CEO Insights

Tax: A new risk to corporate reputation

Author: Rick Stamm - Vice Chairman, Global Tax

Tax has moved up the agenda of business leaders around the world. This does not come as a surprise to me or, I suspect, to many in the C-Suite at multinational corporations worldwide.

In the past 12 months we have seen a sharp rise in public debate on how businesses pay their taxes and on how countries levy them, a topic that has engaged governments, the media, citizen advocacy groups, NGOs and multilateral bodies such as the OECD. Tax avoidance will be at the heart of next month’s G8 summit in Northern Ireland, the first time that it has taken on such prominence at the meeting. The tax debate is adding a new dimension to the uncertain global business environment that we face in 2013.

Corporations are certainly feeling the heat – especially those who have found themselves in the media spotlight due to their tax strategy – and justifiably are concerned about the reputational and strategic risks. However there seems to be a disconnect. Our new report, Tax Strategy and Corporate Reputation, shows that almost half of CEOs do not consider corporate reputation a priority area for investment in the year ahead.

This seems contrary to the environment in which we are operating. It is my belief that tax strategy and managing this link to corporate reputation should become a higher strategic focus for businesses in 2013. Business leaders need to acknowledge that tax and the link to corporate reputation creates new risks that they cannot afford to ignore.

Explore this issue in detail and download the report here on pwc.com: 16th Annual Global CEO Survey: A focus on tax.

Rick Stamm is PwC’s Vice Chairman for Global Tax. He is responsible for building the capabilities of Tax practices across the PwC network of firms, as well as for interacting on Tax and business issues with many of the firm's larger clients.

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Is your financial services talent model fit for growth in today’s business climate?

In our recent 16th Annual Global CEO Survey, CEOs of financial services organisations told us that talent shortages are one of the biggest threats to growth today.  Attracting talent has become more difficult given the negative perception of the industry following the financial crisis.  And while, historically, a key part of the employee value proposition within the industry has been built around financial reward, the funds needed to sustain the old levels of compensation are simply no longer there.

These people challenges come at a time when it’s critical for financial institutions to rebuild trust with disenchanted customers - and society as a whole - in order to strengthen customer loyalty, retention and growth. But before re-engaging your customers, you need to have your own people on board.

Our new report, Seizing back the people agenda, looks at the steps needed to move your people strategy forward in today’s business climate – from attracting and retaining the right people, to organising them in the most effective way, shaping the right culture and managing performance and reward.

A culture of integrity, customer focus and risk-awareness is key to re-engaging with customers and rebuilding confidence in the financial services industry. There are clear competitive advantages for getting this right including better targeting of products, stronger reputation and more effective retention of key people.

Pay is still important, but not at the expense of everything else. There needs to be a more viable balance between risk and capital demands, employee reward and the returns needed to attract investment and fund future growth.


Jon Terry
Global FS HR Consulting Leader
Email: Jon Terry 

Jon Terry is PwC’s global financial services HR consulting leader, based in London. Jon has over 25 years experience advising banks, insurers and asset managers on their people challenges, including assisting them address their recruitment, talent, retention, remuneration and employee communication issues

The year of the fox

In recent years, CEOs have needed to call on one characteristic over all others: resilience. They’ve needed to be agile and wily. They’ve needed to know when to be bold, when to take their chances and when to retreat from risk.

There’s some provenance to this. Isaiah Berlin in his 1953 essay, “The Hedgehog and the Fox”, says that people fall into one of two categories - hedgehogs or foxes. In business, hedgehogs can be great, visionary leaders. They’re focused, driven and resolute – “They know only one thing, but they know it well.”

Foxes are less fixed in their views - ever-shifting and comfortable with ambiguity. This pragmatism has been an essential characteristic for business leaders in recent times when grand ideas have been squeezed out by management challenges that may only stretch as far as the next quarter’s financial results.

When asked about the leader he most admired for PwC’s recent 16th Annual Global CEO Survey, one Canadian CEO went for Alaric, king of the Visigoths, because:

“He invaded Rome with an elite military force. He did it with a combination of planning execution and the inherent belief that the existence of a good plan was far superior to the search for the perfect one. His ability to act with sufficient information defined his leadership style.”

The tenets of Nassim Nicholas Taleb’s new book, Anti-fragile, are aligned with the survey’s findings. Resilience, he says, involves being thick-skinned, being able to learn quickly from mistakes and failures, and being flexible enough to bend to grasp new opportunities.

But we need hedgehogs too. As well as dealing with adversity, the role of a leader is to set long-term strategies in an environment where growth will require new ways of thinking and doing things. Pragmatism can help you survive but you need vision to thrive.

There are visionaries working in businesses everywhere. It’s time they came out of hibernation.


Andrew Smith
Thought Leadership, PwC UK
Contact: Andrew Smith

Andrew Smith is a member of PwC’s Thought Leadership team in the UK.

Read more about the leaders and leadership qualities CEOs most admire.

Leadership and the stories we tell

On Business Day at the Nobel Peace Prize Forum last month – which coincided with International Women's Day – Nina Easton of Fortune asked aloud whether the world might be more peaceful if there were more women in leadership positions. She went on to suggest that it might be a less risky place with more women in charge.

That’s one of the interesting issues on which PwC's 16th Annual Global CEO Survey question on CEOs' role models might shed some light. PwC asked over 1,000 global CEOs to name leaders from history and literature that they admired. The results showed that female CEOs were less likely to name a military or wartime role model than their male counterparts. However, military and/or wartime leaders were the most common type of leader identified overall. Are the mostly male CEOs who responded telling us that they see themselves as going to battle every day?

For the most part, CEOs told PwC that they admired more what leaders do (action) than who they are (character). Action-oriented traits were typically the reasons given for admiration, from pragmatism to persistence and from vision to innovation. But some CEOs suggested that character (from caring about people to demonstrating ethical values) is critical to the ability of business to make the world better in the long run. Interestingly, even though psychologists and philosophers tell us that we learn much of our character from stories, barely more than a handful of CEOs named literary figures as role models. Nearly all of them opted for historical role models instead. If CEOs read more stories, would they be more inclined to write more endings in which all of the characters lived happily ever after?

 

Christopher Michaelson
Strategy and Risk Institute Leader, PwC US
Email: Christopher Michaelson

Christopher leads PwC’s Strategy and Risk Institute, drawing on business practitioners’ experience and academic and NGO partners’ knowledge and analysis to understand risks and their strategic implications for business objectives and social well-being.

PwC ranks China as world’s #1 investment destination

The China Development Forum is an annual meeting that aims to promote a better understanding of the key economic and social issues faced by China. The CDF brings together an impressive group of academics, policymakers, and businesspeople from around the world all of whom bring to the event thought-provoking ideas concerning China’s way forward.

At this year’s CDF, which was held in Beijing on March 23-25, I had the opportunity to launch a PwC research report --- Choosing China: Insights from multinationals on the investment environment --- that provides compelling insights about how CEOs perceive investment opportunities in China; and the changes they believe the Chinese government should consider in order to enhance China’s standing as a destination for inbound investment.  The report is based on a survey of 227 CEOs and additional in-depth interviews with 11 others.

The CEOs have an interesting story to tell. More than half (56%) chose China above other developed and emerging economies --- including Brazil, Russia, India and the US --- as their first preference in terms of foreign investment. Moreover, over 70% of the CEOs with current operations in China plan to increase their investment over the next five years. So, it’s a safe bet that China’s attractive business environment --- including an expanding domestic market, a large pool of skilled workers, and favourable tax regulations --- will continue to make this remarkable country a magnet for cross-border investment.

But while it now ranks as the world's top destination for foreign investment generally, our research also reveals that in particular sectors, other countries are outpacing China. For instance, while most consumer and industrial product companies name China as their preferred investment destination, businesses in the technology and financial services sectors view Brazil more favourably. Clearly, with dynamic economies like Brazil close on its heels, China’s policymakers must take additional steps to maintain its attractiveness to foreign investors. Our research shows that among those steps are policies to improve government transparency and accountability and strengthen anti-corruption efforts. Chinese officials are well aware of the necessity of taking these sorts of actions in order to provide investors with greater certainty and a more level playing field in which to do business.

Most significantly, our study confirms that CEOs remain optimistic about China’s prospects and are ready to work in partnership with China’s businesspeople and policymakers to ensure that investments in that country deliver value to all parties. Read the full report, produced by PwC in support of the China Development Forum, to find out more. 


Dennis Nally
Chairman, PwC International Ltd. 

Dennis Nally leads the global network of PwC firms.

Resetting the compass

Since 2012 proved to be a less than impressive year for global deal flow, I know many people are looking closely at the markets for signs of an improvement. And I think we’ve spotted one, as an interesting trend of buyers from emerging markets acquiring developed market companies has started to emerge.

In 2012, high-growth markets invested over US$32.6 billion in mature market targets - almost three times the 2005 amount. Over the past five years, a total of US$161 billion has flowed west from China, India, the Gulf Region, Russia and Brazil - more than in the other direction.

I think this trend represents a huge opportunity for mature market companies. In our latest deals report, Resetting the compass: Navigating success in deal-making for mature market sellers and high growth market buyers, we explore what motivates emerging market companies to acquire developed market ones. For some, it’s to gain access to established market channels. Others are looking for brands, know-how or intellectual property that they can leverage at home. Certain emerging market companies feel that the time’s ripe to go global – and divestment and restructuring in some mature markets are providing them with particularly alluring deals.

Having advised on many such deals, it’s clear to me that buyers and sellers, unfamiliar with each other’s processes and corporate and cultural contexts, often need support. There’s no ‘one size fits all’ approach: differences in valuations, processes, decision-making, and completion timeframes, all need particular attention.

From the emergence of privately-owned Chinese companies as international investors and Indian companies going global, to the shifting patterns of outbound M&A by Russian, Gulf and Brazilian firms, it’s important that developed market sellers understand what these investors want - and get to grips with a new deal dynamic. For those of you who want to get a head start, take a look at our new report which offers guidance on how to make the most of the opportunities emerging market investors can offer.


Nick Page
Partner, PwC UK
Email: Nick Page

 

Nick leads the Financial Services team in Transaction Services in the UK, and is a member of the Global Financial Services Executive Team.  In these roles Nick advises banks, insurance companies and private equity investors on investments and disposals of financial services businesses and loan portfolios.  Nick also has considerable experience of deals involving businesses in and from emerging markets; he was seconded to PwC Russia in the mid-1990s and has led projects throughout the world.

Stop talking about diversity

Tomorrow, 8 March, marks International Women's Day. As we celebrate the achievements of women in the workforce and beyond, my advice for leaders may seem counterintuitive: Stop talking about diversity.

In this year’s Annual Global CEO Survey, CEOs cited their explicit focus on workforce diversity, including programmes to encourage diversity in the leadership pipeline. This is not surprising or new information. In our interdependent and volatile global economy, a variety of experiences and thinking styles are integral to success and provide some inoculation against uncertainty.

What I found compelling in this year’s survey is that CEOs have changed the conversation. They’ve framed diversity broadly using the vocabulary of growth and sustainability. I picked up three distinct themes in their responses that link business success with diversity, although they don’t explicitly mention diversity. I believe that discussing diversity implicitly — as an integral part of business and growth — will sustain momentum in the face of uncertain markets and help us to tap into the talent we desperately need.

Excise ‘diversity’ from your vocabulary

When we talk about diversity globally, word choice can impede progress. In mature markets, people are often tired of talking about it — they have ‘diversity fatigue.’ In emerging markets, they don’t always believe diversity is relevant, because they see it as an ‘imported’ concept.

When we take ‘diversity’ out of the conversation, the essence of its meaning as a business driver becomes clear. It’s intuitively seen as vital to global growth and sustainability.

As A.M. Naik, Executive Chairman of Larsen & Toubro Limited, India, observes, “Obviously, you need different types of orientation, organisation, structure and leadership to build international presence quickly. Being unable to do that is our biggest threat.”  Traditionally, I believe we’ve made the conversation too narrow, about only one or two facets of diversity; CEOs have started to discuss diversity in terms of its real power — a broad range of perspectives and experiences that bolster business.

Increase transparency with customers and employees

Trust and transparency emerged as strong trends in this year’s survey. Overwhelmingly, CEOs said customers, clients, local communities, and users of social media will significantly influence their business strategies.

Again, diversity is not mentioned explicitly, but it’s inherent in these statements. With a multifaceted customer base, businesses must adapt to their various needs — especially if they want to grow that base, which over half of CEOs say is a priority in 2013. Customers have increasing participation in the decision-making process, and companies that understand and respond with agility will stay relevant.

Transparency is equally pertinent to talent conversations. Alex Lo, President of Uni-President Enterprises Corporation, Taiwan, said, "If a company has a clear [staff development] framework and explicit objectives, everyone is able to understand what role to play, just like in a ballgame. And when people systematically do the right things in the right way, there’s an increase in productivity."

With transparency, talented professionals understand what it takes to rise to the top. Business will move away from a ‘who you know’ mentality that maintains the status quo. By creating transparency in leadership role competencies, leaders can increase objectivity and level the playing field.

Develop junior talent now

Many CEOs reported they develop their leadership pipelines by involving managers below board level in strategic decisions. Indeed, including the perspectives of different generations is another way to stay relevant with customers and connect meaningfully with employees.

The conversation about diversity has often been limited to senior women. Europe has implemented quotas for women on boards, and detractors lament the lack of qualified candidates. Although I’m not convinced that adopting a different mechanism of favouritism will help women in the long run, I do recognise gender imbalance exists today. Despite the influx of female talent, women have not organically risen to the top of organisations.

By shifting the conversation to include junior women, we have the opportunity to press the right lever for balanced leadership teams. We should put our energy behind something we can influence right now: grooming junior women for future leadership roles. This is a sustainable solution for a pipeline full of talented men and women.

As CEOs change the conversation about diversity, we raise the bar for talent and transparency. We enhance trust for increased quality, profitability, and sustainability. One CEO encapsulated this beautifully when he said that in uncertain times like these, balanced investment and leadership helps companies keep their performance on an even keel and take advantage of growth avenues, wherever they may be.

When talent rises to the top, everyone wins.

Find tools and information about developing millennial women now for future leadership roles at the PwC International Women's Day site.

 

Dennis Nally
Chairman, PwC International Ltd. 

Dennis Nally leads the global network of PwC firms. For more about how PwC is changing the conversation about diversity and talent, please visit pwc.com/women.

The question on COOs’ minds: “So now what?”

According to our latest Annual Global CEO Survey, the challenge for CEOs is balancing efficiency with agility. They’re trying to cut costs without cutting value or leaving their organisations exposed to external upheavals.  Meanwhile, many COOs may be wondering, “So now what?” It’s a really good question, and it emanates from two places.

First, after over half a decade of economic turmoil, slow growth, and relentless profitability pressure, the low-hanging fruit is simply gone.  Obvious levers to drive margin through cost reduction have been pulled.  COOs have borne the brunt of these cost-cutting initiatives.  It’s often unpleasant business that takes a toll on relations with suppliers and employees, not to mention an emotional toll on the COO and his or her leadership team.

The second source of the question is the parade of shocks to the system.  These come from all angles and with increasing rapidity:  macroeconomic shifts, natural disasters, geopolitical unrest, and regulatory and tax changes.  And that’s all on top of changes in technology, customer preferences, and the competitive landscape.

There’s no place for a trite answer to such a serious “now what?” question.  I will offer up, however, two vectors that may spur productive thinking in your company:

1. Innovation:  Going beyond new products and services, some executives are looking at innovating the company’s operating model itself.  Uni-dimensional views of the P&L and business processes are replaced by a fresh, multi-dimensional view of the business that seeks fundamentally new ways of doing things—ways to serve customers better with a completely different cost structure.  Creativity can be spurred by leaving your industry sandbox and looking at practices in other industries.  These insights can be both unexpected and profound.
2. Flexibility:  There's no reason to expect volatility to subside.  Operationally, the antidote to uncertainty is flexibility.  Cost-reduction campaigns often work at cross purposes to building resilient, nimble operations.  Minimally, it’s time to balance the criteria for what's 'good' by elevating flexibility and customer satisfaction to the same playing field as efficiency and cost.  Some executives are benefiting from a little catchup by taking special initiative to relook at operations through the flexibility lens, and some are pleasantly surprised to find that the assumed cost trade-off doesn’t really exist, particularly when they factor in the effects of the uncertainties that will likely hit.

Don’t feel guilty if you’re feeling exasperated—many of your peers in the C-suite are.  Open the doors and windows, breathe deeply, and dedicate some effort to thinking anew about your operations.  It’s a great time to do it. 


Mark Strom
Global Operations Leader
Email: Mark Strom

Mark Strom is the global head of operations consulting services for PwC, leading a team across the network of more than 4,000 professionals. Mark and his colleagues specialise in helping clients realise strategic goals and competitive advantage by defining and implementing world-class operations.

 

Why harnessing sustainability makes good business sense

Balancing immediate business needs with longer-term strategy can be tricky.  Often the short-term issues take precedence, with decision making for the future postponed to less challenging times.

We see this in the results of the latest Global CEO Survey, where concern about climate change is less prominent than in previous years, seemingly overshadowed by more pressing short-term economic issues. Just 17% of CEOs feel that addressing the risks of climate change and protecting biodiversity should be ‘a top-three government priority’.

So, how does this short-term mindset impact on clients and shareholders?  Surely too much focus on today’s management structures and demands, at the expense of tomorrow’s strategy, means new business models are overlooked, stifling innovation and growth and ultimately jeopardising the business.

This short-term focus is apparent in the way business - and society at large - has treated our planet’s natural capital for a long time.  Until recently, resources have largely been treated as infinite and ‘free’. But as we continue to push the planet’s boundaries, this is clearly a false assumption. A fundamental shift is required in today’s business models to properly account for the use of these finite resources. And those companies that recognise this need and react first will gain competitive advantage through innovation.

So, the fact that 48% of CEOs plan to increase efforts to reduce their company's environmental impacts is very encouraging and shows real foresight.  Business has a complex relationship with the environment - and with society and the economy, for that matter - so it’s good to see more companies taking an active interest not only in measuring their impact, but in reducing it too. 

At PwC, we sense greater recognition from some CEOs of the important role that business can play in addressing environmental impact, social challenges and improving national outcomes.  Slowly it’s becoming the way to do business – for instance, thinking about ways to reduce reliance on scarce resources through investment in R&D, collaboration across industries, and developing new products or materials.  It leads to greater transparency too which can only be a good thing – especially as companies have growing numbers of stakeholders to consider, each with increasing levels of influence thanks to the social media revolution.

CEOs recognise the need to rebuild public trust and maintain the bridges between business and society.  Thinking longer-term, understanding the impact that your company has on the environment, society and the economy, makes good business sense.


Malcolm Preston
Global Sustainability Leader
Email: Malcolm Preston


Malcolm Preston is global head of sustainability services for PwC, and leads a team of some 700 sustainability and climate change experts. Malcolm specialises in all aspects of sustainability reporting, including the measurement and valuation of environmental, social and economic impacts.

Resilience: winning with risk

I’ve just read that much of Pakistan was plunged into darkness for two hours on Sunday when the nation’s electricity network broke down. The government blamed the electric companies, and the companies blamed underinvestment in infrastructure. But, regardless of who was at fault, both daily life and ‘business as usual’ were disrupted without warning.

On this occasion the fault was a technical one, but according to one news report, the extensive nature of the blackout caused some to fear there’d been a terrorist attack or a military coup. Thankfully there hadn’t, but it’s a reminder of the interconnected and global nature of the changes and challenges that test a nation’s, an organisation’s or an individual’s resilience.

In the third issue of PwC’s Resilience: Winning with risk – which launched at our CEO and Chairman breakfast in Davos during the World Economic Forum (WEF) Annual Meeting – Lee Howell of the WEF introduces a framework for evaluating country resilience. Whether you’re involved in strategising about global growth or in managing global risks, and whether you’re a business person, policymaker, or academic, this article – and the rest of the issue – is a provocative and important read for you. The issue also includes perspectives from:

• Practitioners on the ground confronting political, social and environmental change (including PwC authors analysing social unrest in Egypt, economic uncertainty in Japan, a superstorm in the United States, the impact of climate change on supply chains, and the attitude of private equity toward social investing).
• Experts pursuing market solutions to systemic challenges (including the Wharton Risk Center’s Erwann Michel-Kerjan on innovative financial instruments to strengthen disaster resilience, and a preview of a UN-PwC disaster risk reduction framework).
• CEOs formulating growth strategies against a landscape of challenging global risks (including insights from an interview with National Grid’s Steve Holliday and excerpts from interviews with several other global CEOs, conducted as part of PwC's 16th Annual Global CEO Survey).

To borrow from the title of the Holliday interview, I hope Resilience: Winning with risk helps you “keep the lights on” in your organisation and its operating environment. I look forward to hearing what you think about it and welcome your comments.


Dennis Chesley
Global Risk Services Leader
Email: Dennis Chesley