Rethink Volatility Reshape Strategy Result Smarter...

13th Annual Global CEO Survey Setting a smarter course for growthMain report

ResultSmarter growth

RethinkVolatility

Reshape Strategy

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Foreword

The effects of the downturn were far-reaching. Many business leaders contend they should have anticipated the impact and prepared sooner – allowing them more time to consider various strategic options. As we see in the survey, CEOs continue to work to strengthen their organisations while seeking opportunities emerging from structural shifts in their industries, economies and regulatory environments. They recognise that the decisions they make today, dealing with issues like cash management and cost pressures, will have a lasting impact on their companies’ competitive position. The ability to understand and respond to the structural shifts underway, and to improve risk management capabilities, will be fundamental considerations as CEOs plan their course for growth.

I want to thank the 1,198 company leaders and government officials from over 50 countries who shared their thinking on these difficult issues. The demands on their time are many and we are certainly grateful for their involvement. I am particularly appreciative of the 27 CEOs and 5 senior government representatives who sat down with us for more extensive conversations and provided additional context to our findings.

The tremendous success of the PwC Global CEO Survey – now in its 13th year – is directly attributable to the enthusiastic participation of leaders around the world. We at PricewaterhouseCoopers are very proud of that ongoing commitment.

Dennis M. Nally Chairman PricewaterhouseCoopers International Limited January 2010

In the 13th Annual Global CEO Survey we hear how businesses leaders responded to the challenges brought about by the recession, the concerns they are facing today and, reflecting on often difficult ‘lessons learned’, their strategies for positioning their companies for the long-term.

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Contents

Introduction: Heading towards a growth agenda 2

Section 1 Rethink: From crisis to cautious optimism 7

Employment turning the corner 12

The thorny problem of global policy coordination 14

Section 2 Reshape: The post-crisis environment 17

The regulation paradox: Seeds of a more effective engagement 24

Government ownership: A strategic game-changer 26

Section 3 Result: Adapting to compete 29

Access to capital is a looming problem 38

Post-crisis models emerge 40

Final thoughts: Lessons learned and applied to 2010 43

Research methodology and key contacts 45

Further reading 46

Acknowledgements 48

Supplements

In-depth CEO story Visual story

2 13th Annual Global CEO Survey – Main report

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The past 18 months could serve as the defining period for many CEOs. The recession in developed nations was the worst many had ever experienced, marked not only by the loss of liquidity and the contraction in demand but equally, by the speed with which conditions changed. The resulting rupture to business planning and operations came through clearly in our survey of 1,198 business leaders from around the world for the PricewaterhouseCoopers 13th Annual Global CEO Survey.

With uncertainty on future revenue, business leaders had no option but to act on what they could control. Close to 90% of companies cut costs over the past 12 months. Cash preservation was paramount as assets were divested and jobs cut. The effects of these measures are now being felt in high unemployment in developed nations and in volatile currency and capital market conditions in developed and emerging economies alike.

Most CEOs recognise the situation could have been worse. While business thinking is slowly getting back onto an even keel, there are lasting impacts that may colour future actions. Business leaders are emerging with a healthy respect for risk, volatility and flexibility and a different view of the growth imperative.

‘The big learning point we are all looking for is one that has to do with organisational agility’, said Dr. Paul Reynolds, CEO of Telecom Corporation of New Zealand Limited. ‘In response to the economic crisis, most businesses took action appropriate to a more difficult trading environment. But the real trick is how to get the balance right between hunkering down through tough times and investing in a way that will prepare you to make the most of opportunities that begin to materialise, post-recession. That’s the big lesson – getting the balance right and being sufficiently agile to take advantage of chances for growth and expansion.’

The wreckage of 2009 makes clear the implications of getting the short-term and long-term balance right. We believe measures over the past year to adjust costs, realign capital structures and reinvigorate risk practices throughout organisations as the basis for growth herald a new management agenda.

Introduction: Heading towards a growth agenda

I have emphasised repeatedly that Air China benefited from the rapid growth and quantum leaps in development of the past five years. Since 2008, I have changed my tune somewhat; prudent operation and sustainable development are the most important factors for the development of an excellent enterprise. This is a shift from our previous view on accelerating the pace of development.

Kong Dong Chairman, Air China Ltd, China

How did we look at this situation? First we were afraid, scared in many ways, since we were all exposed to a situation we did not fully understand and could not gauge; pessimism went from 0 to 10. It made us think about our businesses, our boards, our teams – this was an emergency situation and we were forced to make some important decisions. As I see it now, I’m neither more optimistic nor more pessimistic than before, my perception has remained the same since the beginning of the year. We have to handle things carefully, delicately…and we have to visualise a recovery soon.

Carlos Fernandez gonzalezChairman and CEo, grupo Modelo, Mexico

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Key Findings

Organisations are limbering upA sizeable majority of CEOs are planning to take out more costs. Companies in the US, Europe and the UK led in cost-cutting over the past 12 months, and they remain more focused on cost cuts in the short-term. Now the momentum is shifting to companies based in Asia: 93% of CEos in China and India and 90% in Korea plan cost efficiencies over the next three years compared with the global average of 78%.

CEOs are striving to keep debt low and liquidity ample, in part because of uncertainty over the capacity of banks to lend when the time for growth comes. Thus, 83% of CEOs expect internally generated cash flow to finance growth, seven percentage points higher than last year. A majority plan to change capital structures as a result of the crisis. ‘We did a lot of work on our balance sheet for the first six months [of 2009]’, said Dean A. Scarborough, President and CEO of US office supplies maker Avery Dennison Corporation. ‘We’re focusing on de-leveraging. We converted some convertible debt to equity earlier this year, and we cut our dividend in July. We’re well-positioned to survive even another downturn. I wouldn’t say we have a fortress balance sheet, but the walls are higher and thicker than they were a year ago.’

There has been a dramatic cull in headcount over the past 12 months. However, while 25% of CEOs are planning more job cuts this year, 39% plan to increase headcount. One area where resources continue to flow is leadership and talent development. Business leaders are aware they will need the right skills in the right places when recovery sets in. ‘What you do in this environment is add to your talent base and reposition your talent to be more suited for the challenges that are ahead,’ Michael I. Roth, Chairman and CEO of US-based advertiser Interpublic Group, told us. ‘Even though we’ve had a nine to 10 percent reduction in terms of staffing, we’ve also had increases to invest in those markets and resources that are necessary to be competitive.’

Global growth contagion, starting in emerging markets This year, 31% of CEOs are ‘very confident’ in achieving revenue growth over the next 12 months, a significant increase from last year (see figure 0.1). Their outlooks partly reflect unfolding macro-economic conditions yet they are also more confident in their companies’ ability to generate revenue than they are in recoveries in either their industries or their economies.

CEOs based in Latin America and Asia are 11 percentage points more likely to be confident about their near-term revenue growth than those in North America and 20 percentage points more confident than their Western European peers. ‘Companies in India may not be as strong today as they were two years ago, but they have emerged out of this downturn in a far better position than companies in the developed world. In terms of resources both human and financial, we are better off vis-à-vis our brethren in the developed world’, said Sunil Duggal, CEO of consumer goods group Dabur India Limited.

0.1

CEO confidence is on the mend

0

10

20

30

40

50

60

% S

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onfid

ent

20102009200820072005 200620042003

12-month revenuegrowth prospects

3-year prospects

Q: How would you assess your level of confidence in prospects for the revenue growth of your company over the next 12 months?

Q: How would you assess your level of confidence in prospects for the revenue growth of your company over the next 3 years? Base: All respondents (2010=1,198; 2009=1,124; 2008=1,150; 2007=1,084, 2005=1,324, 2004=1,386, 2003=989)

Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010

Note: 2006 confidence question was not asked.

3


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There is a strong indication the recession and subsequent recovery may have accelerated trends favouring growth in some emerging markets, particularly as growth returns to emerging markets earlier. ‘Production but also the consumption of products is shifting to Asia and South America. It would have taken longer without this event, but now it will happen more quickly’, said Mikael Mäkinen, President and CEO of Finnish transport services group Cargotec.

Wary of aftershocksIt is natural after a crisis for a heightened state of wariness to set in, at least temporarily: CEOs are more concerned on a broad range of threats to growth this year. They are actively addressing risk assessment and management as a result.

Responses this year signal that risk is becoming a permanent element of the strategic planning process. More CEOs intend to change their risk management process than any other element of their strategy, organisation or business model. And more boards are increasing their engagement with assessing strategic risk than any other item on the boardroom agenda.

Regulation and its discontentsUnprecedented global measures to stabilise the financial system are drawing qualified praise from business leaders. A majority now think businesses and governments can successfully collaborate to mitigate systemic risk.

But government rescue is one thing; regulatory reform is quite another. Thus, while a protracted global recession remains the biggest worry of CEOs, it is closely followed by over-regulation. More CEOs are ‘extremely concerned’ about over-regulation than any other threat to growth. Concerns over protectionist tendencies are also up ten percentage points on last year’s survey (see figure 0.2).

The concerns are present across industries and borders. ‘For the first time in history, we’ve experienced a financial pandemic and need to determine what sorts of firewalls are required,’ Alfredo Sáenz, Second Vicechairman and CEO, Banco Santander told us. ‘But even minor firewalls will necessarily restrict the way financial institutions deploy their resources globally. The point is that protections against systemic risk will also restrict the globalisation of financial flows.’

Our survey this year looks at how CEOs responded to the crisis and what they are doing to position their companies for recoveries. It also reveals where CEOs best believe regulation can become more effective and what they consider the lasting legacies of the global recession.

This crisis brought up another insight about business. It drove us away from the fact that when we do business with other individuals or companies, the existence of tension, negotiation and conflict is natural. But when you live in a world in which secured Swiss derivatives are swapped, and a safe return is sought in paper, then there is no tension but there is also no care for the other individual. That is why, if you look at this financial collapse in a certain way, it is also a blessing, in particular because it breaks up the world of reckless revenue-seeking to leave behind only that which is basic and essential. It is obviously so much easier to build up a structure of investment papers and derivatives, and it takes less time. However, in that scheme the human being is not considered. The basic principle behind money is that it has to do with doing something with another to mutual benefit. Dealing with another is always difficult but it is a natural process.

Eduardo ElsztainPresident, IRSA group, Argentina


0.2

CEOs’ concerns have broadened beyond the economic crisis

0%2010

2009

Protracted global recession*

Over regulation

Decline in concernfrom 2009 – 2010



Lack of stability in capital markets*

Protectionist tendencies of national governments

Inflation

Low-cost competition

Energy costs

Availability of key skills

Climate change

Scarcity of natural resources (e.g. raw materials, water, energy)

Pandemics and other health crises

Security of the supply chain

Inadequacy of basic infrastructure (e.g. electricity, water, transport)

Terrorism

* ‘Protracted global recession’ and ‘Lack of stability in capital markets’ were previously ‘Downturn in major economies’ and ‘disruption of capital markets’, respectively.

Not concerned at all Not very concerned Somewhat concerned Extremely concerned


3 421219 4329 23426

31 18371327 273312

7 3020 4232 16439

33 9302730 173220

39 12371338 112921

37 17311531 233114

30 17331929 193517

37 13331634 35 1615

34 7194032 122530

31 9213832 122331

31 12 65038 26 926

40 26 72640 25 1024

36 18 73935 22 1131

32 14 74735 21 1033

Q: How concerned are you about the following potential threats to your business growth prospects? Base: All respondents (2010=1,198; 2009=1,124)


Rethink

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7PricewaterhouseCoopers

Section 1

Rethink: From crisis to cautious optimism

Confident in companies, tentative on recoveriesCEOs are emerging from deeper cost-cutting than they expected last year. In last year’s survey, conducted as the financial crisis unfolded late in 2008, 26% of CEOs told us they expected headcount reductions over the next 12 months. A year later, close to half of respondents reported they cut jobs and at least 80% of CEOs in each region initiated cost reductions. In North America and Western Europe, close to a quarter of companies divested a business or exited a significant market. It is clear that few considered simply riding out the recession a viable response. ‘The crisis took us to a new place. It was a reset for our business’, said Angela F. Braly, President and CEO of US health insurer WellPoint Inc.

They are now guardedly confident about generating revenue growth in the near term and they are decidedly more confident over a three-year time horizon. Indeed, over that time period, CEOs are about as confident of their revenue prospects as they have ever been in our survey. Of course, this may partly be a reflection of the depths to which demand had sunk.

Higher confidence on growth holds true regardless of where CEOs are based, although geography is strongly correlated with the relative strength of confidence levels. CEOs based in countries where the crisis had the least impact on GDP and where recoveries were already underway by the third quarter of 2009 are naturally the most confident. Nonetheless, confidence increased markedly among CEOs in North America and in Latin America, two regions where most CEOs (except those in Brazil) are expecting a later recovery.

‘We know there’s a lot of pent-up demand for our products from the SME [small- and medium-size enterprise] base and, indeed new customers,’ said Paul Walker, Chief Executive of UK business software maker The Sage Group plc. ‘When confidence returns to the SME community, when the economies pick up, we’ll see software growth come back into the sector. So, we remain very confident.’

The consistently higher confidence suggests CEOs believe companies are strategically positioned to capture competitive gains in their markets ahead of a broad-based improvement in demand. This may be a different future than they expected only two years ago, but their growth strategies appear to bear this out: A clear majority of CEOs are focused on their existing markets and fewer believe new geographical markets or new product development offer better potential for business growth.

There’s been a lot of talk about the new normal. But I think you have to ask the question ‘What was normal before?’ I subscribe to the theory that the economic activity we saw in 2007 and 2008 was overly buoyant – and that drove overly buoyant consumption. The pendulum has now swung in the opposite direction. From a debt-pricing and risk-pricing perspective, I don’t think we will or should go back to where we were in 2007 and 2008. At the same time, I suspect that to some extent, the pendulum has overcorrected. But I don’t think we’re going to go back to the conditions that we saw in 2007 and 2008.

Ken MacKenzieManaging Director and CEo, Amcor, Australia

CEOs are still addressing cost-cutting while they set their companies for take-off in recovery.


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This may further signal a period of heightened competition as companies aim to increase sales at a time of uneven or moderate economic growth. For example, in North America 80% of CEOs are somewhat or very confident of growth over the next 12 months, despite only 67% believing the economy will have recovered by the end of 2010. The same pattern emerges for CEOs in Western Europe, the most pessimistic in our survey (see figure 1.1). The trend is most striking among CEOs in Latin America, the most confident in our survey: 91% have some measure of confidence on revenue growth in the near term, but only 66% anticipate national economic recoveries during that time frame.

1.1

CEOs are confident, despite expectations that recovery will not begin until at least the second half of 2010

0

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100

% E

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LatinAmerica

AfricaMiddleEast

AsiaPacific

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CEEWesternEurope

5 313

2718 13 16

18 18

21

26

21 30 22

36 35

33

24

2930

28

37 38

29 15

2918 31

In 2011

In the second half of 2010

In the first half of 2010

Already recovered

‘Very’ or ‘somewhat confident’ in 12-month revenue growth prospects

Q: When do you expect recovery to set in for your nation’s economy?

Q: How would you assess your level of confidence in prospects for the revenue growth of your company over the next 12 months? Base: 28-442


We will definitely become a more focused organisation as a result of the crisis. Our service operations have gotten sharper, for example. And the crisis also prompted us to sell off some peripheral parts of our business, and that has made us a leaner organisation. So I do think we’re stronger as a result of facing these challenges and preparing ourselves for whatever might happen in the economy. Our people figured out how to achieve higher productivity as a result of some of the challenges they faced and they’re not going to go back to their prior behaviour. They’re going to take advantage of what they’ve learned and carry it forward. So the crisis took us to a new place – it was a reset for our business.

Angela F. BralyPresident and CEo, WellPoint Inc., US

For us, the key to wise foreign investment is good risk management practices. Risk management is now the primary task of state-owned enterprises.

SHEn HetingExecutive Director, President, Metallurgical Corporation of China Ltd, China


When it comes to confidence, size mattersThe highest levels of confidence emerge from CEOs of the largest firms, which we define as revenues of over $10 billion a year. Over the longer term, nearly all large-company CEOs are somewhat or very confident in revenue prospects. They are more likely to be very confident as a group than all CEOs, by 13 percentage points.

CEOs from the largest companies also acted more dramatically during the crisis and they appear to be more actively positioning their portfolios for growth. More undertook cost-cutting measures than CEOs from smaller companies; slightly more are expecting further cost cuts in the near term. They were far more likely to have completed an acquisition or entered a strategic alliance over the past year and to be planning deals and alliances in the coming year.

In emerging economies, optimism comes with uneaseA distinctive split emerged between CEOs based in the G8 developed economies and those based in the other members of the G20, including faster growing China and India. CEOs in the developed economies were far more cautious on near-term revenue prospects, with 23% ‘very confident’ versus 42% of CEOs in newer member G20 nations (see figure 1.2).

1.2

CEOs from G8 nations are less confident and expect a later recovery

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Non-G20 Non-G8 membersof G20

G8

167

2020

31

32

2832

30

29

24

14

In 2011



In 2011

Already recovered or before the end of 2009

‘Very confident’ of 12-month revenue growth prospects


Q: When do you expect recovery to set in for your nation’s economy? Base: All respondents (249-453) n.B. Recovery is defined as stable and steady economic growth. Don’t known/refused not included.


Scaling back our capacity expansion programme, scaling back working capital from inventories, managing the demands for increased credit from distressed distributors – it’s all been pretty demanding. In the event, however, we’ve been able to take some costs out of our system. All in all, we’ve come through pretty well. The real question is: Where is the economy headed? Is it bouncing back? I don’t really see that it is.

graham MackayChief Executive, SABMiller plc, UK

Research efforts and new product development will increasingly be focused on emerging countries. We have made the ability to develop products on the ground central to our marketing organisation. Why restrict innovation to just 20% of the market (i.e. developed countries)?

Bruno LafontChairman and Chief Executive Director, LAFARgE group, France


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CEOs also believe recovery for G8 nations is likely to occur much later than in the new G20 countries and non-G20 countries. This reflects economic reality: In China’s case, for one, output accelerated over the course of 2009; the country is likely to exceed the government’s target of 8% for 2009, the IMF estimates. To compare, the output of developed economies is forecast to decline 3.4% in 2009.1

Yet, CEOs from the newer member G20 economies are also the most aware of threats to business growth prospects. They are more concerned about over-regulation, low-cost competition, currency volatility and energy costs.

We examined just how broadly and deeply different CEOs considered the risks present in the business environment by constructing an ‘Anxiety Index’, which measures their relative levels of concern over 20 potential threats to business growth prospects.2 Chief executives in Western Europe scored the lowest on our Anxiety Index, at 33.47 (out of a theoretical range of 0 to 100), against a global average of 38.89 (see figure 1.3). CEOs in Japan are a very notable exception among the G8. They have the highest Anxiety Index score of CEOs in all major countries at 57.54. Younger companies – those that have been in business fewer than five years – also tended to have a higher Anxiety Index scores.

1.3

CEOs from Western Europe show the lowest level of concern in the ‘Anxiety Index’

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AfricaMiddleEast

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CEEWesternEurope

36.90

33.47

44.73 46.44

34.38 34.12

52.39

Global index:38.89

Q: How concerned are you about the following potential threats to your business growth prospects related to or emerging from the current economic crisis and other threats? Base: All respondents (1,198)


Note: We analysed concerns by creating an index score out of 100 based on responses to 20 potential threats to growth: ‘Extremely concerned’ received a score of 100; ‘Somewhat concerned’ received a score of 50; ‘Not very concerned’ received a score of 25; and ‘Not concerned at all’ received a score of 0.

1 International Monetary Fund, World Economic Outlook (October 2009). 2 The Anxiety Index scores CEO concern levels on 20 threats to business growth prospects, thus allowing us to compare different groupings. We analysed concerns by creating an

index score out of 100: “Extremely concerned” received a score of 100; “Somewhat concerned” received a score of 50; “Not very concerned” received a score of 25; and “Not concerned at all” received a score of 0. This resulted in a global anxiety index of 38.89 which suggests that overall respondents are “somewhat concerned” about potential threats.

When we look at the developing world, such as the Middle East and Southeast Asian economies, for us it is not China or India but countries like Indonesia, Pakistan, Thailand, Vietnam and the Philippines that have grown and are continuing to grow. Even through the crisis they have grown at 5% or 6%.

Phil CoxCEo, International Power plc, UK

Basically, our response to the crisis has focused on the upgrade of procedures.

Pablo IslaDeputy Chairman and CEo, Inditex, Spain


3 International Monetary Fund, World Economic Outlook (October 2009).

These responses suggest CEOs based in developed economies are more comfortable with their current positioning. For example, compared with CEOs in other regions, fewer CEOs in Western Europe and in North America are planning new cost-cutting initiatives or making changes to their long-term leadership development programmes and capital investment plans. The greater level of both confidence and concern for CEOs of companies based in developing nations suggests that they have more room to climb and perhaps at the same time, fewer safeguards to check a fall.

One explanation for the relatively higher levels of concern in emerging economies in Asia Pacific, Latin America and Africa is that some of these CEOs are encountering stresses that may engulf more companies as they shift from a focus on cost-driven restructuring measures to a focus on growth.

Emerging economies also bore the brunt of the drop-off in global capital flows in 2009, triggering currency swings and higher financing costs in some regions. Export-oriented emerging markets faced a sharp decline in overseas demand. World trade was projected by the IMF to fall 11.9% in 2009.3

Thus CEOs in Latin America, Central and Eastern Europe, and Asia are more likely to be concerned about threats centred on globalisation, including exchange rate volatility, protectionism and macro-economic imbalances. The higher anxiety levels outside North America and Europe may also reflect not only different phases of the business cycle, but also differing levels in economic development.

The global economy is now starting a process of recovery, but the greatest challenge will be the way in which this mega-issuance of money and debt will be absorbed, and it is here where I see a very bright warning light, because I look at the situation with Argentine eyes, and we are very well aware of the cost of resolving a crisis by means of the printing of money.


The flow of foreign investment has been substantial and has been targeted at Brazil as one of the best world market options. It can’t be denied that our universe has become very jittery. These funds have not necessarily come to stay. Investors are very agile at seeking the best markets at any specific time, so there could be a migration of these funds as the markets recover. For now, though, the financial world is still in a crisis recovery mode. Although things have become much better, that doesn’t mean it is over.

Claudio Eugênio Stiller galeazziCEo, Pão de Açúcar group, Brazil


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As a sustainable, credible economic recovery is unlikely without a reversal in unemployment rates, headcount expansion plans in the private sector are a key indicator. Our survey shows that while many companies are still downsizing, more will be adding to their workforces (39%) than will be cutting (25%) over the next 12 months (see figure 1.4).

Certainly one of the more difficult actions in the past year was cutting jobs. Close to half of companies in the survey decreased the size of their workforces. Companies based in North America and in Western Europe led, with 69% of US companies and 63% of UK companies decreasing headcount. Utilities proved the most stable, with 21% of companies reporting cuts. Cuts were most prevalent in industrial manufacturing (68%) and auto (80%) companies and in the media/entertainment sector (71%). The latter two sectors are among the least likely to be adding jobs in the coming year (see figures 1.5 and 1.6).

Highly skilled still globally in demandSpecialists remain in demand, and many parts of the world are still struggling to attract and keep talent. Over the long term, businesses may live to regret the drastic headcount reduction they have made during the downturn.

Tigran Nersisyan, President of Russian food and beverage maker Borodino Group, said he spends a significant amount of his time on ‘HR issues’ locally and abroad. ‘We did our best to retain our specialists, who are always in demand. To be honest, just as before the crisis, we still face a shortage of highly trained workers, such as IT specialists, software developers, and experienced marketing staff. Specialists of all kinds are in great demand. In manufacturing the situation is worse still because we are implementing new generation technologies that require highly qualified employees’, he said. ‘We still face major HR issues. I spend about 40 percent of my time on HR policy issues both locally and overseas. It’s impossible to reduce costs or material consumption without new technologies and these new technologies require highly qualified employees who are hard to come by.’

1.4

More CEOs will be adding jobs than cutting them in the coming year

Decrease(77% of those who expect to decrease headcount in next 12 months had already made cuts)

Past 12 months Next 12 months

0%

Stay the same

Increase byless then 5%

Increase by 5-8%

Increase by more than 8%

48

25

22

34

13

20

7

10

9

9

Q: What happened to headcount in your organisation globally over the past 12 months?

Q: What do you expect to happen to headcount in your organisation globally over the next 12 months? Base: All respondents (1,198)


1.5

Where are jobs being added?

0%

Spain 6 3

Germany 14 3 10

Italy 18 11

France 14 5 11

Netherlands 20 7 7

Japan 29 8

Mexico 23 10 3

Russia 17 13 7

Global 20 10 9

US 25 7 7

UK 14 9 19

Australia 30 7 10

Canada 18 15 15

Korea 30 17 3

China & Hong Kong 23 17 13

India 23 13 23

Increase by more than 8%Increase by 5-8%Increase by less than 5%

Brazil 27 7 27

Q: What do you expect to happen to headcount in your organisation globally over the next 12 months? Base: All respondents (30-1,198)


Employment turning the corner


With many companies cutting their graduate and trainee intakes and CEOs becoming increasingly critical of government’s ability to provide a skilled workforce, there is emerging evidence of a growing ‘talent gap’ in a number of regions – where demand for key skills over the coming decade will exceed the available supply. The spectre of demographic shifts and ageing populations may have temporarily slipped from some CEOs’ minds, but it could return to haunt them in future.

African CEOs are the most concerned, but they’ve taken steps to respond. ‘One aspect in which the financial crisis has worked in our favour is that it has created a wider pool

of available talent. In the last two years, we have managed to attract very significant talent from both Europe and North America. These are highly experienced people who bring with them enormous knowledge. And since many of them experienced the banking crisis firsthand, they also understand how to mitigate such events. That has been a major benefit to Equity’, said Dr. James Mwangi, Managing Director and CEO of Equity Bank in Kenya.

Time for an overhaul of HR A majority of CEOs (79%) intend to increase their focus and investment on how they manage people through change, which includes redefining employees’ roles in the organisation. They feel they need to change their strategies for managing talent. The scale of these intended changes suggests that, for whatever reason, existing practices did not support the business when the crisis hit. We believe there are three major human capital failures that were brought to the surface as a result of the downturn:

Existing reward models are broken. Whether as a result of regulatory or public pressures, they are not seen as fit for purpose in many parts of the world. This is not just confined to financial services; we are seeing criticism of reward models across sectors.

CEos were unable to move talent around quickly when the crisis hit. This led to large-scale layoffs to save cash at one extreme, but also left crucial talent gaps at the other. Organisations will have to find more agile ways of deploying and reallocating talent to where it is most needed. Those organisations that underwent drastic headcount reduction now face the costly exercise of rehiring and retraining as demand improves and we head into the upturn.

Employees lack the key skills needed to operate and compete in the new emerging environment. Notable skill gaps include greater risk awareness, market adaptability, change management capability and responding to new customer demands. CEOs in many parts of the world also believe that governments have largely failed to supply a workforce with the right skills. This is likely why 41% of CEOs expect to increase their focus on training and development.

1.6

Who is adding jobs?

Energy 15 15 6

Consumer goods 23 7 8

Pharmaceuticals/life science 25 10 3

Chemicals 24 15

Global 20 910

Retail & distributive wholesale 21 14 5

Insurance 21 4 15

Industrial manufacturing 19 9 13

Engineering & construction 23 15 4

Technology 15 10 17

Business & professionalservices 14 10 21

Banking & capital markets 20 16 12

Transportation & logistics 21 10 7

Utilities 21 5 7

Automotive 22 44

Entertainment & media 23 33

Metals 3 1212

0%





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CEOs have long sought more cooperation among governments to harmonise tax and address other overlapping regulatory burdens that stem from running an international business operation. In this survey – conducted before global climate talks in Copenhagen concluded without a binding agreement on emissions reductions – expectations were high that regulatory coordination would successfully mitigate systemic risks and harmonise new regulations.

CEOs were less certain that the path to smarter regulation involves governments working more closely or in empowering multilateral organisations to act as global regulators (see figure 1.7). It begs the question: Where will effective supranational cooperation on economic and financial policies take place? It is of increasing importance to business leaders. Sixty-five percent said they fear governments will become more protectionist. These concerns are rising even as trade conditions were little affected over the past year. The World Trade Organisation (WTO) in its annual report released in November 2009, while noting slippage on trade policy in most G20 countries, said ‘the world economy is about as open for trade today as it was before the crisis started.’

Most CEOs expect that the G20 group, representing 85% of the global economy, will become the dominant political and economic power. The G20 succeeded the G7 or G8 as the forum for international economic coordination in response to the financial crisis and in recognition of the growing relevance of emerging markets in the world’s economy.

Yet the G20 forum poses challenges for global policy coordination. In recent years, global negotiations have become more difficult as more parties, often with differing perspectives and constituencies, come to the table, as witnessed by the Copenhagen climate negotiations and earlier by the WTO’s Doha trade talk stalemate. Ian Bremmer, President of the US-based Eurasia Group consultancy, anticipates less policy coordination as the G20 replaces the G8: ‘The G20 is not just a bigger coordination problem; it’s not just herding more cats, though that would be more difficult. The G20 is herding cats along with animals that don’t like cats.’

Among government officials, we also found support for greater convergence as well as an acknowledgement of the challenges to get there. ‘It’s probably not realistic to think that regulatory frameworks are going to be identical across countries. It’s probably not productive to even try to achieve that’, said Robert Bhatia, Deputy Minister of Alberta Seniors and Community Supports in Canada. ‘But convergence – meaning moving closer together while allowing for somewhat differing approaches – yes, I think that is a positive. That has to help in terms of facilitating international transactions and trade.’

The thorny problem of global policy coordination

It’s a bit too many Gs [G8, G20]. There is some inflation of such institutions here. Their function is not absolutely clear, whether or not they for example should be a substitute for international institutions that don’t work. It is definitely necessary to include economically strong states into these organisations, even when they do not have a status of market economies, such as China, for example, and non-members of OECD.

Martin TIapa Deputy Minister, Ministry of Trade & Industry, Czech Republic


1.7

Global risks will be contained – but not by multi-laterals

3265

60 38

55 42

39 57

78 19

2868

0%

Government and business efforts will be unableto mitigate key global risks like climate change,

terrorism and financial crises

Regulatory insight will remain primarily theremit of each nation’s own regulators despite

increased co-operation

Governments will become more protectionist

The pressure on natural resources willcontinue to increase

The G20 will be the new dominant economic andpolitical power in the world

Within nations, the gap between rich and poorpeople will increase

Government and business efforts will mitigate key global risks like climate change, terrorism and financial crises

Multi-lateral organisations will increasingly provide oversight on regulatory issues such as in financial services

The world will be more open to free international trade

Efficiency of resource usage will improve

The G8 nations will remain the dominant economic, and political powers in the world

Within nations, the gap between rich and poor people will decrease

Q: Which of the following scenarios do you feel is more likely to occur in the future (more than 3 years)? Base: All respondents (1,198) Respondents chose a scenario from each pair, or the option ‘Don’t know/Refused’.


Of course, global forums such as the WTO and the G20 are not the only outlet for national cooperation on economic policy. Even as the WTO’s talks have broken down, for example, regional trade agreements have risen sharply, accompanying a broader trend of rising intra-regional trade and capital flows before the financial crisis. CEOs expect the trend to continue despite the downturn. ‘Right now I see a lot more trade agreements happening between countries that don’t include the United States’, said Dean A. Scarborough of Avery Dennison Corporation.

Regional trade agreements are largely thought to impede global trade in the long-term. And some issues cannot truly be addressed with regional solutions; problems such as climate change or financial system stability would leak over borders and undercut the desired outcomes of the regulatory cooperation. Yet regional agreements could represent stepping stones towards global coordination and begin the process of harmonisation among neighbouring nations that are likely to have some interests in common.

Reshape

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Section 2

Reshape: The post-crisis environment

Worst fears fail to materialise on regulations… yetRegulation is a perennial concern for CEOs. This year, how business leaders view regulatory issues has to be understood through the lens of ‘what might have been’ at the start of 2009, when the uncertainty which hung over the financial system and by extension, the global economy, was so great. At that time, drastic measures to contain the crisis and preserve national economies were a realistic prospect. Massive bailouts ensued and with them, expectations of radical regulation to prevent another crisis.

The alarmist scenarios of trade barriers and regulatory rewrites largely failed to materialise. Yet there remains a sense that more regulatory change is inevitable. CEOs see little encouraging news on compliance costs. Regulatory burdens on corporations were not addressed during the downturn. In fact, in this year’s survey, more CEOs cited a lack of progress on cutting red tape than a year ago, 67% to 57%. Only 2% of CEOs based in the US said the government has reduced regulations (see figure 2.1). Some governments are listening, at least when it comes to taxes. Our annual measure of the comparative ease of paying taxes in 183 countries found that 45 economies had reduced the tax burden on SMEs, or made it easier for them to pay taxes, in the year through 1 June 2009.4 Yet, few CEOs believe that trend will continue.

2.1

Only 15% of CEOs worldwide believe their government has reduced the regulatory burden

0%

Brazil

Korea

China & Hong Kong

Japan

Italy

Global

Spain

Mexico

Russia

Canada

India

Germany

France

Australia

Netherlands

UK

US

0

2

3

7

7

11

13

30

13

13

13

13

15

37

15

16

27

Q: Thinking about the role of government in the country in which you operate, how much do you agree or disagree with the following statements? % who ‘agree’ or ‘strongly agree’ with the statement, ‘The government has reduced the regulatory burden on corporations’. Base: All respondents (30-1,198)


Note: Respondents who ‘agree’ or ‘strongly agree’.

4 ‘Paying Taxes 2010: The Global Picture’, PricewaterhouseCoopers and the World Bank (2009).

As the process of economic stabilisation unfolded in 2009, we sought to discover what CEOs consider the lasting legacies of the downturn.


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We believe CEOs also worry that regulatory approaches designed to deal with perceived problems in the financial sector will wend their way through the entire economy. ‘There’s a tendency by government to tar every company with the same brush’, said Graham Mackay, Chief Executive of UK brewer SABMiller plc. ‘Certain regulatory reforms useful and necessary for financial companies – new approaches to risk, remuneration, or corporate governance – would clearly be intrusive if applied indiscriminately to business as a whole.’ Other CEOs shared similar concerns about the unintended consequences of regulatory reforms.

Getting closer to consumers Some of the strategic rethinking we uncovered – aside from consideration of varying regional growth rates – is connected with what is happening to consumers. Business leaders appear as split as economists on the lasting impact of the crisis on the consumer but they are changing company strategies to adapt.

Not surprisingly, consumer goods, retailers and wholesalers, media/entertainment and technology companies are the most concerned that a permanent shift is underway (see figure 2.2). Nearly half of CEOs cite a permanent shift in consumer spending and behaviour as a threat to their business growth prospects. The concern is highest among CEOs based in North America, Asia-Pacific and Africa.

Eighty-one percent of CEOs expect to adjust their strategies in response to changing consumer behaviours. Technology and media/entertainment companies are deeply involved in reorienting their businesses to those changing purchasing habits: 46% of media/entertainment companies predict a ‘major change’ in strategy as do 44% of technology companies. Even less cyclical industries such as energy companies and utilities are making those types of changes (see figure 2.3).

2.2

Technology, entertainment, retail and consumer goods companies are likely to be concerned about permanent shifts in consumer behaviour...

0%

Utilities

Retail & distributive wholesale

Entertainment & media

Technology

Consumer goods

Transportation & logistics

Chemicals

Industrial manufacturing

Global

Automotive

Insurance

Energy

Metals

Business & professional services

Pharmaceutical/life sciences

Banking & capital markets

Engineering & construction

26

37

37

38

40

42

44

64

46

48

48

49

52

66

54

55

60

Q: How concerned are you about the following potential threats to your business growth prospects related to or emerging from the current economic crisis? % ‘extremely concerned’ or ‘somewhat concerned’ about ‘permanent shifts in consumer behaviour’. Base: All respondents (33-1,198)


We certainly don’t need more regulation in the media industry overall. In general, markets have to be free. But we’ve also seen, in other industries, what can happen when freedoms are abused or when there is too little regulation. There have to be rules, and these rules must be binding for all players in the market.

Hartmut ostrowskiChairman and CEo, Bertelsmann Ag, germany


2.3

… and they are likely to be changing their strategies in response

0%

Business & professional services69

Energy71

Utilities71

Industrial manufacturing74

Transportation & logistics75

Engineering & construction76

Pharmaceuticals/life sciences78

Retail & distributive wholesale91

Metals79

Automotive80

Global81

Chemicals83

Banking & capital markets83

Entertainment & media94

Technology85

Consumer goods89

Insurance90

Q: In the wake of the economic crisis, to what extent do you anticipate changes to any of the following areas of your company’s strategy, organisation or operating model? Base: All respondents (33-1,198)


Note: Respondents who stated ‘some change’ or ‘a major change’ to their strategy, organisation or operating model in response to changing consumer purchasing behaviours.

‘What we do see is more down-trading to discount economy brands,’ said Graham Mackay of SABMiller plc. ‘But it’s really an extension of a more fundamental dynamic. As markets mature, mainstream, standard-price beers eventually come under threat from premium brands at the top and discounters at the bottom. The middle gets eroded.’

On the other hand, household earnings are expected to rise in emerging economies, fuelling an expansion of middle classes. A slow but steady shift towards more consumption in emerging markets is an opportunity that CEOs are pursuing across segments.

Sensing opportunity in new consumer habitsConsumers are seeking more value, but ‘value’ manifests itself in a variety of ways in consumers’ eyes. The survey shows that 64% of CEOs are sensing a shift in consumers’ preferences to associate with environmentally and socially responsible businesses – consumers perceive value in a company’s reputation. And 60% of CEOs expect consumers will play a more active role in product development in their companies, another dimension of value perceived by consumers and a trend represented by open source computing and social networks. ‘After the crisis, consumers will demand a very high level of quality’, said Pablo Isla, Deputy Chairman and CEO of Spanish fashion retailer Inditex. ‘There are also new communications technologies to keep in touch with consumers, such as blogs, Facebook and so on. Inditex has two million Zara users fans on Facebook, a completely new and powerful communications tool.’

Benetton’s positioning in what we like to call ‘democratic fashion’ is helpful in facing the crisis, however; the consumer on average is spending less and more shrewdly. Spending a lot is less trendy than it has been in the past and consumers prefer to buy greater quantities of products at the same price rather than a single ‘designer’ product.

gerolamo Caccia DominioniCEo, Benetton group SPA, Italy


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2.4

Public trust is down in financial services and automotive, but much less elsewhere

0%


Consumer goods

Technology

Pharmaceuticals/life sciences


Metals

Energy




Global



Automotive

Insurance

Utilities

Chemicals

Significant fall in public trust Slight fall in public trust Slight rise in public trust Significant rise in public trust

26 41335

42 4194

34 6104

17 21017

23 3123

18 4158

20 3116

19 4194

16 4216

18 393

18 6153

9 399

18 18

15 2123

11 3184

7 7142

4 1520

Q: To what extent do you believe the public’s trust in your industry has changed as a result of the economic crisis? Base: All respondents (33-1,198)


Note: Responses of ‘Public trust stayed the same’, ‘Don’t know/Refused’ excluded.


The interest in drawing in consumers at the product development stage is not limited to companies in the technology and consumer goods sector, which have long been in the forefront in collaborative product development initiatives. Financial services CEOs are more likely than their peers to involve consumers in development, perhaps as a result of regulatory initiatives on consumer financial protection in addition to the growing sophistication of online financial products.

Public trust: A concern for the financial and auto sectors Perceptions of a change in public trust in business as a result of the recession are driven by sectoral and regional differences. Globally, only 8% of CEOs believed their industries experienced a ‘significant fall’ in trust. The figure rises to over one-third of banking and capital markets CEOs (see figure 2.4).

The perspectives may come as a surprise to some in Western Europe and North America, where a wave of populist outrage prompted authorities to discourage bonuses in the financial sector, the recipient of significant public funds. An FT/Harris poll of adults in six Western countries shows the recession negatively influenced views of business leaders. On average, 67% said they held a worse opinion of leaders as a result of the downturn.5

Yet most CEOs outside of financial services believe the economic crisis has not changed public perceptions of their industries, despite the broad-based job cuts and other cost-driven measures in 2009. Most business leaders believe that problems of trust are restricted to the banks and countries that experienced the worst banking crises. ‘I agree with the view that the recent behaviour and actions of certain company managements has disillusioned the public’, said Pawan Munjal, MD and CEO of Hero Honda Motors Limited in India. ‘But just as a few rotten apples cannot ruin an entire harvest of apples, a few unethical acts cannot, and should not, tarnish the reputation of an entire industry.’

It would be surprising for CEOs to report a steep drop in public trust if they were based in countries where the downturn was muted. Accordingly, few CEOs based in China and Hong Kong feel there has been a significant decline in trust in their industry – and no CEOs in Canada or Brazil do. ‘In less developed countries, the private sector – and the multinational corporation, specifically – is viewed as a bastion of wealth, power, and influence. Consequently, we are very conscious of public opinion and go to great lengths to protect our reputation and build the trust of the local community’, said Graham Mackay of SABMiller plc. ‘Quite frankly, if there’s any clear erosion of trust, I think it’s directed towards the political establishment.’

5 FT/Harris Interactive Poll (April 2009).


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Executive compensation is a persistent and prominent focus of public distrust. Yet, the furore over soaring executive pay did not register widely. The view that companies can rebuild trust through new remuneration models appears to be held by a minority of CEOs from virtually every country. Overall, less than a third of CEOs who recognised a decline in public trust said they were changing compensation practices in response. Banks and capital markets companies are, not surprisingly, the most likely to be changing compensation practices.

In the US, 44% of CEOs who experienced a decline in trust said they were changing pay practices. They appear to stand somewhat apart from their boards on the contentious subject. A majority of US directors expect the heightened government focus on pay will impact board-level

discussions on compensation for all companies, according to a 2009 poll of 1,007 directors. In the same poll, 60% of directors conceded boards are having trouble controlling CEO compensation levels.6

In general, compensation and workforce practices are areas where CEOs would least like to see any change in regulation. They are concerned that more regulation in this area will limit their ability to attract and keep good people and, in turn, hamper their ability to recover from the effects of the downturn.

As for improving public trust in their industry, far more favour participating in industry initiatives or engaging in dialogue with regulators (see figure 2.5). Overall, the financial services companies are the most active in adopting a variety of strategies to help rebuild trust.

6 ‘What Directors Think’, PwC/Corporate Board Member Magazine (November 2009).

Globally, yes, the public’s trust in the private sector has certainly been shaken. But not so in India. Not a single bank in India went bankrupt and not a single investment house defaulted. So there is a big difference.

Sunil DuggalCEo, Dabur India Limited, India

One of the biggest lessons we have learnt is about risk management. In the past, we believed that it is the things that we ourselves do – or fail to do – that would hurt us most. But now we understand that the environment can also affect us significantly. So we now want to be in a position to shape and influence the wider banking industry. Most of the organisations that failed were brought down not because of toxic assets but because public trust was lost. So we have learnt a valuable lesson about managing the external environment, about thinking macro and acting micro. That’s made Equity Bank a stronger organisation. We are more aware now of the possible repercussions of events out of our control.

Dr. James MwangiMD and CEo, Equity Bank, Kenya


2.5

CEOs who are addressing issues of trust are split on their approaches

51

50

49

37

31

30

0%

63

64

Media relations programme and advertising

Revisions to reporting and engagementwith investor community

Participation in industry initiatives toimprove the sector's reputation

Proactive dialogue with policy-makers and regulators

A systematic approach to measuringand managing reputation

Expansion of your corporate responsibility programme

Engagement with NGOs to improvepractices that affect your reputation

Changing executive compensation practices

Q: Which, if any, of the following activities have you initiated or are you planning to initiate in your own company as a result of the decline in trust? Base: Respondents who stated there has been a slight or significant fall in public trust in their industry (304)



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A year into the crisis, businesses are at a critical juncture in their relationship with government. The broad effects of coordinated monetary and fiscal measures to stimulate growth – and the measured approach to date on regulatory reform and trade policy – have set a foundation for a closer engagement with the public sector.

At the same time, there is an increase in the negative perceptions of CEOs on the success of government intervention regarding the environment, access to natural resources, availability of skills and the regulatory burden. This reflects the ‘regulation paradox’ we encounter each year in the survey: CEOs express the desire for more government leadership and action in certain areas (e.g. climate change and tax harmonisation) while also believing government action is only positive when it helps their business.

In an effort to highlight the gaps – and find where there is promise of a more effective public and private sector engagement – we asked CEOs for their views on a smarter

approach to regulation. We also extended the research through interviews with senior decision-makers in governmental organisations across the world.7

CEOs are more willing than in the past to step up to the challenge. ‘I think there is much that can be done in partnership between business and government’, said Angela F. Braly of WellPoint Inc. They are not waiting for new regulation but increasing involvement to help shape it. Over two-thirds are prioritising cooperation with regulators. Nearly 60% believe smarter regulation will stem from working more closely together (see figure 2.6).

Businesses and regulators cannot expect to agree on everything, yet we did find areas where CEOs acknowledge common goals with more activist regulators:

CEos favour better enforcement over new regulation for financial sector stability, and for social and environmental sustainability. They believe regulators have the leeway to make use of powers they already have and thus that

7 For more from the government perspective, see ‘Government and the global CEO: Setting a smarter course for growth’, PwC Public Sector Research Centre (January 2010).

The regulation paradox: Seeds of a more effective engagement

Some countries may impose protectionist barriers but I don’t think they’ll be very significant. In addition, in Brazil’s case, the appreciation of its currency (the real) may offset possible protectionist barriers.


The public’s disillusionment has moved beyond the banks to the private sector in general, so that governments are now talking about more regulation to stop a similar crisis from ever happening again. But hasty regulation will be bad regulation and my concern is that creativity, innovation, and enterprise will be stifled at a time when they should be encouraged

Paul S. WalshChief Executive, Diageo plc, UK


heightened enforcement would be more effective than systemic change. Only 8% and 12% called for less regulation for financial sector stability and for social and environmental sustainability, respectively.

Antipathy to regulation strengthens where regulation could harm job creation. Business leaders are more clearly opposed to new regulations in innovation, foreign investment and access to capital.

Most oppose new or more regulation on workforce practices, including compensation. Opposition is led by Brazil, where 63% seek less workforce regulation, followed by 52% in the US and 46% in Germany.

2.6

CEOs want regulatory clarity and stability, and to be included in the policy-making process

0%

Place more emphasis on fairly enforcing existing regulations

Work more closely with other nations to harmonise regulations

Ensure regulations are clear and stable

Work more closely with the private sector to maintain competitiveness 59

57

45

39

32

21

15

Focus regulation on outcomes, not process

Make the representation of emergingeconomies in global bodies more equitable

Empower multi-lateral organisations to act as global regulators

Q: In which of the following ways do you believe government could best improve the policy-setting process with regard to smarter business regulation? Base: All respondents (1,198) n.B. Respondents chose up to three of the seven possible options

Note: Responses of ‘Don’t know/refused’ excluded.

It is incumbent on us to engage as much as we possibly can with government and with the civil service. The power sector does not speak with one voice, since it is a collection of individuals, all of whom have got a slightly different agenda. I have some sympathy for government and opposition when they say, ‘What does the industry want me to do here?’ and they get seven different replies.



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Rising government influence over the global business environment in 2009 was marked by the increase in state ownership and control in a whole range of companies. Our survey reflects the change: 14% of companies have government ownership or backing, up from 10% in the last year. Nearly a third of all companies said the government owns a stake in a major player in their industry.

Government’s new reach in 2009 – largely a result of the unprecedented measures to stabilise the financial system – is changing the debate on government ownership in the private sector. Nearly half of CEOs were positive towards government taking an ownership role in times of crisis, including those in North America, whose dissatisfaction with most issues involving government measures to improve business conditions is evident elsewhere in the survey (see figure 2.7). CEOs from two sectors that received considerable support from governments around the world during the crisis – automakers and banks – are among the most appreciative of government ownership to stabilise a crisis.

The relative acceptance of public ownership ends when a crisis fades away. More than two-thirds of CEOs have significant concerns about long-term state involvement in business with important implications for government policies on competition and fair markets. Even those that are experiencing government ownership have negative perceptions over long-term state ownership, although slightly less so.

While CEOs may desire a pull-back from government ownership, popular support appears to be holding in some polls. A GlobeScan/University of Maryland poll in 2009 of

We’ve learned which conditions apply to China and which do not. With regard to this crisis, China is in a relatively advantageous position and I attribute that to China’s monetary policy. But there are also conditions in China that we must pay attention to. China’s economic development relies on exports and all over the world we’re regarded as a manufacturing country. However, the raw material we use is mostly supplied domestically, and the products we produce are sold relatively cheaply. In fact, the products we sell seldom reflect a high technical content or value-added. So in my opinion, China should reduce its volume of exports, but begin to manufacture products of higher quality and higher value-added. That would contribute substantially to China’s economic development. The core issue is how much innovation is contained in your products.


I am unable to say with any certainty how a regime for controlling systemic risk will come about. I do know, however, that this issue has many unanswered questions. In the case of a cross-border institution, when a failure occurs as a result of systemic risk, who pays the bill? The treasury of one country or the other?

Alfredo SáenzSecond Vicechairman and CEo, Banco Santander, Spain

Government ownership: A strategic game-changer


2.7

Not all CEOs agree that government ownership is helpful in times of crisis

0%

88

75

63

78

56

54

65

83

69

69

78

76

54

78

83

72

62

74

69

61

70

50

51

61

34

41

54

40

Government ownership helpsto stabilise an industry

in times of crisis

Government ownership willlead to political interference

in the marketplace

North America Western Europe Asia Pacific Latin America

CEE Middle East Africa Global average

Government ownershipdistorts competition

in an industry

Government ownershipinherently creates a

conflict of interest with its regulatory function

Q: How much do you agree or disagree with the following statements about government ownership? Base: All respondents (28-442)


Note: Respondents who stated ‘agree’ or ‘strongly agree’. Please note small base for Middle East.

8 ‘Wide Dissatisfaction with Capitalism — Twenty Years after Fall of Berlin Wall’, BBC World Service, GlobeScan, University of Maryland Program on International Policy Attitudes (PIPA) (November 2009).

adults in 27 countries found that a majority called for less active government ownership or control in just four of the countries.8 Indeed, given the range of experiences with public ownership in countries where the crisis was more muted – from East Asia to the Middle East and Latin America – state ownership is likely to endure for some time in one form or anther, be it state-owned enterprises, sovereign wealth funds or national oil companies.

And CEOs recognise this. They are shifting strategies to respond to other influences of the government over the economy. ‘Government spending as a percentage of GDP in almost every economy is going up. We’ll adapt to that environment. In fact, we need to look at government as more of a customer’, said Dean A. Scarborough of Avery Dennison Corporation. ‘Our strategy in the past was ’let’s just stay under the radar’, and that’s not doable anymore. We need to be an influence, certainly, so we’re going to step up our involvement in the public sector to influence the outcome in a good way.’

We should work to refine our model of regulation whereby a merits-based review becomes part of the regulatory process and acts, if you like, as a self-managing check over the scale and scope of regulation and whether or not it’s achieving its intended outcomes.

Dr. Paul ReynoldsCEo, Telecom Corporation of new Zealand Limited, new Zealand

Result

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Section 3

Result: Adapting to compete

Short-term cost focus Despite widespread restructurings last year, many businesses remain committed to further cost-cutting. In an indication of the cost pressure they continue to face, 69% of CEOs we surveyed plan cost-reduction initiatives in the next 12 months, compared with the 88% who made cuts over the past year (see figure 3.1).

3.1

Cost-cutting remains agenda item no. 1

Implemented acost-reduction initiative

Have initiated in past 12 months Plan to initiate in coming 12 months

0%

Outsourced a business process or function

Entered into a new strategicalliance or joint venture

‘Insourced’ a previouslyoutsourced business

process or function

Divested or spun-off majority interest in a business or

exited a significant market

Completed a cross-border merger or acquisition

Ended an existing strategic alliance or joint venture

88

69

35

34

35

46

23

17

20

30

18

14

17

20

Q: Which, if any, of the following restructuring activities have you initiated in the past 12 months?

Q: Which, if any, of the following restructuring activities do you plan to initiate in the coming 12 months? Base: All respondents (1,198)


Note: Responses of ‘Don’t know/Refused’ and ‘None of the above’ excluded.

Last year’s survey found CEOs taking action to survive swift drops in demand without cutting deeply into investments vital to long-term competitiveness. Conditions are improved but the cost pressure remains.

Business leaders are also bracing for continued volatility. ‘Under the current situation, demand changes every day, and enterprises need to adapt rapidly. In fact, wide fluctuations in market conditions have become very normal and we must be ready to respond to a whole range of possible conditions: low market prices, strong demand, or no demand’, Huang Tianwen, President of China-based Sinosteel Corporation, told us.

Price fluctuations are impacting recovery scenarios for some. ‘What makes this recovery atypical is the degree of volatility in commodity pricing. We are seeing demand come back. But demand might not fully recover because of the degree of volatility that still exists’, said Andrew Ferrier, CEO of New Zealand dairy exporter Fonterra Co-operative Group.

In this environment, CEOs are less likely to explore new markets. And an unrelenting focus on cash flow is likely to force CEOs to make hard decisions about where they allocate resources for the long-term and how they account for risks – including climate change – along the way.

We decided, going into this recession, that while we didn’t have a huge amount of debt compared to many people in the UK, we had to be very focused on cash generation and reducing our debt. We’ve done that over the last 15-18 months, and opted not to pursue an acquisition strategy during this difficult time, given the risk it would bring to the business.

Paul WalkerChief Executive, The Sage group plc, UK


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Organic growth for now The largest proportion of CEOs (38%) is positioning companies for better penetration of their existing markets. Such an approach is expected when capital and resources are scarce and business managers have fewer margins for error (see figure 3.2). However, the focus on organic growth captured in the survey this year fits a trend that predates the economic crisis. The concentration on existing markets has risen steadily since 23% of CEOs in 2007 cited it as the main vehicle for growth. It naturally follows that in each year since 2007, consistently fewer CEOs see more potential for growth in new geographic markets.

3.2

Existing markets remain the focus for growth

15

14

11

0%

20

38Better penetration of existing markets

New product development

New geographic markets

Mergers and acquisitions

New joint ventures and/orstrategic alliances

Q: Which one of the following potential opportunities for business growth do you see as the main opportunity to grow your business in the next 12 months? Base: All respondents (1,198)


Note: Responses of ‘Don’t know/Refused’ excluded.

An existing-markets focus is overwhelmingly favoured by the largest companies; they are also the most likely to have operations in different geographies already. CEOs in Asia-Pacific and Africa are also more likely to take this view than those in Western countries. An organic growth outlook for businesses in developing nations is not surprising; their home markets are growing more quickly and many were less impacted by the downturn. In fact, if anything, it appears to have accelerated longer-term growth strategies for some. ‘The recession in the Western economies has prompted Indian IT companies to re-examine their global delivery model and address weaknesses. And as a result, a number of these companies have moved up the value chain’, said Pawan Munjal of Hero Honda.

Cash is still kingCompanies are relying heavily on internally generated cash flow to finance growth. This is little changed from a year ago. With new customers proving difficult to acquire, businesses can be expected to increasingly focus on cash flows from the existing customer base. Nevertheless, the heightened focus on costs and cash preservation likely signals continued pricing pressure on suppliers and vendors in the near term. ‘People are thinking more about cash flow. If it lasts for 10 years, I have to take equipment for 10 years. This means that I do not spend 100% of my capital needs now; it means that I spend 50% now and 50% in 10 years’ time. This is affecting the strategy on all of our products’, said Mikael Mäkinen of Cargotec.

I am more worried about the growing public borrowing and its serious consequences. With all its seriousness, the crisis has shown us some positive lessons which we should take advantage of. The situation was worse in 2007, when there was heavy borrowing and a bubble with no clear end. This crisis should teach us to be more demanding of ourselves.


I am concerned about the significant rally in the valuation of several businesses and corporations when this whole situation has not been completely absorbed or eliminated; this could be generating another kind of economic bubble. Such high valuations do not match the reality of some countries’ markets and economies. I think we might be seeing what we want to see – a kind of illusion. Moreover, the bad credit or toxic investments that have caused so much damage in the financial systems haven’t been assimilated or eliminated yet. So there is no real alignment between what we see and what we feel. One of the main things that will emerge is how our people, clients, consumers and the families of our co-workers feel. Because they are living the reality.’



Slightly fewer expect to tap the bond markets, with 24% planning to issue debt v. 28% last year. It may suggest that the record-pace of issuance in 2009 in part served to satisfy immediate financing needs over longer term growth-related plans. It is also apparent that business leaders are reluctant to ‘over-finance’ in the near term. This is perhaps as much a measure of lessons learned as it is conservatism in the face of a period of slack demand.

CEOs are striving to keep debt low and liquidity cushions ample: 61% are expecting to change capital structures as a result of the crisis. ‘To the extent that changes in the capital markets dictate a more conservative approach to one’s balance sheets, I would say that every business in the world has been affected’, Andrew Ferrier of Fonterra Co-operative Group told us. ‘We plan to run our gearing at a significantly lower level than we have traditionally. That is not to say that we ran a high-risk strategy previously. But we are feeling as a result of market uncertainties that it is better to be more conservative going forward.’

Sourcing investments from cash generated by operations is certainly not a new approach, but a renewed emphasis could have profound implications for some suppliers as it impacts the purchasing and capital investing cycle, which

3.3

R&D and advertising are lower on the list of investment priorities

0%

Initiatives to realise cost efficiencies

No change

R&D and new product innovation

Strategic technology infrastructure or applications

Capital investments

Advertising and brand-building

Organic growth programmes

Leadership and talent development

Significant decrease in investment Moderate decrease Moderate increase Significant increase in investment

3741

21473

3

6

6

6

18461

1

16431

16

17

27

28

32

32412

12 7 42353

16 8 39323

Q: How do you plan to change your long-term investment decisions in the following areas over the next 3 years as a result of the economic crisis? Base: All respondents (1,198)



has accelerated in recent years. ‘Business development is often funded not out of profits but through investments using debt or equity finance. And while it may take 10–12 years to pay back long-term investments, technology often becomes obsolete after three years. So investment in new technology may actually hinder profitability. So a question arises: How can companies shift away from development financed by investment to development financed by profit generation?’ noted Tigran Nersisyan of Borodino Group.

Positioning for the long-term In a sign of the times, when CEOs were asked about their investment plans over the next three years – ‘initiatives to realise cost efficiencies’, cited by 78% of CEOs, was the most frequently identified target for a moderate or significant increase in investment. Investments that are commonly considered vital for long-term growth, such as R&D and new product development, and advertising and brand-building, lagged far behind. And capital investments were last on the list, with just 40% of CEOs planning to increase cap-ex spending (see figure 3.3). This is true even in capital-intensive industries, such as industrial manufacturing and automotive, which may reflect overcapacity relative to demand forecasts that have been revised downwards.


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Different strategies for growth emerge at the industry level. Banks and capital markets businesses, for example, say they are more likely than others to focus on organic growth; they are also among the least likely to consider new geographic markets as the best opportunity for growth, which partly reflects the regulatory barriers they face when they enter new geographies. This perhaps explains why banks are most likely to be investing in advertising and brand-building, in order to rebuild reputation and strengthen the franchises they already have.

On the other hand, industrial manufacturers are now among the least likely to be investing in initiatives to realise cost efficiencies. Many of them have been living under intense

margin pressures for years, as their downstream customers shopped for cheaper suppliers and as raw materials prices fluctuated. Cost efficiencies are a fact of life. Rather, these CEOs are now more likely than most of their peers to be increasing investments in R&D.

Risk and strategy go hand in handBusiness leaders are making changes ahead of what many expect may become a more restrictive regulatory environment once recovery sets in. Clearly, CEOs are more risk aware: 41% anticipate a ‘major change’ to their risk management approach (see figure 3.4).

3.4

More CEOs are planning a ‘a major change’ to risk management than other elements of their strategy, organisation or operating model

0%

Approach to managing risk

Investment decisions

Strategies for managing talent

Organisational structure (including M&A)

Focus on corporate reputation and rebuilding trust

Capital structure

Engagement with your board of directors

No change Some change A major change

43 4115

18 3348

295021

23 2749

Responding to changing consumer purchasing behaviours 17 2655

33 2343

37 1744

42 1641

Q: In the wake of the economic crisis, to what extent do you anticipate changes to any of the following areas of your company’s strategy, organisation or operating model? Base: All respondents (1,198)



The bank has a social purpose which is that of financing the system’s growth. Ultimately, that became irrelevant. What became relevant was what mechanisms one could put in place to try to earn more.


When the market changes, you cannot simply follow normal procedures or maintain outmoded strategies, management structures, or market positioning. New conditions dictate a quick response.

HUAng TianwenPresident, Sinosteel Corporation, China


Risk is not only moving up the corporate agenda in response to the crisis, but is seen as something that needs to be embraced by the organisation as a whole. That one in five say their board of directors is ‘significantly more engaged’ in assessing strategic risk indicates that for many, approaches to risk are moving beyond controls-based risk management to corporate strategy and financial management.

‘We did not realise that the damage was going to be so great. What inspires me most is that an enterprise like ours cannot go through such difficulties by its own efforts or by

3.5

Board agendas are getting busier – with assessing strategic risks at the top

0%

Assessing strategic risks

No change

Ensuring regulatory compliance

Focusing on the long-term key performance indicators

Assessing the leadership pipeline for succession planning

Enforcing high ethical standards

Constructively engaging the management team on strategy

Overseeing financial health

Significantly less engaged Less engaged More engaged Significantly more engaged

3 2051

23432

3

4

5

1744

1

1

15451

1 19

25

30

34

34

4132

1 17 44334

2 13 40

43

376

Aligning executive compensation with long-term performance 2 12355

1

Q: With respect to your board, to what extent is your board of directors modifying their behaviour as a result of the economic crisis? Base: All respondents (1,198)



using a simple form of protection. Therefore, we are paying more attention to our internal controls and management mechanisms’, said Kong Dong, Chairman of Air China Ltd.

The higher level of involvement by directors is not merely taking place in the financial sector, where risk standards are actively changing, but across all sectors. Directors are more focused on internal as well as external concerns, raising their engagement on long-term key performance indicators and succession planning as well as compliance and strategic risk (see figure 3.5).

Currently, the M&A market is very sluggish and there are few opportunities around. However, given the current climate, transactions that can represent the first step towards strong future development are not out of the question. Crucially, we have a clear strategy and know how to draw out and develop added value.


I believe that we will emerge stronger and with more influence. We have capital and a well-established business. So I believe that there will be clear opportunities for us.



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Risk management is a process for allOf those CEOs who said they plan some change or significant change to their approach to managing risk – and 89% are – slightly more said they plan to integrate risk management capabilities into business units than change other processes related to risk. They are assigning risk functions to business heads, a process that aligns risk with strategic business planning. ‘We learned that we must further strengthen our internal controls and risk management capabilities. The financial crisis has made it clear that all enterprises must be better prepared against future risks’, said Huang Tianwen of Sinosteel Corporation.

No clear consensus emerges on what CEOs consider the first steps to take as they reinvigorate and reinforce risk management in their organisations. Their focus ranges from changing reward structures to improving risk-related information analysis. They are also collectively managing risks with supply chain partners and working with other partners – regulators, customers, NGOs and even competitors – to prevent and prepare systemic risks.9

3.6

More companies raised their investment in climate change during the crisis than reduced

0%

Don’t know

52%45%

3%

Yes

No

Did your company have a climate change strategy one year ago?

If yes, how did the crisis impact your climate-change strategy?

7

13

17

Reduced investment in climate change strategy

Don’t know/refused

Delayed investment in climate change strategy

Raised investment in climate change strategy

Had no effect on investment 61

2

Q: Thinking back one year ago, did your company have a strategy to respond to the challenges posed by climate change? Base: All respondents (1,198)

Q: To what extent has the recession affected your company’s investment in its climate change strategy? Base: Respondents who had climate change strategy in place one year ago (623)


Companies in sectors generally more reliant on the global trading system are raising their engagement to address risks in the supply chain and exposure to systemic or low- probability, high-impact events. Auto industry businesses are nearly unanimous in responding to potential supply chain issues, and planning further collaboration with partners to collectively manage risks. They are also the most concerned over financially stressed suppliers, at 76%, compared with a global average of 47%.

Setting the pace on climate changeThe recession restricted corporate investment in many areas – but climate change wasn’t one of them. Indeed, climate change raised its position on the CEO agenda despite the severity of the recession. More CEOs said they were concerned about climate change this year than last. And among the slim majority of CEOs who had climate change strategies in place before the crisis, more CEOs maintained or even increased investment in their climate strategies than reined in spending (see figure 3.6).

9 ‘Exploring Emerging Risks’, PricewaterhouseCoopers (January 2009).


Corporate responses to climate change are linked to government policy and regulatory requirements: 61% of CEOs were preparing for the impacts of climate-change initiatives such as emissions trading or carbon taxes (see figure 3.7). This despite significant uncertainties over the direction and speed of climate policy. Only 25% of CEOs agree in the survey – conducted prior to the Copenhagen climate change summit in December – that the government has clear and consistent long-term environmental policies. In this regard, then, the failure to produce a binding global agreement on climate change at Copenhagen was a setback for CEOs.

Yet Copenhagen may not have affected CEOs’ plans that dramatically. Many leaders are moving ahead despite both financial pressures and the regulatory uncertainty. ‘I think that in 2009 sustainability has been less front-of-mind. But I have no doubt that as we move through the current global economic crisis and we start to get back to the ’new normal’, sustainability issues will become front-of-mind again for the consumer’, said Ken MacKenzie, Managing Director and CEO of Australian packaging group Amcor.

3.7

Three out of five CEOs are preparing for the impacts of climate-change initiatives such as emissions trading


Yes

No 35%

61%

4%

Q: Is your company preparing for the impacts of climate-change initiatives in the coming 12 months? Base: All respondents (1,198)


Note: Climate-change initiatives defined to include cap-and-trade or other carbon pricing policies, energy efficiency standards, industry or capital markets reporting requirements, climate-change adaptation strategies, and other efforts to move towards a low-carbon economy.

It also makes good business sense to find innovative solutions to this issue [sustainability] and to create ‘green growth’ long-term. We see a growing public interest in ‘green topics’ and sustainability, which is catered for by our books, magazines, TV programmes and also in our printing business. Overall we will further explore the market for green products and services.

Hartmut ostrowskiChairman and CEo, Bertelsmann Ag, germany

CEOs have to recognise that a lot of their long-term planning will need to be tossed out of the window. There has to be a lot more volatility built into your modelling; your ability to do your three- and five-year planning in that kind of an environment is diminished. You have to be much more tactical.

Ian BremmerPresident, Eurasia group, US


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In a separate survey of executives with responsibility over sustainability practices, two-thirds of large companies believe their efforts, including publishing reports on environmental performance, go beyond legal requirements.10

So many leaders are beginning to craft a business case for sustainability. The output from the World Economic Forum’s Task Force on Low Carbon Prosperity, a global multi-stakeholder group, set the tone for proactive business leaders to begin that process independently and in collaboration with the public sector.11 ‘We have always been interested in moving in this direction. But even for us, even in this, it is important to get ourselves up to date and therefore perhaps to become less, I would say, provocative/challenging and a little more specific’, Gerolamo Caccia Dominioni, CEO of Italian fashion retailer Benetton Group SPA, told us.

Several business drivers underpin the business benefits of a climate-change strategy. More CEOs expect climate change will lead to new products and services for their companies than those who worry that climate change entails a significant expense. And CEOs are attuned to the shift in public perceptions of climate change and corporate responsibility: Nearly two-thirds of CEOs in Western Europe, Asia-Pacific and Latin America expect a reputational advantage from their climate strategies (see figure 3.8). ‘As a consumer marketing company, our biggest concern is that consumers will choose not to buy our brands because we have not done the right thing,’ said Paul S. Walsh of UK-based beverage company Diageo plc. ‘But having done the right thing, it’s invigorating to see how that can ignite the imagination of our employees and the communities in which we operate. It also affords us the opportunity to get out ahead of regulation.’

3.8

Reputational advantage is the leading driver of responses to climate-change initiatives

0%

Climate-change initiatives willslow growth in my industry

My company will benefit fromgovernment funds or financial

incentives for ‘green’investments

Compliance with climate-changeinitiatives will be a significant

expense for my company

Our response to climate-changeinitiatives will provide a reputational advantage for my company among

key stakeholders, includingemployees


CEE Middle East Africa

My company will need to reduce itsemissions significantly

Climate-change initiatives will lead tosignificant new product and service

opportunities for my company

51

64

64

66

43

57

70

42

55

45

52

30

39

25

26

38

37

40

22

29

43

32

34

37

38

24

36

30

33

29

39

23

15

25

23

30

20

19

41

11

21

13

Global average

Q: How much you agree or disagree with the following statements about the potential impacts of climate-change initiatives? Base: All respondents (28-442)


Note: Respondents who stated ‘agree’ or ‘strongly agree’.

10 ‘Appetite for change: Global business perspectives on tax and regulation for a low carbon economy’, PricewaterhouseCoopers (January 2010). 11 For more information on the Task Force on Low Carbon Prosperity, for which PricewaterhouseCoopers served as project advisor, visit: www.weforum.org/en/initiatives/ghg/index.htm


12 ‘The China Greentech Report 2009’, PricewaterhouseCoopers (September 2009).

One driver that fails to register broadly – that is, outside China – is government financial incentives and other measures to ‘go green’. China has been the major beneficiary of the UN’s Clean Development Mechanism carbon offset programme and investments in low-carbon technology over the past decade have accelerated as part of the government’s stimulus spending directed at infrastructure. These investments are seeding what one report estimates could develop into a US$500 billion to US$1 trillion greentech market by 2013.12

Energy companies and utilities are more likely to have climate strategies in place and lead all sectors in preparing for climate initiatives in the near term. The two industries are already heavily regulated on emissions in many nations.

We do take full legal, economic, and social responsibility to protect the environment, which – as a by-product – also benefits our public reputation. Compared to the US, Europe, Japan and other industrialised countries, China still has a long way to go in terms of environmental protection. Only through relevant laws and regulations established by government, and voluntary implementation by enterprises of those laws and regulations, will the goal of environmental protection be achieved.


I would like to see greater focus by CEOs on long-term environmental issues. We must not be slaves of the immediate. Otherwise, we will destroy the future.


At 53% and 55%, respectively, they are also more concerned about the cost of climate-related regulation than the global average of 34%, and acknowledge the potential for slower industry growth as a result. Equally, however, they are more convinced that climate-related initiatives will lead to substantial new products and services (62% and 67%, respectively) than the global average (47%).

Interestingly, of all business leaders, those in energy and utilities are among the most likely to believe that efficiencies will improve natural resource usage over the next three years. The sentiment is not shared by some of their greatest customers: CEOs in automotive and transportation and logistics are among the most likely to believe the opposite.


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In the middle of a financial crisis and billion-dollar bank bailouts, it may come as a surprise that an inability to finance growth does not score among the top-ten concerns for CEOs globally. The relatively low concern on financing, at least in the short term, is consistent with surveys from central banks in the US, the Eurozone and Japan, which revealed persistently weak demand for commercial loans through the first nine months of 2009. Chinese banks were a notable exception among the G20 economies. Bank lending surged as the Chinese government pushed stimulus measures largely through the banking sector.

Fund-raising pressures typically lag a recovery and capital spending remains subdued in most economies. Many companies also rely on their own resources: 83% of business leaders in the survey expect internally generated

cash flow to help finance growth plans. Moreover, many companies have completed a round of cost cuts and moved to refinance at low interest rates.

Post-crisis bank lending capacity is untestedLook ahead, however, and it is clear that financing will become a more pressing issue. If liquidity was ‘last year’s problem’, the survey responses suggest that access to capital is a strong contender for ‘next year’s problem’ – meaning it will rise in importance as growth spreads in 2010 and beyond, and companies seek more funds to invest. Over half of CEOs expect access to bank financing and credit will become more difficult after the recovery sets in. Forty-five percent anticipate more difficult access to capital through the debt markets, despite the healthy rebound in the bond market in 2009 (see

3.9

Access to capital is expected to become more difficult

0%

Compliance and reporting to meet capital markets requirements

Same as before the crisis

Access to capital from alternative investors (e.g. private equity or sovereign wealth funds)

Access to capital through equity markets

Access to capital through debt markets

Access to bank financing and credit

Significantly easier Moderately easier Moderately more difficult Significantly more difficult

10 15392

16 10415

17 7384

19 5324

20 7

28

26

29

35

32303

Q: For each of the following, how do you expect conditions to change after economic recovery sets in, compared with before the economic crisis? Base: All respondents (1,198)



Access to capital is a looming problem


figure 3.9). ‘Which ever way you look at it, the cost of capital has definitely gone up’, said Paul S. Walsh of Diageo plc. ‘So we continue to try to level out our investment profile.’

Expectations that access to capital will become more difficult stretch across industries and company sizes. Yet it is expected to weigh more heavily on smaller companies. ‘First of all, for our SME customers, there are not many options around finance. The old days of long-term leases, HP on assets, is something either they’re in or have done or would find more difficult, so a lot of them are restricted to the more traditional markets of banking’, said Paul Walker of The Sage Group plc. ‘Even some of the venture capital availability for SMEs has probably disappeared, so I don’t think they have the same options as the larger corporates when looking for finance.’

Smaller companies in the survey are showing higher levels of concern over financially stressed suppliers than their peers. Unlike the largest companies, they are more reliant on banks for financing.

Challenge comes when businesses start to growSeveral factors point to tighter capital conditions. Chief among these is the prospect for higher interest rates as inflation rises. As always with interest rate cycles, it is a question of when. CEOs anticipating a 2011 recovery in their industries are the most concerned over an inability to finance growth at an acceptable cost of capital.

Other concerns surrounding capital costs are likely related to global market conditions. Cross-border capital flows, including foreign direct investment, lending, and sales and

purchases of securities, dropped over 80% in 2008, leading to volatility in exchange rates and higher costs of capital in some emerging economies last year.13 Capital markets stability remains a highly ranked concern for CEOs, although not at the level seen last year.

In developed economies, weak demand for lending throughout much of 2009 has left the post-crisis capacity of banking sectors to fuel and support growth largely untested. Banks are expected to remain risk-averse as regulations evolve and as they repair their balance sheets and the weak securitisation market continues to limit their own sources for loan funds.

‘There is a lot of concentration on lower risk, higher strength organisations. Unfortunately, what happens in that environment is that the people who don’t need the money are the ones who have the money easily available to them’, said Michael I. Roth of Interpublic Group.

The challenge will come when businesses start to grow and need more people and more capital. The implications for companies with weaker market positions or those that are more reliant on banks for credit are clear. Banks will seek to lend to customers they regard as a long-term and valuable partner. ‘As far as our customers are concerned, capital is available, but not to everybody. That’s a huge difference now’, said Mikael Mäkinen of Cargotec. ‘Most of our ‘key risk’ customers do get capital. However, a few years back, you could see all kinds of companies popping up like mushrooms and starting up businesses – that capital is not available today. That should mean it is a better foundation. The sources of capital that our customers go to are being much more selective than before. That is a huge change.’

13 ‘Global capital markets: Entering a new era’, McKinsey Quarterly (September 2009).


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When we analysed responses related to threats to growth, engagement with boards and regulation, we found that two sets of CEOs emerged from the others. Each represents different attitudes towards achieving success in the post-crisis environment, spanning geography, industry and size. Both engaged in similar levels of restructuring activities last year, and both also share similar outlooks on revenue growth prospects. Yet, the two clusters indicate that despite universal relief that the worst of the crisis appears over, not everyone is approaching recovery in the same way. Here’s a look at where they differ on key points in our survey.

Consolidators: Drawing on existing networks The first cluster, representing roughly a third of business leaders in our survey, we call ‘Consolidators’ for their conservatism: they are making few changes to their strategies and operations. Consolidators come from all regions of the world, although two-thirds are based in North America and Europe. The majority are established businesses with a long tenure. They are far less concerned about threats to business growth than the Adaptors, but they exhibit greater antipathy to regulation in general, particularly regulation surrounding foreign investment and innovation.

Consolidators are focused on strengthening their existing market position. They are also more likely to be planning to strike strategic alliances and to close acquisitions than other CEOs.

Consolidators investment plans are restrained. Most Consolidators will rely on internally-generated cash flow to finance growth. And fewer plan to raise or change spending on technology, R&D or capital investments. (See figure 3.10.)

Consolidators expect fewer organisational changes. More Consolidators cut workforces during the recession. While the two groups were equally likely to have implemented cost-cuts in the past year, Consolidators are less likely to be planning cuts going forward. Consolidators are less likely to outsource and far less likely to collaborate with external specialists suggesting a more traditional internal organisational approach.

Adaptors: Concerns prompt radical changes to the business modelThe other set of CEOs, whom we call the ‘Adaptors’, is taking bold steps in many directions, to adjust to a new environment.

Roughly one-sixth of business leaders fall into this category. Adaptors come from all regions although 63% are based in emerging markets in Asia-Pacific and Latin America. They are a mix of both small and large businesses. They are far more concerned over a range of threats to growth: they are twice as concerned as Consolidators on their ability to finance growth, exchange-rate volatility and energy costs. They are nearly three times as concerned as Consolidators over supply chain security. These concerns are leading them to take decisive actions to adapt to the new environment and mitigate risks to their business. Adaptors are aggressively changing operating models and investment strategies and they are not done with restructuring. More are planning cost-cuts in the near-term than Consolidators.

Adaptors are reorienting strategies. (See figure 3.11.) More are planning investments in technology, R&D and capital investments. They are investing in people, including in training and leadership programmes.

3.10

Adapters are more aggressively investing in a range of areas

Initiatives to realize costefficiencies

Consolidators Adaptors

0%

Leadership and talentdevelopment


Strategic technologyinfrastructure or applications

R&D and new productinnovation

Advertising andbrand-building

Capital investments

72

84

61

80

60

76

52

76

37

54

35

55

74

49

Q: How do you plan to change your long-term investment decisions in the following areas over the next 3 years as result of the economic crisis? Base: All respondents (361, 215)


Note: Respondents who stated ‘moderate’ or ‘significant increase in investment’.

Post-crisis models emerge


Adaptors are highly risk-aware – and are pro-actively addressing many of their concerns. They are more likely to be pushing risk management practices out into all business operations. And they are taking steps to prepare for systemic risks.

Our viewIt is too early to tell whether one strategy will be more successful than the other. In fact, in our view, Consolidators and Adaptors represent archetypal strategies that could both lead to lasting success, building on particular organisational strengths and environmental factors. Yet, clearly risks remain for both.

Consolidators feel they are now on the right track for recovery, that the recession helped them ‘cut the fat’ and do what they do better, but otherwise, they are not looking to

change drastically. For this set, too much change may be a distraction from the market or departure from their business model. Or, they may have the luxury to be more conservative as they wait for their competition to thin out. They will concentrate on finding ways to keep existing customers in a challenging environment and alliances and joint ventures could be a smart way to offer customers more.

However, there is a risk that new players, with innovative products, emerge and that Consolidators may not have the agility to adjust their operating model. They are cutting fewer costs and investing relatively less in R&D, talent and organic growth programmes than Adaptors.

Regulatory simplicity and fairness are also a cornerstone priority for Consolidators. They are aware that regulation shapes growth strategies – regulations impacting innovation and foreign investment are particularly anathema. But are they equally attuned to potential change to regulatory frameworks as recoveries set in? They are less likely than Adaptors to believe government can improve policy by more engagement with business.

Adaptors are undergoing significant change to create a new basis for sustainable growth over the long-term. This may signify a belief that as the market shakes out, this is the time to come forward and seize opportunity. For Adaptors, this includes being more innovative about climate change, more collaborative about regulation, and more agile. They want to be ready to compete in the emerging environment, and potentially steal the lead over other organisations that might be taking a ‘business as usual’ approach. These businesses will be more resilient to change over the long-term and are creating a talent pipeline for the long-term, despite having had to make some short-term headcount reductions.

Yet there is no real comfort zone for Adaptors. Some are acting from a position of strength; some may be under duress. Each may be as likely to boom as to bust. While most expect to finance growth from internal sources, their wider ranging investment strategies may require additional, alternative sources of finance in a lending environment that most CEOs expect is about to become more difficult. They recognise that capital is likely to be in short supply in the coming months and they may find it difficult to execute their strategy for that reason. There might also be a danger that they are changing too rapidly, before it is really clear what the new environment will look like.

3.11

Adaptors are more likely to be changing their strategy, organisation or operating model


Consolidators Adaptors

0%

Responding to changingconsumer purchasing

behaviours



Organisational structure(including M&A)

Focus on corporate reputationand rebuilding trust

Capital structure

76

92

75

92

74

89

69

87

57

75

53

68

44

69

85

66

Engagement with yourboard of directors

Q: In the wake of the economic crisis, to what extent do you anticipate changes to any of the following areas of your company’s strategy, organisation or operating model? Base: All respondents (361, 215)


Note: Respondents who stated ‘some change’ or ‘a major change’.

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Final thoughts

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Lessons learned and applied to 2010

One of the more consistent regrets was not acting fast enough when conditions turned. ‘If I was to do it all over again, I would be more pessimistic. All the stuff I had to do, for example in cost savings, I would do at the beginning. Be more radical’, reads one fairly typical comment. The idea that some businesses or entire industries can be immune from or little changed by conditions appears to have taken some time to defeat. It is not easy to appreciate how a bankruptcy on Wall Street can so swiftly sap liquidity throughout the banking system.

Judging by the number of times certain words or phrases were used, if there had been signposts warning of the turmoil on the road ahead and how to prepare, they would have read, in order: ‘Evaluate risk’, ‘Cost is king’, ‘Cash is king’, ‘Be transparent’, ‘Greed can be hazardous’, ‘Don’t Trust anymore’, ‘Be flexible’ and helpfully, from a CEO in Uruguay, ‘Always have a Plan B’.

CEOs are attempting to strengthen the resilience of their organisations and yet remain attuned to the opportunities emerging. It is a difficult balancing act, as attested by the apparent contradictions they conveyed. Lessons learned from the financial crisis revolve chiefly around gaining more control over these newly appreciated vulnerabilities, internal and external.

Long-term planning is critical – but be prepared to change at a moment’s noticeThe importance of strategy, clearly understood by customers, employees and business partners, cannot be underestimated in a crisis. Yet the speed with which market conditions change today can render planning models moot. The key is embedding agility throughout an organisation to enable rapid reaction to changing trends while maintaining a strategic positioning. ‘Flexibility is the most important weapon’, said a CEO in Portugal. ‘Flexibility is the key to smoothing the effects of the crisis and is needed in production, costs and commercial actions.’

Stay disciplined on costs, but incur them to innovateThe vigorous cost-cutting measures adopted over the past year exposed inefficiencies throughout organisations, and CEOs remain highly focused on costs. Yet this inward concentration needs to be balanced with a long-term focus on what it will take to remain competitive. ‘I’ve discovered that you can’t actually reduce your costs dramatically and

Lessons learned from the financial crisis revolve chiefly around gaining more control over these newly appreciated vulnerabilities, internal and external.

Throughout this report, we have described how business leaders responded to the challenges brought by the recession and how they are positioning their companies for the future. We also asked CEOs to describe, anonymously and in their own words, what lessons they are taking away from the crisis.


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still remain profitable’, said a UK-based CEO. With so much of the world’s growth expectations placed on demand from emerging markets, more heated competition is likely, with domestic competitors buoyed by relative financial strength to compete with Western multinationals. Innovation and ew product development are cornerstones for future positioning. One CEO said the crisis taught his company not to outsource on innovation. ‘Don’t wait on another crisis for change’, said a CEO in industrial manufacturing. ‘It’s with innovation than we can be strong.’

Encourage banks to lend – but assume they won’tCompanies are paying far closer attention to their own cash management and leverage, and have learned not to rely on a single source for financing. ‘It had never been a big factor before, but borrowing levels have over-extended companies financially, leaving them vulnerable to the whim of the banks’, said a UK CEO. The reality is that this is the time to deepen the relationship with the bank. While a majority of CEOs expect to finance growth from internal cash, 40% also expect to turn to banks. Financing costs are rising as banks become more selective; they will favour companies whose strategy and long-term outlook give them confidence.

Manage risk in good times and badThe importance of good risk management practices was by far the most frequently cited ‘lesson learned’. CEOs fault their own approaches to risk as much as risk practices in the financial sector. ‘The regulations are fine, but it’s the companies that should evaluate the risks better’, concluded a CEO in financial services. ‘We thought the party of 2008 would continue forever. We need to take our risk management seriously’, said a Czech CEO. Effective risk management cannot be done on the fly. The time to manage risks and address complacency is when conditions are improving. ‘Risk management should be a long term systematic strategy. Not just implemented at the time of crisis’, commented a CEO in China. The alternative has proven daunting. ‘Managing risk in a changed environment is a big challenge’, noted a Belgian CEO.

CEOs were very candid about the lessons they learned during this crisis. We could not possibly include all of the helpful lessons in this document, so we put many on our website.

We welcome you to visit www.pwc.com/ceosurvey to read CEOs’ views, in their own words, on how they intend to avoid another crisis, on the tough choices they are making to enforce cost discipline while preserving long-term investments, on the lasting legacies of the crisis on regulation and public trust, and how they are reshaping their strategies to compete in a post-crisis environment.

We thought the party of 2008 would continue forever. We need to take our risk management seriously.


This is the 13th Annual PricewaterhouseCoopers’ Global CEO Survey and we have followed the same methodology as we used the previous years to ensure we are fairly representing the emerging economies of the world. We have conducted interviews in 52 countries worldwide, and varied the number of interviews in line with their GDP, measured at market exchange rates, in 2006.

Research methodology and key contacts

In total, we conducted 1,198 interviews with CEOs in 52 countries between 24th August and 16th November 2009. By region, 442 interviews were conducted in Western Europe, 289 in Asia Pacific, 167 in Latin America, 139 in North America (39 in Canada), 93 in Eastern Europe and 68 in the Middle East & Africa.

The interviews were spread across a significant range of industries. Further details, by region and industry, are available on request. The interviews were mainly conducted by telephone, with the exception of Japan, where a postal survey was administered and Africa, where most of the interviews were conducted face to face. All the interviews were conducted in confidence and on an unattributable basis. The lower threshold for inclusion in the top 30 countries was companies with more than 100 employees or revenues of more than $10 million. This is raised to 500 employees or revenues of more than $50 million in the top 10 countries.

37% of the companies had revenues in excess of $1 billion, and a further 38% had revenues of $100 million to $1 billion. The remaining 21% had revenues of less than $100 million. Company ownership is recorded as private for 50% of all the companies, with the remaining 47% listed on at least one stock exchange.

To better appreciate what is underpinning the CEOs’ outlook for growth we also conducted in-depth interviews with 27 CEOs from five continents over the fourth quarter of

2009. Their insights cover a wide range of topics, from prospects for recovery to new dynamics of post-crisis environment, balancing growth with risk management and lessons learnt. Their interviews are quoted in this report, and more extensive extracts can be found in the CEO Story supplement. The full interviews and a selection of video bites are available on the dedicated website www.pwc.com/gx/en/ceo-survey/perspectives.html.

PricewaterhouseCoopers’ extensive network of experts and specialists has provided its input into the analysis of the survey. Our experts span many countries and industries.

Note: Not all figures add up to 100% due to rounding of percentages and to the exclusion of ‘neither/nor’ and ‘don’t know’ responses.

For further information on the survey content, please contact: Sophie Lambin, Director of Global Thought Leadership +44 20 7213 3160 [email protected]

For media enquiries, please contact: Mike Davies, Director of Global Communications +44 20 7804 2378 [email protected]

For enquiries about the research methodology, please contact: Claire Styles, Thought Leadership Research Manager +44 20 7804 0115 [email protected]


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Re-thinking and Re-shaping the business environment: Government and the Global CEO (January 2010)

This publication assesses the changing relationship between government and business as the world emerges from crisis and sets out on the road to recovery. The research carried out for the PricewatehouseCoopers‘ 13th Annual Global CEO Survey is extended and deepened by including a selection of interviews with senior decision-makers in governmental organisations across the world to understand better the implications for government policy of the views of CEOs as we emerge from troubled times.

Appetite for change: Global business perspectives on tax and regulation for a low carbon economy (January 2010)

A global study which explores the views of the business community on environmental issues and perceptions of the current environmental tax and regulation regimes. The survey comprises almost 700 interviews worldwide, covering 15 countries. The paper is intended to help inform the dialogue between national governments and international institutions on tax policy in this arena and to ensure that the perspective of business is well represented and understood.

Biodiversity and business risk: (January 2010)

Biodiversity and business riskA Global Risks Network briefing

World Economic Forum January 2010

A briefing paper for participants engaged in biodiversity related discussions at the World Economic Forum Davos-Klosters Annual Meeting

Prepared by PricewaterhouseCoopers for the World Economic Forum

Recently, the broad systemic implications of biodiversity loss and ecosystem degradation linking to resource management, climate change and population growth have been more explicitly articulated. This briefing paper explores both specific and broader systemic effects and the associated business risks.

Low carbon economy index (December 2009)

pwc

Low Carbon Economy IndexDecember 2009

This publication examines climate change issues and the challenges facing the world economy as it works to reduce carbon emissions. The index looks at the period from 2000 to 2050, and an intermediate timeframe to 2020.

The India competitiveness review 2009 (November 2009)

TheIndia Competitiveness Review 2009

Thierry Geiger, World Economic Forum

Sushant Palakurthi Rao, World Economic Forum

In collaboration with

Confederation of Indian Industry


This paper shares advance findings of PwC’s 13th Annual Global CEO Survey for the Indian chief executives. The analysis suggests that the Indian CEOs remain optimistic despite the global economic crisis. Underlying this confidence is their belief that the country’s economy is well on its way to recovery, with nearly two-thirds expecting recovery by the middle of 2010.

Rebuilding the global economy: Rebalance, Connectedness, Sustainability (November 2009)

Rebuilding the Global EconomyRebalance l Connectedness l Sustainability

This survey of business leaders in the APEC region explores the impact of the financial crisis and the role of APEC in rebuilding the global economy going forward, with particular emphasis on the themes of rebalancing, connectedness, and sustainability.

Further readingThese publications can all be found on www.pwc.com/researchandinsights


Managing tomorrow’s people: How the downturn will change the future of work (September 2009)

Pay and promotion freezes, changes to pension schemes, cuts in recruitment and slashed training budgets have eroded the trust between some employers and their employees. This

paper uses scenario planning to map how the global economic crisis will impact the widely accepted shortage of talent predicted for tomorrow’s world.

Exploring emerging risks: (January 2009)

Managing known risks

Exploringemergingrisks

Extending Enterprise Risk Management (ERM) to address emerging risks

Extending Enterprise Risk Management (ERM) to address emerging risks: This paper looks at how organisations identify, assess, and manage risks, what techniques they are using as the basis for determining response strategies that align with their strategy and risk appetite and tolerance.

PricewaterhouseCoopers’ 12th Annual Global CEO Survey (January 2009)

Fool proof plans

Futureproofplans

12th Annual Global CEO SurveyRedefining success

This survey sets out to further explore the pessimism that prevailed across all geographic regions, business sectors and levels of economic development, painting a picture of how CEOs were navigating the time of extreme economic uncertainty while working to achieve enduring success.


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The following individuals and groups in PricewaterhouseCoopers and elsewhere contributed to the production of this report.

Acknowledgements

Editorial teamEmily Church Sophie Lambin Larry Yu

Editorial boardCristina Ampil Mike Davies Nick Jones Christopher Michaelson Elizabeth Montgomery Oriana Pound Deepali Sussman Leyla Yildirim

Advisory boardHans Borghouts Tom Craren Dan DiFilippo Moira Elms Glen Peters David Phillips Tony Poulter Michael Rendell Mark Schofield Jeremy Scott

Publishing and Project managementAngela Lang Irina Ruseva Suzanne Snowden Alina Stefan Claire Styles

Online contentVhanya Barba Lee Connett Tracy Fulham Tim Kau

Design and layoutStudioec4

Research and data analysisThe research was coordinated by the PricewaterhouseCoopers International Survey Unit, located in Belfast, Northern Ireland.

pwc.com/ceosurveyPricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

© 2010 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” and “PwC” refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL). Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

Printed on FSC 100% recycled material, supporting responsible use of forest resources. Produced at a mill that is certified to the ISO14001 environmental management. This product has been awarded the NAPM 100% Recycled Mark.

100%

ResultLighting the way

RethinkVision

Reshape Visibility

13th Annual Global CEO Survey Setting a smarter course for growthVisual story

2 13th Annual Global CEO Survey – Visual story

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In this supplement, we present an extended set of figures used to inform our analysis. While some of these appear in the body of the report, many do not. Taken together, they provide additional information and offer a visual complement to our narrative.

The visual story should be read in conjunction with the main report of the PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 also available at www.pwc.com/ceosurvey

Note: Not all figures add up to 100% due to rounding of percentages and to the exclusion of ‘neither/nor’ and ‘don’t know’ responses.

† This symbol indicates the figure also appears in the main report.


Contents


The talent agenda remains vital as hiring returns 9

Shifting views on the complicated relationship with government 13

The impact of the crisis on the business environment – capital, consumers and public trust 18

The sustainability agenda 22

Setting a smarter course for growth 24


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4


1†


0

10

20

30

40

50

60

% S

tatin

g ve

ry c

onfid

ent

20102009200820072005 200620042003


3-year prospects





2†


0

20

40

60

80

100%

Eco

nom

ic r

ecov

ery

exp

ecte

d

LatinAmerica

AfricaMiddleEast

AsiaPacific

NorthAmerica

CEEWesternEurope

5 313

2718 13 16

18 18

21

26

21 30 22

36 35

33

24

2930

28

37 38

29 15

2918 31

In 2011



Already recovered


Q: When do you expect recovery to set in for your nation’s economy?

Q: How would you assess your level of confidence in prospects for the revenue growth of your company over the next 12 months? Base: 28-442


On the whole, CEO confidence has risen from the depths experienced a year ago. They are now guardedly confident about generating revenue growth in the near term and they are decidedly more confident over a three-year time horizon. Geography helps drive confidence, as many companies expect growth from faster-growing emerging markets. Yet, CEOs this year are wary of a wider range of threats to their growth prospects.


3

Expectations of regional growth vary by CEOs’ headquarters

CEOs are headquartered in this region

Latin America

CEE

Middle East

Africa

Asia Pacific

Western Europe

North America

% expecting regional growthHQ: % expecting regional growthHQ: % expecting regional growthHQ: % expecting regional growthHQ:

% expecting regional growthHQ: % expecting regional growthHQ: % expecting regional growthHQ: % expecting regional growthHQ:

North America

63

50

42

44

14

60

33

Latin America

CEE

Middle East

Africa

Asia Pacific

Western Europe

North America

Western Europe

50

49

42

31

41

43

11

Latin America

CEE

Middle East

Africa

Asia Pacific

Western Europe

North America

Middle East

50

61

71

54

20

72

50

Latin America

CEE

Middle East

Africa

Asia Pacific

Western Europe

North America

Eastern Europe

62

62

40

60

56

40

33

Latin America

CEE

Middle East

Africa

Asia Pacific

Western Europe

North America

Latin America

86

65

77

80

67

25

100

Latin America

CEE

Middle East

Africa

Asia Pacific

Western Europe

North America

Africa

64

63

58

76

40

67

87

Latin America

CEE

Middle East

Africa

Asia Pacific

Western Europe

North America

Asia

91

84

80

72

75

60

78

Latin America

CEE

Middle East

Africa

Asia Pacific

Western Europe)

North America

Australasia

69

52

80

50

33

50

33

Q: In the next 12 months, in each of these regions are you expecting your business to grow? Base: All respondents North America (14-139), Western Europe (60-412), Asia Pacific (25-250), Latin America (12-150), CEE (3-86), Middle East (2-25), Africa (2-39). Base of companies headquartered in Australasia too small for inclusion.



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4†


0%2010

2009

Protracted global recession*

Over regulation




Lack of stability in capital markets*

Protectionist tendencies of national governments

Inflation


Energy costs


Climate change

Scarcity of natural resources (e.g. raw materials, water, energy)



Inadequacy of basic infrastructure (e.g. electricity, water, transport)

Terrorism




3 421219 4329 23426

31 18371327 273312

7 3020 4232 16439

33 9302730 173220

39 12371338 112921

37 17311531 233114

30 17331929 193517

37 13331634 35 1615

34 7194032 122530

31 9213832 122331

31 12 65038 26 926

40 26 72640 25 1024

36 18 73935 22 1131

32 14 74735 21 1033




6†

CEOs from Western Europe show the lowest level of concern in the ‘Anxiety Index’

0

10

20

30

40

50

60

Anx

iety

Ind

ex

LatinAmerica

AfricaMiddleEast

AsiaPacific

NorthAmerica

CEEWesternEurope

36.90

33.47

44.73 46.44

34.38 34.12

52.39

Global index:38.89

Q: How concerned are you about the following potential threats to your business growth prospects related to or emerging from the current economic crisis and other threats? Base: All respondents (1,198)


Note: We analysed concerns by creating an index score out of 100 based on responses to 20 potential threats to growth: ‘Extremely concerned’ received a score of 100; ‘Somewhat concerned’ received a score of 50; ‘Not very concerned’ received a score of 25; and ‘Not concerned at all’ received a score of 0.

5†

Global risks will be contained – but not by multi-laterals

3265

60 38

55 42

39 57

78 19

2868

0%

Government and business efforts will be unableto mitigate key global risks like climate change,

terrorism and financial crises



Governments will become more protectionist

The pressure on natural resources willcontinue to increase

The G20 will be the new dominant economic andpolitical power in the world

Within nations, the gap between rich and poorpeople will increase

Government and business efforts will mitigate key global risks like climate change, terrorism and financial crises

Multi-lateral organisations will increasingly provide oversight on regulatory issues such as in financial services



The G8 nations will remain the dominant economic, and political powers in the world

Within nations, the gap between rich and poor people will decrease

Q: Which of the following scenarios do you feel is more likely to occur in the future (more than 3 years)? Base: All respondents (1,198) Respondents chose a scenario from each pair, or the option ‘Don’t know/Refused’.



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7

CEOs in Asia Pacific, Latin America and Africa are decidedly more concerned about a range of potential threats to growth than their peers from other regtions

North America (139)

Western Europe (442)

Asia Pacific (289)

Latin America (167)

CEE (93)

Middle East (28)

Africa (40)

Protracted global recession 59 60 77 62 65 57 70

Over regulation 63 55 63 75 46 46 70

Lack of stability in capital markets 53 62 66 44 55 39 63

Exchange rate volatility 54 47 74 60 62 39 75

Macroeconomic imbalances (e.g. trade or fiscal) 50 52 54 61 59 46 65

Protectionist tendencies of national governments 50 39 54 70 45 32 53

Permanent shift in consumer spending and behaviours 56 44 55 41 45 46 55

Financially stressed suppliers 36 50 49 46 49 43 33

Inflation 43 31 48 45 37 50 68

Inability to finance growth 28 41 42 43 43 29 53

Low-cost competition 45 52 66 53 45 54 58

Energy costs 43 48 63 63 40 32 80

Availability of key skills 39 43 58 57 54 64 80

Climate change 22 36 44 51 16 32 48

Scarcity of natural resources (e.g. raw materials, water, energy) 19 27 53 51 11 29 48

Pandemics and other health crises 33 24 53 41 23 39 43

Security of the supply chain 29 26 44 48 23 43 38

Inadequacy of basic infrastructure (e.g. electricity, water, transport) 14 21 35 65 35 36 78

Terrorism 27 23 38 43 16 54 33

Loss of biodiversity (e.g. soil degradation, fisheries collapse) 14 18 34 53 11 36 45

0-10% higher than global average >10% higher than global average

Q: How concerned are you about the following potential threats to your business growth prospects related to or emerging from the current economic crisis?

Q: How concerned are you about the following other potential threats to your business growth prospects? Base: All respondents (base in brackets) Please note small base for Middle East


Note: Respondents who stated ‘extremely’ or ‘somewhat concerned’.


9†


0%

Spain 6 3

Germany 14 3 10

Italy 18 11

France 14 5 11

Netherlands 20 7 7

Japan 29 8

Mexico 23 10 3

Russia 17 13 7

Global 20 10 9

US 25 7 7

UK 14 9 19

Australia 30 7 10

Canada 18 15 15

Korea 30 17 3


India 23 13 23


Brazil 27 7 27



8†

More CEOs will be adding jobs than cutting them in the coming year

Decrease(77% of those who expect to decrease headcount in next 12 months had already made cuts)

Past 12 months Next 12 months

0%

Stay the same

Increase byless then 5%

Increase by 5-8%


48

25

22

34

13

20

7

10

9

9

Q: What happened to headcount in your organisation globally over the past 12 months?

Q: What do you expect to happen to headcount in your organisation globally over the next 12 months? Base: All respondents (1,198)


The talent agenda remains vital as hiring returnsWhile many companies are still downsizing, more will be adding to their workforces than will be cutting over the next 12 months. CEOs signalled intentions to increase investment in talent, particularly in change management and training programmes.


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10†

Who is adding jobs?

Energy 15 15 6



Chemicals 24 15

Global 20 910


Insurance 21 4 15



Technology 15 10 17




Utilities 21 5 7

Automotive 22 44


Metals 3 1212

0%




11

Managing people through change is the top item on the talent agenda

0%

Managing people through change (e.g. redefining roles in organisation)


Flexible working environments

Remuneration levels

Global mobility, including staff travel or international secondments

Collaborations with networks of external specialists

Staff morale and employee engagement programmes

Training and development programmes

No change Changing somewhat Changing to a large extent Changing significantly

20 26 1538

27 133623

24

38

39

26 1534

443 14

18 7

1

0

1

1

134

16 6 23540

15 6 2

1

3443

Pension and healthcare arrangements 10 42858

Q: Regarding your people strategy, to what extent will you change your approaches to the following areas, as a consequence of the economic crisis? Base: All respondents (1,198)



12

Top talent priorities, by industry

0%

Managing people though change (e.g. redefining roles in organisation)

Training and development programmes

64 Metals

71 Utilities

73 Retail & distributive wholesale

74 Energy

76 Business & professional services

76 Industrial manufacturing

78 Consumer goods

79 Global

79 Engineering & construction

80 Chemicals

81 Transportation & logistics

83 Pharmaceuticals

82 Metals

64 Utilities

77 Retail & distributive wholesale

71 Energy

74 Business & professional services

74 Industrial manufacturing

75 Consumer goods

77 Global

80 Engineering & construction

83 Chemicals

76 Transportation & logistics

82 Automotive

85 Pharmaceuticals

Automotive90



Insurance77

Insurance73



Technology78

Technology71

Q: Regarding your people strategy, to what extent will you change your approaches to the following areas, as a consequence of the economic crisis? Base: All respondents (33-194)


Note: Respondents who stated ‘changing somewhat’, ‘changing to a large extent’ or ‘changing significantly’.


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Shifting views on the complicated relationship with government CEOs have consistently voiced concerns about over regulation in our surveys and few CEOs this year believe the regulatory burden is lessening. Yet, their unease is particularly noteworthy this year not only because expectations of regulatory reforms are heightened in the aftermath of the global crisis, but also because many CEOs voiced optimism about the outlook for businesses and governments to successfully mitigate systemic risk. They have differing beliefs about how to make regulation smarter.

13

Prospects for regulatory cooperation

0%

Regulatory cooperation will help successfully mitigate systemicrisks such as another economic crisis or climate change

National regulators will give more authority toglobal or regional bodies

New regulations will largely be harmonised because ofcooperation among governments

Disagree strongly Disagree Agree Agree strongly

641

31 67 31

5

3 13

22

53 12

Q: How much do you agree or disagree with each of the following statements about anticipated regulatory cooperation among national governments on new regulations? Base: All respondents (1,198)

Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Note: Responses of ‘Neither/nor’ and ‘Don’t know/refused excluded’.


14†


0%

Brazil

Korea

China & Hong Kong

Japan

Italy

Global

Spain

Mexico

Russia

Canada

India

Germany

France

Australia

Netherlands

UK

US

0

2

3

7

7

11

13

30

13

13

13

13

15

37

15

16

27

Q: Thinking about the role of Government in the country in which you operate, how much do you agree or disagree with the following statements? % who ‘agree’ or ‘strongly agree’ with the statement, ‘The government has reduced the regulatory burden on corporations’. Base: All respondents (30-1,198)

Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Note: Respondents who ‘agree’ or ‘strongly agree’.


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15

A majority of CEOs are looking for governments to drive global tax and regulatory frameworks

0%

The government should drive convergence of global tax and regulatory frameworks

The government is changing its tax rules and practices to raise more tax from business

The government is taking adequate steps to improve the country’s infrastructure (e.g. electricity, water supply, transport)

The government is working to improve health care access at lower cost

The government has clear and consistent long-term environmental policies

The government helps companies secure access to natural resources (e.g. raw materials, water, energy)

The government has been effective in helping create a skilled workforce

The government has reduced the regulatory burden on corporations


8 42 1414

24 18298

14 73325

32 42614

35 42120

33 11816

36 21721

34 21433

Q: How much do you agree or disagree with the following statements about the role of Government in the country in which you operate? Base: All respondents (1,198)


Note: Responses of ‘Don’t know/refused’ and ‘Neither/nor’ excluded.

16†

CEOs want regulatory clarity and stability, and to be included in the policy-making process

0%

Place more emphasis on fairly enforcing existing regulations

Work more closely with other nations to harmonise regulations

Ensure regulations are clear and stable

Work more closely with the private sector to maintain competitiveness 59

57

45

39

32

21

15

Focus regulation on outcomes, not process

Make the representation of emergingeconomies in global bodies more equitable

Empower multi-lateral organisations to act as global regulators

Q: In which of the following ways do you believe government could best improve the policy-setting process with regard to smarter business regulation? Base: All respondents (1,198) N.B. Respondents chose up to three of the seven possible options



17

A majority of CEOs want less or no change to regulation covering access to capital and foreign investment – but more regulation or better enforcement to maintain financial sector stability

0%

Financial sector stability

Access to affordable capital

25

More regulation Better enforcement of existing regulation

A different kind of regulation

Access to foreigninvestment opportunities

Less regulation No change

32 21 8 13

14 18 15 2426

9 14 3213 29

Q: Through what approach would you like to see regulation address each of the following areas? Base: All respondents (1,198)



18

CEOs would like to see more intellectual property protections and fewer regulatory barriers to innovation

0%

Innovation and competitiveness

Safeguarding intellectual property

12




16 19 32 18

26 31 11 227




19

Increased regulatory protection of the environment and consumers is more supported by CEOs than regulations covering workplace practices

0%

Social and environmentalsustainability

Protecting the interests ofconsumers and the public

25



Workforce practices,including compensation


27 21 12 13

20 29 16 2112

8 16 3518 21




20†

Not all CEOs agree that government ownership is helpful in times of crisis

0%

88

75

63

78

56

54

65

83

69

69

78

76

54

78

83

72

62

74

69

61

70

50

51

61

34

41

54

40

Government ownership helpsto stabilise an industry

in times of crisis

Government ownership willlead to political interference

in the marketplace


CEE Middle East Africa Global average

Government ownershipdistorts competition

in an industry

Government ownershipinherently creates a

conflict of interest with its regulatory function

Q: How much do you agree or disagree with the following statements about Government ownership? Base: All respondents (28-442)


Note: Respondents who stated ‘agree’ or ‘strongly agree’. Please note small base for Middle East.


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The impact of the crisis on the business environment – capital, consumers and public trustThe crisis is expected to leave a lasting impact on the business environment, even beyond regulatory changes. Access to capital, consumer behaviours and public trust are three areas that are reshaping CEOs’ strategies.

21†


0%

Compliance and reporting to meet capital markets requirements


Access to capital from alternative investors (e.g. private equity or sovereign wealth funds)





10 15392

16 10415

17 7384

19 5324

20 7

28

26

29

35

32303





22†


0%

Utilities



Technology

Consumer goods


Chemicals


Global

Automotive

Insurance

Energy

Metals





26

37

37

38

40

42

44

64

46

48

48

49

52

66

54

55

60



23†

… and they are likely to be changing their strategies in response

0%


Energy71

Utilities71






Metals79

Automotive80

Global81

Chemicals83



Technology85

Consumer goods89

Insurance90



Note: Respondents who stated ‘some change’ or ‘a major change’ to their strategy, organisation or operating model in response to changing consumer purchasing behaviours.

24

How are long-term consumer behaviours changing?

0%

Consumers will place a higher emphasis on familiar brands

Consumers will play a more active rolein product and service development

Consumers will spend less and save more

Consumers will place a higher emphasis on a company's environmentaland corporate responsibility practices before making a purchase

64

63

60

54

36

1

2

Consumers will place a higher emphasis on thecountry of origin for the products they buy

None of the above

Don't know/refused

Q: In which of the following ways do you believe long-term consumer behaviours will change? Base: All respondents (1,198)



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25†


0%


Consumer goods

Technology



Metals

Energy




Global



Automotive

Insurance

Utilities

Chemicals


26 41335

42 4194

34 6104

17 21017

23 3123

18 4158

20 3116

19 4194

16 4216

18 393

18 6153

9 399

18 18

15 2123

11 3184

7 7142

4 1520


Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Note: Responses of ‘Public trust stayed the same’, ‘Don’t know/Refused’ excluded.

26†

CEOs who are addressing issues of trust are split on their approaches

51

50

49

37

31

30

63

64

0%

Media relations programme and advertising

Revisions to reporting and engagement with investor community

Participation in industry initiatives to improve the sector's reputation

Proactive dialogue with policy-makers and regulators

A systematic approach to measuring and managing reputation

Expansion of your corporate responsibility programme

Engagement with NGOs to improve practices that affect your reputation

Changing executive compensation practices

Q: Which, if any, of the following activities have you initiated or are you planning to initiate in your own company as a result of the decline in trust? Base: Respondents who stated there has been a slight or significant fall in public trust in their industry (304)



The sustainability agendaThe recession restricted corporate investment in many areas – but climate change wasn’t one of them. CEOs are beginning to make the business case for addressing the challenges associated with sustainability.

27†


0%

Don’t know

52%45%

3%

Yes

No



7

13

17






2




28†

Three out of five CEOs are preparing for the impacts of climate-change initiatives such as emissions trading


Yes

No 35%

61%

4%

Q: Is your company preparing for the impacts of climate-change initiatives in the coming 12 months? Base: All respondents (1,198)


Note: Climate-change initiatives defined to include cap-and-trade or other carbon pricing policies, energy efficiency standards, industry or capital markets reporting requirements, climate-change adaptation strategies, and other efforts to move towards a low-carbon economy.


pwc.com/ceosurvey

29†

Reputational advantage is the leading driver of responses to climate change initiatives

0%

Climate-change initiatives willslow growth in my industry

My company will benefit fromgovernment funds or financial

incentives for ‘green’investments

Compliance with climate-changeinitiatives will be a significant

expense for my company

Our response to climate-changeinitiatives will provide a reputational advantage for my company among

key stakeholders, includingemployees


CEE Middle East Africa

My company will need to reduce itsemissions significantly

Climate-change initiatives will lead tosignificant new product and service

opportunities for my company

51

64

64

66

43

57

70

42

55

45

52

30

39

25

26

38

37

40

22

29

43

32

34

37

38

24

36

30

33

29

39

23

15

25

23

30

20

19

41

11

21

13

Global average

Q: How much you agree or disagree with the following statements about the potential impacts of climate-change initiatives? Base: All respondents (28-442)


Note: Respondents who stated ‘agree’ or ‘strongly agree’.


Setting a smarter course for growthWhile remaining vigilant on cost structure, CEOs are also reshaping their businesses to position for recovery by addressing their risk management processes, focusing on organic markets and investing in leadership development.

30†

Cost-cutting remains agenda item no. 1

Implemented acost-reduction initiative


0%

Outsourced a business process or function



process or function





88

69

35

34

35

46

23

17

20

30

18

14

17

20

Q: Which, if any, of the following restructuring activities have you initiated in the past 12 months?

Q: Which, if any, of the following restructuring activities do you plan to initiate in the coming 12 months? Base: All respondents (1,198)


Note: Responses of ‘Don’t know/Refused’ and ‘None of the above’ excluded.


pwc.com/ceosurvey

31†


0%






Capital structure



43 4115

18 3348

295021

23 2749

Responding to changing consumer purchasing behaviours 17 2655

33 2343

37 1744

42 1641




32†

Board agendas are getting busier – with assessing strategic risks at the top

0%

Assessing strategic risks

No change

Ensuring regulatory compliance

Focusing on the long-term key performance indicators

Assessing the leadership pipeline for succession planning

Enforcing high ethical standards

Constructively engaging the management team on strategy

Overseeing financial health

Significantly less engaged Less engaged More engaged Significantly more engaged

3 2051

23432

3

4

5

1744

1

1

15451

1 19

25

30

34

34

4132

1 17 44334

2 13 40

43

376

Aligning executive compensation with long-term performance 2 12355

1

Q: With respect to your board, to what extent is your board of directors modifying their behaviour as a result of the economic crisis? Base: All respondents (1,198)




33†


15

14

11

0%

20









34

Internal cash flow dominates financing plans

0%

Equity markets

The debt market

Bank lending

Internally generated cash flow 83

40

24

17

15

15

10

Private equity or venture capital

Divestiture (sale) of existing assets

Domestic government sources

3

2Don't know/refused

Sovereign wealth funds

Q: How do you expect to finance this growth? Base: : All respondents (1,198)


Note: Multiple responses allowed.

35†


0%


No change



Capital investments





3741

21473

3

6

6

6

18461

1

16431

16

17

27

28

32

32412

12 7 42353

16 8 39323







100%

ResultTransformation

RethinkAssumptions

Reshape Business Models

13th Annual Global CEO Survey Setting a smarter course for growthIn-depth CEO story

pwc.com/ceosurvey


Section 1 Rethink: From crisis to cautious optimism 5

Section 2 Reshape: The post-crisis environment 11

Section 3 Result: Adapting to compete 19

Final thoughts: Lessons learned and applied to 2010 27

CEOs interviewed: Company profiles 29

Contents


2 13th Annual Global CEO Survey – In-depth CEO story

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Much of the strategic and operational actions business leaders are taking in response to the new environment is captured in the main report of the PricewaterhouseCoopers 13th Annual Global CEO Survey. It is clear that while cost adjustment remains paramount, companies are moving ahead and confidence in revenue growth is recovering.

To better appreciate what is underpinning those outlooks for that growth – and what keeps business leaders up at night – we also conducted in-depth interviews with 27 CEOs from five continents over the fourth quarter of 2009.

Selections from these interviews are presented here. We remain grateful to all of the 1,198 CEOs who took part in our annual survey and we are particularly grateful to the 27 CEOs for sharing their insights on the business environment in 2010 and their perspectives on the economic and financial crisis, a crucial turning point for many.

The full transcripts for each interview are available online; some interviews are also on video. The interviews, as well as the full 13th Annual Global CEO Survey, the quantitative data and prior years’ surveys, are all accessible at pwc.com/ceosurvey

Business thinking is getting back to an even keel, but the recession leaves lasting impacts that may colour future actions.



Rethink

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Section 1

Rethink: From crisis to cautious optimismMany business leaders are emerging with a healthy respect for risk, volatility and flexibility, and a different view of the growth imperative.

‘ I have emphasised repeatedly that Air China benefited from the rapid growth and quantum leaps in development of the past five years. Since 2008, I have changed my tune somewhat; prudent operation and sustainable development are the most important factors for the development of an excellent enterprise. This is a shift from our previous view on accelerating the pace of development.’

Kong Dong Chairman, Air China Ltd., China

‘ Everybody has to be leaner and place more emphasis on being closer to the customer, which in our case means moving away from having everything in Europe.’

Mikael MäkinenPresident and CEo, Cargotec, Finland

‘ This crisis brought up another insight about business. It drove us away from the fact that when we do business with other individuals or companies, the existence of tension, negotiation and conflict is natural. But when you live in a world in which secured Swiss derivatives are swapped, and a safe return is sought in paper, then there is no tension but there is also no care for the other individual. That is why, if you look this financial collapse in a certain way, it is also a blessing, in particular because it breaks up the world of reckless revenue-seeking to leave behind only that which is basic and essential. It is obviously so much easier to build up a structure of investment papers and derivatives, and it takes less time. However, in that scheme the human being is not considered. The basic principle behind money is that it has to do with doing something with another to mutual benefit. Dealing with another is always difficult but it is a natural process.’


‘ I think global capital flows will likely change and I am convinced that Africa could be a net beneficiary because of its positioning as the next frontier for investment. Africa holds the world’s largest mineral wealth which is especially valued by emerging markets. A lot of investment will be required to exploit that wealth. With better infra-structure, Africa might also one day be seen as a competitive region for manufacturing. And to the extent that Africa becomes viewed as a unified market of one billion consumers, I think it would be very attractive to investors.’


Global growth contagion – starting in emerging markets


Dean A. ScarboroughPresident and CEo,

Avery Dennison Corporation, US

‘ I thought it would be worse, but it’s incredible how China has rebounded. Now, I’m talking specifically about our materials business, which serves the domestic economy there [China] and is not export-driven. There are still a lot of consumers in China with money, and the Chinese government stimulated the economy pretty aggressively, and effectively, it seems.

I think China’s export economy will also come back; it has started to stabilise. China’s still a low-cost manufacturing platform for a lot of companies, and inventory de-stocking has pretty much ended. Now it’s down to consumer demand outside China.’

Phil CoxCEo, International Power plc, UK ‘ When we look at the developing world, such as the Middle East and Southeast Asian

economies, for us it is not China or India but countries like Indonesia, Pakistan, Thailand, Vietnam and the Philippines that have grown and are continuing to grow. Even through the crisis they have grown at 5% or 6%.’

Kong Dong Chairman, Air China Ltd., China

‘ I went to the Star Alliance CEO meeting in the US not long ago. It enhanced my knowledge of the Euramerican aviation industry. I found it has developed into a rather mature and saturated state, so its supply and demand relationship is unlikely to have a sudden breakthrough. By contrast, China has a lot of potential in this respect.’

Claudio Eugênio Stiller galeazziCEo, Pão de Açúcar group, Brazil ‘ The flow of foreign investment has been substantial and has been targeted at Brazil as

one of the best world market options. It can’t be denied that our universe has become very jittery. These funds have not necessarily come to stay. Investors are very agile at seeking the best markets at any specific time, so there could be a migration of these funds as the markets recover. For now, though, the financial world is still in a crisis recovery mode. Although things have become much better, that doesn’t mean it is over.’

‘ I am concerned about the significant rally in the valuation of several businesses and corporations when this whole situation has not been completely absorbed or eliminated; this could be generating another kind of economic bubble. Such high valuations do not match the reality of some countries’ markets and economies. I think we might be seeing what we want to see – a kind of illusion. Moreover, the bad credit or toxic investments that have caused so much damage in the financial systems haven’t been assimilated or eliminated yet. So there is no real alignment between what we see and what we feel. One of the main things that will emerge is how our people, clients, consumers and the families of our co-workers feel. Because they are living the reality.’

Carlos Fernandez gonzalezChairman and CEo, grupo Modelo,

Mexico

Yet with higher confidence, comes greater unease


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‘ We’ve learned which conditions apply to China and which do not. With regard to this crisis, China is in a relatively advantageous position and I attribute that to China’s monetary policy. But there are also conditions in China that we must pay attention to. China’s economic development relies on exports and all over the world we’re regarded as a manufacturing country. However, the raw material we use is mostly supplied domestically, and the products we produce are sold relatively cheaply. In fact, the products we sell seldom reflect a high technical content or value-added. So in my opinion, China should reduce its volume of exports, but begin to manufacture products of higher quality and higher value-added. That would contribute substantially to China’s economic development. The core issue is how much innovation is contained in your products.’

ShEn hetingExecutive Director, President, Metallurgical Corporation of China Ltd, China

‘ Billions – even trillions – have been pumped into the markets and must obviously be withdrawn at some point. But politicians are clearly reluctant to do so, as they are concerned of the risk of precipitating another decline in growth. In response to the financial crisis, we have probably reacted too aggressively – particularly in the US. We have pumped too much money into the economy, and we will probably be too late in withdrawing it. Financial bubbles are a risk we should always have in mind.’


‘ Although I have not seen it yet in the 73 countries where we have a presence, I think it [protectionist barriers] is a trend that could harm international trade. The economists and other experts have shown that protectionist barriers are not useful measures to cure the economy and preserve growth. However, I view it as a possible risk in the current economic situation.’


‘ The global economy is now starting a process of recovery, but the greatest challenge will be the way in which this mega-issuance of money and debt will be absorbed, and it is here where I see a very bright warning light, because I look at the situation with Argentine eyes, and we are very well aware of the cost of resolving a crisis by means of the printing of money.’


‘ Just the sheer size of the debt crisis in terms of the gap that was created, how much cash has gone in to support it, and therefore what it means in terms of the timeline to recover and pay for it is, effectively, a big unknown.’


Shift in private debt to public sector is particular source of unease

Protectionism worry on the rise … is it justified?


Claudio Eugênio Stiller galeazziCEo, Pão de Açúcar group, Brazil ‘ Some countries may impose protectionist barriers but I don’t think they’ll be very

significant. In addition, in Brazil’s case, the appreciation of its currency (the real) may offset possible protectionist barriers.’

Eduardo ElsztainPresident, IRSA group, Argentina ‘ Job losses in markets such as that of the US have not yet resulted in protectionist

barriers but they have led to a slower pace of accession by new countries to free trade agreements… The most probable scenario is that barriers will be imposed on capital flows, and I foresee a more regulated world… Brazil has set a 1.5% tax on ADR conversion transactions, and signs such as this are beginning to reveal some of the secrets as to how regulations are going to be added.’

Mikael MäkinenPresident and CEo, Cargotec, Finland ‘ We moved some of the factories that produce products for the US market from

Sweden to the US itself because of concerns over government regulation and the tendency for them to buy local. We were afraid that one day there would be a regulation that the US government buy from a US manufacturer. In China there is a similar tendency to buy from Chinese producers. Having said that, I do not think there will be a kind of protectionism at large. But there will be countries like the US that prefer to buy from US manufacturers. This goes for the big nations … nobody could care less what little nations like Finland do.’

Ian BremmerPresident, Eurasia group, US ‘ Multi-national corporations ultimately need access to global consumer markets, global

capital flows and global labour to succeed. In a world that is not led by the G7, where state capital is as viable an economic model as a regulated free market is for many states, multi-nationals will not have that access; they will be constrained.’

Sunil DuggalCEo, Dabur India Limited, India ‘ Developed nations are in a very serious structural downturn which may be impossible

to reverse. Even if it does reverse it will take a long, long time. The best thing for the developed economies would be to develop completely revolutionary technologies, such as “green” technologies. In contrast, well-governed countries in Asia and Africa are on a growth curve that is pretty similar to that of India’s.’

‘ The structural shifts have already begun. The emerging markets, if you will, are a critical component of the business environment that we have to compete in. So whether it be the BRIC countries, where we have to have a strong presence, our clients are demanding that we be in emerging markets. Brazil, Russia, India and China are markets that we are investing in. We have a very strong competitive position in those markets, and we will continue to grow it. That doesn’t mean that the United States is not going to grow, as well. It’s just a question of the rate of growth. Certainly the emerging markets seem to have the ability to grow more rapidly than a more mature market, such as the United States or Europe.’

Michael I. RothChairman and CEo,

Interpublic group, US

A sense that the crisis accelerated global economic drivers


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‘ It’s not the Chinese consumer replacing the American consumer, it’s Chinese investment replacing the American consumer. That is the difference in the world between 2010 and 2008. Which of those two things is bigger? We need to recognise that China’s investment is not on the same scale as a driver of global economic growth that the American consumer was over the last five years.’


‘ The economy of Europe and the US will get back to normal development after this economic crisis. Therefore, we will maintain our transport capacity deployment to the utmost in the international market and will not withdraw from the market in a hurry. Air China will not be short-sighted.’


‘ I will point out that the US dairy producers seem to have taken a bigger hit than almost any other dairy producers in the world. We have seen significant reductions in US dairy production and that production is not recovering the way it is in other parts of the world. That may be attributable in part to the fact that US dairy farms are heavily leveraged and that sort of economic formula doesn’t snap back quickly.’

Andrew FerrierCEo, Fonterra Co-operative group, new Zealand

‘ The US is, I think, one of two countries in the whole world that tax the foreign earnings of domiciled companies. To be competitive in a global economy, we need to move to a territorial tax strategy like other countries’. Unfortunately, the current administration sees this as a place to get money to fund deficits, but they will kill the golden goose if they’re not careful. I really do worry about that. It’s not a smart idea. We’re a global company domiciled in the US, but two-thirds of our revenue comes from outside the US. It would not be a good thing for the United States to fundamentally disadvantage its corporations, both at home and abroad, with that kind of tax strategy.’

Dean A. ScarboroughPresident and CEo, Avery Dennison Corporation, US

‘ Although there are a lot of problems in the US economy, my personal view is that we should never underestimate its strength. The US economy has an effective mix of market-based mechanisms and good external regulation. During the financial crisis, the US government did apply a stimulus package. But the stimulus package will eventually end and, sooner or later, the American economy will get back on track. The US economy has a great capacity for self-balance and self-adjustment and the society is comfortable with questioning and debate.’

hUAng TianwenPresident, Sinosteel Corporation, China

Debate on the future role of the US economy


Reshape

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Section 2

Reshape: The post-crisis environment As the process of economic stabilisation unfolded in 2009, CEOs consider the lasting legacies of the downturn.

‘ Consumers here have cut back, but they’ve cut back on anticipation of a worsening recession as much as the reality of the recession. In fact, we are already seeing some signs of bounce-back in the New Zealand market. So I do expect a recovery of consumer spending.’


‘ Consumer behaviour today is very different from what it was a decade ago. Today, regardless of their financial position, people want to spend money. Without losing traditional Russian care for children’s and grandchildren’s future, today’s culture is no longer based though on saving to support them. Our mentality has changed and I’m in no position to say whether that’s for better or worse. We simply have not invented any other approach to driving economic development than that of growing consumer consumption.’

Tigran nersisyan President, Borodino group, Russian Federation

‘ I think it’s pretty clear that consumer demand won’t come back. So much of American consumers’ capital was locked up in homes that were basically annuities where value was going up every year. A lot of that value has been destroyed and it’s not coming back. That will allow for younger people coming into the workforce to buy property and you’re going to see a re-distribution of wealth in the US that over the long term will probably serve America well. But, it’s not going to re-build consumer confidence tomorrow.’


‘ There has been a fundamental shift in how consumers will spend their dollars, as well as the ecological effect of the spend. Consumers are looking for a “green” effect, I think appropriately.’

Michael I. RothChairman and CEo, Interpublic group, US

Opposing views on a permanent change in consumer behaviour


Sunil DuggalCEo, Dabur India Limited, India ‘ Going forward, might consumer demand contract? Highly unlikely, I think. Will it remain

the same? Quite likely. The best case scenario is that a revived economy will stimulate even greater demand and take us to a higher growth trajectory.’

Andrew FerrierCEo, Fonterra Co-operative group,

new Zealand

‘ I think this propensity to trade down is temporary. It may last a couple of years. But ultimately, I think we will see consumers come back to the brands they know and trust.’

gerolamo Caccia DominioniCEo, Benetton group SPA, Italy ‘ Benetton’s positioning in what we like to call “democratic fashion” is helpful in facing

the crisis, however; the consumer on average is spending less and more shrewdly. Spending a lot is less trendy than it has been in the past and consumers prefer to buy greater quantities of products at the same price rather than a single “designer” product.’

Pablo IslaDeputy Chairman and CEo, Inditex,

Spain

‘ After the crisis, consumers will demand a very high level of quality. There are also new communications technologies to keep in touch with consumers, such as blogs, Facebook and so on. Inditex has two million Zara users fans on Facebook, a completely new and powerful communications tool.’

Eduardo ElsztainPresident, IRSA group, Argentina ‘ The good thing is that the increase in per capita income in the BRIC countries,

especially because of salary improvements that take place with the opening up of new jobs, has a profound impact on living conditions in such countries. In emerging countries, a small increase in per capita income generates deep changes in the global economy. We have followed this same philosophy for 20 years, we know the great impact that produces a US$50 increase in a citizen’s income of an emerging country, the first thing they will do will be to spend it on food, on eating better: meat, fried rice and more dairy products. And that is where we in Argentina benefit spectacularly, because we are in a position to produce seven times more than what we consume. And we produce a product that will be in high demand for the next 50 years.’

‘ I think security in the broad sense is going to be an important factor. What do I mean by that? Well, people are worried about viruses, such as swine flu. People are worried about their personal security. They’re worried about the security of the food market. We’ve had a lot of scares in the last few years around jalapeno peppers, peanuts and spinach. More people are starting to care about what goes in their mouths. Where did it come from? So we’re going to see more compliance, more track-and-trace, more investment in protecting supply chains or important areas of the economy. I think that’s definitely coming.’



Sensing opportunity in new consumer habits


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‘ The reluctance of the banks to lend wasn’t directed toward companies like us. It was the smaller, medium sized enterprises that felt squeezed.’


‘ The credit crunch has not damaged us. It has however had repercussions on our partners who manage points of sale, in particular the smaller ones, which therefore have less contractual power over the banking world.’


‘ I am unable to say with any certainty how a regime for controlling systemic risk will come about. I do know, however, that this issue has many unanswered questions. In the case of a cross-border institution, when a failure occurs as a result of systemic risk, who pays the bill? The treasury of one country or the other?’


‘ Banking has been redefined by this crisis, and it appears that size has become a significant factor going forward. Unless you’re focusing on a clearly defined niche, you can’t operate in the wider market without having achieved sufficient scale because technology – which has become a big driver of the banking industry – is hugely expensive and the unit cost is dependent on the size of the bank. A bank’s attractive-ness in terms of raising capital and ability to absorb shock is again determined by the size of its capital base. You can’t afford to be heavily capitalised and still remain small because capital is very expensive and needs to be leveraged.’


In banking, size matters …

‘ Clearly, after Enron and some of the huge issues in the US eight or nine years ago, Sarbanes-Oxley completely over-reacted to what had happened in the market and shut the door after the horse had gone. I get the impression, looking at some of the regulation around governance that’s been issued of late, that we don’t seem to have over-reacted this time. Where I think we really have to apply regulation, as I’m sure you hear all the time, is around the banks. That is clearly where we’ve got to get it right because it’s clear to everyone that a weak financial system will have a catastrophic effect on the economy.’


‘ There is a lot of concentration on lower risk, higher strength organisations. Unfortunately, what happens in that environment is that the people who don’t need the money are the ones who have the money easily available to them.’


Regulatory priorities: Getting it right with financial services

… and size is a factor for bank customers, too


‘ I believe that all restrictions on capital movement should be lifted and customs barriers lowered. These are a serious hindrance. Regulation must be present, but regulation should create incentives to encourage certain business behaviours, such as those related to corporate social responsibility. Regulation should be incentive-based. Business should be encouraged to invest in social assets and environmental protection. Summing it all up, I’d say that regulation should be based on clear and effective laws that are free of judicial corruption.’

Tigran nersisyan President, Borodino group,

Russian Federation

‘ It is incumbent on us to engage as much as we possibly can with government and with the civil service. The power sector does not speak with one voice, since it is a collection of individuals, all of whom have got a slightly different agenda. I have some sympathy for government and opposition when they say, ‘what does the industry want me to do here?’ and they get seven different replies.’


Pawan MunjalMD and CEo,

hero honda Motors Ltd., India

‘ Under-regulation is as damaging as over-regulation. For example, there is much talk about traffic congestion in our cities. But even as the vehicle population has exploded, virtually no attempt has been made to control or regulate traffic movement. I think city administrations need to be given more teeth. Very often city administrations are subservient to state control. Similarly, there is often a conflict of regulatory interest between the state government and the Centre.’

‘ Markets – when they are working well – are much more efficient in the allocation of resources. In times of financial turmoil, it is necessary for the government to strengthen regulation. But if we over-regulate markets, it will have a negative effect on market efficiencies and the natural development of markets. In the end, it will also erode the core competencies of businesses competing in those markets.’

hUAng TianwenPresident, Sinosteel Corporation,

China

‘ Financial sector players are in a unique position to influence the private sector to play a major role in promoting sustainable development. They can do this by adopting ecologically sound risk management practices, investing in products and services that are environment friendly, and incorporating environment due diligence practices to the credit initiation and management processes.’

honorable (hon.) Amando Tetangco Jr.governor, Bangko Sentral ng

Pilipinas (BSP), Philippines

‘ Instead of looking for more restrictions, we could look for more collaboration and generate through good practice more value in the industry and the whole country.’

Carlos Fernandez gonzalezChairman and CEo, grupo Modelo,

Mexico

Steps towards smarter regulation


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‘ We should work to refine our model of regulation whereby a merits-based review becomes part of the regulatory process and acts, if you like, as a self-managing check over the scale and scope of regulation and whether or not it’s achieving its intended outcomes.’


‘ In many ways it isn’t the large companies that bear the brunt of regulation. After all, the large companies have the infrastructure to handle the regulatory burden. What over-regulation does is to stifle the start-ups, the smaller enterprises. That’s where the real issue is.’


‘ We certainly don’t need more regulation in the media industry overall. In general, markets have to be free. But we’ve also seen, in other industries, what can happen when freedoms are abused or when there is too little regulation. There have to be rules, and these rules must be binding for all players in the market.’

‘ We should make sure that we adopt the kind of regulation that supports rather than stifles medical innovation and a robust private market. There are many, many examples of how that has or has not worked in health care.’

‘ I think that co-operation is essential because everything is inter-connected and we don’t want businesses to move to environments where similar regulation is not applied. Companies are very mobile nowadays.’

hartmut ostrowskiChairman and CEo, Bertelsmann Ag, germany


David LevinePrésident-directeur général de l’Agence et de santé et de services sociaux de Montréal, Canada

‘ There’s not enough productivity in the healthcare sector, and it has much more to do with the link between the doctor and patient and process than it does anything else. You have incredibly wide outcomes and costs for the same procedure in different hospitals in different parts of the country. Suppose I have that problem inside my business. If there’s wide variation between my factories, what do I do about it? We get teams together to put best practices in place. And guess what? We lower the cost, we improve the quality and we narrow the variation at the same time. That’s not being done in healthcare. I’m sure it would lower costs better than rationing, which, if we try, people aren’t going to accept.’


CEOs support US healthcare reform but question policy direction


‘ Healthcare reform, I think, is a requirement. There are too many people who don’t have appropriate healthcare, and therefore it’s our responsibility to make sure they have it. Costs have gotten out of hand. One of the single biggest issues we have is how we manage our healthcare costs and how much sharing with our people should we put in. We want to make sure that we’re fair, we’re competitive and that our people are being adequately protected from a healthcare point of view. But the costs are rising at a rate that is not consistent with the way the overall businesses in the economy are growing. Therefore something has to be done.’

Michael I. RothChairman and CEo,

Interpublic group, US

‘ I think the health care reform discussion has changed over time. Originally, the discussion was around value and ways to construct a sustainable health care model. Over time, the discussion narrowed to one focused on health insurance market reform and health care financing. And I think that just postpones a serious debate about some very critical issues: the solvency of the Medicare and Medicaid programmes, the need for tort reform, and ways to promote the next wave of health care innovation. So there are a number of things we should be tackling in the discussion that we’re currently not.’


‘ Much of this newly available capital tends to flow to stock markets and only a small part to industry. As a consequence, there is the possibility of overheated stock markets and new speculative bubbles appearing. In the meantime, businesses face reduced margins and lack of working capital and this hinders their cash flow.’

‘ I feel there is loss of trust in the private sector and there are questions about capitalism’s ability to allocate resources rationally. But that is a debate that needs to be taken a step further. We have lost trust in existing systems but what is the alternative? What alternative would be better at allocating resources? Rather than condemning private sector capitalism altogether, we should modify in ways to ensure that it works for the public good. I would like to see a combined effort by the private sector and the regulatory authority to find a balance that will protect the public good.’


Russian Federation

Dr. James MwangiMD and CEo,

Equity Bank, Kenya

‘ Credit will become more expensive, more difficult to attain, and will be relatively scarce. As marginal players are pushed out, capacity will decline. And there will be more supervision generally. The same process will more or less occur in the capital markets. Credit in capital markets will become more complex, expensive, and scarce.’

Alfredo SáenzSecond Vicechairman and CEo,

Banco Santander, Spain

Credit crunch eases, but not for all

Rebuilding public trust


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‘ With the onset of the crisis, many companies thought they could go back on their obligations. But the market soon made it clear that obligations should be met. A company’s prospects hinge only on its reputation and the integrity of its people. One can cheat once, but you won’t get away with it again.’


‘ Public trust is a real issue for big business, not just in the United States, but globally. I’ve been through a couple of turnarounds now, and my philosophy on that is pretty straightforward, and that is transparency. If all the constituents, whether they be investors or employees, are aware of what’s going on and they feel that you’re being transparent with them, they give you some slack. It’s those companies that are very close to the vest that leads to this type of distrust. Of course, governance is critical and I believe communicating is key. I have open dialogue and an open door. That lends itself to trust.’


‘ Whether there’s an erosion of trust generally in the private sector, I’m not sure. We are perhaps a bit different from many other companies in that a lot of our business is based in poor countries. And in those countries, the private sector – and the multinational corporation, specifically – is viewed as a bastion of wealth, power, and influence. Consequently, we are very conscious of public opinion and go to great lengths to protect our reputation and build the trust of the local community. Quite frankly, if there’s any clear erosion of trust, I think it’s directed toward the political establishment.’

‘ I think in the US and Europe where major financial institutions failed, confidence and trust in the private sector have declined sharply. In Asia, the financial sector has been relatively unscathed, so I don’t think the confidence in the private sector here has been much affected. But that doesn’t mean we don’t need reform in corporate governance.’


haruhiko KurodaPresident, Asian Development Bank, Philippines


Result

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Section 3

Result: Adapting to compete Last year’s survey found CEOs taking action to survive swift drops in demand without cutting deeply into investments vital to long-term competitiveness. The pressure has not gone away.

‘ CEOs have to recognise that a lot of their long-term planning will need to be tossed out of the window. There has to be a lot more volatility built into your modelling; your ability to do your three- and five-year planning in that kind of an environment is diminished. You have to be much more tactical.’


‘ The era of high oil prices in 2008 has given us a clear indication that fuel costs will become the major cost for airlines in less than a decade. It accounted for merely about 20% of the total cost 10 years ago, but the proportion has soared to 41% or 42% in a very short time. The highest fuel prices once reached about RMB 9,000 per ton of jet fuel, including taxes and other related costs. Therefore, this is becoming a great challenge for the sustainable and sound development of airlines. Although we cannot control the movements of fuel prices, as a leader in aviation businesses, we won’t sit by and watch price increases without doing anything. To avoid price risks, we are now engaged in hedging. This was a difficult decision for us but one that had to be made.’


‘ The crisis has its silver lining in the sense that we were forced to identify these budget-ary “leaks” and bring them under control. Going forward, we’re going to scale up our new expertise and train managers at all levels to apply it.’


‘ If you’re not looking at your cost structure in this environment, you’re asleep at the switch. If the revenue isn’t there, in order to protect margins, you have to take a look at your cost profile. So IPG, like all other companies, has been doing that since the end of 2008, and we will continue to look at our ratio of cost-to-revenue as this goes forward.’


‘ We know that if push comes to shove, certainty of capital structure comes first. The market does not like losing earnings but it has no forgiveness whatsoever if you run out of cash. The very worst thing that we could have done is gone back to the market and said, “Sorry, we did not get our capital planning right and we’re out of cash. We didn’t sell this business when we could have but now we need a rights issue and we’re cutting the dividend.” It was a straightforward decision to sell the Czech business.’


Heightened focus on costs

Cash is still king …


… and less appetite for leverage

‘ We plan to run our gearing at a significantly lower level than we have traditionally. That is not to say that we ran a high-risk strategy previously. But we are feeling as a result of market uncertainties that it is better to be more conservative going forward.’


new Zealand

‘ As we emerge from the crisis, we’re beginning to see a re-pricing of assets around the world and that presents opportunities for a business like ours. A potential acquisition that we might have passed up before the crisis hit because the price was too high, may today be much more attractively priced. Coming out of the crisis, I think we are beginning to see good opportunities for prudent investors.’


new Zealand

‘ We decided, going into this recession, that while we didn’t have a huge amount of debt compared to many people in the UK, we had to be very focused on cash generation and reducing our debt. We’ve done that over the last 15–18 months, and opted not to pursue an acquisition strategy during this difficult time, given the risk it would bring to the business… When we see the economic upturn we’ll be in a very strong position to take advantage of that.’

Paul WalkerChief Executive, The Sage group plc,

UK

‘ As economic conditions change greatly, companies have put their transport capabilities back to the home market. A new round of a price war is heating up, and the supply exceeds demand as a whole. We must win customers with our brand and cannot follow the trend to reduce prices. We have our own judgments and opinions. In fact, the passenger load factor has improved a lot this year. And the effect is pretty good.’


Short-term focus on existing markets

‘ We are very clear that we will not look for acquisitions in the developed markets where there are very high levels of competition, entrenched players, few platforms, and, more importantly, very little growth. Instead, we will continue to invest in our core markets, which include South Asia, the Middle East and North Africa, and sub-Saharan Africa. These markets, we believe, offer long-term growth prospects.’


Positioning for the long-term: Acquisition strategies


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Phil CoxCEo, International Power plc, UK‘ If you did a deal in the more developed world, the likelihood is short term margins will

be down. Banks don’t like this, as there is not enough security for their lending so this tends to reduce capacity. This limits how much, even if we wanted to, we could invest. Therefore it’s been more of a focus on the developing world and more of a focus on renewables in the developed one, because they fill the same sort of niche in the sense that they are heavily incentivised, supported by the regulatory framework, which is driving demand. A lot of economies want to increase their renewable footprint and again it comes back to the financing; because they are incentivised and supported by regulatory framework, they are able to get finance as well.’


‘ Currently, the M&A market is very sluggish and there are few opportunities around. However, given the current climate, transactions that can represent the first step towards strong future development are not out of the question. Crucially, we have a clear strategy and know how to draw out and develop added value.’


‘ I believe that we will emerge stronger and with more influence. We have capital and a well-established business. So I believe that there will be clear opportunities for us.’

Ian BremmerPresident, Eurasia group, US‘ Western multi-nationals are still very, very attracted to international investments.

In some cases, they’re even more attracted, because emerging markets are where they see the big growth opportunities. Some of those investments will be more challenging now, because there are going to be much tougher domestic competitors in those spaces. The trend towards capital controls may constrain that investment over the long term. But we likely won’t see much impact of that in 2010.’

‘ Research efforts and new product development will increasingly be focused on emerging countries. We have made the ability to develop products on the ground central to our marketing organisation. Why restrict innovation to just 20% of the market (i.e. developed countries)?’


‘ I would anticipate in the future that there would be more R&D centres – one in Europe, one in the Americas and one in Asia. And I think that this is a huge change which the politicians have not understood in Europe – that after the recession we will not go back to the old way of doing everything in Europe. I think this is a fundamental change in our business.’


Positioning for the long-term: R&D shifting to emerging economies


Risk and strategy go hand in hand

‘ We have an Executive Committee, which meets weekly, that devotes 80 percent of its time to risk issues. We also have the Risk Committee, which is the highest committee in the bank dedicated to the assessment of risk. The Risk Committee is comprised of independent Board directors and bank executives responsible for risk management.’

Alfredo SáenzSecond Vicechairman and CEo,

Banco Santander, Spain

‘ Now, more than ever, the company and its board have become more sophisticated in our analysis of risk. It’s an agenda item at all of our board meetings. And we continue not only to get better at quantifying risk, but also in building right the kind of culture that can appropriately manage risk over the short- and long-term.’


‘ Our operational risk processes have always been fairly robust, but we’ve done a lot of work on strategic risk management. When considering strategic risk we map a risk’s probability of occurrence against the impact it would have on the business and we formally review this once a year. Once we complete that review, we enter into a cycle of continuous improvement of our mitigation plans. That’s a journey we’ve been on for the past two or three years and we feel that our control posture is much improved as a result. And that’s helped us come through the global economic downturn really well.’

Ken MacKenzieManaging Director and CEo, Amcor,

Australia

‘ I feel confident in saying that never in our company’s history has our board been more involved in these issues. But that involvement has much more to do with the huge structural changes taking place in our industry rather than issues related to the recession.’

Dr. Paul ReynoldsCEo, Telecom Corporation

of new Zealand Limited, new Zealand

‘ Price volatility has been one of the most significant spin-off effects of the financial crisis. Consequently, we’re developing a new risk management capability that takes volatility into account in terms when we sell a product, how far forward we contract, and all other risk considerations in selling a year’s production of dairy products.’


new Zealand

‘ For us, the key to wise foreign investment is good risk management practices. Risk management is now the primary task of state-owned enterprises.’

ShEn hetingExecutive Director, President,

Metallurgical Corporation of China Ltd, China


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‘ Over the last few years, the company has progressively eliminated the use of a large number of harmful substances and materials, including asbestos. Today, every raw material and chemical we use is thoroughly evaluated for its environmental impact before it is introduced into a production process. We have many ongoing environmental projects.’

Pawan MunjalMD and CEo, hero honda Motors Ltd., India

‘ Companies have had to give increasingly greater thought to the issue of sustainability, if not out of need, at least as a posture required by consumers.’


‘ Typically, in our business, environmental risks are at the top on our list. But with risk comes opportunity and we see the whole environmental agenda as a terrific commercial opportunity. We see changing consumer behaviour around issues of sustainability as an opening to develop new products and differentiate ourselves from the competition.’


‘ [Sustainability] is a huge thing for us. Employees ask me all the time about what we are doing around sustainability. The younger generation especially wants to work for companies that make a difference. That’s really critical. The Milton Friedman school of thought, that our job is just to go make money, well, pardon the pun, but that thinking’s not sustainable anymore.’


‘ We expect our vendors – for example, the manufacturers of our servers, switchers, and transmission equipment – to continuously improve the efficiency of their products so that our infrastructure as a whole consumes far less energy. And as we function in a more energy-efficient way, we simultaneously operate more cost effectively.’


‘ We have started to do scenario planning, which we had never done before. We are trying to look at various scenarios – the probability of them, how they will affect us. So, I cannot tell you it is only for climate change. I look at scenarios from our customers’ point of view; how does the world evolve and how does transportation in the world evolve. From there come the scenarios. From that we look at the appropriate change. From the list you have here, I would pinpoint climate change as the biggest one. We use outside consultants and universities – so we take it to a very high level. What does climate change mean? OK, the sea rises five metres. You have to rebuild all the harbours … big business opportunity. But that would mean that it would be forbidden to transport many goods like Perrier water. Nobody needs Perrier water in Asia. It is totally unnecessary to transport it. We are in the early stages of this now.’


Companies are setting the pace on climate change




‘ A lot of the fundamental technology is out there, but the way the laws are being written is just crazy. The government wants to put a tax on carbon, but then let everybody out of it, so that no one gets hurt. It’s insane. Put a tax on carbon, just put a tax on it.’

Eduardo ElsztainPresident, IRSA group, Argentina ‘ There has been a kind of magic scenario in the corporate world, with executives

being offered derivatives, stock options, phantom stock plans and other possibilities. However, I believe that managers will show you whether they truly believe in the company or not when they receive shares and maintain them in the long term. I think this will be a new trend in management compensation.’

Phil CoxCEo, International Power plc, UK ‘ More competitive times mean that we need to have narrow levels of tolerance between

good, acceptable and lower performance. We are thinking more critically about how we differentiate, how we incentivise, how we reward top performers and how we identify areas where people who are good can improve further.’


‘ There’s a huge amount of misinformation being circulated. Take, for example, this concept of “carbon footprint”, which leads to pressure to buy “local” In the case of beer, one might argue that imported brands from Italy or the Czech Republic have an excessive carbon footprint because of their associated cost of transport, and one should, instead, buy local brands. In reality, the transport of that imported beer incurs a tiny carbon footprint compared to the construction of the supermarket itself and having all those shoppers drive their cars to the store. That’s where the carbon footprint is. Take another example: returnable bottles. Retailers don’t like returnable containers because they’re a hassle. And so they’ve forced the beverage producers to develop disposable packaging, which, in environmental terms, is much more expensive than returnable packaging. In the debate about sustainability and climate change, there’s a great deal of misinformation and special interest at work.’

Sunil DuggalCEo, Dabur India Limited, India ‘ The biggest contributor to climate change is population. We may be very

sanctimonious in saying that Indians are very low emitters of greenhouse gases, but when you consider that our population is growing by 2.5 percent every year, the figures don’t look good. If India doesn’t keep its population under control, there will be little it can do to help minimise climate change.’

And experiencing some frustration with the direction of emissions-control policies

New people strategies: Linking compensation with long-term performance


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‘ We have a strong corporate culture of partnership. Partnership means jointly looking for solutions and finding them. This is not always simple but certainly worth doing. Bertelsmann has always been an advocate of a good corporate culture, and we have nurtured this culture over the decades. We communicate openly and comprehensively, give our employees a lot of autonomy and let them participate in the company’s success. This increases motivation, identification, and loyalty. And our culture has proven to be very crisis-resistant. Partnership pays off, especially in tough times.’


New people strategies: Collaboration

‘ Recruiting people is much more important than before. At the same time, the business is really globalising, we need to recruit for top positions in areas outside our home base in the Nordic region. As a result, we really have to think about our values and how we communicate them because those prospective employees don’t know Cargotec – they don’t even know where Finland is.’


‘ What you do in this environment is add to your talent base and reposition your talent to be more suited for the challenges that are ahead. Even though we’ve had a nine to 10 percent reduction in terms of staffing, we’ve also had increases to invest in those markets and resources that are necessary to be competitive.’


‘ From a human resources perspective, the downturn has actually benefited us. Our attrition levels are at an all time low and the talent pool available to us is a lot bigger than it was during the up-cycle.’


Talent needs little changed by recession


Final thoughts

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Final thoughts

Lessons learned and applied to 2010Bruno LafontChairman and Chief Executive Director, LAFARgE group, France

‘ It’s fair to say that the general understanding of the economy has made record strides. This is the first crisis of the internet era – not to mention highly-developed derivatives markets – and everyone now has a clearer vision of globalisation and the divide between the real economy and finance.’

‘ I am more worried about the growing public borrowing and its serious consequences. With all its seriousness, the crisis has shown us some positive lessons which we should take advantage of. The situation was worse in 2007, when there was heavy borrowing and a bubble with no clear end. This crisis should teach us to be more demanding of ourselves.’


‘ Most importantly, we learned that we must further strengthen our internal controls and risk management capabilities. The financial crisis has made it clear that all enterprises must be better prepared against future risks.’


‘ The last year has been an unforgettable lesson for me. I frankly admit that our enterprise lacks the capacity to judge the tremendous change of the macro-economy in terms of our traditional management. When the forebodings of financial crisis hit last year in the US, we concentrated on doing our own things – the snow disaster, the 12 May earthquake and the Olympic Games, which we promised the world to do well. We did not realise that the damage was going to be so great. What inspires me most is that an enterprise like ours cannot go through such difficulties by its own efforts or by using a simple form of protection. Therefore, we are paying more attention to our internal controls and management mechanisms.’


‘ This type of economic downturn is always an opportunity for people to perhaps take a much harder look at their own operational efficiency and where they could be leaner and take appropriate action. We’ve certainly done that at Sage. We come out as a business in a much stronger position.’



‘ [When] emerging economies begin to cool off, things can slow down very, very quickly. And that is a scenario that may be unfamiliar to some younger businesspeople who are used to operating in the very stable and predictable worlds of Europe, the US, and the more mature Asian economies. One big lesson learned is that developing economies simply don’t provide consumer marketers with the kind of safety net that they’re used to when operating in the developed world. A second lesson learned is the importance of making sure that you have very clear visibility of the inventory at each point in your extended supply chain. And a third lesson has to do with consumers’ changing consumption habits. In our case, we’ve seen the relative share of consumption of our products in bars and restaurants outpaced by in-home consumption. That required us to develop a different set of marketing skills better suited to in-home consumption.’


‘ We have implemented tight controls over the whole process, from logistics to sales. I believe that one of the factors underlying the crisis was loss of control.’


Russian Federation


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CEOs interviewed


Eurasia Group is the world’s leading political risk research and consulting firm. It provides financial, corporate and government clients with information and insight on how political developments move markets. Headquartered in New York, the company has offices in Washington and London, as well as a vast network of experts and resources around the world. For more information, please visit www.eurasiagroup.net.


WellPoint works to simplify the connection between Health, Care and Value. We help to improve the health of our communities, deliver better care to members, and provide greater value to our customers and shareholders. WellPoint is the nation’s largest health benefits company, with approximately 34 million members in its affiliated health plans.

Company profiles


International Power is a leading independent power generation company with interests in 32,358 MW (gross) of power generating capacity, located in 21 countries across five core regions – North America, Europe, Middle East, Australia and Asia.


CEOs interviewed


Air China Limited is the leading provider of air passenger, air cargo and airline-related services and products in China. Its operational headquarters are in Beijing and it has 9 branches in other major Chinese cities where it provides air transportation and other airline-related services, including aircraft maintenance and ground services. As of June 2009, the Company operated a fleet of 243 aircraft, serving 143 destinations in 32 countries and regions.


Dabur India Ltd is a leading consumer goods company in India with several successful brands in segments like healthcare, personal care, homecare, food and beverages and over-the-counter drugs. Dabur has 17 state-of-the-art manufacturing units spread across the globe and its brands are marketed in over 60 countries. The US$601 million Dabur India has three subsidiary group companies – Dabur International, Fem Care Pharma and newu – and eight step-down subsidiaries in countries like Nepal, Egypt, Bangladesh, Pakistan, Nigeria, UAE and the US.


The Benetton Group is present in 120 countries around the world. Its core business is fashion apparel: a group with a strong Italian character whose style, quality and passion are clearly seen in its brands, the casual United Colors of Benetton, the glamour oriented Sisley, and Playlife American college style. The Group produces over 150 million garments every year. Its network of over 6,200 contemporary stores around the world, offers high-quality customer services and generates a total turnover of over 2 billion euro.


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The IRSA Group is active in the financial, agricultural and real estate development business, with revenues of US$580 million and assets valued at US$4.6 billion.

Through Cresud, which is listed on the Buenos Aires Stock Exchange since 1960 (CRES) and in New York’s NASDAQ (CRESY), IRSA directly and indirectly manages more than a million hectares distributed along Argentina, Brasil, Paraguay and Bolivia, which produce grain, meat and milk.

The real estate branch of the corporation, IRSA Inversiones y Representaciones S.A., is listed on the Buenos Aires Stock Exchange (IRSA) and the NYSE (IRS). It operates a shopping centre, offices, 5 star hotels and an urban land reservoirs portfolio and develops residential projects in Argentina.

Company profiles

Andrew FerrierCEo, Fonterra Co-operative group, new Zealand

Fonterra is the world’s largest dairy exporter, accounting for around one third of cross-border dairy trade. As New Zealand’s largest and truly multinational business, Fonterra trades in 140 countries and employs 16,000 staff. In 2009, revenues were NZ$16 billion.

The product portfolio includes dairy ingredients, liquid and powdered milks, cultured foods and yoghurts, butter, cheese and specialty foodservices products.


The Pão de Açúcar Group is the largest retail chain in Brazil with gross sales totalling about US$23 billion a year and 137,000 employees. It now ranks as the eighth largest corporate conglomerate in the country after acquiring the Ponto Frio and Casas Bahias chains in 2009 and operates through a chain of 1,807 stores in 18 Brazilian states.



Lafarge is the world leader in building materials, with top-ranking positions in all of its businesses: Cement, Aggregates & Concrete and Gypsum. With more than 84,000 employees in 79 countries, Lafarge posted sales of EUR19 billion in 2008.

In 2009 and for the fifth year in a row, Lafarge was listed in the ‘Global 100 Most Sustainable Corporations in the World’. With the world’s leading building materials research facility, Lafarge places innovation at the heart of its priorities, working for sustainable construction and architectural creativity.

CEOs interviewed

ShEn hetingExecutive Director, President, Metallurgical Corporation of China Ltd, China

Metallurgical Corporation of China Ltd. (MCC) is a large industrial group operating in various specialised fields, across different industries and in many countries, with engineering and construction, resources development, equipment manufacturing and property development as the principal businesses.


Grupo Modelo is a publicly held company leader in the production, distribution and sale of beer. The group owns seven beer production facilities in Mexico and its business portfolio includes 12 brands, among which Corona Extra is the number one imported beer in the USA with 28% of the market share.


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One of the world’s largest brewers with brewing interests and distribution agreements across six continents. Its brands includes international beers such as such as Pilsner Urquell, Peroni Nastro Azzurro, Miller Genuine Draft and Grolsch along with local brands such as Aquila, Castle, Miller Lite, Snow and Tyskie. Six of its brands are among the top 50 in the world. It is also one of the largest bottlers of Coca-Cola products. In the year to the end of March 2009, the group reported US$2.96 billion in adjusted pre-tax profit and revenue of US$18.7 billion. It is listed on the London and Johannesburg stock exchanges.


Amcor is a leading global packaging manufacturer offering a broad range of plastic, fibre, metal and glass packaging products, along with packaging-related services, A$9.5 billion annual sales, 21,000 employees worldwide, 73,165 shareholders, 226 sites, 34 countries.

Company profiles


Cargotec improves the efficiency of cargo flows by offering solutions for the loading and unloading of goods on land and at sea – wherever cargo is on the move. Cargotec’s main daughter brands for cargo handling Hiab, Kalmar and MacGregor are global market leaders in their fields www.cargotec.com


CEOs interviewed


Borodino Group of Companies was founded in 1994 and today is one of the greatest transnational corporations in Russia.

Borodino Group – multisectoral holding developing its activity in such fields as: engineering, construction, machine-building, electrification, telecommunications, financing and food stuff production. Group unites more than 80 companies and industrial ventures with over 15,000 employees. Powerful industrial, scientific and technological basis allows the Group to provide 95% of production process with own raw materials and intellectual resources.

Dr. James MwangiManaging Director and CEo, Equity Bank, Kenya

Equity Bank is the leading microfinance bank in Africa, listed at the Nairobi and Uganda Stock Exchanges. It is the largest bank in the region in terms of customer base with 54% of all bank accounts in Kenya and has a presence in Uganda and Southern Sudan. The Bank has received accolades for its transformational business model that has enabled millions of ‘unbanked’ people access affordable financial services. Equity Bank is the holder of the Best Microfinance Bank in Africa Award by the African Banker in 2008 and 2009.

Pawan MunjalMD and CEo, hero honda Motors Ltd., India

New Delhi-headquartered Hero Honda is the world’s largest two-wheeler manufacturer. This joint venture between the Hero Group of India and Honda of Japan sold over 3.72 million units in 2008-09. The US$2.6-billion Hero Honda has grown by leaps and bounds since its inception 25 years ago. Today, Hero Honda has three manufacturing plants (in Gurgaon, Dharuhera and Haridwar), 256 manufacturing partners and 3,500 customer touch points spread across India. Despite the global recession and a slowdown in India’s two-wheeler industry, Hero Honda grew by 11.53% in 2008–09, thereby garnering a 57% share in the country’s two-wheeler market. The company managed to achieve this through the launch of new brands, a strong rural focus and by driving down costs. The two-wheeler major has an impressive portfolio of 14 motorcycles and a scooter.


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Bertelsmann is an international media company encompassing television (RTL Group), book publishing (Random House), magazine publishing (Gruner + Jahr), media services (Arvato) and media clubs (Direct Group) in more than 50 countries


Telecom is New Zealand’s largest telecommunications service provider, offering a comprehensive range of mobile, fixed and information computer technology products and services to consumer and business customers. Telecom was one of the first telcos in the world to be fully privatised. Telecom employs almost 7,000 people in New Zealand and around 1,600 more in Australia and around the world. It has annual revenues of over US$4 billion.

In 2006, the New Zealand Government introduced legislation that introduced regulation operational separation of its business units.

Company profiles


Interpublic is one of the world’s leading organisations of advertising agencies and marketing services companies. Our agency brands create marketing solutions on behalf of clients in every major world market. Our companies cover the spectrum of marketing disciplines and specialties, from traditional services such as consumer advertising and public relations to emerging services such as mobile and search engine marketing.


CEOs interviewed


Inditex is one of the world’s largest fashion distributors. It has over 4,500 stores in 73 countries in Europe, the Americas, Asia and Africa. Inditex has eight fashion concepts (Zara, Pull and Bear, Massimo Dutti, Bershka, Stradivarius, Oysho, Zara Home and Uterqüe), all of which share the same commercial and managerial focus: adapting the supply chain to the customer demands in order to deliver new items to each store twice per week. Inditex has been listed on the stock exchange since 23 May 2001, and has been a member of the FTS4Good and Dow Jones Sustainability Indexes since 2002.


Avery Dennison is a recognised industry leader that develops innovative identification and decorative solutions for businesses and consumers worldwide. The company’s products include pressure-sensitive labelling materials, graphics imaging media, retail apparel ticketing and branding systems, RFID inlays and tags, office products, specialty tapes, and a variety of specialised labels for automotive, industrial and durable goods applications. A FORTUNE 500 company with sales of US$6.7 billion in 2008, Avery Dennison is based in Pasadena, California and has employees in over 60 countries. For more information, visit www.averydennison.com.


Banco Santander is a leading retail and commercial bank, with presence in 10 main markets including Spain, UK, Germany, Portugal, Brazil, Mexico, Chile and US. With more than 14,000 branches, over 170,000 employees and 90 million customers, Banco Santander is the largest bank in the euro zone by market capitalisation and third in the world by profit.


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Sinosteel Corporation is a state-owned enterprise under the supervision of the State-Owned Assets Supervision and Administration Commission of the State Council. It is a large multi-national enterprise with a clearly defined core business that integrates resources development, trade and logistics, engineering project and science and technology, equipment manufacturing and specialised services, providing a comprehensive auxiliary service for the steel industry, especially steel mills. There are 86 subsidiaries under the governance of Sinosteel, among which 63 are in China and 23 abroad. The core business revenue of Sinosteel reached RMB168.4 billion in 2008, ranking them 372nd among the 2009 World Top 500 according to the Fortune’s list.


Sage is a leading global supplier of business management software solutions to 6.1 million small and medium-sized enterprises (‘SMEs’) worldwide. ‘Our goal is to help our customers manage their business processes more effectively through software applications and support services.’


Diageo is the world’s leading premium drinks business with an outstanding collection of beverage alcohol brands across spirits, wine and beer categories. These brands include: Smirnoff, Johnnie Walker, Captain Morgan, Baileys, J&B, José Cuervo, Tanqueray, Guinness, Crown Royal, Beaulieu Vineyard and Sterling Vineyards wines, and Bushmills Irish whiskey. Diageo is a global company, trading in over 180 markets around the world. The company is listed on both the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE). We employ over 22,000 talented people worldwide with offices in around 80 countries. They have manufacturing facilities across the globe including Great Britain, Ireland, the United States, Canada, Spain, Italy, Africa, Latin America, Australia, India and the Caribbean.

Company profiles





100%

CEO perspectives on successInterview transcripts of Andrew Ferrier, CEO, Fonterra Co-operative Group

ResultBusinessalchemy

RethinkWorkforce motivation

Reshape The talentpool

13th Annual Global CEO SurveyThe In-depth CEO story

Andrew Ferrier is the CEO of Fonterra Co-operative Group

PwC: What effect has the global financial crisis had on your key markets?

AF: One of the biggest shocks we experienced was the volatility in the cost of consumer pricing. We are in the food industry. And in our business, we saw dairy prices rise dramatically, then decline during the course of the crisis, and then, at the bottom of the crisis, dairy prices went right back up again. I think most commodities experienced that sort of volatility – a huge rise in commodity prices just before the crisis hit, and then, following the start of the crisis, a massive overreaction downward. We were very concerned about consumer reaction to that kind of volatility. In fact, to a significant degree, consumers backed off buying dairy products. For example, in Asia – depending on the country – we saw the whole category down between 5% and 20%. What we saw was consumer ‘sticker shock.’ Consumers were unsure what dairy products were going to cost week-to-week and, as a result, they were not sure whether they should maintain their regular buying habits or back off buying these products. So, the financial crisis created an enormous amount of uncertainty in our markets.

PwC: Would you say that there was a strong correlation between the course of the global financial crisis and the sort of pricing volatility experienced by Fonterra?

AF: Although it’s likely coincidental, dairy product consumption fell almost in a straight line from a May 2008 high to a February 2009 low, which coincides with the bottoming out of the global economy.

PwC: Is it fair to say that your key markets are beginning to recover?

AF: I would say that recovery is slowly setting in. Nonetheless, what makes this recovery atypical is the degree of volatility in commodity pricing. We are seeing demand come back. But demand might not fully recover because of the degree of volatility that still exists.

PwC: So, some of your markets may have experienced lasting change as the result of the global financial crisis?

AF: Yes, I would say so. Moreover, that change may apply to the food industry as a whole. We certainly see consumers looking for less expensive products. And trading down from national brands to house brands is a trend that may be with us for a while.

PwC: In response, has Fonterra introduced different price points into its product mix?

AF: To some degree. I think this propensity to trade down is temporary. It may last a couple of years. But ultimately, I think we will see consumers come back to the brands they know and trust.

PwC: Have changes in the capital markets affected the capital structure of your own business?

AF: To the extent that changes in the capital markets dictate a more conservative approach to one’s balance sheets, I would say that every business in the world has been affected. Despite the fact that Fonterra has an excellent credit rating, we are no different. So we plan to run our gearing at a significantly lower level than we have traditionally. That is not to say that we ran a high-risk strategy previously. But we are feeling as a result of market uncertainties that it is better to be more conservative going forward.

PwC: Has Fonterra seen changes in banks’ behaviours in relation to risk premiums?

AF: Yes, absolutely. I think, across the world, the pricing of risk has risen – thus increasing the cost of capital.


PwC: As the world emerges from recession, do you expect to see structural economic shifts?

AF: From the perspective of the food industry, not really. Having said that, I will point out that the US dairy producers seem to have taken a bigger hit than almost any other dairy producers in the world. We have seen significant reductions in US dairy production and that production is not recovering the way it is in other parts of the world. That may be attributable in part to the fact that US dairy farms are heavily leveraged and that sort of economic formula doesn’t snap back quickly.

PwC: Have infrastructure investments by governments affected any part of your business?

AF: We are seeing that in China. Because of the financial crisis – but also because of their domestic dairy crisis last year – China has made huge investments in dairy industry infrastructure. And we have been cooperating with the Chinese government on that and advising them on ways to rebuild their dairy industry. In terms of infrastructure investment not specifically related to the dairy industry, my observation is that, around the world, we are seeing a lot of activity. For example, here in New Zealand, we are working in conjunction with the New Zealand government on ways to drive efficiencies in the supply chain. From a business perspective, I see governments’ desire to invest in infrastructure as something that is very positive for us.

PwC: Has the financial crisis undermined the public’s trust in the private sector?

AF: I certainly think that’s true of the banking industry. Here in New Zealand, if you consider the number of failures, not among the major banks but among many finance companies, I assume many consumers are wondering, ‘What’s safe and what’s not safe?’ That is probably true across the world with regard to the public’s opinion of the financial sector. But I don’t really see that sort of scepticism directed to the food industry. The food industry has always had a strong quality focus, and so I would say that we have come through this crisis much stronger than many other sectors.

PwC: Has the financial crisis had an effect on your company’s strategy?

AF: In the short-term, the crisis has encouraged greater focus on our balance sheet – trying to be more prudent, being extremely careful about managing working capital and having less interest in acquisitions. All the normal steps you would expect a prudent organisation to take in volatile times. But as we emerge from the crisis, we’re beginning to see a repricing of assets around the world and that presents opportunities for a business like ours. A potential acquisition that we might have passed up before the crisis hit because the price was too high, may today be much more attractively priced. Coming out of the crisis, I think we are beginning to see good opportunities for prudent investors.

PwC: What effect has the financial crisis had on your company’s approach to risk management?

AF: For Fonterra, pricing volatility has been one of the most significant spin-off effects of the financial crisis. Consequently, we’re developing a new risk management capability that takes volatility into account in terms when we sell a product, how far forward we contract and all other risk considerations in selling a year’s production of dairy products. Developing that capability is something that management has focused on in a very significant way as has our board of directors.

PwC: Has the financial crisis constrained your company’s ability to raise capital?

AF: We don’t have difficulties raising debt, but as I said earlier, we are keeping a more prudent debt ratio. As a cooperative, our capital is subscribed by our suppliers and linked to the volume of milk they supply to us. I have just proposed to our shareholders a change to our constitution that will ultimately end up in more equity being available to us. As a result, we expect to be able to raise capital more easily than we did before.

Andrew Ferrier, CEO, Fonterra Co-operative GroupContinued


PwC: And will more capital expand the investment opportunities available to you?

AF: Yes, that is correct. We see many opportunities and are thrilled that we now have more capital behind us to take advantage of those opportunities.

PwC: What are the key drivers of M&A activity in the dairy industry?

AF: In general, we saw over priced assets for a long period of time. Consequently, very few assets traded. With assets now being repriced, there are some good opportunities out there. Having said that, we now are seeing multiples rise again. So you’ve got to pick and choose your opportunities carefully.

PwC: Were gaps in your company’s risk management exposed as a result of the financial crisis?

AF: I would say, yes. There is no futures market for dairy products, and so we did not have an easy way to hedge forward our sales. With the level of volatility that exists now in the spot market, we can no longer just take a simple position with regard to the type of contracting that we might normally do. So we had to find ways to hedge our products. And one of the ways we did that was to establish a dairy commodities exchange. Right now, the exchange’s members is limited to Fonterra and its direct customers. But as the dairy market becomes more sophisticated, we expect that membership in the exchange may expand. So that is one of the steps we took in response to the financial crisis.

PwC: In the face of the financial crisis, how have you managed to maintain the morale of your employees?

AF: As I mentioned, the crisis precipitated a drop in dairy prices, which resulted in lower returns to our owners – the farmers who comprise our dairy cooperative. On the other hand, we had an excellent year in the brands we sell globally and actually grew both market share and margins. So we had a two-sided message to our employees: ‘Total return to our farmers has gone down. But at the same time, we have grown profits.’ To the extent that we managed to grow profits, it hasn’t been as tough on our people as it has been for employees in other companies.

PwC: Has Fonterra been able to recruit talent from companies hurt by the financial crisis?

AF: Yes. We have recruited talent that we may not have otherwise been able to attract before the crisis occurred.

PwC: In our last annual global survey of CEOs, 72% of the respondents told us that talent was a critical driver of their companies’ long-term success. Would you say that is also true for Fonterra?

AF: I am in complete agreement with that sentiment. And frankly, I think that as time goes on – and the world grows evermore competitive – human capital will become an even more important factor to business success.

PwC: In order to improve productivity in the future, what sorts of business models might your organisation adopt?

AF: On that front, we are taking a number of actions. We invest a significant portion of our R&D budget in technology that is intended to help us drive efficiencies. This is critical for us because, at a bare minimum, we must offset the annual rate of inflation. Along with technology, we also drive efficiencies through continuous process improvement – what we call ‘operational excellence’. Finding ways to do things better is built into our corporate culture. And when you have a culture in which your people are continuously driving greater efficiency, you can avoid disruptive and painful cost-costing exercises.



PwC: As a consequence of the financial crisis, do you expect governments to enact new regulations and might that lead to over regulation?

AF: There is that risk. But here in New Zealand, I don’t see over regulation as a material risk. And that, in part, reflects the attitude of the New Zealand government, which is very focused on attempts to drive the country’s overall productivity. What I see in New Zealand is a government that is ready to regulate in areas where regulation can actually aid productivity, and a government that is willing to work with large businesses in order to improve the wellbeing of all New Zealanders. Proactive businesses that are willing to work with the government can find ways to help enact effective and efficient regulation.

PwC: What about regulation in some of your overseas markets?

AF: We are struggling in some countries – such as Sri Lanka and Argentina, for example – in terms of price controls. It’s been a reaction by government against the volatility surrounding commodity prices. So while I gave you a favourable response concerning the regulatory approach taken in New Zealand, it’s a lot trickier in other parts of the world.

PwC: From your perspective, are there positive aspects to regulation?

AF: I can say that if well thought out in full consultation with the business community, regulation can have many positive aspects. The issues that regulation must address are complex and there is always going to be a resulting cost on industry. But if done responsibly, regulations can ultimately open up opportunities in terms of broader consumer acceptance for your products. So for businesses, regulation presents both threats and opportunities.

PwC: What are your views regarding regulation of the banking sector?

AF: Broadly speaking, if you look at the countries that came through the financial crisis reasonably well, it was those countries that had sound regulation on their financial services industries. New Zealand, Australia, and Canada, for example. So, I think there is a lesson there that a little more aggressive regulation in the financial sector area across the world would be a sensible thing. Ultimately, I would like to see that as one outcome of this crisis.

PwC: Governments around the world are trying to reach agreement on accords that address the risks of climate change. What are your thoughts about that effort?

AF: From my perspective in the food industry, I think the world also needs accords on ways to increase food production by 50% over the next 30 years. That is what the United Nations is saying we must do – and the question now becomes how are we going to increase food production in a way that is sustainable for the environment? That is a big issue for the food industry. But it is also a huge global concern. It’s inappropriate for any country to stick their head in the sand and say, ‘Let’s not worry about the environmental consequences of food production.’ New Zealand is taking action around the environmental implications of large-scale agriculture. And I think the global food industry has to say, ‘We are going to be increasing production but we are going to do it in a responsible way.’

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CEO perspectives on successInterview transcripts of Alfredo Sáenz, Second Vice Chairman and CEO, Banco Santander





Alfredo Sáenz is the Second Vice Chairman and CEO, Banco Santander

PwC: What will it take for the economies of your main markets to stabilise?

AB: Let’s begin with Spain. In Spain we expect a slow recovery that, in macro terms, will probably not be perceptible until the second half of 2010. Moving from macro to micro, the situation is complex as the type of economic structure that will emerge from this crisis will not be the same as the one we have left behind.. Obviously, the construction and property industry will recover more slowly and will probably take more time to absorb the excess.

We are concerned about the industrial sector because, in comparison to the present financial crisis, the crises of the 1980s and 1990s were not as deep or intense as this one. Above all, those past crises did not have such a large credit component as the current one. The construction sector will eventually resuscitate, as will tourism and the service sector. But the industrial sector in this country, which is of medium size and already suffering, has a more complicated horizon.

PwC: Do you expect more protectionist barriers to arise as a result?

AB: That’s difficult to imagine. The world has stigmatised protectionist policies. Economists and others have clearly demonstrated that protectionism does not guarantee anything – particularly, not growth.

PwC: Do you expect to see changes in the way the banking sector operates?

AB: We may see a couple of changes. The first relates to a separation of high-risk activities, or casino banking, which is investment banking in its purest form, from what is now called, narrow banking, or the traditional deposit and loan banking. I do not mean that they will be legally separated, but that they will come under different regulatory treatments to distinguish one type of banking from the other. They will be regulated differently and the risks assumed by each type of institution will be weighted differently. If hybrid banks combining aspects of theses two bank types are allowed to continue, they will require specific treatment.

The second change we might see relates to capital requirements. I believe that regulation will mandate additional capital for all types of banks, particularly investment banks with highly leveraged balance sheets. At the same time – following the recent period in which there really were no liquidity rules – I expect liquidity requirements to be tightened considerably. All these things will create a very different playing field and entail certain consequences. Credit will become more expensive, more difficult to attain, and will be relatively scarce. As marginal players are pushed out, capacity will decline. And there will be more supervision generally. The same process will more or less occur in the capital markets. Credit in capital markets will become more complex, expensive, and scarce. The banks and capital markets will attempt to pass the costs associated with this new regulatory environment onto customers, just as every business does. If nuclear power plants require greater security they become more expensive; but nobody expects that General Electric or Alstom will simply absorb those additional costs.

One other additional point: The concept of a globalised financial market might also be re-thought because globalisation generates systemic risk. Now, economists and politicians alike believe that the world needs this type of global financial capacity. But it is also clear that in a globalised financial market the risks of contamination are very high – as we have seen in the case of Lehman Brothers. How to control this kind of systemic risk is a major cause of concern for regulators. There are now plans to establish international committees with responsibilities for managing systemic risk. For the first time in history, we’ve experienced a financial pandemic and need to determine what sorts of firewalls are required. But even minor firewalls will necessarily restrict the way financial institutions deploy their resources globally. The point is that protections against systemic risk will also restrict the globalisation of financial flows.


PwC: Where will the control over systemic risk lie?

AB: Not with any one single country. It is possible that general control will rest with one or more of the international regulatory bodies that already exist. For example, the European Union might generate a systemic risk doctrine for all of Europe and on that basis each EU member would have to create particular laws conforming to that doctrine. But I am unable to say with any certainty how a regime for controlling systemic risk will come about. I do know, however, that this issue has many unanswered questions. In the case of a cross-border institution, when a failure occurs as a result of systemic risk, who pays the bill? The treasury of one country or the other? The issue is therefore very complicated. All the major international forums such as the G8 and G20 are discussing this matter; and Basel and other bodies have been asked to study it and propose solutions. Eventually, this will lead to some type of restrictions on growth, or on particular kinds of growth, or on particular ways to manage capital. This will probably not occur until the financial crisis is over.

PwC: And yet, Spain’s banking sector is highly regarded. Would not its international standing help it exert some influence on the course of regulatory deliberation?

AB: It is true that the Spanish banking sector – and Santander in particular – has a very good reputation with in the EU. This means that they listen to us and respect us The international financial forums are a kind of spider web relationships and connections that have been created over many, many years. We cannot expect to force our way in overnight but we are currently participating in all the discussions and working groups going on in the international financial arena.

PwC: Once a recovery takes hold, will consumer spending return to its former levels?

AB: Consumers have very short memories. We are now in a phase in which consumers must de-leverage and that means saving more and investing and consuming less. Consumers must therefore acknowledge that there can be no easy credit right now.. Nevertheless, the Spanish banking sector needs to concentrate on doing what it must; we cannot turn water into wine. In the past six years, Spain has become hyper-leveraged by almost €800 billion. We now need to de-leverage. The actual issue is not that Spanish banks are refusing to lend, but a bank is simply a link in a long economic chain and the de-leveraging process must therefore be undertaken by the entire real economy.

PwC: Will we ever return to the same economic behaviours as before?

AB: I am sure that we will return to the stock markets and buy risk-based products and make mistakes because this has always happened. I am old enough to tell you that I have seen these behaviours over the course of four crises. Human greed results in these behaviours. People say, “I swear I will never invest in the stock market again.” And then, four years later, they invest in the stock market.

PwC: I imagine that consumers’ financial attitudes and behaviours will depend on whether or not liquidity surpluses reappear.

AB: Of course – because if there are surpluses, we will go too far again. Billions – even trillions – have been pumped into the markets and must obviously be withdrawn at some point. But politicians and authorities are clearly reluctant to do so as they are concerned about the risk of precipitating another decline in growth. In response to the financial crisis, we have probably reacted too aggressively – particularly in the US. We have pumped too much money into the economy, and we have to be careful in order to avoid withdrawing it too late. Financial bubbles are a risk we should always have in mind.


Alfredo Sáenz, Second Vice Chairman and CEO, Banco SantanderContinued

PwC: Has the financial crisis caused you to re-think Santander’s business model?

AB: Our model has worked well and we have experienced only a minor impact as a result of the financial crisis. In fact, results for 2009 will be similar to last year’s, and our prospects are good. We have therefore not changed our approach. But we have taken into greater consideration four issues. The first is risk management – an issue that has been highly relevant to this crisis. We have asked ourselves the question: is our risk management adequate? The overall result is very positive. The second issue concerns portfolio management – which baskets we put our eggs in. Right now, our portfolio focuses on Spain, Brazil, the UK, and, to a certain degree, the US. We have no investments in Central Europe or Asia. Third, we have devoted quite a lot of time to keeping abreast of developing regulatory reform. Fourth, whatever happens in the future, it is clear that we must have a lot of capital on hand. There will be dark clouds and storms, so it is better to be in a strong capital position even though some of our analyst and investors say we conserve too much capital. But during uncertain times we must be well protected and ready to take on board events as they occur.

PwC: Has the financial crisis affected the functioning of your Board of Directors?

AB: We have an Executive Committee, which meets weekly, that devotes 80 percent of its time to risk issues. The Committee assesses operations and controls over risk, reviews large customers, and considers the bank’s sector positioning. One can think of it as an Executive Committee for Risk. In order to ensure an optimal focus on risk, the Executive Committee is comprised of both executive and non-executive Board members. We also have the Risk Committee, which is the highest committee in the bank dedicated to the assessment of risk. The Risk Committee is comprised of independent Board directors and bank executives responsible for risk management. Because our business embraces the principle of independence, neither the Chairman nor I are on the Risk Committee. When an issue is too complex for the Risk Committee to make a decision, that issue is passed on to the Executive Committee. But in the end, most issues related to risk are decided by the Risk Committee. In terms of the way banks typically manage risk, I believe that Banco Santander is at the top of the pile. All these approaches having to do with managing risk that are purported to be recent major discoveries, Banco Santander has been applying for a long time.

PwC: During the downturn, has it been difficult to maintain the commitment and engagement of the bank’s employees?

AB: No, I have not perceived this to be an obstacle – not at all. Of course, the downturn has changed our objectives and priorities. But while our 2009 and 2010 budgets will establish incentives similar to previous ones, more emphasis will be placed on increasing investment and on recovery. It is a matter of aligning incentives with our objectives.

PwC: Has the downturn provided an opportunity to recruit from the international pool of talent?

AB: We do a very good job developing talent internally and have well-structured career plans for international positions. I often say that one of the most fundamental changes that could occur at this bank is when the Board and Management Committee meetings are held using English.

PwC: What focus has Banco Santander placed on the issues of sustainability and climate change?

AB: We are focusing actively on two things. First – above and beyond the obligations imposed upon us by regulation – we are very involved in issues of responsible financing. We have established various committees employing social responsibility criteria to screen our financing opportunities. We are also involved in the development of the Equator principles which encourage businesses in the financial industry to conduct their operations in socially responsible ways and adopt sound environmental management practices. As regards climate change, we have not adopted a position on that because we have not been asked to.



PwC: Do you think that Banco Santander will emerge from the financial crisis stronger?

AB: Unlike others, we have been relatively unaffected by this crisis. That being the case, I believe that this crisis will help us to become stronger in relative terms. Within the constraints that are imposed on us by the new regulation, I believe that we will emerge stronger and with more influence. We have capital and a well-established business. So I believe that there will be clear opportunities for us.





CEO perspectives on successInterview transcripts of Angela F. Braly, President and CEO, WellPoint Inc.





Angela F. Braly is the President and CEO, WellPoint Inc.

PwC: Do you see any positive economic indicators in your markets?

AB: Most of our 34 million WellPoint members come to us as employees of an insured employer group. So employment data is a very important reference point for us. It’s the economic factor that most directly impacts our business. But it’s not just levels of unemployment that we look at. It’s also the levels of underemployment. For us, underemployment means that more people are working in part-time jobs that don’t provide health benefits. So in our business, we watch unemployment and underemployment quite closely – while also acknowledging that these are lagging economic indicators. Right now in our markets, we’re still seeing employment losses, although those losses are beginning to stabilize. As we look forward, we expect unemployment to remain at relatively high levels until, potentially, the end of 2010.

PwC: As a result of the economic contraction, do you expect changes to your capital structure going forward?

AB: Because we’re a health insurance company, we’ve always tended to be conservative in terms of our capital reserves. We take into account the ups and downs of the economic cycle during our capital planning process. On a comparative basis, I would say that given the volatility we’ve experienced, our capital positioning has grown more conservative. And in light of continuing factors – such as high unemployment rates and the H1N1 flu epidemic – that’s likely to remain the case for the foreseeable future.

PwC: What are your expectations about consumer spending once an economic recovery gets underway?

AB: Our business provides us with an interesting perspective on consumer consumption. We know that healthcare services and health insurance are valued by most consumers. But at the same time, we recognize that some consumers who enjoy good health might not view health insurance as an essential purchase. Now, the marketing techniques commonly used to stimulate demand for consumer goods may not make sense for health insurance. Also, how the consumer views spending for the health care services they need is impacted by the design of their health insurance policy. We feel the best approach is to educate consumers – give them the tools they need to make smarter health insurance and health care choices. At WellPoint, for example, we focus a lot of on information transparency so that the consumer fully understands the cost of any given medical procedure and how much they will be responsible for.

PwC: What’s been the consumer response to that approach?

AB: Consumers welcome the opportunity get involved in their own healthcare decisions. The key is making consumers aware of the choices available to them. So our focus is getting consumers engaged and making sure they have the information they need. And as a result, they’re having more informed conversations with their doctors and hospitals about what a procedure costs, what the potential benefits of the procedure are, and what the risks might be.

PwC: Some observers believe that the economic crisis has undermined the public’s trust in the private sector. Do you agree? And what is your industry doing to help restore public trust?

AB: I think the public’s trust in almost all sectors of business and government is an issue right now. As a consequence, it’s very important that the health insurance industry articulates its value proposition in a very clear and precise way. In my view, the industry’s value is in speeding and simplifying the public’s access to affordable health care. We help consumers get the right procedure, at the right time, in the right setting. I think if we help the public to understand our value proposition, their trust in us will return.


PwC: Will WellPoint become a stronger company as a result of the economic crisis?

AB: I think we will definitely become a more focused organization as a result of the crisis. Our service operations have gotten sharper, for example. And the crisis also prompted us to sell off some peripheral parts of our business, and that has made us a leaner organization. So I do think we’re stronger as a result of facing these challenges and preparing ourselves for whatever might happen in the economy. Our people figured out how to achieve higher productivity as a result of some of the challenges they faced and they’re not going to go back to their prior behavior. They’re going to take advantage of what they’ve learned and carry it forward. So the crisis took us to a new place – it was a reset for our business.

PwC: Has your board of directors become more hands-on as a result of the economic crisis?

AB: Our board has been and continues to be deeply engaged in issues relating to strategy and risk. Being a health insurance company, our core business is in evaluating risk. But now, more than ever, the company and its board have become more sophisticated in our analysis of risk. It’s an agenda item at all of our board meetings. And we continue not only to get better at quantifying risk, but also in building right the kind of culture that can appropriately manage risk over the short- and long-term.

PwC: What is your approach to acquisitions? And how does that effect the way you go about building your brand and innovating?

AB: WellPoint has been built through acquisition – we’re the product of 14 separate Blue Cross and Blue Shield plans coming together. So we are very much attuned to potential acquisitions and opportunities to combine with other Blue Cross and Blue Shield companies. But we also realize that all acquisitions must be in service to our brand. Our brand is very valuable to us – it’s the strongest one in the industry. And since our brand is perceived differently by each of the age groups we serve, we must be very diligent about taking a focused, customized approach to enhancing the value of our brand among each of those demographics. On the issue of innovation, we think that as a result of health care reform, there will be new opportunities for growth. Consequently, we’re looking at what we call a core innovation strategy and a non-core innovation strategy. For example, we have a joint venture in China that allows us to diversify both our core skills as well as non-core competencies – like our ability to process claims for Chinese insurers. So we’re definitely focused on how we can be structured for innovation.

PwC: Is WellPoint taking any new steps with respect to risk management?

AB: We’re actually in the process of gathering risk management best practices –from across our industry and other industries as well – and embedding those practices into our organization. Our end goal is to put in place a sophisticated risk management model that responds both to the requirements of good governance as well as day-to-day operations and management. When our model is up and running it will provide us with improved supervision of our capital position and a better handle on future operating results.

PwC: How have you been able to maintain morale and motivate staff during the downturn?

AB: If your people aren’t on board and committed to your mission, you can’t be successful. And I do think our associates have felt the effects of the downturn in many ways, as most of us have. So we’ve done a couple of things to make sure we are addressing those issues. First, we took a different approach to our incentives for our frontline associates – the people who work in customer service and claims administration. This year, we brought their incentive structure closer to home by changing from an annual incentive structure to a quarterly one. And instead of tying their incentive to operational results for the whole company, we tied it to the results of their on-the-job performance. That has turned out to be very popular with our frontline associates and it is driving improved performance. Getting a quarterly reward can make a big difference to a frontline associate.


Angela F. Braly, President and CEO, WellPoint Inc.Continued

PwC: What kind of people and skills will you look for in the future?

AB: We know that WellPoint can be a change leader in our industry. But to become the change leader, we need folks who are comfortable with change and prepared to be a part of the change that is coming to the health care industry. At the same time, the skill level we require of our people is rising. Our goal is to have a very engaged relationship with our members. That’s because the member’s entire life situation has a direct bearing on how their medical condition can and should be treated. So for example, rather than thinking about a WellPoint member as an asthmatic, we want our frontline associates to think about that person as a single mom, who’s working part-time, who also has asthma. From our associates’ perspective, it’s more satisfying to have that kind of a deeply informed relationship with a member. But that requires different skills so we’re making sure that WellPoint people come to us with those the skills or acquire them through our training programs.

PwC: Are reforms in health care necessary to restore US competitiveness?

AB: I absolutely believe that responsible and sustainable health care reform is necessary to keep American companies competitive. We know that medical costs are growing at an unsustainable rate. And we know that much of that is related to the inefficiency of the health care system. Right now, reimbursement is geared to the quantity of health care services consumed rather than the quality of those services or the results they achieve over time. And so the goals of health care reform should focus on the factors driving health care costs, and ways to steer toward higher quality and greater efficiency. We’ve really got to get to the underlying costs of care. But what we’re seeing now in the debate is a move to add additional taxes onto the health care industry, which – in the end – is really just another tax that businesses and individuals will have to bear. So we are very concerned that reform should not be limited to the health insurance market but instead considers the whole of the health care system.

PwC: Do you have concerns regarding over-regulation of the health care industry?

AB: I’m concerned that the wrong kind of health care regulation could have unintended consequences that make certain kinds of insurance plans – that many people have today and like – unaffordable or unavailable. You know, health insurance is already a highly regulated industry. But the question is, have those regulations been applied in a way that meets the original policy? Or have those regulations been used for other purposes never intended by the original framers of the regulation? It’s an important consideration. I think there is much that can be done in partnership between business and government. But I’m concerned about our industry’s continuing ability to innovate. We should make sure that we adopt the kind of regulation that supports rather than stifles medical innovation and a robust private market. There are many, many examples of how that has or has not worked in health care.

PwC: Is the current reform agenda sufficient for tackling health care’s fundamental problems?

AB: I think the health care reform discussion has changed over time. Originally, the discussion was around value and ways to construct a sustainable health care model. Over time, the discussion narrowed to one focused on health insurance market reform and health care financing. And I think that just postpones a serious debate about some very critical issues: the solvency of the Medicare and Medicaid programs, the need for tort reform, and ways to promote the next wave of health care innovation. So there are a number of things we should be tackling in the discussion that we’re currently not.



PwC: What about the role of the individuals in health care reform?

AB: It’s essential that individuals accept responsibility for their own health and understand how their health affects the health care system, overall. When individuals exercise regularly and get the right kind of nutrition that makes a big difference in their lives. But it also makes a big difference to our over-burdened health care system. To some degree, having a greater focus on healthy behavior is an opportunity that we’re missing out on





CEO perspectives on successInterview transcripts of Bruno Lafont, Chairman and Chief Executive Director, LAFARGE Group





Bruno Lafont is the Chairman and Chief Executive Director, LAFARGE Group

PwC: How would you describe Lafarge’s current performance? What is the outlook for the coming period? You have suggested several times that mid-2010 could be the first milestone on the road to a rebound in Western countries – do you stand by that?

BL: First, I would deal with Lafarge’s environment, which has been strongly affected by the market turmoil. This is especially true in the developed world, which has been hit by the most severe construction sector recession in 50 years. The key feature of the crisis has been the profound and brutal slowdown in the developed countries. Depending on which case you look at, volumes have plunged by 15% to 30%. In its wake, the crisis has inevitably generated funding problems, unemployment and deficits, which all point to the same conclusion: private investment has stalled and only government stimulus measures can kickstart growth. Even then, the benefits will not feed through until 2010.

On the other hand, we are also seeing signs that things are stabilising somewhat, and it appears unlikely that the situation will decline further. A handful of indicators are showing signs of improvement, including housing prices, building permits and mortgage lending, and unemployment rates are levelling off. Taken together, these encouraging developments suggest an upturn in the second half of 2010, albeit starting from a very low base. Moreover, there is a genuine need for construction in countries such as France, the UK and the US.

Emerging countries, on the other hand, are something of a mixed bag. While the economies of the central European nations are highly dependent on the developed countries, Africa, the Middle East and Asia are in much better shape. Against this backdrop, Lafarge has been performing well and has demonstrated its ability to adapt swiftly to the circumstances. As planned, we have put in place a strategy aimed at shoring up our financial structure in light of the debt taken on as part of the Orascom acquisition. In addition, our free cash flow generation targets have broadly been achieved – i.e. a 60% increase in free cash flow. I can honestly say that I have been impressed by the effort and focus shown by our teams across the world, and by the Group’s ability to meet its objectives.

PwC: What were the main levers used by Lafarge to achieve these goals?

BL: We took the right decisions very early on. For example, our capital increase and action plan were announced in February, while our cost-cutting programme was launched three years ago, before the onset of the crisis. Moreover, we made free cash flow a key indicator over one year ago, and a portion of variable compensation of 2,000 top managers is indexed to that. All of these initiatives have yielded excellent results.

In addition, our ambitious plan to develop 60 million tonnes of fresh capacity was scaled back to 40 million tonnes within three months. These all demonstrate our responsiveness in a deteriorating market. Although I remain cautious, I think we may see an improvement in the second half of 2010.

PwC: How does your deep footprint in emerging countries represent a strategic advantage for Lafarge? How do you expect your sales breakdown to evolve over the medium term? And what is your view on the influence of emerging countries in the broader economy? Do you think that their momentum is sustainable?

BL: In 2008, emerging countries represented 50% of our sales, more than two-thirds of our cement capacity and 60% of net income. The crisis has actually bolstered their influence. These countries will continue to absorb 80% of the world’s construction requirements over the coming decade. At the same time as we have consolidated our position in developed markets, Lafarge has successfully integrated into emerging countries and we are continuing to step up our industrial capacity there. We have a large pipeline of projects in emerging countries but we only consider local consolidation opportunities if they make sense in terms of synergies and if they represent reasonable value. Currently, the M&A market is very sluggish and there are few opportunities around. However, given the current climate, transactions that can represent the first step towards strong future development are not out of the question. Crucially, we have a clear strategy and know how to draw out and develop added value.


PwC: What emphasis does Lafarge place on innovation? Does it have a major part to play for the Group in the quest for durability in building materials, ecohousing, etc.?

BL: Lafarge has a strong ecological footprint. For sure, we’re among the leading emitters of CO2 – but we were also one of the first to commit to reducing them. All of the products, systems, ideas and services that emerge from Lafarge are aimed at boosting the energy efficiency of buildings, improving all-round durability and respecting our commitments to combat current climate change. Lafarge is one of the most innovative players on this matter in developed countries. We boast the world’s leading research centre for building materials.

Research efforts and new product development will increasingly be focused on emerging countries. We have made the ability to develop products on the ground central to our marketing organisation. Why restrict innovation to just 20% of the market (i.e., developed countries)? Our current offering includes innovative products adapted to varied local contexts that take account of the local climate, lifestyle, income, resources, etc. We are improving our knowledge of local markets, but we still have plenty of scope for improving our understanding of the specific needs and conditions of each country. In 20 years, we have accumulated a wealth of knowledge that allows us to generate value for our customers and for Lafarge.

In terms of organisation, the degree of emphasis to place on global versus local development is a constant challenge for management. Lafarge’s activities are local, yet we cannot ignore the global environment. We have succeeded in implementing a multi-local structure whereby we provide the means at the central level to respond to local needs. The current phase is focused on strengthening our local resources.

PwC: Sustainable development has become a major concern in our society, and Lafarge has long since flown the flag. Here we are a couple of days before the Copenhagen Summit closes: what is your analysis of the role of business – notably industry – in the fight against global warming? How can or should it contribute?

BL: As I said previously, our sector is especially concerned and Lafarge has stepped forward to lead the way in terms of combating global warming. We acted virtually alone initially, but we took the whole sector with us. Take for example the Cement Sustainability Initiative (CSI) programme within the World Business Council for Sustainable Development, which brings together 21 cement businesses and illustrates the unique sector-based approach to climate change: the members set out their scope and measurement system, make pledges and have their commitments audited. It’s a form of self-regulation. Through this programme, we cut CO

2 emissions by 70 million tonnes between 1990 and 2007. That represents the emissions of a developed country of approximately 20 million people. So, in the context of the overall environmental effort required, Lafarge is ready to press ahead with concrete actions to preserve the environment. The per-tonne price of carbon is a major investment criteria for us – bearing in mind that these decisions are taken with a 50-year horizon. But there is scope for rapid progress as long as the environmental effort is equitably distributed, that all the players are bound by the same commitments.

Lafarge also works closely with NGOs. For example, we have just renewed a partnership agreement signed with the WWF 10 years ago. Awareness of sustainability issues has reached such a point that there is no turning back – and rightly so.

Bruno Lafont, Chairman and Chief Executive Director, LAFARGE GroupContinued


PwC: How have you adapted your HR policy, and in particular your talent management strategy, to the recession?

BL: People are central to Lafarge’s industry. The transformation of the natural raw materials we work with requires skilled management and expertise. This is the prerequisite for an efficient cement plant. Our teams are superb and our long-term goal is to continue to outperform our competitors at all our industrial sites, which now number more than 2,000 in 80 countries. This is a tremendous challenge. Our efforts have been concentrated on gearing our HR policy to this difficult period. While we are strong on diversity, we are determined to improve further and to develop new talents across all our territories. What’s more, we have continued recruiting in emerging countries.

The integration of Orascom is a key subject. Acquisitions enrich Lafarge with high-quality human resources and allow us to share experience and build on it. That is what we are doing at the Cairo Management Center, where three of our senior managers are tasked with attracting new talent, redeploying resources, building Lafarge know-how into the Orascom teams, interconnecting our experience and acquiring an in-depth understanding of local needs. All Group functions are represented at the Management Center. We developed it very quickly, but it is proving a fabulous tool for streamlining and improving efficiency through working practices and hands-on management.

PwC: What is the most important lesson to draw from the economic crisis?

BL: First and foremost, the crisis is still with us. Secondly, I prefer to think that we are constantly learning that we never stop learning, so I’m not sure how appropriate the question is. You can learn in less volatile periods as well, but the process tends to be slower. Also, you have to bear in mind that the next crisis or economic transition will necessarily be different. Nevertheless, I think it’s fair to say that the general understanding of the economy has made record strides. This is the first crisis of the internet era – not to mention highly developed derivatives markets – and everyone now has a clearer vision of globalisation and the divide between the real economy and finance.

We also have a better understanding of the role of the state. In crisis conditions, private interests cannot remain in isolation and must inevitably come to terms with the collective interest. Lastly, we have seen the shortcomings of the every-man-for-himself approach: co-operation is a precondition of success and we must therefore seek to develop ways of co-operating each and every day.




Bruno Lafont, Chairman and Chief Executive Director, LAFARGE GroupContinued

CEO perspectives on successInterview transcripts of Carlos Fernandez Gonzalez, Chairman of the board of directors and CEO, Grupo Modelo





Carlos Fernandez Gonzalez is the Chairman of the board of directors and CEO, Grupo Modelo

PwC: This interview is based on three basic topics. The first one is your perception about the current global situation and what trends you identify, as well as if you think we are on the way to recovery, if you think there are still serious rebound risks. Also, what is the crisis’ impact on the Mexican economy and your particular sector? The second topic is the strategy with which you are fighting this situation and the third is about regulatory issues. Should we start then with your perception of the global and national environment?

CF: As I see it now, this situation caught everyone by surprise. What happened with the mortgages in the US in 2007 was just a warning sign of what was to happen. Undoubtedly, this was going to have consequences...maybe we all experienced a winning streak for several years with healthy growth, the development of many economies, the consolidation and strengthening of several financial institutions, and businesses that mushroomed in 10 years while for others that growth had taken almost a century. There was an important dynamism in the global economy. We limited the mortgage issues to the real-estate sector, neglecting the consequences they could have in the global economy; that same phenomenon in the US occurred under different conditions and had a different scope in many other parts of the world. This was a like a small snowball that turned into an avalanche, as was evident at the end of 2008

How did we look at this situation? First we were afraid, scared in many ways, since we were all exposed to a situation we did not fully understand and could not gauge; pessimism went from 0 to 10. It made us think about our businesses, our boards, our teams – this was an emergency situation and we were forced to make some important decisions. As I see it now, I’m neither more optimistic nor more pessimistic than before, my perception has remained the same since the beginning of the year. We have to handle things carefully, delicately…and we have to visualise a recovery soon.

I am concerned about the significant rally in the valuation of several businesses and corporations when this whole situation has not been completely absorbed or eliminated; this could be generating another kind of economic bubble. Such high valuations do not match the reality of some countries’ markets and economies. I think we might be seeing what we want to see – a kind of illusion.

Moreover, the bad credit or toxic investments that have caused so much damage in the financial systems haven’t been assimilated or eliminated yet. So there is no real alignment between what we see and what we feel. One of the main things that will emerge is how our people, clients, consumers and the families of our co-workers feel. Because they are living the reality, a reality that still hasn’t reached macro- and micro-businesses. For example, if you go to a corner shop it doesn’t have the liquidity it used to have; if Modelo, Coca Cola or Bimbo vendors were there earlier, the owner will not have enough money to pay your vendor and will ask him to come back again. Resources are limited and the operation costs (taxes, electricity, property taxes, etc.) are growing. Summarising, what I see is a lack of congruency, so it will take us some time to recover. And I fear the early signs of recovery may not be natural but have been forced by the significant investments made – maybe we haven’t learned the lesson yet.

PwC: Some experts believe government stimulus investments have produced excess liquidity in some markets, which could be inflating new bubbles. Do you think this current liquidity could turn again into new investments or a resumption of foreign investment in emerging markets?

CF: I think this is already happening, there’s evidently an important liquidity and a lot of people prefer to invest, instead of putting their money in the bank with really low interest rates. It is important to consider if the multipliers are correct. The significant increase in business valuations (in some sectors) this year should alarm us. The multipliers paid in the past by some industries or sectors were based on a promising future and we could afford to give awards; however, in the current situation we see a future of work but not exactly a future of bonanza. So, I definitely believe the world has to continue working and investing to generate wealth, jobs and a better distribution in every way, but this should be natural not induced.


PwC: Focusing more on your company, some headlines do not reflect the sparkling results from Grupo Modelo, and a few other companies. How have you achieved those results in such adverse conditions?

CF: Realistically, we would have never expected those results based on this scenario. I think they are due to three important factors: first, real understanding of the economy based on a proper cost-benefit balance for consumers or end-users. So, in the last five or six years there has been no price increase, there has been an important performance and effectiveness improvement, and we have tried to find a way to attract clients. Second, the way we generate products allows us to increase volume, helping us to have healthy margins and continue our business deals and expansion plans, including the development of new products. Third, we are cautious and focused: our philosophy has been not to go crazy and generate ‘go go companies’, as Dr. Asis said. That is to say, start generating luxury in one area and there another and another …our business focus is beverages, especially beer. Everything is based on an important framework of discipline, which is reflected in the good results; and the national market which allows us to work in that direction; our products are considered luxury items in the international market because they are much more expensive than the local beers, so there we have experienced some setbacks in volumes, around 4% decrease compared to last year. This is mainly due to that factor, since people stopped visiting restaurants, resorts, hotels, etc. or are not willing to spend their money in the same ways.

PwC: Have you felt any pressure from the international regulations, tariffs, or any other trade tax?

CF: Not until now; sometimes they want to apply a certain tariff, perhaps promoted by local competitors; sometimes they require a certain label, origin certificates and some additional issues that complicate our exports or imports scheme in those places, but fortunately we have been able to comply with them.

PwC: What is the secret to creating value during a crisis and where is your strategy going in the next few years?

CF: I think that every company must have a plan for the long run; if you don’t know where you want to be, everyday decisions become difficult and it is hard to focus the efforts of your work team and collaborators towards your goal. Grupo Modelo, from the start, had clear objectives; some were short- or medium-term objectives, but the most important ones are those that always inspire and help you to move forward to fulfil your dreams. Some dreams seem unachievable but you somehow manage to reach them and then you have more dreams to fulfil. This has been part of our philosophy and the other part has been caution, always updating and not doing crazy things, always trying to create value through the delivery of results. Likewise, I believe there is a cycle to these things: not every year has to be extraordinary, there are difficult years, important challenges, but fortunately this long-range vision has always helped us to overcome rough patches.

PwC: In the strategic part, what direction did you decided to take: expand your production capacity? Create new products? Assume a more aggressive position in the international markets?

CF: I think Modelo has always had a cautious spirit, but has also assumed some risks. Evidently, every business has its challenges and you must make decisions for things to happen, measuring precisely the context where you work from the start. In the 1920s Mexico was a country that was recovering from a very serious problem, and the company decided to build a beer factory, the youngest in the country. There were other beer groups that had much more history in the market, but the company decided to do it and do it right. The same is true of other crises; and now we are in the process of starting the operation of a beer factory next year in Coahuila. We have always been able to launch our projects one way or the other, building big factories with significant investments in the middle of some crisis. That is what we’ll do now, we’ll continue to invest, improving our positioning and expanding our production plant. We plan to achieve a better management of our general infrastructure, strengthening our exports, looking for a way to develop new markets, maybe exporting other brands, improving our resource distribution and logistics in the country. The factory I mentioned before will help us achieve these goals, so I think there is no reason for stopping and waiting for the crisis to be over. This is what we have learned from the past, not just in our sector, but others too, to always take the long-term view.

Carlos Fernandez Gonzalez, Chairman of the board of directors and CEO, Grupo ModeloContinued


PwC: What is the production capacity of this new plant you are building?

CF: Our initial investment is approximately $600m with which we will be able to produce 10 million hectolitres of beer. The idea is to do it in two stages, the first one would start by the end of Q1 or the beginning of Q4 next year, and the second one would start during the last quarter. So, if we consider that the installed capacity is enough by that time, we could invest the remaining $5m by 2011, so there would be five million hectolitres with the possibility of turning them into 10 in less than 12 months.

PwC: You will have approximately a 90-million installed capacity…

CF: No, we’ll have capacity of around 70 million hectolitres. This year we’ll sell approximately 60 million.

PwC: Are you thinking to establish factories abroad in the future?

CF: Well, we have a malt factory in Idaho, which is an area of the US rich in two-line barley, which is not produced in Mexico and is essential for our products.. Aside from that, we could say that our strategy and exporting goals have been to produce in Mexico; that is why we have tried to have cost-effective breweries, generating benchmarks where our indicators are higher than the international indicators, and as long as we can continue improving those indicators and have really competitive production costs, we’ll definitely be able to continue exporting from Mexico.

PwC: As for branding, how do you create a successful brand like Corona and is there also the possibility of making a similar success story out of other brands of the group?

CF: The philosophy of the company has always implied extreme care of the product: quality does matter, it is highly valued by the client, and all our investment in ensuring that quality has definitely paid off. During the 1960s we started an internal campaign focused on quality in every stage and we started the renovation of Cervecería Modelo in Mexico City; during the 1980s we renewed all the factories to guarantee the best equipment, the best systems, the best machinery and equipment vendors. So, I can proudly say that we have the leading processes and procedures in the industry. This is what supports our strategy to position our products abroad. Modelo has always been aware of the need to have a brand portfolio that could compete with any international brand – and is successful in the biggest market – the US market. A brand that is successful in the US becomes successful in other parts of the world. So, I believe Modelo is well-positioned in that environment as a high-quality product, in a market that is always looking for innovation and new products with a different identity, with a new economic dynamism generated by the baby boomers, and also with folkloric ideas. Corona and Grupo Modelo know how to take advantage of that environment – with a well-defined strategy and the undisputed support of the board of directors. There have been times when we have run important risks, because exporting costs were high and we barely received profits or even registered some losses due to all the necessary investments and the low volumes of earlier days. Later, the brand started to generate that preference and to position itself without advertising campaigns, and finally we became a top brand and started facing the attacks of competitors, which generated media coverage we had never imagined.

PwC: Positive for you right?

CF: It was positive but there were critical and difficult moments. However, all that helped position the product, and after that we generated a concrete communications strategy to promote the product and we decided to make a mass-media campaign, which had to be simply focusing on the product and we got what we wanted.



PwC: Which would be the spirit of Corona brand?

CF: I think the spirit of the brand is somehow related to enjoy what you do and what you have. Sometimes we come to this world and we do not enjoy much, living crazy. All our communication is based on stating Corona is the beer, period, that’s it! Quality does not have borders and our ads just invite people to sit down and enjoy a beer, enjoy what you have! Overall we have a strong portfolio of brands: the most popular one is Corona, of course, because it is the main brand of the group, with which we have entered many markets. Corona Light is also showing an important double-digit growth rate. It’s been successful in the Mexican market and the industry in general. The can we use for Corona Light is the same as the tall Modelo Especial, which has already positioned in the US as the third most important beer brand in that country, with double-digit growth rates. We are not doing a lot of promotion or merchandising of that brand now, but it is generating an important sales volume and we are satisfied with the results. Pacifico is another brand that is also growing steadily, even though it is showing moderate growth at a little over 5%. Modelo Especial and Negra Modelo are doing well; Negra Modelo has its own niche and is generating positive results. I think we are one of the few beer producers that are currently producing 13 different brands of beer; practically all of our brands are known in many different countries and we are proud of that. So, I think we have a pretty well-positioned portfolio. In the domestic market we have Modelo Light, Estrella, Montejo, Leon, Tropical Light, and all of them have significant growth rates and presence in their corresponding niches. We are also working on the Modelo Chope, which is a draught beer that has been very well-received and we are satisfied with its performance. In our culture draught beer is not very popular, especially in bars or restaurants, but little by little we can transform the culture, not change it completely, but generate an important presence.

PwC: About distribution channels, how much has your commercial division grown and what are the results obtained?

CF: We have made an important change in the structure of our commercial division during the last six years, investing heavily in IT and using the latest technologies. We have implemented an ERP and all the related tools to gain a better understanding of the market around the national distribution centre renewal; today we have 32 agencies with a higher drop size and effectiveness, as well as a higher billing rate. This is also due to the training we have given our people, because we strongly believe that the higher the education and training level, the better the judgement and operational ability.

PwC: What does China mean for Grupo Modelo?

CF: On one hand, China is a headache and, on the other hand, it is an opportunity. A headache because we have had some troubles regarding the commercialisation of our products there, problems that thanks to the Chinese government and the Mexican authorities we have been able to solve. However, we still have problems. For example, there are people trying to refill the bottles with another beer and sell it at the same price or exporting refilled products from other areas of Asia or even copying our image to launch another brand. Nonetheless, it is a market that represents a great deal of opportunities. We have an imports and distribution agreement with Anheuser Busch InBev in China: I think there are opportunity areas for both and we’ll continue looking for a way to position ourselves strongly in that market.

PwC: How are things going with AB InBev?

CF: We are in the process of arbitration and we are awaiting the final resolution in the next few months.



PwC: What can you tell me about regulation? How do see the domestic environment, where do you think the regulatory systems will go in your environment and generally? Do you think there are some risks generated by the new regulations or new tax effects, like the ones we are facing now?

CF: Regulations are going to be inevitably linked to industry in general, and for certain industries like ours will become more specialised. For example, one restriction on our industry is that we can only sell our products to people over 18. However, I think that in some instances good practice is not being generated or that everyone is not measured equally. We always have to compare ourselves with the best rather than the underachievers, and doing that means generating the proper balance between the development of an industry and local, regional or national development. I think there are good international practices that could be adopted and adapted here in Mexico, and some things we do here in Mexico could be adopted by other countries. I think in our industry the lack of understanding about what we do for the community in general creates more regulations, in messages and communications, for example… we have far more regulations here than in other countries and I think the beer industry has given a lot to Mexico and will continue to do it. It is an important industry for the jobs it generates and because it has positioned Mexico as one of the main beer producers in the world. Instead of looking for more restrictions, we could look for more collaboration and generate through good practice more value in the industry and the whole country.

PwC: To conclude, regarding labour, you were not forced to make an important downsizing in these times of crisis, which leads me to think that yours is a company that focuses on retaining talent and promoting innovation. How do you manage your labour policies?

CF: One of the main things I particularly ask from all our team is respect, a lot of respect and communication. Respect in how they say things and treat people. Attitude is also very important. This focus has ensured we have low rotation rates and high seniority rates. We have a good combination of youth and experience, but most of us have around 20 years’ experience in the company and the average age is 35. We have people of 45 or 50 years old who have been working for the company for 30 years, and we have young people around 30 for whom this was their first job; they do not want to go anywhere else. We have had to make some adjustments, but it was almost natural wastage, due to retirements. However, if we have to let some of our people go, we always speak the truth and do it respectfully.

PwC: And how does the Group promotes innovation?

CF: We have looked for a way to develop a strong internal communications system, inviting everyone to participate in ‘kiosks’ or in the intranet to comment on various subjects to allow us to improve processes, programmes, take care of our clients, etc. But the innovation part focuses on talking about machinery, equipment and processes. We have an engineering team that is probably the best or second best in the world on innovation. In fact, an important part of our technological development and the improvement of our specialised equipment has been achieved by our engineers and vendors, and these vendors are already commercialising what was developed with our people. We are not interested in generating patents or being acknowledged in this sense, what we want is to solve issues, and we provide our recommendations or suggestions, and then they make the adaptations and develop prototypes that are generating great results. Some are no longer prototypes; they have already become equipment. We have an innovation committee that meets once a month to discuss packaging trends; we assess and talk about financial issues, since finance has a lot to do with innovation because our ultimate goal is to generate income to continue investing. Every innovation represents an investment, and we have to consider legal issues to ensure regulations compliance. Marketing and sales are also an important part of innovation to realise ideas and operations, and find out if we can do what we have in mind. Our sessions last from one to two hours, depending on the topics and products presented, and then we make an assessment and decide which ones will continue and which will have to wait.



PwC: Is climate change challenging you in any way?

CF: Yes, I believe it affects us all. Therefore, as part of our social responsibility we have to deliver the best results to generate the best resources possible and offer them to as many people as we can. We try to improve quality of life; we focus on educational and ecological plans, because the more education we have the better civilizations we will build.

Regarding the ecological part, forests have been there for hundreds of years and we are just catching a moment of their existence. But we keep on destroying what took years and years to develop. What will happen to our world, our planet? Climate change will affect the health of people and the development of society. If we are not able to take good care of our environment, we will surely be incapable of taking good care of our society. Natural resources will also be affected, which implies the limitation of goods and services; therefore, it is absolutely necessary to protect what really matters. Every year, we issue a social responsibility report detailing the progress achieved, for example, in the water retrieval area, the disposal of waste, contaminating emissions, as well as our specific plans and our philosophy.

PwC: How has corporate governance changed in Grupo Modelo during the last few years?

CF: Corporate governance is a key value in Grupo Modelo and it has evolved according to the reality of the environment and of the company itself. Corporate governance is definitely more dynamic, from the establishment of the partnerships to the members of the board and the board committees, because since our alliances with foreign partners and since we became a public company – not too long ago by the way – the internal dynamics of the organisation changed. We have non-executive directors, foreign partners, board committees with specific functions integrated only by independent advisors, who try to meet the specific needs of the company and comply with the requirements of Sarbanes Oxley and the Mexican Stock Market Law. Besides, we are convinced we have to do it and we do it, and the company has evolved as expected, complying and taking care of all this. Our board of 19 has a great combination of specialists and professionals with wide experience in the national and international market, in legislations, finance…so our sessions are very enriching and productive, based on an open collaboration, and continue to generate value for the company.





CEO perspectives on successInterview transcripts of Claudio Eugênio Stiller Galeazzi, CEO, Pão de Açúcar Group





Claudio Eugênio Stiller Galeazzi is the CEO of Pão de Açúcar Group

PwC: What is the impact of the recent global financial crisis on the dynamics of globalisation, on the capital market and on consumer behaviour?

CG: The Brazilian crisis occurred against a different backdrop from that of the global economy. It was more intense on the international scene, where a true financial meltdown occurred, which affected the economy as a whole. We felt this close up with our partner, the Casino French retail chain: we witnessed how greatly it suffered from the effects of the crisis as of September 2008.

Brazil was the last country to experience the crisis and the first to exit from it. The growth in domestic consumption in the last couple of years, driven by an increase in the population’s purchasing power and the measures adopted by the government, spared our country from feeling the effects of the crisis as strongly as other world economies. It was possible to predict that the emerging nations would suffer the effects of the crisis less, insofar as they had already been seeking a certain independence from the American economy and from developed countries generally. To investors, the country became an expedient alternative for defensive action. There was a large flow of investments into Brazilian securities.

For example, the performance of Pão de Açúcar shares improved on the stock exchange. They have appreciated by 84% over the last two years, whereas the stock exchange only recorded 9% growth in the same period.

PwC: Should we expect to see changes in international trade and in capital flows as an outcome of the crisis?

CG: I don’t believe that trade barriers will be erected. We, for example, are increasing our imports. Some countries may impose protectionist barriers, but I don’t think they’ll be very significant. In addition, in Brazil’s case, the appreciation of its currency (the real) may offset possible protectionist barriers, and may keep our foreign trade process from being affected by potential limitations. Owing to our large domestic consumption, we are not dependent on exports, which was precisely what protected us to a certain extent from the effects of the crisis.

The flow of foreign investment has been substantial and has been targeted at Brazil as one of the best world market options. It can’t be denied that our universe has become very jittery. These funds have not necessarily come to stay. Investors are very agile at seeking the best markets at any specific time, so there could be a migration of these funds as the markets recover. For now, though, the financial world is still in a crisis recovery mode. Although things have become much better, that doesn’t mean it’s over.

PwC: Would you say that the crisis rattled public confidence in the private sector as a whole?

CG: There was a loss of confidence in financial institutions in the world as a whole but, again, this did not affect Brazil to any great extent because of the structure of our banking system. Governments had to inject billions of dollars to sustain the market.

PwC: What were the most significant changes made in strategy, in the business model or in the organisational structure of companies as an outcome of the crisis?

CG: Our investment forecast in early 2008 was R$3bn. At the end of the first quarter, the crisis – which was already threatening to appear in the second semester of the previous year – was looming over us. We reduced our investment forecast to less than half to strengthen our working capital, thus adopting a more conservative position. We restructured our debt profile, renegotiating and extending payment terms. In September, when the effects of the crisis landed on Brazil’s doorstep, our cash position was reinforced and we were recording a growth in store sales. That is to say, we stepped into the crisis shored up.

We ushered in 2009 with a more conservative position, but in a situation that favoured pursuing opportunities to broaden our market share. The upshot was that, although 2009 foretold a year of meagre business expectations, we were able to make two large acquisitions and double our size, from gross sales of R$22bn to about R$40bn.


PwC: How did the crisis affect employee motivation and measures to increase productivity?

CG: We were prepared to address possible needs to change our staff structure. We had an emergency plan but there was no need to take any action. There was no drop in sales and I think things could have been even better if there hadn’t been a cut in industrial production in the first quarter of the year. Contrary to expectations, we have had a substantial increase in employee levels this year.

PwC: Do you think there will be an increase in regulation and how do you assess the threat of excessive regulation to business growth?

CG: Internationally speaking, I am convinced that there will be increased regulation, especially in the financial market. The main concern is that any regulatory measures are not defined as a reaction triggered by a moment of panic, but rather that they are introduced to regulate excesses. I don’t believe that the objective will be to restrict free float. There will undoubtedly be greater inflexibility, greater control and greater levels of inspection. In Brazil, the most concerning aspect is that, as a rule, laws create a highly bureaucratic process. My fear is not regulation per se but the bureaucracy it will create.

PwC: What are your views on sustainability?

CG: Companies have had to give increasingly greater thought to the issue of sustainability, if not out of need, at least as a response required by consumers. This consideration must be part of a company’s daily business concerns. The ideal situation is for both companies and government to address the issue and each, in turn, seek the best solutions in the sphere in which each operates, ultimately working together as supplementary forces.

At Pão de Açúcar, we have undertaken several initiatives to promote sustainability. We have a system in place to control the source of the meat we market and we are constantly expanding our supply of organic products, although we still have a limited number of suppliers. We have two “green” stores – their construction complies with Leed (Lead in Energy and Environmental Design) standards, their furniture is made of certified wood, all their electric power comes from renewable sources, they offer organic products in greater number than any other store and they provide rubbish and oil recycling programmes.




Claudio Eugênio Stiller Galeazzi, CEO of Pão de Açúcar GroupContinued

CEO perspectives on successInterview transcripts of Dean A. Scarborough, President and CEO, Avery Dennison Corporation





Dean A. Scarborough is the President and CEO of Avery Dennison Corporation

PwC: What will it take for the economies of your key markets, both domestic and global, to stabilise, if they haven’t already? And are there specific signals that will indicate, or have already indicated, to you that a recovery is underway?

DS: First of all, recovery is at full steam in emerging markets, especially Asia. For us, China’s right way back to where they were. We had a few flat quarters there, but now it’s back to very high growth.

PwC: Did you expect that, or did you think the global recession would go deeper?

DS: I thought it would be worse, but it’s incredible how China has rebounded. Now, I’m talking specifically about our materials business, which serves the domestic economy there [China] and is not export-driven. There are still a lot of consumers in China with money, and the Chinese government stimulated the economy pretty aggressively, and effectively, it seems.

I think China’s export economy will also come back; it has started to stabilise. China’s still a low-cost manufacturing platform for a lot of companies, and inventory de-stocking has pretty much ended. Now it’s down to consumer demand outside China.

The two metrics I look at in most of our businesses are, first, inventory-to-sales ratios; given our position in the supply chain, what people do with their inventories is the thing that’s the most volatile for us,. We saw an immense amount of de-stocking in the first two quarters of this year. Our sales were down 13 percent organically for the first two quarters, and then they were only down six in the third quarter. Then, as I talked to customers and looked at the ratios for retail and apparel, for example, I started to see them reach the trough in the peak-to-trough for that ratio. People aren’t investing a lot in new inventory; they’re operating at a different level today, chasing sales and replenishing as they go with less.

The other metric is consumer discretionary spending. That’s the one I’m worried about. Let’s not get too enamoured of the GDP numbers that have come out.

PwC: Yes, just today the EEU reported that its GDP numbers for the third quarter were up…

DS: And it’s a “so what?” Government spending is up, and the inventory de-stocking, which pulls down the GDP, seems to be over, but the consumer with the willingness or ability to spend hasn’t returned yet. With unemployment rates as high as they are, especially here in the US, it’s not clear to me that we’re going to see a change. Given what housing and the stock market have done, I believe consumers are going to be conservative and try to repair their personal balance sheets for the next couple of years.


PwC: Because your international business has become so prominent, will some countries play a larger or smaller role in global trade than in the past?

DS: I see little trade skirmishes, but I don’t see them as a huge issue. Actually, it’s interesting. Right now I see a lot more trade agreements happening between countries that don’t include the United States. That doesn’t impact us all that much because we tend to supply and support within regions, and we don’t have a lot of cross-regional business. So it’s useful for us to see trade barriers between regions go down. I’m frustrated for our economy as a whole, because I think the current administration is just way too protectionist. Anyway, the trade issues are not going to affect us too much. I think we’ll be fine.

PwC: How might capital flows and capital markets change, and how would those changes affect your capital structure?

DS: I think we’re okay. We did a lot of work on our balance sheet for the first six months of this year. We’re focusing on de-leveraging. We converted some convertible debt to equity earlier this year, and we cut our dividend in July. We’re well-positioned to survive even another downturn. I wouldn’t say we have a fortress balance sheet, but the walls are higher and thicker than they were a year ago. We don’t have a problem accessing credit.

Here’s what I worry about: I worry about our customers. A lot of our customers are small. They are having problems getting credit. And that’s an issue for us as a company. Risk premiums seem to be back to normal now, and that’s a good thing, but I do worry that at some point all this government borrowing could crowd out private investment, and that interest rates could go up. Economists are saying there’s no risk of that in the next couple of years. I hope they’re right, but every government is running heavy, heavy deficits, so I do worry about that for the medium term.

PwC: Will capital flow freely across borders when recovery sets in? Will foreign investors return? Will opportunities to invest overseas be attractive?

DS: From my perspective, I don’t see any issues there. If the US government tries to tax US corporations’ foreign earnings differently, we may see a different set of capital flows, but for the wrong reason. I have not felt any restrictions so far, and I don’t anticipate any, at least at this point.

PwC: To follow up on that, what is your perspective on some of the tax law changes that are being proposed?

DS: The US is, I think, one of two countries in the whole world that tax the foreign earnings of domiciled companies. To be competitive in a global economy, we need to move to a territorial tax strategy like other countries’. Unfortunately, the current administration sees this as a place to get money to fund deficits, but they will kill the golden goose if they’re not careful. I really do worry about that. It’s not a smart idea. We’re a global company domiciled in the US, but two-thirds of our revenue comes from outside the US. It would not be a good thing for the United States to fundamentally disadvantage its corporations, both at home and abroad, with that kind of tax strategy.

PwC: Do you get some feeling as to which way those winds might blow?

DS: I’m concerned about it. The government’s running such high deficits; they know they need to raise tax revenue, and the politics around foreign earnings are relatively easy. Unfortunately, most voters don’t understand the implications of raising taxes on multinational corporations. In the short term, it could enhance government revenues. In the long run, it will not. So it’s a really bad idea.

PwC: Are your opinions being asked for and listened to in this debate?

DS: We work very closely with the Business Roundtable. We are spending time in Washington to help explain to Congress that this is not a good idea.

Dean A. Scarborough, President and CEO, Avery Dennison CorporationContinued


PwC: You talked earlier about consumer spending and confidence. In the economic crisis, consumer demand has certainly fallen in many key markets. Recognising that so many of your end customers are dependent on consumer purchasing and confidence, when recovery sets in, what’s your expectation as to whether that spending will return and whether purchasing behaviours will resemble those seen in the past?

DS: That’s the $64,000 question. Again, emerging markets are back, but it’s too early right now to declare that the consumer is back in the US and Western Europe. I just don’t think we know the answer yet. I’ve heard such a wide variation of opinions from different economists. Some say we’re back. Others say, no, consumers are going to change their behaviour. I think it’s pretty fragile right now. We’ve seen a slight increase in retail sales in the US, and I’m hopeful Christmas is going to be okay. That will start to build some confidence. But it’s so fragile. All it will take is one really bad event somewhere and we’ll go back into a hole for a while. That’s what I worry about.

PwC: Are you anticipating major structural shifts in economies as they emerge from this recession?

DS: Some of them are obvious. Government spending as a percentage of GDP in almost every economy is going up. We’ll adapt to that environment. In fact, we need to look at government as more of a customer. Our strategy in the past was “let’s just stay under the radar,” and that’s not doable anymore. We need to be an influence, certainly, so we’re going to step up our involvement in the public sector to influence the outcome in a good way. The other areas I see: Is technology still going to be a growth area? Healthcare and clean technology?

I think security in the broad sense is going to be an important factor. What do I mean by that? Well, people are worried about viruses, such as swine flu. People are worried about their personal security. They’re worried about the security of the food market. We’ve had a lot of scares in the last few years around jalapeno peppers, peanuts and spinach. More people are starting to care about what goes in their mouths. Where did it come from? So we’re going to see more compliance, more track-and-trace, more investment in protecting supply chains or important areas of the economy. I think that’s definitely coming.

PwC: To follow up on that, you mentioned in an interview last year that food safety problems in China may create opportunities for Avery Dennison related to possible food-labelling regulations.

DS: Any time governments want compliance around track-and-trace, or people want to know what’s in a product, it tends to be good for our business.

PwC: On a related subject, some observers believe the economic crisis has undermined the public’s trust in the private sector’s motivations and the reputations of entire industries. Do you agree? If so, what are some of the specific things that Avery Dennison is doing to restore either the public’s trust in the private sector or the reputation of your industry?

DS: At the end of the day, you’ve got to have a strategy, and you’ve got to communicate it. You’ve got to have values, and you’ve got to focus in on them. We’ve spent a lot of time in the last few years reinforcing our values as a company. We have developed a very strong values and ethics programme in the company, with a lot of transparency, which I think is a real positive message. You’ve got to make sure the reputation of your company is good inside the four walls, and with your customers. You’ve got to set an example.

Sustainability and social responsibility are part of that, too, and we’re increasingly focusing on that as an extension of our values. We need to do more, so for us it’s just the beginning. You do the best you can for your shareholders, for all your constituents, and you have to lead by example.



PwC: What are the most significant changes in your strategy, business model or organisation that you’ve initiated in response to this economic crisis. Specifically, could you discuss Avery Dennison’s restructuring programme announced in fourth quarter of last year.

DS: The restructuring programme is actually very straightforward – it’s all about getting our fixed costs down when our volume drops. There isn’t anything necessarily strategic about it.

More important, though, we are changing where we’re focusing as a company and what we’re doing as a result. We are a market leader in our three major sectors: pressure-sensitive materials, retail-information services, and office and consumer products. But, frankly, we haven’t been growing fast enough, and that’s been our fundamental issue. Our focus has been almost 100 percent on our direct customer – people who are reselling our products – either by converting them or selling them. In office products, it’s the superstores. In our pressure-sensitive materials business, it’s printers. In our retail-information services business, it’s apparel manufacturers.

The real change for us in strategy is to get a lot more externally focused. So now our focus in office products is the actual end consumer. In pressure-sensitive materials it’s not the printer, it’s the brand owners – the consumer packaged-goods company or the transportation company such as UPS. In RIS, it’s the retailer or the brand owner, such as Nike, Adidas or Under Armour. Our job is to understand their needs. How can we help enable their brand to sell more? And how can we help our customers be more intelligent so their supply chains operate more efficiently?

That lens is different for us. Here’s the great news: We have yet to find an end-use market or consumer who doesn’t think we’re relevant in their space; they think it’s great we’re there. And our competitors aren’t doing it. This is great news, because if the initial reaction is positive, and your competitors aren’t there, then we should go there.

The challenge for us is to find innovative solutions with the insights we gain from this work. It’s going to cause us to think differently about the solutions we’re providing. For example, in pressure-sensitive materials we’re going to have to partner or offer equipment as part of the solution, which we haven’t done in the recent past. We did a long, long time ago. It’s challenging us to think differently about those markets. It’s a much more rigorous external orientation on end users and customers to get key insights in these new markets. It’s a big strategic change in the company for us.

PwC: Has it been difficult to implement that type of new or expanded thinking?

DS: On one level yes, because it requires investment in a tough time. It requires training and new capabilities. It’s required us to go outside and bring in some capabilities. For example, if we’re going to call on the food market, we’ve hired people with a lot of expertise in food. Our old strategy would be to take somebody inside the company and try to have them to learn about the food market. That’s a bad idea; it just takes too long. Instead, let’s find somebody in that market who knows a lot about it, and we’ll tell them all they need to know about Avery Dennison.

The second thing is, we worried way too much about what our direct customer would think. Will they punish us? Will they take away business? Will they worry about us competing with them? The reality is, in most cases, they’re glad we’re doing it, because our objective isn’t to try to figure out how to squeeze more margin from them. Our objective is to grow the business, which is certainly consistent with their objective. A lot of the mental block has been in our heads, not external.

PwC: Is that bold on your part to invest at this time?

DS: It’s necessary. We have ramped up our investment in end use and consumer marketing. We’re investing in hiring and training people in these new areas and skills. At the same time, we’re generating some of the dollars by restructuring and reducing our workforce. The second place we’re investing is information technology. We need stronger business-intelligence and networking capabilities to be successful in a global environment, so we’ve brought in new IT leadership and new thinking. We’re going to be spending more on IT to enable us to leverage our scale and our knowledge on a global basis much better than we’ve ever done before.



PwC: With the hope, too, that the IT investment will increase your efficiencies?

DS: Yes. We’re already really good at using Enterprise Lean Sigma as a productivity enhancer, especially in our supply chain and operations. In fact, you can see it in our numbers. Our gross profit margins were very good in the third quarter of 2009. One of the reasons is because we know how to execute that well. Now we need to leverage our scale in functions like finance, IT and human resources and make these services a lot more efficient and more effective. We have wide variation in the cost and capability depending on the business that we’re serving. I know from our supply chain work that we can do this better.

This is going to be a big change for us. We’re really globalising the business. More of our businesses are running on global functional models today, which definitely ramps up two things. You need to have really good people to be able to manage around that complexity, and you need to have good information availability and structure so you can do it on an efficient basis. We’re breaking through those barriers now. It’s a cultural change, it’s a business model change for us, but it’s absolutely the right thing for us to do.

PwC: To follow up on that, has your board become more engaged with strategy, risk, leadership development or other areas that in the past had primarily been management’s responsibility? You recently brought on a board member from the energy sector, and you have a board member in healthcare, both of which are key areas right now.

DS: We’re doing a much better job these days of engaging our board on strategy and risk management. We have a great board, and we should utilise all of their skills to help the success of the company. They definitely have an oversight and governance role, but for me the most important contribution the board can make is to help us with the strategy development and execution.

PwC: Is your ability to respond to new opportunities constrained by difficulties in raising capital? You said earlier that capital is not really much of an issue for the company.

DS: We have adequate cash flow to invest in the business for the long term. We’re focused more on de-leveraging right now. We’ve cut the dividend and we’ve converted some convertible debt to equity. We’re going to pay down some debt. We’re increasing fixed assets a little bit for the IT function, but overall they’re lower. We’re not hot and heavy after any acquisitions right now. We have adequate access to capital; we have a billion-dollar revolver we can tap into, so liquidity is not an issue. We’re in pretty good shape.

PwC: What gaps in risk management, at Avery Dennison or within your industry, were exposed by the economic crisis? Did you make any incremental changes to address them, or are you initiating different approaches to risk?

DS: We did a couple of things this year. At the behest of the board, we did much more aggressive scenario planning. At the end of last year, the board asked us to show them a really extreme business case. They pushed us to say, ‘You really need to think about how bad this recession could be’. Remember, a year ago everybody was highly uncertain. It was tough to get capital; it was very doom and gloom. The exercise pushed us to say, if this recession is long and protracted, there are decisions we should make today, because if we wait, it will be too late to have made them. For management, it certainly opened our eyes. We said, ‘There’s no downside to taking action early’. That led us to convert the convertible debt and cut the dividend. We beat our bottom line and free cash flow targets, because we had put enough plans in place. In fact, we over-performed in a worst-case volume scenario. So that was a real positive.

PwC: What about how you managed risk regarding vendor relationships and customer relationships?

DS: We did some vendor risk management. On the customer side, we took a real hard look at who we were giving credit terms to. So we’re using enterprise risk management more effectively now as a business. We talk about it with the board. I still think we have a ways to go, because the tools are still clunky if you’re a non-financial organisation. But we did a good job of identifying the things that could really hurt us in the future and building action plans around them.



PwC: With regard to your employees, have you been able to maintain morale and motivate staff while achieving productivity?

DS: Yes and no. Our employee engagement scores aren’t as high as they should be. At the same time, the organisation has risen to the occasion in the last year. I spend a lot of time communicating our vision and our strategy, talking to people about what we’re doing, why we’re doing it and how we’re doing it. It’s easier today to do that, by the way, with all the tools you have to communicate with people.

At the senior level, it’s been interesting. I got a comment from a director at our strategic off-site meeting in July, who asked me, Why is the management team so enthusiastic and motivated? I thought about it for a minute and said, ‘Hope’. He said, ‘What do you mean?’ I said, ‘There are a lot of things out there that are not under our control. The economy is not under our control, and volume is down because people are de-stocking. All we can do is react to that environment. We’re investing in the things that we think will make us successful in the long run. In the whole external orientation, when we’re out talking to consumers and end users, we’re getting an incredibly positive response. So we can really grow if we do this well’. If we had gone out there and the reaction had been, ‘We don’t really need to talk to you guys’, it would have been a whole different conversation, because we would have been discouraged. But we’re encouraged by our early adventures into this new world. A little success goes a long way in this kind of environment.

PwC: In what ways has the financial crisis affected your ability to recruit and retain talent?

DS: Obviously retention has been a lot easier, because most people are voting for security. But we’ve also been able to attract some great talent, especially in our new growth platforms area. They believe in the vision of the company and what we’re trying to do with these new growth platforms. I am very energised by this. I’ve also made some changes in my management team.

PwC: Do you believe that reforms in the financial sector, healthcare and energy are necessary to maintain or, as some argue, even restore US competitiveness? Why or why not? And what are your major concerns about the impacts of proposed reforms?

DS: I think the reforms, the way they’re coming out, are fundamentally flawed, because they don’t leverage market mechanisms. For example, let’s take carbon. I actually think it’s a good idea for us to try to regulate the amount of carbon we’re putting into the atmosphere. Now, I’m not an alarmist and think that the whole world is going to come crashing down. On the other hand, I don’t think it’s a good idea to fool around with the atmosphere, because it’s something we don’t have a lot of control over.

A lot of the fundamental technology is out there, but the way the laws are being written is just crazy. The government wants to put a tax on carbon, but then let everybody out of it, so that no one gets hurt. It’s insane. Put a tax on carbon, just put a tax on it. Yes, people will have to pay more for gasoline. Tough. That’s the only way we will change our behaviour. Europe has much higher taxes on fuel and carbon-based things, but somehow they seem to survive and people adapt. They drive smaller cars, they use public transportation.

To me it’s a marketplace orientation. It’s the same thing with healthcare. The issue we have is that there’s not enough productivity in the healthcare sector, and it has much more to do with the link between the doctor and patient and process than it does anything else. You have incredibly wide outcomes and costs for the same procedure in different hospitals in different parts of the country. Suppose I have that problem inside my business. If there’s wide variation between my factories, what do I do about it? We get teams together to put best practices in place. And guess what? We lower the cost, we improve the quality and we narrow the variation at the same time. That’s not being done in healthcare. I’m sure it would lower costs better than rationing, which, if we try, people aren’t going to accept.

PwC: Are you concerned that there is a risk of over-regulation in the US in the current environment?

DS: Yes.



PwC: In what ways could businesses like yours help governments make regulation smarter?

DS: I wish I knew the answer to that question, I really do. The fundamental issue is that the motivations of a non-profit sector like the government are so different from the for-profit sector. For example, the state government in California can’t take hours away from state employees when it’s running a huge deficit. That’s just unfair to taxpayers.

I do think the federal government did a good job of preventing a financial meltdown. The government had to intervene. It could not let the confidence in the financial sector fall away; we would have gone down a spiral that would have gotten more and more difficult to correct. I give the government a lot of credit for stabilising the financial sector. They had to do it, and I’m happy they did.

PwC: Following up on that, what one thing could governments do to stabilise the financial sector and minimise the risk of another meltdown?

DS: I wish it could be just one thing. Governments need to require higher reserves and more capital, and they have to mandate transparency. It’s as fundamental as that. And can’t encourage the financial system to make mortgages available to people who can’t afford them.

PwC: The American Clean Energy and Security Act that passed in the US House of Representatives is largely recognised as the first comprehensive bill to address energy security and climate change. Of course, there is still a long way to go before the Senate passes its own climate-change bill, and then the two bills must be merged and voted upon. In the meantime, however, are you preparing Avery Dennison to benefit from any of the provisions outlined in the House bill?

DS: It’s not going to impact us that much. We’re not a huge carbon emitter. We’re doing all the sustainability things we should -- reuse, reduce and recycle. This is a huge thing for us. Employees ask me all the time about what we are doing around sustainability. The younger generation especially wants to work for companies that make a difference. That’s really critical. The Milton Friedman school of thought, that our job is just to go make money, well, pardon the pun, but that thinking’s not sustainable anymore.

PwC: Finally, we’ve touched on a lot of different areas here. About which of all these issues would you most like to learn what your fellow CEOs have told us?

DS: Economic recovery and consumer behaviour. Those are areas that are going to show us our path forward.





CEO perspectives on successInterview transcripts of Dr. James Mwangi, Managing Director and CEO, Equity Bank





Dr. James Mwangi is the Managing Director and CEO of Equity Bank

PwC: To what extent has the global economic crisis affected your country?

JM: Our domestic capital markets were hit hard. The Nairobi Stock Exchange saw an appreciable flight of capital. In terms of exports, the market for cut flowers has suffered most, but coffee and tea exports have been affected, too. Tourism volume has also slowed. We had hit the one-million-visitors mark in 2007, but are now down to 400,000. However, the impact on our Diaspora remittances has been minimal – we have had only a 5% reduction. In terms of direct foreign investment, that had already been on the decline for the past two years.

PwC: How might the financial crisis affect the African economy?

JM: I think global capital flows will likely change and I am convinced that Africa could be a net beneficiary because of its positioning as the next frontier for investment. Africa holds the world’s largest mineral wealth, which is especially valued by emerging markets. A lot of investment will be required to exploit that wealth. With better infrastructure, Africa might also one day be seen as a competitive region for manufacturing. And to the extent that Africa becomes viewed as a unified market of one billion consumers, I think it would be very attractive to investors.

PwC: What will it take for the economies in your market to stabilise?

JM: Fortunately, as a result of a very conservative regulatory framework, the African banking sector has largely been insulated from the crisis. No African banks failed or were undermined by toxic assets. If you look at the performance of African banks in 2008, they did much better than in 2007. And looking at the first half of 2009, it appears that their performance will improve again. But while there was no direct hit, the African banking sector was not completely immune to the crisis. The slowdown in the economy naturally affected the volume of their transactions. The fall-off in direct foreign investment was also a lost opportunity for African banks.

PwC: Do you expect consumer consumption to eventually return to its pre-crisis level?

JM: Consumer behaviour might change slightly. In particular, I doubt whether the level of consumer consumption in the US will continue to be as high as it has historically been. I think there might be a few lessons about Africa’s culture of saving that America might wish to adopt. But the nature of consumption may also change from a propensity to consume what we call high-end products, to more economical ones. For example, here in Kenya we now see fewer gas guzzlers on the roads and more economical vehicles. So we may see a shift toward ‘affordable consumption’. Of course, if the economy fully recovers people will naturally want to go back to products that defined their previous quality of life. In that case, industries that drive ‘quality of life consumption’ are likely to return to their pre-crisis levels. But very top-end ‘snobbish’ consumption might still remain a bit soft.

PwC: Do you anticipate structural shifts in the world’s economies as a result of the economic crisis?

JM: Finance ministers and regulatory authorities around the world are using incentive packages to drive private capital towards particular sectors. When we look at China, the US and here at home, it’s pretty clear that we’re seeing huge shifts in how these economies are driven. In Kenya, we’re shifting towards what you might call rural development and that will have a direct impact on the livelihoods of ordinary Kenyans.

PwC: Are changes in the Kenyan economy causing your business to adopt a different strategy?

JM: Of course, you have to align yourselves to the micro-economics of the environment in which you operate. You always do your level best to align your organisation to the external environment. So you study that environment and adjust your behaviour accordingly.


PwC: Has the economic crisis undermined the public’s trust in the private sector?

JM: I feel there is loss of trust in the private sector and there are questions about capitalism’s ability to allocate resources rationally. But that is a debate that needs to be taken a step further. We have lost trust in existing systems, but what is the alternative? What alternative would be better at allocating resources? Rather than condemning private sector capitalism altogether, we should modify in ways to ensure that it works for the public good. I would like to see a combined effort by the private sector and the regulatory authority to find a balance that will protect the public good.

PwC: What is your organisation doing to restore public trust?

JM: The financial industry thrives on confidence, so we are doing our utmost to restore public trust. In that regard, we are doing more listening and take very seriously the concerns being expressed. And we are giving those concerns due consideration before we respond. But you do not know what can be reasonably promised because it may take sometime before the new economic system takes shape. But we are doing our very best to ensure that the integrity of the financial system is quickly restored.

PwC: Do you think your organisation will come out of this financial crisis stronger?

JM: Equity bank will become much stronger because there are so many lessons to be learnt. One of the biggest lessons we have learnt is about risk management. In the past, we believed that it is the things that we ourselves do – or fail to do – that would hurt us most. But now we understand that the environment can also affect us significantly. So we now want to be in a position to shape and influence the wider banking industry. Most of the organisations that failed were brought down not because of toxic assets but because public trust was lost. So we have learnt a valuable lesson about managing the external environment, about thinking macro and acting micro. That’s made Equity Bank a stronger organisation. We are more aware now of the possible repercussions of events out of our control.

PwC: Were any gaps in your organisation exposed by the financial crisis?

JM: One of the issues we’ve had to contend with is the diversification of our business across the world’s economies, some of which were resilient to the downturn while others were vulnerable. Getting that global diversification right is a very good way of managing risk. As a bank operating in emerging markets, we have quite significant correspondent relationships with banks, both in Europe and America. During the crisis, it was frightening to watch what was happening to those banks. That kind of exposure helped us to rethink and diversify our risks across the world. Our risk management perspective is no longer country-based, or regional-based. It is a global risk framework that we are operating on. The crisis also caused us to rethink our currency exposure because, as the crisis unfolded, different currencies behaved very differently. Another issue that emerged as a result of the crisis is that companies with strong business continuity programmes seemed to respond to the crisis faster than those without. And that caused us to review our own ability to respond quickly to unexpected challenges.

PwC: Have changes been made to your business model as a result of the financial crisis?

JM: Equity Bank has proved that profit can be made by operating at the bottom of the pyramid. The fact that the financial crisis had minimal impact on us suggests that in operating at the bottom of the pyramid, we are perhaps better insulated from crisis than those operating at higher levels of the pyramid. That informs our internal debate as to the merits of continuing with our high-volume, low-margin, bottom-of-the-pyramid business model. We sometimes ask ourselves whether we should stop thinking of ourselves as an organisation that operates exclusively at the bottom of the pyramid, and, instead, become more inclusive. At the same time, we realise that different sectors of the community were affected differently by the financial crisis. The middle and upper income segments of our society were the owners of assets that were particularly affected by the crisis. But the lower income segment of the population was most affected by inflation, which increased their cost of food by almost 70%. So we understand that if we were to become a more inclusive financial system, we would also become more vulnerable to a wider range of risks and shocks. So our consideration of what diversification strategy to adopt has been greatly informed by the turn of events.

Dr. James Mwangi, Managing Director and CEO, Equity BankContinued


PwC: Has your organisation been constrained by difficulties in raising capital?

JM: Fortunately, on the eve of the crisis, Equity Bank had just raised $185 million. That capital provided us with a cushion and enabled us to take advantage of the opportunities arising from the crisis. The capital markets continue to demonstrate a lot of interest in Equity. High performing companies are always very attractive to available capital.

PwC: Will there be increased M&A activity in the banking sector as a result of the financial crisis?

JM: I think banking has been redefined by this crisis, and it appears that size has become a significant factor going forward. Unless you’re focusing on a clearly defined niche, you can’t operate in the wider market without having achieved sufficient scale because technology – which has become a big driver of the banking industry – is hugely expensive and the unit cost is dependent on the size of the bank. A bank’s attractiveness in terms of raising capital and ability to absorb shock is again determined by the size of its capital base. You can’t afford to be heavily capitalised and still remain small because capital is very expensive and needs to be leveraged.

PwC: During the financial crisis, how have you been able to maintain staff morale?

JM: Our people work for the benefit of our investors. But because we have an employee share ownership scheme, our people also work for the benefit of themselves. In this way, the interests of our investors and our people are aligned. We also try to promote within our people a higher calling beyond simply earning a living. We want them to understand that what they do helps make Africa a better place by promoting the economic and social prosperity of its people. That higher calling makes them wake up a little bit more motivated.

PwC: In what ways has the financial crisis affected your ability to attract and retain talent?

JM: One aspect in which the financial crisis has worked in our favour is that it has created a wider pool of available talent. In the last two years, we have managed to attract very significant talent from both Europe and North America. These are highly experienced people who bring with them enormous knowledge. And since many of them experienced the banking crisis first-hand, they also understand how to mitigate such events. That has been a major benefit to Equity.

PwC: As a consequence of the financial crisis, do you anticipate a wave of new regulation?

JM: It’s true that new regulation is on the way. The European Union has already started talking about what they want to see. Looking at the US, we also see the regulators gearing up. Right now, I think that bankers lack the moral authority to continue to advocate for self-regulation. But I also believe that excessive regulation stifles innovation. We need to strike a delicate balance between self-regulation and external regulation and avoid overreacting. This requires a reasoned dialogue where people listen to each other without rushing to conclusions. We must create a clear regulatory framework – but one that provides sufficient space to accommodate innovation, which is what private capital is best at.

PwC: What sorts of regulation would you welcome?

JM: What I would advocate is the harmonisation of regulations. It sometimes becomes very difficult to operate within a given region because different regulatory regimes across the region may address the same issue in different ways. There would be quite a lot of good that would be derived from harmonised regulation.



PwC: How can governments ensure against overregulation?

JM: Stakeholder engagement and involvement is critical. There must be dialogue and an open environment that allows give-and-take. And everybody must understand what it is that we are trying to achieve. Then we can ask, ‘What is the best way to achieve that end?’ I would say that in Kenya I am seeing that sort of dialogue take place. I am not seeing any over-reaction, but maybe that is because we were not significantly affected by the global financial crisis. In Kenya, the financial sector remains very solid, so there is no overriding reason to call the regulators to action. In jurisdictions where governments had to bail out the financial industry using public resources, regulators are much more justified in expressing their concerns and driving their agenda.

PwC: What is your company doing with respect to the issue of climate change?

JM: First, we screen all our lending to ensure we are not funding activities that destroy the environment. Second, the university students we employ as interns during the holidays are given training on the issue of climate change and the role the community can play in protecting the environment. We are also members of a business coalition organised to restore and preserve the Mau Forest in Kenya’s Rift Valley. I would like to see greater focus by CEOs on long-term environmental issues. We must not be slaves of the immediate. Otherwise, we will destroy the future.





CEO perspectives on successInterview transcripts of Dr. Paul Joseph Reynolds, CEO, Telecom Corporation Of New Zealand Limited





Dr. Paul Joseph Reynolds is the CEO of Telecom Corporation Of New Zealand Limited

PwC: What will it take for the economies of your key markets to stabilise?

PR: Telecom New Zealand’s key markets are New Zealand and Australia. Both economies managed to avoid the kind of damage suffered by other economies around the world. In terms of assessing the impact of the financial crisis on our business, we generally find that people continue to buy telecommunications services even in a recession. Within the consumer market for telecom services, the key factor for our business is the level of employment. If people are still employed, they’re using telephones and other forms of communication – even if their overall confidence in the economy is low. Having said that, it is also true that unemployment is still rising in New Zealand and that could have an impact on our business. Overall, when unemployment begin to fall back to a more normal level, I think you will see the New Zealand and Australia economies begin to stabilise.

PwC: Have you seen the behaviours of the capital markets change, and if so, how might that affect your company’s own capital structure?

PR: Clearly, as the result of the recession, capital has been pretty scarce – particularly in New Zealand. And that’s why we’ve taken the view that with regard to our financing, we need to be A-rated so that we’re able to raise debt in international markets – which is very necessary when operating from an economy like New Zealand. In fact, over the last 18 months we have had our borrowing requirements covered, so we have not actually had to raise capital or debt during the worst of the recession.

PwC: Have you seen changes in bank behaviour in relation to your ability to raise capital?

PR: I understand that banks have become much more cautious. But since we haven’t had to go to the banks to raise debt, we haven’t been affected directly.

PwC: What are your expectations about consumer spending once an economic recovery gets underway?

PR: New Zealand experienced a relatively modest recession in comparison with other economies around the globe. Nevertheless, consumers here have cut back, but they’ve cut back on anticipation of a worsening recession as much as the reality of the recession. In fact, we are already seeing some signs of bounce-back in the New Zealand market. So I do expect a recovery of consumer spending.

PwC: Do you, however, expect to see any lasting changes in consumer spending habits?

PR: As far as the domestic telecommunications market is concerned, I expect a return to normality amongst New Zealand consumers. However, what is less certain is whether there will be sufficient confidence in the economy to support a return to the normal numbers of foreign tourists coming to New Zealand, and similarly, the number of New Zealanders travelling overseas. That inbound and outbound travel generates inbound and outbound telephone traffic, which has a significant impact on our revenues.

PwC: As the world emerges from recession, do you expect to see structural economic shifts in your key markets?

PR: The Australian and New Zealand telecom markets are experiencing very significant structural shifts as a result of government investment in and regulation of the telecom sector. The impact of those government actions will result in new opportunities, new services, and innovation in the marketplace. But it will also mean intensifying competition. So going forward, I do expect four or five years of very intense activity in the telecom market both in Australia and New Zealand



PR: I have not seen significant trust issues in my industry or in this market as a result of the recession.

PwC: Nevertheless, in the context of the financial crisis, has your company become more conscious of protecting its reputation?

PR: Telecom New Zealand has initiated a very significant programme to improve its reputation in the marketplace – not specifically in response to the recession, but because we think that reputation is a critical marketplace factor for us. Over the next four or five years the structure of our industry and the way this industry is regulated is going to go through some dramatic changes. And as these changes unfold, we feel that reputation will provide us with the continuity we need to maintain and strengthen our position in the marketplace. So yes, reputation is a huge issue for us and we are working extremely hard on it. But it hasn’t been driven solely by recession.

PwC: Has the financial crisis had an effect on your company’s operations or strategy?

PR: We took very specific cost-reduction measures in response to this recession. For example, we froze salaries across the business, and we significantly reduced the number of contractors and consultants we use. But we’ve also been investing heavily in the belief that, as the crisis fades, there is a big market opportunity for us. At a time when some of our competitors have cut back, Telecom New Zealand has been investing aggressively so that, as we come out of this recession, we are poised to take advantage of opportunities.

PwC: As a result of the global financial crisis, has your board of directors become more involved in issues of strategy or risk management?

PR: The board of Telecom New Zealand has been heavily engaged in strategy and risk management over the last year. I feel confident in saying that never in our company’s history has our board been more involved in these issues. But that involvement has much more to do with the huge structural changes taking place in our industry rather than issues related to the recession.

PwC: Has the financial crisis constrained your company’s ability to raise capital?

PR: We have not experienced any constraints in raising capital or debt in the last year.

PwC: Did the economic crisis reveal any gaps in your company’s risk management?

PR: I don’t think the financial crisis in New Zealand revealed much of anything of significance to us. Naturally, it did cause us to pay extra attention to operations like credit management, debt management, collections and so forth. But we have good controls in those areas and a very detailed risk management plan. Of course, the pressure of the financial crisis caused us to re-examine and refresh some of our practices. But I would not say that the recession surfaced any major risk exposures.

PwC: The financial crisis has prompted a call for new regulation. Do you see any positives that might result from new regulation?

PR: There is a need for regulation. But there’s also a need to give closer scrutiny to the way in which regulation is developed. One of the significant issues we face in New Zealand is how to institutionalize a merits-based review of regulation. I don’t think regulation should be designed in secret. The process should be transparent and open to scrutiny – the same way that many business processes are. So I think we should work to refine our model of regulation whereby a merits-based review becomes part of the regulatory process and acts, if you like, as a self-managing check over the scale and scope of regulation and whether or not it’s achieving its intended outcomes. In our particular industry, telecom operators are looking for the opportunity to earn a reasonable rate of return on their investment capital. Consequently, we must have a schedule of regulated pricing that appropriately reflects the degree of risk that telecom operators must take on – and, in the past, that has not always been the case. But I am hopeful of more transparency in this area in the future.

Dr. Paul Joseph Reynolds, CEO, Telecom Corporation Of New Zealand LimitedContinued


PwC: Is there benefit in governments driving a global or regional convergence of regulatory frameworks?

PR: There are very definitely opportunities for regulatory harmonisation across Australia and New Zealand – particular in the telecommunications sector. For example, New Zealand already has in place an equal-access model whereby all telecom companies have equal access to the infrastructure of the incumbent operator: Telecom New Zealand. That being the case, Telstra, the Australian telecom incumbent, has open access to our network. On the other hand, when Telecom New Zealand operates in Australia, we do not have the open access to Telstra’s infrastructure on equivalent terms, which I don’t think is very helpful. So there is certainly scope for harmonisation.

PwC: Do you see governments taking steps to achieve regulatory convergence?

PR: I am aware that meetings have taken place to discuss harmonisation, but I have seen no action. Politicians, policymakers, regulators and industry people across Australia and New Zealand come together and talk about these issues. But I have yet to see concrete action by government or regulators.

PwC: Are there lessons to be learned from the global financial crisis?

PR: I think the big learning point we are all looking for is one that has to do with organizational agility. In response to the economic crisis, most businesses took action appropriate to a more difficult trading environment. But the real trick is how to get the balance right between hunkering down through tough times and investing in a way that will prepare you to make the most of opportunities that begin to materialise, post-recession. That’s the big lesson – getting the balance right and being sufficiently agile to take advantage of chances for growth and expansion.

PwC: What action might government take to address the risk of climate change?

PR: I think governments need to give industry some clear guidelines as to what they would like industry to contribute and achieve. In the context of climate change, the telecom industry is in a relatively strong position in the sense that we provide services that can reduce the carbon footprints of others. For example, telecom services can reduce the need for travel and increase the ability to work from home. To the extent that governments encourage companies to adopt energy saving policies – including the use of telecom services – the telecom industry can help support those policies by developing capabilities, including strong broadband-based communication tools that reduce the carbon footprint of thousand of businesses.

PwC: What is your company doing to address the risk of climate change?

PR: Our company is a significant consumer of electricity, and so consequently, we have a strong focus on making sure that our infrastructure is comprised of energy efficient equipment. We expect our vendors – for example, the manufacturers of our servers, switchers, and transmission equipment – to continuously improve the efficiency of their products so that our infrastructure as a whole consumes far less energy. And as we function in a more energy-efficient way, we simultaneously operate more cost effectively.

Dr. Paul Joseph Reynolds, CEO, Telecom Corporation Of New Zealand LimitedContinued




CEO perspectives on successInterview transcripts of Eduardo Elsztain, President, IRSA Group





Eduardo Elsztain is the President of IRSA Group

PwC: What will the economies of your Group’s key markets need to achieve stability, if they have not yet done so?

EE: The injection of liquidity in developed economies has achieved some degree of stabilisation of the crisis. What we experienced in the last quarter of 2008 was one of the greatest shocks ever felt in the whole of economic history. I think the global economy is now starting a process of recovery, but the greatest challenge will be the way in which this mega-issuance of money and debt will be absorbed, and it is here where I see a very bright warning light, because I look at the situation with Argentine eyes, and we are very well aware of the cost of resolving a crisis by means of the printing of money. I see a world returning to growth, but I think that the medicine that was needed has been used and will continue to be used, and it remains to be seen how we emerge from this medical treatment.

PwC: Are there specific indicators that the recovery has begun?

EE: Consumption is on the rebound, credit is gradually picking up, markets are stabilising and stock markets are looking better. The injection of money into the economies halted the financial panic.

My impression is that the world is now beginning to expand again at a slower rate; the United States and Europe are beginning to show slow growth, while emerging markets are doing so at a faster rate. I think that this crisis will double the speed at which emerging economies are going to grow. We will see a world with less fear than in 2008, but the biggest question to be answered will be the effect of monetary emission.

PwC: How are things going for Argentina in this context?

EE: In the case of this crisis, comparatively the largest of all both systemically and globally, Argentina was better prepared. Bank balance sheets were stronger, and in the case of individuals, few had borrowed. Activity levels were impacted somewhat in the last year, but the situation was not serious. I think that in our case, in Latin America, as we have gone from one crisis to the next in the last 30 years, we were prepared for the current one. In addition, as Argentina has recently gone through a big crisis, it has in fact absorbed better the impact of this last one, and I believe that in 2010 the country will grow by 3% to 5%, perhaps closer to an annual 5%.

PwC: Will there be more protectionist barriers?

EE: This is a very important matter, and is a question that should be asked of the leading economies. Job losses in markets such as that of the US have not yet resulted in protectionist barriers, but they have led to a slower pace of accession by new countries to free trade agreements. It is clear that when there is a crisis, there is a strong obligation to protect employment.

PwC: How might capital flows and capital markets change, and how would such changes affect your capital structure?

EE: The most probable scenario is that barriers will be imposed on capital flows, and I foresee a more regulated world. For example, Brazil has set a 1.5% tax on ADR conversion transactions, and signs such as this are beginning to reveal some of the secrets as to how regulations are going to be added. In the next 10 years I can envisage a business environment with a more regulated capital market, with a tax on permanence, for example. This will no doubt not be decided on by a single country but, there will be greater overall attention to such matters.


PwC: Are you able to detect business opportunities?

EE: Difficulties generate skills, and we have 20 years of experience in volatile environments so that, as a management team, we are well-prepared to face critical situations as well as those of a stable and growing market. In the last six months we have acquired a 10% interest of Hersha Hospitality Trust, a chain of 70 hotels in the US, with an option to purchase an additional 10%.

For us, having experienced all the crises we have gone through in Argentina is of real value: to understand how to operate in a stressed financial situation, how to deal with high leverage, restructure debt, invest in a market that has ground to a halt with collapsing stock market prices… All this has now helped us to open the door to the US. This is a market that a few years ago would have been inaccessible to us, and today represents a lesser risk within our structure. In the last year we have expanded our real estate business into the US and in the agricultural sector we have expanded into Paraguay and Bolivia; and we are making inroads into the Brazilian market. Having a market team that is trained for crises allows us to do all this at the most critical moments.

PwC: Once the recovery gains strength, what are your expectations regarding the return of consumption?

EE: Consumption is strong in Argentina at present, although personal and mortgage debt is extremely low. In the case of the US, indebtedness is much higher, so I expect increased savings levels and a greater contraction of consumption, with a lower level of luxury item purchases. The good thing is that the increase in per capita income in the BRIC countries, especially because of salary improvements that take place with the opening up of new jobs, have a profound impact on living conditions in such countries.

In emerging countries a small increase in per capita income generates deep changes in the global economy. We have followed this same philosophy for 20 years. We know the great impact that produces a US$50 increase in a citizen’s income of an emerging country. The first thing they will do will be to spend it on food, on eating better: meat, fried rice and more dairy products. And that is where we in Argentina benefit spectacularly, because we are in a position to produce seven times more than what we consume. And we produce a product that will be in high demand for the next 50 years. Consumption in developed economies will be less dynamic, and BRIC countries, consumers will gain in income levels and consumption capacity, so that their markets will become very strong.

PwC: What were the most significant changes in strategy, business model or organisation that you made in response to this economic crisis?

EE: We made no changes in product and continue to produce basic agricultural commodities: after the crisis, the demand on what we produce is even stronger. If we have one aim, it is that our agricultural company (Cresud) should become ‘feeder of the world’. There are few regions like Latin America where there is so much concentrated potential for the exploitation of agriculture. What the region needs to take advantage of is a complete production cycle, so that value can be added to gross product.

PwC: Do you consider that there will be significant structural changes in economies when they emerge from this recession?

EE: I think that in the case of the emerging countries there will be a greater commitment to infrastructure investment, at least in Latin America. This will be a smart thing to do, because it is very much needed. Some work is being seen, but much more is required. Globally, the world’s leading economies need to deal with their deficits.

Eduardo Elsztain, President, IRSA GroupContinued


PwC: Some analysts consider that the economic crisis has undermined public confidence in the motivations of the private sector and has damaged the reputation of entire industries. Would you agree?

EE: I believe there has been a lot of damage to reputations, particularly in the financial industry, but I do not foresee the disappearance of it. When there is a system that makes such a huge collective mistake, people register the impact and there is still a feeling of fear. What happened will have its cost and the greatest indication of this is the firmness shown by the price of gold, which continues firmly upwards because people are seeking refuge in it. Recovery will be possible, however, as happened in Argentina, where there was a confidence crisis in relation to banks and the financial sector; once everything returned to normal, people went back to making use of the banking system.

At the time when Argentine credit dried up, we as a company were in the midst of the development of a major shopping centre (Dot Baires). Sometimes being brought to a halt in the middle of such projects can be very costly, particularly when trying to start up again later, and it was a difficult time. The matter was dealt with at three board meetings and we decided to go ahead. Today we can say that we are glad we did so, because the mall is among the top three, when ranked by sales on a daily basis. Our company had and has a low debt level in comparison to peers from other countries, but maintaining a conservative financial structure was a lecture we learnt from the 2001 Argentine crisis. We leveraged that knowledge to keep our commercial and financial commitments during this last crisis.

PwC: There is talk of a generalised crisis of confidence. What individual responsibility is borne by companies?

EE: Each company is responsible for doing its businesses well and in an honourable way. I consider myself to be an entrepreneur and when an entrepreneur spots a flaw in what he is doing, he notes it, learns from it and corrects it for not doing it again.

PwC: As a result, what types of adjustments are being made?

EE: The major adjustments were made at the time of the crisis in Argentina in 2002, when we restructured management and made use of human resources in an integrated manner across all the companies in the group... All these more drastic restructuring actions had therefore already been taken during the last global crisis. The most difficult year for us in this regard was 2002, because office occupancy levels dropped, as did shopping mall revenues. This situation made us take drastic actions, including 20% wage cuts to our top management. Banks were closing, rental income dropped to zero and the overall scenario was very tough, but we decided to hang on to our people. We began a programme to reduce our borrowing, issuing convertible debt for our companies, and all the measures that we took at that time, seven years ago, have enabled us to take advantage of the current situation to expand our business.

PwC: Which of these measures do you intend to keep in place?

EE: We will keep our debt low, with a large liquidity cushion. We continue to be very rational in relation to our management team and we have incorporated control of expenditure as something absolutely essential. One very new step that we are implementing is to grant key people a greater stake in the company.

There has been a kind of magic scenario in the corporate world, with executives being offered derivatives, stock options, phantom stock plans and other possibilities. However, I believe that managers will show you whether they truly believe in the company or not when they receive shares and maintains them in the long-term. I think this will be a new trend in management compensation.



PwC: Have you made changes to improve the situation, or have you decided on a totally new approach?

EE: We faced the crisis as an opportunity. We have bought back shares and debt off our own Group; we bought other assets in the country at a heavy discount. Moreover, we took advantage of the current situation to expand internationally. The Argentine real estate sector is going to remain firm because local mortgage borrowing is one of the lowest in the world. Prices per square meter are very inexpensive, close to cost, and there is a very substantial housing shortage. This is a market with little risk of a downturn and it is possible for us to gain access to long-term finance in Argentina.

In the agricultural sector, the Latin American region will have the responsibility of continuing to produce food and incorporating technology to face the growing protein demand of emerging countries. Land prices will remain firm and there will be considerable investment, with many new players. However, many of them will be financial investors that will have problems of lack of experience in a market that is blissfully unaware. As to investment trends, I believe that bonds, derivatives and options are tough bones to chew on. Investment funds are beginning to show interest in real assets and I think this trend will gain strength. These are products for which consumption will be firm for the next 50 years.

PwC: Looking forward, what emerging or systemic risks [climate change, pandemics, natural disasters] are you making preparations for?

EE: There is a responsibility to care for the common good. Governments should back up international agreements that promote actions and commitment for the preservation of the environment.

Our company has developed actions to reduce the consumption of energetic resources through the diverse endeavours it faces. These actions are backed up by internal and external communications to our stakeholders. On the other hand, I consider that in the midst of this financial crisis there is another crisis, one that has to do with the difficulty faced by a large percentage of the population in gaining access to basic goods.

This crisis brought up another insight about business. It drove us away from the fact that when we do business with other individuals or companies, the existence of tension, negotiation and conflict is natural. But when you live in a world in which secured Swiss derivatives are swapped, and a safe return is sought in paper, then there is no tension, but there is also no care for the other individual. That is why, if you look at this financial collapse in a certain way, it is also a blessing, in particular because it breaks up the world of reckless revenue-seeking to leave behind only that which is basic and essential. It is obviously so much easier to build up a structure of investment papers and derivatives, and it takes less time. However, in that scheme the human being is not considered. The basic principle behind money is that it has to do with doing something with another to mutual benefit. Dealing with another is always difficult, but it is a natural process.

PwC: How have you been able to recruit and retain talent in these times?

EE: I have been in business for 28 years and I have seen that people who enjoy what they are doing always stay. And if they are not enjoying what they do, they have the option to change their job within the same ecosystem formed by all our Group companies. We have an extremely high talent retention level. In Cresud we have three generations of employees working for us and the average length of employment in the Group is much longer than the one in the market. I believe in the value of our human capital; their welfare is essential.

PwC: Have you been able to maintain productivity?

EE: We have already lived in times of crisis in many occasions. We have been well-trained for it all our lives.





CEO perspectives on successInterview transcripts of Gerolamo Caccia Dominioni, CEO, Benetton Group SPA





Gerolamo Caccia Dominioni is the CEO of Benetton Group SPA

PwC: What will it take for the economies of your key markets to stabilise, if they haven’t already? Are there specific signals that will indicate, or have indicated, to you that recovery has set in? Global trade is famously sensitive to the global economic cycle. When recovery sets in, will global trade return to levels seen before the crisis? Will the patterns of trade differ?

GCD: Benetton works in 120 countries, taking an innovative approach geared towards anticipating a presence in emerging markets. In these markets there are positive signs of a recovery of the financial sector. However, there seems to be convergence as regards the consumer crisis which is affecting both the emerging markets and the regular markets. The unemployment rates, in particular in the regular markets, continue to worsen and we cannot see any improvement for 2010.

Benetton’s positioning in what we like to call, ‘democratic fashion’, is helpful in facing the crisis, however; the consumer on average is spending less and more shrewdly. Spending a lot is less trendy than it has been in the past and consumers prefer to buy greater quantities of products at the same price rather than a single ‘designer’ product. In this sense, the excellent price/quality ratio that characterises Benetton has attracted groups of consumers who formerly focused on higher-end sectors of the market. Finally, one consideration on protectionism: in general, governments tend to defend local production and facilitate consumption of products made in their own country. This is a trend that may have an impact on the model of consumerism which emerges from this crisis.

PwC: How might capital flows and capital markets change, and how would these changes affect your capital structure?

GCD: Benetton has limited indebtedness and a sound asset structure. The credit crunch has not damaged us. It has however had repercussions on our partners who manage points of sale, in particular the smaller ones, which therefore have less contractual power over the banking world.

PwC: In the economic crisis, consumer demand fell in many key markets. When recovery sets in, what is your expectation about whether consumer spending will return and whether purchasing behaviours will resemble those seen in the past? How will that affect your strategy or your product and service mix? What kinds of strategic or operational changes have you initiated in response?

GCD: Our opinion is that consumption will not recover substantially in the next 12–24 months. In the emerging markets, in particular India and China, there will instead be a greater acceleration due to the need for status symbols. We are aiming to widen the sales network, which is closely connected to local issues of consumer recovery.

PwC: Does the label MADE IN ITALY help as regards consumer choice?

GCD: Benetton, as it chooses to be transparent in its communications with the consumer, includes the product’s country of origin. We have labels in 17 different languages so the consumer can be a little confused because they have in their heads an Italian brand and then they find that the country of origin is somewhere other than Italy. However, we think that ‘made in’ is not exclusively associated with the geographical place of production, now managed on an international scale, but it represents the place where the product was designed, the type of quality control which is carried out and, in general, the high-quality standards of the product.



GCD: As I said before, we are expecting to enter emerging markets. Internally, we are concentrating on issues of efficiency and human resources management. We are, for example, reviewing our creative choices in order to reduce the number of articles in each collection, which will bring a benefit in production management terms. Finally, we are working to make our shops more attractive. In short, we are implementing a series of considered and thoroughgoing measures at various points in the value chain from product conception to point of sale.

PwC: Some observers believe the economic crisis has undermined the public’s trust in the private sector’s motivations and the reputations of entire industries. Do you agree? If so, what are some specific things your company is doing to restore either the public’s trust in the private sector, in general, or the reputation of your company and industry?

GCD: On this point, Italy is very different from other countries. We privatised a lot during the boom years and now there’s a sense that we are turning back towards forms of greater public presence in business. I think that this is one effect of the crisis, but at least in the Italian banking sector the balance hasn’t changed substantially in this context.

PwC: Do you feel that your organisation will be stronger coming out of this crisis than it was before? If yes, in what way?

GCD: The easy answer is ‘yes’; qualifying this response, we should consider that Benetton works within the Italian system. We need public intervention, in terms of new rules and laws, lighter bureaucracy, to improve competitiveness, which is becoming ever fiercer from other systems. If we look at the Italian fashion system, however, the production chain is changing. There is a new, more flexible way of doing business and some areas of the sector (for example, textiles) are no longer competitive.

PwC: What are the most significant changes – in your strategy, business model or organisation – that you initiated in response to this economic crisis?

GCD: We are mainly working on optimising costs in all areas in order to generate efficiency. In particular, we are working both on issues of internal organisational structure and retail streamlining. We must aim at positioning in terms of profitability of our shops, renegotiating prices and costs. The issue of risk management is significant in a company like ours in which the shareholders are present and stand shoulder to shoulder with the management in the making of strategic decisions. This type of structure tends to be able to seize opportunities more rapidly than traditional multinationals. This is a strength which must be preserved.... we need to balance the issue of risk management in an organisation that tends towards better discipline and timely reactions to outside events in order to seize the opportunities they offer.

PwC: What gaps in risk management in your company or your industry were exposed by the economic crisis? Did you make incremental changes to address them or are you initiating a whole new approach to risk?

GCD: Benetton’s risk management has benefited from the diversification of the risk itself being distributed between various partners with which we work to develop the distribution network. Nowadays, taking into account that our business is based on a wholesaler sales structure, the main element in risk management we have to face is that involved in changing from a prevalently sell-in to a sell-out management.

PwC: The economic crisis has been stressful for most employees, many of whom have been asked to accomplish more with less. How have you been able to maintain morale and motivate staff? What kinds of models or arrangements will help your company achieve productivity improvements in the future?

Gerolamo Caccia Dominioni, CEO, Benetton Group SPAContinued


GCD: Local focus is a strength in moments of crisis, to give an example, but it is a weakness as regards professional growth. Therefore we have preferred to focus our investments more towards professional growth, organising a series of training courses. We have also tried to strengthen one of the issues that I consider to be fundamental, and that is to encourage people to be open in their attitude and not to be inward looking, which is a trait of companies that are very local in their outlook and character. Therefore, on the one hand, an element of positivity regarding localisation, but on the other hand it is essential for us to invest more in growth, in training, in opportunities… which, in fact, are in a way challenging management or the organisation regarding the balance of global stability.

PwC: How can governments ensure that new regulation does not become over-regulation?

GCD: I think that for us this is not an insignificant problem: we have a public sector which does not make things easy. I will give you an example: we have now succeeded, working in close collaboration with customs, in obtaining this certificate known as AEO [Authorised Economic Operator]. The benefits associated with the obtaining of such certification, in which we have invested time and human resources include, among other things,: a speeding up of customs procedures and checks (currently more than three checks per week); an improvement in relations with the customs authorities; and recognition by foreign authorities as being ‘above board’.

This is a first step in a different relationship with the public authorities, a different relationship which must presuppose the fact that if we want to maintain distributive reality as we have in Castrette, we have to distribute 150 million items throughout the world; we must also consider that if we operate in a location which is not ideal, if the transport routes are such as they are, if regulations do not make things easy for us, if customs obstruct us, if…, if…, if…, you understand that in the end we arrive at a point at which we say ‘how can I sustain this production system?’ Therefore, there is certainly a need among the regulators in general for a different level of concern for the manufacturing world. It isn’t limited to the issue of the car; you can’t just give incentives to cars, the car +32%, and everyone is happy. This is an old system of financing that is somewhat outdated.

PwC: The tendency will be to increase regulation in general, which was one of the preoccupations of the CEOs in the last survey – do you see opportunities anywhere in the world or are there merely barriers to entry or obstacles for the type of business you have?

GCD: We are a company that has chosen the route of transparency, has selected the way of international-level competition, which has always gone into the arena without looking for protection. Unfortunately, we rely more on ourselves than on others. It is clear that there is cause for debate, whether shops open or don’t open on Saturday or Sunday, if in some zones they can open and in other areas they can’t. And we can’t succeed in agreeing although today the system of commerce is a free system throughout the world, and I believe that even in Italy it would be opportune to fall into line in this sense.

To some extent governments could favour and facilitate ... take the example of the renewal of the commercial contract, bearing in mind the Italian issue now on the table for next year. I believe that, with reference to flexible working, tax cuts on Christmas bonuses to favour consumerism, investment incentives for anyone who wants to refurbish in some way or investment incentives for small entrepreneurs who are in commercial business, these are all issues in which we could say ‘remember that we aren’t just a highly centralised economy of big companies, but have a network and a presence in important local territory that we have to maintain and protect’.



PwC: What one thing could governments do to stabilise the financial sector and minimise the risk of another meltdown?

GCD: I think that this is a very important issue. Not only governments but everyone in general has a duty to realise that we should include in the scope of our life plans, our management plans etc., social values that we didn’t consider before. The issue is that we should no longer be evaluating our performance and our results only on the basis of the bonuses we are earning; we must evaluate them on our contribution to growth in the quality of the life of the system. And quality of life means so many things: it doesn’t substantially mean only consuming, but means re-valuing on the one hand the public as a support for the company, and on the other hand the company as a socially useful tool for the growth of not only economic values, but also cultural and social values. I think that this would avoid, in future, recreating a situation in which we lose sight of the social objectives for which we exist. The bank has a social purpose which is that of financing the system’s growth. Ultimately, that became irrelevant. What became relevant was what mechanisms one could put in place to try to earn more. What is the purpose of an audit company? It is substantially to ensure to third parties a system of transparency.

PwC: Have you therefore thought about sustainability projects to give greater transparency to the type of business you are doing?

GCD: I believe that we have always been interested in moving in this direction. But even for us, even in this, it is important to get ourselves up to date and therefore perhaps to become less, I would say, provocative/challenging and a little more specific.





CEO perspectives on successInterview transcripts of Graham Mackay, Chief Executive, SABMiller plc





Graham Mackay is the Chief Executive of SABMiller plc

PwC: Has dealing with the global financial crisis over the past 12 to 18 months been a tough personal challenge for you?

GM: Obviously, the global financial crisis has affected the business climate and changed the trajectory of our own business. So, yes, it has been a pretty testing 18 months or so. Having said that, beer is a relatively resilient category. If you look at our performance, total volume growth has gone from the upper single digits to about flat, or perhaps, -1%. That’s not an enormous swing – companies in many industries were hit much harder. On the other hand, the beer business requires an immense physical infrastructure and that makes its economics very dependent on capacity-utilisation. It only takes a relatively small decline in service volumes to make quite a big difference to the bottom line. So utilisation is quite important. In addition, the start of the crisis caught us while we were in a pretty substantial capacity expansion mode, and we quickly had to scale back. But the financial crisis has affected us more in terms of currency movements and commodity cost fluctuations then in actual trading volumes. Still, scaling back our capacity expansion programme, scaling back working capital from inventories, managing the demands for increased credit from distressed distributors – it’s all been pretty demanding. In the end, however, we’ve been able to take some costs out of our system. All in all, we’ve come through pretty well. The real question is: Where is the economy headed? Is it bouncing back? I don’t really see that it is.

PwC: Is this financial crisis different from previous ones you’ve experienced?

GM: Yes. It’s different because it’s global. In the past, we’ve had ups and downs across individual regions. But for the entire world to be affected by the same crisis more or less simultaneously – that puts us into an entirely different territory. Having said that, the crisis did have different impacts across the various regions in which we operate. Central Eastern Europe was extremely affected. South Africa, too. The rest of Africa – not nearly as much. Neither Latin America nor the US was terribly hard hit. And China – hardly at all.

PwC: Do you see any signs of an economic recovery?

GM: We don’t see signs of a recovery, per se. We do see some parts of the world where the decline may be over and slow growth may be returning. I think it would be premature to say that we’re seeing a general recovery.

PwC: What signals would indicate to you that an economic recover is taking hold?

GM: Sales volume, basically. I’ve always regarded beer as an excellent concurrent indicator of consumer economic activity. Generally speaking, beer volumes have stopped sliding and, on balance, I think we’ve reached some kind of bottom. But until unemployment starts to come down, I don’t think we’ll start to see a convincing economic recovery.

PwC: So you expect a slow recovery?

GM: Very slow, yes.


PwC: As a consequence of the financial crisis, do you expect to see fundamental changes in consumer behaviour?

GM: One reads about how consumers are re-assessing the value equation and how their buying habits will never be the same again. I don’t know whether that’s true or not and, quite frankly, I don’t think anyone knows. Our industry is an old one – beer has been around for a long time. What we do see is more down-trading to discount economy brands. That’s a clear trend that’s been occurring throughout the world. But it’s really an extension of a more fundamental dynamic. As markets mature, mainstream, standard-price beers eventually come under threat from premium brands at the top and discounters at the bottom. The middle gets eroded. Now, in some markets, it may be the case that the consumer drift towards discount beer is accelerating while – for the time being – the consumer drift towards premium brands has slowed. Nevertheless, in most markets it’s still quite possible to have high-end brands that grow – and grow quite well. Consumers will often buy whatever brand is on discount, but also take a couple of carry packs of a top-end import or craft beer as a special treat for themselves. That sort of consumer behaviour is a well-known and understood.

PwC: How does your company address those various patterns of consumer purchases?

GM: We respond by offering products at all points on the price ladder in order to capture consumers as they drift up or down from the middle. In most markets, that’s our strategy.

PwC: Has the economic crisis undermined the public’s trust in the private sector? And, if so, what is your company doing to rebuild that trust?

GM: Whether there’s an erosion of trust generally in the private sector, I’m not sure. We are perhaps a bit different from many other companies in that a lot of our business is based in poor countries. And in those countries, the private sector – and the multinational corporation, specifically – is viewed as a bastion of wealth, power, and influence. Consequently, we are very conscious of public opinion and go to great lengths to protect our reputation and build the trust of the local community. Quite frankly, if there’s any clear erosion of trust, I think it’s directed towards the political establishment.

PwC: Do you see a role for the private sector in helping governments enact smarter regulation?

GM: As far as regulation is concerned, I think we need to ensure that governments understand the distinction between the financial sector and companies like ourselves. There’s a tendency by government to tar every company with the same brush. Certain regulatory reforms, useful and necessary for financial companies – new approaches to risk, remuneration, or corporate governance – would clearly be intrusive if applied indiscriminately to business as a whole. I think there’s absolutely no justification for that, and making those sorts of distinctions is an important job for the private sector.

PwC: Has the financial crisis constrained your company’s access to capital?

GM: Not dramatically. Obviously, we watched very carefully how the banking crisis might affect us in terms of credit lines and so on. In the event, we weren’t particularly affected, and managed to roll over various debt lines when we needed to. As it happened, we were able to do that after the worst of the crisis had passed, and so avoided punitive interest rates. In fact, our coupon has come down. Of course, we were helped by the fact that we aren’t highly geared to begin with – and also because we’re a very big company. I think the reluctance of the banks to lend wasn’t directed towards companies like us. It was the smaller, medium-sized enterprises that felt squeezed.

Graham Mackay, Chief Executive, SABMiller plcContinued


PwC: Did the economic crisis reveal any gaps in your risk management?

GM: Not particularly. The operations of our company are spread out around the world and, as a result, our risks are widely spread, too. We will have a particular risk in any given a country. As an example, let’s use Russia where, during the financial crisis, there was something of a credit crunch amongst the wholesalers because they could no longer fund their stocks and working capital. So we stepped into the breach to extend our wholesalers more accommodating terms – essentially keeping them in business. Now, there was an operating risk in doing that. But that doesn’t aggregate to an operating risk at the global level because conditions from one country to another differ very, very widely. So while the financial crisis may have been global in scope, it generated, for us, localised risks only.

PwC: How is your company addressing sustainability issues and the question of climate change?

GM: We manage the business with the intent of continuously reducing our impact on the environment. In essence, we always try to do more with less. To that end, we’ve established a 10-point sustainability score sheet to monitor our performance and set targets for improvement. A number of those 10 items – carbon usage, for example – have a direct bearing on climate change. As far as the climate-change debate is concerned, our company doesn’t play a particularly active role in that – nor do I think we necessarily should. I have my own views on things that are being proposed in governmental and intergovernmental circles, but they are personal views, not company views.

PwC: What action might government take to address the risk of climate change?

GM: One thing that governments can do is to make it a great deal easier to build nuclear power stations. I think that’s the elephant in the living room that – for many, many years – governments have been reluctant to acknowledge. I’m an engineer by background and I take an interest in these matters. Speaking personally, I think the intense focus on renewable sources of energy is misdirected. Relative to the scale of the problem, a couple of wind farms off Kent simply won’t make a difference. Huge volumes of raw, bulk energy are what’s required. I think it’s a disgrace that in the UK, decades have gone by without investment in nuclear energy as opposed to the investments France and other countries have made. We’re essentially being held ransom by special interest groups, which the government hasn’t been prepared to take on.

PwC: Do you think that consumers expect your company to be active on climate-change issues?

GM: I don’t know that consumers as a whole do. I think that certain interest groups pay attention to that. But there’s a huge amount of misinformation being circulated. Take, for example, this concept of “carbon footprint”, which leads to pressure to buy “local.” In the case of beer, one might argue that imported brands from Italy or the Czech Republic have an excessive carbon footprint because of their associated cost of transport, and one should, instead, buy local brands. In reality, the transport of that imported beer incurs a tiny carbon footprint compared to the construction of the supermarket itself and having all those shoppers drive their cars to the store. That’s where the carbon footprint is.

Take another example: returnable bottles. Retailers don’t like returnable containers because they’re a hassle. And so they’ve forced the beverage producers to develop disposable packaging, which, in environmental terms, is much more expensive than returnable packaging. In the debate about sustainability and climate change, there’s a great deal of misinformation and special interest at work, which I think is part of any political process. It works its way out in time.




Graham Mackay, Chief Executive, SABMiller plcContinued

CEO perspectives on successInterview transcripts of Hartmut Ostrowski, Chairman and CEO, Bertelsmann AG





Hartmut Ostrowski is the Chairman and CEO of Bertelsmann AG

PwC: The first questions deal with the economic conditions following the financial and economic crisis. With this in mind we have ascertained that numerous governments have supported many of their key industries, for examples in Germany, the USA and France where scrapping premiums were provided to stimulate the automobile industry. Worldwide banks were protected from collapse. What measures, if any, should be introduced to stabilise your markets?

HO: I can only speak for the media and services industry, of course. The media industry doesn’t need any particular stimuli. As a general rule, the media should be free from government influence. What is important for us is that we have as much freedom as possible.

PwC: Related to this, it would be interesting for us to know how Bertelsmann’s financing structures have changed due to the crisis and if you have noticed financial restraints on the market?

HO: Our long-term financing structures haven’t changed, and our financing is absolutely stable. We have been concentrating on capital market financing for some time now. In a forward-looking move we issued a new bond at the beginning of this year, to make sure that we have sufficient liquidity even in tough times.

PwC: How do you view the topic of ratings?

HO: Ratings will remain important in securing access to the capital market, which is essential for a privately owned company such as Bertelsmann.

PwC: During the economic downturn consumer demand has sunk in many key markets and advertisers have cut their marketing budgets severely. What effect has the crisis had on your industry?

HO: We have to differentiate between two areas here: consumer spending and ad spending. Consumer spending has been less affected by the crisis. And as for Bertelsmann’s products, our customers can always afford a good book or a magazine. Advertising has been hit much harder. But Bertelsmann’s portfolio is well-diversified – we’re less dependent on advertising than other media companies. And in general we can say that, compared to other sectors, the media industry has been only moderately affected by the crisis. Our industry has shown that it can respond very well – and quickly – as a whole. And the media industry still generates a good return on sales, which in times of crisis provides a solid foundation.

PwC: We would now like to turn our attention to the subject of strategy. How you have positioned Bertelsmann to weather the crisis. We are particularly interested in your opinions on strategy, risks, investment and personnel. Do you think that Bertelsmann will emerge from the crisis stronger than before?

HO: Yes, definitely.


PwC: What are the most far-reaching measures that you have implemented from a strategic and organisational point of view, also pertaining to your business model, in order to react to the economic crisis?

HO: We analysed different scenarios and implemented an extensive program in spring 2009, called ‘2+5’. It is based on two guidelines: first, a decentralised approach and delegation of responsibility, and secondly, continuity and value creation. As a very decentralized media company, we can make decisions quickly and with great flexibility Our executives have great freedom to operate, and we grant them a lot of responsibility. They know what is good for the business in each particular situation. Our decentralized structure therefore enables us to react quickly and appropriately. This is always vital but especially in times of crisis. The programme’s five work packages entail the following: First, safeguard liquidity and stable financing. Secondly, we carefully examine the possibilities for saving costs in all our businesses. Thirdly, we demand leadership and responsibility from our management, especially during the crisis. Fourthly, we are examining our complete portfolio. Sometimes when the economy is good, we will pull an ailing business along – something we cannot afford to do in times of crisis. And finally, we strive to use every possible opportunity for growth, while also staying on the lookout for new technological developments and lines of business. We have made excellent progress on implementing these five work packages, and have already seen some very positive effects in the second half of 2009, so we will continue to forge ahead with all of them.

PwC: That’s easy to say but probably not as easy to realise?

HO: Absolutely. The particular challenge here is that we are working on all five areas at the same time. But our management team is highly motivated, and the programme has unleashed the full potential of our decentralized organisation. The challenge was to act in a decentralized manner and still maintain some supervision over the process. We have achieved this by setting up control boards.

PwC: In this context it is also interesting to know whether your supervisory body in times of crisis had a deeper dialogue with you regarding questions of strategy, risks and management behaviour. Was this the case?

HO: The supervisory board has certainly asked more questions during this phase. Bertelsmann has always had a very proactive, entrepreneurial supervisory board, and we have a tradition of close and trustful cooperation. It is vital that our supervisory body is involved in strategic decision-making processes from a very early stage, and we continually communicate with each other in that spirit.

PwC: Let’s talk about the financial market and the effects of the financial crisis once again. Are you encountering problems procuring outside capital at the moment?

HO: We are not listed on the stock exchange and therefore have natural limits on our equity. So we have to cover our financing needs via internal growth, profitability and debt capital markets. As mentioned earlier, we were able to issue sizeable bonds despite the uncertain times in spring 2009. Therefore we haven’t encountered problems raising outside capital, but it has been harder. Our group’s conservative and long-view financing policy has been a great help, as have our credit ratings and transparency.

PwC: The economic crisis has certainly been nerve-racking for many employees. At Bertelsmann how have you managed to keep your employees motivated?

HO: We have a strong corporate culture of partnership. Partnership means jointly looking for solutions and finding them. This is not always simple but certainly worth doing. Bertelsmann has always been an advocate of a good corporate culture, and we have nurtured this culture over the decades. We communicate openly and comprehensively, give our employees a lot of autonomy and let them participate in the company’s financial success. This increases motivation, identification, and loyalty. And our culture has proven very crisis-resistant. Partnership pays off, especially in tough times.

Hartmut Ostrowski, Chairman and CEO, AGContinued


PwC: In the last few years 72% of CEOs were of the opinion that personnel are a critical factor in long-term success. Do you agree with this point?

HO: Definitely. This is especially true for the media industry, because it is a people business. As a creative company, our success is absolutely dependent on our employees, their ideas and intellectual resources.

PwC: Many observers assume that there will be more regulation in the future, even though our experience always shows that CEOs think that over-regulation substantially endangers growth. What do you think about this?

HO: We certainly don’t need more regulation in the media industry overall. In general, markets have to be free. But we’ve also seen, in other industries, what can happen when freedoms are abused or when there is too little regulation. There have to be rules, and these rules must be binding for all players in the market.

PwC: Finally, let’s talk about Copenhagen and the question of how to protect our environment and the topic of corporate responsibility. With the reduction of CO2, do you see branches of business that would be of interest to Bertelsmann?

HO: First, I’d like to note that the outcome of the Copenhagen Summit is truly disappointing, especially since climate change is one of the biggest challenges facing society in the twenty-first century. This challenge not only has vast implications for global political decision-making, as seen in Copenhagen, it also demands a broad-based response from business.

Though the media industry may not be one of the biggest polluters, we acknowledge our corporate responsibility to deal with the issue of climate change. At Bertelsmann, responsibility towards the environment is part of our corporate culture and, as such, is included in our company’s value system. With this in mind, Bertelsmann’s executive board has issued a climate strategy, and as a first step we have just completed an analysis of our global carbon footprint in 2008. Based on this, we will identify opportunities for reducing CO2 emissions and will engage and motivate current and future employees to tackle the issue of climate change.

We also realize that it makes good business sense to find innovative solutions to this issue and to create ‘green growth’ long-term. We see a growing public interest in ‘green topics’ and sustainability, which is catered for by our books, magazines, TV programmes and also in our printing business. Overall, we will further explore the market for green products and services.




Hartmut Ostrowski, Chairman and CEO, AGContinued

CEO perspectives on successInterview transcripts of Huang Tianwen, President, Sinosteel Corporation




13th annual global CEO SurveyThe In-depth CEO story

Huang Tianwen is the President of Sinosteel Corporation

PwC: How was the Chinese steel industry affected by the global financial crisis?

HT: The global financial crisis had a significant impact on the Chinese steel industry. In October 2008, steel prices, including iron ore prices, began to plunge, and within China, demand for steel dropped dramatically. now, a year later, it’s difficult to say whether or not the steel industry has emerged from the financial crisis. Certainly, many types of enterprises are beginning to recover, but others are still struggling with a dramatic drop in profitability. During 2009, the market for steel has been quite uneven – often low, but occasionally high. In any case, demand is unstable. additionally, steel prices fluctuate frequently – along with the prices of downstream and upstream resources, especially products associated with raw and secondary materials. So, the entire steel industry supply chain has been greatly affected by the financial crisis.

PwC: What steps did Sinosteel take in response to the crisis?

HT: We adopted a series of guidelines that can be summarised as follows: pay close attention; stay calm; strengthen confidence; be cautious; and be prepared to adjust. Let me explain further. We pay close attention to all marketplace changes. We stay calm in the face of pricing volatility. We take strength and confidence in Sinosteel’s contribution to the long-term development of the Chinese economy, integration into the global economy, and growing resilience to market fluctuations. In order to avoid risks, we must be more cautious in making financial and operational decisions. and lastly, we should adjust our management structure and business practices to best suit prevailing market conditions. using these guidelines, we took a series of measures that helped us to achieve our aims. Those aims were to ensure the financial stability of the enterprise; keep our core business basically stable; and, when considering questions of employment security, to balance our need to generate financial returns with the responsibility we bear to the larger society.

PwC: It sounds as if 2009 was a challenging year for Sinosteel. Can you tell me more about your experience of the year?

HT: Two unusual things occurred in China’s steel industry this year. First, even though market demand was weak and unstable, steel output exceeded last year’s level by 10%. This was in stark contrast to most forecasts, which anticipated a dramatic year-on-year decline in production. This increase in production is attributable to a series of rescue measures undertaken by the Chinese government – and also various steel companies – to expand domestic demand. The other unexpected event is that during 2009, China went from being a net exporter of steel to a net importer. That is, the volume of imported steel products during 2009 was larger than our export volume. again, this contradicts our estimates prepared at the beginning of 2009.

PwC: Can you give us an overview of Sinosteel’s performance so far in 2009?

HT: as of October 2009, Sinosteel has accrued sales revenue of RMB110 billion. Overall sales revenue is down by about 20 percent from the same period last year. However, our production volume – including that of iron ore, steel products, and chrome ore – is up 20–40% from the same period of last year. This seeming discrepancy – a decline in revenue and an increase in production – is explained by the substantial fall in steel product pricing. Profitability has also declined dramatically from last year. The overall situation may turn positive in the future. But right now, the dynamics of the steel industry are very unstable.

PwC: Would you say that the financial crisis has passed?

HT: not yet. But the worst has passed, and the economy is beginning to gradually recover.


PwC: Have you learned any lesson from the financial crisis?

HT: Yes, we have learned some lessons. Most importantly, we learned that we must further strengthen our internal controls and risk management capabilities. The financial crisis has made it clear that all enterprises must be better prepared against future risks. In terms of Sinosteel, we will focus on improving three specific ‘abilities.’ The first is our predictive ability – to understand where the market is headed. The second is the ability to quickly adapt operations to changing market events. and the third is the ability to change our business model or management structure to better suit conditions in the marketplace. Of course, no organisation can expect to be totally precise in its predictive ability. But what one can do is to continuously recalibrate one’s forecasts and analysis on the basis of unfolding events in the marketplace. I recognise that it’s difficult to make accurate predictions about markets and products. However, in order to improve our ability to understand how the market will develop over the long-term, we can strengthen our analysis of macroeconomic trends and changes in supply and demand curves. What about our ability to adapt quickly to changing market conditions? When the market is good, we have lots of business and profitability is excellent. This is very normal. But under the current situation, demand changes every day, and enterprises need to adapt rapidly. In fact, wide fluctuations in market conditions have become very normal and we must be ready to respond to a whole range of possible conditions: low market prices, strong demand, or no demand. The third ability requires an enterprise to improve its core competencies, find a firm footing, and survive and develop in a changing market. When the market changes, you cannot simply follow normal procedures or maintain outmoded strategies, management structures, or market positioning. new conditions dictate a quick response.

PwC: In response to the financial crisis, do you expect government to enact stronger regulation?

HT: We can see from the financial crisis that all governments are strengthening regulation. This is to be expected, since the crisis could easily escalate if regulation is not enhanced. However, this normal response by government may lead to over-regulation, which can already be seen here and in other countries. This kind of over-regulation may be necessary in the short-term, but over the long-term, it is unsustainable. If imposed over the long-term, market economies cannot work well. China’s 30 years of economic reform and opening-up to the global economy has achieved great success. Reform – opening up – unleashed the people’s energy. now, state-owned, private sector, and overseas investors can all have a role in the Chinese economy. and following our reform and opening up, it’s proper and necessary that marketplace behaviour be regulated. good regulation provides the foundation for a market economy. So in my view, it is understandable and appropriate for the short-term to rely on government stimulus. But over the long-term we need to expand domestic demand. governmental stimulus is not sustainable and the government’s financial resources are limited. Viewed from the perspective of a market economy, and based on historical experience both in China and abroad, it is correct to say that the government is less efficient than the market. The government’s ability to allocate resources efficiently is not ideal and will result in waste. Markets – when they are working well – are much more efficient in the allocation of resources. So, yes – in times of financial turmoil, it is necessary for the government to strengthen regulation. But if we over-regulate markets, it will have a negative effect on market efficiencies and the natural development of markets. and in the end, it will also erode the core competencies of businesses competing in those markets. If businesses lose their core competencies, and rely instead on regulation, everything will go back to the planned economy. In my opinion, if reform and opening-up can be further deepened, and if we can maintain the momentum of our 30 years of economic reform, China’s economy will maintain a rapid and sound development. and if China’s process of urbanisation continues, the domestic consumer market will have huge potential.

PwC: What measure should be taken by government to mitigate the risks of climate change?

HT: In my opinion, three measures can be taken by government. First, government can help form a national consensus that climate change is a problem that affects everyone – not only people in the uS, but also those in China. If we don’t pay attention to climate change, sooner or later it will affect the lives of everyone living on the planet. Second, the government should formulate strict emission standards and implement them robustly. Existing standards are not systematic and are often contradictory. If strict standards can be formulated for every industry and implemented by every company, that will have a positive impact on climate change over the long-run. Third, the government can provide guidance as to which industries will be encouraged on the basis of their sustainability and contribution to society, as well as which industries should be phased out because of their damaging effects on the environment and society.

Huang Tianwen, President, Sinosteel CorporationContinued


PwC: What steps did Sinosteel take during the financial crisis in order to retain employees?

HT: We took a number of measures. Most importantly – even in the face of a deteriorating economy – we made sure that the salary levels of our employees remained relatively stable. In terms of maintaining company morale and cohesion, our approach was three-fold. The first was to preserve the confidence of our people in the long-term development and success of our company. If the company continues to be well-managed, if we can demonstrate ongoing client loyalty, if we keep on expanding overseas, then our employees will still believe in the future of the company – even during tough times. So confidence is important. The second factor is making sure our employees understand and embrace the company’s goals and strategies. This is crucial to enhance company cohesion and retain talented people. The third factor is corporate culture, which can help the company persevere during difficult periods. Culture communicates the company’s purpose and values to its employees and that helps hold people together.

PwC: Will China lead global economic recovery?

HT: During the financial crisis, China’s economy proved to be more resilient than any other economy in the world. and many Chinese enterprises are among the best performing companies in the world. nevertheless, China’s economy faces many uncertainties. although China is playing a more and more important role, we still cannot assume that China will take the lead in the global economy or become its engine. The influence that China’s economy has now cannot compare with that of the uS. In terms of ‘engine of the global economy’, China still lags far behind the uS. It is true that as the result of the financial crisis, many american enterprises face problems and some have even declared bankruptcy. But even in good times, many american enterprises declare bankruptcy. In the uS, it is a normal for the market to allocate resources and maintain a balance in this way. In contrast, the Chinese market still cannot fully exert its role in terms of resource allocation. Those sorts of market-based mechanisms have not yet been completely established here. For example, state-owned enterprises enjoy preferential policies. So there is a big gap between the current market system and our ultimate goal. In the long run, it’s important that all Chinese enterprises – whether they are state-owned, private, or foreign funded – compete with one another on an even playing field. In this way, good enterprises have the chance to develop and bad ones become bankrupt. So, although there are a lot of problems in the uS economy, my personal view is that we should never underestimate its strength. The uS economy has an effective mix of market-based mechanisms and good external regulation. During the financial crisis, the uS government did apply a stimulus package. But the stimulus package will eventually end and, sooner or later, the american economy will get back on track. The uS economy has a great capacity for self-balance and self-adjustment and the society is comfortable with questioning and debate. These capacities are what China lacks and, consequently, our core competitiveness still lags far behind that of the developed countries. The overall competence of China’s entrepreneurs, including their inventiveness, management capacity, and strategic judgement is almost equal to that of executives in the world’s largest international enterprises. The key problem China faces is the government’s administration of the economy, which has, to a large extent, limited the creativity and innovation of Chinese entrepreneurs. If there is programme of major reform to address this issue, I believe that the creativity of Chinese entrepreneurs will be unleashed. at the same time, China must remain sober-minded and should not overestimate itself.


© 2010 PricewaterhouseCoopers. all rights reserved. ‘PricewaterhouseCoopers’ and ‘PwC’ refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL). Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. no member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.


Huang Tianwen, President, Sinosteel CorporationContinued

CEO perspectives on successInterview transcripts of Ian Bremmer, President, Eurasia Group, US





Ian Bremmer is the President, Eurasia Group, US

PwC: When thinking about the global economy, what indicators are you watching that will tell you the shape of recovery in key markets?

IB: First of all, I’m pretty confident whatever sort of recovery we get is going to be jobless. But that by itself doesn’t really tell you how we’ll know we’ve turned the corner. For that, we need to see more confidence from the private sector. We’re not there yet. There’s still an enormous amount of uncertainty out there and we should recognise that. There is still a lot of disagreement even over the key indicators we need to look at. Is it the strength of the dollar? Is it productivity numbers or employment numbers? Is it growth numbers? Is it the equity market?

Since I started as an analyst some 20 years ago, I’ve never seen so little consensus amongst key industry players – whose decisions will determine what kind of a recovery we’re going to have – about the direction they’re taking for the next year. Are they going to invest? Are they going to lay off more people? Just as there has been no consensus about the shape of the recovery, there has been no consensus about how confident businesses feel. So what I’m watching, quite frankly, are things like the results of PwC’s Annual Global CEO Survey. I don’t mean to say that in a cute way.

PwC: Is that lack of consensus just in the US or is that a global phenomenon?

IB: That uncertainty is true in most of the developed world, with the exception of Canada and Australia, two countries that are both significant commodity players. Australia can take advantage of Asian growth because of its location, and Canada, with a smaller number of more consolidated banks, has not been as exposed to the financial meltdown. But, leaving those two aside, the uncertainty remains throughout the Eurozone, the United States and Japan. And it is a completely different story in major developing markets

PwC: Global trade is famously sensitive to the global economic cycle. When recovery sets in, will trade return to the levels and patterns we saw before the crisis?

IB: I don’t think it’ll return to quite what it was before the crisis. The ability of Americans to consume the way they were, particularly with the relatively weak dollar, is not going to be anywhere near what it was. China may have a harder time exporting to the US. Still, we are also going to see more South-to-South flows, and as a result, some of those exports are going to go to other markets. The emerging Indian middle class will have an appetite to buy reasonably high quality manufactured goods out of China, and we will see more consumption coming out of Brazil. The other thing we will see is more regionalisation of trade and capital flows. For example, you’re going to see a lot more intra-GCC investment and trade within the Gulf region. You’ll see a lot more intra-Asian trade. That is a trend that I think is just beginning, but frankly will become a major challenge to the globalisation trends that we’ve seen in the last 30 years.

PwC: Cross-border capital flows were estimated to have fallen by 82% in 2008, and capital controls appear to be coming back into fashion. Will international capital flows return when recovery sets in?

IB: It comes down to who’s making the decisions. The Chinese recovery is not a consumption-led recovery, it’s an investment-led recovery – and that investment is being determined by Beijing. A lot of that investment is, of course, inward, and you’re seeing that focus not only in terms of where they’re putting money, but also the way they’re thinking about stockpiling commodities and setting other sorts of policies. Those are decisions that political leaders are making primarily for purposes of the strategic stability of the country, and not to maximise short-term returns. So, as a consequence, you’re going to see less of those cross-border capital flows. What’s happening in China is also happening in places like Abu Dhabi. It’s happening and has been happening in places like Russia. There are similar trends directionally at least in places like the United States, but it’s much, much smaller. The US government, of course, has had a major impact in terms of stimulus, but its spending is much less structural and much less strategic.


PwC: What about private investment? Do companies see overseas investments as attractive as they were before?

IB: First of all, let’s be clear that there isn’t always a bright line between public and private. What is a private investment when it comes from China or Saudi Arabia? It may be a private company, but the ties to the state are very different, and the ties to strategic initiatives are often very different than when investments come from companies in the United States, Japan or the West.

With that as a caveat, I would say Western multi-nationals are still very, very attracted to international investments. In some cases, they’re even more attracted, because emerging markets are where they see the big growth opportunities. Some of those investments will be more challenging now, because there are going to be much tougher domestic competitors in those spaces. The trend towards capital controls may constrain that investment over the long term. But we likely won’t see much impact of that in 2010.

PwC: Consumer demand fell sharply in the US and other key markets during the crisis. Will that spending return?

IB: I think it’s pretty clear that consumer demand won’t come back. So much of American consumers’ capital was locked up in homes that were basically annuities where value was going up every year. A lot of that value has been destroyed and it’s not coming back. That will allow for younger people coming into the workforce to buy property and you’re going to see a re-distribution of wealth in the US that over the long term will probably serve America well. But, it’s not going to re-build consumer confidence tomorrow. We are definitely going to be in an environment where Americans are going to be spending an awful lot less. Savings rates in the US three years ago were -1.5% – that clearly wasn’t sustainable. Wage expectations for the average American are not coming back. And, with financial regulatory reform probably coming in the early part of 2010, you have to assume that credit is going to be handled differently than it was. Some might argue that the investment banks have not fundamentally changed their structure, but that does not mean that the days of easy credit are coming back. There is some cyclicality to it in the US, of course. There’s no question that spending is going to come back from what it was in 2009. But, I don’t think the excesses that we saw in the last few years will come back. And we’re talking about a global environment where most of the world is looking to the United States, the world’s largest economy, to do the consumption.

PwC: What might take the place of American consumers as the engine for global growth?

IB: The US as an engine for global growth is going to be replaced to a degree by China. But China is a much smaller economy. China’s consumption is undergoing a slow and gradual structural change; it’s probably the biggest one in the world. They’re building extraordinary cities, and creating an expanded and educated middle class. That is going to lead to more consumption, year after year. The numbers aren’t in yet, but China was probably the world’s largest market for automobiles in 2009. And not many Chinese can afford automobiles yet. So that is where their consumer growth is going to come from.

But, let’s keep in mind that household consumption is 35% of China’s GDP and in the United States it’s almost twice that. It’s not as if, suddenly next year, China is going to be a consumption-led economy. It won’t. Consumption was actually larger a few years ago: in 2004, it was about 40%; in the early 1990s it was about 50%. The Chinese save about 25% of their income and they’re not going to change and become Americans overnight. There’s going to be a very long-term gradual shift. But, they’ll never become Americans in their consumption patterns, in my view. So consumption patterns are changing and they’re changing faster than they would have without the global recession.

The real structural driver is China’s investment of state and private capital into building infrastructure. Twenty-three per cent of the world’s nuclear plants that are either presently under construction or approved are being built in China, for example. It’s one of the big structural changes that we’re seeing in the world economy right now. It’s not the Chinese consumer replacing the American consumer, it’s Chinese investment replacing the American consumer. That is the difference in the world between 2010 and 2008. Which of those two things is bigger? We need to recognise that China’s investment is not on the same scale as a driver of global economic growth that the American consumer was over the last five years.


Ian Bremmer, President, Eurasia Group, USContinued

PwC: What strategies or operating models have to change as a consequence of those trends?

IB: First of all, you’d better not rely on the US consumer coming back the way they were. American auto-makers have had this great bail-out, for example, and GM says they’re doing so well that they don’t need to sell Opel. I hope they don’t believe that the Cash-for-Clunkers programme is a structural fix, because that short-term stimulus isn’t coming every year. The same will be true with all sorts of durable goods going forward. Certainly, I hope that a lot of multi-nationals recognise this and are adjusting their consumer models. Beyond that, CEOs have to recognise that a lot of their long-term planning needs to be tossed out of the window. In this environment, we’re seeing such an extraordinary geo-political and geo-economic change away from the United States and towards China, away from consumption-led demand – which is easier to project – towards investment and in many cases state investment, which is much more opaque and potentially much more volatile and subject to policy shifts. There has to be a lot more volatility built into your modelling; your ability to do your three- and five-year planning in that kind of an environment is diminished. You have to be much more tactical. You have to plan with a readiness to make changes on short notice, and you probably need to revise strategic plans much more frequently, with new assessments of the global environment, than you did before this crisis hit.

PwC: Are CEOs changing how they make their resource allocation decisions?

IB: What I see right now are CEOs who have gone through major restructuring in the last year. They’ve gone through major downsizing and now they have some money to spend. Their productivity numbers are up and they’re saying, ‘Where are we going to deploy that cash? Where are the opportunities? We want to go in.’ Their behaviour in that regard reflects the business cycle. They’re not saying they need new processes to figure out how to deploy that capital. You don’t make the structural changes in your decision-making process unless you’re facing absolute cataclysm, and most of these corporates are not facing cataclysm. They’ve gotten through it, or they believe they’ve gotten through it, and now they’re ready for business-as-usual. That’s where I would say most CEOs are, although they certainly are more humble and more cognisant of uncertainty.

PwC: Are CEOs more aware of strategic risks because of the crisis?

IB: The crisis has opened CEOs’ eyes to strategic risk from their own policy-makers. I think every corporate in America right now is aware of the fact that the tax structure may change, for example, and that labour is more influential. But they might be missing the bigger picture. When a big crisis hits, you focus on the things that just went wrong or are potentially going wrong for you right now. You don’t necessarily look at the other basket of factors that haven’t hit you, but are looming on the horizon.

It strikes me that one of the biggest risks out there for American multi-nationals is their ability to compete effectively in markets that are driven by the state, and markets where the state is not only the principal arbiter, but also the principal actor in the economy. I don’t think that’s understood. Multi-national corporations ultimately need access to global consumer markets, global capital flows and global labour to succeed. In a world that is not led by the G7, where state capital is as viable an economic model as a regulated free market is for many states, multi-nationals will not have that access; they will be constrained. For me, this is the single biggest global change that we’ve seen in the last year. The same thing that has happened to international oil companies in the last 30 years is now happening to companies across a large number of sectors. And, I do not believe that CEOs have woken up to that reality.

That is kind of a new world-environment for these multinationals. You’re interviewing a lot of CEOs, but I’d be very surprised if these themes come up over and over again. I think they’re thinking much more about their own internal issues – we’ve hired a lot of people, we need to make our numbers, we need to deploy capital. I think that’s what they’re thinking about.



PwC: How do you compete in this kind of new world environment?

IB: If companies are operating where the state’s investment role is decisive, or even in countries where the state is becoming more important as a driver, they need to think about what their relationship with government actors is going to be. If you’re investing in infrastructure in the United States, what’s your relationship with the national and state governments that are critical to those decision-making processes? If you are investing in a place where there are growing competitors that have links to government or are government-owned – in China, Russia, the Gulf or even in places like Brazil, which hasn’t historically been thought of in that category but is moving in that direction – who are your partners? As you become more profitable, are you going to be seen as a profit centre that these states want to have for themselves, or are you truly partnering with the government? What makes that relationship durable – if you’re valuable to them now, are you going to be as valuable to them in three years?

Think about what firms like Toyota are doing in China right now. If there is a sufficient amount of new technology they can continue to share with the Chinese, it will make the Chinese want to partner with them. If not, what are they going to offer that makes them indispensible? Don’t fool yourself: just because you’re indispensible today, don’t think that you’ll be indispensible tomorrow. Take a hard look at how indispensible you are likely to be to your host government in these markets, in six months, in 12 months, in three years. And if that answer is changing even a little, you better have contingency plans. I don’t think that companies are good at this and I don’t think CEOs are good at this. They don’t like to respond to impending troubles that are growing gradually.

PwC: How do companies become indispensable partners?

IB: If you want to be indispensible you first need to understand very well what your partners want and what they need. You need to look at the cold reality of these investments much more honestly and not just talk of partnerships, commitments and long-term relationships. And you have to look at it from the eye of your partner. I know a lot of corporates that are investing in Africa, and they see the Chinese coming in and buying everything. How do you make yourself indispensable to a country like Kenya, for example, when the Chinese are offering billions of dollars of aid to the government? Look at what the Kenyans need most: jobs. The Chinese export labour in addition to capital. So if you’re investing in Kenya, you focus on how you’re setting up jobs both directly with your investments, and also maybe through some NGO funding or other things that you’re doing. In other words, where do you have a strategic advantage that your competitors don’t.

I think about a company like Starbucks operating in China right now. Does China really care that much if there are additional places for high-end coffee? Maybe not that much. But they really care about new advanced agricultural techniques to improve the quality of their coffee. If Starbucks can give that to the Chinese, it makes them indispensable. But they also need to find a way to give that to the Chinese in a way that doesn’t just last for six months before the Chinese can do it themselves. It has to be sustainable for the long term. So, you have to first find out what they want, and then you have to find out what they’re going to continue to want. This is not easy, and it is harder now than it was five years ago. But it’s also more critical now to get it right than it was five years ago.

PwC: Is becoming indispensable to government the only key to success?

IB: The other thing big corporations need to do when the environment is getting more challenging is to know what your leverage is with your own government. Industry’s relationship with Congress is going to become tighter. There is going to be a nativist reaction in the United States – one portion of it will be anti-immigration, one portion of it will be protectionist. But when everyone is expecting 10% unemployment or 17.5% under-employment to continue for some time, there will almost certainly be a policy reaction that tries to do something about America’s role in the world. Industry needs to understand how they want to approach that with their local Congressman or Congresswoman, and with the Administration.



PwC: Does your ability to partner with governments depend on public trust?

IB: First, it depends on the country. How much does public sentiment in Russia really impact decision making in the Kremlin? Not a huge amount. There’s an enormous amount of top-down decision making that occurs for all but the most public of brands in Russia. So you worry about being made the next Yukos, but you don’t really worry about large demonstrations against your brand. Secondly, it depends on how close you are to consumers, as both Carrefour and Starbucks found out in China. Third, it depends on the host country of the company that’s investing. We have to recognise that there are some places in the world where being an American company, for example, is not an advantage. When Bank of America took over Merrill Lynch, it certainly would have been my strong advice that it maintain the Merrill brand in Russia and not become Bank of America, because it wasn’t going to help them there. And, after the enormous flap in the Islamic world over the cartoons depicting Mohammed in a Danish newspaper, suddenly every Danish company operating in Islamic countries had a very real vulnerability. And that’s a big deal.

PwC: You’ve written about the rising influence of state capitalism. What elements of that trend will persist and what elements will fade?

IB: What we’ve seen over the course of the last 30 years of slow, steady growth is that emerging markets have become more important and accessible global energy supplies have come increasingly from more unstable parts of the world. During that period, state entities have become more significant in the world economy – that’s true of national oil corporations, of state-owned enterprises, of privately-owned national champions linked to many states, and of sovereign wealth funds. The global economic crisis has sped that up dramatically. Now, instead of one system in which you have regulated free markets, you see some free-market countries and some countries where you have state capitalism, and some countries which are more or less in the middle. That will lead to lower global economic growth because state capitalism is less efficient and less coordinated, and to the regionalisation of capital and trade flows.

Multinational corporations are going to be increasingly challenged in the state-capitalist environment. And I do not think those things will go away in a year; those things will become more significant as we move into the post-recession geo-economic system. Maybe the first indication of that was the Obama trip to Beijing [in November 2009]. It was a very different kind of diplomatic back and forth than we were used to seeing.. There’s going to be a lot more of that.

PwC: If more state capitalism will lower economic growth, will it also lower volatility?

IB: On balance, it probably will, although that needs to be mitigated against the fat tails that come from non-traditional sources. In other words, the pure economics may become somewhat less volatile, but the factors that impact economic outcomes are becoming more diffuse, and those two forces are not moving in the same direction. So, for example, a major climate catastrophe in a region or a country could play out in climate policy mechanisms. The same might be true for a nuclear incident, or a terrorist incident, or other similar sorts of events that come out of non-traditional areas. But, from a purely geo-economic standpoint, yes, I suspect there might be a little bit less volatility as a consequence of state capitalism.



PwC: The G20 is emerging as an influential forum. Will the G20 lead to more policy coordination among nations?

IB: No. I think there will be less policy coordination in the G20 – probably much less. If you talk to the organisers who are responsible for working with the ministers and heads of state during G7 meetings, they would say that organising those meetings was like herding cats, because you had so many different national cultures and perspectives. But the reality was that the G7 countries all basically share some fundamental values. The G20 is not just a bigger coordination problem; it’s not just herding more cats, though that would be more difficult. The G20 is herding cats along with animals that don’t like cats. There are a number of countries in the G20 that fundamentally disagree that a regulated free market system is the way to run an economy. They fundamentally disagree that democratic institutions are the most effective way to run the polity. And, now that those countries are of increasingly comparable importance on the global stage, we need to recognise that free market and state capitalist systems are at some level fundamentally incompatible. Does that have an impact on policy coordination? You bet. Whether we’re talking about climate change, or collective security in Iraq and Afghanistan, or nuclear non-proliferation, or the global financial regulatory framework, or trade and protectionism, there are going to be fundamental disagreements within the G20. So the G20 will increasingly look less like the G7 and more like the UN Security Council. And that means there’ll be wonderful flowery statements that will be painstakingly crafted to show that everyone is committed to free trade, or to climate change agreements. But the reality will be very far from that.

PwC: So is the G20 more of a symbolic forum?

IB: It is. I don’t think that’s well understood right now, because in the context of the response to this unprecedented global economic crisis, all of the actors in the G20 are showing how seriously they’re taking the response, and how it is something everyone wants to see succeed. But as we get out of this global recession, however anaemically in some countries, that will be shown to be a façade that does not represent the reality of the absence of global governance that we increasingly see on the world stage today.

PwC: Are there other ways in which more policy coordination among nations could take place?

IB: Yes, first of all, I think that we will see more regionalisation of policy coordination. If the United States pulls out of Iraq and is unable to stop Iranians from developing nukes, the Gulf states will become more coordinated in that region. We’ve already seen a lot of statements about the creation of an East Asian community along the lines of the EU model. I think it’ll be hard to do and there will be tough negotiations about Japan’s role and about America’s role. But all of this is an indication that we will see more regionalisation of policy in places like Asia. I think you’ll also see more coordination of financial and monetary policy among the troika of the ECB, the Fed and the BoJ, because in the context of this changing world, like-minded actors will have more reason to be transparent with one another and to coordinate their activities. But if you’re asking whether there’s going to be something in addition to the G20 that really creates policy agreement among the world actors, I would say that would only happen on a thematic basis. And it will probably only happen in response to crisis. Unfortunately, by the way, my definition of ‘crisis’ is a more significant event than what we’re presently seeing.

PwC: How big does a risk have to become to be enough of a ‘crisis’ to spur policy coordination?

IB: Well, climate change clearly is not seen as an adequate enough crisis to lead to policy coordination, at this point. Iran going nuclear is not enough of a crisis; we may call it one and it may sell more newspapers, but the reality is, it is not considered a sufficient priority to create effective global institutions and mechanisms.



PwC: What’s one thing that governments can do to stabilise the global financial sector and minimise the risk of another meltdown

IB: Well, they’ve done a lot already. In the United States they’ve put an enormous amount of money into it, and basically said some institutions are too large to fail. They’ve created a lot of confidence; some would say too much confidence, given how the markets have run up over the last three or six months. Europe and Japan have also acted effectively. So, if there’s one thing policy-makers have done right, it’s stabilised the major financial players. I suspect if additional hits come from commercial real estate or from consumer lending on the credit card side, governments will step back in. They understand the financial markets need to run. So, I think that’s the one piece of the global recession that’s been dealt with. In fact, they dealt with it so effectively that some believe that nothing further is needed. As a consequence, you may not get the structural financial regulatory reforms, like bringing back the Glass-Steagall Act in the United States, which people such as Paul Volcker believe are needed. There might have been a willingness to do that had it been higher on the agenda than healthcare in the US, which took a lot longer than expected. Financial reform is not that sexy; it’s hard to get people to understand it – lots of lawmakers don’t understand it – but there would have been more of an opportunity to get something done had it been part and parcel with the financial stimulus package right from the beginning. There are a lot of things on Obama’s plate and it would’ve been difficult to get this perfect, but in hindsight, doing healthcare first probably was a mistake.

PwC: Do you think more structural reforms are needed in the financial sector?

IB: I’m generally with Volcker, yes.

PwC: What’s the one thing governments should do to successfully address climate change?

IB: Well, it depends on what you’re trying to accomplish. If you’re Japan and you know that the US isn’t going to get anything done soon, you can put forward policies that you know you can’t implement because they sound good. In the absence of consensus, you simply position yourself better with your own domestic constituency – which will do well for you politically, but doesn’t help get to the resolution that you actually want. So, it’s a tough situation.

The big problem right now is in the US, with Obama trying to get the Senate to actually pass something. Obama has been successful in taking some of the heat off Copenhagen by getting all the international players to recognise, ‘Okay, we’re not going to get a treaty.’ But he’s not going to have a free pass for 2010. All he’s done is forestall the issue a little bit. Obama is going to have a very tough time in 2010 overall: Afghanistan is more of a crisis, there’s high unemployment, mid-term elections are coming up, and then there’s climate change. It’s going to be a much harder year for Obama than 2009, which is sort of unfortunate if you think about what he inherited. But it’s the reality.





CEO perspectives on successInterview transcripts of Ken MacKenzie, Managing Director and CEO, Amcor





Ken MacKenzie is the Managing Director and CEO of Amcor

PwC: Is there something about Amcor that others might find of particular interest?

KM: I think what makes Amcor interesting is that we operate in over 30 countries. We’re in both North and South America, and in Eastern and Western Europe. We’re in Australasia, as well as in Asia. Overall, roughly one-third of our business is in the Americas, one-third is in Europe, and one-third is in Asia. As a result, we’ve got good insight into what’s happening in both mature markets and emerging markets around the world. That being said, we are largely a food and beverage packaging company. We don’t have as much exposure to the general economy, as some other companies may have. However, we do have very good global exposure.

PwC: How would you describe trading conditions over the past year or two?

KM: In a word: ‘tough.’ We’re in the packaging segment for food, beverages, healthcare, and tobacco, and those are relatively defensive sectors. Our volumes over the last 12 months are 5 to 7% below where we were trading prior to the economic crisis. So we’re defensive, but not completely immune. And it’s been interesting to watch how the economic crisis has unfolded around the world. We saw it begin first in Europe, in early 2008, where it manifested itself as a slow and steady decline. In contrast, in North America we saw the crisis start in October and November of 2008 – and there it was a much more dramatic destocking event, a much more precipitous drop in economic activity. In the emerging markets, we really haven’t seen much downturn at all; those markets have been robust for the past 12 months. Finally, in Australasia, where the economic downturn first appeared in early 2009, we saw a more precipitous drop than in was Europe. The crisis in Australia was shorter and sharper than it in other parts of the world.

PwC: Do you see signs of a recovery ahead?

KM: We get that question a lot. Generally, in our own business, we are now seeing a return to stability, but at a level of activity 5 to 7% lower than prior to the economic crisis. We are not seeing growth, but we are also not seeing any further deterioration in economic conditions.

PwC: Are you anticipating a timely return to growth?

KM: I think growth will return. That said, it will be a slow process. We are expecting more of a ‘U-shaped’ economic recovery rather than a ‘V-shaped’ one. We see conditions remaining as they are for the next 12 months, then slow growth returning thereafter.

PwC: Do you foresee structural changes arising in your industry as a result of the economic crisis?

KM: No. We have seen some drop-off in the discretionary-end of food and beverage consumption. But in general, we have not seen any large structural shifts that will affect our industry.

PwC: What about structural changes arising in the capital markets?

KM: Conditions have been very fluid in the capital markets. During the first quarter of 2009 it was very difficult – bank debt was the only debt available. But conditions today are much better. Much of the private placement market is now open, and so one of our key objectives is to try to lengthen our debt maturity profile.


PwC: Is it your view that the economic crisis has established a ‘new normal’?

KM: There’s been a lot of talk about the new normal. But I think you have to ask the question ‘What was normal before?’ I subscribe to the theory that the economic activity we saw in 2007 and 2008 was overly buoyant – and that drove overly buoyant consumption. The pendulum has now swung in the opposite direction. From a debt-pricing and risk-pricing perspective, I don’t think we will or should go back to where we were in 2007 and 2008. At the same time, I suspect that to some extent, the pendulum has overcorrected. But I don’t think we’re going to go back to the conditions that we saw in 2007 and 2008.

PwC: Has the crisis affected the ways your company takes on debt and considers risks?

KM: Prior to the crisis, we had already taken the business through a pretty comprehensive restructuring programme to improve our cost position. The programme came about in response to events during the period 2000 to 2004. During that time, the company had undertaken a number of acquisitions and repositioned itself as a global packaging company. We had done a lot of right things strategically, but the company’s financial performance still deteriorated. So the programme we established was really about returning Amcor to a stronger financial position and making it a higher performing company. We’ve reduced our workforce by about 10% and divested about $1.5 billion of non-core assets, using those proceeds to strengthen our balance sheet. By August 2008, we were feeling pretty confident that our programme was working and announced to the market that we had refocused the business into core segments and, going forward, would look for acquisition opportunities. That’s when the Alcan opportunity came along.

PwC: The timing of those actions seems prescient. Did you see storm clouds?

KM: I like to think that we were that clever. The reality, however, was that we were taking the company through a programme that we thought appropriate at the time. The business wasn’t performing and needed to improve. And as part of that effort, we saw the benefits of re-focusing the company on its core product segments and growing those strong market positions. Where we didn’t have a strong market position, we made the decision to either fix it or exit it. In fact, we did exit a number of segments. In hindsight, we appeared to have exited those segments at the top of the economic cycle.

PwC: What was the rationale for the Alcan acquisition?

KM: The rationale was pretty clear. The businesses that we are acquiring from Alcan – flexible packaging for healthcare, food and tobacco – fall exactly within our own core product segments. So the Alcan acquisition is right on strategy for us and it occurred at exactly the right time. We had been divesting assets at the top of the cycle and then we moved to a more growth oriented phase when asset values started to be more in line with what we thought was reasonable.

PwC: Will further growth for Amcor depend on economic recovery?

KM: From our perspective, we see recovery being a slow return to growth over the next 12 to 24 months. Nevertheless, in terms of profit growth for Amcor, that’s going to come from the Alcan acquisition and the $200–250 million of synergies that we will realise in putting the two companies together. So, regardless of what occurs in the general economy, we’ve got a great growth opportunity to work on over the next 12 to 24 months.

PwC: What goals are you setting for the Alcan acquisition?

KM: With respect to the Alcan acquisition, we’ve set out a very clear target: $200–250 million of synergies. We’ve also put time horizons around that target: 35% in year one, a further 45% in year two, and a final 20% in year three. And we will report progress to the market as we move along our journey.

Ken MacKenzie , Managing Director and CEO, AmcorContinued


PwC: One of your key programmes is ‘Value Plus’. Could you explain its intent?

KM: Value Plus is a very important programme. It’s fundamentally about improving our sales and marketing capability across all our businesses. Value Plus has three components. The first is an economic model that allows us to understand precisely our product and customer profitability. The second is improving the talent in our sales and marketing area. Over the last three years we’ve probably turned over about 35% of our sales force and really upgraded the talent there. The third component is the implementation of sales metrics that are aligned with our product and customer profitability model. As we put the Alcan and Amcor businesses together, Value Plus is going to be essential in positioning the combined strength of Amcor and Alcan for the benefit of our customers.

PwC: Has the economic downturn exposed weaknesses in the way Amcor is managed?

KM: I think the short answer to that is ‘no’. Amcor had previously gone through a well-publicised trade practices crisis in 2005 that precipitated the departure of the previous CEO. That event really focused us on our risk management processes and, when I became CEO, gave me the mandate to do a review of those processes. That review focused on two risk categories: operational risks – which you can think of as safety and occupational health; and strategic risks. Our operational risk processes have always been fairly robust, but we’ve done a lot of work on strategic risk management. When considering strategic risk we map a risk’s probability of occurrence against the impact it would have on the business and we formally review this once a year. Once we complete that review, we enter into a cycle of continuous improvement of our mitigation plans. That’s a journey we’ve been on for the past two or three years and we feel that our control posture is much improved as a result. And that’s helped us come through the global economic downturn really well.

PwC: Are there lessons you’ve learned along the way?

KM: Yes: Processes need to be simple if they are going to be effective. And they need to reflect a combination of both bottom-up – in our case, that means having our business groups around the world identify risks in their local market – and top-down, which looks over the horizon at future risks on a macro-level. If you can bring those two approaches together, I think you end up with a fairly robust process.

PwC: What are some of those macro-risks that Amcor considers?

KM: There are a number of particular risks that we track more closely than others. Typically, in our business, environmental risks are at the top on our list. But with risk comes opportunity and we see the whole environmental agenda as a terrific commercial opportunity. We see changing consumer behaviour around issues of sustainability as an opening to develop new products and differentiate ourselves from the competition.

PwC: Are you committed to environmental issues because that makes sense as part of a business strategy?

KM: First and foremost, it’s at the heart of our social licence to operate, which calls for operating in a way that has the least possible impact on the environment. On World Environment Day in 2008, we launched a programme called EnviroAction, which set sustainability targets for our operations. Targets call for a 10% reduction in our greenhouse gas emissions, a 30% reduction in waste to landfill, and a 45% reduction in water consumption in water-stressed regions, such as Australia. We’re well on the way to achieving those targets. Sustainability also has a commercial dimension. One of the things we’re doing in that area is looking for opportunities to introduce biodegradable materials into our packaging. We’ve done a lot of work in that area. Additionally, sustainability, I think, is going to provide us with some ‘white space’ opportunities, the sorts of new business opportunities that are now largely unrecognised and underserved.



PwC: Has the downturn resulted in a loss of momentum around sustainability issues?

KM: I think that in 2009, sustainability has been less front-of-mind. But I have no doubt that as we move through the current global economic crisis and we start to get back to the ‘new normal’, sustainability issues will become front-of-mind again for the consumer. As for Amcor, an ambitious sustainability agenda is still very much a part of our strategic platform. We’ve had to make tactical choices in the short-term, and clearly we’ve been much more focused on making sure that our balance sheet is in good shape. But we are still moving forward with our sustainability agenda.

PwC: In the face of the downturn, what have you been doing to help maintain morale at Amcor?

KM: In January, at the height of the global economic crisis, we launched a programme called ‘Being Amcor’. We had a good debate within the management team as to whether it was an appropriate time to launch a global programme that talked about our beliefs and values, our operating model, and the core disciplines of our business. We came to the conclusion that a difficult operating period was exactly the right time to talk about what’s important to us as a company and how we expect our people to behave. The programme was extremely well-received by our employees. In hindsight, I think it was the right message sent at the right time.

PwC: With respect to climate change, do you think that the private sector must act irrespective of regulation?

KM: I absolutely believe that industry has an obligation to act independent of government regulation. At Amcor, we haven’t waited for government regulation. We’ve launched our own carbon pollution reduction programmes. We believe that’s part of our social licence to operate.

PwC: Looking out three to five years, what does success look like for Amcor?

KM: For Amcor, the best is yet to come. Back in 2005 and 2006 we had an underperforming business. So we made the decision to reshape our portfolio, sell $1.5 billion worth of assets, and focus on the financial performance of our company. That agenda has gone very well for us over the last three or four years. As we emerge from the global economic crisis, I think we are in a position of strength with respect to acquisition opportunities. That being said, we will not acquire opportunistically, and the Alcan acquisition is right on strategy. In Amcor and Alcan we are putting together two fantastic packaging companies, both well-respected leaders in the healthcare, food and tobacco packaging segments. The really exciting part of this acquisition for me is the opportunity to create an unbeatable value proposition for our customers. We’re going to have a significantly larger geographic footprint than we have today. That’s going to allow us to service more customers in more locations. It’s also going to allow us to have more contingent supplies – if we have an issue in one part of the world, then we can seamlessly transfer customers’ requirements to another part of the world. And we’re creating deep resources, focused around an in-depth understanding of customer requirements, so that we’re in a stronger position to develop new customer-driven products. Moreover, because of the way we’ve funded this transaction, we’ll have the financial strength to follow our customers into new markets and selectively invest in new technologies.





CEO perspectives on successInterview transcripts of Michael I. Roth, Chairman and CEO, Interpublic Group





Michael I. Roth is the Chairman and CEO of Interpublic Group

PwC: What will it take for the economies of your key markets and those of your clients [advertisers and marketers worldwide] to stabilise, if they haven’t already? And are there particular signals that will indicate, or have indicated, that a recovery has set in?

MR: Well, I think the first sign of a recovery will be the level of [consumer] confidence. That confidence has to come initially from the consumer and then the business sector. We’re starting to see some of that coming back. We’re not there yet, but without that type of confidence, people aren’t going to spend any of their dollars. This is an interesting environment, because a lot of our clients have a lot of cash on their balance sheets. It’s not that this is a depression, where there’s no money to be spent. People are being very cautious about how they spend their dollars and when they spend them. So once we start seeing more confidence in the overall stability and recovery, then I think we’ll see clients, as well as consumers, start to spend again.

PwC: With regard to an eventual business recovery among IPG’s diverse US clients, how might capital flows and capital markets change? And how would those changes affect a resurgence in advertising and marketing activities among your clients?

MR: The capital flows have already changed; there’s no question about it. What’s happened is, the risk profile of lenders has changed dramatically. As a result of that, all of our clients, as well as IPG, have to focus on the financial stability of their own organisation so that we can have access to the capital markets and that the funds will flow freely on a global basis. The reality is, this is a global environment. It’s not just one capital market that we’re looking at. We see it in our own share positions, as well as our own debt offering. It’s a global offering. The capital markets are certainly looking on a global basis, and people are not willing to take the risk that they’ve taken before, given what’s happened in the capital markets. So there is a lot of concentration on lower risk, higher strength organisations. Unfortunately, what happens in that environment is that the people who don’t need the money are the ones who have the money easily available to them. But eventually it’ll trickle down, once risk profiles become more tolerable.

PwC: In looking at that global environment, do you see that governments may, in a recovery, erect barriers to foreign advertising and marketing activities?

MR: This is a global environment. To the extent that governments erect barriers, I think they’re doing their own country a disservice. So I don’t expect to see barriers in terms of capital markets. If anything, the capital markets are more global than they’ve ever been, and therefore there should be freedom to pick and choose which capital markets you want to have access to. It’s encouraging to see governments starting to talk to each other about it. We’ve seen the G7 expand, if you will, and I think that’s a recognition of the fact that this is a global economy and we have to have access to all the different resources that are present.

PwC: In this economic crisis, consumer demand has fallen in many key markets, which obviously impacts the business not only of your clients, but your own overall business. When recovery sets in, what are your expectations about whether consumer spending will return, whether purchasing behaviours will resemble those seen in the past and, and how that will affect the advertising industry?

MR: Well, certainly consumer spending is a key component of a recovery. In our business, since a lot of clients are spending behind their brands, you want to see consumer behaviour increase in terms of their spending. There’s no question that there’s a change in the buying patterns of the consumer. The days of freely spending money, I think, have passed. People are looking for value for their dollars, and even if you can afford to spend more money, it’s appropriate to think about how you spend your dollars.

You see it in advertising, as well. A couple of years ago, advertising was focused on feeling good and exciting and so on. Now it’s value for your dollar, price-conscious spending, as well as functional spending, efficiencies and things like that. There has been a fundamental shift in how consumers will spend their dollars, as well as the ecological effect of the spend. Consumers are looking for a ‘green’ effect, I think appropriately. Our clients have to recognise that and are, in fact, changing the way they do business, as we are.


PwC: How will this affect your strategy, and what kinds of strategic or operational changes are you making in response?

MR: Well, the changes we have to make are to really have a think tank on consumer insights. So we’re spending a fair amount of time on our own, as well as with our clients, to make sure that we have the consumer insights to help get the messaging out there that’s appropriate. In certain segments, a green environment is critical, therefore we have to have the insight into what consumers are looking for – whether it be recyclable types of products or energy-efficient products. All of these things go into the consumer’s psyche that we have to be able to respond to.

PwC: Is it any more difficult, given the depth and breadth of this economic crisis, to measure that kind of consumer response and behaviour?

MR: Yes, it’s difficult to measure, because a lot of it is geographic. Remember, some countries are evolving, and they’re aspiring to the good old days of the United States, where people would spend lavishly and so on. Therefore, they’re going to be looking to accomplish that, whereas other countries, which are already there, are looking to pull back. So the insights are really geographic. You have to be able to tap into the markets that you’re in, as opposed to just one global approach to it. It’s pretty challenging, but we have the resources to do that.

PwC: Are you anticipating major structural shifts in economies, both in the US and key international regions, as they emerge from the recession? And how might those shifts affect your business?

MR: The structural shifts have already begun. The emerging markets, if you will, are a critical component of the business environment that we have to compete in. So whether it be the BRIC countries, where we have to have a strong presence, our clients are demanding that we be in emerging markets. Brazil, Russia, India, and China are markets that we are investing in. We have a very strong competitive position in those markets, and we will continue to grow it. That doesn’t mean that the United States is not going to grow, as well. It’s just a question of the rate of growth. Certainly the emerging markets seem to have the ability to grow more rapidly than a more mature market, such as the United States or Europe.

PwC: I want to move on to some questions related to how you are positioning IPG to succeed in the post-crisis environment. We’re most interested in your views on strategy, risk, investment and talent. What are the most significant changes in IPG’s overall strategy, business model or organisation, which you initiated in response to this economic crisis?

MR: Well, like any other good business, the first thing you look at is costs. If you’re not looking at your cost structure in this environment, you’re asleep at the switch. If the revenue isn’t there, in order to protect margins, you have to take a look at your cost profile. So IPG, like all other companies, has been doing that since the end of 2008. As a result, we’ve already seen a 9 to 10% reduction in our overall employee base, and we will continue to look at our ratio of cost-to-revenue as this goes forward. Certainly when the recovery comes, then we’ll look to reinvesting in our talent.

That doesn’t mean to say we’re not reinvesting in talent now. What you do in this environment is add to your talent base and reposition your talent to be more suited for the challenges that are ahead. We see a lot more people, for example, on the digital side being added to our talent base. Even though we’ve had a 9 to 10% reduction in terms of staffing, we’ve also had increases to invest in those markets and resources that are necessary to be competitive. We continue to invest in digital media in certain geographic areas.

Michael I. Roth, Deputy Chairman and CEO, Interpublic GroupContinued


PwC: How much, if any, leverage did individual units within IPG have in initiating changes like this?

MR: We manage our businesses from two perspectives. One is growth revenue and margin. Each of our business units has the opportunity to get to a margin target, and they can get there either on the revenue side or on the cost side. That’s how you manage the business end, and in this environment, since the revenue isn’t there, they have to take action with respect to their cost profile. They have to do business more efficiently, with fewer people and in geographic areas that are more prone to the recovery when it comes. So the leverage, if you will, is across the board. It’s up to our business unit heads to manage it, and we’re there to make sure everyone is marching to the same drummer.

PwC: From both a philosophical and a practical standpoint, how did you address the age-old conundrum of convincing clients to continue advertising and marketing activities during an economic downturn?

MR: Well, it’s kind of interesting. I used to be on the other side of the table, and I was one of the first to say, ‘Look, if we’re challenged from a margin perspective, let’s cut our advertising budget.’ The reality is – and I know this sounds self-serving – that clients and corporations have to invest in their brand even in a downturn. Studies clearly show that in order to keep your brand, you have to invest behind it. Otherwise you lose market share. And, certainly, if you want to gain market share, you have to spend behind the brand. So the evidence is there; we can present the evidence. The enlightened clients understand the importance of spending marketing dollars even in a down market.

PwC: Is the push-back that you traditionally get from that kind of thinking any different or a little tougher this time around?

MR: It’s actually a little easier. It’s tougher because the economic environment is causing them to protect their own balance sheet and their own P&L. But it’s easier because we have more tools available to show that what we’re doing moves the needle. It’s that kind of dialogue that we have to have.

PwC: Is IPG’s ability to respond to emerging opportunities, including the growing importance of social media and mobile technology, constrained by difficulties in raising capital? And what kinds of adjustments, perhaps in unconventional financing or new ways of tapping into capital, are you making as a result?

MR: We’ve been fortunate. We had started repositioning our balance sheet a number of years ago, and frankly our balance sheet right now is as strong as it’s ever been. We’ve recently raised $600 million dollars. We’ve extended our maturities. We have $1.8 billion in cash, and therefore we’re not constrained in terms of capital at all. In fact, we have enough cash and financial support on our balance sheet that we don’t need to access the capital markets on a short- or a long-term basis. We’re in a position of strength in terms of being able to invest in people and resources, and that’s what we intend to do.

PwC: What gaps in risk management in your company and its affiliates were exposed by the economic crisis? Did you make incremental changes to address them, or are you initiating a whole new approach as a result?

MR: I wouldn’t call them gaps as a result of the economic downturn. What happens is, like everything else, when things are more difficult, you have a microscope view of costs and profitability. What this caused us to do is, go to the next layer of operations to make sure that we’re not running businesses at a loss. That we’re structured appropriately, and that we’re not spending money in a way that ultimately doesn’t prove to grow revenue. This environment has just caused us to look a little deeper and a lot harder in terms of our expense profile.



PwC: The economic crisis has been stressful for most employees, many of whom have been asked to accomplish more with less. How have you been able to maintain morale and motivate your staff?

MR: You know, the morale issue is a tough one. My view is that everyone likes to cross the street in a crowd. If everyone is having a miserable time, it’s somewhat helpful to know everyone else is miserable. So I think people had that kind of attitude. It’s a tough environment. We have to suck it up and we have to get through it. It’s not that we’re in one position and the rest of the world is in another. I think that’s helped. In terms of the morale, I meet with clients, I meet with our people, I send out communications. As long as our people are informed in terms of what’s going on with our clients and with our company, that’s what you have to do. Everyone knows we’re in this boat together, and we have the resources to get through it. We all just have to put our heads down and do what we do best. Like I say, it’s not that others are doing great and we have a problem. That’s a big difference in terms of the environment.

PwC: Recognising your industry’s unique dependence on creative individuals, in what ways has the financial crisis affected your ability to recruit and retain creative talent?

MR: Well, it’s a mixed bag. On one hand, it’s a difficult economic environment, so people aren’t likely to go out looking for jobs elsewhere. You know, it’s the old adage: ‘It’s good to have a job.’ That’s helped on the retention side. It’s hurt on the recruiting side, because the other side of that is true. Where we have had needs, if you will, we have not had any problems recruiting very solid talent for those spots. We’ve added some senior people at our company in this environment, and I’m very pleased with the type of people we’ve added and our ability to recruit. So it’s good and it’s bad. It’s good in terms of, there’s talent out there that we can tap into. It’s a little more difficult, but it’s okay.

PwC: Some observers believe the economic crisis has undermined the public’s trust in the private sector’s motivations and the reputations of entire industries. Considering how IPG overcame its own problems, what advice would you offer to other CEOs with regard to restoring public trust?

MR: Public trust is a real issue for big business, not just in the United States, but globally. I’ve been through a couple of turnarounds now, and my philosophy on that is pretty straightforward, and that is transparency. If all the constituents, whether they be investors or employees, are aware of what’s going on and they feel that you’re being transparent with them, they give you some slack. It’s those companies that are very close to the vest that leads to this type of distrust.

And, of course, governance is critical. One of the things I’m very proud of at IPG is that from a governance point of view, we consistently get the highest ratings in our industry in terms of what we’ve done as a public company. I believe communicating is key, so I get out, I meet with our clients, I meet with our people. I have open dialogue and an open door. That lends itself to trust. But there are companies out there, there are individuals out there, who view this as an opportunity. Most companies operate in a very sound financial and trusting way. It’s unfortunate that there are those companies that have caused distrust to exist. What we have to make sure is that we don’t overreact to the ones who have caused this. The Enrons of the world, if you will, ultimately gave rise to the Sarbanes-Oxley provisions, which you can argue went too far or not. That being said, we viewed Sarbanes-Oxley as an opportunity to get our house in order. It gave us much greater visibility in terms of how we managed our business. Whether it was the most cost-effective way to do that or not remains to be seen, but that’s behind us now. We have the controls that are necessary to have that kind of transparency.



PwC: This last set of questions relates to the relationship between the public and private sectors. Soaring healthcare costs and wasteful spending are universal concerns, regardless of which side one is on in the US healthcare policy debate. Do you believe the current reform agenda is sufficient in tackling this fundamental problem in our healthcare system?

MR: There are personal answers to that and there are business answers to it. Healthcare reform, I think, is a requirement. There are too many people who don’t have appropriate healthcare, and therefore it’s our responsibility to make sure they have it. Costs have gotten out of hand. One of the single biggest issues we have is how we manage our healthcare costs and how much sharing with our people should we put in. We want to make sure that we’re fair, we’re competitive and that our people are being adequately protected from a healthcare point of view. But the costs are rising at a rate that is not consistent with the way the overall businesses in the economy are growing. Therefore something has to be done.

Whether you go out and drastically reform the entire healthcare field, I seriously doubt that can work. What we should focus on are those people who need healthcare, and how we can help them and make the other systems we have work better, as opposed to starting with a clean sheet of paper. It’s a pretty difficult thing to do. Ultimately, it may make sense to start with a clean sheet of paper, but as a practical matter, I don’t see it happening. We’re spending a lot of time debating it, rather than focusing on getting something done and accomplished that has an impact. That’s what we should be doing.

PwC: Given the structure of your organisation, have you thought about or looked at how healthcare reform might affect IPG?

MR: Right now we’re going through our budgets. We’re looking at our healthcare costs. We’re looking at our options for our people in terms of our healthcare insurance. We’re looking to see how to maximise the benefits, as well as minimise the costs, in terms of the options. Certainly we look at how healthcare legislation may impact that. But right now, what I’m interested in is the immediate cost of it and making sure that our people are adequately protected. That’s what we do. As the legislation emerges from Washington in this case, then we’ll have to deal with it. But right now, we have plans in place. We have costs that we have to deal with and we’re managing that.

PwC: Considering the current legislative debates regarding not only healthcare, but also energy and financial reform, are you concerned that there is a risk of over-regulation in the US? And in what ways could businesses help governments make regulation smarter?

MR: I’m on a lot of boards and partnerships that address the Washington business relationships. I was concerned initially in terms of the backdrop of an overreaction to big business in Washington and taking legislative action that I felt was too restrictive in terms of how we manage our business. That’s lessened a bit, but I do get concerned when I see too many legislators trying to manage our business, whether it be through compensation or accountability.

We do a very good job of having an independent board of directors that is very actively involved in the management and frankly of oversight with respect to what management is doing. That’s where the battle should be fought. That is, are companies being properly governed from a management point of view? And if the answer to that is ‘no’, then something should be done about it. But as far as having legislation that brings them [government regulators] into the boardroom, I think that’s totally inappropriate. I know that’s self-serving, but in the long run, that’s the way businesses should be run. Those businesses that are transparent and governed properly usually do better and outperform anyhow, so eventually the markets will take care of that.



PwC: What one thing could governments do to stabilise the financial sector and minimise the risk of another meltdown?

MR: In terms of stabilising the financial sector, I don’t think there is a silver bullet. What we saw never happened before. There isn’t one solution out there that’ll fix it. We did what had to be done in terms of putting up safety valves and providing financing when the financing dried up, and I think it worked. We’re seeing somewhat of a loosening of the credit markets, and financial institutions are performing better. There should be government oversight of financial institutions through the regulatory bodies, but we’re seeing some of that already take hold. Therefore, we should step back. I don’t think we should step forward and tighten the regulations more.

Certainly regulations are made to ensure that things are adequately monitored. In the insurance industry, there are state regulators that have been managing insurance companies for years. Now, if those regulations are not operating effectively, then they should be changed. But that doesn’t mean they have to go beyond their original charters and go into other businesses and other industries. We had a unique circumstance; we had a perfect storm. We reacted to it, and now we should let capital markets do their thing. Ultimately that’s the way to get through this. I believe in the free market system.

PwC: One last question: About which of all the issues that we’ve discussed here would you most like to learn what your peers, other CEOs, have told us?

MR: Obviously the big question for my peers is, how do they see the recovery? How do they see it evolving? What areas do they believe are going to be the quickest to recover and what they’re doing about it? I’m always interested in other perspectives. I’m open to listening to people who may know more about it than I do, and learning from it. An open forum and an open dialogue on those issues are critical.





CEO perspectives on successInterview transcripts of Mikael Mäkinen, President and CEO, Cargotec





Mikael Mäkinen is the President and CEO of Cargotec Group

PWC: What will it take for the economies of your key markets to stabilise, if they haven’t already? Are there specific signals that will indicate, or have indicated, to you that recovery has set in?

MM: In general I would say that it has stabilised, but at a low level. I think it would be fair enough to say that is where we are. It’s not going down, nor is it going up either. One of the first indications of it going up in our type of industry is investments … that we could see investments happening somewhere in the world. And that drives, then, transportation. But I think the market is very mixed in that respect. If you read the newspapers and look at what the banks are saying one would believe that everything is back to normal. For us, being back to normal means we are getting orders. If we don’t get big numbers of orders it has not returned to normal. That is a fact.

PWC: I noted that you have about half of your business in Europe, about 30% in APAC and the balance in the Americas; as far as capital investment is concerned, do you see recovery in one market before the other, or will it be pretty much uniform?

MM: My guess is that the earliest recovery is already underway in Asia, to be followed by the Americas and then Europe. So, Europe will be far behind these other regions.

PWC: How might capital flows and capital markets change, and how would these changes affect your capital structure?

MM: Capital for our own company is available if we need it. As far as our customers are concerned, capital is available, but not to everybody. That’s a huge difference now. Most of our ‘key risk’ customers do get capital. However, a few years back, you could see all kinds of companies popping up like mushrooms and starting up businesses – that capital is not available today. That should mean it is a better foundation. The sources of capital that our customers go to are being much more selective than before. That is a huge change.

PWC: In the economic crisis, consumer demand fell in many key markets. When recovery sets in, what is your expectation about whether consumer spending will return and whether purchasing behaviours will resemble those seen in the past?

MM: I believe we have reached the bottom, but I think the recovery will take a long time – longer than we have seen in the past following similar recessions. Part of the business, which is a truck-related business, will return to normal during the second-half – the third quarter – next year. The other parts of our business will stay on a lower level still, at least a year. We also have to remember, that despite what everyone says, there was over-investment before this crisis. Which means, even if it normalises, we spent too much. There is excess that must be worked off. For example, someone may have needed 70 terminal trucks but over-bought by buying 100. Even if the market normalises, they still have 30 trucks to carry them for the next half of year. That is what, in my opinion, will prolong the recovery period. The highest level of investment was artificial.


PWC: How will that affect your strategy, or your product and service mix? What kinds of strategic or operational changes have you initiated in response?

MM: There was not just over-investing, but also over-spending, which means in this case, over-specifying. What does that mean? You asked how that changes our product mix and strategy. I think that everybody is taking away from whatever equipment they buy the ‘nice-to-have’ part. You know, everybody wanted to have air-conditioning in their equipment and maybe it was not necessary. This is a big change, and that is what’s changing our strategy. I think that in the future a ‘good-enough’ product is good enough. So, I think this over-spending led to over-specifying – taking all the extras that were available. Everyone was saying there would be growth and more growth. And let’s say there is a crane, or whatever, that can last for 20 years. Before, nobody wanted to buy a crane that lasted for only 10 years because the money was available. But I think in this new world, the money is not available. So, you have to buy two lots of the 10-year product, rather than buying once for 20 years. And this, in my opinion, is a very big change across the world.

People are thinking more about cash flow. If it lasts for 10 years, I have to take equipment for 10 years. This means that I do not spend 100% of my capital needs now; it means that I spend 50% now and 50% in 10 years’ time. This is affecting the strategy on all of our products. We have to go to ‘good-enough’ products instead of always the best. This does not mean we should lower the quality of our products – you shouldn’t tell your customer it lasts for 20 years when it will only last for 10.

PWC: Are you anticipating major structural shifts in economies as they emerge from this recession?

MM: I believe that not only production but also the consumption of products are shifting to Asia and South America. It would have taken longer without this event, but now it will happen more quickly.

PWC: Does this affect your investing going forward?

MM: Yes, definitely. It drastically shifts the investments from Europe to Asia and the Americas. And investment is, of course, production facilities, but it’s also people. It’s also shifting the decision-making on, for example, what type of products we are to make in Europe and Asia. As things have been, 50% of our business has been in Europe, so our products were designed by European engineers for European customers and also sold in Asia. The shift to Asia will mean that more emphasis will be on Asians to say ‘this is the product we need – we don’t need your European-designed product’. So, I would anticipate in the future that there would be more R&D centres – one in Europe, one in the Americas and one in Asia. And I think that this is a huge change which the politicians have not understood in Europe – that after the recession we will not go back to the old way of doing everything in Europe. I think this is a fundamental change in our business.

We have had to reduce our payrolls by more than 3,000 people and, if we include contractors, the total cut is over 10,000 jobs in the Nordic region. If we move to Asia, we are not going to buy the components from Sweden. If we move the factory from Sweden to China, we will source our components in Asia. This is what I think people have not yet understood. This is a huge change. There have been a lot of interpretations about what the market recovery is going to look like on a graph … some say there will be a ‘W’-shaped curve, others say an ‘L’-shaped curve. I think that after this, you will just need to turn the page … it will be something totally new.

Mikael Mäkinen, President and CEO, CargotecContinued


PWC: Some observers believe the economic crisis has undermined the public’s trust in the private sector’s motivations and the reputations of entire industries. Do you agree?

MM: Of course, we are going to be blamed because as I said we have had to reduce our employment by 3,600 people. That has nothing to do with the public’s trust, but rather the employee’s trust. It is easier to explain the loss of jobs due to the recession but, as I said earlier, after the recession it is a new page in our industry. We have employed more than 1,000 people in these other regions. So that is the difficult part. We have not added in Europe.

Also, firing 3,600 people has changed our own company. It is very difficult for us to say that we will employ you for a lifetime. We cannot promise that any more. We also, as an employer, have to accept the fact that we cannot expect employees to stay with us the rest of their life, which means a more competitive recruitment market. Maybe we have to offer employees something more, whether it is training or whatever, than before this crisis to keep them in the firm.

PWC: … If so, what are some specific things your company is doing to restore either the public’s trust in the private sector, in general, or the reputation of your company and industry?

MM: As a company and an employer it is very much a question about values; you at least must have some written values and work according to them. I think that is very important.

PWC: What are the most significant changes – in your strategy, business model or organisation – that you initiated in response to this economic crisis?

MM: Everybody has be leaner and place more emphasis on being closer to the customer, which in our case means moving away from having everything in Europe. That’s an organisation change and a business model change. An example is that we have closed five factories in northern Europe and have added two in China, one in the US and one in Poland, which is a low-cost part of Europe. Also, there is the employee shift that I mentioned. And also the decision-making is shifting, with more emphasis on deciding and designing products in markets outside of Europe. This is also reflected in our top management. When I started (two years ago), everyone was from Finland. Now there is one from the US, one from Holland, one from Germany, one from China and the rest from Finland. Fifty percent from the Nordic region have been replaced.

PWC: Has your board become more engaged with strategy, risk, leadership development, or other areas that in the past had primarily been management’s responsibility? If so, in what specific ways?

MM: Yes, and I underline strategy and leadership development. The board has been more engaged in these, and has put more emphasis on them than before. As I referred to earlier, closing five factories and moving in a completely new direction has meant that the board wants to be assured that those are the right things to do. And hand in hand with that goes leadership development.

PWC: Is your ability to respond to new opportunities constrained by difficulties in raising capital? What kinds of adjustments are you making as result?

MM: I think it has put a lot of pressure on brand building. We actually were three companies before [Hiab, Kalmar and McGregor] – and Cargotec was more like a holding company. We have amalgamated these three companies, coming up with a new logo, and now everybody is employed by Cargotec. And that’s very important now in this economic environment when we have had to move around a lot of people, combine offices in countries, and so forth. It was much, much more important to do this now than before. We had a three-year plan and compressed it into one year because of the recession. This was easier to do as our volume of orders went down. We actually refocused our efforts from delivery and selling to putting our corporate structure in order.

I wanted to do it in one year so that we could refocus the organisation again as quickly as possible on the outside world. And I think that as the economy starts to grow some companies won’t grow with it partly because they have been caught up in this internal, downward spiral. They will still be restructuring when the economy turns around and will not notice that, hey, someone wants to buy your products.



PWC: What are some specific ways in which you have been able to keep the organisation focused on growth, despite capital constraints?

MM: The only point here is that we have not let our restructuring interfere with our customer relationships in any way.

PWC: What gaps in risk management in your company or your industry were exposed by the economic crisis? Did you make incremental changes to address them or are you initiating a whole new approach to risk?

MM: Two new things here. One is order cancellations. That someone would cancel something was unheard of over the last 10 years. They would buy it, and they often bought it, even if they didn’t need all of it. Now, because of cancellations we have to monitor our customers’ behaviour, even after they have placed an order – that’s something totally new. The other change is that we now have to monitor subcontractors’ risk. Are your subcontractors healthy enough to be able to provide you with the components? Our factories are assembly factories, so we make an order and if a subcontractor cannot supply it the whole assembly process collapses. And this is one of the dangers when the recovery comes. All the market analysts are focusing on the bigger companies. What lies behind them are the subcontractors. When the market goes up 20%, you may find your company only going up 10% because your subcontractors are unable deliver due to their inability to get components.

PWC: Looking ahead, what emerging or systemic risks [e.g., climate change, pandemic disease, geopolitics, natural disasters, etc.] are you preparing for?

MM: We have started to do scenario planning, which we had never done before. We are trying to look at various scenarios – the probability of them, how they will affect us. So, I cannot tell you it is only for climate change. I look at scenarios from our customers’ point of view; how does the world evolve and how does transportation in the world evolve. From there come the scenarios. From that we look at the appropriate change.

From the list you have here, I would pinpoint climate change as the biggest one. We use outside consultants and universities – so we take it to a very high level. What does climate change mean? OK, the sea rises five metres. You have to rebuild all the harbours … big business opportunity. But that would mean that it would be forbidden to transport many goods like Perrier water. Nobody needs Perrier water in Asia. It is totally unnecessary to transport it. We are in the early stages of this now.

PWC: The economic crisis has been stressful for most employees, many of whom have been asked to accomplish more with less. How have you been able to maintain morale and motivate staff?

MM: It’s a question of values. You have to tell your own people what the company values are and why you have had to fire 3,000 people, and still try to keep up the morale of the rest of them. It is very much about communication. We have done a huge job on the values of the three different business areas. Altogether we had 10 sessions in which 200 people gave their views about our values – what they should be, the common values for Cargotec. Then we asked all of our employees if they had any comments. We got 3,200 comments. Remember, we have 6,000 people with computers – 50% answered!

They already had values, so we had to extract and combine them. We, as top management, did not try to create new values. We asked, ‘What are those values that we have had for 100 years?’ We had to identify them, regroup them, put them into sentences and then communicate them. The outcome of this is that everybody understands what this company stands for. Now, they have to make up their minds if they want to be part of it.



PWC: Last year, 72% of CEOs told us that talent was a critical driver of long-term success. In what ways has the financial crisis affected your ability to recruit and retain talent?

MM: This goes hand in hand with the values I spoke of. To employ people you have to show them the values – what this company stands for, especially in these times when you have to make so many redundant. Would you like to be employed by us when one-quarter of our employees have been fired? Maybe ‘no’, because, as a newcomer, you may be the first to go in another recession. As I have already said, recruiting people is much more important than before. At the same time, the business is really globalising, we need to recruit for top positions in areas outside our home base in the Nordic region. As a result, we really have to think about our values and how we communicate them because those prospective employees don’t know Cargotec – they don’t even know where Finland is.

PWC: Most observers believe that more regulation is coming. Yet, CEOs have consistently told us that over-regulation is a major threat to their growth – including 55% of CEOs last year. Will new regulation lead to over-regulation?

MM: Regulation affects us all, but the other companies (referring to banks, brokerages, investment funds, hedge funds and other financial institutions) probably have a better view on this question. We moved some of the factories that produce products for the US market from Sweden to the US itself because of concerns over government regulation and the tendency for them to buy local. We were afraid that one day there would be a regulation that the US government buy from a US manufacturer. In China there is a similar tendency to buy from Chinese producers. Having said that, I do not think there will be a kind of protectionism at large. But there will be countries like the US that prefer to buy from US manufacturers. This goes for the big nations … nobody could care less what little nations like Finland do.

PWC: What one thing could governments do to stabilise the financial sector and minimise the risk of another meltdown?

MM: Though I believe that the sub-prime events in the US started the current recession, I think there were other more important underlying reasons. If a French harbour over-invests, it has nothing to do with housing in the US. The expansion had been going on so long, that nobody noticed that it should have stopped for a few years and stabilised – it just went on. There was too much money available.

What needs to be known is what is behind the available capital … is it real. Not all of it was ‘real’, it was a bubble. That is where the government has to step in, to stop the over-leveraging of capital. So from that point of view, more transparency could have helped. I don’t think that regulation helps – some clever guy always finds his way around it. But some transparency would have helped. Think about the analysts who were saying two years back that you have to leverage more, that your company is doing things wrong, and that your gearing is not high enough. If the middle class in Africa had grown at a huge pace, then further expansion could have been possible. You would have created more consumers. But if you have normal markets and you just create wealth, then you have to understand that something is wrong.



PWC: What one thing could governments do to successfully address the risk of climate change?

MM: The way that I understand it here is that every company has to take climate change into consideration when developing new products. We have been told that climate change will be forgotten because we cannot afford it in this recession and so forth. Actually, I do not think that is the case. There is a lot of pressure in China to accept the climate change case because there the environmental issues are so big that people in some cases are dying. Here, we may not have as much snow as we did 10 years ago. But if some members of your family die because of pollution or because you have floods due to climate change, then it is not an issue that will go away.

So yes, we have to take it into consideration in the way we operate. Most of our R&D goes into those environmental issues that have an effect on climate change. All of our big customers want to be good citizens. And pressure from our customers comes to ensure that our products are environmentally friendly so they can minimise their own carbon footprint. Also young people don’t want to work in companies that are not environmentally sound.





CEO perspectives on successInterview transcripts of Kong Dong, Chairman, Air China Ltd





Mr KONG Dong is the Chairman of Air China

PwC: Mr. Kong, we know the economy has kept slowing down in the past 12 months. So, my first question is what effect it may have on Air China’s future development in aspects such as the strategy and the new passenger source. Could you please share your opinions about that?

MKD: I am watching the development of China’s economy closely, including that of the aviation sector. The financial crisis should be a test for China’s economy and for us, as part of it. As an aviation industry leader in China, Air China is facing a very severe challenge. The process brought us both success that we enjoyed in going through the financial crisis and hard lessons caused by a lack of preparedness. However, I feel the most fortunate thing is that Air China has built a very good foundation during these six years of development.

Despite the bad financial performance in 2008, the crisis didn’t hurt our core competitiveness and actual operation capability. In 2009, our performance has been quite outstanding. It should be mentioned that the forecast by the International Air Transport Association (IATA) was very pessimistic, and the original loss estimate even increased to US$11 billion for the global aircraft industry. Considering the actual conditions in the first three quarters, it also thinks the prediction is very objective. However, the situation is exactly the opposite in China. We have the ability, courage and boldness to resist the financial crisis and we have been supported by some government policies. Under such conditions, I think the performance of our enterprise is especially outstanding, because we have generated a profit of nearly RMB 3.8 billion in the third quarter.. When I attended a Star Alliance conference and discussed our development with CEOs of many airline companies, they were envious of our results.

First, these achievements are the result of our determination in carrying out a long-term business strategy. Since the reshuffle, we have targeted ourselves as an international large hub airline company. We have worked hard for six years to realise the target. In fact, those foundations safely carried us through the severe winter of the industry. For example, Beijing Capital Airport has become one of the best global aviation hubs in the world. We built this very successful hub with Beijing Capital Airport. The occupancy rate of flights is about 45% in the Beijing hub and, in terms of the total traffic turnover, we have reached 50% and constructed several flight banks, connections between inbound flights and outbound flights. Our hubs play important roles in the domestic market, which is reflected clearly in our operation and production data.

Second, while focusing on building the Beijing hub, we also gave attention to regional hubs in the southwestern area. In Chengdu, the 12 May Wenchuan earthquake caused great losses to us last year. In 2009, we worked hard to restore our southwestern hubs very quickly. Our current production and operation status is better than that prior to the earthquake in the southwestern area. At the same time, we also paid close attention to Shanghai. We took opportunities to establish our Air China Shanghai branch rapidly. Our aim is to participate in the building of Pudong international hubs in Shanghai, which is the most important portal in China. For long-range international inbound and outbound flights in Pudong, if Star Alliance companies also counted, we should be competitive and have a large market share.

We also see an obvious production characteristic in the Chinese home market; that is ‘domestic better than international, passenger traffic better than freight’, with which we were faced during the industry’s severe winter. We also saw unreasonable and imperfect aspects in the arrangement of stressing the domestic market during those years of development. So we took the opportunity to set up our new branch company in Hubei, although it was very difficult. It can support our hubs in Beijing and Chengdu and at the same time improve the future arrangement of Chinese airports. Therefore, I personally think the success of the hub strategy is a very important factor in overcoming the influence of the financial crisis.

Another success is that Air China has developed a very strong brand over those years of hard work. What customers care about most, I think, is the brand of an airline when they make a trip. And it should be safe, comfortable, convenient and fast. We have been working hard to build such an environment. As a result, we enjoy good market positions in some major routes in our dominant cities. As economic conditions change greatly, companies have put their transport


capabilities back to the home market. A new round of a price war is hotting up, and the supply exceeds demand as a whole. We must win customers with our brand and cannot follow the trend to reduce prices. We have our own judgements and opinions. In fact, the passenger load factor has improved a lot this year. And the effect is pretty good.

Third, our relative cost advantage is outstanding and we have good control over capital expenditure, fleet expansion and market matching. So far, we own about 250 aircraft. Some old aircraft have been retired immediately, which not only improves the efficiency but leads to good results in oil saving, emissions reduction and green operation. So I think the comprehensive effect of all these factors helped us walk out of the crisis last year and enables us to see essential things behind it.

Last, I feel we never give up on our goals, and have confidence in ourselves. We believe our comprehensive strength or aggregative indicator will be in the top 10 among global airline companies by 2015. There are many comparisons and evaluations, such as only comparing sales turnovers. However, an enterprise with heavy losses would not be a strong one or a very vital one, if only sales turnovers compared. In this sense, we say, given our strength across the board, we will be in the top 10 in the world. This is one of our goals.

Meanwhile, as a central enterprise, we believe our company should go outbound like a national team and compete with these first-class airline companies around the world. Sure, we might not win the first place but that is not important as long as we are able to represent ourselves at a national level. This is where we are positioning ourselves. We are not complacent about being superior to fellow domestic airline companies; on the contrary, we have always regarded these international outstanding airlines as examples we shall follow, and as standards we should reach. So in my opinion, this financial crisis is a great challenge to each international enterprise, one that tests whether an enterprise leader possesses the tact to manage crises and the ability to bring confidence to his team. Leaders, in such circumstances, should have the necessary confidence and pass it on to the staff, making them feel they are able to overcome various difficulties and finally succeed in their team.

PwC: You’ve just mentioned Green Transport. Environment protection and sustainable environment protection are both important issues, especially in the aviation industry. One thing we all agree on is that the development of the aviation industry keeps pace with economic development, so air traffic will continue to grow as the world’s relations become closer and closer. However, it will also have great impact on the environment during the process. In this context, what kind of goals, from your perspective, can be achieved to ensure environment protection by an airline, a state or even the whole world? As people’s demand for transport continues to increase, the cost is also one of the factors we should consider in addition to environment protection. How can we make it a balance?

MKD: The era of high oil prices in 2008 has given us a clear indication that fuel costs will become the major cost for airlines in less than a decade. It accounted for merely about 20% of the total cost 10 years ago, but the proportion has soared to 41% or 42% in a very short time. The highest fuel prices once reached about RMB 9,000 per ton of jet fuel, including taxes and other related costs. Therefore, this is becoming a great challenge for the sustainable and sound development of airlines. Although we cannot control the movements of fuel prices, as a leader in aviation businesses, we won’t sit by and watch price increases without doing anything. To avoid price risks, we are now engaged in hedging. This was a difficult decision for us but one that had to be made. The CEO of an airline company must always look to the long-term development of his company. That’s why I’ve just mentioned green management. Here I’ll talk about it in three parts.

First of all, tap internal potential. With current capacity, flight team scale and market demand, we’ve taken many measures, like using second dispatch to accurately calculate how much fuel the plane shall carry, shortening the taxi time, and taking measures on APU, etc. There is significant potential for savings, but this is only a partial solution.

KONG Dong, Chairman, Air China LtdContinued


We have become very interested in the latest energy-saving planes with low-carbon emissions. For example, our company will be the first user of the Boeing 787. Therefore, we can gradually replace those aircraft with high oil consumption with more cost-effective and energy-saving ones. In the development plan of our company, we are preparing to change the main models of our trans-Pacific long-range aircrafts from 747-400, 747 Combi to 777-300ER. With double valves, the new aircraft can save a lot of fuel, calculated to be between 10% and 30%. Therefore, it’s also a good way to reduce carbon emissions.

Ultimately, green management depends on collective awareness, for it has become a challenge to the whole world, and we are just a part of it. We are, of course, duty-bound to save energy and reduce emissions. We treat it not only as an issue of enterprise development or cost control, but also as a kind of social and historical responsibility, as well as a strategic decision for a cosmopolite. We’ll spare no effort to take effective measures on energy-saving and emission reduction issues.

PwC: There is no doubt that the aviation industry develops with economic growth in China. With GDP growing soundly year by year, China’s aviation industry is generally thought to have a bright future. Comparatively speaking, aviation industries of Europe and the US might have some pressure due to the economic downturn in this financial storm, which reduces people’s demand for aircraft. What do you think of their development? Is there a large difference between that of the long-term and the short-term?

MKD: I went to the Star Alliance CEO meeting in the US not long ago. It enhanced my knowledge of the Euramerican aviation industry. I found it has developed into a rather mature and saturated state, so its supply and demand relationship is unlikely to have a sudden breakthrough. By contrast, China has a lot of potential in this respect. Although China is already a great power in aviation, it also has a large population and the market is far from saturated. However, we have to admit our companies are still a considerable distance from first-class Euramerican airlines. Such airlines attach great importance to the development of the Chinese market. They urge China to open the skies as they did. But as with our accession to WTO, we need time to grow up. We’ll not open the skies until we have the strength to compete fairly with them. To be honest, we are still at a disadvantage in our share of the market in these major routes to Europe and the US. However, this situation is changing gradually. I have been insisting that China, as a great power, should have at least one excellent airline company to support such aspirations. No matter whether it is on the routes to America or the routes to Europe, we should have an airline company that can compete with the best airlines in the world. Though we are currently at a disadvantage, we have a lot of customers, most of whom are economy passengers including Chinese travellers and business people.

I think the economy of Europe and the US will get back to normal development after this economic crisis. Therefore, we will maintain our transport capacity deployment to the utmost in the international market and will not withdraw from the market in a hurry. Air China will not be shortsighted. By making great efforts, we gain a position in the market and we gain recognition. This can be in our membership of the Star Alliance. We joined the Alliance in 2007 and got about RMB 1 billion from it in 2008. As it should be, we offered some of our customer resources to Star Alliance partners. Based on this, I have confidence in the international market. With the improvement of income and living standards of China’s common people, they want to travel round the globe, and do business with the world. These local customers are our basic resources. We have the responsibility to carry them to other countries. I still have confidence.

As for the international market, with the recovery of the EU, the US and other markets, China’s airliners and our partners will see steady development. I have confidence in this too.



PwC: As Air China the biggest airline company of China, how is its risk and internal control? Have there been any new developments? What measures do you want to take in terms of sustainable development?

MKD: The last year has been an unforgettable lesson for me. I frankly admit that our enterprise lacks the capacity to judge the tremendous change of the macro-economy in terms of our traditional management. When the forebodings of financial crisis hit last year in the US, we concentrated on doing our own things – the snow disaster, the 12 May earthquake and the Olympic Games, which we promised the world to do well. We did not realise that the damage was going to be so great. What inspires me most is that an enterprise like ours cannot go through such difficulties by its own efforts or by using a simple form of protection.

Therefore, we are paying more attention to our internal controls and management mechanisms. For example, our internal control system requires that I personally chair the risk management committee every month, and control all kinds of risks – political, economic, financial, exchange, oil, safety, and stability. In addition, we will choose the more important problems and provide measures for them. We will not let these problems change into crises through negligence. I think the hedging of oil prices last year was no longer a risk but a crisis for us. We dealt with the crisis calmly and went through it. Therefore, we have made great progress on internal controls. We have trained up some experts and young people on the world economy and the international air transport.

Secondly, I think our systems are stricter than before on issues such as expenditure control and fleet expansion. From 2008 till now, we have done well in some areas. For example, the scale of our fleet is the smallest in China and its expanding speed is the lowest. At that time, the development speed of our fleet was three to four points lower than the point predicted by Civil Aviation Administration of China for the development of China’s aviation development. At present, many airline companies think that excessive transport capacity exists, and so most of them have closed down the operation of some aircraft and have also returned some. These things don’t occur in our company. In terms of structure, transport capacity is a key factor in determining the survival of airline companies. It is very difficult to alleviate the situation once one wrongly judges it and makes a decision too fast for an expected growth rate. Therefore, leaders in our company, who have experienced good times and bad times, always pay more attention to internal controls.

Finally, when we face all kinds of crises, many measures are effective and can be run from top to bottom. These measures can be supported by almost all the staff of Air China. I think this is something we have gained in going through this financial crisis. When we made plans, for example, to address the crisis, we urged each department to control internal costs by reducing expenses across the board. The staff of Air China supported this proposal through their actions. From all of these things, you can see that Air China’s leaders conveyed a sense of risk awareness to all staff, who strongly support our plans and requirements.

My understanding is that after an enterprise encounters a major setback, as Premier Wen Jiabao said, ‘confidence is the most important thing’. If we can maintain the confidence and the will to overcome difficulties, and take the proper corresponding measures, we can lead the enterprise out of these difficulties and obstacles. I have emphasised repeatedly that Air China benefited from the rapid growth and quantum leaps in development of the past five years. Since 2008, I have changed my tune somewhat; prudent operation and sustainable development are the most important factors for the development of an excellent enterprise. This is a shift from our previous view on accelerating the pace of development.





CEO perspectives on successInterview transcripts of Sunil Duggal, CEO, Dabur India Limited





Mr Sunil Duggal is the CEO of Dabur India Limited

PwC: Do you see signs of an economic recovery in your key markets?

SD: Our market focus is on 20 countries. Of those, we have noticed that the lower the stage of economic development, the stronger the optimism that revival and growth will occur. The signals we are getting from the more developed economies, particularly the GCC [Gulf Cooperation Council] countries, indicate that recovery is going to be more long-term. But signals from countries like Egypt or the nations of sub-Saharan Africa, which are lower down the development index, are far more positive. The same is the case with India. There are, however, exceptions to this rule. For example, in two countries that are important to us – Nigeria and Pakistan – the outlook is very different. These countries have gone through a lot of turmoil. Consequently, the outlook there is negative. Barring GCC, Nigeria and Pakistan, our markets show positive signals.

PwC: What about Europe and the US?

SD: We don’t do much business there. That’s why I hesitate to comment on those markets. We have a subsidiary in the UK. But it essentially serves the diaspora population.

PwC: How has India’s competitiveness in the world economy changed as a result of the economic crisis?

SD: Companies in India may not be as strong today as they were two years ago, but they have emerged out of this downturn in a far better position than companies in the developed world. In terms of resources, both human and financial, we are better off vis-à-vis our brethren in the developed world.

PwC: In what sectors has India emerged more competitive?

SD: India’s competitiveness is stronger in a lot of sectors including auto, consumer staples, consumer durables, and information technology, all of which have grown at an incredible pace. Consumer staples and consumer durables are showing very strong growth. I think IT companies have withstood the storm beautifully, even though they have substantial exposure to the developed markets.

PwC: In what sectors is India weaker as a result of the economic crisis?

SD: Agriculture is the only sector that has shown negative growth. Perhaps this is an anomaly exacerbated by a bad monsoon season. However, lack of growth in agricultural produce has been evident, even in normal monsoon years. So, it may be the case that the Indian agricultural sector’s yield curve has hit a plateau. This is a cause of concern because a significant portion of the Indian population depends on agriculture-related activities for their livelihood. Right now, the agricultural sector is being supported by economic stimuli provided by the government. But economic stimulus can’t be sustained over a long period of time. One day it will stop. Barring agriculture, everything else is doing fine.

PwC: How might the economic crisis affect your company’s capital structure and dependence on the capital markets?

SD: Ours is a very capital-light industry, so capital inflows are completely irrelevant insofar as we are concerned. We generate levels of cash that are more than adequate to fund our needs. Any non-linear activity, like an acquisition, can be funded through internal accruals. Since our balance sheet is so strong and profitability so high, we have not faced any shortage of capital. We also don’t need to worry about return on capital, since the base is so small.


PwC: There were news reports that Dabur is scouting for acquisitions. Is it true?

SD: Yes. For a capital-light company like us, acquisitions are a very good way of deploying cash. Typically, we pay out 50% of our total profitability as dividend and the balance goes into reserves to fund acquisitions. We are very clear that we will not look for acquisitions in the developed markets where there are very high levels of competition, entrenched players, few platforms, and, more importantly, very little growth. Instead, we will continue to invest in our core markets, which include South Asia, the Middle East and North Africa, and sub-Saharan Africa. These markets, we believe, offer long-term growth prospects. Regions like sub-Saharan Africa are 20 years behind most developing countries and we understand very well how to navigate that growth curve. Additionally, because many markets in Africa are small and volatile in terms of their socio-political environment and currency, multinationals don’t take these markets seriously. As a result, the valuations in these markets are sensible. By way of contrast, the valuations in India are quite stretched. India offers huge upsides in terms of growth, but no acquisition in India comes cheap as there are too many players that are already eyeing that market.

PwC: What are your expectations about the return of consumer spending?

SD: Our industry has seen no demand destruction in the last 12 to 18 months. Actually, it’s been a very good period for us. Going forward, might consumer demand contract? Highly unlikely, I think. Will it remain the same? Quite likely. The best-case scenario is that a revived economy will stimulate even greater demand and take us to a higher growth trajectory. The future is at least as good as where we are today, and it definitely holds the possibility of becoming much better.

PwC: From what region do you expect your strongest competition to come?

SD: Fortunately, we do not compete with China. In the creation of brands, China is way behind India. We play in a sector where technology and manufacturing capabilities are far less important than consumer insights and brand creation. That’s why our business model is more enduring. If we were a manufacturing firm – making motor scooters, for example – I would be very worried about competition from China. At the end of the day, China’s manufacturing capabilities are a lot better. But in our industry, manufacturing efficiency only gives you an extra 2 to 3% margin. But a branded product can typically command a 20 to 40% premium over unbranded products and weak brands. Our product platform is based on herbal, non-chemical, non-invasive products. In all our markets, there is a distinct preference for herbal products. We also work very hard to build our brands. In overseas markets, our advertisement-to-sales ratio is 50% higher than in India.

PwC: Are you anticipating structural shifts in national economies as they emerge from the downturn?

SD: As manufacturing moves eastwards, we’re seeing huge economic dislocations in the developed economies. That’s reflected in the developed economies’ unemployment figures. It’s not easy to create service sector jobs to substitute for job losses in manufacturing. Moreover, jobs in the service sector have also been moving eastward. As a consequence, the developed nations are in a very serious structural downturn, which may be impossible to reverse. Even if it does reverse it will take a long, long time. The best thing for the developed economies would be to develop completely revolutionary technologies, such as ‘green’ technologies. In contrast, well-governed countries in Asia and Africa are on a growth curve that is pretty similar to that of India’s. How enduring is this growth? Some of these Asian and African countries will grow up to a point and then pause. But due to its human resources, India will continue to go up the growth curve.

Sunil Duggal, CEO, Dabur India LimitedContinued


PwC: Some observers believe that the economic crisis has undermined the public’s trust in the private sector. Do you agree?

SD: The public’s faith in the Indian corporate sector has not really been shaken. The Satyam scandal, for example, has not affected everyday life. The failure of an IT company that derives 80 to 90% of its revenues from offshore businesses does shake the confidence of the company’s clients and employees, but not that of the common man. If an auto company had gone out of business and there were a few million cars that didn’t have a back-up for servicing, the fallout would have been far greater. Globally, yes, the public’s trust in the private sector has certainly been shaken. But not so in India. Not a single bank in India went bankrupt and not a single investment house defaulted. So there is a big difference.

PwC: Did you make changes in your business in response to the economic crisis?

SD: We didn’t do anything revolutionary. But when we saw signs of a downturn, we proactively began to tighten our belts, even though our business was doing well. Fortunately, the worst-case scenario never happened and we weathered the global downturn. All of that is behind us now and we are very optimistic about the future. We will be scaling up our investments, increasing capacity, investing in brands and taking a far more aggressive view of our business, particularly with regard to our food and beverage and skin care products.

PwC: Is your business constrained by difficulties in raising capital?

SD: We have not faced any difficulties in raising capital. We have had lots of opportunities in the developed markets, but we have resisted the temptation to buy assets there. You would be amazed at the number of propositions that come to us from Europe and North America. At first glance, these opportunities appear attractive from the valuation standpoint, but when you do the projections, you find that they are actually value-destructive. So we have been extremely disciplined insofar as the developed markets are concerned. I believe that you should be faithful to your strategy. If your strategy says ‘do not acquire assets in the developed markets because they cannot offer you value in the long-term’, there is little sense in succumbing to temptation – even when assets come cheaply.

PwC: What gaps in your company’s risk management were exposed by the economic crisis?

SD: One area where we did suffer was currency. We enjoyed the benefits of a fairly strong rupee in the earlier parts of the year. And then the rupee started depreciating at a very rapid clip, which was inexplicable and unexpected. As a result, we were caught on the wrong foot. The currency still remains volatile and will always be a matter of concern. Currency fluctuations are a business hazard. We take positions when there is high visibility in terms of the currency outlook. Today, the visibility is very poor.

PwC: How have you been able to maintain morale and motivate staff during the downturn?

SD: From a human resources perspective, the downturn has actually benefited us. Our attrition levels are at an all-time low and the talent pool available to us is a lot bigger than it was during the upcycle. With respect to employee morale, most workers would give an arm and a leg to be employed by a company that is doing well and giving out good bonuses. When our employees see the plight of their peers working in companies impacted by the downturn, they feel quite fortunate. So employee morale at Dabur is very good – as good as I have ever seen it.



PwC: What investments or reforms should the Indian government focus on in order to improve India’s competitiveness?

SD: Education has not received the attention it deserves. There are several public–private partnership initiatives underway in education in the semi-rural and rural areas, where the government actually pays private players to deliver skill-building initiatives to under-privileged youngsters. These are very welcome steps. But more needs to be done. For example, we should allow foreign universities into India. Why should Indian students go abroad for higher education when the same quality can be made available to them here? In terms of infrastructure, the hurdles are visible to all. There are a plethora of laws and bottlenecks that slow the pace of infrastructure growth. We would also welcome FDI [Foreign Direct Investment] in the retail sector. Some believe that FDI in retail would be disruptive. But in our view, FDI will help create better products at lower prices and help small-scale manufacturers get better access to consumers.

PwC: Will new regulation lead to over-regulation?

SD: In India, barring a few areas like finance, there has not been any significant new regulation. Having said that, I feel the whole tax-rationalisation process will affect us. For instance, the goods and services tax [being introduced in India from April 2010] will definitely have a business impact, but I can’t say whether it will be favourable or unfavourable. Similarly, the Direct Tax Code [being introduced in India in 2011–12] will have a huge impact on the way we conduct our business. Generally, I am ambivalent about the new direct taxes, some of which are at quite worrisome levels. With regard to the US or Europe, new regulatory barriers enacted there could, in my view, be detrimental to those economies. For instance, if the US discourages offshoring and European countries encourage it, American companies will become highly disadvantaged.

PwC: What one thing could governments do in order to successfully address climate change?

SD: The biggest contributor to climate change is population. We may be very sanctimonious in saying that Indians are very low emitters of greenhouse gases, but when you consider that our population is growing by 2.5% every year, the figures don’t look good. If India doesn’t keep its population under control, there will be little it can do to help minimise climate change. Unfortunately, the Indian government has given up the fight against our population explosion. I find that extremely alarming.

PwC: What is your company doing to address climate change?

SD: We are trying to make our facilities as environmentally friendly as possible. The first step we took in that direction was to refit our factory boilers to run on renewable sources of fuel. That effort has been recognised by the United Nations, and a lot of other Indian companies have followed suit. Additionally, all our new facilities have been built to LEED gold certificate standards.





CEO perspectives on successInterview transcripts of Pablo Isla Álvarez de Tejera, Deputy Chairman and CEO, Inditex





Pablo Isla Álvarez de Tejera is the Deputy Chairman and CEO of Inditex

PwC: What would the economies of your main markets need to do to settle down? Is there any sign of the start of the recovery?

PI: I think the financial mechanisms and the credit sector will progressively return to normality. I am more worried about other issues, such as the international trade barriers, i.e., the potential protectionist barriers which may be built among the different countries after this crisis. Although I have not seen it yet in the 73 countries where we have a presence, I think it is a trend that could harm international trade. The economists and other experts have shown that protectionist barriers are not useful measures to cure the economy and preserve growth. However, I view it as a possible risk in the current economic situation. Globally, I think China and Brazil are very strong economies with a very high future potential.

PwC: How will financial markets and capital flows change and how these changes will affect your share capital structure?

PI: I think the financial system will change and a global political economy will arise. I am more worried about the growing public borrowing and its serious consequences. With all its seriousness, the crisis has shown us some positive lessons which we should take advantage of. The situation was worse in 2007, when there was heavy borrowing and a bubble with no clear end. This crisis should teach us to be more demanding of ourselves. This will affect products, since consumers will demand more from their purchases. We will also need a more demanding management style.

Of course, there have been many changes during last year. There is less uncertainty. This crisis has helped us to enhance our business management, which has benefited the company. The crisis has caused us to enhance internal management proceedings, increase efficiency levels and focus on the upgrading of operative effectiveness and the business management as well.

PwC: Consumer demand has collapsed during the current economic crisis in some key markets. When recovery finally takes off, which will the expectations be in relation to consumer expenditure comeback? Will their purchase behaviours be similar to the past ones?

PI: After the crisis, consumers will demand a very high level of quality. There are also new communications technologies to keep in touch with consumers, such as blogs, Facebook and so on. Inditex has two million Zara users’ fans on Facebook, a completely new and powerful communications tool.

PwC: What are the most significant changes – in strategy, business model and organisation – you have implemented in your company as a response to the economic crisis? Has your ability to respond to new opportunities been limited by these difficulties when raising capital? As a result, what type of adjustments are you making?

PI: Inditex’s investment policy is more demanding but we have not slowed down our growth as a result. We are more demanding than ever regarding our growth, looking for quality and investment return on new locations. Nevertheless, our development strategy remains the same for the mid and long term.

Basically, our response to the crisis has focused on the upgrade of procedures. This has allowed us to face the crisis through product enhancement, better manufacturing cycles, and more internal coordination and so on. We continue growing with no problems since our funding is based on internal capital flows and so the credit crunch has not damaged us.

I also think that Inditex has never lost its long-term outlook. We have faced the crisis as a way of enhancing our own business management, always thinking on the long term, keeping our strategic focus in regions where we are sure we can keep growing. Our business model is also a major strength since it is based on fashion, reasonable prices, closeness and flexibility to adapt to changeable consumer demand.


PwC: The economic crisis has put a great number of employees under pressure because employers want more for less. How have you managed to keep staff motivated and encouraged?

PI: We have not noticed major changes in our people or in the awareness of our internal brand. On the other hand, we are perceiving that people prefer working at a demanding level: they do things better. Overall, though, the company has not suffered great pressures nor had any problem with employees.

Our challenge in the human resources area is motivating, identifying and retaining talent through internal promotion. The opening of new stores and new concepts represents a good source of internal promotion and contributes to talent retention. Maybe it is good to have a bit of concern because this increases the level at which you operate. Being in the comfort zone makes you behave in a more indulgent way, while more demanding conditions makes you much more competitive. High-performance people value such motivational conditions because they know they are going to be assessed by their results. For Inditex, people are its main value and motivation is always one of its main aims.

PwC: Most experts believe the level of regulation will be higher next year. However, 55% of CEOs interviewed last year think an excessive regulation framework would be a serious threat for their companies’ growth. Would a new regulation translate into a regulatory excess?

PI: As I said above with regard to regulatory risks, we are worried about the trend towards increasing the protectionist barriers to free trade.

PwC: What else should the governments do to face the climate change successfully? Which measures will your company take to face the climate change risk? How has your company turned the climate change response into a competitive advantage?

PI: With regard to climate change, Inditex has incorporated environmental considerations in all the processes of the company; the environment is part of our firm decision making. We have worked on eco-efficiency issues, energy efficiency and logistics efficiency and we have also opened some eco-efficient stores, such as our new Zara store in Korai Street, in Athens. This store comprises the main energy efficiency foundations of the Eco-efficient Store Project, one of the main initiatives of the 2007-2010 Inditex Environmental Strategic Plan. Thanks to its design and the use of environmentally-friendly materials, the eco-efficient store is achieving a 30% increase in energy efficiency.

If we look at costs, our environmental policy does not create any increase since the savings achieved offset the investments we have to make. In relation to other aspects of sustainability, we have incorporated all labour aspects of our supply chain through a conduct code we require of all our suppliers. Our position in social and environmental issues is about taking action rather than talking; we do not want to use it as a marketing tool. We are discreet and, in general terms, we do not communicate everything we do.

The human factor is key to the environment. Our employees care about the environment and CO2 emissions; they are proud of our environmental policy and this is one of the most common comments we receive. For instance, our stores carry out what we call “Japanese meetings” every day: for 10 minutes before the store is open employees talk about the most important issues of the day; sometimes those minutes are devoted to new environmental issues. In this way employees become aware and they feel very proud of it. They are young people who appreciate these attitudes because they match their values. We have cut down the electric power we use and we are setting our own restrictions for a proper level of consumption, also shared by society. Our stores are managing proper and efficient energy use, taking into account that customers are sharing our thinking.

Pablo Isla Álvarez de Tejera, Deputy Chairman and CEO, InditexContinued


PwC: With regard to the Government initiative to give consistency and boost the incentive measures for a new economic model in order to overcome the crisis on a sound basis, which aspects do you think should be considered in the “sustainable economy” as a future option? How should our economy, labour market, business fabric and productive model evolve?

PI: Firstly, we should analyse which industries are the most and truly competitive and in which we know how to make a difference. From that starting point, the development of the foundations of a new industry should be layed on the good management of our already internationally renowned industries. That way, the tradition and modernity balance should provide the foundations for future growth. That balance is one of the distinguishing factors of countries with the greatest economic potential.

The internalisation concept is one of the essential aspects of this modernisation. We must believe that any traditional business or a future potential one should be internationally competitive. This is a basic requirement for any business.

From my point of view, we should incorporate administration reform into the debate on sustainable economy, as it is one of the keys to future growth. In short, I think we should explore new ways and new industries to lay the foundations of a new and strong economic model in Spain. However, I believe that it is definitely necessary to manage our current model in a better way, with some relevant changes.





CEO perspectives on successInterview transcripts of Pablo Isla Álvarez de Tejera, Deputy Chairman and CEO, Inditex





Pablo Isla Álvarez de Tejera is the Deputy Chairman and CEO of Inditex

PwC: What would the economies of your main markets need to do to settle down? Is there any sign of the start of the recovery?

PI: I think the financial mechanisms and the credit sector will progressively return to normality. I am more worried about other issues, such as the international trade barriers, i.e., the potential protectionist barriers which may be built among the different countries after this crisis. Although I have not seen it yet in the 73 countries where we have a presence, I think it is a trend that could harm international trade. The economists and other experts have shown that protectionist barriers are not useful measures to cure the economy and preserve growth. However, I view it as a possible risk in the current economic situation. Globally, I think China and Brazil are very strong economies with a very high future potential.

PwC: How will financial markets and capital flows change and how these changes will affect your share capital structure?

PI: I think the financial system will change and a global political economy will arise. I am more worried about the growing public borrowing and its serious consequences. With all its seriousness, the crisis has shown us some positive lessons which we should take advantage of. The situation was worse in 2007, when there was heavy borrowing and a bubble with no clear end. This crisis should teach us to be more demanding of ourselves. This will affect products, since consumers will demand more from their purchases. We will also need a more demanding management style.

Of course, there have been many changes during last year. There is less uncertainty. This crisis has helped us to enhance our business management, which has benefited the company. The crisis has caused us to enhance internal management proceedings, increase efficiency levels and focus on the upgrading of operative effectiveness and the business management as well.

PwC: Consumer demand has collapsed during the current economic crisis in some key markets. When recovery finally takes off, which will the expectations be in relation to consumer expenditure comeback? Will their purchase behaviours be similar to the past ones?

PI: After the crisis, consumers will demand a very high level of quality. There are also new communications technologies to keep in touch with consumers, such as blogs, Facebook and so on. Inditex has two million Zara users’ fans on Facebook, a completely new and powerful communications tool.

PwC: What are the most significant changes – in strategy, business model and organisation – you have implemented in your company as a response to the economic crisis? Has your ability to respond to new opportunities been limited by these difficulties when raising capital? As a result, what type of adjustments are you making?

PI: Inditex’s investment policy is more demanding but we have not slowed down our growth as a result. We are more demanding than ever regarding our growth, looking for quality and investment return on new locations. Nevertheless, our development strategy remains the same for the mid and long term.

Basically, our response to the crisis has focused on the upgrade of procedures. This has allowed us to face the crisis through product enhancement, better manufacturing cycles, and more internal coordination and so on. We continue growing with no problems since our funding is based on internal capital flows and so the credit crunch has not damaged us.

I also think that Inditex has never lost its long-term outlook. We have faced the crisis as a way of enhancing our own business management, always thinking on the long term, keeping our strategic focus in regions where we are sure we can keep growing. Our business model is also a major strength since it is based on fashion, reasonable prices, closeness and flexibility to adapt to changeable consumer demand.


PwC: The economic crisis has put a great number of employees under pressure because employers want more for less. How have you managed to keep staff motivated and encouraged?

PI: We have not noticed major changes in our people or in the awareness of our internal brand. On the other hand, we are perceiving that people prefer working at a demanding level: they do things better. Overall, though, the company has not suffered great pressures nor had any problem with employees.

Our challenge in the human resources area is motivating, identifying and retaining talent through internal promotion. The opening of new stores and new concepts represents a good source of internal promotion and contributes to talent retention. Maybe it is good to have a bit of concern because this increases the level at which you operate. Being in the comfort zone makes you behave in a more indulgent way, while more demanding conditions makes you much more competitive. High-performance people value such motivational conditions because they know they are going to be assessed by their results. For Inditex, people are its main value and motivation is always one of its main aims.

PwC: Most experts believe the level of regulation will be higher next year. However, 55% of CEOs interviewed last year think an excessive regulation framework would be a serious threat for their companies’ growth. Would a new regulation translate into a regulatory excess?

PI: As I said above with regard to regulatory risks, we are worried about the trend towards increasing the protectionist barriers to free trade.

PwC: What else should the governments do to face the climate change successfully? Which measures will your company take to face the climate change risk? How has your company turned the climate change response into a competitive advantage?

PI: With regard to climate change, Inditex has incorporated environmental considerations in all the processes of the company; the environment is part of our firm decision making. We have worked on eco-efficiency issues, energy efficiency and logistics efficiency and we have also opened some eco-efficient stores, such as our new Zara store in Korai Street, in Athens. This store comprises the main energy efficiency foundations of the Eco-efficient Store Project, one of the main initiatives of the 2007-2010 Inditex Environmental Strategic Plan. Thanks to its design and the use of environmentally-friendly materials, the eco-efficient store is achieving a 30% increase in energy efficiency.

If we look at costs, our environmental policy does not create any increase since the savings achieved offset the investments we have to make. In relation to other aspects of sustainability, we have incorporated all labour aspects of our supply chain through a conduct code we require of all our suppliers. Our position in social and environmental issues is about taking action rather than talking; we do not want to use it as a marketing tool. We are discreet and, in general terms, we do not communicate everything we do.

The human factor is key to the environment. Our employees care about the environment and CO2 emissions; they are proud of our environmental policy and this is one of the most common comments we receive. For instance, our stores carry out what we call “Japanese meetings” every day: for 10 minutes before the store is open employees talk about the most important issues of the day; sometimes those minutes are devoted to new environmental issues. In this way employees become aware and they feel very proud of it. They are young people who appreciate these attitudes because they match their values. We have cut down the electric power we use and we are setting our own restrictions for a proper level of consumption, also shared by society. Our stores are managing proper and efficient energy use, taking into account that customers are sharing our thinking.





CEO perspectives on successInterview transcripts of Paul S. Walsh, Chief Executive, Diageo plc





Paul S. Walsh is the Chief Executive of Diageo plc

PwC: Have the last 12 to 18 months posed a particularly tough personal challenge for you?

PW: It has been tough primarily because of the severity of the crisis and the speed with which it hit us. It took many businesses by surprise. We consider ourselves a reasonably stable consumer products business but a lot of the normative data that we were accustomed to seeing changed very starkly and very quickly, and we found ourselves having to respond rapidly. We’ve had to take some difficult actions to respond to the new realities – and that creates its own challenges. And through it all, we’ve had to keep our eye on new opportunities. So yes – it’s been an interesting year. But the crisis will pass and we need to ensure that we emerge from it stronger than our competition.

PwC: Compared to previous ones, is there something different about the present financial crisis?

PW: I think it is different. It’s certainly different than the Asian crisis of the late 1990s or the slowdown in the early part of the new millennium. I would suggest that we’ve had a couple of things going on that, combined, created the perfect storm. First, the massive run- up in oil prices. And secondly, the liquidity crisis that afflicted the banking sector. I think those two factors conspired to magnify the extent the problem. As you know, a year or so ago the whole banking system came perilously close to closing down. We’ve never seen that in our lifetime.

PwC: What lessons learned would you like to convey to the next generation of business leaders?

PW: Over the past decade, many companies have come to depend on the very attractive growth rates afforded by developing markets. That’s certainly true in our case. But when those emerging economies begin to cool off, things can slow down very, very quickly. And that is a scenario that may be unfamiliar to some younger businesspeople who are used to operating in the very stable and predictable worlds of Europe, the US, and the more mature Asian economies. In contrast, if orders to Chinese factories begin to dry up, workers there are very quickly out of a job, out of money, and they stop spending. So one big lesson learned is that developing economies simply don’t provide consumer marketers with the kind of safety net that they’re used to when operating in the developed world. A second lesson learned is the importance of making sure that you have very clear visibility of the inventory at each point in your extended supply chain. And a third lesson has to do with consumers’ changing consumption habits. In our case, we’ve seen the relative share of consumption of our products in bars and restaurants outpaced by in-home consumption. That required us to develop a different set of marketing skills better suited to in-home consumption.

PwC: Do you see signs that an economic recovery is underway?

PW: I think it varies dramatically by region. Asia does appear to be coming back – which amplifies my earlier point that as rapidly as developing economies can crash, so too can they recover quickly. Likewise, I would suggest that with the exception of some currency dislocations, Latin America has weathered this crisis well. I think the economic crisis came late to Africa and has still ways to play out there. Europe is very patchy. The UK: not too bad, France: not too bad. Germany: OK. Russia: coming back. There are still huge issues facing Ireland and Spain. And some of the central European countries have not recovered the vibrancy that they had a year or so ago. The US is the wild card in all of this. If the US economy does not get back its stride, China will be affected because China, of course, is a major supplier of consumer products to the US. So while this is a very complex situation, I would say that the US is the lynch pin.


PwC: In what ways are consumers in your major markets changing their habits and behaviour?

PW: First of all, we have to recognise that the consumer is a local animal and therefore trends do vary market by market. We also have to recognise that if you live in one of the developed economies and still have a job, you’re probably better off than you were a year ago. Your mortgage costs and energy costs are down. The price of food and gasoline is down. You’re probably feeling pretty good. The thing that’s holding you back from spending is that you continue to see mounting job losses – which I suspect are going to continue. So in particular markets, certain consumers are better off. But what are the larger trends that cross over many different markets? First, there is greater consumer orientation around value. Does this mean people will no longer pay for premium products? No – but it does mean that as marketers we have to be more diligent in communicating a product’s value proposition. The consumer’s shopping habits have changed. They seek out the best deal and avoid displays of ostentatious consumption. Bling is out. Similarly, whenever you have tough times – be it economic or social – you begin to see a cocooning phenomenon. We saw that after 9/11; people just didn’t want to go out. It wasn’t related to the economy at all. And today, we’re seeing a renewed emphasis on cocooning – people just want to stay home and enjoy their families and friends. Fortunately, many people want to enjoy our brands in that home environment, so for us, there’s some upside.

PwC: How have you addressed the consumer’s re-orientation toward value?

PW: I think it’s a mistake to equate value with price. So what we’ve been doing since the crisis began is to up-weight our investment in communicating the attributes of our various brands. Our job now is to reinforce the brands’ quality credentials and remind consumers of the emotional benefits of those brands. That’s one aspect of what we’ve been doing. But as we entered this crisis, it was very clear to us that things were not normal and were not going to snap back any time soon. So early on we also embarked upon a pretty rigorous cost reduction programme. It’s been hard. But we had to make sure that we had the financial headroom to protect our margins in an environment where pricing would become more challenging.

PwC: Have any of your competitors made mistakes in responding to the economic crisis?

PW: I never criticise our competitors. I start from the proposition that they are very smart and are out to eat my lunch. Consequently, we give a lot of credence to whatever they do and respond accordingly.

PwC: Has the economic crisis undermined the public’s trust in government?

PW: You can look at the role that government plays in this crisis through many different lenses. But let’s just consider a couple. First, at some point, someone is going to have to pay for the accumulating deficits and that will drive demand for increased taxation, which I think could serve to stifle the recovery. Clearly, that’s a very tough balancing act. So taxation – that’s one lens. Another lens is focused on the banking sector and the reasons for its near-collapse. After all, banks are a bastion of society, so how were they allowed to fail? There is a sense of entire communities being let down by the banks. But I think that the public’s disillusionment has moved beyond the banks to the private sector in general, so that governments are now talking about more regulation to stop a similar crisis from ever happening again. But hasty regulation will be bad regulation and my concern is that creativity, innovation, and enterprise will be stifled at a time when they should be encouraged. So those are the two risks that we run: taxation and regulation. I invest as much time as I can in trying to convince government officials that they need to be very careful in this regard.

Paul S. Walsh, Chief Executive, Diageo plcContinued


PwC: Can you say a bit more about what you’re telling government officials?

PW: It isn’t necessarily the regulation itself that’s the problem. It’s the law of unintended consequences. My company is in a pretty unique situation in that being exporters of Scotch whisky and British gin we have a considerable operational base in the UK and are therefore a large contributor to the UK economy – even though our products are sold in many other communities around the world. Given that, it is important that UK regulations imposed on our product lines are not seized upon by governments elsewhere to serve as de facto barriers to entry. So that is one issue that I talk to government officials about – the need to protect free trade in the broadest sense possible.

PwC: Do you consider your industry over-regulated?

PW: There are some examples of over-regulation and we have made those arguments to the appropriate officials. But in many ways it isn’t the large companies that bear the brunt of regulation. After all, the large companies have the infrastructure to handle the regulatory burden. What over-regulation does is to stifle the start-ups, the smaller enterprises. That’s where the real issue is.

PwC: What is your company doing to help restore the public’s trust in business generally?

PW: I believe that all you can do is to lay out your business objectives, organisational philosophy, and corporate values in a very transparent manner and through your actions demonstrate the sincerity of your dealings. An attempt by business to launch a campaign to restore trust would very quickly be seen, I think, as propaganda and could quickly backfire. There is no silver bullet here. We’ve just got to go about our business while trying to up-weight our dialogue with as many stakeholders as possible.

PwC: Has the crisis affected your company’s access to capital?

PW: After the collapse of Lehman, many companies were wondering if they could fund themselves and which banks might survive long enough to help them with that process. We were very fortunate. We had a very good balance sheet, an outstanding finance team, and were able to float a bond issue to re-schedule debt. Since that time, the capital markets have definitely eased up. But which ever way you look at it, the cost of capital has definitely gone up. So we continue to try to level out our investment profile. Right now, we have a third of our business in North America and just less than a third in Europe. What I would like is to up-weight our presence in Asia and Latin America so that we have a more even spread and greater exposure to the emerging markets.

PwC: Did the economic crisis expose any gaps your management planning?

PW: I think we were reasonably well prepared. Of course, it’s difficult to develop mitigation plans in the abstract – it can become quite an academic exercise. That aside, the processes that we had set up previously allowed us to address with some alacrity many of the conditions that did arise. At the onset of the crisis, we put through some organisational changes, downsized our supply footprint, and did things of that nature pretty quickly. Other steps – such as finding ways to appeal to the more price conscious consumer – took a bit more time. But overall, I’m pleased with the speed we demonstrated. I would say that we had the landscape pretty well charted. We had ideas and were able to translate those ideas into plans very quickly.



PwC: In general, do you think that most managers tend to under-plan?

PW: I have no evidence to suggest that. To the contrary, I think there is often a danger of over-planning. One can devote a lot of resources to develop plans in the abstract that later fail to address the reality that actually unfolds. That’s why I prefer to have ideas about what to do rather than step-by-step plans. After you see the reality of what you’re facing, you can tailor your ideas accordingly.

PwC: How have you been able to maintain employee morale during the economic crisis?

PW: There are very few companies that have not experienced some fall off in employee motivation. It’s just not pleasant coming to work when someone thinks that they or a colleague might lose their job. Our approach has been to be as transparent and communicative as possible about the reality of the situation. Having agreed on the need to take costs out of the business, we moved quickly to let individuals know the status of their positions. And we tried to treat those who were going to be losing their jobs with the dignity that they deserve. That doesn’t necessarily make it any easier, but at least everyone understood the situation and felt that they would be treated fairly. So I would say empathy, communication, and speed are the keys. You can’t drag these things out. In hindsight we were very fortunate to have implemented prior to the start of the crisis a leadership development programme that touched about 800 people in our company. Having gone through that programme, our managers were better prepared to make the kinds of tough decisions that will help us emerge from these difficult times a stronger company.

PwC: What has your company been doing to address the challenges of climate change?

PW: I think all businesses face a threat from climate change and the threat comes in different guises. One guise is related to the concerns of the environmentally-conscious consumer – the “new age” consumer. Before they buy your products, these consumers want to satisfy themselves that your facilities are sufficiently environmentally friendly. In our case, we’ve embarked upon a programme of equipping one of our new distilleries with an absolutely state-of-the-art energy management system that will have a massive impact on emissions. It is, in fact, a closed-loop system by which energy is generated from spent grains originating in the distillation process itself. This allows the distillery to be virtually self-sustaining in terms of its energy requirements. It is complex technology but we’re very encouraged by its performance so far and look forward to seeing it become fully operational during 2010. As a consumer marketing company, our biggest concern is that consumers will choose not to buy our brands because we have not done the right thing. But having done the right thing, it’s invigorating to see how that can ignite the imagination of our employees and the communities in which we operate. It also affords us the opportunity to get out ahead of regulation.

PwC: Your company is involved in the Water for Life project in Africa. What purpose do corporate responsibility initiatives like that serve?

PW: Our corporate giving serves two purposes. First, it inspires pride in our organisation and allows us to be seen as a viable, responsible operator in the community. Secondly, our giving helps to develop our communities so that their citizens, in turn, can become customers for our products. In that way, corporate giving acts as a virtuous circle. In the case of Water for Life, there are many people around the world who lack reliable access to one of the life’s basic needs – clean water. We felt that helping to solve that problem is the right thing to do. Beyond the obvious benefits of health and sanitation, making clean water readily available also promotes education in that it is typically children who bear the burden of harvesting water. And if children are spending their day harvesting water, they’re not going to school. So Water for Life is one way we can help to create vibrant communities that have the capability to develop economically and, perhaps one day, consume our products.






PwC: Do leaders of global companies have certain traits in common?

PW: I think, first of all that it’s a privilege to be the CEO of a company such as Diageo. I remind myself of that very frequently, and I think many other CEOs feel the same way about their own companies. Certainly, operating in the commercial arena globally requires a degree of cultural fluency and a certain inquisitiveness. You need to be able to embrace new cultures and new ideas. But I think the one thing that most CEOs probably have in common is the recognition of how critical it is to recruit and motivate great people. The larger your operation, the more you rely on fantastic people to help run your organisation.


CEO perspectives on successInterview transcripts of Paul Walker, Chief Executive, The Sage Group plc





Paul Walker is the Deputy Chief Executive of The Sage Group plc

PwC: Sage as a business sits across multiple market sectors, so in many ways you’re a bellwether for how the economy is doing across a number of markets, and also particularly for the small/medium size enterprise [SME] market. Are you starting to see signs of recovery?

PW: We’re not seeing SMEs indicating that they’re ready to start investing again. As you probably know we have about six million customers across the globe. So, for example, our most recent research tells us that approximately 90% of them are indicating that they do not expect to have more employees in their business in a year’s time; they think it’s going to be flat so they’re not in recruitment mode. That would indicate that they’re not seeing any major change in market conditions. Secondly, some of our SMEs are saying there is a little more volume in the market, i.e., work to go and get, but it’s not got the same value that it used to have. More importantly, they’re not really prepared to take a risk in expanding their capacity to deal with perhaps just a little more volume – they are still very cautious.

PwC: And are you seeing much change across your different geographic markets?

PW: Yes, mixed views. We saw places like South Africa gently come down over the last year. They seem to be following the rest of the world now, as their boom has subsided. Germany seems a little bit more stable and arguably marginally more buoyant in terms of other European businesses we’re in. France came into the recession later. We didn’t see the impact on our French business, a decline in revenues, until around April of 2009. It had quite a good period up until then. Then it really became very difficult there but equally it seems to have come out a little bit quicker and is certainly ahead of our UK business which is still having a tough time. As we all know, Spain is having a very tough time too. And in North America, very similar to the UK, there are still tough market conditions and rising unemployment; we certainly haven’t seen any green shoots there.

PwC: More specifically in the UK, where you’re based, in which sectors do you expect to see green shoots?

PW: We cover a wide section of sectors. We haven’t been able to identify any sector that is showing more buoyancy than any other at the moment. You might argue that small retailers might start to see the first impact of consumers starting to spend again, whereas our customers in the construction industry, where we have quite a big position, they’re always going to lag a little bit and until there’s that confidence you’re not going to see people building. As yet, we haven’t seen noticeable change in any of the sectors.

PwC: During the economic crisis, consumer demand fell in a number of markets. You’re clearly primarily a business-to-business organisation, but what’s your view on whether consumer spending is going to return to previous levels or whether consumer behaviour will have altered on a longer term basis?

PW: We think consumer behaviour will have altered, certainly for the longer term, from what it was. It won’t return to the levels that we saw prior to this recession. The simple reason for that is that what we’ve been through, particularly with the banking crisis over the last two years, has inevitably caused people to be a lot more cautious, a lot of young people coming out of the universities are obviously struggling to get jobs and to be in employment and therefore that will create a more cautious person going forward. Secondly, I firmly believe that rising property equity was boosting consumer spending. Clearly, that has changed with the significant reduction in property prices and I suspect there’s further to go. When you mix all that together over the next five years we will not return to that boom time.


PwC: There’s been a lot of talk about SMEs struggling to get the right financing. What have you seen in the market? Is that an issue that you’ve observed affecting your customers and your own business?

PW: Again from our research, over 80% of SMEs surveyed recently said they continue to be very concerned about the ability to go into the credit markets and raise either additional working capital or indeed capital for longer term projects. Indeed, the accountants market, which we service, expressed a similar opinion. However, again, there are two sides to this: even though only 12% of the people who responded to this survey had actually applied for a bank loan 88% of these had been successful, with a good business plan, in either obtaining additional working capital or obtaining loans for expansion or longer term projects.

PwC: And are you seeing differences between markets at all?

PW: No, not really.

PwC: One of the things which we’re certainly hearing is that the issue is shifting from the availability to the cost. Are your clients starting to look at alternative means of financing? If so, what kind of options are they looking at?

PW: Let me answer that in two parts. First of all, for our SME customers there are not many options around finance. The old days of long-term leases, HP on assets, is something either they’re in or have done or would find more difficult, so a lot of them are restricted to the more traditional markets of banking. Even some of the venture capital availability for SMEs has probably disappeared so I don’t think they have the same options as the larger corporates when looking for finance. In terms of Sage, because of our extremely strong cash flow we’ve tended to be a business to rely on the traditional bank markets with five-year borrowing to service our acquisition programme. However, now that the banks have, in effect, specified three-year lending, we are looking at various options to raise capital instead of just being totally reliant on the bank market.

PwC: Do you believe the economic crisis has undermined the public’s trust in the motivations of the private sector? If you do, what kind of actions are you considering for your organisation?

PW: I think the diminishing public trust around the private sector is very much limited to the financial services industry. Arguably through this difficult time, certainly in our industry where we’ve supported our customers with vigour, I think they’ve actually seen us as a very important, trusted partner in terms of the support and the business support we’ve given them. So, again, talking to our SMEs, and I can only really comment about Sage and the SMEs, I don’t think there’s a mistrust in the broader private sector or entrepreneurship or capitalism. It’s very much around the banking sector, about the financial services and clearly the greed and the high-risk approach many of these bank boards took in terms of trying to grow their profits.

PwC: You talked about how you’ve positioned yourself as a trusted advisor to your clients through the crisis, can you give any specific examples of the kinds of things you’ve done?

PW: In any event we take 35,000 calls a day from our customers where we’re helping them with either technical or product or business issues; but where we’ve been able to help is by providing support and indeed software, for example, if they’ve got to make people redundant, if they’re trying to tighten up their financial controls, if they’re trying to have a better insight into their financial information, if they’re trying to establish the credit worthiness of their own customers. Support around those types of areas has made life easier for that SME community.

PwC: Do you think that your organisation is going to come out of the crisis stronger than it was before?

PW: I think we will come out as a stronger business. It’s allowed us to demonstrate even more clearly the value that we provide to our customer base and they pay for that, giving us a stronger position there. Also, recognising that we’ve had to take cost out of the business, this type of economic downturn is always an opportunity for people to perhaps take a much harder look at their own operational efficiency and where they could be leaner and take appropriate action. We’ve certainly done that at Sage. We come out as a business in a much stronger position.

Paul Walker, Chief Executive, The Sage Group plcContinued


PwC: You talked about having had to make some hard choices, what would you say some of the most significant changes, whether it’s at a strategy level, at a business model level or an organisational level, have you had to initiate in response to the crisis?

PW: Probably two things; first of all recognising that revenues weren’t going to be growing and that there was more likely to be a small decline. We didn’t want to see our profit margin decline, so we looked long and hard, particularly around back-office activities, at where we could use either additional technology or just be more efficient: we’ve significantly streamlined our back-office activities and as a result are much more efficient. In terms of strategy, over the years Sage has been quite an acquisitive company and we decided, going into this recession, that while we didn’t have a huge amount of debt compared to many people in the UK, we had to be very focused on cash generation and reducing our debt. We’ve done that over the last 15-18 months, and opted not to pursue an acquisition strategy during this difficult time, given the risk it would bring to the business. As a result of that, our shareholders certainly have valued our strategy of reducing debt down to a minimal level because they believe it will put us in a strong position to look at acquisition targets. When we see the economic upturn we’ll be in a very strong position to take advantage of that.

PwC: Do you have any sense of when you think you’re going to see that economic upturn?

PW: I’d be very surprised if we saw it in the next 12 months, and I can’t look beyond that at the moment.

PwC: Through the past 18 months, has your board become more engaged with different aspects of your business than it was before? What sort of changes have you seen in the board behaviour?

PW: It’s a good question. Because we went into this recession without the high risk debt that many businesses had and that many people had been encouraged to take on through banks and through boards, because we didn’t have that situation our board didn’t have the same sensitivity around a fairly debt-laden balance sheet. However, the board became much more engaged in discussing how we would maintain our profit margin and how we would run our business more efficiently in these times and were equally supportive of our strategy not to go out on the acquisition trail in the way that had been part of our profile for many years. So, there is no doubt, without giving too much confidential information away, that the board became much more engaged about the financials of the business, not the debt, but the financials of the business, and indeed the performance of the business.

PwC: You’ve always allowed your different businesses in different countries a lot of opportunity to localise and embedded themselves in the local culture. Thinking about what we’ve been through, has that shifted the balance at all between the local and the centre, and also how that impacts on the board’s behaviour?

PW: It’s a very interesting point. Our position has been very clear. We think being a highly decentralised business, and, as you quite rightly say, being very local where we empower a lot of the strategic thinking and the running of the business in those local markets, has been a huge advantage during this recession. It’s allowed us to be much more agile in taking cost out of those local markets – the local businesses have been able to look very specifically at their own operations to see where they can take cost out and where they need to continue to invest. That will probably have changed a bit from market to market, depending on where they are in the sector and, indeed, where the economic cycle was. So, rather than having a blanket approach we’ve been able to be extremely agile and flexible in looking at our cost structures on a very local basis. And, equally, we believe that having that local way of running a business will allow us to react to those local market conditions as and when we see an economic upturn. So, our decentralised approach has been a huge advantage.



PwC: You’ve been working to reduce your debt burden. Have capital constraints in any way hampered your growth?

PW: No, they haven’t because the decision to reduce our debt was clearly a reaction to the recession and to the market conditions. Probably it is just as relevant that some of the valuations of targets hadn’t mirrored where the actual economies were going. So, it wasn’t the absence of capital because we genuinely believed, given our track record, that if a very important strategic acquisition arrived on our doorstep we could have raised the cash from our shareholders. So, as bank refinancing comes up who knows? It’s probably affected our attitude more than our ability.

PwC: You noted that your decentralised approach has allowed you to be much more agile. Do you think what we’ve been through has exposed any gaps in risk management in either your company or in your industry?

PW: In the broader IT industry I don’t think this recession has highlighted additional risks. Arguably, the important steps made by the IT industry over the last 10 years in providing better technology, better services for corporates and SMEs, have probably helped us weather the recession, because businesses are generally are more efficient and have a much better insight into their data. I don’t think Sage had any major concerns about risk. As a decentralised business we’ve made sure that the controls around cash collection and ability to extend credit for customers have been suitably rigorous. None of our subsidiaries have the ability to go out and borrow. So, because of the nature of our business, we’ve seen heightened risk around our operations other than perhaps just cash collection and the ability to grant credit to customers.

PwC: Sage, like many other companies, had to make some redundancies through the recession. What factors guided your approach beyond looking to control costs?

PW: The total number of people who left Sage was probably about 1,000 out of a workforce of about 14,500, so a reasonable chunk, and it varied again from market to market. In the UK we have a varied workforce in terms of age and we needed to cut 200 jobs. We had sufficient applications for voluntary redundancy, so we didn’t have to go down that statutory redundancy programme with a lot of interviews and putting people at risk, and our employees in the UK really applauded the management team on how it dealt with that rather sensitive and difficult area.

North America was very different. There is significant rising unemployment there and we just said to some of our businesses, look, revenues are down, we’ve got to take cost out of the business and we are going to be taking out 500 jobs across what was a 4,500 people business. Interestingly, I got quite a few positive emails on this from both people who left the business and people who stayed, who all felt that we had communicated and handled it well and treated them fairly. So, broadly speaking, our employees, particularly because I think the communication was handled very well, have understood why it’s happened and have been quite complimentary about the way it’s been executed.

PwC: In many organisations, the past 18 months have been quite stressful and people are being asked to do more with less. What are you doing to make maintain morale and to motivate staff?

PW: You make a very good point about stress. It has been a difficult period and stress will rise as people worry about whether they’ll have a job or not. Being very open and trying to communicate on a regular basis even if you don’t know what all the facts are is critical. In the UK, we said, “Look, there are going to be some job losses but with what we know today, and the current financial state of the business is very healthy, we won’t have to make anymore unless the economy gets worse”. That was an important message − we’ve made the redundancies and, broadly speaking, people then can settle back down into their jobs. Senior management in the operating companies at Sage also found it a very stressful time because, in the main, they had never experienced a recession before or the need to take some of the actions that we’ve had to take over the last 18 months. As an executive team, we’ve had to communicate and guide and talk about how important leadership is in a recession and how communicating the direction of the business and where it is going is absolutely paramount to maintain confidence in it in these times. People have to come in full of spirit and vigour to make sure that the workforce sees that they have strong leadership.



PwC: What kind of models or changes do you think you’re going to need to put in place to get greater productivity in the future?

PW: There was a realisation, both in senior management teams and actually down in middle management as well, that what happens in a boom economy and a business that’s growing is that you inevitably get processes and procedures and people building their own little empires. We have started to challenge them about whether they need that process or procedure, that extra bureaucracy that creates jobs, saying can we not break down some of these areas and let’s be a little bit more agile, let’s be a little bit more entrepreneurial; and that can make us more efficient. And a lot of our employees have been up to that challenge and have probably quite enjoyed looking at how we can deliver a service to our customers in a more efficient way.

PwC: One of the big concerns we hear is the fear of more regulation and that this is a threat to the growth of businesses, and this isn’t just from a financial services companies. Do you think that new regulation is going to lead to over-regulation and how might that play out in your business?

PW: First of all, we operate in an unregulated market, fortunately, and I don’t see that changing. So, if I apply my mind to regulation from government and from governance and from the FSA around listed companies, there’s clearly been a review of governance around boards and we’ve seen some reports come out. I thought the good news was, when I read those reports and the new combined code, that they don’t seem to have over-reacted from a broader governance point of view around boards and businesses or, indeed, remuneration as they might have done. Clearly, after Enron and some of the huge issues in the US eight or nine years ago, Sarbanes-Oxley completely over-reacted to what had happened in the market and shut the door after the horse had gone. I get the impression, looking at some of the regulation around governance that’s been issued of late, that we don’t seem to have over-reacted this time. Where I think we really have to apply regulation, as I’m sure you hear all the time, is around the banks. That is clearly where we’ve got to get it right because it’s clear to everyone that a weak financial system will have a catastrophic effect on the economy.

PwC: And are there ways that you think businesses could actually help governments to make regulation smarter?

PW: Could businesses make regulation smarter? I’m trying to figure how that would work. I come from a sector where it’s difficult for me to really have an insight into that. In our industry I can’t really think of something that would be helpful. Clearly, and this is not about regulation, where we would like to see a lot of impetus is making sure that SMEs believe that they can get credit for a good business as and when they need it and that there’ll be the confidence to go out and do that. So, to some extent that is partly about regulation of the banks and making sure that they’re doing what they should be doing in any Western world economy.

PwC: One area, when we talk regulation, is the tax arena.

PW: Yes. We’ll see what happens, certainly from a UK perspective.

PwC: The Copenhagen Climate Summit is all over the news [in December 2009], what one thing could governments do to successfully address the risk of climate change?

PW: I don’t think there is one thing that they could do. The whole issue about climate change has to be tackled in numerous ways, whether it’s around air travel, whether it’s around just simple use of effective lighting which they’ve made some good progress on. So, I personally don’t think there’s one thing that would actually contribute to make a big change… unless it’s just increasing awareness, although they’ve done a pretty good job about that: most people are aware about trying to be careful about fuel and recycling products and making sure that they deal with their rubbish in a certain way. Compared to ten years ago, there’s been a massive mindset change.

PwC: I certainly see my behaviour changing in little ways.

PW: Yes, I agree. So, I suppose arguably the governments have done a good job in terms of awareness.



PwC: This is slightly more personal, but if you look back over the past 18 months, what have you personally found most challenging?

PW: What I’ve found most challenging is managing a team of people who are used to being in a growth business, used to being in a growth sector, and managing their desire in challenging their own cost base, so that they don’t damage the longer-term value of the business. That has really been my challenge, to persuade my colleagues and my executive team to balance that short-term vision of preserving margin and desire to cut costs to make sure we don’t damage the longer-term value of the business and its ability to grow when the economy comes back. That’s been a big challenge, particularly managing people who in the main have not been through a recession before.

PwC: Of the issues we talked about, are there areas that you’d be particularly interested to hear what your fellow CEOs would have to say?

PW: I’d be very interested in their views on regulation because it’s not something that I’m as close to. I’d be interested in their views about what they’re seeing in the current economic climate. Are they seeing things that may be different to me in the sectors they work in? Perhaps people are servicing the corporate market more than the SME market and starting to see people starting to become confident and starting to buy again. Maybe people in the retail sector are getting an interesting insight into what consumers are doing. So, they’d be the areas that I’d be interested in learning more about.

PwC: Finally, I’d like to open the floor for you to share anything else that this discussion may have prompted.

PW: I suppose one thing I would like to share is my disappointment with politicians during this period. Whilst one can argue that they were quite robust in making sure that some of these big financial institutions didn’t go bust, frankly I don’t think they had any choice in that. Where I’ve been disappointed is the way this recession has been politicised. Politicians have taken some actions and have done some things that were purely about politics and playing to the public around the banks and the economy and around tax. It hasn’t helped people, it hasn’t helped us move on from the recession and I’ve been very disappointed that they haven’t done what I think a lot of people in business and industry have done, which is say we’ve got a tough time, we’ve all got to be in this together, and work through it.

PwC: And your confidence in the future of Sage?

PW: Well, I remain very confident because we have a large SME population of six million customers; we know there’s a lot of pent-up demand for our products from that base and, indeed, new customers and when confidence returns to that SME community, when the economies pick up, we’ll see software growth come back into the sector. So, we remain very confident.





CEO perspectives on successInterview transcripts of Pawan Munjal, MD and CEO, Hero Honda Motors Ltd., India





Pawan Munjal is the Managing Director and CEO of Hero Honda Motors

PwC: Are you seeing signs of an economic recovery in your key markets?

PM: We are seeing strong recovery in the manufacturing and infrastructure sectors. Over the last six months, the performance of the mining, electricity, and construction industries has ranged from steady to robust. Growth in consumer durables has been extremely strong over the last few months. So yes, recovery has set in, and it seems sustainable. But the real strength of the recovery will be tested over the next few quarters when tighter financial and monetary conditions kick in.

PwC: How has India’s competitiveness in the world economy changed as a result of the economic crisis?

PM: I do not hold the view that India’s competitiveness in the world economy has changed. Yes – exports to key Western markets had slumped, but this is because of slowing demand. Exports decline, in fact, seem to have bottomed, November’s figures show that they started picking up again.

PwC: Are some sectors of the Indian economy stronger now as the result of the global financial crisis?

PM: I think the recession in the Western economies has prompted Indian IT companies to re-examine their global delivery model and address weaknesses. And as a result, a number of these companies have moved up the value chain. Similarly, in the wake of lower demand and thinner order books, companies in the automobile and engineering sectors have begun to look inwards with the intent of improving their process capabilities and cost base. Many of these have become leaner, meaner, and stronger companies as a result – and this is reflected in the latest quarterly results. While their topline may not have grown very quickly, the profitability of a number of Indian engineering and automobile firms has risen.

PwC: Are some sectors of the Indian economy now weaker as the result of the global financial crisis?

PM: India’s exports of textiles, leather, gems and jewellery, and petroleum products have been affected as a result of slowing demand in the West. Many of these are labour-intensive sectors, and it isn’t easy to move up the value chain – especially when markets are contracting. However, a number of larger garment players are now turning their attention to the domestic Indian market. The domestic market is quite large and demand is stable.

PwC: How might capital flows change as the result of the global financial crisis – and how might that affect your company’s own capital structure?

PM: There are conflicting views as to how much capital India will be able to attract in 2010, given that the markets have had a very strong run-up since March 2009. My own guess is that while capital flows will still be positive because of strong growth, investors will be concerned about expensive valuations. Hero Honda is a listed company, and given our performance, we are always on the radar of global portfolio investors. We will continue to attract their attention, but I don’t foresee any changes in our capital structure, irrespective of the ways in which capital markets behave, as we are a cash surplus and zero debt company.

PwC: Do you expect consumer spending to return to pre-crisis levels?

PM: The two-wheeler industry was certainly affected by India’s economic slowdown. But Hero Honda managed to buck the trend and posted strong growth – mostly because of our product mix and solid presence in rural areas, which have been relatively less affected by the global crisis. Additionally, our extensive pan-Indian network has also helped us tap emerging pockets of growth. Given the low levels of two-wheeler penetration in India – and with aspirations rising and incomes growing across the country – we don’t see the two-wheeler industry going into a period of decline anytime soon. As for purchasing behaviour, we expect to see consumption levels return to pre-crisis levels in the next one to two years.


PwC: From what region do you expect your strongest competition to come?

PM: India is one of the most competitive two-wheeler markets in the world. Because of our favourable demographics and the potential to achieve market depth, virtually every global player is in India or planning to establish a presence here. While domestic players will continue to perform, going forward I expect strong competition from multinational corporations.


PM: There are very clear structural shifts occurring in the Indian economy. In the past year, the government has stepped up investments in sectors like roads, coal, ports, and power in order to reduce India’s infrastructure deficit, which is considerable. These investments will continue over the next five to ten years as India seeks to improve the quality of its infrastructure services. In recent years, there have also been significant social sector and job creation initiatives targeted towards rural areas. Such investments will eventually lead to a virtuous circle of prosperity – which is in the interest of companies like Hero Honda.

PwC: Has the economic crisis undermined the public’s trust in the private sector?

PM: I agree with the view that the recent behaviour and actions of certain company managements has disillusioned the public. But just as a few rotten apples cannot ruin an entire harvest of apples, a few unethical acts cannot, and should not, tarnish the reputation of an entire industry. Hero Honda was built on the principle of trust. And across all categories of stakeholders, this trust has not once been shaken in our 25 year history. We adopted strong corporate governance practices before they were mandated by Indian law.

PwC: Have changes been made to your company as a consequence of the economic crisis?

PM: Even though we have not been significantly affected by the economic crisis, we have implemented new process efficiencies at our plants, rationalised practices along our supply chain, and reoriented marketing budgets in order to bring down costs. In our business approach, we always stress the importance of cost rationalisation – irrespective of market conditions. In lean times, cost rationalisation helps companies make normal profits. During a boom, the same cost rationalisation helps firms generate super-normal profits. So it is a win-win.

PwC: Has your company’s ability to respond to new opportunities been constrained by difficulties in raising capital?

PM: We do not face any constraints in raising capital. In any case, we are a debt-free and cash-rich company, and most expansions are funded through internal accruals. As regards our advertising and brand-building efforts, while our campaigns are continuously evolving in tune with customer needs, we also take care to build on our time-tested strengths.

PwC: Did the economic crisis reveal gaps in your company’s risk management practices?

PM: We have always been a financially conservative company, so we have not been exposed to any major risks during the crisis. Our treasury management is reasonably risk-free, and we have rarely, if ever, succumbed to the temptation to make a quick buck.

PwC: How have you been able to maintain staff morale during the economic crisis?

PM: Since we performed extremely well during the crisis, the stress level in our company has been much less than in many others. In any case, we routinely set strong productivity and efficiency targets in our offices and plants, and by and large, these targets are met. The fact that there was no job insecurity in our company during the crisis ensured that morale and motivation was not an issue for us.

Pawan Munjal, MD and CEO, Hero Honda Motors Ltd., IndiaContinued


PwC: What investments or reforms should the government focus on in order to improve India’s long-term global competitiveness?

PM: Wiping out the infrastructure deficit, executing social programs more effectively, cutting down red tape, and framing flexible labour policies should be among the government’s top priorities. Of these, the first has already started, even though there is some ways to go. Red tape is still a huge problem, although I think with e-governance projects now rolling out across different layers of government, there will eventually be a reduction in bureaucracy. However, what really worries me – and where I think India’s long-term competitiveness, particularly as a manufacturing destination might suffer – is the lack of labour reforms. India’s outdated labour laws – the ones that seek to protect existing jobs irrespective of market conditions – actually impede the creation of new jobs.

PwC: As a consequence of the financial crisis, do you expect governments to enact new regulations and might that lead to over-regulation?

PM: I think the issue is not whether there should be less regulation or more regulation. The central issue is the quality of regulation. In the infrastructure sector – especially roads and electricity – India needs a better quality of regulation. We also need stricter implementation of environmental laws. Bharat IV norms [vehicle emission standards] are kicking in from 2010, but, except in a few cities, how successful will authorities be in preventing pollution? I am not sure. Rules must be fair, consistent and balanced and apply to everyone. Applying these rules sensibly is the job of the regulator. Today, a battery of permissions is required to cut a tree. But if a road has been widened in a city, and trees are in the way, why should it take two years to get clearance to cut those trees?

Under-regulation is equally damaging. For example, there is much talk about traffic congestion in our cities. But even as the vehicle population has exploded, virtually no attempt has been made to control or regulate traffic movement. I think city administrations need to be given more teeth. Very often city administrations are subservient to state control. Similarly, there is often a conflict of regulatory interest between the state government and the Centre.

PwC: What is your company doing to address the risk of climate change?

PM: Hero Honda has continuously aspired to become one of India’s most environmentally-sustainable firms. Over the last few years, the company has progressively eliminated the use of a large number of harmful substances and materials, including asbestos. Today, every raw material and chemical we use is thoroughly evaluated for its environmental impact before it is introduced into a production process.

We have many ongoing environmental projects. For example, the green roof on our third Haridwar plant helps save a substantial amount of energy by moderating roof temperature as well as the temperature of surrounding areas. We have also established a “Green Vendor Development Program” to address the front-end of our supply chain and a “Green Dealer Development Program” for the back-end. In both of these programs, our partners are expected to manage their material resources, energy resources, and industrial wastes and effluents according to a number of pre-determined parameters. We are also evaluating various proposals for buying renewable energy from various sources. Hero Honda is a zero-discharge company and we recycle all water used in our manufacturing processes. In terms of rainwater harvesting, our techniques have been included in a best practices case study published by the Centre of Science and Environment. And in order to mitigate global warming, we are developing policies to offset our carbon footprint with carbon credits.




Pawan Munjal, MD and CEO, Hero Honda Motors Ltd., IndiaContinued

CEO perspectives on successInterview transcripts of Philip Cox, CEO, International Power plc





Philip Cox is the CEO of International Power

PwC: Have the last 12-18 months, been a tough personal challenge for you?

PC: Yes, without a doubt. As a CEO in a capital-intensive industry, dealing with a debt market in meltdown was probably issue number one - focusing on capital structure and how the business model would work in a totally different banking environment. We do follow the economic cycle in our market so if demand is down, the right reactions within the business as to what we can realistically and aggressively do to address efficiency improvements, cost improvements, are very important, without taking our foot off the pedal in terms of growth. We operate internationally, which includes developing markets and some of those have continued to grow well despite the downturn, so it’s not a ‘one size fits all’ market. Parts of our markets have been strong and continue to be whilst others have not been so strong.

PwC: Would you say that this financial crisis is different to previous ones that you might have encountered in the past?

PC: Yes, this financial crisis has been bigger and deeper.

PwC: More structural would you say?

PC: I think just the sheer size of the debt crisis in terms of the gap that was created, how much cash has gone in to support it, and therefore what it means in terms of the timeline to recover and pay for it is, effectively, a big unknown. But it just seems deeper and longer and far more serious than anything that we have seen before. The numbers say that just by themselves. They are colossal in scale.

PwC: So what’s your view about the recovery? Do you think there are signs of recovery on the way? What signs are you looking for?

PC: One of the things we look at, not surprisingly, is demand for power and demand for gas products. Both of those came down a lot last year. In our world, the developed world, a lot means 7%-8%. We’re not the best lead indicator of recovery because we’re one step away from the end customer in the business. Nevertheless, it seems that there are at least early signs of levelling out at a low level. That would be true for the US and the UK, two of our big developed market positions.

When we look at the developing world, such as the Middle East and Southeast Asian economies, for us it is not China or India but countries like Indonesia, Pakistan, Thailand, Vietnam and the Philippines that have grown and are continuing to grow. Even through the crisis they have grown at 5% or 6%. They may have been growing at 10%-12% before but they are relatively much less affected by the meltdown.

PwC: Are you anticipating major structural shifts in economies as they emerge from this recession? What I mean by that, would you expect greater investment in public priorities like energy infrastructure?

PC: Yes, but it is difficult to be precise. I think energy is right in the middle of two key debates, security of supply and climate change. There are two big drivers: one is what is the right energy mix or power mix in the light of security of supply, i.e. predominantly not being reliant on imported fuel, oil and gas in particular. And the other, linked to that, is what is the optimum mix of generation in terms of lower CO2 emissions and environmental emissions. That puts the power sector right in the middle of the whole political debate about if you’re going to spend money, where is it best allocated? It would make sense to incentivise power generation in terms of infrastructure investment. I think power is increasingly coming into that regulatory/investment mix.


PwC: Have your strategic priorities shifted as a result of the crisis and what might trigger future shifts as the recovery unfolds?

PC: I would say there has been no fundamental shift in policy. Maybe there has been some fine tuning but our overall strategy is still the same: power generation in both developed and developing economies. They are both good positions but for different reasons. New capacity in developing economies but also replacement of older, less efficient plant in the developed world. In terms of priorities, because power prices are at low levels in the merchant markets, the developed world predominantly, there is less focus there from a growth point of view when compared to the developing world. Growth for us is new build, new projects, new capacity, because that is what the markets need and there is still healthy demand for that. If anything, we have been more focused in developing economies where there are more opportunities, and you can get the projects financed.

If you did a deal in the more developed world, the likelihood is short term margins will be down. Banks don’t like this, as there is not enough security for their lending so this tends to reduce capacity. This limits how much, even if we wanted to, we could invest. Therefore it’s been more of a focus on the developing world and more of a focus on renewables in the developed one, because they fill the same sort of niche in the sense that they are heavily incentivised, supported by the regulatory framework, which is driving demand. A lot of economies want to increase their renewable footprint and again it comes back to the financing; because they are incentivised and supported by regulatory framework, they are able to get finance as well.

PwC: What about the geographic footprint itself? Have you looked at additional markets because you’ve been relatively, I wouldn’t say conservative, but consistent in a way…

PC: Not as a result of the economic crash. You’re right, we are conservative before we take a view because we are a long-term business and once you’ve got a power station on the ground you can’t do much to move it. You need 40 years to get payback, so we’re constantly looking at potential new markets, North Africa is an example along with Vietnam and the Philippines.

PwC: But that’s not a consequence of the crisis.

PC: It’s not a consequence. The drive would have been just as strong whether the crisis happened or not.

PwC: There’s been lots of talk about the economic crisis undermining public trust in the private sector. What’s your view on that? Is it something that you feel in your industry you’ve been affected by?

PC: No, I really don’t. Public trust has been heavily focused around banks and financial services. I think in the more old fashioned world of power generation there are very real assets. If you build something you know what it is. You know where you spend your money. You’ve got something very tangible. People look to us for skills in financing, and in operating and in project management. Therefore I haven’t felt any lack of trust.

In a sense the very strong drivers that we see in the developing world, particularly in economies which have been very government focused, government owned – where power generation has been a government function - are showing more and more openness, to attract foreign capital. It is very capital intensive and they need more financing. They need fresh resources to take away that 100% burden on the state, so in places like North Africa and Vietnam that is part of their strategy.

PwC: That’s interesting because I think there’s been quite a bit of talk as well about retrenching to more protectionist tendencies.

PC: No, we haven’t seen that. I think it is about skills and finance. Those are the two interests from their governments’ point of view.

Philip Cox, CEO, International Power plcContinued


PwC: Is your company doing anything specific to build trust with your stakeholders? For instance, what the public might think when looking at International Power from this perspective might be to make some connection between the amount of carbon that gets pumped into the atmosphere.

PC: Carbon is a good one. The public’s point of view is ‘you’re a big emitter of CO2. What are you doing about it? I don’t trust that you’re taking this seriously’. As we’re not a retailer or a brand that the end consumer is buying from, we are one step away in the consumer’s mind. But we do take it very seriously. Our approach to environmental management has three major building blocks – improved environmental performance at our existing assets, the building of high efficiency plants where we develop greenfield growth opportunities, and the expansion of our significant renewables portfolio. All these initiatives make very sound environmental and commercial sense.

PwC: But that’s more business as usual, a long term view, not necessarily exacerbated by the crisis.

PC: These issues are not new ones brought on by the crisis.

PwC: Thinking about changes you may have made to the organisation, has the crisis exposed any gap in your risk management? Have you used that opportunity to reassess some of the processes and approaches around your business?

PC: The crisis has not affected our risk management, fundamentally, in terms of how we trade and sell our output. From a financing perspective, we are taking a lower risk approach. We want to be absolutely sure our liquidity is particularly strong. If we’re looking to put debt on an asset, before the crunch we would have probably gone for the maximum. Now, while we would like to know what the maximum is, we probably won’t go there. We are also more conservative in terms of allocating capital, what we spend it on from an investment point of view, which means higher investment hurdles for our growth opportunities. Secondly, slightly away from the risk point of view, within the business we have much more of a focus on efficiency and cost reductions but there is a limit on this. A large part of our cost base is fixed because it’s capital and it’s interest and it’s depreciated, but we’ve done a lot more work on the variable cost.

The other focus is on people and is about performance management. More competitive times mean that we need to have narrow levels of tolerance between good, acceptable and lower performance. We are thinking more critically about how we differentiate, how we incentivise, how we reward top performers and how we identify areas where people who are good can improve further. A big drive for us this year is ‘how can we be better performance managers?’. That is not necessarily just downturn related, it’s more about where we are in the maturity of the company. The fact the market is much tougher has simply put that under the microscope.

PwC: Have you felt at all, the tension between, on the one hand, reassuring the market about the debt structure of the company, and at the same time, maintaining earnings?

PC: Yes, we’ve had to deal with the trade-off between debt security and growth. For example we sold our Czech business, but not because we needed to. We’d have been fine if we didn’t. We did it because it was a fantastic deal and great value for shareholders. The trade-off was the earnings from that business have gone but we can reinvest the capital.

PwC: So what have you learned through that process?

PC: We know that if push comes to shove, certainty of capital structure comes first. The market does not like losing earnings but it has no forgiveness whatsoever if you run out of cash. The very worst thing that we could have done is gone back to the market and said, ‘Sorry, we did not get our capital planning right and we’re out of cash. We didn’t sell this business when we could have but now we need a rights issue and we’re cutting the dividend.’ It was a straightforward decision.



PwC: Back to your points about communication and refocusing your approach to keeping talent. Have you communicated more to your employees to maintain morale in a condition of crisis? Has your approach to that slightly changed?

PC: If you tell people that you are going to concentrate more on talent and that you want to keep them, that’s easy to say but it doesn’t really mean anything. What we’ve done is in the background. We’ve done a lot more work on performance management. We’ve done a lot more work on what it means in terms of talent identification and management, which we’re going to roll out progressively, and more work on succession management. We haven’t been out there beating the drum, because that’s not our style and we’ll tell people when we’re ready. We’ve done this work with a wide group of people across all of the business – not just one or two people from HR. We’ve got people across all functions, across all regions, looking at performance management, talent management and succession so I think the message is out there in the organisation that there’s a lot more happening.

PwC: What behaviours have you focused on to drive strategy and execution?

PC: It has been a big push. How we do business is extremely important. And consciously I think one thing that I’ve been pushing much more over the last 12 to 18 months than I ever did before is delivery and bottom line. We’ve got values for a reason and how we operate, how we behave with each other, is absolutely key.

PwC: I think you’re selling yourself short here. …

PC: We try very hard to portray the kind of values and behaviours we want. I have a high degree of confidence that, overall, our teams operate in that way too. I think there are always areas where they don’t and where we can improve and I would definitely want to raise that level of consciousness. The companies that survive and do well are the ones that have got good, strong values which are consistently applied and people know what they are and have got a good expectation of how you’re supposed to operate and what the company stands for. We need to do more and push that adherence to values, as an overt part of performance management bonus allocations.

PwC: Has your board been generally more engaged with risk strategy and leadership development and again would you necessarily associate that with the crisis?

PC: We have been more focussed on capital structure and the debt market. There are very close lines of communication across the board in any case. We’ve also addressed leadership development specifically. The chairman’s been very engaged with this and on succession, people are happier. I think the board is reassured that there’s more going on but it has not been quite as overt as the capital market.

PwC: More regulations are coming and yet over the years CEOs tell us that regulation is a major threat to growth and competitiveness. Government ownership seems to be leading to even more negative perceptions. What is your view? Will new regulation lead to over-regulation?

PC: The worry for us is that regulation could kill open competitive markets. That is the risk for us in the power sector. We want regulation to be used sparingly. It is here as a matter of course and there is a lot of it. Our central theme is, don’t expand what we’ve got. The more you regulate and either incentivise or dis-incentivise certain parts of the power generation space, the more it ceases to be an open competitive market and you’ve lost a lot of the benefits.



PwC: So what part does business have to play to make these regulations smarter?

PC: It is incumbent on us to engage as much as we possibly can with government and with the civil service. The power sector does not speak with one voice, since it is a collection of individuals, all of whom have got a slightly different agenda. I have some sympathy for government and opposition when they say, ‘what does the industry want me to do here?’ and they get seven different replies.

PwC: And are you systematically engaging with government?

PC: Yes, we are. We have upped our game on this over the last two or three years and we do as much as we can. Wholesale power generation has been pretty low down on the radar screen of government. Three years ago they probably wouldn’t have known who International Power was. They might have done, but not as they would a Centrica or Scottish Power, somebody who’s in the retail public eye, in the voters’ eye. But now we are being much more systematic and heavy duty about engaging with government.

PwC: What is your company doing to address the challenge of climate change?

PC: We are driven by meeting power demand so it’s quite likely that our CO2 would go up year on year because we are expanding capacity. Our view and our CO2 policy is to generate as efficiently as possible but we’re still burning coal. If coal is the indigenous fuel in Indonesia, that is what Indonesia is going to use – but we’ll burn it with the most efficient turbine equipment possible. Renewables are also important. We had no wind capacity three years ago. We’ve now got over 1,200 megawatts which puts us in the top 10 producers worldwide for onshore wind. However, there is a lot more to be done on that. Efficiency and renewables are two thrusts, plus some specific small-scale CO2 reduction initiatives. In Australia, which is 95% coal, we’ve got the country’s largest carbon capture plant and we’re working with the government on test applications to see how CO2 and sulphur emissions can be reduced.

PwC: With governments battling now in Copenhagen, what do you expect to come out of that? What can government do to help on climate change?

PC: We are not expecting anything formally specific or binding from Copenhagen. There will be intent but nothing specific.





CEO perspectives on successInterview transcripts of SHEN Heting, Executive Director, President, Metallurgical Corporation of China Ltd





SHEN Heting is the Executive Director, President, Metallurgical Corporation of China Ltd

PwC: What’s your perspective on the global economy and its impact on MCC?

SH: In September 2009, MCC was successfully listed simultaneously in two capital markets. Our listing signals that a gradual recovery of both the Chinese and global economies is taking hold. In my personal view, the Chinese economy – aided by national stimulus policies focused on infrastructure projects and domestic consumption – is recovering steadily and has walked out the shadow of the global financial crisis. As for the world economy, I also feel it is improving in both Europe and the US. As a state-owned enterprise, MCC follows central government policies and guidance.

We believe the next few years will be very positive and I have full confidence in MCC – even though the Chinese government has announced that the steel, polycrystalline silicon, and wind-powered electricity generation industries will be restricted. The test for China now is to restructure its national economy by restructuring individual state-owned enterprises. That means that MCC will have to reshape its industrial base to match the national economic framework set by the central government. Despite this, I believe the future of MCC is good. Right now, MCC is mainly engaged in five business lines. The first is our engineering, procurement and construction business. With respect to that business, we will focus in the future on modernisation in order to support the manufacture of innovative, high quality products which we are now working with steel plants to develop. During the process of modernisation, we will also address issues of high energy consumption and environment protection.

Our second line of business is equipment fabrication, primarily for the steel industry. As the economy recovers and we readjust our industrial base in keeping with the national economic framework, we will develop a new generation of equipment to meet the emerging requirements of steel plants. Our third business is in harvesting natural resources. In the future, the volume of natural resources required by China will rise dramatically, and that provides us with a good foundation for further growth. MCC’s fourth and fifth lines of business are in real estate development and the provision of related services.

This is a very vibrant sector of our national economy. So all five of our businesses are developing well and I believe that the prospects for MCC are favourable.


PwC: What is your view about the importance of environmental protection?

SH: Environmental protection is both a global issue and one of growing concern within China. The Chinese central government is formulating very robust environmental protection requirements, and MCC actively provides environmental protection solutions to other Chinese enterprises. Nevertheless, in China, the concept of environmental protection and laws pertaining to it are still in their formative stage. And while many Chinese enterprises have environmental protection facilities, these facilities are often underutilised. During an inspection, environmental protection equipment may be turned on. Following an inspection, the equipment may be turned off to save costs. This is very common.

With regard to environmental protection, we at MCC see ourselves as having three core tasks. First, we must actively assume legal responsibility for protecting the environment. That means we take full responsible for harmful emissions. If something goes wrong, those incidents will be investigated and prosecuted according to law. Second, we must ensure that our environmental protection facilities are compliant with regulatory requirements. Third, we must work hard to improve areas of environmental protection where we haven’t done so well.

I’ve told officials at the National Development and Reform Commission and the Ministry of Environmental Protection that we assume our environmental protection responsibilities and will fulfil them. Take for example the project between MCC and Baosteel in Zhanjiang in Guangdong province where we have invested in state-of-the art environmental protection facilities. So we do take full legal, economic, and social responsibility to protect the environment, which – as a by-product – also benefits our public reputation. Compared to the US, Europe, Japan and other industrialised countries, China still has a long way to go in terms of environmental protection. Only through relevant laws and regulations established by government, and voluntary implementation by enterprises of those laws and regulations, will the goal of environmental protection be achieved.

PwC: What are the lessons learned from the global financial crisis?

SH: One of the main problems exposed is our lack of understanding of financial derivative products and what constitutes adequate resource reserves. So I believe first of all we should enhance our knowledge of the financial derivatives industry, for that was where the crisis began. If we know little or nothing about financial derivatives, how can we confront the present financial crisis? In addition, we’ve learned which conditions apply to China and which do not. With regard to this crisis, China is in a relatively advantageous position and I attribute that to China’s monetary policy. But there are also conditions in China that we must pay attention to. China’s economic development relies on exports and all over the world we’re regarded as a manufacturing country. However, the raw material we use is mostly supplied domestically, and the products we produce are sold relatively cheaply. In fact, the products we sell seldom reflect a high technical content or value-added. So in my opinion, China should reduce its volume of exports, but begin to manufacture products of higher quality and higher value-added. That would contribute substantially to China’s economic development. The core issue is how much innovation is contained in your products.


SHEN Heting, Executive Director, President, Metallurgical Corporation of China LtdContinued

PwC: Does MCC have any intentions to develop its five business lines overseas?

SH: IWe are considering transforming MCC into a world-class enterprise group or, as it is commonly referred to, a multi-national company. We now have about 36 offices around the world. But we need to increase our level of foreign investment. One of our goals is to expand our position in the construction steel sector, with Brazil, India, and the Middle East being our target markets. We would also like to enter the European and US markets. Frankly speaking, the technologies of European and American iron and steel companies may not be much stronger than ours.

Thirty years ago, China essentially traded its domestic steel market for technological know-how. Over time, we digested all that technical knowledge. Now, China commands the world’s best iron and steel technology. We are a dominant player in steel producing 700 million tons of a year. At this point, no country can compare with us in terms of steel production. So we must look outward and invest aboard. Currently, MCC has a total of six overseas projects. I’ve always felt that no matter what conditions prevail in the marketplace, the intrinsic value of our products is lasting. If there’s a downturn today, we will not sell products. But when the market recovers, we will always sell products. I think we still have to step up the development of our manufacturing capabilities. But that shouldn’t prevent us getting involved in promising projects abroad. For us, the key to wise foreign investment is good risk management practices. Risk management is now the primary task of state-owned enterprises.

PwC: What is MCC’s general approach to building strong internal controls?

SH: MCC’s culture is different from that of most other corporate groups. Our upper and lower channels communicate with one another very well, and this is a distinguishing feature of our culture. As a result, I think MCC’s internal controls are strong. Of course, we also work hard to continuously improve our management and control capability.

PwC: How is MCC’s corporate culture promulgated within its workforce?

SH: In 1998 when MCC was established, China’s economic development was still at a low level, as was its steel industry. In those initial years, our main concern was solving the problems of our branch companies and building workforce confidence in the enterprise as a whole. Building confidence is the first important step in building a strong enterprise culture. The second step involved incentives and rewards. In the early years, our people were hungry for reward, so we established long-term strategic targets and a good reward system that benefited everybody. That bolstered the confidence of our people even more. The third step involved the public listing of MCC. We prepared for our listing very carefully over a two year period in a way that reflected the cohesion of management and the strength of our internal controls. In finally becoming a publically listed company, our people recognised that MCC was no longer the enterprise it was previously. Instead, it was an international enterprise that operated on the basis of advanced management concepts, procedures, and systems.

PwC: In your view, will the global economic recovery be a ‘U-’, ‘V-’ or ‘W-shaped one?’

SH: I should first say that while I am an economist, I do not have special expertise in macro-economic issues. But based on my intuition, I expect the recovery of the global economy to follow a U-shape. People understand that they have spent more than they should have and will be reluctant to return to previous levels of consumption. On that basis, we shouldn’t expect a V-shaped recovery. Instead, the economy will recover gradually. It is very normal.




SHEN Heting, Executive Director, President, Metallurgical Corporation of China LtdContinued

CEO perspectives on successInterview transcripts of Tigran Nersisyan, President, Borodino Group





Tigran Nersisyan is the President of Borodino Group

PwC: Following the financial crisis, what sorts of problems is your company experiencing?

TN: We operate in a number of markets including Russia and the CIS countries [Commonwealth of Independent States]. We are also aggressively expanding into promising African markets. In terms of the problems we face, the major issue is lack of liquidity and free capital movement.

PwC: Have you seen any signs of economic stabilisation and recovery?

TN: No, not yet. It’s still very difficult to get access to capital and cash instruments.

PwC: What government action might lead to economic stabilisation and recovery?

TN: The most promising development is the low interest rate established by the FRS [Federal Reserve System] and the ECB [European Central Bank]. The Bank of Russia is also implementing the same policy and over the past month has lowered its interest rate two or three times. This is a positive factor for the capital market. Unfortunately, much of this newly available capital tends to flow to stock markets and only a small part to industry. As a consequence, there is the possibility of overheated stock markets and new speculative bubbles appearing. In the meantime, businesses face reduced margins and lack of working capital and this hinders their cash flow. Businesses are also constrained in their access to capital because the Bank of Russia puts limits on borrowing from abroad. So for the time being, we have increased liquidity in the stock markets but a lack of liquidity in the real sector.

PwC: Does the situation you describe present a significant stumbling block to economic recovery?

TN: It’s an obstacle to a rapid recovery. Nevertheless, a slow recovery – aided by greater liquidity – is underway. Hopefully, by the end of 2010 – as surplus liquidity in the stock markets begins to accumulate – cash will start to flow to the real sector. But this is going to take time.

PwC: Will the capital markets remain cautious even once the crisis is over?

TN: Absolutely.

PwC: Has the financial crisis resulted in any changes to fundamental business economics?

TN: The main problem is the difficulty of sustaining long-term investments. One of reasons the financial crisis occurred is that we have forgotten what profit means, loosing the profit philosophy as it is. Instead of thinking in terms of profitability, we think first in terms of revenue, DDS, or cash flow – and only then do we think of profit. As a result, business development is often funded not out of profits but through investments using debt or equity finance. And while it may take 10-12 years to pay back long-term investments, technology often becomes obsolete after three years. So investment in new technology may actual hinder profitability. So a question arises: How can companies shift away from development financed by investment to development financed by profit generation?

PwC: You say that technology rapidly becomes obsolescent. How does your company cope with that problem?

TN: The new technologies we implement are either purchased outright or developed in-house. This reduces our costs. For example, we are investing in African coal mines and, at the same time, acquiring coal mine engineering companies. We also try to limit our investments. We hope that a well-qualified and efficient team supported by the right technologies, combined with careful control over investment costs, will result in a profitable enterprise.


PwC: Following economic recovery, do you expect consumer demand to return to pre-crisis levels?

TN: The demand is likely to raise sharply.

The philosophy of saving embraced by our parents’ generation is dying out. As a result demand is likely to rise sharply. Consumer behaviour today is very different from what it was a decade ago. Today, regardless of their financial position, people want to spend money. Without loosing traditional Russian care for children’s and grandchildren’s future, today’s culture is no longer based though on saving to support them. Our mentality has changed and I’m in no position to say whether that’s for better or worse. We simply have not invented any other approach to driving economic development than that of growing consumer consumption.

PwC: Within Russia, what industries are likely to take priority in terms of economic development?

TN: I’m 90% sure that in Russia it will be telecommunications. While we tend to claim that we are a developed country, we still lag far behind Europe and America – maybe by 10-15 years. Also, the Russian government has announced plans to support the development of the automotive and nuclear energy industries. With the rise of innovative nuclear and hydrogen-based energy generation, natural gas consumption will decline.

PwC: Has the financial crisis brought to light problems in Russia’s largely commodity-based economy?

TN: In Russia, the crisis immediately made it clear where we had been heading for many years. Our business group consists of companies located in Europe, Asia and, of course, Russia. No other country has been as deeply affected by the crisis as Russia. Here, everything came to a halt thus demonstrating that our economy had been focused totally on the oil and energy sectors. When consumption slumped by 30-40 percent, our economy spiralled. This is why all funding today, as far as I know, is going to develop the high technology and telecommunication sectors. Hopefully, we will be able to turn our economy around and develop 21st century technologies so we won’t have to import them. So far, Russia has failed to achieve this, under both planned and market economies.


TN: I, for one, do not share that view. Even before the crisis there were companies that created Ponzi schemes and sold mystical housing. And there were banks that took deposits and then failed to repay them. There will always be such companies, crisis or no crisis. So this negative perception should not be extended to all businesses. A large number of companies – including ours – had very honest talks with banks to explain that we were ready to account for every single ruble of borrowed money. And we have paid interest strictly on time, no matter what it cost. We did our best to fulfil all our obligations to investors and banks. We had offers to sell our debt for half price. Now, we have a bond loan currently valued at 98%. There are good and bad people – and with the onset of the crisis, many companies thought they could go back on their obligations. But the market soon made it clear that obligations should be met. A company’s prospects hinge only on its reputation and the integrity of its people. One can cheat once, but you won’t get away with it again. There were issues with rating agencies when companies with high ratings went under, but this does not mean that the very system of ratings and audit has lost its way. There is simply no better model on offer. And we have to try using the existing one.

Tigran Nersisyan, President, Borodino GroupContinued


PwC: How did the crisis affect your management of the group and its long-term strategy?

TN: As a result of the crisis, we’ve learned to team up as a family might do during hard times. Now, we meet more often to discuss our problems and share concerns. Previously, our group managers preferred not to talk about their business problems or even hid them. Now, we get together to analyse our weaknesses and identify ways to fix them. Also, we have started calculating our operating costs and focusing on ways to reduce them. And we have come to value people who think out-of-the-box. All this is producing results; for the fourth consecutive month, the company has shown growth and our profit has doubled.

PwC: Have these changes been accompanied by modifications in the group’s organisational structure?

TN: Yes, they have. We have streamlined management of our business units and each has been set the task of increasing profitability and cutting operating costs.

PwC: Do you think these sorts of changes will be sustained once the crisis is over?

TN: Yes. Our cost reduction effort represents a significant achievement for us and we are going to continue to work along these lines. I am aware that during the crisis, many companies first focused on cutting salaries. But we focused on reducing indirect costs – in particular, we cut our marketing spend. We concluded that between 30-60 percent of our advertising budgets failed to provide us with any direct benefit because we had not conducted robust enough budget estimates and budget analysis. We didn’t consider the actual efficiency of our spending. So, the crisis has its silver lining in the sense that we were forced to identify these budgetary “leaks” and bring them under control. Going forward, we’re going to scale up our new expertise and train managers at all levels to apply it.

PwC: So you have learned some valuable lessons from the financial crisis?

TN: Absolutely, the crisis has been a learning experience. It’s also brought us back to earth and ended our complacency. Take myself, for example. I used to come to the office at 11:00am. Now I’m back in form. I arrive at the office at 9:00 am and leave at midnight. The crisis does not allow me to relax even for a second.

PwC: And the crisis has re-engaged top management?

TN: Sure. We are much more actively involved. Top management has taken responsibility for the most complex areas of the business. For example, we conduct business in Mongolia building and selling housing. But because Mongolia has no strict requirements for documentation of business activities, we chose to prepare only rudimentary documentation. But today we document projects there in detail – every square meter used and every rouble earned. And we have implemented tight controls over the whole process, from logistics to sales. I believe that one of the factors underlying the crisis was loss of control.

PwC: Has the financial crisis had particular impacts on specific sectors of your business group?

TN: In terms of sector-specific impacts, I’d point to heavy engineering and machine building. Before the start of the crisis, customers such as major aircraft, helicopter, and space aviation manufacturers used to order ready-made machines from us. Recently, these same companies have started to bring us certain key components and asked us if we could incorporate their design into our own products. As a result, these companies no longer need highly compensated technical staff because we take care of the design customization process from start to finish. In this way, we are able to offer our clients a comprehensive service and reduce their design and specification costs.



PwC: So you have extended your range of customer services?

TN: Absolutely. Now when we take part in tenders, we are treated differently because we do not sell just a machine or an engine, but are able to customise our products to suit a particular client. Of course, in doing this we incur additional costs. But customers are happy to cover those costs because of the significant saving they incur. This results in an interesting and fruitful cooperation with our customers. In our food operations, 98 percent of our goods are produced on a full-cycle basis from raw materials to finished goods. Before the crisis, that figure was 75-76 percent. So, we now control the whole value chain from raw materials to sales, and this provides us with a significant competitive advantage. In the construction business that we are actively developing, we build business-class housing in the Kaluga Region that costs RUB 25,000 per square metre. I’ve read in a newspaper that according to the Ministry of Economic Development, low-income housing typically costs RUB 25,000 per sq metre. So, we can now build business-class housing for the same price. This is all the result of the crisis, which has focused the group on sharpening the way it thinks, calculates, and designs. Before the crisis, our project budgets provided for 25 percent more reinforcing steel and concrete because we hedged against project design mistakes. Now, we have switched to CAD processes and implemented new technologies including ERP – and with the improved efficiency that this provides we have managed to reduce project planning timelines and lower costs and material consumption. We keep saying that the Russian economy is non-competitive due to it use of technologies, materials, and components that have to be imported from Europe and, in the process, incur punitive exchange rates. But once we get our cost base right, we believe that we can help turn that situation around.

PwC: Have you managed to continue investing regardless of the difficulties?

TN: The problem with finance is its 22-25 percent interest rate. Regardless of what newspapers say about state-owned banks, they have not reduced their interest rates. Even with a 16 percent rate, bank lending fees can amount to 6-7 percent of the principal. Thus, the overall cost remains 22-23 percent. But we are managing to invest out of own capital. This year, we have carried out analyses of our various projects and R&D facilities and now have figures that prove our capability to develop and produce new commercial technologies. By October 2009, we had contracts signed with companies in Central Asia, Turkmenistan, Kyrgyzstan, and South-East Asia and North Africa that are willing to buy our technologies. If we hadn’t worked hard all year, we wouldn’t have had these contracts. And we invested in these new technologies. As to our construction business, it continues, but at a much slower pace due to lack of liquidity and current low purchasing power of the population. Likewise, our food business has neither grown nor shrunk.

PwC: How did the financial crisis effect your workforce requirements?

TN: I can’t tell you that no Russian company laid off qualified staff. The same is true of our company. But we did our best to retain our specialists, who are always in demand. To be honest, just as before the crisis, we still face a shortage of highly trained workers, such as IT specialists, software developers, and experienced marketing staff. Specialists of all kinds are in great demand. In manufacturing the situation is worse still because we are implementing new generation technologies that require highly qualified employees. To that point, we’ve established close ties with institutions of higher education and sponsor vocational colleges so that we can develop a pipeline of talent. And in an effort to retain key staff we fund employees’ education and training. However, we still face major HR issues. I spend about 40 percent of my time on HR policy issues both locally and overseas. It’s impossible to reduce costs or material consumption without new technologies and these new technologies require highly qualified employees who are hard to come by.



PwC: How does your company maintain workforce morale and engagement?

TN: In our group of companies we encourage independent thinking. We do not tell people what to do, nor do we proceed strictly by job descriptions. On the one hand, this makes the act of managing more challenging, but on the other, it also makes it more exciting. So, we encourage people to act independently and get results. We want results, and the pursuit of results is what motivates our people. Ambitious people who wish to make good soon find their way. We have many bright young people, because we require youthful energy and enthusiasm. But our manager ranks are comprised of many different age groups. The largest proportion of managers over the age of 55 is found in our construction and project design entities. Operation managers are largely people in their 20s or 30s. People who run our production facilities tend to be in their 30s and 40s. Our system is well thought-out and accommodates a good mix of experienced and younger staff.

PwC: What sort of impact will the financial crisis have on regulatory policy?

TN: In 2003, I received my PhD degree for a dissertation on state regulation of the consumer market. I chose this subject because it was very topical. I believe that regulation should be subtle and well-balanced because even slight changes in regulatory policies can affect the economy and society at large. At the start of the financial crisis, we didn’t expect our bank r egulator – the Bank of Russia – to act as competently as it did. But from October 2008, banking regulation has been very efficient and without drastic U-turns. And it was this consistent bank sector regulation that has stabilised the situation in manufacturing and allowed us to ride out the hard times when banks were demanding repayment of all loans – even those not yet due – and raising interest rates. So the bank sector regulators acted wisely. But otherwise, I believe the government should not be involved in regulating the economy. However, today the government – in the form of state-owned banks and government corporations – is the central player in the Russian economy. So this is a situation where the government has essentially ceased to be a regulator and act instead as a market player – which is a far cry from how a market economy should operate. But what gives us hope is the president’s pledge that the government will soon withdraw from the major banks, and government corporations will be restructured along market economy lines.

PwC: Should the private sector cooperate with governments in regional development?

TN: Business can and should help, but only to an extent. Since 1995, we have built three plants in Medyin, which is in the Kaluga region. We faced an acute shortage of human resources and so decided to build housing to accommodate specialists that we hired in Siberia. We ended up investing in the construction of manufacturing plants, housing, and related infrastructure. In my opinion, this is the best sort of cooperation between business and the government, unlike, for example, paying fees to a local regional authority. That is money down the drain. That just makes local authorities complacent. I believe that the system should work like this: If you employ people at your production facilities, you should invest in infrastructure development, housing, and amenities such as kindergartens and schools. You should also ensure that your workforce is adequately compensated.

PwC: What kinds of regulation might avert another financial crisis?

TN: I believe that all restrictions on capital movement should be lifted and customs barriers lowered. These are a serious hindrance. Regulation must be present, but regulation should create incentives to encourage certain business behaviours, such as those related to corporate social responsibility. Regulation should be incentive-based. Business should be encouraged to invest in social assets and environmental protection. Summing it all up, I’d say that regulation should based on clear and effective laws that are free of judicial corruption



PwC: What, if anything, is your company doing to help mitigate the effects of climate change?

TN: We have lost markets due to climate change. Before 1997, we had a big share of the Moscow soft drink market, especially during the warm season from April to July. We used to have huge sales over this period. But, for the last ten years Moscow has had very rainy summers and this has affected out soft drink business. As to our response to climate change, we haven’t yet addressed this issue in Russia and are not likely to do so in the next decade. We face so many other issues that climate change is not a priority.





ResultSmarter growth

RethinkVolatility

Reshape Strategy

13th Annual Global CEO Survey Setting a smarter course for growthQ&A: Telling the CEO survey story

19910_CEO_Q&A_Print_v1_SB1901.indd 1 19/1/2010 15:26:53

13th Annual Global CEO Survey – Q&A: Telling the CEO survey story2

ContentsQ1: How do CEOs view the global economic crisis? 3

Q2: How bad did conditions get? 3

Q3: Has business turned around? 4

Q4: Which CEOs are the most confident? 4

Q5: Is the news all good? 5

Q6: How can CEOs be more confident and more worried at the same time? 5

Q7: Isn’t over-regulation always a concern for CEOs? 6

Q8: Was there anything surprising about what CEOs weren’t worried about? 7

Q9: How are CEOs positioning to grow in an environment characterised by 7 more regulation and more difficult access to capital?

Q10: Is that what you mean by a ‘smarter course for growth’? 8

Q11: Does that mean companies are hiring again? 8

Q12: If employment picks up, that bodes well for household consumption. 9 Do CEOs expect consumer spending to return?

Q13: Were reputations damaged by the crisis? 10

Q14: Does a climate-change strategy affect a company’s reputation? 10

Q15: What are the major lessons learned from the crisis? 11

IntroductionFew, if any, business leaders will forget the past 18 months. The global recession was the most serious many had ever experienced. Setting a smarter course for growth, the PricewaterhouseCoopers 13th Annual Global CEO Survey, looks at what measures CEOs are taking in response to recession, how they view the post-crisis business environment and what changes they are making to adapt their organisations. We surveyed 1,198 business leaders from around the globe from September to November 2009 and conducted further in-depth interviews with 27 CEOs.

What did we learn? Global business leaders had to make dramatic changes to their organisations, including reducing headcount, selling off assets and preserving cash. That painful experience has led many CEOs to rethink their approach to risk in an increasingly volatile world. It’s abundantly clear how quickly a contagion can spread, and how damaging it can be. CEOs now know they need to plan for volatility, so they can see risks coming, sidestep them, and position themselves for what follows.

To do that, CEOs have begun to reshape not only their strategies, but also their capabilities. It takes strategic flexibility to address risk at a deeper level. And it takes organisational agility to respond to volatility. That doesn’t mean CEOs will become risk averse; rather, they may become more deliberate in examining alternatives, formulating a Plan B, and ensuring they can execute on it. The result, we believe, will be a smarter course for growth, a resilient path that will produce a sustainable long-term upside for organisations – along with their shareholders, employees, customers and communities – while accounting for a range of economic, social and environmental forces that comprise both threats and opportunities.

This document highlights key findings in the 2010 CEO Survey. Please go to www.pwc.com/ceosurvey to read the full report, the in-depth CEO story (which summarises CEO views in the words of those we spoke to), the visual story (which graphically illustrates our detailed findings) and other online tools.



Q1: How do CEOs view the global economic crisis? The crisis will serve as a defining event for many CEOs. The recession in developed nations was the worst many had ever experienced. Cash preservation was paramount as assets were divested and jobs cut. Restrained consumer spending, rising unemployment, and regulatory reforms remain significant concerns. Business leaders are emerging with a healthy respect for risk, volatility and flexibility and a different view of the growth imperative.

The big learning point we are all looking for is one that has to do with organisational agility. In response to the economic crisis, most businesses took action appropriate to a more difficult trading environment. But the real trick is how to get the balance right between hunkering down through tough times and investing in a way that will prepare you to make the most of opportunities that begin to materialise, post-recession. That’s the big lesson – getting the balance right and being sufficiently agile to take advantage of chances for growth and expansion.

Dr. Paul Reynolds, CEO, Telecom Corporation of New Zealand Limited, New Zealand

Q2

More cost-cutting to come in the year ahead

Implemented a cost-reductioninitiative


0%

Outsourced a businessprocess or function



process or function





88

69

35

34

35

46

23

17

20

30

18

14

17

20

Q: Which, if any, of the following restructuring activities have you initiated in the past 12 months, or do you plan to initiate in the coming 12 months? Base: All respondents (1,198). Response of ‘None of the above’ and ‘Don’t know/refused’ excluded


People are thinking more about cash flow. If it lasts for 10 years, I have to take equipment for 10 years. This means that I do not spend 100% of my capital needs now; it means that I spend 50% now and 50% in 10 years’ time. This is affecting the strategy on all of our products.

Mikael Mäkinen, President and CEO, Cargotec, Finland

Q2: How bad did conditions get?

It was worse than many expected. In last year’s survey, conducted at the height of the financial crisis near the end of 2008, 26% of CEOS told us they expected headcount reductions over the next 12 months. Over the past year, just under half of CEOs reported job cuts. Programmes were often conducted at an accelerated pace; no industry was immune. Cost-cutting initiatives were taken by 88% of CEOs over the past year and 20% divested a business. Capital positions became more conservative over the course of the year. Many described refinancing to push out maturities, reduced borrowing and other measures to work down debt in anticipation of leaner times.



Q4: Which CEOs are the most confident?This year, where a CEO is based, and where the company has operations, has a big influence on confidence. Even before the crisis, it was no secret that emerging markets were of vital importance for many CEOs, regardless of where they were based. Now, CEOs’ mindsets are also attuned to the uneven rates of economic recovery found around the world. So, for example, CEOs based in Latin America and Asia are 11 percentage points more likely to be confident about their near-term revenue growth than those in North America and 20 percentage points more confident than their Western European peers. In fact, CEOs are more confident of their companies’ ability to generate revenue than they are of recoveries in their nations’ economies. It suggests they believe companies are strategically positioned to capture competitive gains in their markets ahead of a broad-based improvement in demand.

Q3: Has business turned around?There’s a definite sense that the worst is over. This year, 31% of CEOs are ‘very confident’ about achieving revenue growth over the next 12 months, a significant increase from last year. Over the longer-term – a three-year period – CEOs are about as confident of their revenue prospects as they have ever been in our survey.

We know there’s a lot of pent-up demand for our products from [small- to medium-size enterprises] and, indeed, new customers and when confidence returns to that SME community, when the economies pick up, we’ll see software growth come back into the sector. So, we remain very confident

Paul Walker, Chief Executive, The Sage Group plc, UK

Q3


0

10

20

30

40

50

60

% S

tatin

g ve

ry c

onfid

ent

20102009200820072005 200620042003


3-year prospects





Q4


0

20

40

60

80

100

% E

cono

mic

rec

over

y ex

pec

ted

LatinAmerica

AfricaMiddleEast

AsiaPacific

NorthAmerica

CEEWesternEurope

5 313

2718 13 16

18 18

21

26

21 30 22

36 35

33

24

2930

28

37 38

29 15

2918 31

In 2011 In the second half of 2010 In the first half of 2010 Already recovered


Q: When do you expect recovery to set in for your nations economy? Base: 28-442


Production but also the consumption of products is shifting to Asia and South America. It would have taken longer without this event, but now it will happen more quickly.

Mikael Mäkinen, President and CEO, Cargotec, Finland



Q5: Is the news all good? Definitely not. CEOs concerns are up across a range of threats to business growth in our survey. A protracted global recession remains their biggest worry, closely followed by concerns about over-regulation. Concerns over protectionist tendencies are also up ten percentage points on last year’s survey. CEOs in Latin America, Central and Eastern Europe, and Asia are more likely to be concerned about threats centred on globalisation, including exchange rate volatility, protectionism and macro-economic imbalances.

Q5


0%

2010

2009

Protracted globalrecession*

Over-regulation

Decline in concern from2009 – 2010

Decline in concern from 2009 – 2010


Lack of stability incapital markets*

Protectionist tendencies ofnational governments

Inflation


Energy costs


Climate change

Scarcity of natural resources(e.g. raw materials, water, energy)



Inadequacy of basic infrastructure(e.g. electricity, water, transport)

Terrorism




3 421219 4329 23426

31 18371327 273312

7 3020 4232 16439

33 9302730 173220

39 12371338 112921

37 17311531 233114

30 17331929 193517

37 13331634 35 1615

34 7194032 122530

31 9213832 122331

31 12 65038 26 926

40 26 72640 25 1024

36 18 73935 22 1131

32 14 74735 21 1033



I’ve never seen so little consensus amongst the key industry players – whose decisions will determine what kind of recovery we’re going to have – about the direction they’re taking for the next year. Are they going to invest? Are they going to lay off more people? Just as there has been no consensus about the shape of the recovery, there has been no consensus about how confident businesses feel.

Ian Bremmer, President, Eurasia Group, US

Q6: How can CEOs be more confident and more worried at the same time?

Perhaps because they are addressing their risk management processes, and making the requisite changes to their strategies and capabilities. Survey responses this year signal that risk management is becoming a permanent element of the strategic planning process. More CEOs intend to change their risk management process than any other element of their strategy, organisation or business model. And more boards are increasing their engagement with assessing strategic risk than any other item on the boardroom agenda. For many, approaches to risk are moving beyond controls-based risk management to corporate strategy and financial management.

We did not realise that the damage was going to be so great. What inspires me most is that an enterprise like ours cannot go through such difficulties by its own efforts or by using a simple form of protection. Therefore, we are paying more attention to our internal controls and management mechanisms.

KONG Dong, Chairman, Air China Ltd, China



Q7: Isn’t over-regulation always a concern for CEOs? It is and our surveys have consistently reflected that. CEOs expect more changes to the regulatory environment are still to come, but this year’s survey revealed both optimism and pessimism about those reforms. On the one hand, a majority of CEOs now think businesses and governments successfully can mitigate systemic risk. This is new and possibly the result of the measures governments took to stabilise the banking sector and a recognition that some issues are beyond the scope of a company to mitigate by itself. CEOs also favour better enforcement over new regulation in a number of areas, including financial sector stability.

At the same time, there is an increase in the negative perceptions of the success of government intervention with regards to a wide range of issues. Areas where CEOs are more clearly opposed to new regulations – in innovation, foreign investment and access to capital –

Q6


0%






Capital structure



43 4115

18 3348

295021

23 2749

Responding to changing consumer purchasing behaviours

17 2655

33 2343

37 1744

42 1641




Now, more than ever, the company and its board have become more sophisticated in our analysis of risk. It’s an agenda item at all of our board meetings. And we continue not only to get better at quantifying risk, but also in building right the kind of culture that can appropriately manage risk over the short- and long-term.

Angela F. Braly, President and CEO, WellPoint Inc., US

There’s a tendency by government to tar every company with the same brush. Certain regulatory reforms useful and necessary for financial companies – new approaches to risk, remuneration, or corporate governance – would clearly be intrusive if applied indiscriminately to business as a whole.

Graham Mackay, Chief Executive, SABMiller plc, UK

are likely areas where more regulation could harm recoveries underway. CEOs also worry that regulatory approaches designed to deal with perceived problems in the financial sector will wend their way through the entire economy.

Q7


0%

Brazil

Korea

China & Hong Kong

Japan

Italy

Global

Spain

Mexico

Russia

Canada

India

Germany

France

Australia

Netherlands

UK

US

0

2

3

7

7

11

13

30

13

13

13

13

15

37

15

16

27

Q: Thinking about the role of Government in the country in which you operate, how much do you agree or disagree with the following statements? % who ‘agree’ or ‘strongly agree’ with the statement, ‘The government has reduced the regulatory burden on corporations’. Base: All respondents (30-1,198).

Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Note: Respondents who ‘agree’ or ‘strongly agree’



Q8: Was there anything surprising about what CEOs weren’t worried about?

In the middle of a financial crisis and following billion-dollar bank bailouts, it may come as a surprise that an inability to finance growth did not score among the top-ten concerns for CEOs globally. But fund-raising pressures typically lag a recovery and capital spending remains subdued in most economies. Moreover, many companies have completed a round of cost cuts and moved to refinance at low interest rates. Currently, companies are relying heavily on internally-generated cash flow to finance growth.

Look ahead, however, and financing could become a more pressing issue. If liquidity was ‘last year’s problem’, the survey responses suggest that access to capital is a strong contender for ‘next year’s problem’ – meaning it will rise in importance as growth spreads in 2010 and beyond, and companies seek more funds to invest. Over half of CEOs expect access to bank financing and credit will become more difficult after the recovery sets in. Forty-five percent anticipate more difficult access to capital through the debt markets. CEOs are striving to keep debt low and liquidity cushions ample: 61% are expecting to change capital structures as a result of the crisis.

Q8


0%

Compliance and reporting to meet

capital markets requirements


Access to capital from alternative investors (e.g. private equity or

sovereign wealth funds)





10 15392

16 10415

17 7384

19 5324

20 7

28

26

29

35

32303




To the extent that changes in the capital markets dictate a more conservative approach to one’s balance sheets, I would say that every business in the world has been affected. We plan to run our gearing at a significantly lower level than we have traditionally. That is not to say that we ran a high-risk strategy previously. But we are feeling as a result of market uncertainties that it is better to be more conservative going forward.

Andrew Ferrier, CEO, Fonterra Co-operative Group, New Zealand

Q9: How are CEOs positioning to grow in an environment characterised by more regulation and more difficult access to capital?

They are focusing on the markets they know best and being more cautious. The largest proportion of CEOs (38%) is positioning companies for better penetration of their existing markets. Such an approach is expected when capital and resources are scarce and business managers have fewer margins for error. But they’re being careful about rationalising their expectations for growth in different markets as countries emerge from the crisis. And they’re being careful about risk management and financial health, so they can weather aftershocks from the crisis. They’re watching their cost structures carefully, but still investing in areas they deem vital. Really, it’s an extension of the balancing act between short-term necessities and long-term factors that we found in last year’s survey.

Q9


15

14

11

0%

20











Q11: Does that mean companies are hiring again?Absolutely. Our survey shows that more companies will be adding to their workforces (39%) than will be cutting (25%) over the next 12 months. Companies in India, China and Brazil are leading in increasing jobs. CEOs are concerned about their governments’ abilities to provide a skilled workforce, and there is emerging evidence of a growing ‘talent gap’ in a number of regions – where demand for key skills over the coming decade will exceed the available supply. That’s why talent and leadership development are so important.

Q10: Is that what you mean by a ‘smarter course for growth’? That’s part of it. The smarter course for growth involves a better understanding of the consequences of risk, as we’ve talked about, and rationalising growth and investment plans to fit the smarter course. CEOs need to make tough choices about investments in an environment of tighter capital. More than three-quarters of CEOs plan more cost-cutting initiatives in the coming three years. Yet, while only 40% expect to increase their capital investments (suggesting there’s still over-capacity in many sectors), there are some areas that CEOs are not paring back, notably, leadership and talent development.

We did our best to retain our specialists, who are always in demand. To be honest, just as before the crisis, we still face a shortage of highly trained workers, such as IT specialists, software developers, and experienced marketing staff. Specialists of all kinds are in great demand. In manufacturing the situation is worse still because we are implementing new generation technologies that require highly qualified employees.

Tigran Nersisyan, President, Borodino Group, Russian Federation

Q10


0%


No change



Capital investments





3741

21473

3

6

6

6

18461

1

16431

16

17

27

28

32

32412

12 7 42353

16 8 39323




What you do in this environment is add to your talent base and reposition your talent to be more suited for the challenges that are ahead. Even though we’ve had a nine to 10 percent reduction in terms of staffing, we’ve also had increases to invest in those markets and resources that are necessary to be competitive.

Michael I. Roth, Chairman and CEO, Interpublic Group, US



Q12: If employment picks up, that bodes well for household consumption. Do CEOs expect consumer spending to return?

Important shifts in consumer behaviours may be on their way: 81% of CEOs expect some change to consumer behaviour and almost half cite a permanent shift in consumer spending and behaviour as a threat to their business growth prospects. It depends on the market, of course. The concern is highest amongst CEOs based in North America, Asia-Pacific and Africa. The survey shows that 64% of CEOs sense a shift in consumers’ preferences to associate with environmentally and socially responsible businesses.

Q11a


0%

Spain 6 3

Germany 14 3 10

Italy 18 11

France 14 5 11

Netherlands 20 7 7

Japan 29 8

Mexico 23 10 3

Russia 17 13 7

Global 20 10 9

US 25 7 7

UK 14 9 19

Australia 30 7 10

Canada 18 15 15

Korea 30 17 3


India 23 13 23


Brazil 27 7 27



Q11b

Who is adding jobs?

Energy 15 15 6



Chemicals 24 15

Global 20 910


Insurance 21 4 15



Technology 15 10 17




Utilities 21 5 7

Automotive 22 44


Metals 3 1212

0%




Q12a


0%

Utilities



Technology

Consumer goods


Chemicals


Global

Automotive

Insurance

Energy

Metals





26

37

37

38

40

42

44

64

46

48

48

49

52

66

54

55

60



Q12b

…and they are likely to be changing their strategies in response

0%


Energy71

Utilities71






Metals79

Automotive80

Global81

Chemicals83



Technology85

Consumer goods89

Insurance90


Note: Respondents who stated ‘some change’ or ‘a major change’ to their strategy, organisation or operating model in response to changing consumer purchasing behaviours



Q13: Were reputations damaged by the crisis? Perhaps not that broadly, using public trust as a measure of reputation. Most business leaders expect the post-crisis public trust issue remains firmly with banks and isolated to countries that experienced the worst banking crises. And CEOs are actively taking steps to address public trust in different ways: Of those who say their industry has experienced a decline in trust, a majority plans to participate in industry initiatives or engage in dialogue with regulators. Overall, the financial services companies are the most active in adopting a variety of strategies to help rebuild trust.

Q13


0%


Consumer goods

Technology



Metals

Energy




Global



Automotive

Insurance

Utilities

Chemicals


26 41335

42 4194

34 6104

17 21017

23 3123

18 4158

20 3116

19 4194

16 4216

18 393

18 6153

9 399

18 18

15 2123

11 3184

7 7142

4 1520



Note: Responses of ‘Public trust stayed the same’, ‘Don’t know/Refused’ excluded

Q14: Does a climate-change strategy affect a company’s reputation?

Interestingly, climate change raised its position on the CEO agenda despite the severity of the recession. Among CEOs who had climate-change strategies in place, more maintained or even increased investment in their climate strategies than reined in spending over the past 12 months. Corporate responses to climate change are linked to government policy and regulatory implications: 61% of CEOs were preparing for the impacts of climate-change initiatives such as emissions trading or carbon taxes, despite the lack of clear policy signals from governments.

Public trust is a real issue for big business, not just in the United States, but globally. I’ve been through a couple of turnarounds now, and my philosophy on that is pretty straightforward, and that is transparency. If all the constituents, whether they be investors or employees, are aware of what’s going on and they feel that you’re being transparent with them, they give you some slack. It’s those companies that are very close to the vest that leads to this type of distrust. Of course, governance is critical and I believe communicating is key. I have open dialogue and an open door. That lends itself to trust

Michael I. Roth, Chairman and CEO, Interpublic Group, US

Q14


0%

Don’t know

52%45%

3%

Yes

No



7

13

17






2






Nearly two-thirds of CEOs in Western Europe, Asia-Pacific and Latin America expect a reputational advantage from their climate strategies, so CEOs are attuned to the shift in public perceptions of climate change and corporate responsibility. Yet, CEOs are also beginning to build a broader case for sustainability programmes. More CEOs expect climate change will lead to new products and services for their companies than those who worry that climate change entails a significant expense, for example.

Our biggest concern is that consumers will choose not to buy our brands because we have not done the right thing. But having done the right thing, it is invigorating to see how that can ignite the imagination of our employees and the communities in which we operate. It also affords us the opportunity to get out ahead of regulation.

Paul S. Walsh, Chief Executive, Diageo plc, UK

Q15: What are the major lessons learned from the crisis? CEOs are attempting to strengthen the resilience of their organizations and yet remain attuned to the opportunities emerging. It’s a difficult balancing act, as attested by the apparent contradictions they conveyed. Lessons learned from the financial crisis revolve chiefly around gaining more control over these newly appreciated vulnerabilities, internal and external.

That means gaining longer-term foresight, while improving the ability to react at a moment’s notice. It also means incurring less financial risk to improve the resilience of the company, while maintaining investments in vital strategic building blocks. Managing through these paradoxes is the key to executing a smarter course for growth.

We asked all 1,198 CEOs in our survey to describe, anonymously, what lessons they are taking away from the crisis. Their responses were illuminating so we’ve included 9 lessons that illustrate how leaders intend to set a course for smarter growth, including their new understanding of the nature of risk and the changes to strategy and the organisation that will be needed to respond.

‘ This crisis came as a nasty surprise for most businesses and we need to be aware that it can happen again.’

‘How much impact external influences have on strategy and organisation.’

‘ The importance of risk management at the extreme ends and in all that one does. Keep your core business and start other businesses only when you fully understand them...’

‘ We should have planned better and not just spent when making major profits. We should have made better expansion plans as an investment; not throwing money away on luxury goods.’

‘ To react on time, to be on top of things continuously and avoid being complacent, especially during the successful years. To keep up with what is coming and not to linger in the past.’

‘ This crisis has helped to better understand where the realities of business and industry are. We were on an artificial model, a leverage-based system. Now we’re back to basics.’

‘ Diversification, having more than one product and having product flexibility. Understand the processes of the delivery chain and your customers.’

‘ You need to consistently review your business processes, even in times of high growth, so that when an economic crisis hits, you can react swiftly and with purpose.’

‘ The crisis stemmed from excessive profit-making and has once again made clear ‘there is no such thing as a free lunch.’ We should return to the basic and focus on value-based management.’

For further information, please contact: Sophie Lambin Director of Global Thought Leadership +44 20 7213 3160 [email protected] www.pwc.com/ceosurvey





100%


RethinkState-owned

Reshape Smart regulation

ResultMutual prosperityRethinking and reshaping the business environment: Government and the global CEOSetting a smarter course for growth

2 Government and the Global CEO

Foreword

Welcome to ‘Rethinking and Reshaping the business environment: Government and the Global CEO’ in which we assess the changing relationship between government and business as the world emerges from crisis and sets out on the road to recovery.

We have again extended and deepened the research for PricewatehouseCoopers’ 13th Annual Global CEO Survey by including a selection of interviews with senior decision-makers in governmental organisations across the world. Our aim in doing this − and in publishing the findings here − is to understand better the implications for government policy of the views of CEOs (an increasing number of them in companies with some form of government backing) as we emerge from troubled times.

As such, we believe that this report represents a further significant contribution to mutual understanding and productive future relationships between the public and private sectors.

‘A slow Spring’

Business confidence is recovering, after a dramatic fall in 2008, with government fiscal stimulus being critical to this recovery. But CEOs highlight some major challenges in this year’s Survey, not least of which are fears of a protracted global recession and over-regulation with worries about protectionism also rising rapidly. And CEOs are responding, by cutting costs and reducing staffing whilst focusing much more on managing risk.

The ‘Great Recession’ has also spurred unprecedented levels of government intervention in business, particularly in financial services, and highlighted the importance of government’s role in addressing global and systemic risks. Indeed, a remarkable feature since our last Survey is the degree to which business and government have become increasingly co-dependent – with one in seven companies in our Survey now having some form of government backing.

Restoring confidence, re-building trust

So what does this mean for government? Whilst CEOs battle to restore their relationship with consumers as well as regulators, trust in government’s brand, whether at international, national, regional or city levels, is perceived by the government officials we interviewed to have survived. Indeed, government intervention has been essential to help restore public confidence, particularly in the banking sector, a fact recognised by the CEOs we interviewed.

In our view, the increased optimism that business and government can overcome systemic risks is the most important message from business in this year’s Survey. There remains, however, uncertainty amongst CEOs about government’s longer term role in shaping, and being an active part of, the business environment. How far has government changed the rules of the game forever?


This year the 13th Annual Global CEO Survey website contains new, interactive tools, which allow users to customise data and charts.

View an interactive compilation of video, key quotes and transcripts at • pwc.com/ceosurvey/indepth.

Examine the data from every angle – by business issue, region and industry sector at • pwc.com/ceosurvey/thestory.

Look at the • industry summaries – a complete picture of the issues at the heart of each industry.

Hand-pick the most relevant information and create a • custom report.

pwc.com/ceosurvey

Taking off

Fixing the financial system, managing publicly owned stakes in companies, coordinating better internationally on global issues such as climate change, and attending to long-standing problems in healthcare, infrastructure and other areas all mean significant change for nations, and will require increased collaboration between the public and private sector. Governments need to continue to invest in, and strategically manage, the ‘capitals’ needed by any society for long-term prosperity – financial, intellectual, social, environmental, technical and political capital. And they must increasingly collaborate cross-border to build joint capitals ranging from intelligent transport systems to international energy management, and do so in a way that is sustainable and does not mortgage the future.

This report sets out the views of CEOs and of government officials as the world sets off down a new runway to growth. It considers the implications of the post-crisis environment for governments and how they must act in their different roles: as owners of businesses; as major debtors internationally; and as smarter, more collaborative regulators. And it considers the role of the G20 as the new forum for mitigating global risks and putting in place policies and mechanisms for collaboration that are appropriate for the challenges of global public risk management in the 21st century.

Finally, we would like to thank not only 1,198 company leaders from over 50 countries who shared their views with us for the CEO Survey, but also the government officials who took the time to share their thoughts with us. We are grateful to them for their cooperation and frank insights. We look forward to a continuing and fruitful dialogue on how to create the society and government of the future for the citizens of tomorrow today, in a trusted, sustainable and more collaborative society.

Jan Sturesson & Carter Pate Global Government and Public Services Co-LeadersPricewaterhouseCoopers LLP


Contents

Summary 05

Global recovery, global risks 08

Government as strategic game-changer? 15

The smarter, more collaborative regulator 21

The outlook for policy harmonisation 27

Government as debtor 31

Final thoughts: Governments as intelligent Investors 36

Acknowledgements 37

Key contacts 38


Yet the unprecedented global coordination by governments to stabilise the financial system last year has drawn qualified praise from business:

CEOs have reversed their opinions from last year about •whether businesses and governments can successfully mitigate systemic risk – a majority (57%) now think they can (compared with 46% last year).

Almost half of CEOs interviewed (49%) also believe that •government ownership helps to stabilise an industry during a crisis.

This optimism for international coordination, and for more effective governmental collaboration with business, is one of the major findings in the survey this year, one which we believe can reset the relationship between business and government.

Clearly, such collaboration is not easy – the recent Copenhagen climate change talks demonstrated the pressures created by competing national interests when trying to negotiate global frameworks. Leaders in government are well aware of the challenges that lie ahead whilst business also worries about the consequences, as shown by the rise in CEO concerns of protectionism in our Survey (up ten percentage points from last year).

Leaders in the public and private sectors know that they have important, and different, roles to play if systemic risks are to be mitigated successfully. In our view, this year’s Survey highlights the need for governments to build on this platform and focus on creating and delivering value in their different roles:

as larger owners of business: with one in seven of CEOs •surveyed having some form of government backing (up from one in ten last year), governments are altering the business landscape and becoming strategic ‘game-changers’ as owners, customers, competitors and regulators to different degrees in different markets.

as • credible debtors: with the rapid rise in budget deficits in many economies, particularly developed G20 economies (with debt to GDP ratios projected to rise to 118% by 2014), credible plans are needed now setting out the exit strategy from government stimulus packages and subsequent actions to turn the tide of debt. Tough decisions involving increasing tax revenues and reducing spending will be critical to restoring the public finances back to health. Failing to fix these fiscal deficits, by contrast, would be a recipe for persistently high interest rates, more volatile currencies and a less certain environment for business investment, employment and growth.

as • more collaborative, smarter regulators of business: with six in ten CEOs concerned about over-regulation (and a rise of 9% of those ‘extremely concerned’ from last year), and a significant increase in CEO perceptions of rising regulatory burdens (67%, compared with 57% last year), dialogue and closer working between business and government – co-design – is needed more than ever to achieve smarter regulation.

5

Summary

Business confidence is returning with 81% of CEOs showing some measure of confidence on revenue growth prospects over the next 12 months even though 60% expect national economic recoveries only in the second half of 2010 or later. CEOs in BRIC economies, and in large companies, are by far the most confident. But CEOs still have many concerns – of protracted recession (65%), of over-regulation (60%), of unstable capital markets (59%) and as yet unfounded fears of a wave of protectionism (49%).


Strategic ‘game-changers’

More than two thirds of the CEOs surveyed have significant concerns about long term state involvement in business with important implications for government policies on competition and fair markets. Despite the antipathy of most CEOs to state ownership, including a majority of the CEOs surveyed with government backing, there are also times when government intervention is necessary to stabilise industries as CEOs also largely agree.

Given the increase in government stakes in business – an extension of last year’s trend – the challenge for government now is to make decisions on how long they will retain their stakes in business and, for those that it is decided should return to the private sector, set out their exit strategy alongside a realistic timetable.

Whether it is ideologically or economically driven, governments will still retain some stakes in businesses for the foreseeable future. For instance, in our report ‘Back to the Future’, which focused on the relationship between government and financial services, we anticipated that the complexity of individual financial institutions’ situations, difficult market conditions and an unattractive disposal environment will combine to make the possibility of early government exit from their stakes in the private sector highly unlikely, perhaps taking five to seven years or more before governments are able to fully divest of their stakes and related guarantees.

In the interim, clear objectives and governance arrangements are needed to ensure governments act as good owners and manage carefully the potential conflicts arising from their distinct roles as owners/shareholders, acting on behalf of taxpayers, and supervisors/regulators, acting on behalf of consumers and businesses.

Credible debtors

With budget deficits rising in most economies, and with critics of government policy challenging the cost and effficiency of economic stimulus programmes in creating jobs amid estimates by some commentators of high costs per job created, governments are facing a conundrum – how to deal with ever more debt at a time when the needs of businesses and citizens for support are rising, with the economic downturn resulting in greater numbers of unemployed and disadvantaged people needing state assistance. The lesson from history is that a focus on efficiency is rarely enough to turn around major fiscal deficits – governments must transform their approach and seek radically new ways of doing things. There is a need to revisit the role of government, stop some activities, prioritise some areas over others and re-design service delivery if radical cuts are to be achieved.

Sustainable solutions require political will and ownership at the highest level. This will, in our view, entail a combination of tax rises and spending cuts, where the decisions on both are guided by the impacts on economic growth and social outcomes – progressive austerity is the order of the day. But, as any business or family household knows, balancing budgets still requires tough choices and a robust, evidence-based approach to prioritisation which balances the relative importance of government programmes with the ability of government to deliver.

Smarter, more collaborative regulators

The burden of regulation continues to grow in the eyes of CEOs – two thirds of CEOs do not believe governments have reduced their regulatory burdens – and business is also still seemingly unconvinced by government’s track record on achievement of its priorities on issues such as infrastructure, skills development and climate change.

Yet there is still a desire for collaboration to achieve a win:win for business and government when it comes to smartening regulation. This is particularly critical at the current point in the economic cycle when governments must beware of imposing regulations which stifle innovation, competitiveness and the growth of jobs – the call from business this year is for a combination of less regulation in areas which stifle competitiveness (like access to capital) and better enforcement of existing regulations in other areas (such as financial sector stability).


This year, we went further and asked CEOs and government officials how best to achieve the goal of smarter regulation. The clear response was for dialogue and closer working between business and government – co-design.

Clearly, achieving a smarter approach to regulation nationally is a challenge – whether this can be achieved globally is even more open to question. Whilst harmonisation of regulatory approaches and increased collaboration is in vogue, with a desire expressed by both business and government for a more systemic approach to tackling global risks, we have found little desire amongst business or government for new supranational regulatory institutions.

There is no doubt that much stronger global governance is needed to safeguard the fundamentals of the world economy. The G20 is evidently seen by CEOs as the key forum for collaboration, although whether it has the capacity and cohesiveness to make a real difference is as yet untested, with a number of the reforms proposed at recent meetings yet to be fully followed through. As such, we believe that more needs to be done to strengthen its capacity for effective decision-making and follow-through by reforming the supporting infrastructure, including global organisations such as the IMF and the World Bank.

Final thoughts: Governments as intelligent investors

Business concern is currently focusing, rightly, on protracted recession. However, CEOs and governments around the world need to look forward. Governments must act as intelligent investors: for growth to take off, governments at all levels must invest strategically and sustainably in the various ‘capitals’ needed by any society for long-term prosperity, with the priority being projects with a high social and economic return, which will assist private sector wealth creation, particularly in infrastructure. Equally, governments should be wary of cutting investment plans to balance the books – this will not solve structural fiscal deficits, and will only serve to solve today’s problem at the expense of creating new ones for tomorrow.

Most importantly, governments must continue to re-build confidence and public trust, reduce uncertainty further through intelligent and authentic leadership and vision and create policies and mechanisms for collaboration that are appropriate for today’s global flows of capital. Public sector leaders must shift gear, from being reactive to events to being both proactive and interactive, with business and society. Governments must seize the opportunity to chart a way ahead, investing in the future as the global economy takes off towards growth.


1 Brazil, Russia, India and China

Light at the end of the tunnel

Business confidence is critical to economic recovery given the impacts on investment and jobs, so the views of CEOs are perhaps of greater interest to government now than for many years. We were therefore heartened to find that CEOs were more confident in this year’s Survey but nonetheless cautious about revenue prospects (Figure 1): overall, 81% of CEOs show some measure of confidence – responding ‘somewhat confident’ or ‘very confident’ – on revenue growth prospects over the next 12 months, with almost a third (31%) of CEOs ‘very confident’, in line with expectations for a moderate recovery. While CEOs are somewhat more confident in their company’s ability to generate revenue growth in the near-term, they are decidedly more confident over the longer-term, defined as a three-year time horizon.

So, there is light at the end of the tunnel. The majority (72%) of CEOs anticipate recovery for their industry before the end of 2010 with CEOs from all industry sectors expecting to recover within a similar timeframe, even financial services (Figure 2). Recovery for countries is also expected before the end of 2010, but fewer CEOs (13%) believe that recovery has already set in and 60% expect national economic recoveries only in the second half of 2010 or later. Almost half (44%) of CEOs in BRIC1 countries believe their countries have already experienced recovery. Recovery in G8 nations is expected to take longer.

Global recovery, global risks

PwC’s 13th Annual Global CEO Survey occurred as the global economy began to recover, with many countries past the worst of the recession. However, whilst confidence is returning there is also a heightened awareness of risks, as identified both by the 1,198 business leaders worldwide surveyed as well as through our discussions with a selection of government leaders.

Confidence returns

01

0

10

20

30

40

50

60

% S

tatin

g ve

ry c

onfid

ent

2010200920082007200620052004

12 months 3 years

Ref: Q1a and Q1b. How would you assess your level of confidence in prospects for the revenue growth of your company over the next 12 months and 3 years? Yearly comparison. Base: All respondents (2009 = 1,198; 2008 = 1,124; 2007= 1,150; 2006 =1,084; 2004 = 1,324; 2003 = 1,386).


0% 10 20 30 40 50 60 70 80 90 100

Already recovered orrecovery expected before

the end of 2009



In 2011

Don’t know/Refused

23

13

18

21

31

31

24

29

5

5

Industry Nation’s Economy

Expectations of recovery for industries and countries

02

Ref: Q1c. When do you expect recovery to set in for your industry? Q1d. When do you expect recovery to set in for your nations’s economy? Base: All respondents (1,198) N.B. Recovery is defined as stable and steady economic growth.



Size and place count

Confidence and recovery expectations are tied to geography – where the CEO is based – and the size of the company. A distinctive split emerged between CEOs based in the G8 developed economies and those based in the other members of the G20, including faster-growing China, India and Brazil. CEOs in the developed economies were far more cautious on near-term revenue prospects, with 23% ‘very confident’ versus 42% of CEOs in newer member G20 nations. BRIC companies are by far the most optimistic over the short and longer-term, whilst CEOs in G8 countries have the lowest degree of confidence, particularly over the short-term. The highest levels of confidence also emerge from CEOs from the largest firms (defined as having revenue of over $10 billion a year).

Two-speed recovery

A majority of CEOs also expect recovery to set in for their industries by the second half of 2010. But CEOs believe recovery for G8 nations is likely to occur much later than in the other G20 countries and non-G20 countries: 54% of CEOs based in the wider G20 group of nations expect recovery to set in by the first half of 2010 compared to 26% of CEOs in the G8 nations. For instance, China’s growth accelerated over the course of 2009 and is likely to exceed the government’s target of 8% according to IMF estimates. In comparison, the output of developed economies is projected to have declined by 3.4% in 20092. This reflects economic reality and is re-inforced by the views from our government interviews where Asia is seen as a particular growth engine.

Yet we’re all more worried now

Notwithstanding the return of confidence, particularly in the longer term, CEOs have a whole host of concerns which they believe are a threat to their growth prospects (Figure 3). For all CEOs, there is a level of unease with the broader forces underpinning the relative strength of recoveries around the world. They are more concerned about a number of external threats to business growth than they were in the previous year’s survey as many pull away from survival mode and a singular focus on the crisis.

The top three business risks this year are also top of the agenda for many governments:

Protracted global recession, where almost two thirds •(65%) of CEOs are extremely or somewhat concerned especially in Asia-Pacific (77%); indeed many of our government interviewees like Shelly Jamieson, Secretary of the Cabinet and Head of the Ontario Public Service in Canada expect a ‘slow spring’ believing the worst is behind us but expecting a gradual recovery to moderate growth.

Over-regulation, with the highest number of CEOs •extremely concerned (27%, compared with 18% last year) for any risk and especially in Latin America (75%), perhaps fearing a government reaction to perceived failings by business leading to global recession.

Lack of stability in capital markets, with 59% of CEOs •somewhat or extremely concerned, especially in Asia Pacific (66%). This is again mirrored by our government interviewees who were worried about the continuing volatility of capital flows (and access to capital) and the possibility of as yet unseen problems emerging in the banking sector.

CEOs from the G20 economies outside the G8 are also the most aware of threats to business growth prospects; they are more concerned about over-regulation, low-cost competition, currency volatility and energy costs. This year’s Survey also, for the first time, has separate analysis for Africa which reveals that CEOs in this continent are most concerned about energy costs and the availability of skills (80% somewhat or extremely concerned about both of these threats) closely followed by the inadequacy of basic infrastructure (78%).

2 IMF “October World Economic Outlook (WEO),” released 1 October, 2009. (http://www.imf.org/external/pubs/ft/survey/so/2009/RES100109A.htm)


pwc.com/ceowsurvey

The rise of protectionism?

There is also a significant increase in concerns about the rise of protectionism (Figure 4), with 49% of CEOs somewhat or very concerned about governments’ protectionist tendencies (up from 39% last year). This is especially the case in Latin America, where protectionism is second only behind over-regulation (70% compared with 75%), and across the BRIC economies (63% of CEOs somewhat or extremely concerned). In Latin America several countries adopted measures to increase tariff barriers on certain imports as the crisis unfolded, but this trend is rising across all regions.

However, alarmist scenarios of protectionist trade barriers largely failed to materialise in 2009: the World Trade Organisation (WTO) noted in its annual report released in November that whilst there has been slippage on trade policy in most of the G20 countries, “the world economy

is about as open for trade today as it was before the crisis started.” At most, post-crisis trade restrictions should amount to 1% of world merchandise trade, it said3.

Other significant increases in concerns featured climate change (though less so for North America), pandemics and other health crises – again of concern to governments. Indeed our government interviewees cited further specific concerns over environmental and natural resource degradation and depletion, air and water pollution, commodity price pressure and increasingly volatile weather patterns.

Environmental degradation and the negative effects of climate change have worsened and could become even more pronounced in the coming years. Economic growth is necessary for poverty reduction… However, economic growth must also be environmentally sustainable.

Haruhiko Kuroda President, Asian Development Bank

3 Overview of developments in the international trading environment”, Part A, Annual Report by the WTO Director-General. (http://www.wto.org/english/news_e/news09_e/wt_tpr_ov_12_a_e.doc)

0%

Don’t Know/Refused

Protracted global recession -6 2342-29 0

Over-regulation -12 2733-27 1

Lack of stability in capital markets -9 1643-32 1

Exchange rate volatility -15 2335-27 0

Low-cost competition -14 2331-31 0

Energy costs -17 1935-29 1

Macroeconomic imbalances (e.g. trade or fiscal) -10 1440-35 1

Availability of key skills -15 1635-34 1

Protectionist tendencies of national governments -20 1732-30 1

Permanent shift in consumer spending and behaviours -17 1633-34 1


Potential threats to business prospects

03

Ref: Q3a and Q3b. How concerned are you about the following potential threats to your business growth prospects? Base: All respondents (1,198).



Note: Comparison of concerns only maps concerns that were asked in both 2008 and 2009.Base: 2009 (1,198) 2008 (1,124).

Threats to revenue growth – Percentage change 09/10

04

Clearly, these global risks cannot be solved, or ameliorated, by businesses or governments on their own. But who should take the lead? CEOs have nuanced views on the role of government: nothwithstanding the critical role of government in avoiding recession turning into full blown depression, the views of CEOs vary significantly on the role of government and its success in delivering on some of their fundamental requirements (Figure 5).

In general, CEOs perceive a lack of progress by government in many areas. There is a significant increase from last year’s Survey in the negative perceptions of CEOs on the success of government intervention with regards to the environment, access to natural resources, availability of skills and the

regulatory burden. CEOs are seeking concise and clear direction from governments on long-term environmental policies but do not think governments are delivering these policies (55%) or protecting biodiversity and ecosystems (45%). A majority (56%), again this year, say governments should drive convergence of global tax and regulatory frameworks but fear that governments are under pressure to raise more tax from them (47%), especially in the Americas. CEO views are also split on whether government is delivering basic infrastructure (Box 1) and are not convinced that the bedrock of a skilled workforce (57%) or access to natural resources (49%) is being delivered.

The evolving relationship between business and government

2010 2009 % change 09/10

% concerned % concerned

Over-regulation 60 55 +5%

Protectionist tendencies of national governments 49 39 +10%

Inflation 40 49 -9%

Energy costs 53 50 +3%

Low cost competition 54 48 +6%

Availability of key skills 51 46 +5%

Climate change 37 26 +11%

Scarcity of natural resources 35 30 +5%

Security of the supply chain 34 33 +1%

Pandemics and other health crises 35 18 +17%

Terrorism 30 21 +9%

Inadequacy of basis infrastructure 33 25 +8%

Increase of 10% or more Increase of 1% -9% No change or decrease


0%

2010

2009

The government should drive convergence ofglobal tax and regulatory frameworks

The government is changing its tax rules andpractices to raise more tax from business

The government is working to improvehealthcare access at lower cost

The government has clear and consistentlong-term environment policies

The government effectively protectsbiodiversity and ecosystems

The government has been effective in helpingcreate a skilled workforce

The government helps companies secure accessto natural resources (e.g. raw materials, water, energy)

The government has reduced the regulatoryburden on corporations

The government is taking adequate steps toimprove the country’s infrastructure

(e.g. electricity, water supply, transport)



-7 18-1319 39-14 1442-8

-25 1227-10-24 1829-8

-13 10-25 31-25 733-14

-32 426-14

-33 820-15-35 421-20

32 223-12

-33 118-16

-36 217-21

-31 20 3-15

-34 14-33

-34 419-14

2-32 18-25 3

The changing role of government

05

Ref: Q16. Thinking about the role of Government in the country in which you operate, how much do you agree or disagree with the following statements? Base: All respondents (2009 = 1,198; 2008 = 1,124).



There are also strong national differences of view on the effectiveness to date of governments addressing CEOs’ long term priorities (see Table 1). CEOs in China/Hong Kong are the most positive about the role of government interventions, with a majority believing that government is taking adequate steps to improve the country’s infrastructure (87%), improve healthcare access at lower cost (72%), providing clear and consistent long-term environmental policies (62%), protecting biodiversity and ecosystems (53%) and creating a skilled workforce (52%). However, the only other case where a majority of CEOs believe government has been effective is in the provision of infrastructure – in Korea (63%) and Germany (54%).

On the other hand, there is relative disdain from CEOs for government’s ability to create a skilled workforce in US, Spain, Italy, Korea, Mexico and Brazil with 10% or less of CEOs in these countries believing that government has been effective in helping create a skilled workforce. In addition, in the US a staggering 89% of CEOs believe their government is changing its tax rules and practice to raise more tax, along with UK (78%), Spain (76%) as well as a majority in Brazil (67%), Mexico (67%) and Russia (57%). Yet, apart from China, Korea and the UK, a majority of CEOs believe government should drive the convergence of global tax and regulatory frameworks.

Overall, these mixed reseponses suggest a range of areas where government policy-makers and businesses can more effectively collaborate to stimulate economic growth.

Infrastructure in many countries is reaching its natural lifespan and is in need of replacement but there is increasingly a lack of public money. Raising taxes is becoming difficult and unattractive given budget deficits which are already requiring increases in corporate and personal income taxes across countries. The private sector has also become more risk averse and is struggling to raise private funds for infrastructure development in the current economic climate.

Governments need to re-start the market for infrastructure development by creating new incentives to the private sector given the risks involved in the current climate. Some examples include offering termination fees to protect businesses against failure of projects, which may re-kindle interest in markets such as the US, and offering a guarantee of a minimum rate of return (or return on

investment floor) commensurate with the risks of a project. Further action also needs to be taken to include maintenance as part of public-private infrastructure contracts to extend the life and quality of assets.

One innovative option to overcome delays in financing Public Private Partnerships is being tried in South America where the Costa Rican government is creating a trust to receive funding from a private sector investor to essentially purchase – and own – a water treatment facility for a period of 20 years, during which time the trust would lease the facility back to the government. At the end of the 20-year period, ownership would revert back to the government of Costa Rica. The government of Costa Rica is therefore able to obtain financing for a period of 20 years at reasonable interest.

Box 1: Delivering infrastructure to meet business needs


Summing up

Clearly confidence is returning as are expectations of recovery within the next 12 months. But there are still risks – of protracted recession or slow recovery, of over-regulation and of unstable capital markets as well as fears, as yet unfounded, of a wave of protectionism.

This raises some important and uncomfortable issues for government, particularly against mixed views of CEOs on their ability to rise to these challenges. In particular:

What are the implications of governments becoming •owners of businesses ranging from financial services to automotive?

What gaps in public risk management have been exposed •by the financial crisis, particularly given the need to understand better the intricacies, complexities and interconnections of the financial system, and address overlaps and loopholes in regulatory oversight? How can

there be a closer dialogue between regulators and the regulated – smart regulation – both nationally and internationally?

When will governments have to exit from their •accommodative fiscal and monetary policies which were necessary to overcome the very real threat of depression and deflation, but which if left loose too long will stoke inflation? And what actions need to be put in place to deal with debt?

We look in turn at these issues in the remaining sections of this report.

Role of government

TABLE 01

Ref: Q16. Thinking about the role of Government in the country in which you operate, how much do you agree or disagree with the following statements? Respondents who stated ‘agree’ or ‘strongly agree’ Base: All respondents (base in brackets).


Global USA Canada Spain Germany UK Netherlands France Italy China/HK Japan Korea India Australia Russia Mexico Brazil (1198) (100) (39) (34) (63) (64) (30) (44) (38) (60) (75) (30) (30) (30) (30) (30) (30)

The government should drive convergence of global tax 56% 50% 51% 68% 75% 36% 60% 61% 61% 43% 55% 33% 73% 60% 67% 73% 77% and regulatory frameworks

The government is changing its tax rules and practices to raise 47% 89% 21% 76% 43% 78% 23% 25% 13% 30% 31% 20% 30% 43% 57% 67% 67% more tax from business

The government is taking adequate steps to improve the country’s 40% 27% 49% 21% 54% 13% 37% 39% 24% 87% 20% 63% 27% 33% 13% 27% 30% infrastructure

The government is working to improve health care 30% 34% 31% 21% 27% 20% 20% 14% 18% 72% 16% 30% 20% 7% 30% 47% 3% access at lower cost

The government has clear and consistent long-term 25% 13% 31% 9% 27% 22% 23% 30% 8% 62% 23% 23% 17% 27% 10% 13% 0% environmental policies

The government effectively protects biodiversity 25% 32% 31% 29% 30% 13% 37% 11% 8% 53% 12% 13% 13% 27% 3% 13% 3% and ecosystems

The government helps companies secure access to natural 19% 8% 21% 6% 19% 8% 13% 9% 18% 38% 32% 40% 7% 23% 10% 23% 3% resources

The government has been effective in helping create a skilled 19% 3% 28% 3% 19% 19% 37% 27% 0% 52% 8% 3% 33% 30% 13% 7% 10% workforce


So, how is the landscape changing for business? Have those CEOs with the backing of government developed different views from CEOs with an exclusively private boardroom? And what are the implications for government?

A changing landscape for business

New government influence over the global business environment in 2009 was nowhere so clearly marked as in the increase in ownership in companies. A third of all companies said the government owns a stake in a major player in their industry, rising to 43% amongst companies with revenue over $10 billion. The change is most pronounced in financial services, where 56% of CEOs said the government held stakes in a major player in their country which is second only to utilities (71%).

Government’s new reach in 2009 is changing the debate on government ownership in the private sector. Almost half (49%) of CEOs were positive towards government taking an ownership role in times of crisis, including those in North America, whose dissatisfaction with most issues involving government measures to improve business conditions were well marked elsewhere in the Survey. This sentiment was more strongly backed amongst business leaders in Asia-Pacific (61%) and the Middle East (54%), and decidedly less so amongst CEOs in Latin America (34%), Africa (40%) and Central/Eastern Europe (41%). Within Europe, where CEOs largely agree that government ownership in a time of crisis is a stabilising force, the most support came from French CEOs (68%) and the least from Italian CEOs (37%). Amongst industries, only a third (31%) of insurers considered short term ownership a stabilising force in times of crisis, against 56% of auto CEOs and 55% of banking and capital markets CEOs.

Popular support for government ownership in the post-crisis environment also appears to be holding in some polls. A GlobeScan/University of Maryland poll in 2009 of adults in 27 countries said a majority called for less active government ownership or control in just four of the countries4. This suggests an exit strategy may not be as fast as free-marketers might desire. Indeed, given the range of experiences with public ownership in countries where the crisis was more muted, from East Asia to the Middle East and Latin America, state ownership is likely to endure for some time in one form or another.

The harmony between government and business ends for CEOs, however, on the implications of longer-term public ownership of businesses. Non-government backed CEOs perceive negative implications of government ownership across the board, particularly those based in North America (Figure 6). More than two-thirds of all CEOs agree that government ownership distorts competition, leads to political interference and creates a conflict of interest with its regulatory role, rising to over 80% across all of these categories in North America.

Government as strategic game-changer?

Last year’s Survey revealed what we thought at the time was a startling statistic – 10% of the companies we surveyed had some form of government ownership or backing spread across all of the industry groups we surveyed. This year, there has been a further and significant increase in the proportion of our sample of CEOs with some form of government backing – up to 14%. CEOs are coming to realise that they face a new reality in the future, a global environment marked by governments as owners, regulators, customers and competitors, to different degrees in different markets.

It is the duty of a government to ensure that whatever measure it takes to support the economy, that measure be as precisely targeted to the intended goal as possible, with as little collateral damage as possible.

Normand Bergeron Président-directeur général de l’Agence des partenariats public-privé du Québec, Canada

4 Survey of 29,033 adult citizens across 27 countries, conducted for BBC World Service by the GlobeScan, together with the Program on International Policy Attitudes (PIPA) at the University of Maryland. (http://www.globescan.com/news_archives/bbc2009_berlin_wall/)


0%


Government ownership will lead topolitical interference in the marketplace

Government ownership inherently creates a conflictof interest with its regulatory function

-4 2646-11 1

-3 2547-11 2

Government ownership distortscompetition in an industry

Government ownership influences regulationand enforcement in the industry

Government ownership discouragesthe entry of foreign competitors

Government ownership helps to stabilisean industry in times of crisis

-4 3041-12 2

-4 1850-11 2

-6 1537-23 2

-9 841-22 1

Neither/Nor

12

12

12

15

17

17


0% 10 20 30 40 50 60 70 80 90 100

Government ownership will lead to political interference

in the marketplace

Government ownership inherentlycreates a conflict of interest with its

regulatory function

Government ownership distortscompetition in an industry

Government ownership discouragesthe entry of foreign competitors

Government ownership helpsto stabilise an industry in

times of crisis

53

75

53

76

51

74

60

69

5538

48

64

Government Owned/Backed Non Government Owned/Backed

Government ownership influencesregulation and enforcement in

the industry

Views on government ownership

06

Views of government-backed companies on government ownership

07

Ref: Q17b. How much do you agree or disagree with each of the following statements about Government ownership? Base: All respondents (1,198).


Ref: Q17b. How much do you agree or disagree with each of the following statements about Government ownership? Respondents who stated ‘agree’ or ‘strongly agree’ Base: All respondents (166, 1,013).

Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 20100% 10 20 30 40 50 60 70 80 90 100




Organisational structure(including M&A)

Focus on corporate reputationand rebuilding trust

Capital structure

Engagement with yourboard of directors

89

84

84

81

79

78

83

81

65

73

75

77

59

73

55

63


Responding to changing consumerpuchasing behavious

Government-Owned companies’ strategies

08

Ref: Q7. In the wake of the economic crisis, to what extent do you anticipate changes to any of the following areas of your company’s strategy, organisation or operating model? Respondents who stated ‘some change’ or ‘a major change’ Significant at 95% confidence interval. Base: All respondents (166, 1,013)


Even those that are experiencing government ownership have negative perceptions (Figure 7), although slightly less so with the results suggesting that experience of government involvement reduces concerns about interference, conflicts of interest and competitive distortions (though there is still a majority of CEOs in state-backed companies who have these concerns in all cases).

A two-headed monster?

But does government ownership make such a difference to the views of CEOs on a range of issues? From those with experience it appears not – in general, the views of government-backed CEOs mirror those of their private sector counterparts. For instance, like their private sector counterparts, CEOs with some form of government backing are more confident in their short and long term prospects. They also perceive the same threats to their businesses – protracted recession, over-regulation and unstable capital markets – although they are significantly more worried about energy costs (63% compared to 52%) and inflation (47% compared to 39%). Recession barely dents their momentum with climate change strategies.

There are, however, some important differences for CEOs with some form of government involvement. There is some indication from our results that government stakes provide a cloak under which to take urgent actions e.g. making more organisational changes and capital re-structuring, whilst also enabling those companies to take a longer term view on areas such as capital investments, learning and development and preparing for risks (scenario planning):

Government-Owned companies appear to be making •more changes to their strategy, particularly focusing on corporate reputation and re-building trust as well as capital structures. There also appears to be somewhat more engagement between Boards and their executives in state-backed organisations (Figure 8).

Almost half (48%) of state-backed CEOs are planning •moderate or significant increases in their long-term capital investments (Figure 9).

Government-Owned companies are also more likely to be •planning for systemic risk and high risk/low probability events, with a majority of state-backed CEOs (57%) making preparations (Figure 10).

Ref: Q10. With respect to your approach to risk management, to what extent are you increasing your focus in the following areas as a result of the economic crisis? Respondents who stated ‘to a large extent or ‘significantly’ Significant at 95% confidence interval. Base: All respondents (166, 1,013)

0% 10 20 30 40 50 60 70 80 90 100

Integrating risk managementcapabilities into business units

Reassessing your tolerance for risk

Collaborating with supply chainpartners to collectively manage risks

Preparing for systemic risk and low-probability, high impact events

Allocating resources to risk-relatedinformation gathering and analysis

63

57

57

52

52

50

55

49

45

57

48

54


Creating personal accountability andreward structures for good risk

management, including risk taking

Approach to risk management

10

0% 10 20 30 40 50 60 70 80 90 100






Capital investments

81

78

71

69

64

64

64

59

57

60

42

41

39

48


Strategic technology infrastructureor applications

Ref: Q8. How do you plan to change your long-term investment decisions in the following areas over the next 3 years as a result of the economic crisis? Significant at 95% confidence interval. Base: All respondents (166, 1,013)


09


Non Government-Owned companies have made greater •headcount reductions, although the differences reduce looking ahead with both types of business planning similar approaches in the next 12 months (Figure 11).

In addition, state-backed CEOs are slightly more likely to •be changing their approach to staff morale and employee engagement programmes and collaboration with networks of external specialists (Figure 12).

To own or not to own

The concerns stated around political interference and the impact of government ownership on competition clearly necessitates transparent consideration by governments on how active and long-term state investments in business should be and their associated exit strategies.

There has been an expectation by many commentators of early exits of government stakes in business. Some governments, however, may want to stay longer and use their stakes to help shape markets e.g. on the sustainability agenda in the energy and auto sectors, although there are risks that ownership is less effective than other tools to achieve such policy outcomes.

0% 10 20 30 40 50 60 70 80 90 100

Managing people through change(e.g. redefining roles in organisation)

Traning and development programmes

Staff morale and employeeengagement programmes

Collaborations with networksof external specialists

Flexible workingenvironments

Global mobility, including staff travelor international secondments

Pension and healthcarearrangements

81

79

80

77

80

75

64

61

59

63

57

63

56

55

41

42


Remuneration levels

Ref: Q15. Regarding your people strategy, to what extent will you change your approaches to the following areas, as a consequence of the economic crisis? Respondents who stated ‘changing somewhat’, ‘changing to a large extent’ or ‘changing significantly’ Base: All respondents (166, 1,013)

0% 10 20 30 40 50 60 70 80 90 100

Decrease

Stay the same

Increase by less than 5%


Dont’t know/refused

39

50

30

21

16

12

5

7

9

11

1


Increase by 5-8%

Headcount reductions

11

Ref: Q14a.What happened to headcount in your organisation globally over the past 12 months?

Significant at 95% confidence interval. Base: All respondents (1,198) N.B. Recovery is defined as stable and steady economic growth.

Approaches to people strategy

12


Activism not interference

Governments as owners can take a longer-term approach. In our view, the optimal role for government is to take the role of an activist investor, acting as a ‘critical friend’ by engaging and challenging the boards of state-supported businesses on their strategy and encouraging a longer-term approach to business. They should not, however, interfere in day-to-day operation – such businesses should be run in the same way, with the same attention to best practice, as any other business.

This needs to be done in the context of an appropriate governance structure, which recognises the unique involvement of government and where the roles of all players are clear – boards, management, government and other shareholders. For example, the UK’s Shareholder Executive applies four principles when working with management teams of government-owned businesses: clarity, value, transparency and professionalism.

Managing conflicts of interest

Governments need to manage carefully the conflicts arising from their distinct roles as owners/shareholders, acting on behalf of taxpayers, and supervisors/regulators, acting on behalf of consumers and businesses. Where government ownership, in some cases through sovereign wealth funds, is partial as opposed to full, governments need to be particularly transparent on the extent of their backing for business: this is needed for markets to assess the riskiness or otherwise of business ventures, as demonstrated by the highly publicised case of Dubai World and the concerns about the level of backing it eventually received from government.

The presence of government intervention can also create market distortions for example by creating differences in employers’ costs of capital, impacting remuneration structures and creating unfair competition through state guarantees. Governments must ensure that, where they are not full owners, they do not use their shareholdings to abuse the rights of minority shareholders. Governments also need to guard against getting involved in operational decisions and using their (temporary) ownership of business inappropriately as a tool of activist business policy, with the resulting accusations of political meddling.

Maximising economic and social returns

There is an important distinction between maximising shareholder value within a context that is supportive to wider economic and social goals and using government ownership of business as a substitute for more appropriate policy mechanisms to achieve those social objectives. Whilst in government ownership (in part or in full), the focus should be on developing and implementing a strategic plan to maximise the return, both financial (to shareholders) and economic/social (to the wider economy and society), from their forced investments. In our view, an activist government’s exit strategy should aim to achieve an economic and social return on investment (SROI) as well as a financial one. For example, in the case of State Supported Banks by increasing lending levels to maintain economic activity at a higher level than would otherwise be the case. SROI, however, should not be used as a cover for politically expedient sales of shares at a low price or indeed state support of companies doomed to fail.

Box 2: Being a good owner


There is also an issue of who buys the former government stakes and their strategies and motives. Government ownership of business needs case-by-case consideration as different countries have different experiences and heritages of state involvement. In general, however, CEOs and our government interviewees appear to believe that for most sectors state ownership should be a last resort and a temporary, not permanent, solution.

Nevertheless, whether it is ideologically or economically driven, governments will still retain some stakes in businesses for the foreseeable future. For instance, in our report ‘Back to the Future’, which focused on the relationship between government and financial services, we anticipated that the complexity of individual financial institutions’ situations, difficult market conditions and an unattractive disposal environment will combine to make the possibility of early government exit from their stakes in the private sector highly unlikely. “It will take two to three years to sell major holdings, but five to seven years or more before governments are able to fully divest of their stakes and related guarantees.”

Given that temporary state ownership will stretch into the medium term, governments should not therefore waste this opportunity for reform. They must clearly define their objectives, take a positive role and seek to be ‘good owners’ (Box 2). Our research5 shows that this involves addressing three key elements: managing conflicts of interest; taking an ‘activist’ role; and focusing on the wider returns of ownership to society. There is also clearly a need for transparency when government has a stake in businesses and for governance procedures to be put in place to ensure that neither customers nor minority shareholders lose out from government intervention.

Summing up

It is clear that CEOs have significant concerns about long term state involvement in business with important implications for government policies on competition and fair markets. Despite the antipathy of most CEOs to state ownership, including a majority of CEOs with government backing, there are also times when government intervention is necessary to stabilise industries, as CEOs also on balance agree.

As such, the challenge for government is to make decisions on how long they will retain their stakes in business and, for those that it is decided should return to the private sector, set out their exit strategy alongside a challenging but realistic timetable. In the interim, clear objectives and governance arrangements are also needed to ensure governments act as good owners and manage carefully the potential conflicts arising from their distinct roles as owners/shareholders, acting on behalf of taxpayers, and supervisors/regulators, acting on behalf of consumers and businesses.

5 See ‘Back to the Future’ for a full discussion of these issues in the financial services industry

The basic lesson is that the state should withdraw from private business because it is still true that the private sector makes significantly better decisions than the state… I think that it is necessary to support structural changes, more market economics, better environment for business, healthy state finances, less protectionism. These are the things that should be done.

Martin Tlapa Deputy Minister, Ministry of Industry and Trade, Czech Republic


This year, as well as taking the temperature of the relationship between business and government on regulation, we tested to see what CEOs want most from government, how regulation can be made smarter and in what areas.

Is the burden of regulation still rising?

Over-regulation remains a perennial concern in our Survey, having been a top three issue for a decade. This year over-regulation moved back to the second spot, with a significant increase over last year in those ‘extremely concerned’ about it (up to 27% from 18%).

CEOs are clearly concerned that they will face a backlash as governments seek to regulate more in order to curb perceived excesses in private markets. That a near financial collapse could presage a wave of regulation could be expected to trouble CEOs facing weak demand.

CEOs have also been clear in prior years that a significant issue for them is the compliance burden. Overall, two thirds (67%) of CEOs do not believe that government has reduced the regulatory burden on corporations, a rise from 57% last year. Indeed, this year only in Japan is there a positive balance of CEOs believing that their government has reduced the regulatory burden7 , and even here by a much reduced proportion and on a downward trend (Table 2, where negative numbers indicate that those CEOs agreeing that regulatory burdens are falling are outweighed by those disagreeing). CEOs in US, Brazil and UK lead the way in their view that the regulatory burden has not been lifted.

The smarter, more collaborative regulator

Over-regulation and concerns about regulatory over-reach have risen again this year and yet CEOs are also convinced of the need for the involvement of government to mitigate systemic risks. In past issues of this report, we have commented on this ‘regulatory paradox’ - on the one hand, CEOs want more government leadership and action in some areas e.g. on climate change6 and driving the convergence of global tax and regulatory, whilst on the other hand CEOs are inclined to believe government action is only good when it helps their business and bad otherwise.

The public’s disillusionment has moved beyond the banks to the private sector in general, so that governments are now talking about more regulation to stop a similar crisis from ever happening again. But hasty regulation will be bad regulation and my concern is that creativity, innovation, and enterprise will be stifled at a time when they should be encouraged.

Paul Walsh CEO, Diageo

6 For further CEO views on climate change, see PwC’s forthcoming publication ‘Appetite for Change: Global business perspectives on tax and regulation for a low carbon economy’ 7 Excludes those who neither agree nor disagree and those who don’t know or refused to answer


I don’t think business will be all that accepting of a lot more regulation. But I think it will be accepting of more effective regulation… The key is to establish non- ideological consultation and collaboration between the government and the private sector. The private sector must recognise that the government has legitimate aims in bringing about certain social outcomes. And those social outcomes should be of concern to businesses, too. At the same time, the government shouldn’t play a larger or more prescriptive role than it has to.

Robert Bhatia Deputy Minister of Alberta Seniors and Community Supports, Canada

CEOs’ views of the regulatory burden

TABLE 02

Balance of CEOs who agree (strongly or slightly) as against disagree (slightly or strongly) that the government in which their business is headquartered has reduced the regulatory burden on corporations (%)

The paradox is that whilst CEOs criticise the actions of governments and perceive ever increasing regulatory burdens, they are also ever more keen to collaborate with them. CEOs are not waiting for new regulation but are stepping up their involvement to help to shape it. They are prioritising cooperation with regulators as they seek to rebuild trust in their industries (Figure 13). For example, nearly two thirds of CEOs (63%) plan to initiate, or have already done so, a proactive dialogue with policy-makers and regulators to increase levels of trust, especially in North America (74%) and Africa (79%), and sectorally in financial services (76%).

0% 10 20 30 40 50 60 70 80 90 100

Participation in industry initiatives to improve the sector’s reputation

Proactive dialogue withpolicy-makers and regulators

A systematic approach tomeasuring and managing reputation

Expansion of your corporateresponsibility programme

Media relations programmeand advertising

Changing executivecompensation practices

None of the above


Revisions to reportingand engagement with

investor communityEngagement with NGOs

to improve practices thataffect your reputation

64

63

51

50

49

37

31

30

3

1

Views of those experiencing a decline in the public trust

13

Ref: Q12b. Which, if any, of the following activities have you initiated or are you planing to initiate in your own company as a result of the decline in trust? Base: Respondents who stated there has been a slight or significant fall in public trust in their industry at Q12a (304)

Country 2008 2009 2010

Global -39 -36 -52

US -58 -59 -90

Canada -57 -34 -54

Mexico N/A -50 -70

UK -87 -68 -85

France -54 -35 -71

Germany -64 -49 -62

Netherlands -77 -50 -70

Italy -78 -48 -58

Spain -52 -47 -67

Russia -44 -47 -57

Brazil -73 -57 -90

China and Hong Kong 6 0 -8

Japan 35 18 6

India 20 -40 -60

Australia -69 -67 -76

Korea -44 20 -7


What does smart regulation mean to business?

So, what can government do to reverse this significant deterioration in perception on a rising tide of regulatory burden? In last year’s report8, we set out our views on the need for a smarter approach to regulation (Box 3).

Many of the principles of better regulation are well known: regulation needs to be proportionate, accountable, consistent, transparent and targeted. Yet last year we found there was a missing ingredient – stability – and a rapidly changing context – globalisation – as well as a renewed purpose – to stop players in markets behaving irresponsibly.

In our view, the key principles underpinning a smarter approach to regulation are as follows:

‘Think global, act local’ – define the right rules to •underpin success in a modern global economy, tailored to the national and local context;

Fair reciprocity – it is not enough to define a •transparent set of rules, but to implement them in a fair and reciprocal way;

Outcome-based – focus on outcomes, not purely •process, and make judgements on results, not just box-ticking; and

Clarity and stability – ensure that the rules for •regulation are clear and not subject to constant tinkering and change for change’s sake.

Box 3: Smart regulation

This year, we went on to ask CEOs for their views on the actions that could most impact a smarter approach to regulation (Figure 14). This revealed that whilst there is overwhelming concern that the regulatory burden is rising, a majority of CEOs (59%) believe the key to smarter regulation is for government to collaborate more closely with the private sector, particularly in Africa (70%). This approach – of co-design – may mirror CEOs desire to work more closely with their customers. Elsewhere in the Survey we found that 60% of CEOs expect consumers to play a more active role in product and service development. In this sense, why should government and business not work in a similarly collaborative fashion? The desired result would achieve governments’ desired outcomes but minimise the cost of compliance.

8 ‘Redefining Success: Government and the Global CEO – Runway to Growth’, PSRC March 2009

Smartening policy-setting and regulation

14

0%

Work more closely with the privatesector to maintain competitiveness

Ensure regulations areclear and stable

Work more closely with other nationsto harmonise regulations

Place more emphasis on fairlyenforcing existing regulations

Focus regulation on outcomes,not process

None of the above


Make the representation ofemerging economies in global

bodies more equitable

Empower multi-lateral organisationsto act as global regulators

59

57

45

39

32

21

15

0

2

Ref: Q19. In which of the following ways do you believe government could best improve the policy-setting process with regard to smarter business regulation? Base: All respondents (1,198) N.B. Respondents chose up to three of the seven possible options


CEOs also argue that regulation needs to be more supportive of business: the clearest call is to ensure that regulation is above all else clear and stable – 57% of CEOs want this, rising to nearly two thirds (65%) in North America. It is also worth noting that a slight majority of CEOs (51%) in the largest companies in our sample (over $10bn revenues) favoured closer working across borders to harmonise regulations, rather than giving more power to international regulators, a theme to which we will return in the next section.

Our government interviewees also expressed concerns about the need to address overlaps and loopholes in regulatory oversight and achieve closer dialogue between regulators and the regulated.

Are all regulations equally important?

Whilst there is a desire on both sides for regulators to work more closely with the private sector and for rules to be clear, consistent and stable e.g. on climate change, there are still varying business views by type of regulation.

Support from CEOs for new regulation is scattered and largely a minority view despite the evident lapses in the financial sector (Table 3). More CEOs are instead seeking either less regulation or better enforcement in areas where they perceive gaps in regulatory practices:

CEOs believe that some areas of regulation are priorities •for if not reducing then at least staying the same, primarily in areas which most impact their competitiveness: on innovation, access to both capital and foreign investment

opportunities and particularly on workforce practices (including pay) where 35% of CEOs want less regulation.

In other areas, CEOs favour better enforcement of existing •regulation: this particularly applies to financial sector stability, social and environmental sustainability, consumer protection rules and safeguarding intellectual property rights. For instance, CEOs favour better enforcement of existing regulation to ensure financial sector stability over less regulation by a factor of four.

Coordination minimises, if not eliminates, overlaps, improves synchronisation, and allows agencies to build upon competencies and learnings of the others.

Honorable (Hon.) Amando Tetangco Jr., Governor, Bangko Sentral ng Pilipinas, Philippines

So from our point of view the best road to regulation is through social dialogue.

Dr Juan Somavia Director-General, International Labour Organisation (ILO)

Changes desired to regulation

TABLE 03

Ref: Q18. Through what approach would you like to see regulation address each of the following areas? Base: All respondents (1,198).


More Better A different Less No change regulation enforcement of kind of regulation in (%) existing regulation regulation (%) regulation (%) (%) (%)

Financial sector stability 25 32 21 8 13

Innovation and competitiveness 12 16 19 32 18

Access to affordable capital 14 18 15 26 24

Access to foreign investment opportunities 9 14 13 32 29

Social and environmental sustainability 25 27 21 12 13

Protecting the interests of consumers and the public 20 29 16 12 21

Workforce practices, including compensation 8 16 18 35 21

Safeguarding intellectual property 26 31 11 7 22


This diagnosis by business of the nature and impact of regulation is significant – with governments under pressure to create jobs in the economy, there is a need for actions to reduce the negative impacts of regulation in areas which directly impact on the competitiveness of business whilst acting on behalf of consumers, employers and citizens to guarantee better societal outcomes.

So, how can better dialogue be achieved?

Our government interviewees were concerned about making sure that regulatory interventions are smart, flexible and judicious. There is also a strong feeling that public risk management needs to be strengthened along with system-wide (or macro-prudential) monitoring.

However, our government interviewees were also cognisant of the need to avoid excessively inhibiting innovation and place a higher priority on focusing on outcomes and specific objectives (particularly creating jobs and wealth whilst protecting the disadvantaged). In parallel, it is recognised that the processes to achieve these ends should not be overly prescriptive and that there is a preference for better enforcement of existing regulations rather than rafts of new ones, which is in line with the desires of CEOs.

Critically important in the minds of our government interviewees is the involvement of stakeholders through a proper dialogue on the practical issues of implementation and, where new regulation is needed, the importance of gradual, planned changeovers. The result in their view is a much better outcome: better informed stakeholders with a better appreciation of the rationale for regulation and so more likelihood of compliance.

Importantly, it is recognised that there is a need to engage better with Small and Medium sized Enterprises (SMEs). Large companies have the resources to invest in engaging with government and regulators whereas smaller companies are less able to do so and also to absorb compliance costs. It was noted in our discussions that there is a role for better use of new technology to facilitate this dialogue. An interesting example quoted was in Canada where an e-risk registry has been created to enable public scrutiny of new regulations (see box 4), allied to a willingness to get rid of obsolete regulations e.g. though an Open for Business initiative. In many countries, there is also a drive to improve inter-agency co-ordination, as happens for instance in the Philippines where its financial regulators interact via its Financial Stability Forum.

It’s all about the ability or the art of developing regulations that achieve specific objectives but don’t go beyond what is needed because overregulation brings creativity and innovation to a halt… Regulation is needed to avoid falling into crisis again but it has to be applied wisely because too much regulation can literally fossilize the innovative side of the private sector. It has to be done but not over-done.

David Levine Président-directeur général de l’Agence de santé et de services sociaux de Montréal, Canada

Box 4: Using new technology in Ontario

Large corporate entities design ways to talk to government – it’s part of their DNA. But our economy is actually made up of small and medium sized businesses that don’t have that same capacity. They’re busy doing their work so you can’t put these people on committees and meet every month; you can’t waste their time. So you have to find ways to interact and perhaps there’s a role for technology in that, and there’s a way to be more inclusive. We do have a regulatory electronic registry for new regulations. So we actually post regulations for a 30-day period, and everybody can see them and can comment. It’s been very successful. It’s a very transparent way to say, ‘Look, this is what we’re thinking about doing’. It has allowed us to reach people I don’t think we would have reached otherwise.

Shelly Jamieson Secretary of the Cabinet and Head of the Ontario Public Service, Canada


Summing up

It seems that whilst business perceives further increases in the regulatory burden this year and, as we have seen earlier, is unconvinced by government’s track record on achievement of its priorities e.g. on environment, skills and climate change, there is a desire on both sides for collaboration to achieve a win:win for business and government when it comes to smartening regulation. This is particularly critical at the current point in the economic cycle when governments must beware of imposing regulation which stifles innovation, competitiveness and growth of jobs. Most CEOs and the government officials we interviewed believe that dialogue and closer working between business and government – co-design - is the best way to achieve smarter regulation.

Clearly, achieving a smarter approach to regulation nationally is a challenge – whether this can be achieved globally is even more open to question. There is, however, a recognition by our interviewees of the need for greater international cooperation and information sharing but some realism on the extent to which standardisation can occur, with a call for increasing harmonisation and alignment of approaches to allow for country differences in implementation. We discuss this further in the next section.

Regulations need to be dynamic and responsive to a changing economic environment. Dialogue is important. Dialogue between regulators and other stakeholders should therefore be continuing, cordial and comprehensive... We believe that the more informed stakeholders are, the better they are able to appreciate the rationale for regulations. In turn this makes regulation (and policy) more potent in effecting the desired results.


Many Asian governments consult quite widely with the private sector when considering new policies or strategies and that is, of course, absolutely correct. Input from the private sector is always quite useful. In the same vein, ADB can provide policy-makers with best practices and lessons learned from around Asia or even other regions of the world. In this way, ADB aspires to become a kind of knowledge bank that policy makers can draw upon.

Haruhiko Kuroda President, Asian Development Bank (ADB)


Is G20 the answer?

There is a clear shift perceived, by both CEOs and our government interviewees, in the geopolitical balance – the rise of G20 has been a symbol of a change in the world order. Most CEOs (78%) expect the G20 will become the dominant political and economic power (Figure 15).

CEOs are also increasingly confident that efforts by government and business can effectively confront global challenges like climate change, terrorism and financial crises. As noted earlier, they have long sought more cooperation amongst governments to harmonise tax and address other overlapping regulatory burdens that stem from running an international business operation. There is now an expectation from a majority of CEOs (57%, compared with 46% last year) that business and government efforts will be able to mitigate global risks like climate change, terrorism and financial crises.

This is a significant change to last year’s contrary set of views which may, perhaps, be borne of the experience of governments working together to avert the global financial crisis going into meltdown.

This is further supported by a confidence amongst two thirds of CEOs (65%) that regulatory co-operation among national governments will help successfully mitigate systemic risks such as economic crisis, particularly among CEOs in Asia Pacific (72%) and the Middle East (75%). A slightly lower proportion of CEOs (47%) expect this to extend to the harmonisation of new regulations although there is more pessimism in North America where only a third (34%) see this happening (Figure 16).

Strikingly, however, this trend to harmonisation stops short of calling for regulation by multilateral bodies, with a split view from CEOs on whether national regulators will give more authority to global or regional bodies and with CEOs in North America again more sceptical, only a quarter (25%) thinking that.

The outlook for policy harmonisation

Whilst the Great Recession has driven a more ‘hands-on’ economic policy-making approach in developed and emerging economies alike, the outlook for policy harmonisation amongst governments and the degree to which the hands-on approach will persist is of utmost importance in understanding the unfolding economic landscape. The global financial crisis has sharpened the recognition by CEOs that government has a key role in shaping responses to global risks, that markets cannot solve all problems and that intervention is needed. There is, however, less certainty on how this role is best deployed and by whom.


The rise of the G20

15

0% 0%

2010 2009

Governments wil become more protectionist

The pressure on natural resourceswill continue to increase

Within nations,the gap between richand poor people will increase

Government and business efforts will beunable to mitigate key global risks like

climate change, terrorism and financial crisis



The G20 will be the new dominant economicand political power in the world



Within nations,the gap between richand poor people will decrease

Government and business efforts will mitigate key global risks like climate change, terrorism and financial crisis

Multi-lateral organisations will increasinglyprovide oversight on regulatory issues suchas in financial services

The G20 nations will remain the dominanteconomic and political powers in the world

-65 32 -46 51

-60 38 -72 26

-78 19 -73 25

-68 28 -70 27

-39 57 -50 46

-55 42

Note: *G20 is full G20, including G8Base: All respondents (2009 = 1,198; 2008 = 1,124). Respondents chose a scenario from each pair, or the option ‘Don’t know/Refused’


Regulatory cooperation

16

Ref: Q20. How much do you agree or disagree with each of the following statements about anticipated regulatory cooperation among national governments on new regulations? Base: All respondents (1,198).



2

Neither/Nor

17

223

423

0%

Regulatory cooperation will help successfully mitigate systemicrisks such as another economic crisis or climate change

National regulators will give more authority toglobal or regional bodies

New regulations will largely be harmonised because ofcooperation among governments


Neither/Nor highest in Asia Pacific and CEE

641

31 6-7 -31

-5

-3 -13

-22

53 12


As CEOs are less certain that multilateral organisations will supplant oversight by national regulators any time soon or that national government will empower multilateral organisations to act as global regulators, this begs the question: where will effective supra-national cooperation on economic and financial policies take place?

Given that most CEOs expect the G20, representing 85% of the global economy, will become the dominant political and economic power it might be expected that this will be the obvious forum for such supra-national cooperation. Yet whilst the G20 set out an ambitious agenda in September 2009 to work together on growth, climate change and financial regulation, among other issues, the stresses facing financial policy-makers representing nations from a wider range of growth and development stages are evident.

Indeed, the G20 forum poses its own challenges for global policy coordination. In recent years, global negotiations have become more difficult as more parties, often with differing perspectives and constituencies, come to the table, as witnessed by the current stalled status of the World Trade Organisation’s Doha trade talks. Of course, global forums such as the WTO and the G20 are not the only outlet for national cooperation on economic policy. Even as the WTO’s talks have broken down, for example, regional trade agreements have risen sharply higher, accompanying a broader trend of rising intra-regional trade and capital flows, before the financial crisis (Figure 17). Such agreements are thought to impede global trade in the long-term. Yet, they could represent stepping stones towards global coordination and begin the process of harmonisation amongst neighbouring nations that are likely to have some interests in common. Still, some issues require truly global frameworks, such as climate change, to prevent individual countries undercutting the desired outcomes of such regulatory cooperation.

The case for harmonisation

Our government interviewees also highlighted to us the need for a more systemic approach to global risks, borne of recognition that countries are becoming ever more interdependent and the need to look at risks in aggregate rather than at the level of an individual institution, sector or country. Similarly the lack of congruence between individual action and the collective good is spurring a move towards greater information sharing across regulators to minimise risks, allied to a push for stronger governance corporately to manage risks more effectively and carry them down from Board level to the front-line. Whilst there is recognition of the difficulty of applying regulations globally, there is also evidently a willingness to try harder.

How well national governments coordinate on regulatory reform is however less clear, even when regulators have similar intentions. The day after UK authorities in December imposed a one-time, 50% tax on bonuses of more than £25,000 in UK banks, for example, France announced similar steps. Yet, Germany decided against a new tax, a move Deutsche Bank’s CEO said should strengthen the country as a financial hub9. The example highlights the link between national competitiveness and regulation, and the need for harmonisation in order to reduce regulatory arbitrage.

9 Ackermann Sees German ‘Advantage’ Without Bonus Tax”, Bloomberg, 12 Dec, 2009. (http://www.bloomberg.com/apps/news?pid=20601109&sid=aLP_cZ3zUNw4)

I think it’s probably not realistic to think that regulatory frameworks are going to be identical across countries. It’s probably not productive to even try to achieve that. But convergence, meaning moving closer together while allowing for somewhat differing approaches, yes, I think that is a positive. That has to help in terms of facilitating international transactions and trade.



Num

ber

of r

egio

nal f

ree

trad

e ag

reem

ents

co

min

g in

to fo

rce

0

2

4

6

8

10

12

14

16

1959 2009*1964 1969 1974 1979 1984 1989 1994 1999 2004

*through October

Regional Trade Agreements

17

Source: World Trade Organisation RTA database

There is also a desire to increase collaboration between multilateral governmental institutions (EU, UN, WB and IMF) to help to foresee future crises and mitigate their impacts. If this does not happen, we may even see an acceleration of an interesting trend whereby world cities are taking up some of the responsibility by collaborating directly, bypassing national governments e.g. on climate change, energy management and a variety of other pressing cross-border issues.

However, there is limited appetite, and indeed some healthy scepticism, amongst our government interviewees for new global institutions – like CEOs, most favour more of a push to harmonise regulatory approaches.

Summing up

It is evident that harmonisation is in vogue and a desire for a more systemic approach to tackling global risks but through improving collaboration, and reform, of existing institutions rather than a desire to create a new panoply of multilateral oversight. The G20 is evidently seen as a more important forum for collaboration, although whether it has the capacity and cohesiveness to make a real difference is as yet untested, with a number of the reforms proposed at recent meetings yet to be fully followed through.

We remain optimistic, however, that the G20 is the right forum for addressing global risks, even if more needs to be done to strengthen the supporting infrastructure to make things happen.

It’s a bit too many Gs [G8, G20]. There is some inflation of such institutions here. Their function is not absolutely clear, whether or not they, for example, should be a substitute for international institutions that don’t work. It is definitely necessary to include economically strong states in these organisations, even when they do not have a status of market economies, such as China, for example, and non-members of OECD.

Martin Tlapa Deputy Minister, Ministry of Industry and Trade, Czech Republic

So are governments working together better? Yes, the G20 took the responsibility to take some central decisions. I believe that that was a good initiative but at the same time we have to move in the wider context of the United Nations system, the Economic and Social Council so you have the force and the strength and the leadership coming out of the G20 but you also ensure that the rest of the countries feel that what we are doing is something that is of interest to everybody.

Dr Juan Somavia Director-General, ILO


Governments across the world are therefore facing the twin policy challenges of maintaining support for their economies long enough to ensure a robust, private sector-driven economic recovery takes shape whilst at the same time planning for a new era of much higher public sector debt which will remain with us all for many years to come. Whilst CEOs did not offer their views on these challenges, our government interviewees had some robust opinions.

Walking a tightrope

Latest estimates, and the views of our CEOs, indicate that 2010 will see a return to world growth. As the global economy makes a gradual recovery, governments will soon need to make decisions on their economic stimulus packages in order to avoid over-stimulating their economies lest inflation rear its ugly head.

The timing of exit from the accommodative fiscal and monetary policy is clearly a threat currently troubling administrations at international and national levels. The concerns expressed by our senior government interviewees expressed this as walking a tightrope between disrupting growth if support is withdrawn too quickly and seeing inflation take off if economic stimulus is maintained for too long. In some regions, this is compounded by the need to re-balance economies away from export-led growth to more reliance on domestic consumers, particularly in Asia. In most countries, there is also a need to re-build consumer confidence.

In addition, critics of government policy claim that economic stimulus packages are proving very expensive and inefficient as a way of creating jobs, with Reuters estimating that in the US the economic stimulus package “has saved or created 640,329 jobs since it was enacted back in February through the end of October... That amounts to $246,436 per job based on the $157.8bn that has been awarded so far.”11

A separate study12 calculates that since 2000 Spain has spent €571,138 to create each “green job”. Although the types of data, assumptions and criteria used in these examples are different with more substantive research needed for a comparable analysis and robust conclusions, the general issue raised is that of the need for more substantive research to evaluate the effectiveness of such job creaton programmes.

Government as debtor

Stimulus spending is underpinning the recovery – the IMF estimates that support committed (if not fully implemented) to the financial sector alone has reached close to 6% of GDP for the advanced G20 economies and 0.4% for emerging economies10. Yet public debt is ballooning in the process, virtually assuring higher taxes and/or reduced public spending in many nations once recovery sets in.

One is the timing of the exit from the accommodative monetary and fiscal measures... Late withdrawal raises the spectre of inflation and asset bubble as ultra low rates may lead to inappropriate risk taking. Excess liquidity remaining in the system longer than necessary can lead to higher inflation. On the other the hand, too early withdrawal of supportive monetary and fiscal policies could disrupt growth.


10 IMF/ Fiscal Affairs Department “The State of Public Finances Cross-Country Fiscal Monitor: November 2009” 11 ‘Cost-Benefit analysis of jobs stimulus’, James Pethokoukis, Reuters, 7 December, 2009 12 ‘Study of the effects on employment of public aid to renewable energy sources’, Universidad Rey Juan Carlos, Spain


Dealing with debt

Equally pressing is the build up of debt caused by a vicious combination of bank bailouts with subsequent declines in tax revenues and rises in social protection spending as well as spending to stimulate a return to economic growth. According to Robert Bhatia, Deputy Minister of Alberta Seniors and Community Supports, Canada, the result is a ‘fragility of government budget positions’.

Many governments have a fiscal mountain to climb, as can be seen from the trajectory of debt for G20 countries in Figure 18, particularly for those which did not build up reserves in the boom years. This applies at state, local and city as well as national levels.

In the short term, the focus remains on stimulating economies by maintaining increases in public spending as the global economy turns around and heads towards the recovery ward. But, in the medium term, dealing with debt on such an unprecedented scale and avoiding a long term drag on economic recovery requires credible, sustainable plans to address the fiscal gap and avoid a return to intensive care.

Governments, particularly in developed economies, need therefore to develop credible plans to return to sustainable public finances by a combination of tax rises and spending cuts whilst being mindful of the impact of actions on growth, development and social outcomes e.g. better educated, healthier populations with less poverty and, in the long run, mitigating impacts on climate change.

Yet a return to growth is fundamental because it is the primary source of government revenue through personal and corporate income taxes. The priority for government, therefore, is to spend on projects with a high social and economic return, which will assist private sector wealth creation. This includes infrastructure projects, support for SMEs and strategic sectors as well as addressing longer term policy challenges such as healthcare, education, ageing populations and the desire for low carbon economies.

Government debt of G20 countries as % of GDP

18

0

20

40

60

80

100

120

140

%

2014201020092007

Emerging G20 economies Advanced G20 economies

Source: IMF staff Position Note, November 2009

Let me say first that I don’t think there is any government in the world that wanted to get into this level of debt. They were obliged by the crisis of the financial system so I believe the financial system has a big responsibility in ensuring that governments don’t have to continue being indebted, they have to help the real economy to get going and for that they have to lend… So what should be your strategy to progressively exit from this level of debt? I would say you have to prioritise job creation or social protection, for the more vulnerable, anything that has to do with increasing investment, sustainable enterprise, job creation – and leave it to the last.

Dr Juan Somavia Director-General, ILO

We have a deficit that we need to address, which means that we’re in the middle of an expenditure restraint exercise where we’re looking at our core businesses across government and saying, ‘Which are the ones that we fundamentally have to be in?’ ‘Who can best provide these services?

Shelly Jamieson Secretary of the Cabinet and Head of the Ontario Public Service, Canada


Doing more with less

There are also important steps that governments can take to do more with less. An obvious starting point is to focus on improving operational efficiency. The most politically attractive areas are in the back office, through reducing duplication, sharing services and re-deploying resources to the front-line. The UK’s Operational Efficiency Programme (OEP) is an example of this approach where the government is seeking efficiency savings in five areas: back office and IT, collaborative procurement, asset management, property and through local incentives and empowerment. The lesson from history, however, is that a focus on efficiency, is rarely enough to turn around major fiscal deficits – governments must transform their approach and seek radically new ways of doing things (see Box 5).

But while delivery efficiencies can save money and improve service, they can’t save, say, 10 percent of your overall budget. If you’re sending $1000 cheques to tens of thousands of people every month and manage to do that more efficiently, you will save money. Instead of costing you three dollars a month to send a cheque out, you may get it down to one dollar. That’s great, but you’re still sending $1000 payments. So, increased efficiency is only a small part of the budget challenge.


Box 5: Lessons from international experience

Netherlands Study Group on the Budget Margin

The Netherlands experienced a period of successive budget deficits in the 1980s and early 1990s. The Study Group on the Budget Margin proposed reforms including a medium-term framework and an agreement process for establishing policy and budget priorities for the duration of the parliamentary term. After implementing these reforms, net debt was reduced by 50% between 1995 and 2009.

Canada’s Programme Review 1994-99

Canada’s public finances were in crisis in the early 1990s, with debt at around 70% of GDP and a budget deficit which peaked at 9.2% of GDP. This prompted a wide-ranging Programme Review, which started from the premise of “what is the Government’s role?” rather than “what shall we cut from the budget?” The Prime Minister was a strong champion for change and a public campaign formed a consensus within Canada that the debt had to be eliminated. Programmes were put through a common Programme Review Test, and those that failed were marked for abandonment or transfers. The biggest savings by far were from “stopping doing things” – efficiency measures just did not make enough of a difference. As a result public sector employment fell by 23% (c. 47,000 jobs) in three years and the budget returned to surplus within a decade.

Sweden’s Consolidation Programme 1995-98

Sweden’s programme was also prompted by poor finances (debt at 84% of GDP and a budget deficit around 10% of GDP). The programme introduced three-year ceilings on expenditure for each ministry. It was up to departments to fulfil service obligations whilst achieving budget cuts of 11% from 1995-98. After 1998, public agencies had to match private sector productivity levels. Debt fell to around 40% of GDP by 2006.

Ireland 2008-09

Facing rising deficits, in November 2008 the Irish government established a Special Group on Public Service Numbers and Expenditure Programmes to make recommendations for a return to ‘sustainable public finances’. The Group, comprising public and private sector representatives, reviewed each government department’s spend as well as cross-cutting issues and themes and asked whether services were needed and, if so, whether public or private sector should provide them. The Special Group recently reported and identified €5.3 billion of savings i.e. 9.3% of relevant public spending.


The single most important factor in unlocking significant, sustainable reductions in public spending is strong political leadership at the highest level. Without political will and ownership at the highest level, nothing will change. This sets the tone for officials and Chief Executives across the public sector and puts doing more for less at the top of the agenda, alongside the delivery of services to meet public demand.

Prioritisation

Public support and understanding of the issues and the challenge are also vital whilst any measures to reduce costs or re-prioritise services must be a coherent package, so that the ‘pain’ is shared. Governments can also draw on best practice from the private sector. Public sector organisations need to look beyond traditional approaches to cost reduction and encourage new ideas and practices that will transform service delivery.

Private sector companies that are emerging from the downturn as winners are those who have proactively undertaken a strategic, financial and operational review, while positively maintaining ‘business as usual’ and managing their varying stakeholders’ agendas. We believe that these core principles are equally applicable in helping public sector organisations to work through the current economic downturn.

In particular, business has learnt through harsh experience that it is critical to set priorities and allocate the scarce resources available accordingly. Similarly, governments need to stop doing some things in order to focus on other areas of higher priority. Government needs to undertake a fundamental review of its activity and role. In particular, government must prioritise ruthlessly and ensure spending is ‘on strategy’ and not wasted because ‘we’ve always done things that way’ (see Box 6 for an approach to prioritisation).

This, of course, is easier said than done, particularly if it is to be done in a rational and robust way. It is far too easy to develop lists of activities to cut, programmes to stop and organisations to cull, without thinking through the systemic consequences, or to focus on areas of spend which are ‘easy’ to cut. It is also straightforward to call for (although harder to deliver) across-the-board cuts of, say, 10 or 20% without assessing the relative priority of different areas of spend.

These approaches risk incoherent decisions where some very high priority frontline services are cut, whilst some less important activities continue. Similarly, cuts in one area made without consideration for the related services can risk worse outcomes. We believe that a consistent, robust, evidence-based approach is the best way to achieve lasting consensus and success, and ensure a coherent approach to new, lower cost public service delivery.

Where you make the most progress with the efficiency agenda is when the political leader and the official leader are both clearly signed up. If one of them isn’t, you’ll make some progress, but not a lot – and if neither of them are, you are not going to make any progress at all.

Sir Peter Gershon UK Civil Service World, 30 June 2009


Summing up

Governments are facing a conundrum – how to deal with ever more debt at a time when needs are rising, with the economic downturn resulting in greater numbers of unemployed and disadvantaged people needing state assistance. Efficiency improvements will be necessary, but not sufficient on their own to fill the fiscal gap. It will also mean revisiting the role of government, stopping some activities, prioritising some areas over others and re-designing service delivery.

Turning the tide of debt by taking tough decisions on both tax and spending will be critical to restoring the public finances back to health. Failing to fix fiscal problems, by contrast, would be a recipe for persistently high interest rates, more volatile currencies and a less certain environment for business investment, employment and growth.

Sustainable solutions require political will and ownership at the highest level. This must, in our view, entail a combination of tax rises and spending cuts, where the decisions on both are guided by the impacts on economic growth and social outcomes – progressive austerity is the order of the day. But, as any business or family household knows, balancing budgets still requires tough choices and a robust, evidence-based approach to prioritisation which balances the relative importance of government programmes with the ability of government to deliver.

A strategic prioritisation tool for government

Evidence BaseCost-benefit analysis

Core competence analysis

DO

consider

doing more

BUY

invest,

do smarter

SELL

or run cheaply

for a return

STOP

sell any

components

you can

Str

ateg

ic P

riorit

ies

Rel

ativ

e P

riorit

y

Relative PerformanceHigh Low

Low

High

Box 6: A strategic approach to prioritisation

Based on a wide range of public and private sector experience, our view is that prioritisation needs to separate out two important elements of decision making: the relative priority of different areas of spend (which is subjective and will often be determined politically) and the relative performance of the public sector in delivering the service (as determined by an objective cost/benefit analysis). Lower priority services which are delivered poorly are candidates to be stopped; if they are delivered effectively there may be a case for privatisation, or possibly for providing the service to a lower standard at a lower cost. In contrast, higher priority services should continue to be provided, though with radical redesign (e.g. outsourcing) if the public sector provides them poorly at the moment.

The technique is intended to take a ‘zero-based’ approach. Indeed, the approach is as much a process as an outcome - it is essential to involve decision-makers and key stakeholders, as the conclusions should be theirs if they are to be subsequently implemented. The tool can be applied at any level, be it the whole of government or part of an agency, and we believe it is essential as a mechanism for ensuring tough choices are made in a robust and evidence-based way.


CEOs and governments around the world need to look forward. Governments must act as intelligent investors: for growth to take off, governments at all levels must invest holistically, strategically and sustainably in the ‘capitals’ needed by any society for long term prosperity, with the priority being projects with a high social and economic return, which will assist private sector wealth creation, particularly in infrastructure. Equally, governments should be wary of cutting investment plans to balance the books – this will not solve structural fiscal deficits, and will only serve to solve today’s problem at the expense of creating new ones for tomorrow.

There will also be a need for more collaboration between countries based on a need for enhanced infrastructure between as well as within countries (‘joint capitals’) e.g. intelligent transport infrastructure and broadband, as well as to solve debt problems. Yet this must be done carefully given that, at the same time, many governments face rising budget deficits.

It is striking also to reflect on the lessons of the global financial crisis which our interviewees highlighted including a need to:

align policies and have a clear vision of what is being •achieved, particularly avoiding asset bubbles, be they in real estate, commodities or capital markets;

sharpen public and private risk management systems;•

improve coordination between government agencies;•

maintain a dialogue between the public and private •sectors;

question the status quo on a continuing basis; and•

focus on social protection and going for job creation •and growth.

The financial crisis and subsequent global recession has highlighted the central role of government in addressing global and systemic risks. There is no doubt that much stronger global governance is needed to safeguard the fundamentals of the world economy, particularly human and financial capital and natural resources. Public risk management must also improve with stronger mechanisms for mitigating global systemic risks needed, including reform of institutions such as the IMF and World Bank and a greater role for the G20 as a real-time decision -making forum.

Most importantly, governments must continue to re-build confidence and public trust, reduce uncertainty further through intelligent and authentic leadership and vision and create policies and mechanisms for collaboration that are appropriate for today’s global flows of capital. Public sector leaders must shift gear, from being reactive to events to being both proactive and interactive, with business and society. Governments must seize the opportunity to chart a way ahead, investing in the future as the global economy takes off towards growth.

Final thoughts: Governments as intelligent investors

Business concern is focusing, rightly, on protracted recession. CEOs and Governments around the world are preparing for take off and a return to growth. But now is also a time for governments to reflect and learn the lessons of the global financial crisis and put in place the processes and early-warning systems which will help reduce the risk of another global recession in the foreseeable future.

Public and private sector risk management systems must be sharpened. Coordination among government agencies must be improved. Dialogue between the private and public sectors must continue.



The following individuals and groups in PricewaterhouseCoopers and elsewhere contributed to the production of this report.

Acknowledgements

Core editorial teamJan Sturesson Partner, Global Government & Public Services Leader

Carter PatePartner, Global Government & Public Services Co-Leader

Nick C JonesDirector, PwC’s Public Sector Research Centre

ResearchAlina StefanGlobal CEO Survey Team

Claire StylesGlobal CEO Survey Team

Hayley RimmerGlobal CEO Survey Team

Jill HaasanInternational Survey Unit

Other contributorsEgon de Haas Global Government

Sophie Lambin Director, Global Thought Leadership

Lindsey Ford Government and Public Sector Marketing, UK

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100%

Setting a smarter course foAutomotive

13th Annual Global CEO Survey

Few, if any, business leaders will forget the past 18 monhave ever experienced. Setting a smarter course for gGlobal CEO Survey, looks at what measures CEOs are tcrisis business environment and what changes they are 1,198 business leaders from around the globe, includingNovember 2009 and conducted further in-depth interviewNovember 2009 and conducted further in depth interview

What did we learn? Global business leaders had to make dramheadcount, selling off assets and preserving cash. That painfurisk in an increasingly volatile world. It’s abundantly clear how CEOs now know they need to plan for volatility.

To do that, CEOs have begun to reshape not only their strategaddress risk at a deeper level. And it takes organisational agilibecome risk averse; rather, they may become more deliberateensuring they can execute on it. The result, we believe, will bea sustainable long-term upside for organisations – while accouforces that comprise both threats and opportunities.

Sector Key FindingsBusiness model changes in the offingBusiness model changes in the offingThe automotive industry is undergoing some of the most signoperating model in nearly 100 years, as a result of new powetechnologies, increasing interest in electric vehicles and the emerging markets. Hence the fact that 68% of automotive CEcompanies’ organisational structure.

Confidence levels improvingLast ear a tomoti e CEOs ere the least confident in theiLast year, automotive CEOs were the least confident in theisector in our survey. This year their expectations have improwhile CEOs in the automotive sector are less likely to state tabout prospects for revenue growth over the next 12 monthssectors, they are actually more likely to state they are ‘someware 'not confident at all' -- a big improvement from last year's

Climate change offers risks, opportunitiesCli t h i i ifi t i f th t ti i dClimate change is a significant issue for the automotive inducompanies struggling to stay afloat in the global recession, alikely to report that the recession has delayed their companychange strategy. CEOs in the automotive sector are more likimpacts of climate-change initiatives in the coming 12 monthsectors, though. More of them see compliance with climate-cto be a significant expense for their company than do CEOssame time, compared to CEOs across all sectors, more alsosame time, compared to CEOs across all sectors, more alsochange initiatives will lead to significant new product and ser

Sector responding to broader pressure on natural resMore automotive CEOs state the pressure on natural resourcincrease than do CEOs across the survey sample. In responautomotive companies devoting efforts to enhancing developreduce the amount of resources needed to produce and run

PricewaterhouseCoopers LLP

or growth:

ths. The global recession was the most serious many growth, the PricewaterhouseCoopers 13th Annual taking in response to recession, how they view the post-making to adapt their organisations. We surveyed

g 50 automotive sector CEOs, from September to ws with 27 CEOsws with 27 CEOs.

matic changes to their organisations, including reducing ul experience has led many CEOs to rethink their approach to

quickly a contagion can spread, and how damaging it can be.

gies, but also their capabilities. It takes strategic flexibility toty to respond to volatility. That doesn’t mean CEOs will

e in examining alternatives, formulating a Plan B, and e a smarter course for growth, a resilient path that will produceunting for a range of economic, social and environmental

Rethink Strategic direction

nificant changes in its ertrain and connecting growing importance of the EOs plan to change their

r 12 months o tlook of an

Reshape Business models

Result Growth

r 12 months outlook of any oved considerably. And hey are ‘very confident’

s than their peers in other what confident. Only 4%

s 18%.

t b t ith

Talking PointsIs your business model responding to new vehicle trends and the growing

stry, but with many automotive CEOs are more y's investment in its climate kely to be preparing for the hs than their peers in other change initiatives as likely across the sample. At the

o believe that climate-

importance of emerging markets?

How are you coping with climate change and resource scarcity?o believe that climate

rvice opportunities.

sourcesces will continue to

nse, we see many pment in new areas which vehicles.

scarcity?



Sector Key FindingsStabilising the supply network is crucial Automotive CEOs are much more concerned about financsuppliers than CEOs in other sectors. They are also moresupply-chain security and more likely to be actively collabsupply-chain security and more likely to be actively collabtheir partners to manage risk. This is partly because the asupply chain is very integrated; many original equipment (OEMs) share key suppliers, so problems at one companaffect others. In addition, automotive companies rely on thinvest in new technologies and many suppliers are struggthese investments, given the current economic climate anan industry long burdened with excess capacity and low p

Risk management also a general focusAutomotive CEOs are also paying more attention to otherrisk; ninety-two percent are planning to allocate more resrelated information gathering and analysis.

Exchange rate volatility a concernMore automotive CEOs are concerned about exchange rath th i th l h l fl tithan their peers across the sample as a whole, reflecting international exposure of many players in the industry.

Achieving cost efficienciesAutomotive CEOs think investing in cost efficiencies is implan to spend more on such initiatives over the next threedramatic shifts in consumer behaviour, together with newand structural changes, will make it difficult for many comreduce their costs substantially.

Headcounts down; Auto companies supporting staffEighty percent of automotive CEOs report headcount redhighest percentage of any sector in our survey. Automotivalso changing some of their approaches to people strategto the overall sample, more automotive CEOs state that tchanging their strategy around managing people through redefining roles in the organisation) and staff morale and engagement programmes.

Bringing more activities back in-houseCompared to the overall sample, more automotive CEOsthey have 'insourced' a previously outsourced business pfunction in the last 12 months, suggesting that some comreassessing the cost savings gained by outsourcing arrang g g y g


or growth:

cially stressed e worried about borating with

Rethink Supplier networks

Reshape Risk exposure

Result Stabilityborating with automotive manufacturers y can quickly heir suppliers to gling to fund nd its impact on profitability.

Related Talking PointsTo what extent are you collaborating with financially

r areas around ources to risk-

ate volatility th

collaborating with financially stressed suppliers to manage risk?

How are you managing exchange rate volatility?

What impact have costthe

mperative; 90% e years. But

w regulations mpanies to

What impact have cost reductions had on your staff? Are you supporting them through change and investing in employee morale programmes?

uction -- the ve CEOs are gy. Compared hey will be change (e.g.,

Have you ended any outsourcing arrangements this year? What factored into the decision?

employee

s report that process or panies are

ngements.g

pwc



Sector Key FindingsConcerns about funding Most automotive companies need to invest in meeting evstandards and promoting innovation, fulfilling demand for technologically integrated vehicles and expanding their ptechnologically integrated vehicles and expanding their pgrowth regions. So it is not surprising that 72% of automosomewhat or extremely concerned about the volatility of tmarkets (compared with 58 % of the total survey populati

New product development remains keyNew product development remains a key area of focus. Mthe automotive sector see new product development as th

t it t th i b i i th t 12 th topportunity to grow their business in the next 12 months tpeers across the overall sample.

Bank lending more importantCEOs in the automotive sector are more likely to finance bank lending (50% vs. 40% overall), but given the tough tsector, accessing these types of funds may be difficult go

The impact of government interventionThe impact of government interventionA number of automotive manufacturers received widely pgovernment bailouts in 2009. But though 56% of automotbelieve that government ownership helps to stabilise an inof crisis, 82% think that it also results in political interferenmarketplace.

Automotive CEOs see slight drop in public trustGovernment bail outs have shaken the trust of some consGovernment bail-outs have shaken the trust of some consauto industry, and automotive CEOs recognise this to somautomotive CEOs are more likely to state there has been public trust in their sector as a result of the economic crisother sectors.

Looking for less regulation on innovation, workforce Innovation is absolutely critical to maintaining competitive

t ti i d t M t ti i bautomotive industry. Many automotive companies are buworkforce obligations which cast a shadow over their balaimproving the situation is key to achieving long-term fiscaboth of these factors, it's not surprising that 50% of CEOautomotive sector would like to see less regulation regardand competitiveness, and 56% favour less regulation of wpractices, including compensation.


or growth:

olving r more resence in

Rethink Financing options

Reshape Bank lending

Result Liquidity

resence in otive CEOs are the capital on).

More CEOs in he main th d th i

Related Talking PointsDo you have sufficient fi i t f dthan do their

growth through times facing the

oing forward.

financing to fund new product development, including responding to new trends? How is your relationship to bank lenders?

Are you working to buildpublicised tive CEOsndustry in times nce in the

sumers in the

Are you working to build public trust in your company and the sector as a whole?

Are you sharing the message with your national government that less

sumers in the me extent --a slight fall in is than CEOs in

practiceseness in the

d d ith

regulation is needed, particularly around innovation and workforce practices?

urdened with ance sheet; al health. Given Os in the ding innovation workforce

pwc



Learn morePlease see www.pwc.com/ceosurvey to access the full PSurvey, Setting a smarter course for growth, and supportalong with other online resources.

C t t d t ilContact details

www.pwc.com

Rick HannaGlobal Automotive Leader+1 313 248 [email protected]

Francis CizmarGlobal Automotive Programme Team+1 313 394 [email protected]


This publication has been prepared for general guidance on matters of interest only, and does not conswithout obtaining specific professional advice. No representation or warranty (express or implied) is givextent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accacting, or refraining to act, in reliance on the information contained in this publication or for any decisio

© 2010 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to Pricewarequires, the PricewaterhouseCoopers global network or other member firms of the network, each of w

Design_1000081_jp

or growth:

PricewaterhouseCoopers 13th Annual Global CEO ing Visual Story and In-depth CEO Story documents,

Alexander MuellerGlobal Automotive Programme Team+49 511 5357 [email protected]

4

stitute professional advice. You should not act upon the information contained in this publication ven as to the accuracy or completeness of the information contained in this publication, and, to the cept or assume any liability, responsibility or duty of care for any consequences of you or anyone else n based on it.

aterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context which is a separate and independent legal entity.

Setting a smarter course foChemicals


Few, if any, business leaders will forget the past 18 monhave ever experienced. Setting a smarter course for growCEO Survey, looks at what measures CEOs are taking ibusiness environment and what changes they are makinbusiness leaders from around the globe, including 46 ch2009 and conducted further in-depth interviews with 27 C2009 and conducted further in depth interviews with 27 C



Sector Key FindingsReady to strike a dealThe number of chemicals companies engaging in cross-band acquisitions is substantially higher than it is in other sthree percent of chemicals CEOs have completed at leaswithin the past 12 months and 46% plan to do so within thmonths.

Looking to Asia to lead the wayThe chemicals industry is particularly strong in Asia and N67% of chemicals CEOs head companies with operations59% head companies with operations in North America (c42% and 36%, respectively, of the total survey sample). Hchemicals CEOs, like their peers in other sectors, expect more profitable than North America over the next 12 monpanticipate doing more business in the former, while only 5doing more business in the latter.

Innovation key to growthChemicals CEOs continue to invest in new product innovpercent plan to increase their expenditure on R&D over thyears, which is more than in any other sector except ente

di ( 4%) I d d 30% f h i l CEO lmedia (at 74%). Indeed, 30% of chemicals CEOs plan to‘significant’ increases in the amount they invest.


or growth:

ths. The global recession was the most serious many wth, the PricewaterhouseCoopers 13th Annual Global n response to recession, how they view the post-crisis

ng to adapt their organisations. We surveyed 1,198 emicals sector CEOs, from September to November CEOsCEOs.





Talking Points

border mergers sectors. Thirty-st one such deal he next 12

How are you evaluating acquisition targets?

Are you well-positioned to take advantage of growing markets in Asia?

North America; s in Asia and compared with However, most Asia to prove

nths; 84%

Will you be able to keep up with competitors who are increasing spend on R&D to drive innovation?

52% anticipate

ation. Sixty-five he next three ertainment &

ko make



Sector Key FindingsBacking tomorrow's leadersEighty-three percent of chemicals CEOs also plan to spenleadership and talent development over the next three yethese CEOs intend to spend ‘significantly’ morethese CEOs intend to spend significantly more.

Cost-cutting and infrastructure improvements planneCost-cutting and infrastructure improvements are high onchemicals CEOs, too. Eighty-seven percent aim to investcutting initiatives over the next three years. Similarly, 76%more in upgrading their strategic technological infrastructfacilitate modern manufacturing and logistics processes.

Major changes in the offingMore chemical CEOs -- 39% -- anticipate a major changecompany's organisational structure in the wake of the ecodownturn.

Inflation, protectionism, exchange rates seen as majoChemicals CEOs are much more concerned about inflatiopossible protectionist tendencies of national governmentpossible protectionist tendencies of national government in other sectors; a full 63% are somewhat or very concernthese factors may prove a threat to growth (compared to respectively, of the overall sample). An even larger numbalso worried that exchange rate volatility may pose a threjust 58% of the survey sample overall. These findings refstrong exposure to macroeconomic trends.

Energy costs remain a major challengeEnergy costs remain a major challengeChemicals CEOs are much more likely to be concerned acosts (72% vs. 53%) than their peers across the overall sresult is based primarily on concerns over oil prices, refleimportance of petroleum as a raw material for many prodthe energy-intensive nature of the sector's production andprocesses.

Low cost competition rings alarm bellsLow-cost competition rings alarm bellsSeventy percent of chemicals chief executives express cocost competition may threaten growth, compared to 54% sample overall.


or growth:

nd more on ears, and 30% of

Rethink Reporting lines

Reshape The organisation

Result Simpler structures

edn the agenda of t more in cost-% aim to invest ture in order to

Related Talking PointsIs your strategic technology

e in their onomic

or riskson and about than their peers

iDo you have robust programmes in place to foster key research talent and groom tomorrow's leaders?

nfrastructure robust enoughthan their peers ned that both of 40% and 49%,

ber -- 76%-- are eat, compared to lect the sector's

nfrastructure robust enough to handle globally networked supply chains and increasing security requirements?

Have you optimised your

about energy sample. This ecting the ucts, as well as d transport

organisational structure?

Do you have a full picture of how oil price volatility could impact your profitability?

Are you responding to the

oncern that low-of the survey

threat of low-cost competition? What actions are you taking to position your business?



Sector Key FindingsResource scarcity, terrorism, supply chain security akey issuesChemicals CEOs are also more concerned about a numbth t t b i th Th h lik l tthreats to business growth. They are much more likely to or extremely concerned about future scarcity of natural revs. 35% overall), as chemical producers rely on natural resupply raw materials for their products. Further, over half overall) see security of the supply chain as an issue, whilexpressing concern, compared to 30% of the sample ovepercent worry about terrorism, compared to 30% of the saConcerns over terrorism and security of the supply chainConcerns over terrorism and security of the supply chain reality that many chemical products can be dangerous to store.

Climate change and pandemics also cause for concerOther systemic risks also raise red flags for sector CEOs.(vs. 37% overall) are concerned about climate change. Pother health crises have also moved up the list, with 48%concern compared to 35% overallconcern, compared to 35% overall.

Bank financing seen as more accessibleMore chemicals CEOs, around 30%, anticipate that accesfinancing and credit will actually become easier after econsets in, compared with before the economic crisis.

Sector CEOs believe systemic risks can be addressedMany chemical companies are developing products to hey p p g pother industries use resources more efficiently and combachange, and chemicals CEOs are accordingly much moretheir peers to believe that efficiency of natural resource uimprove in the future (59% vs. 38% of the overall sample)view that scarcity of resources poses a risk. They are alsothan their peers in other sectors to believe that governmeefforts will mitigate key global risks like climate change, tefi i l ifinancial crises.

CSR will be a top priority for tomorrow's consumersChemical CEOs are even more convinced than their peerconsumers will place a higher emphasis on a company's and corporate responsibility practices before making a puvs. 64% overall). They are less convinced that consumersmore active role in product and service development, tho60% overall), and also not as convinced that consumers wfamiliar brands.


or growth:

re

ber of other b h t

Rethink Systemic risk

Reshape Collaboration

Result A better world

be somewhat esources (63% esources to (54% vs. 34% e 43%

erall. Forty-three ample overall. stem from the

Related Talking ointsDo you have a strategy for

Related Talking PointsHow well are you managing

stem from the transport and

rn. Another 50% andemics and expressing

y gyevaluating potential acquisition targets?

Have you considered how you might be able to take advantage of government

f ‘ ’

risks related to resource scarcity?

Are you satisfied with your company’s efforts to promote and publicise corporate social

ss to bank nomic recovery

delp companies in

support of ‘green’ investments?

Have you evaluated how future trends in government investment in infrastructure could affect your business?

corporate social responsibility practices?

p pat climate e likely than sage will ), despite their o more likely

ent and business errorism, and

could affect your business?

rs that environmental

urchase (76% s will play a ugh (48% vs. will seek out



Sector Key FindingsBoards ramp up engagement around compliance, straChemical executives are more likely to believe that the bodirectors are more engaged with ensuring regulatory comresult of the economic crisis (65% vs 52% of the overall sresult of the economic crisis (65% vs. 52% of the overall sare also more likely to see the board providing constructivwith the management team on strategy (72% vs. 61% ove

Trust in the sector undamaged by the downturnChemical executives do not believe that the economic critrust in their industry. Not one felt that the industry saw a public trust, and only 4% believed trust suffered slightly. Mthi d (35%) t ll f l th t bli t t i th i t hthird (35%) actually feel that public trust in their sector hathey were more positive on this front than any other secto

Poverty likely to continueChemical CEOs are less sanguine about the prospects foequality. Eighty-three percent feel the gap between rich awithin nations will increase (compared to 68% of the ove

Learn morePlease see www.pwc.com/ceosurvey to access the full PSurvey, Setting a smarter course for growth, and supportialong with other online resources

C t t d t il

along with other online resources.

Contact details

www.pwc.com

Saverio FatoGlobal chemicals leader+1 (216) 875 [email protected]

Alison McNerneyGlobal chemicals client service adviso+1 (646) 471 [email protected]




Design_1000081_jp

or growth:

ategyoards of

mpliance as a sample) They

Related Talking PointsTo what extent are you

sample). They ve engagement erall).

sis damaged significant fall in

More than a i d

engaging your board around compliance or strategy issues? Could you be doing more?

s increased –or in our survey.

or social and poor people erall sample).


rJoy WintonGlobal chemicals marketing+44 20 7804 [email protected]

4



Retail and consumer goods sector findings from the 13th Annual Global CEO Survey

The business world has changed dramatically in the last 18 months, and the new reality has dramatically impacted retail and consumer goods companies. Will consumer demand rebound? It’s clear that no one really knows the answer yet. But what is clear is that a lot of long-term planning will have to be thrown out the window. According to Ian Bremmer, president of Eurasia Group, a leading global political risk research and consulting group, companies will “have to plan with a readiness to make changes on short notice, and you probably need to revise strategic plans much more frequently, with new assessments of the global environment, than you did before this crisis hit.”

The upheaval to business planning and operations came through clearly in the 13th Annual Global CEO Survey. The survey, conducted in September to November 2009, consists of interviews with 1,198 business leaders from around the globe—272 of those in the retail and consumer goods sectors.

February 2010 | Volume 1

Highlights

• Business confidence among retail and consumer goods CEOs is up from last year, but still less than in past years.

• Of potential threats to their businesses, retail and consumer goods CEOs are both very concerned about overregulation.

• Two-thirds of all retail and consumer goods CEOs think consumers will favour socially and environmentally responsible companies. The large majority of both anticipate changes will be required to respond to shifts in consumer behaviour.

• 47% of consumer goods CEOs had no climate change strategy in place a year ago, and only 33% of retail CEOs did.

Setting a smarter course for growth

Background: Some trends:*

• Consumers are spending less—and looking to get the most value for their money. Savvy consumer goods companies are looking for innovative ways to define “value” beyond price.

• Private label continues to gain market share as consumers continue to shop for value.

• Narrower is the new “norm”, and retailers are looking to decrease product assortments on the shelf to cut excess inventory, make more room for store brands and generally create a more efficient, less confusing shopping experience for customers. Some suppliers are cutting the number of products they manufacture in order to get ahead of the game.

• Leading companies are collaborating with partners to deliver innovative trade promotions. A consumer might get a coupon for a significant discount at a second retailer or for an event when purchasing a basket of the first retailer’s products.

* Excerpted from a PwC-hosted panel discussion on “Winning trends of leading CPG companies” that included Jane Nielsen, SVP & CFO PepsiCo Americas Beverages, PepsiCo; Stephen A. Sibert, SVP Industry Affairs, GMA; Patrick Yost, Director, PricewaterhouseCoopers, Marty Weintraub, Vice President, Karabus Management and moderated by John Maxwell, PwC Global Retail and Consumer Leader.

r&c worlds

express

In brief Few if any business leaders will forget the last 18 months. The retail and consumer goods CEO responses to the 13th Annual Global CEO Survey show how they view their current prospects and what changes they are making to adapt.

What’s happening to business confidence?

Guarded optimism prevails. Consumer goods CEOs are somewhat more confident than retailers, and both are more confident than last year.

What keeps CEOs awake at night?

A lengthy global recession is at the forefront of retail and consumer goods CEOs’ concerns. On the plus side economic turmoil has impacted growth trends favourably in some emerging markets, creating opportunities.

How are CEOs responding to changing consumer behaviour?

Nearly all believe that strategy changes will be required and both feel strongly that consumers will place a higher emphasis on a company’s social and environmental practices. A significant portion foresees changes in strategy as a result.

What are the best prospects for growth in the next year?

As was the case last year, the focus will be on existing markets, rather than new markets or new product development.

2

3

“It made us think about our businesses, our boards, our teams— this was an emergency situation and we were forced to make some important decisions.”

—Carlos Fernandez, CEO, Grupo Modelo

CEOs are emerging from the deep uncertainty of the past months and are guardedly confident about the future. 29% of retail CEOs and 35% of consumer goods CEOs are very confident about their companies’ prospects over the next 12 months, compared with just 14% and 27% respectively last year. Confidence is still less than it was in previous years, however. This year’s higher confidence suggests CEOs believe their

Some glimmers of good news

companies are strategically positioned to capture competitive gains in their existing markets ahead of a hoped-for broad-based improvement in demand. Their growth strategies tend to bear this out: The largest percentage is focused on their existing markets and fewer believe that new geographical markets or new product development offer better potential for business growth.

4

Concerns remain The survey examines how CEOs perceive the risks of the business environment. As is natural after the shock of recent economic events, CEOs are concerned on a number of external threats to growth. Of a broad range of potential risks, retailers were most concerned about the possibility of a lengthy recession, stability of the capital markets, over regulation and potential shifts in consumer spending, in that order. Consumer goods CEOs worried most about exchange rate volatility and over regulation, along with energy costs. Keeping costs in line continues to be on executives’ minds, especially among consumer goods CEOs. 68% of consumer

goods CEOs and 64% of retail CEOs said that headcount had either decreased or at best stayed the same last year. Though cutbacks are forecast by 26% in each sector, the good news is, more CEOs see headcount increasing—if only slightly—than decreasing in the next 12 months. Highly-trained specialists will always be in demand, according to Tigran Nersisyan, president of Russian food and beverage maker Borodino Group. “To be honest, just as before the crisis, we still face a shortage of highly trained workers, such as IT specialists, software developers and experienced marketing staff. Specialists of all kinds are in great demand.”

5

Changing strategies to adapt

Business leaders appear to be split on the lasting impact of the economic crisis, but they are changing company strategies to adapt. Consumer goods and retail are high on the list of sectors most concerned that a permanent shift in consumer behaviour is underway. 64% of retail CEOs and 55% of consumer goods CEOs are either extremely or somewhat concerned about “permanent shifts in consumer behaviour” resulting from the current economic crisis. A large portion expects consumers to spend less and save more in the future.

Consumer goods CEOs are increasing their focus on preparing for systemic risk and low-probability, high impact events—but moderately. 48% anticipate changing their approach somewhat, but only 34% anticipate altering their practices to a large extent or significantly. Retail executives anticipate some or major change to investment decisions as a result of the economic crisis—83% anticipate some degree of change.

“Benetton’s positioning in what we like to call ‘democratic fashion’ is helpful in facing the crisis, however; the consumer on average is spending less and more shrewdly. Spending a lot is less trendy than it has been in the past and consumers prefer to buy greater quantities of products at the same price rather than a single ‘designer’ product.”

—Gerolamo Caccia Dominioni, CEO, Benetton Group SPA

6

Consumers perceive value in reputation

“Value orientation is driving consumer patterns. Companies that are getting close to the consumer (involving them in product development) are just smart. This isn’t really a shift in consumer-corporate strategy or relationships—consumers will go back to spending more freely when they are more confident.”

—Jeff Thompson, Head of PwC Consulting—Europe, Middle East and Africa

CEOs are bracing for other changes as well, which is why nearly every retail CEO (91%) anticipates making changes to respond to shifting consumer purchasing behaviours, and 89% of consumer CEOs do, as well. Most CEOs agree that new kinds of behaviour offer up new opportunities. Consumer goods and retail CEOs are equally likely to plan to change their strategy as a result of consumers placing a higher emphasis on a company’s environmental and corporate responsibility practices before buying; 65% of consumer goods CEOs feel that consumers will favour environmentally responsible companies. A similar percentage expects consumers to play a more active role in the product development process. This is one of those “values” as perceived by consumers.

Even though socially and environmentally responsible practices are on CEOs’ radar screens, many in the sector still need to face up to the challenges posed by climate change. 47% of consumer goods CEOs had no climate-change strategy in place a year ago and only 33% of retail CEOs did, compared to 52% in the total sample. More than a third has made no preparations for any climate-change initiatives in the coming 12 months. Given consumers’ growing demand for “green” products and practices this is a gap many will need to remedy.

In a related vein, many consumer goods CEOs plan to spend more on advertising and brand building in the wake of the recession— 57% versus just 42% in the larger sample.

Retailers with operations in the area don’t see their business increasing in Asia as much as the survey group as a whole (66% versus 82%). Consumer goods CEOs see the landscape somewhat differently, as, out of those CEOs with operations in the region, 78% believe business in Asia will grow.

Better penetration of existing markets was again seen this year as the major opportunity for business growth. 40% of both retail and consumer goods CEOs cited this as their key focus. Fewer saw new product development or new geographic markets as a focus, and fewer yet were planning to pursue M&A or joint ventures and strategic alliances.

Lessons learned in a crisis

Business leaders responding to the survey often cited regrets at not acting quickly enough when conditions turned. Strengthening the resilience of their organisations while remaining on top of opportunities was deemed critical. Other lessons learned:

• Long term planning is critical—but be prepared to change at a moment’s notice

• Stay disciplined on costs, but incur them to innovate

• Manage risk in good times, as well as in bad

Where to look for growth?

7

Resources To learn more about the retail and consumer goods findings in the 13th Annual Global CEO Survey, please contact:

John MaxwellGlobal Retail & Consumer Leader [email protected]

Denis SmithGlobal Retail & Consumer Knowledge Senior Manager [email protected]

pwc.com/r&cPricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

Our Global Industry Programme demonstrates our industry strengths and drives value for our clients. The programme’s foundation is a deep understanding of business and industry issues, connected with meaningful solutions. Companies leverage our extensive industry resources and knowledge to compete more effectively in specific marketplaces. Our global retail and consumer industry group has designated professionals and territory sector leaders in more than 50 countries around the world, serving all types and sizes of retail and consumer goods companies. A network of retail and consumer-focused professionals assists with transactions, global sourcing, international accounting regulations, transfer pricing, customs, tax and other issues.

© 2010 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. NY-10-0567

Setting a smarter course foEngineering & Construction


g gFew, if any, business leaders will forget the past 18 monhave ever experienced. Setting a smarter course for growCEO Survey, looks at what measures CEOs are taking ibusiness environment and what changes they are makinbusiness leaders from around the globe, including 75 froSeptember to November 2009 and conducted further in-September to November 2009 and conducted further in



Sector Key FindingsSector Key FindingsGreater use of debt financing, changes to capital struoffingMore E&C CEOs – over a third – expect to finance growthdebt market, compared to 24% of CEOs across the entireFurther, a greater number of E&C CEOs – 71 % compareacross the sample as a whole – anticipate changes to thep p gstructure. These findings may reflect the lack of enthusiasmarkets have traditionally had for the E&C sector, which had a high risk of earnings volatility and experienced relamargins. Many sector companies are dependent on a debnot yet operating effectively in many parts of the world.

Risk of inflation in the supply chainThirty-nine percent of the sector CEOs surveyed are concinflation. This is broadly in line with the survey sample asdown from the 50% who worried about this issue last yeasurprisingly low, as inflation could well represent a particufor the E&C sector, given the prevalence of fixed price loncontracts, which make it difficult or impossible to pass on cost base to the end customer.


or growth: nths. The global recession was the most serious many wth, the PricewaterhouseCoopers 13th Annual Global n response to recession, how they view the post-crisis

ng to adapt their organisations. We surveyed 1,198 om Engineering & Construction (E&C) companies, from depth interviews with 27 CEOsdepth interviews with 27 CEOs.





Rethink Financing

uctures in the

h through the e sample. ed to 61% eir capital

g

Reshape Capital structures

Result Growth

Talking Pointspsm the capital has historically

atively low bt market that is

Talking PointsAre you able to access sufficient capital to support business growth?

Are you considering the risk of inflation whencerned about

a whole, and is ar. This result is ular challenge ng term inflation in the

risk of inflation when agreeing long-term, fixed price contracts?



g g

Sector Key FindingsGrowth prospects shifting EastFewer E&C CEOs – just 31%, compared to 46% of the ovexpect their business in Western Europe to grow over themonths In fact nearly as many 28% actually anticipatemonths. In fact, nearly as many, 28%, actually anticipate region. This contrasts starkly with views of growth prospewhere in excess of 70% expect growth.

Risk management focus increasesThe large majority of E&C CEOs, like their peers in other increasing the focus on diverse aspects of risk managemintegrating risk management capabilities into business unallocating resources to risk related information gatheringallocating resources to risk-related information gathering heading up the list.

Board oversight of strategic risk growingNearly four-fifths of E&C CEOs (79%) report that as a reseconomic crisis, their board of directors is more engaged more engaged in assessing strategic risk. Many also statare more engaged on overseeing financial health and foct k f i di t Th i d fterm key performance indicators. The increased focus oncomes as no surprise. In tough economic times, E&C combe especially aware of the viability of the projects that theavoid the trap of taking on work that may significantly incrcorporate risk profile and threaten the profitability and casthe Company.

Investments in cost cutting, leadership development the increaseIn the wake of the economic crisis, more than half of E&Ca major change in their investment decisions, compared tthird of CEOs overall anticipating changes of this magnituwhere E&C CEOs expect to increase investment are arouefficiencies, leadership and talent development, and orgaprogrammes. This implies that despite the growth prognoacutely aware of competitive pressures and the need to sacutely aware of competitive pressures and the need to srealizing efficiencies.

Outsourcing levels lowThe figures suggest that the E&C sector is not as focusedoutsourcing its key business processes or functions as otwith only 16% planning to initiate a programme, compareoverall. Whilst there will be a natural aversion to relinquisk d j t t th bkey processes around project management, there may besector could be doing around its back office processes.


or growth: n

verall sample –e next twelve a decline in the

Rethink Risk management

Reshape Control environment

Result Better compliancea decline in the ects in Asia,

sectors, are ent, with

nits and and analysis

Related Talking PointsA di if i

p

and analysis

sult of the or significantly e their boards

cusing on long-t t i i k

Are you diversifying your business geographically to take advantage of growth in emerging markets?

How well is your senior management team engaging strategic risk

mpanies have to ey enter into and rease the sh resources of

on

management team engaging the board on questions of strategic risk, financial health, and KPIs?

Do you have sufficient programmes in place to trim

C CEOs expect to around a ude. Top areas und cost anic growth osis, CEOs are stay focused on

costs and groom tomorrow’s leaders?

The crisis has actually bolstered their influence. These countries

stay focused on

d on ther sectors, d with 34% hing control of

th

will continue to absorb 80% of the world's construction requirements over the coming decade.

Bruno LafontChairman and CEO Lafarge Group

e more the



g g

Sector Key FindingsE&C CEOs feeling more confidentE&C CEOs are clearly feeling more confident about the mthey operate. Some 73% are either somewhat or very conrevenue growth for their own organisations in the next 12revenue growth for their own organisations in the next 12Furthermore 15% believe economic recovery has alreadysector, with a further 50% expecting it during 2010.

M&A activity low, but set to increaseOnly 15% of E&C CEOs report having completed a crossor acquisition in the past twelve months. Many more – 35into a new strategic alliance or joint ventures. Sector CEO

h t ti iti l l i th i t l thmuch greater activities levels in the coming twelve month27% looking for M&A and 49% expecting to enter into a nalliance or joint venture.

Headcounts hit hardFifty-two percent of E&C CEOs report having decreased hthe past twelve months, and only 22% added staff. Last yanticipated such cuts, while 36% anticipated increases. Treflects the severe impact the downturn has had on the sesituation looks to be improving. Fewer E&C CEOs expectheadcount in the coming 12 months compared to the prevand more are looking to beef up employee numbers.

Climate change investment facing more delaysWhile nearly half of those E&C CEOs with a climate-chanplace report no change in their investments, compared tosample, more of them (24%) state they have delayed invearea due to the impact of the recession.

Government support of green investments less helpfuWhile many sector CEOs see positive aspect to climate chalf agree or agree strongly it will lead to new products anopportunities – fewer believe they will be able to benefit frgovernment support for 'green' investments. g pp g

Infrastructure needs an opportunity for E&CThirty-three percent of the overall survey sample is worrieinadequate basic infrastructure could prove a threat to groare split as to whether the government is doing enough tosituation, but it seems likely that governments will need toinfrastructure spending to address the issue – a situation provide significant opportunity for E&C companiesprovide significant opportunity for E&C companies.


or growth: n

markets in which nfident of months

Rethink Infrastructure needs

Reshape Strategic responses

months. y begun for the

s-border merger 5% – entered Os anticipate

h th h ith

Related Talking Points

Result Growth

hs, though, with new strategic

headcount in year, 29% This finding

Do you have a strategy for evaluating potential acquisition targets?

Have you considered how you might be able to take

ector, but the t to reduce vious period,

nge strategy in o the overall

y gadvantage of government support of ‘green’ investments?

Have you evaluated how future trends in government i t t i i f t testments in this

ulchange – nearly nd service rom

investment in infrastructure could affect your business?

Currently, the M&A market is very sluggish and there are few opportunities around. However,

ed that owth. Opinions o remedy the o increase that should

given the current climate, transactions that can represent the first step towards strong future development are not out of the question.

Bruno LafontChairman and CEO LafargeChairman and CEO Lafarge Group



g g

Sector Key FindingsClarity and stability the priority for regulationE&C companies are subject to a wide variety of regulationaround health and safety. Not surprisingly, more E&C CEpeers across the survey sample stress the need to ensurepeers across the survey sample stress the need to ensureregulations are clear and stable in order to improve the poprocess with regard to smarter business regulation. Feweneed to place more emphasis on fairly enforcing existing

Downturn-related issues still loomFifty-seven percent of E&C CEOs believe an inability to fimay threaten their companies' futures, far more than the 4

ll i d b t fi i i M t CEOoverall worried about financing issues. Many sector CEOsalso concerned about a protracted global recession. Toppthreats related to the economic situation is lack of stabilitymarkets, with 64% of E&C CEOs citing this possibility as

Learn morePlease see www.pwc.com/ceosurvey to access the full PricewaterhouseCoopers 13th Annual Global CEO Survesmarter course for growth, and supporting Visual Story anCEO Story documents, along with other online resources


www.pwc.com

Jonathan HookGlobal E&C Leader+44 20 7804 [email protected]

Joy WintonGlobal E&C marketing+44 20 7804 [email protected]




Design_1000081_jp

or growth: n

ns, particularly EOs than their e that

Talking PointsAre you up to speed on the key regulations that will impact your business ine that

olicy-setting er of them see a regulations.

nance growth 40% of CEOs

59%

impact your business in each of the territories in which you operate?

The key feature of the crisis has been the profound and brutal

s – 59% – are ping the list of y in capital a concern

slowdown in the developed countries. Depending on which case you look at, volumes have plunged by 15% to 30%. In its wake, the crisis has inevitably generated funding problems, unemployment and deficits which all point to the same conclusion:

ey, Setting a nd In-depth .

all point to the same conclusion: private investment has stalled and only government stimulus measures can kickstart growth. Even then, the benefits will not feed through until 2010.

Bruno LafontCh i d CEO L fChairman and CEO Lafarge Group



Key highlights forentertainment andmedia companies


Entertainment and media

Few, if any, business leaders will forget thepast 18 months. The global recession wasthe most serious many have everexperienced. Setting a smarter course forgrowth, the PricewaterhouseCoopers 13thAnnual Global CEO Survey, looks at howCEOs have responded and how they arepositioning their companies for recovery. Italso explores where CEOs believeregulation can become more effective andwhat they consider the lasting legacies ofthe recession.

CEOs have concentrated on reducingheadcount, selling off unwanted assets andpreserving cash, but one area whereresources continue to flow is talentdevelopment. CEOs are aware that they’llneed the right skills in the right places whenthe recovery sets in. Most CEOs have alsoacquired a healthy respect for risk, volatilityand flexibility, and are emerging with adifferent view of the growth imperative.More plan to change their risk managementprocesses than any other element of theirstrategy, organisation or business model.And more boards are getting more involvedin assessing strategic risk than any otheritem on the boardroom agenda.



Changing consumer behaviour

The Global CEO Survey found thatentertainment and media (E&M) CEOsare more likely to believe thatconsumer spending and behaviour willchange permanently as a result of theeconomic crisis, and are moreconcerned about this than many oftheir counterparts in other industries1.

And these concerns perhaps explainwhy E&M CEOs are more likely to planincreased investment in R&D and newproduct innovation in the wake of theeconomic crisis than CEOs in otherindustries2.


Digital growth accelerated by the economicdownturnThese findings illustrate that CEOs of E&M businesses are very awarethat their customers’ desires and habits are changing at anunprecedented pace – a trend that the economic downturn hasaccelerated.

Chair and CEO of Interpublic Group (IPG), Michael Roth, agrees:“There’s no question that there’s a change in the buying patterns ofthe consumer. The days of freely spending money, I think, havepassed. People are looking for value for their dollars, and even if youcan afford to spend more money, it’s appropriate to think about howyou spend your dollars.”

This reflects the findings of PwC’s flagship industry report, the GlobalMedia and Entertainment and Media Outlook 2009-2013, whichhighlights our belief that against a backdrop of tough economicconditions, there will be nowhere to hide from the implications ofdigital migration. Consumers are looking for increased value andcontrol, which is facilitated by and drives a rapidly digitalising mediaworld. Consumers want to consume their media wherever, wheneverand however they want, and the downturn has added considerablemomentum to that trend.

[1] 94% of E&M respondents anticipate some/major change in consumer purchasing behaviours comparedto 81% of the total sample. 60% of E&M respondents were somewhat or extremely concerned about apermanent shift in consumer spending and behaviours, as opposed to 48% across the total sample.

[2] Over the next 3 years, as a result of the economic crisis, 74% of E&M CEOs surveyed plan tomoderately/significantly increase their long-term investment decision with regard to R&D and new productinnovation, as opposed to 57% across the total survey sample.



Changing consumer behaviour

Net kids educating their parentsAs E&M CEOs recognise, value will be a key consideration for allconsumers. The net generation, born between 1977 and 1997 and thefirst generation to grow up in a wholly digital world, make many morechoices about how – and indeed whether – they are prepared to payfor content. Those attitudes are now spreading across thegenerations as parents and grandparents become more comfortablewith digital content.

The downturn has accelerated those new consumer attitudes andbehaviours. In a downturn consumers eschew going out in favour ofstaying at home, consequently watching more TV and video content,listening to more music and spending more time online. Andbehavioural trends go far deeper than simply changing buying habits.Content is increasingly integral to social interactions and relationships,as witnessed by the explosive growth of social networking throughtools such as Twitter and Facebook. The challenge for E&Mbusinesses is how best to capitalise on and monetise these trends.

Marcel Fenez sums up how the search for digital value is presenting achallenge to the industry: “Everyone is looking for a good deal. We’renow seeing the parents of the net generation also wanting to accesscontent for very little or even for free. And ironically in a downturnpeople consume more content but the challenge for media businessesis how to monetise that increased activity in the digital space.”

Shifting place and timeMarcel Fenez, PwC’s Global Entertainment & Media leader,comments: “We are seeing consumers move from ‘prime time’consumption to ‘my time’ – as a result of which many businesses aretaking a fundamental look at how they deliver, price and package theircontent.”

In the entertainment and media world, time and place are no longerset by appointment. Consumers are increasingly liberated from TVschedules by time-shifting devices such as PVRs, video-on-demandand online catch-up services. And media consumption habits arebecoming more and more mobile, with content available on smartphones, netbooks and through wireless connections that allowconsumers to watch and listen where, when and how they want.

Taken together, these trends mean that, according to the Outlook,mobile/digital content will account for more the three-quarters (78 percent) of all revenue growth in the period between 2009 and 2013, withdigital content predicted to account for 31 per cent of all spend oncontent in 2013 compared to 21 per cent today.




Collaboration

The Global CEO Survey found thatE&M business leaders are more likelythan their peers in other industries tohave initiated restructuring activities inthe past 12 months to enter into a newjoint venture or strategic alliance3.

Agility is keyWhile intense competition has long been the default mode forbusinesses in the E&M industry, collaboration is becoming anincreasingly vital approach as new business models demand speed,agility and flexibility to get closer to the digital consumer – as well asthe need to manage down underlying costs.

The challenges facing E&M companies have many differentcomponents, from monetising growing demand for digital content,through capitalising on fast-evolving consumption habits, todeveloping a whole range of new advertising revenue models.

Markets are increasingly global, and yet consumers are looking for aone-to-one, personalised relationship with their media suppliers.Business models increasingly need to flex and fit around the needs ofthe consumer rather than expecting the consumers to adapt theirbehaviour in order to consume media, and that means strategies forcollaboration must be equally flexible.

As revenue models change, cost structures also need to be aligned,and digital delivery provides opportunities for savings. Savings can befurther enhanced by exploiting opportunities to share functions withothers, especially where to do so is non-competitive.


[3] 51% of E&M respondents said they had initiated restructuring activities in the past 12 months toenter into a new joint venture or strategic alliance versus 35% of the total sample.



Collaboration

“We’re going to hear more and more aboutcollaboration rather than just competition.And the key to successful collaboration isgoing to be flexibility. That means neversaying ‘no’ to anything without thinkingcarefully about it first. This is a great time todifferentiate by innovating and capitalizing onnew forms of commercial relationships.”

Marcel Fenez, Global E&M Leader,PricewaterhouseCoopers

It takes two (or three or four…)Building new models to meet these challenges will requirecollaboration between partners across the entire media value chain.What’s more, the new partners are likely to be companies who maymore traditionally have seen each other as competitors.

Collaboration can be used to exploit new areas and drive new, shared,revenue streams to spread the costs and risks involved in buildingnew operations.

In the past partnerships have proven difficult to execute and thereforethe collaborations of today and tomorrow need to be more flexible,with more focus on achieving business objectives and less about‘control for control’s sake’.

Successful collaboration will require finding ways to split risks andrewards. To achieve this businesses should be open to allpossibilities.




Talent

The Global CEO Survey states thatE&M CEOs are more likely to haveseen their organizations reduceheadcount in the past twelve monthscompared to other industries and aremore likely to predict further losses inthe next 12 months4.

However, E&M CEOs are also morelikely to state that staff morale andemployee engagement programmeswill change to a largeextent/significantly5.

Keep the talent pipeline flowingWhile rationalising headcount can provide short time respite fromeconomic pressure, the longer term effects must also be taken intoaccount in an industry such as entertainment and media industrywhich is heavily reliant on talent.

PwC’s analysis shows that businesses retrenching on talent today arelikely to face a tough time tomorrow. Our recent report, Managingtomorrow’s people: How the downturn will change the future of work,uses scenario planning to show that companies which scale back theirpeople investment now are likely to fail in the long term.

And as the long-term decisions taken during the downturn begin to befelt, the winners and losers of the war for talent are starting to revealthemselves, with those who continued to focus on investment andemployee engagement emerging as clear leaders. Hartmut Ostrowski,Chair and CEO of Bertelsmann AG, confirms: “As a creative company,our success is absolutely dependent on our employees, their ideasand intellectual resources”.

Furthermore, in an era of digital transformation the need to ensureinnovation is encouraged and developed becomes paramount.Accordingly, organisations seek to define structures that are flexibleand reward innovation.


[4] 71% of E&M respondents said that headcount in their organisation decreased in the past 12 monthsversus 48% of the total global sample, and 37% of E&M respondents said that headcount was likely todecrease in the next 12 months compared to 25% of the total sample.

[5] 54% of E&M respondents said that their approach to staff morale and employee engagement wouldchange to a large extent/significantly versus 41% of the total sample.



Talent

“What you do in this environment is add toyour talent base and reposition your talent tobe more suited for the challenges that areahead. Even though we’ve had a nine to tenpercent reduction in terms of staffing, we’vealso had increases to invest in those marketsand resources that are necessary to becompetitive.”

Michael Roth, Chairman and CEO,Interpublic Group

People and talent will be such a prized commodity in tomorrow's worldthat only companies who have invested both in a talent pipeline for thefuture and in an environment which allows creativity andentrepreneurialism to flourish will succeed.

It is therefore reassuring to see that E&M respondents to our GlobalCEO Survey are more committed to employee engagement activitythan other sectors as a whole – a sure sign of recognition that theindustry’s success rests in large part on its talent.




Climate change

E&M CEOs we interviewed for theGlobal CEO survey don’t see climatechange as especially relevant to theirbusinesses. They are less likely to bepreparing for climate change than theircounterparts in other industries overthe next 12 months6, and they are alsoless inclined to believe that climatechange initiatives will be a majorexpense for their business7.

And E&M CEOs also tend not to makea strong connection between theinvestments they might make in climatechange related initiatives and theirreputation among stakeholders,including employees8.

Not an E&M issue?It’s easy to see why entertainment and media CEOs do notnecessarily perceive climate change to be of major concern theirindustry. But that perception perhaps fails to take into account the farwider implications of government policies and regulation likely toemerge over the next decade to address the impacts of climatechange.

As Hartmut Ostrowski of Bertelsmann elaborates, “Though the mediaindustry may not be one of the biggest polluters, we acknowledge ourcorporate responsibility to deal with the issue of climate change. AtBertelsmann, responsibility towards the environment is part of ourcorporate culture – and as such is included in our company’s valuesystem.”


[6] 37% of E&M respondents said they were preparing for the impacts of climate-change initiatives in thecoming 12 months, compared to 61% of the total sample.

[7] 20% of E&M respondents agreed that compliance with climate change initiatives will be a significantexpense for their company, versus 34% of the total sample.

[8] 40% of E&M respondents agreed that their company’s response to climate change initiatives willprovide a reputational advantage for their company among key stakeholders, including employees,compared to 61% of the total sample.



Climate change13th Annual Global CEO Survey

Businesses across all industries will unquestionably feel the impact ofchanging regimes – especially in the area of taxation. In a forthcomingmajor study into the impact of climate change on business worldwide,PwC estimates that within a decade, environmental taxes couldamount to as much as 20 per cent of tax revenues in many countries.

All companies will need to start planning for this eventuality, and wewill be analysing the topic further in a new study to be published inFebruary 2010, Appetite for Change: Global businessperspectives on tax and regulation for a low carbon economy,which will examine policy and regulatory initiatives driven by climatechange. Other regulatory impacts will increasingly change the generalbusiness environment, regardless of sector. But what is less clear ishow and where those impacts will be felt.

The full 13th Annual Global CEOSurvey is available at:

www.pwc.com/ceosurvey

The quotes in this article are taken from interviewswith Hartmut Ostrowski, Chairman & CEO,Bertelsmann AG, and Michael Roth, Chairman &CEO, Interpublic Group.

You can access transcripts of the interviews viathe Global CEO Survey website.

Related thought leadership

Global entertainment& media outlook2009-2013

www.pwc.com/outlook

Managing tomorrow’speople: how the down-turn will change thefuture of work

Want to learn more?

Marcel FenezGlobal and eastern region E&M [email protected]

Ken SharkeyUS E&M [email protected]

Phil StokesUK and central region E&M [email protected]

© 2010 PricewaterhouseCoopers. All rights reserved. 'PricewaterhouseCoopers' refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Contact us

www.pwc.com/e&m

Setting a smarter course foIndustrial Manufacturing


gFew, if any, business leaders will forget the past 18 monhave ever experienced. Setting a smarter course for growCEO Survey, looks at what measures CEOs are taking ibusiness environment and what changes they are makinbusiness leaders from around the globe from Septembermanufacturing companies and conducted further in-depmanufacturing companies, and conducted further in dep


To do that, CEOs have begun to reshape not only their strategaddress risk at a deeper level. And it takes organisational agilibecome risk averse; rather, they may become more deliberateensuring they can execute on it. The result, we believe, will bea sustainable long-term upside for organisations – while accouforces that comprise both threats and opportunities

Sector Key FindingsClimate-change initiatives offer new business opportuIndustrial manufacturing CEOs are more optimistic about implications of the global effort to combat climate changeother sectors; 70% believe that climate-change initiativesopportunities to develop new products and services, comtotal survey sample. Sixty-three percent also think that thto such initiatives will provide a reputational advantage. p p g

Asia stands out as a growth region for manufacturersMany industrial manufacturing CEOs are pinning their hopercent already have a presence in the region, and a full increasing that presence over the next 12 months. In conoperating in Western Europe and 43% of those operatingexpect to grow.

Most of our R&D goes into those environmental issues thaeffect on climate change. All of our big customers want tocitizens. And pressure from our customers comes to ensuproducts are environmentally friendly so they can minimisecarbon footprint.

Mikael MäkinenChief Executive, Cargotec


or growth:


ng to adapt their organisations. We surveyed 1,198 r to November 2009, including 102 from industrial pth interviews with 27 CEOspth interviews with 27 CEOs.





Talking Pointsunitiesthe commercial than their peers in

s will result in significant pared with 47% of the eir company’s response

Are you capitalising on new product opportunities related to climate change?

Are you well-

spes on Asia. Fifty-six 93% of them anticipate trast, only 37% of those

g in North America

positioned to take advantage of growing markets in Asia?

at have an o be good re that our e their own

Everybody has to be leaner and place more emphasis on being closer to the customer, which in our case means moving away from having everything in Europe.

Mikael MäkinenChief Executive, Cargotec

1



g

Sector Key FindingsInvestments in cost-cutting easing, R&D on the upswIndustrial manufacturing CEOs are less likely to be investto realise cost efficiencies than CEOs in other sectors. Mahave been facing intense margin pressures for many yeahave been facing intense margin pressures for many yeadownstream customers shop for cheaper suppliers and aprices fluctuate. So they have already made strenuous eftheir costs. They are now more likely than most of their peincreasing the amount they invest in R&D.

Headcounts downMore industrial manufacturing companies have cut their hpast 12 months than in any other sector except automotivpast 12 months than in any other sector except automotiventertainment & media. Over two-thirds of industrial manuCEOs report that they have reduced the number of peopl

Globalisation issues viewed as potential threatsSome concerns related to globalisation, like exchange ratmacroeconomic trade imbalances, rank fairly high on indumanufacturing CEOs lists of concerns, as they do overall

t t d l b l i d l k f t bilit i it lprotracted global recession and lack of stability in capital remain pertinent.

Board engagement staying at the status quoCompared to the overall sample, more industrial manufacsee no change in the board's level of engagement on issuoverseeing financial health, regulatory compliance, and cwith the management team on strategy, although some achanges in these areas.

That someone would cancel something was unheard of obought it even if they didn’t need all of it. Now, because obehaviour even after they have placed an order– that’s sohave to monitor subcontractors’ risk Are your subcontrachave to monitor subcontractors risk. Are your subcontraccomponents? Our factories are assembly factories, so wethe whole assembly process collapses. And this is one ofanalysts are focusing on the bigger companies. What liesgoes up 20%, you may find your company only going up 1to their inability to get components.

Mikael MäkinenChi f E ti C tChief Executive, Cargotec


or growth:

wingting in initiatives any of them rs as their

Related Talking PointsWill you be able to keep up

ith tit hrs, as their s raw materials fforts to control eers to be

headcount in the ve and

with competitors who are increasing spend on R&D to drive innovation?

What impact have headcount reductions had on your staff?ve and

ufacturing e they employ.

te volatility and ustrial . Worries over a

k t l

y

How are you managing macroeconomic risk factors such as exchange rate volatility?

Does your board have full markets also

cturing CEOsues such as

collaborating are still planning

yvisibility on key issues such as your company’s financial health, regulatory compliance, and overall strategy?

ver the last 10 years. They would buy it, and they often f cancellations we have to monitor our customers’

omething totally new. The other change is that we now tors healthy enough to be able to provide you with thetors healthy enough to be able to provide you with the

e make an order and if a subcontractor cannot supply it f the dangers when the recovery comes. All the market behind them are the subcontractors. When the market 10% because your subcontractors are unable deliver due



g

Sector Key FindingsLow-cost competition remains a threatThe prospect of low-cost competition rings alarms bells fosomewhat or extremely concerned about the risk of beingof the overall survey populationof the overall survey population.

Debt markets getting tougherAccessing capital through debt markets will not recover immore industrial manufacturing CEOs (57%) believe it will sort of financing.

Learn morePlease see www.pwc.com/ceosurvey to access the full PSurvey, Setting a smarter course for growth, and supportalong with other online resources


www.pwc.com

Graeme BillingsGlobal Industrial Manufacturing Leader+61 (3) 8603 [email protected]

Erica McEvoyGlobal Industrial Product+61 (3) 8603 [email protected]




Design_1000081_jp

or growth:

or many industrial manufacturing CEOs; 65% are g undercut by less expensive rivals, compared with 54%

mmediately; compared to the overall survey sample, be moderately or significantly more difficult to obtain this


ts Marketing and KM

3



ResultResilience

RethinkRisk

Reshape Controls and processes

Setting a smarter course for growth

13th Annual Global CEO SurveyMetals Industry Summary

pwc.com/ceosurvey

Few, if any, business leaders will forget the past 18 months. The global recession was the most serious many have ever experienced. Setting a smarter course for growth, the PricewaterhouseCoopers 13th Annual Global CEO Survey, looks at what measures CEOs are taking in response to recession, how they view the post-crisis business environment and what changes they are making to adapt their organisations. We surveyed 1,198 business leaders from around the globe from September to November 2009, including 33 metals CEOs from 20 countries, and conducted further in-depth interviews with 27 CEOs.

What did we learn? Global business leaders had to make dramatic changes to their organisations, including reducing headcount, selling off assets and preserving cash. That painful experience has led many CEOs to rethink their approach to risk in an increasingly volatile world. It’s abundantly clear how quickly a contagion can spread, and how damaging it can be. CEOs now know they need to plan for volatility.

To do that, CEOs have begun to reshape not only their strategies, but also their capabilities. It takes strategic flexibility to address risk at a deeper level. And it takes organisational agility to respond to volatility. That doesn’t mean CEOs will become risk averse; rather, they may become more deliberate in examining alternatives, formulating a Plan B, and ensuring they can execute on it. The result, we believe, will be a smarter course for growth, a resilient path that will produce a sustainable long-term upside for organisations – while accounting for a range of economic, social and environmental forces that comprise both threats and opportunities.

Rethink: From crisis to cautious optimism

Metals CEOs are much more positive about the outlook for their companies than they were last year. Thirty percent are very confident of being able to increase revenues over the next 12 months, and 64% of being able to do so over the next three years. Overall, across all industries, the highest levels of confidence emerge from CEOs from the largest companies surveyed, which we define as those companies with annual revenues over $10 billion. Over the longer-term, nearly all large-company CEOs are somewhat or very confident in revenue prospects. They are more likely to be very confident as a group than CEOs of smaller companies by 15 percentage points.

The vast majority of metals CEOs expect to use internally generated cash flows to finance their companies’ growth,

in common with CEOs in other sectors. But a significant number of metals CEOs also plan to turn to the banks (58% versus 40% of the total survey population) or the equity markets (33% versus 17% of the total survey population) to fund future growth.

Eastern Europe stands out as a possible growth driver for the largest companies — 82% of the largest companies with operations in the region expect these to grow in the next 12 months, compared to only 55% of companies with revenues of less than $10 billion. This could signal increased demand in the region for metals companies

Only 27% of metals CEOs are concerned about inflation, fewer than the 40% across the overall survey sample.

Metals industry summary

1 13th Annual Global CEO Survey

Another major issue for metals CEOs is low-cost competition — 33% are extremely concerned this could impede growth. Energy costs were seen as an even greater threat, with 45% extremely concerned about their possible impact.

Metals CEOs are also more concerned about the security of the supply chain — nearly half (48%) are somewhat or extremely concerned that this could pose future hurdles (compared to 34% across the sample as a whole). Somewhat surprisingly, far fewer (15%, compared to 30% overall) are concerned about terrorism. Pandemics and other health crises were also not perceived as a threat by most.

Reshape: The post-crisis environment

Metals CEOs are worried about the possible negative impact of the protectionist tendencies of national governments — 73% expressed concern that these could have a negative impact on business growth (compared to 49% across the overall sample). This finding reflects the strong impact tariffs

can have on market dynamics, particularly in the steel sector. Further, 70% believe that governments will become more protectionist, a view shared by 65% of the survey sample overall.

Somewhat surprisingly, fewer metals CEOs are worried about overregulation than their peers across the sample as a whole, with less than half (45%) seeing cause for concern.

Most of the largest companies already had robust Corporate Social Responsibility (CSR) programmes in place, so fewer need further expansion of their CSR programme in response to a decline in public trust. Large companies definitely see the need to play an active role in addressing issues around trust, though — around two-thirds of CEOs plan to seek proactive dialogue with policy-makers and regulators.

Result: Adapting to compete

Continued volatility looks likely for the metals sector. “Under the current situation, demand changes every day, and enterprises need to adapt rapidly. In fact, wide fluctuations in market conditions have become very normal and we must be ready respond to a whole range of possible conditions: low market prices, strong demand, or no demand,” Huang Tianwen, President of Sinosteel, told us.

Many metals CEOs are looking to risk management systems to help them cope. More than four-fifths of metals CEOs are focusing to a greater extent on nearly every aspect of risk management, from reassessment of their risk tolerance to the creation of personal accountability (see Figure 1). And almost all (97%) are planning to allocate more resources to risk-related information gathering and analysis.

Metals Boards of Directors are also increasing their engagement across every aspect of risk management we surveyed. In some areas differences from the overall survey sample are dramatic. In particular, metals Boards of Directors are much more likely to be increasing their focus on long-term key performance indicators, assessing


Overall sales revenue is down by about 20% from the same period last year. However, our production volume — including that of iron ore, steel products, and chrome ore — is up 20-40% from the same period of last year. This seeming discrepancy — a decline in revenue and an increase in production — is explained by the substantial fall in steel product pricing. Profitability has also declined dramatically from last year. The overall situation may turn positive in the future. But right now, the dynamics of the steel industry are very unstable.

Huang Tianwen President, Sinosteel

strategic risk and overseeing financial health. More metals CEOs also report that their Boards of Directors are constructively engaging the management team on strategy.

Looking back at the past twelve months, cost-reduction initiatives lead the list of restructuring activities by a wide margin, with JVs and strategic alliances in second place. For the coming twelve months, cost reduction remains the highest priority, but somewhat fewer metals CEOs anticipate initiating such measures than did so in the previous twelve months. CEOs from large companies are keeping such measures on the table. More undertook cost-cutting measures than CEOs of smaller companies; slightly more are expecting further cost cuts in the near term. This trend looks likely to continue, as more — 86% — are also expecting a moderate or significant increase in their long-term investment in cost-reduction programmes.

JVs and strategic alliances, in contrast, look to be gaining ground over the coming twelve months, with more than half of metals companies planning such initiatives.

The largest companies appear to be using M&A to drive growth and diversify their portfolios, perhaps taking advantage of prime opportunities in a depressed deals market. They were far more likely to have completed an

acquisition or entered a strategic alliance over the past year and slightly more likely to be planning deals and alliances in the coming year.

Looking ahead to the next three years, most metals CEOs – like their peers in other sectors and in large companies – anticipate making various changes in the wake of the economic crisis. These include changing the way in which they take investment decisions (85%), manage talent (82%), manage risk (82%), organise their companies (79%) and respond to shifting consumer purchasing behaviour (79%). Conversely, very few metals CEOs plan to make major changes in their capital structure or how they manage their companies’ reputations and build trust.


Most importantly, we learned that we must further strengthen our internal controls and risk management capabilities. The financial crisis has made it clear that all enterprises must be better prepared against future risks.


Figure 1

Metals CEOs focusing greater efforts on risk management

75

89

9189

8886

8584

Metals Global

8788

Allocating resources to risk-relatedinformation gathering and analysis

Integrating risk management capabilitiesinto business units

Collaborating with supply chain partnersto collectively manage risks

Preparing for systemic risk andlow-probability, high impact events

Reassessing your tolerance for risk

Creating personal accountability andreward structures for good risk

management,including risk taking8884

97

With respect to your approach to risk management, to what extent are you increasing your focus in the following areas as a result of the economic crisis? Ref. Q10. (Base: Global, 1198; Metals, 33)

Respondents who stated ‘somewhat’, ‘to a large extent’ or ‘significantly’

Cost savings remain a top priority on metals CEOs’ agendas; 88% plan to invest more in realising cost efficiencies over the next three years (see Figure 2); indeed, 55% anticipate increasing that investment ‘significantly’, compared with just 37% of the total survey sample. Metals CEOs are also more likely to be planning moderate or significant increases in their expenditure on leadership and talent development programmes, organic growth programmes and capital investments.

Most metals CEOs (76%), like CEOs in other industries, anticipate that the G20 will be the new dominant economic and political power in the world. They are optimistic about the potential for coordinated progress — 73% believe that government and business efforts will mitigate key global risks like climate change, terrorism, and financial crises, compared to just 57% of the sample as a whole. Metals CEOs see regulatory cooperation as another key to addressing such risks; when asked if it will help successfully mitigate systemic risks such as another economic crisis or climate change, 76% of metals CEOs agree or agree strongly, compared to 64% of the overall sample.

These results may explain why only 21% of metals CEOs see climate change as a potential threat to business growth, compared to 37% of the survey sample overall. In fact, many metals CEOs also see some positive benefits emerging from climate change. Fifty-five percent anticipate that their response to climate-change initiatives will provide a reputational advantage.

Across all sectors, large companies are more likely to report that they have had a strategy in place to respond to the challenges posed by climate change - 64% of CEOs report having such a strategy a year previously, compared to just 51% of smaller organisations. Such programmes help the largest companies address stakeholder demands and strengthen their brand image. Around half also believe their companies will need to reduce emissions significantly, so a climate change strategy makes good economic sense as well. More of these CEOs also expect to take advantage of government incentives for “green” investments.

Final thoughts: Lessons learned and applied to 2010

The importance of good risk management systems was by far the most frequently cited ‘lesson learned’ by CEOs across the survey sample. Metals CEOs are acting on this message, as witnessed by the strong increase in focus on many aspects of risk management.

When the market changes, you cannot simply follow normal procedures or maintain outmoded strategies, management structures, or market positioning. New conditions dictate a quick response.



Figure 2

Cost efficiencies, leadership and talent development top the list of investment priorities for metals CEOs

7669

7664

4058

78

0



Capital investments


Metals Global

88

How do you plan to change your long-term investment decisions in the following areas over the next 3 years as a result of the economic crisis? Ref. Q8 (Base: Global, 1198; Metals, 33)

Respondents who stated ‘moderate’ or ‘significant’ increase

We spoke with executives around the world

The 33 Metals CEOs included in our survey sample came from every corner of the globe, as this map shows. China is emerging as a major force in the global steel market; the quotes included in this document are drawn from our in-depth interview with Huang Tianwen, President, Sinosteel.

Contacts

Jim Forbes Usha Bahl-SchneiderGlobal Metals Leader Global Metals Knowledge & Marketing Manager Tel: +1 905 972 4105 Tel: +49 69 9585 5425

Learn more

Please see www.pwc.com/ceosurvey to access the full PricewaterhouseCoopers 13th Annual Global CEO Survey, Setting a smarter course for growth and the supporting Visual Story and In-depth CEO Story documents, along with other online resources.

pwc.com/ceosurveyPricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

© 2010 PricewaterhouseCoopers. All rights reserved. ‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Setting a smarter course foPharmaceuticals and Life S


Few, if any, business leaders will forget the past 18 monhave ever experienced. Setting a smarter course for growCEO Survey, looks at what measures CEOs are taking ibusiness environment and what changes they are makinbusiness leaders from around the globe from Septemberand life sciences (pharma) companies and conducted fuand life sciences (pharma) companies, and conducted fu



As a "recession proof" sector, the pharmaceutical industry haseconomic crisis, but the sector is facing its own unique challenhealthcare; and the industry is currently undergoing fundamenindustry reinvents itself, sector CEOs are responding in myriad

Sector Key FindingsPharma CEOs continue to be more confident than theThe pharma industry sees bright prospects ahead – a full 53p y g p prevenue growth in the next 12 months, and 43% are somewhLooking out over the next three years, 98% are confident therevenues, although somewhat fewer are very confident. Thishigher level of confidence than across our survey sample ov

Tough times for the economy, but good news ahead fPharma companies are also expecting a quicker recovery fomore of them ha e alread reco ered or e pect reco er befmore of them have already recovered or expect recovery befthe same time, more also report more pessimistic views abo– a full 40% believe that recovery won't set in until 2011, comoverall sample.

Approval of government initiatives to improve healthcPharma CEOs are divided in their views about government ehealthcare. But they are generally more positive than CEOs think that the governments of the countries in which they opeimprove access and reduce costs, versus just 30% of the tot


or growth: Sciences


ng to adapt their organisations. We surveyed 1,198 r to November 2009, including 40 from pharmaceuticals urther in-depth interviews with 27 CEOsurther in depth interviews with 27 CEOs.





s been less directly impacted by some aspects of the nges. The economic crisis left its mark on the future funding of ntal changes to the way it operates. As the pharmaceutical d ways.

eir peers% are very confident of

Rethink Healthcare

Reshape R&D process% y

hat confident of growth. eir company will grow s represents a notably erall.

for the sectorr their own industry –fore the end of 2009 At

p

Result Improved outcomes

Talking Pointsfore the end of 2009. At

out their nations' economy mpared to 29% of the

care accessefforts to improve in other sectors; 53%

Will a later economic recovery have an impact on your bottom line?

To what extent will erate are working hard to tal survey population.

government initiatives around healthcare impact your business?



Sector Key FindingsPatients driving product and service developmentPatients driving product and service developmentPharma CEOs are firmly convinced of the need to addresdirectly; 73% believe that consumers will play a more actidevelopment of new products and services in the future, c60 percent of the overall survey sample. This makes sensgrowing interest in – and demand for – medicines that arepatient populations with specific genetic variations and disubtypes. New product development is the key to successubtypes. New product development is the key to succescompanies – 43% single it out as the main opportunity to business in the next 12 months.

Boards focusing more on compliance, strategy issuesPharma CEOs are used to dealing with intense regulationfinancial crisis has sharpened their focus even more. Sixtreport that the board of directors now plays a bigger rolereport that the board of directors now plays a bigger role regulatory compliance and 73% that it is more closely invstrategy development, compared with 52% and 61%, resptotal survey sample.

Over-regulation and protectionism causes for concerPharma CEOs are more concerned about the risk of overtheir peers in other sectors (75% versus 60%) They are atheir peers in other sectors (75% versus 60%). They are ato believe that governments will become more protectioniand to worry about the impact of protectionism on their cogrowth. The global nature of the industry and existence ocontrols in some markets may help to explain these fears

Skills shortages on CEOs’ radarSi t t f h CEO h t t lSixty percent of pharma CEOs are somewhat or extremelabout the availability of key skills. This is hardly surprisingpharmaceutical and life sciences companies depend on idrive growth, so recruiting and retaining highly-qualified reessential to maintain their competitiveness.


or growth: Sciences

Rethink Patient needs

ss patients ive role in the compared with se, given e targeted at sease s for sector

Reshape New product development

Result More effective medications

s for sector grow their

sn, but the ty-three percent in ensuring

Related Talking PointsHave you already implemented processes to in ensuring

volved in pectively, of the

rnr-regulation than also more likely

reach out to patients when developing new medications or service offerings such as disease management support?

Does your board have fullalso more likely ist in the future ompanies’ f tight price

s.

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Does your board have full visibility of your company’s regulatory compliance and overall strategy?

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ly concerned g; nnovation to esearchers is

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Learn morePlease see www.pwc.com/ceosurvey to access the full PSurvey, Setting a smarter course for growth, and supportialong with other online resources.


/ h

Simon FriendGlobal Pharmaceuticals and Life Sciences Leader+44 (0) 20 7213 [email protected]

Sara SolomonGlobal Pharmaceuticals and Life Business Development & Marketi+44 (0) 20 7804 [email protected]


www.pwc.com/pharmaThis publication has been prepared for general guidance on matters of interest only, and does not conswithout obtaining specific professional advice. No representation or warranty (express or implied) is givextent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accacting, or refraining to act, in reliance on the information contained in this publication or for any decisio


or growth: Sciences

PricewaterhouseCoopers 13th Annual Global CEO ng Visual Story and In-depth CEO Story documents,

Sciencesing

3



Setting a smarter course foTransportation & Logistics


p gFew, if any, business leaders will forget the past 18 monhave ever experienced. Setting a smarter course for gGlobal CEO Survey, looks at what measures CEOs arepost-crisis business environment and what changes they1,198 business leaders from around the globe from Sept& logistics (T&L) CEOs and conducted further in-depth i& logistics (T&L) CEOs, and conducted further in depth i


To do that, CEOs have begun to reshape not only their strategaddress risk at a deeper level. And it takes organisational agilibecome risk averse; rather, they may become more deliberateensuring they can execute on it. The result, we believe, will bea sustainable long-term upside for organisations – while accouforces that comprise both threats and opportunities

Sector Key FindingsCapacity management in existing markets key to growT&L companies are focusing primarily on increasing their exhalf of T&L CEOs anticipate that better penetration of their exgrowth over the next 12 months. In today's volatile markets, capacity smartly will have a head-start on their competitors.

Stresses on the subcontractor network loomMany T&L companies rely on subcontractors, particularly in tMany T&L companies rely on subcontractors, particularly in tsuch partners help to ensure complete coverage of widespresome of these partners were hard hit by the recession, and 6now concerned that financially stressed suppliers could impegrowth. They worry that their partner networks will be inadeqdemand.

Difficulties in finding financing could hinder growthNearly half of all T&L CEOs also fear that inadequate financiNearly half of all T&L CEOs also fear that inadequate financicompanies’ expansion. Fifty-two percent hope to fund that grthe banks, but 60% believe that access to bank financing wileconomic recovery sets in.

Energy costs and climate change key issuesT&L CEOs are far more concerned than their peers about enreflects the energy-intensive nature of the sector. They are aabout climate change a valid worry particularly if the onusabout climate change – a valid worry, particularly if the onus companies are required to compensate financially for all emitransit.


or growth:

ths. The global recession was the most serious many growth, the PricewaterhouseCoopers 13th Annual e taking in response to recession, how they view the y are making to adapt their organisations. We surveyed tember to November 2009, including 67 Transportation interviews with 27 CEOsinterviews with 27 CEOs.





Rethink Market penetration

wthisting business. Nearly xisting markets will drive those who manage their

the logistics sector, where

penetration

Reshape Capacity

Result Growth

Talking Pointsthe logistics sector, where ead delivery areas. But 61% of T&L CEOs are ede their own companies’ quate to meet an upturn in

ing could hinder their

Talking PointsAre you capitalising on new product opportunities related to climate change?

Are you welling could hinder their rowth by borrowing from l be more difficult after the

nergy costs, a fact that also more concerned

shifts and T&L

Are you well-positioned to take advantage of growing markets in Asia?

shifts and T&L ssions generated during



p g

Sector Key FindingsResponding to the changing consumerLike their peers across the survey sample, many T&L CEpermanent changes in consumer behavior in the offing. OCEOs who believe that consumers will place a higher emCEOs who believe that consumers will place a higher emcountry of origin for the products they buy, far more plan tstrategy somewhat (62% vs. 36% overall), although slightchange course significantly (3% vs. 13% overall) or to a la(14% vs. 19% overall).In TL 2030: Volume 1, our experts also predict that consudemand more locally produced products. Corporate sociais gaining importance and more T&L CEOs (48% vs 37%is gaining importance, and more T&L CEOs (48% vs. 37%plan to change strategy somewhat in response to consumhigher emphasis on a company's environmental and corpresponsibility practices before making a purchase.

Sector CEOs more concerned about crisis-related thrT&L CEOs are more concerned about a wide variety of poto future growth related to the current economic crisis, witof a protracted global recession heading the list For twoof a protracted global recession heading the list. For two-CEOs, macroeconomic imbalances and possible protectioof national governments stand out as areas for concern.

Environment will change post crisisT&L CEOs are more likely to state that access to capital tmarkets will be more difficult after economic recovery setswith before the economic crisis. A greater number of T&Lth h lf (51% 33% ll) b li th t th i i tthan half (51% vs. 33% overall) -- believe that their investare likely to undergo a major change.

Strategic technology infrastructure vitalThe economic crisis has had an impact on a variety of loninvestments. T&L CEOs in particular are planning to incredecisions in strategic technology infrastructure or applicatof focus will be critical for many to position themselves asthe future. In T&L 2030: Volume 1, we discuss the need fbecome more efficient through the development of contincontrol of the flow of goods.

Increased emphasis on risk managementLike their peers across other sectors, T&L CEOs are increon risk management. More than four-fifths plan to increasa wide range of risk management related metrics -- and ng gthem (97%) are planning to allocate more resources to risinformation gathering and analysis.


or growth:

Os see Of those T&L

mphasis on the

Related Talking PointsAre you responding to h imphasis on the

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C t t i% overall) also mers placing a porate

reatsotential threats th the shadow thirds of T&L

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How robust are your risk management systems?thirds of T&L

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Note: T&L 2030: Volume 1 is the first installment of the PwC T&L 2030 thought leadership series which examines the industry’s future – pwc com/tl2030tment decisions

ng-term ease investment tions. This type

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We did not realise that the damage was going to be so great. What inspires me most is that an enterprise like ours cannot go through such difficulties by its own

future – pwc.com/tl2030

for supply to uous real-time

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g yefforts or by using a simple form of protection. Therefore, we are paying more attention to our internal controls and management mechanisms.

Mr. KONG DongChairman Air Chinay

sk-related Chairman, Air China



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Sector Key FindingsMany CEOs optimistic about climate changeSixty-one percent of T&L companies already have a climain place, and very few of them have curtailed their investma result of the recession Seventy six percent of T&L CEOa result of the recession. Seventy-six percent of T&L CEOlaunch climate-change initiatives in the coming 12 monthsbelieve that the ‘green’ agenda will slow down their sectoT&L CEOs see a silver lining. Sixty-six percent anticipate reputational advantage from their efforts to combat climat42% expect to develop new products or services and 34%government incentives to go ‘green’.

T&L CEOs positive on infrastructure improvementsT&L CEOs positive on infrastructure improvementsInfrastructure is critical to smoothly functioning transportanetworks, and some countries – not only in the emerging a great deal to do in order to ensure the long-term viabilityinfrastructure. T&L CEOs are somewhat more positive abimprove the situation – 51% agree that the government issteps to improve their country's infrastructure, compared will address infrastructure issues in greater depth in Volumwill address infrastructure issues in greater depth in Volumscheduled for release in May 2010.

Learn morePlease see www.pwc.com/ceosurvey to access the full PricewaterhouseCoopers 13th Annual Global CEO Surve

C t t d t il

PricewaterhouseCoopers 13th Annual Global CEO Survecourse for growth, and supporting Visual Story and In-depdocuments, along with other online resources.

Contact details

www.pwc.com

Klaus-Dieter RuskeGlobal Leader, Transportation & Logistics+49 (211) 981 [email protected]

Peter KauschkeGlobal Business DeveMarketing Transportat+49 (211) 981 [email protected]




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