Executive Education

Today’s Business Leaders Need Total Financial Fluency—Here’s Why

Financial fluency

Today’s strong economy won’t last forever. Some economists are even predicting an economic downturn within the next 12-24 months. A recession creates challenges for business leaders, but it can also present opportunities. Companies need executive leaders who understand the complexities of the market if they want to stay competitive and take advantage of new developments.

When things are going well, it’s natural for businesses to press forward and grab market share. That’s why many companies aren’t adequately prepared to deal with a slowdown. Business leaders often react defensively or wait until it’s too late.

study published in the Harvard Business Review examined more than 5,000 organizations through four distinct business cycles. When the economy dipped (defined by periods of negative GDP growth or greater than 1 point loss over two years), nearly 75% of companies saw revenue decline. Yet, 14% grew revenue and increased profitability. These weren’t small gains, either. The average revenue growth was 9%, while margins went up by 3 points.

What Do High-Performing Companies Do Differently?

What did these select companies do differently? They prepared and acted quickly when conditions changed. They didn’t just take cost-cutting measures. They focused on long-term thinking and growth—even in a down market.

Smart executives are taking action now to prepare for the inevitable changes in the future. Here’s what leading academics have to share on the subject of today’s shifting economy.

Understanding Developments in the Global Economy

Trade Tariffs and Embargoes

Now that the U.S. has effectively entered into a trade war with China (and possibly Mexico), economists warn the effects will be long-lasting. The Rutgers Executive MBA program Director Farrokh Langdana, Ph.D., calls the phenomenon “deadweight loss.” He points to the Opium Wars as examples. In 1820, China had arguably the most robust economy in the world, and tea was one of their most profitable exports. After relationships broke down between Britain and China, however, Britain shifted their focus to India—creating a new supply chain that still exists today.

Dr. Langdana says China’s tariffs on U.S. goods have already permanently affected supply chains for wheat, soybeans, and meat. Now that American exports are taxed, countries like Canada, Brazil, and Argentina can provide more affordable products to fill the market demand. And farmers in the U.S. are already feeling the strain. “Trade wars don’t end,” says Dr. Langdana. Even if the countries “kiss and make up,” those markets might not fully recover—meaning business leaders will need to develop new revenue sources.

Natural Disasters and Environmental Change

As reported by The Economist, the number of natural disasters has more than quadrupled since 1970—nearly 400 occur worldwide each year. The cost to recover from these events is often steep. In addition to rebuilding and conducting repairs, business operations often come to a standstill, resulting in lost time, labor, and productivity. In the U.S. alone, we’ve had two separate weather-related events this year with losses exceeding $1 billion.

The economic impact of climate disasters is undeniable—and some schools are already investigating more sustainable business practices, including Cornell University.

economic Ariel Ortiz-Bobea, Ph.D., is an Assistant Professor with Cornell SC Johnson College of Business, part of The Executive MBA Americas joint program between Cornell and Queen’s University. Recently, he published two papers on the subject of climate change and economic impact:

Monetary Policy

What about the role public policies play in today’s economy? “Monetary policy is one of the key tools in stabilizing the economy when we are entering a recession, when GDP growth is below trend, or unemployment is very high,” says Christian Moser, Ph.D., and Assistant Professor in the Finance and Economics division of Columbia Business School.

A country’s monetary authority, such as the Federal Reserve and Central Bank in the U.S., sets policies that impact the supply of money and interest rates. Rates may go up or down and influence employment, spending, lending, and inflation.

Researchers have found that changes in monetary policies can be monitored as a precursor for economic change. For example, the Yield Curve can be a valuable forecasting tool. This measures the spread between interest rates on three-month Treasury bills and ten-year Treasury notes.

Dr. Moser further explores the topic of regulation policies and their effect on employee earnings and economic stability in the paper “How Could Wage Inequality within and Across Enterprises Be Reduced?” (2017). The Columbia Business School Executive MBA program examines these types of topics in detail in core classes like Global Economic Environment.


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Historical Economic Indicators

Looking for the warning signs of economic change can also help you prepare. In studying each of the major economic downturns in modern U.S. history (1929, 1970s, 1987, 2000-2002, and 2007-2009), Ron Filante, Ph.D., and Associate Professor of Finance at the Pace University Masters in Finance for Professionals program, notes the causal relationship between equity markets and recession.

“There is a link in the economic cycles and the equity markets,” says Filante. “The link will likely continue in the future.”

In addition to stock market signals, the Conference Board’s Leading Economic Index (LEI) monitors other indicators such as unemployment insurance, employment data, and housing permits. A slowdown in the LEI has typically preceded downturns in the economic cycle.

It’s critical in business to know whether you are in what Filante calls a “virtuous cycle” of economic growth, a “flattening of the economy,” or heading into a “death spiral.” Different strategies need to be adopted in each scenario to seize on opportunities.

Transmission Mechanisms and Policy

finanicalPaolo Surico, Professor of Economics and the Academic Director at the London Business School Executive MBA program, also looks at history to guide future business strategy. Past crises have “left a lasting legacy in terms of interest rates and fiscal policy,” Surico says. They’ve placed severe strains on institutional arrangements and changed the way businesses interact.

There’s a correlation between economic events that occur outside the norm in both “good” and “bad” times as a way to indicate market movement. “During periods in which real activity is above its conditional average,” Surico writes in a paper published in CERP. “The estimates of the degree of forward-lookingness and interest rate semi-elasticity are significantly larger (in absolute value) than the estimates associated with below-average periods.”

These findings again point to complex connections between government policies, private businesses, and international relations within a social and cultural context.

Your Personal Growth Plan

Financial literacy is a fundamental component of management and leadership. Having a firm grasp on the financial underpinnings of your business, your industry, and the broader economy impacts decisions both big and small. The greater your understanding, the better decisions you can make.

One of the best ways you can prepare yourself is with an EMBA. These programs are intended for mid-career executives looking to advance their careers, lead an organization effectively, and navigate the challenges ahead. Many programs concentrate on finance and economics so graduates can adapt to the conditions that will define the market in the near future.


Want to learn more about executive education? Look at the EMBA programs in the U.S. and abroad with the highest ratings from Ivy Exec members.


 

About the Author

Paul Dughi has been in executive management positions in the media industry for the past 25 years. At age 55, he earned his MBA in Business Administration while working full-time as President of a multi-station TV group. He is the author of two books on Marketing and Management.