worldwide corporate credit quality dropped to the 97th percentile (compared with 99 in September) for the period of 1990 to 2021, with 100 indicating best conditions.

“While [Omicron’s] impact could be significant, there are too many unknowns to speculate at this point, so our concerns must remain focused on the economic effects of fiscal and monetary policy, especially its unintended consequences,” wrote Martin Zorn, president and chief operating officer of the Kamakura Corporation (Honolulu) in his commentary.

The Kamakura Expected Cumulative Default Rate shows the one-year rate up 0.60% at 1.40%, and the 10-year rate down 0.89% at 19.15%, indicating a likely increase in company defaults in the near future. However, Zorn says more defaults may not be a bad thing.

“I would argue that a rise in short-term defaults is actually a good signal, as the lack of that red flag has created underwriting and trading activity likely to mask a bigger shakeout down the road,” Zorn said. “An increase in short-term default rates and a reduction in the expected longer-term cumulative defaults could in fact bode well for markets.”

Of the 20 “riskiest” firms listed in November, 11 were in China, five were in the U.S., and one each in Luxembourg, Mexico, Norway and Spain. Codere S.A. (BME:CDR), a Spanish consumer services and gaming company, remained the riskiest-rated firm. Of the companies covered by Kamakura, four global defaults occurred—two in the U.S., one in China and one in Germany.

Say you’re an executive aspiring to join the C-Suite. Your access to the firm’s CEO may be limited. But understanding when and how to communicate issues and opportunities upward can make a big difference to your success. And, for that matter, your company’s.

Rob Apatoff, a clinical professor and executive director of the Kellogg Executive Leadership Institute, spent eight years leading FTD Companies before retiring as president and CEO in 2016. Prior to FTD he was CEO of Rand McNally and led a turnaround of the business for private equity before selling the company. Over his career, as a senior executive at companies, including Anheuser-Busch, Reebok and Allstate, he has learned the importance of capitalizing on C-Suite encounters, no matter how fleeting.

Those encounters—whether scheduled or spontaneous—are your auditions for the senior leadership. It’s critical that you show you are in command of your business, and can clearly and succinctly communicate your team’s most important information. Apatoff recommends ways to make the most of the times when you get the CEO’s ear.

Know When to Approach

A surprising number of people have a hard time discerning a good time to approach the CEO. After all, engaging in the hallway, lunchroom or airport may or may not be opportune—it all depends on the CEO, the news you have to share and what else is going on at that moment. But CEOs notice and appreciate when managers are sensitive about how they are approached, so it is important to get this step right.

Apatoff’s advice is to start by asking yourself a few simple questions: How urgent is the information I want to present? Is my goal to simply introduce myself and share something positive about my team, or is there a high-stakes decision that the CEO may wish to weigh in on, in a timely manner?

Then he recommends engaging in some situational awareness and reading the CEO’s body language. If, for example, they are being pulled away to deal with a matter more pressing than yours, maybe now is not the best time to pitch them on a new sales initiative.

“Being able to respect the CEO’s time is always appreciated,” Apatoff said. “I’ve seen people, while trying to get face time, they just don’t properly read the situation. You need to have the ability to read people and have enough EQ to understand the situation that you’re in. Often, CEOs will make a mental note of your thoughtfulness and be more amenable to give you time in future interactions.”

Be Prepared When the Time Arrives

A CEOs’ time is always at a premium. When you have the opportunity to connect with them, the last thing you want to do is draw a blank or shift into small talk. “If you’re trying to make conversation and a connection by bringing up your kid’s home run in T-ball last weekend, you’re not doing anyone any good, especially yourself,” Apatoff said.

Instead, you should be ready at a moment’s notice to talk concisely about whatever it is you want to share. Having your priorities straight and information at the ready demonstrates a level of competency and professionalism that CEOs remember down the road. If the CEO wants to then engage in lighter social talk from there, you can follow their lead and act accordingly.

“Every time you’re in front of the CEO or C-suite, you are being judged—consciously or not,” Apatoff said. “When a company is working on succession planning and looking at high-potential candidates, the C-Suite will often get together and discuss candidates collectively. Executive interactions you’ve had over the years will speak volumes about how buttoned up you are, your perceived maturity, how clear you are in your communications, how much command you have of your business, and ultimately, whether you are promoted.”

Apatoff recalled his days at FTD and working on his own succession plan. He said he constantly kept an eye on talent a couple of tiers down in the organization, looking for managers who seemed capable of more.

“The more I saw leaders that truly were in command of their business, and could speak about potential ideas or innovations, the more rope I gave them,” Apatoff said. “CEOs are always looking for the best and strongest leaders they can find. That’s one of the most important jobs the CEO has. If you’re someone that has displayed the potential to be a leader, even in brief interactions, that speaks well for your future.”

So how do you keep yourself prepared to engage with a CEO? Apatoff recommends a habit he developed when he was leading a department: keep a list of bullet points that you can rattle off quickly. This list should include an overview of your department, key data points to support that overview, and an insight into how that relates to the company at large. He also kept a few of his own creative ideas in reserve, to show how he could be counted on to drive business in both conventional and unconventional ways.

Once you have that list put together, repeat those bullet points until they become as familiar as your favorite song lyrics, so that you are ready to recite them wherever, whenever. “I always had a plan,” Apatoff said. “I wouldn’t always get an opportunity, but I would be prepared with information that was creative, relevant, and helpful to the business, when that opportunity appeared.”

Know When to Assert Yourself

One of your roles as an aspiring leader is to spot trouble—either in your unit or across the company—and show the initiative to escalate that information to leadership, preferably with a course of action to resolve the issue. If you uncover a challenge that is serious enough to impact the company, it’s your responsibility to inform the C-Suite or potentially the CEO.

This is when developing an ongoing dialogue with the CEO through periodic (even very brief) interactions—and being in command of your business when you do connect—pays off. As someone who has already attracted their attention and gained credibility, you stand a better chance of encountering a receptive CEO when you reach out.

“Few C-Suite leaders will accept an employee telling them, ‘I tried, but couldn’t get to you,’ as an excuse for not passing along vital information,” Apatoff said. “Whether it’s through the assistant or their direct reports, there are always ways to inform the CEO of a potential problem or opportunity.”

For example, at a recent conference on security matters, several senior security executives mentioned to Apatoff that they were having difficulty communicating their important ideas to the C-Suite and CEO. Apatoff recommended they request 15 minutes on the agenda for an upcoming staff meeting with the CEO to discuss critical security issues.

“Occasionally integrating ideas and potential issues into staff meetings,” Apatoff said, “will allow you and the company to be better prepared for whatever may come up. If you don’t, and something actually happens, it may be too late.”

If you know you have a critical issue to discuss, but the CEO is not immediately available, Apatoff recommends reaching out to other C-Suite members, rather than waiting. “By having the trust of the other C-Suite and business P&L leaders, you will have a big head start on gaining the trust of the CEO.”

Reprinted with permission Kellogg Insight.

Inflation and supply snags are two of the most pressing risks for businesses today, stunting economic growth and leaving companies unsure of what to do next. However, some experts say the economy is seeing the peak of disruption right now.  

“Maybe the worst of the supply-chain issues are behind us,” said Ryan Sweet, senior director of economic research at Moody’s Analytics, during a recent webinar. “I say ‘maybe’ because … with the new Omicron variant, we could see further disruption.”

Supply-chain improvement is dependent on the state of the pandemic, and inflation is largely tied to the supply chain. In order for the 30-year-high inflation rate to normalize, the supply chain must start flowing smoothly.

“Supply constraints will hopefully ease in the first half of 2022,” said Sweet in a Moody’s Analytics webinar, A Tangled Web: Impact of Supply Chain and Inflation on the U.S. Economy. “The expectation is we get some improvement, not totally back to normal, but that should put some downward pressure on inflation in early next year.”

According to a survey released Monday by the National Association for Business Economics (NABE), the majority of economists (58%) expect supply-chain pressures to ease in early 2022 and 22% say that process has started already.

However, if predictions are wrong and supply snags continue to drive inflation, it could spell disaster for business-to-business credit, he added. “There is no precedent for what we are going through today from a credit risk perspective,” Sweet said. “We don’t have the data to correctly predict what the impact of this sustained inflation is if it ends up not being transitory. We don’t know what the impact will be on corporate debt.”

The Federal Reserve is planning to ramp up its fight against inflation by ending its bond-buying stimulus program and increasing interest rates sooner than originally scheduled. Federal Reserve officials are scheduled to meet Dec. 14-15 to discuss a timeline, but several news reports say plans could be moved up to March. “You’ve seen our policy adapt, and you’ll see it continue to adapt,” Chairman Jerome Powell told lawmakers during hearings last week.

But if predictions are correct and the supply chain eases, lowering inflation, another risk will still be lurking around the corner—inventory correction, Sweet said. “Current supply-chain disruptions are making it difficult for businesses to manage their inventories,” he explained. “Therefore, it's possible that businesses get caught with excess inventories in a couple of years, after they over-order today to compensate for the delays. This has caused recessions in the past and is a symptom of a boom-bust cycle.”

Businesses can try their best to make plans based on today’s economy. But if they overbuy product now, they could be left with too much inventory and be faced with more problems down the road.

The November Purchasing Managers Index (PMI^®) registered 61.1%, up 0.3 percentage points from October. Economic activity in the manufacturing sector grew for 18-consecutive months, according to the November Manufacturing Institute for Supply Management^® (ISM^®) Report On Business^®. The report is based on survey responses from U.S. supply executives to the November PMI^®.

"The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, with some indications of slight labor and supplier delivery improvement,” said Timothy Fiore, CPM, chair of the ISM^® Manufacturing Business Survey Committee. “All segments of the manufacturing economy are impacted by record-long raw materials and capital equipment lead times, continued shortages of critical lowest-tier materials, high commodity prices and difficulties in transporting products.”

Demand and consumption grew during the period. The Employment Index, which expanded for a third month, indicates the ability to hire is improving, partially offset by the challenges of turnover and backfilling. Inputs—expressed as supplier deliveries, inventories and imports—continued to constrain production, but there are early signs of supplier performance improving, the report notes. The Supplier Deliveries Index continued to slow, but at a slower rate, while the Inventories Index expanded more slowly. In November, the Prices Index expanded for the 18^th-consecutive month, at a slower rate, indicating continued supplier pricing power and scarcity of supply chain goods.

“Coronavirus pandemic-related global issues—worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems—continue to limit manufacturing growth potential,” Fiore said in the report. “However, panel sentiment remains strongly optimistic, with 10 positive growth comments for every cautious comment. Panelists remain optimistic that manufacturing growth potential can be achieved as focus surrounds improving supply-chain issues and responding to ongoing high levels of demand.”

The six biggest manufacturing industries—computer and electronic products; food, beverage and tobacco products; chemical products; petroleum and coal products; fabricated metal products; and transportation equipment, in that order—registered moderate to strong growth in November, Fiore said. “Panelists’ comments suggest month-over-month improvement on hiring, offset by backfilling required to address employee turnover. Indications that supplier delivery rates are improving were supported by the supplier deliveries index softening. Transportation networks, a harbinger of future supplier delivery performance, are still performing erratically.”

Comments from survey respondents include:

• "International component shortages continue to cause delays in completing customer orders. Backlog continues to increase." [Computer & Electronic Products]
• "Petrochemical supply chain is slowly showing signs of improvement after multiple weather disruptions in 2021." [Chemical Products]
• "Large volume drops due to chip shortage." [Transportation Equipment]
• "Oil is up, but our capital spending remains flat for now. No new orders at this time." [Petroleum & Coal Products]
• "While steel plate and hot-rolled coil pricing seems to be approaching a plateau, the biggest challenge we have at the moment is finding qualified workers." [Fabricated Metal Products]
• "Business is strong but meeting customer demand is difficult due to a shortage of raw materials and labor." [Furniture & Related Products]
• "In the first nine months of the year, business conditions were off the charts, and sales by far outpaced capacity. This has put backlog at record levels and, surprisingly, customers have been willing to wait, albeit reluctantly. However, there seems to be a flattening: Sales remain strong but are not growing at the same month-over-month pace from the previous six to nine months." [Machinery]