PwCs CEO Survey

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PwCs Global Survey of CEOs

PwCs Global Survey of CEOs

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  • 1. Rethink Volatility Reshape Strategy Result Smarter growth 13th Annual Global CEO Survey Setting a smarter course for growth Main report
  • 2. pwc.com/ceosurvey Foreword 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. 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
  • 3. 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 PricewaterhouseCoopers 1
  • 4. pwc.com/ceosurvey Introduction: Heading towards a growth agenda 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 ‘The big learning point we are all looking for is one that has option but to act on what they could control. Close to 90% to do with organisational agility’, said Dr. Paul Reynolds, of companies cut costs over the past 12 months. Cash CEO of Telecom Corporation of New Zealand Limited. preservation was paramount as assets were divested and ‘In response to the economic crisis, most businesses took jobs cut. The effects of these measures are now being felt action appropriate to a more difficult trading environment. in high unemployment in developed nations and in volatile But the real trick is how to get the balance right between currency and capital market conditions in developed and hunkering down through tough times and investing in a way emerging economies alike. that will prepare you to make the most of opportunities that begin to materialise, post-recession. That’s the big lesson – Most CEOs recognise the situation could have been worse. getting the balance right and being sufficiently agile to take While business thinking is slowly getting back onto an advantage of chances for growth and expansion.’ even keel, there are lasting impacts that may colour future actions. Business leaders are emerging with a healthy The wreckage of 2009 makes clear the implications of respect for risk, volatility and flexibility and a different view getting the short-term and long-term balance right. of the growth imperative. 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. 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 I have emphasised repeatedly that Air China benefited about our businesses, our boards, our teams – this was from the rapid growth and quantum leaps in development an emergency situation and we were forced to make of the past five years. Since 2008, I have changed some important decisions. As I see it now, I’m neither my tune somewhat; prudent operation and sustainable more optimistic nor more pessimistic than before, my development are the most important factors for perception has remained the same since the beginning of the development of an excellent enterprise. This is a the year. We have to handle things carefully, delicately… shift from our previous view on accelerating the pace and we have to visualise a recovery soon. of development. Carlos Fernandez gonzalez Kong Dong Chairman and CEo, grupo Modelo, Mexico Chairman, Air China Ltd, China 2 13th Annual Global CEO Survey – Main report
  • 5. Key Findings Global growth contagion, starting in emerging markets Organisations are limbering up This year, 31% of CEOs are ‘very confident’ in achieving A sizeable majority of CEOs are planning to take out more revenue growth over the next 12 months, a significant costs. Companies in the US, Europe and the UK led in increase from last year (see figure 0.1). Their outlooks partly cost-cutting over the past 12 months, and they remain more reflect unfolding macro-economic conditions yet they are focused on cost cuts in the short-term. Now the momentum also more confident in their companies’ ability to generate is shifting to companies based in Asia: 93% of CEos in China revenue than they are in recoveries in either their industries and India and 90% in Korea plan cost efficiencies over the or their economies. next three years compared with the global average of 78%. CEOs based in Latin America and Asia are 11 CEOs are striving to keep debt low and liquidity ample, percentage points more likely to be confident about in part because of uncertainty over the capacity of banks their near-term revenue growth than those in North to lend when the time for growth comes. Thus, 83% of America and 20 percentage points more confident than CEOs expect internally generated cash flow to finance their Western European peers. ‘Companies in India may growth, seven percentage points higher than last year. not be as strong today as they were two years ago, but they A majority plan to change capital structures as a result of have emerged out of this downturn in a far better position the crisis. ‘We did a lot of work on our balance sheet for than companies in the developed world. In terms of resources the first six months [of 2009]’, said Dean A. Scarborough, both human and financial, we are better off vis-à-vis our President and CEO of US office supplies maker Avery brethren in the developed world’, said Sunil Duggal, CEO of Dennison Corporation. ‘We’re focusing on de-leveraging. consumer goods group Dabur India Limited. We converted some convertible debt to equity earlier this year, and we cut our dividend in July. We’re well-positioned 0.1 to survive even another downturn. I wouldn’t say we have a CEO confidence is on the mend fortress balance sheet, but the walls are higher and thicker than they were a year ago.’ 60 There has been a dramatic cull in headcount over the past 50 3-year prospects 12 months. However, while 25% of CEOs are planning 12-month revenue growth prospects % Stating very confident more job cuts this year, 39% plan to increase 40 headcount. One area where resources continue to flow 30 is leadership and talent development. Business leaders are aware they will need the right skills in the right places when 20 recovery sets in. ‘What you do in this environment is add to your talent base and reposition your talent to be more suited 10 for the challenges that are ahead,’ Michael I. Roth, Chairman and CEO of US-based advertiser Interpublic Group, told us. 0 ‘Even though we’ve had a nine to 10 percent reduction in 2003 2004 2005 2006 2007 2008 2009 2010 terms of staffing, we’ve also had increases to invest in those Q: How would you assess your level of confidence in prospects for the revenue growth markets and resources that are necessary to be competitive.’ 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. PricewaterhouseCoopers 3
  • 6. pwc.com/ceosurvey There is a strong indication the recession and subsequent The concerns are present across industries and borders. recovery may have accelerated trends favouring growth in ‘For the first time in history, we’ve experienced a financial some emerging markets, particularly as growth returns to pandemic and need to determine what sorts of firewalls are emerging markets earlier. ‘Production but also the consumption required,’ Alfredo Sáenz, Second Vicechairman and CEO, of products is shifting to Asia and South America. It would have Banco Santander told us. ‘But even minor firewalls will taken longer without this event, but now it will happen more necessarily restrict the way financial institutions deploy their quickly’, said Mikael Mäkinen, President and CEO of Finnish resources globally. The point is that protections against systemic transport services group Cargotec. risk will also restrict the globalisation of financial flows.’ Our survey this year looks at how CEOs responded to the Wary of aftershocks crisis and what they are doing to position their companies It is natural after a crisis for a heightened state of wariness to for recoveries. It also reveals where CEOs best believe set in, at least temporarily: CEOs are more concerned on a regulation can become more effective and what they broad range of threats to growth this year. They are actively consider the lasting legacies of the global recession. addressing risk assessment and management as a result. Responses this year signal that risk is becoming a This crisis brought up another insight about business. permanent element of the strategic planning process. It drove us away from the fact that when we do business More CEOs intend to change their risk management with other individuals or companies, the existence of process than any other element of their strategy, tension, negotiation and conflict is natural. But when organisation or business model. And more boards you live in a world in which secured Swiss derivatives are increasing their engagement with assessing strategic are swapped, and a safe return is sought in paper, then risk than any other item on the boardroom agenda. there is no tension but there is also no care for the other individual. That is why, if you look at this financial collapse Regulation and its discontents in a certain way, it is also a blessing, in particular because it breaks up the world of reckless revenue-seeking to Unprecedented global measures to stabilise the financial leave behind only that which is basic and essential. system are drawing qualified praise from business leaders. It is obviously so much easier to build up a structure A majority now think businesses and governments can of investment papers and derivatives, and it takes less successfully collaborate to mitigate systemic risk. time. However, in that scheme the human being is not considered. The basic principle behind money is that it But government rescue is one thing; regulatory reform is has to do with doing something with another to mutual quite another. Thus, while a protracted global recession benefit. Dealing with another is always difficult but remains the biggest worry of CEOs, it is closely followed it is a natural process. by over-regulation. More CEOs are ‘extremely concerned’ about over-regulation than any other threat to growth. Eduardo Elsztain Concerns over protectionist tendencies are also up ten President, IRSA group, Argentina percentage points on last year’s survey (see figure 0.2). 4 13th Annual Global CEO Survey – Main report
  • 7. 0.2 CEOs’ concerns have broadened beyond the economic crisis Protracted global recession* 6 29 42 23 Decline in concern 19 3 12 43 42 from 2009 – 2010 Over regulation 12 27 33 27 13 31 37 18 Lack of stability in capital markets* 9 32 43 16 Decline in concern 7 20 42 30 from 2009 – 2010 Low-cost competition 14 31 31 23 15 37 31 17 Energy costs 17 29 35 19 19 30 33 17 Availability of key skills 15 34 35 16 16 37 33 13 Protectionist tendencies of national governments 20 30 32 17 27 33 30 9 Inflation 21 38 29 11 Decline in concern from 2009 – 2010 13 39 37 12 Climate change 30 32 25 12 40 34 19 7 Scarcity of natural resources (e.g. raw materials, water, energy) 31 32 23 12 38 31 21 9 Pandemics and other health crises 26 38 26 9 50 31 12 6 Security of the supply chain 24 40 25 10 26 40 26 7 Inadequacy of basic infrastructure (e.g. electricity, water, transport) 31 35 22 11 39 36 18 7 Terrorism 33 35 21 10 47 32 14 7 0% 2010 * ‘Protracted global recession’ and ‘Lack of stability in capital markets’ were previously ‘Downturn in major economies’ and Not concerned at all Not very concerned Somewhat concerned Extremely concerned ‘disruption of capital markets’, respectively. 2009 Not concerned at all Not very concerned Somewhat concerned Extremely concerned Q: How concerned are you about the following potential threats to your business growth prospects? Base: All respondents (2010=1,198; 2009=1,124) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 PricewaterhouseCoopers 5
  • 8. pwc.com/ceosurvey Rethink
  • 9. Section 1 Rethink: From crisis to cautious optimism CEOs are still addressing cost-cutting while they set their companies for take-off in recovery. Confident in companies, tentative on recoveries ‘We know there’s a lot of pent-up demand for our products from the SME [small- and medium-size enterprise] base and, CEOs are emerging from deeper cost-cutting than they indeed new customers,’ said Paul Walker, Chief Executive expected last year. In last year’s survey, conducted as the of UK business software maker The Sage Group plc. financial crisis unfolded late in 2008, 26% of CEOs told us ‘When confidence returns to the SME community, when they expected headcount reductions over the next 12 months. the economies pick up, we’ll see software growth come A year later, close to half of respondents reported they cut back into the sector. So, we remain very confident.’ jobs and at least 80% of CEOs in each region initiated cost reductions. In North America and Western Europe, close The consistently higher confidence suggests CEOs to a quarter of companies divested a business or exited a believe companies are strategically positioned to capture significant market. It is clear that few considered simply riding competitive gains in their markets ahead of a broad-based out the recession a viable response. ‘The crisis took us to a improvement in demand. This may be a different future new place. It was a reset for our business’, said Angela F. Braly, than they expected only two years ago, but their growth President and CEO of US health insurer WellPoint Inc. strategies appear to bear this out: A clear majority of CEOs are focused on their existing markets and fewer believe They are now guardedly confident about generating new geographical markets or new product development revenue growth in the near term and they are decidedly offer better potential for business growth. 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. There’s been a lot of talk about the new normal. But I think Of course, this may partly be a reflection of the depths to you have to ask the question ‘What was normal before?’ which demand had sunk. I subscribe to the theory that the economic activity we saw in 2007 and 2008 was overly buoyant – and that Higher confidence on growth holds true regardless of where drove overly buoyant consumption. The pendulum has CEOs are based, although geography is strongly correlated now swung in the opposite direction. From a debt-pricing with the relative strength of confidence levels. CEOs based in and risk-pricing perspective, I don’t think we will or should countries where the crisis had the least impact on GDP and go back to where we were in 2007 and 2008. At the same where recoveries were already underway by the third quarter time, I suspect that to some extent, the pendulum has of 2009 are naturally the most confident. Nonetheless, overcorrected. But I don’t think we’re going to go back confidence increased markedly among CEOs in North to the conditions that we saw in 2007 and 2008. America and in Latin America, two regions where most CEOs (except those in Brazil) are expecting a later recovery. Ken MacKenzie Managing Director and CEo, Amcor, Australia PricewaterhouseCoopers 7
  • 10. pwc.com/ceosurvey This may further signal a period of heightened competition 1.1 as companies aim to increase sales at a time of uneven or CEOs are confident, despite expectations that recovery will not begin until at moderate economic growth. For example, in North America least the second half of 2010 80% of CEOs are somewhat or very confident of growth over the next 12 months, despite only 67% believing the economy ‘Very’ or ‘somewhat confident’ in 12-month revenue growth prospects will have recovered by the end of 2010. The same pattern 100 emerges for CEOs in Western Europe, the most pessimistic 29 15 in our survey (see figure 1.1). The trend is most striking 18 % Economic recovery expected 80 31 29 among CEOs in Latin America, the most confident in our 37 38 24 survey: 91% have some measure of confidence on revenue 60 30 growth in the near term, but only 66% anticipate national 33 29 28 economic recoveries during that time frame. 40 26 36 35 21 30 22 20 21 We will definitely become a more focused organisation 18 18 27 18 16 as a result of the crisis. Our service operations have 0 5 3 13 13 gotten sharper, for example. And the crisis also prompted Western CEE North Asia Middle Africa Latin us to sell off some peripheral parts of our business, and Europe America Pacific East America that has made us a leaner organisation. So I do think In 2011 we’re stronger as a result of facing these challenges and In the second half of 2010 preparing ourselves for whatever might happen in the In the first half of 2010 economy. Our people figured out how to achieve higher Already recovered productivity as a result of some of the challenges they faced and they’re not going to go back to their prior Q: When do you expect recovery to set in for your nation’s economy? behaviour. They’re going to take advantage of what Q: How would you assess your level of confidence in prospects for the revenue growth of your company over the next 12 months? they’ve learned and carry it forward. So the crisis took Base: 28-442 us to a new place – it was a reset for our business. Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Angela F. Braly President 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 Heting Executive Director, President, Metallurgical Corporation of China Ltd, China 8 13th Annual Global CEO Survey – Main report
  • 11. When it comes to confidence, size matters 1.2 The highest levels of confidence emerge from CEOs of the CEOs from G8 nations are less confident and expect a later recovery largest firms, which we define as revenues of over $10 billion a year. Over the longer term, nearly all large-company CEOs 100 are somewhat or very confident in revenue prospects. They 14 are more likely to be very confident as a group than all % Economic recovery expected 80 28 32 CEOs, by 13 percentage points. 24 60 CEOs from the largest companies also acted more 31 29 dramatically during the crisis and they appear to be more 40 32 actively positioning their portfolios for growth. More ‘Very confident’ of 12-month revenue 20 undertook cost-cutting measures than CEOs from smaller 20 20 growth prospects 30 companies; slightly more are expecting further cost cuts in 16 the near term. They were far more likely to have completed an 0 7 acquisition or entered a strategic alliance over the past year Non-G20 Non-G8 members G8 of G20 and to be planning deals and alliances in the coming year. In 2011 In the second half of 2010 In emerging economies, optimism comes with unease In the first half of 2010 A distinctive split emerged between CEOs based in the Already recovered or before the end of 2009 G8 developed economies and those based in the other members of the G20, including faster growing China and Q: How would you assess your level of confidence in prospects for the revenue growth India. CEOs in the developed economies were far more of your company over the next 12 months? cautious on near-term revenue prospects, with 23% ‘very 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 confident’ versus 42% of CEOs in newer member G20 economic growth. Don’t known/refused not included. nations (see figure 1.2). Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Research efforts and new product development will Scaling back our capacity expansion programme, scaling increasingly be focused on emerging countries. We have back working capital from inventories, managing the made the ability to develop products on the ground central demands for increased credit from distressed distributors to our marketing organisation. Why restrict innovation to – it’s all been pretty demanding. In the event, however, just 20% of the market (i.e. developed countries)? we’ve been able to take some costs out of our system. All in all, we’ve come through pretty well. The real Bruno Lafont question is: Where is the economy headed? Is it bouncing Chairman and Chief Executive Director, LAFARgE group, France back? I don’t really see that it is. graham Mackay Chief Executive, SABMiller plc, UK PricewaterhouseCoopers 9
  • 12. pwc.com/ceosurvey CEOs also believe recovery for G8 nations is likely to occur 1.3 much later than in the new G20 countries and non-G20 CEOs from Western Europe show the lowest level of concern in the countries. This reflects economic reality: In China’s case, ‘Anxiety Index’ for one, output accelerated over the course of 2009; the country is likely to exceed the government’s target of 8% 60 for 2009, the IMF estimates. To compare, the output of 52.39 50 developed economies is forecast to decline 3.4% in 2009.1 44.73 46.44 Global index: 40 36.90 38.89 Yet, CEOs from the newer member G20 economies are also Anxiety Index 33.47 34.38 34.12 the most aware of threats to business growth prospects. 30 They are more concerned about over-regulation, low-cost competition, currency volatility and energy costs. 20 10 We examined just how broadly and deeply different CEOs considered the risks present in the business environment 0 by constructing an ‘Anxiety Index’, which measures their North Western Asia Latin CEE Middle Africa America Europe Pacific America East relative levels of concern over 20 potential threats to business growth prospects.2 Chief executives in Western Q: How concerned are you about the following potential threats to your business growth Europe scored the lowest on our Anxiety Index, at 33.47 (out prospects related to or emerging from the current economic crisis and other threats? of a theoretical range of 0 to 100), against a global average Base: All respondents (1,198) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 of 38.89 (see figure 1.3). CEOs in Japan are a very notable Note: We analysed concerns by creating an index score out of 100 based on responses exception among the G8. They have the highest Anxiety 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 Index score of CEOs in all major countries at 57.54. Younger of 25; and ‘Not concerned at all’ received a score of 0. companies – those that have been in business fewer than five years – also tended to have a higher Anxiety Index scores. Basically, our response to the crisis has focused on the When we look at the developing world, such as the upgrade of procedures. Middle East and Southeast Asian economies, for us it is Pablo Isla not China or India but countries like Indonesia, Pakistan, Deputy Chairman and CEo, Inditex, Spain 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 Cox CEo, International Power plc, UK 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. 10 13th Annual Global CEO Survey – Main report
  • 13. These responses suggest CEOs based in developed Emerging economies also bore the brunt of the drop-off economies are more comfortable with their current in global capital flows in 2009, triggering currency swings positioning. For example, compared with CEOs in other and higher financing costs in some regions. Export-oriented regions, fewer CEOs in Western Europe and in North emerging markets faced a sharp decline in overseas America are planning new cost-cutting initiatives or making demand. World trade was projected by the IMF to fall changes to their long-term leadership development 11.9% in 2009.3 programmes and capital investment plans. The greater level of both confidence and concern for CEOs of companies Thus CEOs in Latin America, Central and Eastern Europe, based in developing nations suggests that they have more and Asia are more likely to be concerned about threats room to climb and perhaps at the same time, fewer centred on globalisation, including exchange rate volatility, safeguards to check a fall. protectionism and macro-economic imbalances. The higher anxiety levels outside North America and Europe may One explanation for the relatively higher levels of concern also reflect not only different phases of the business cycle, in emerging economies in Asia Pacific, Latin America and but also differing levels in economic development. 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. The global economy is now starting a process of recovery, The flow of foreign investment has been substantial and but the greatest challenge will be the way in which this has been targeted at Brazil as one of the best world mega-issuance of money and debt will be absorbed, and market options. It can’t be denied that our universe has it is here where I see a very bright warning light, because I become very jittery. These funds have not necessarily look at the situation with Argentine eyes, and we are very come to stay. Investors are very agile at seeking the best well aware of the cost of resolving a crisis by means of the markets at any specific time, so there could be a migration printing of money. of these funds as the markets recover. For now, though, the financial world is still in a crisis recovery mode. Eduardo Elsztain Although things have become much better, that doesn’t President, IRSA group, Argentina mean it is over. Claudio Eugênio Stiller galeazzi CEo, Pão de Açúcar group, Brazil 3 International Monetary Fund, World Economic Outlook (October 2009). PricewaterhouseCoopers 11
  • 14. pwc.com/ceosurvey Employment turning the corner As a sustainable, credible economic recovery is unlikely without Tigran Nersisyan, President of Russian food and beverage a reversal in unemployment rates, headcount expansion plans maker Borodino Group, said he spends a significant amount in the private sector are a key indicator. Our survey shows that of his time on ‘HR issues’ locally and abroad. ‘We did our while many companies are still downsizing, more will be adding best to retain our specialists, who are always in demand. to their workforces (39%) than will be cutting (25%) over the To be honest, just as before the crisis, we still face a shortage next 12 months (see figure 1.4). of highly trained workers, such as IT specialists, software developers, and experienced marketing staff. Specialists of Certainly one of the more difficult actions in the past year was all kinds are in great demand. In manufacturing the situation cutting jobs. Close to half of companies in the survey decreased is worse still because we are implementing new generation the size of their workforces. Companies based in North America technologies that require highly qualified employees’, he said. and in Western Europe led, with 69% of US companies and 63% ‘We still face major HR issues. I spend about 40 percent of of UK companies decreasing headcount. Utilities proved the my time on HR policy issues both locally and overseas. It’s most stable, with 21% of companies reporting cuts. Cuts were impossible to reduce costs or material consumption without most prevalent in industrial manufacturing (68%) and auto (80%) new technologies and these new technologies require highly companies and in the media/entertainment sector (71%). qualified employees who are hard to come by.’ The latter two sectors are among the least likely to be adding jobs in the coming year (see figures 1.5 and 1.6). 1.5 Where are jobs being added? Highly skilled still globally in demand Brazil 27 7 27 Specialists remain in demand, and many parts of the world are still struggling to attract and keep talent. Over the long India 23 13 23 term, businesses may live to regret the drastic headcount China & Hong Kong 23 17 13 reduction they have made during the downturn. Korea 30 17 3 1.4 Canada 18 15 15 More CEOs will be adding jobs than cutting them in the coming year Australia 30 7 10 UK 14 9 19 48 Decrease 25 (77% of those who expect to US 25 7 7 decrease headcount in next 12 months had already made cuts) 22 Global 20 10 9 Stay the same 34 Russia 17 13 7 Increase by 13 Japan 29 8 less then 5% 20 Mexico 23 10 3 7 Increase by 5-8% 10 Netherlands 20 7 7 Increase by more 9 France 14 5 11 than 8% 9 Italy 18 11 0% Germany 14 3 10 Past 12 months Next 12 months Spain 6 3 Q: What happened to headcount in your organisation globally over the past 12 months? 0% Q: What do you expect to happen to headcount in your organisation globally over the next 12 months? Increase by less than 5% Increase by 5-8% Increase by more than 8% Base: All respondents (1,198) Q: What do you expect to happen to headcount in your organisation globally over the Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 next 12 months? Base: All respondents (30-1,198) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 12 13th Annual Global CEO Survey – Main report
  • 15. With many companies cutting their graduate and trainee of available talent. In the last two years, we have managed intakes and CEOs becoming increasingly critical of to attract very significant talent from both Europe and government’s ability to provide a skilled workforce, there North America. These are highly experienced people who is emerging evidence of a growing ‘talent gap’ in a number bring with them enormous knowledge. And since many of of regions – where demand for key skills over the coming them experienced the banking crisis firsthand, they also decade will exceed the available supply. The spectre of understand how to mitigate such events. That has been demographic shifts and ageing populations may have a major benefit to Equity’, said Dr. James Mwangi, Managing temporarily slipped from some CEOs’ minds, but it could Director and CEO of Equity Bank in Kenya. return to haunt them in future. African CEOs are the most concerned, but they’ve taken Time for an overhaul of HR steps to respond. ‘One aspect in which the financial crisis A majority of CEOs (79%) intend to increase their focus has worked in our favour is that it has created a wider pool and investment on how they manage people through change, which includes redefining employees’ roles in the 1.6 organisation. They feel they need to change their strategies Who is adding jobs? 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 Banking & capital markets 20 16 12 there are three major human capital failures that were Business & professional services 14 10 21 brought to the surface as a result of the downturn: Technology 15 10 17 Existing reward models are broken. Whether as a result Engineering & construction 23 15 4 of regulatory or public pressures, they are not seen as fit Industrial manufacturing 19 9 13 for purpose in many parts of the world. This is not just Insurance 21 4 15 confined to financial services; we are seeing criticism of reward models across sectors. Retail & distributive wholesale 21 14 5 Global 20 10 9 CEos were unable to move talent around quickly when Chemicals 24 15 the crisis hit. This led to large-scale layoffs to save cash at one extreme, but also left crucial talent gaps at the other. Consumer goods 23 7 8 Organisations will have to find more agile ways of deploying Transportation & logistics 21 10 7 and reallocating talent to where it is most needed. Those Pharmaceuticals/life science 25 10 3 organisations that underwent drastic headcount reduction now face the costly exercise of rehiring and retraining as Energy 15 15 6 demand improves and we head into the upturn. Utilities 21 5 7 Automotive 22 4 4 Employees lack the key skills needed to operate and compete in the new emerging environment. Notable skill Entertainment & media 23 3 3 gaps include greater risk awareness, market adaptability, Metals 12 3 12 change management capability and responding to new 0% customer demands. CEOs in many parts of the world Increase by less than 5% Increase by 5-8% Increase by more than 8% also believe that governments have largely failed to supply Q: What do you expect to happen to headcount in your organisation globally over the a workforce with the right skills. This is likely why next 12 months? 41% of CEOs expect to increase their focus on training Base: All respondents (33-1,198) and development. Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 PricewaterhouseCoopers 13
  • 16. pwc.com/ceosurvey The thorny problem of global policy coordination CEOs have long sought more cooperation among Yet the G20 forum poses challenges for global policy governments to harmonise tax and address other overlapping coordination. In recent years, global negotiations have regulatory burdens that stem from running an international become more difficult as more parties, often with differing business operation. In this survey – conducted before global perspectives and constituencies, come to the table, as climate talks in Copenhagen concluded without a binding witnessed by the Copenhagen climate negotiations and agreement on emissions reductions – expectations were earlier by the WTO’s Doha trade talk stalemate. Ian high that regulatory coordination would successfully mitigate Bremmer, President of the US-based Eurasia Group systemic risks and harmonise new regulations. consultancy, anticipates less policy coordination as the G20 replaces the G8: ‘The G20 is not just a bigger CEOs were less certain that the path to smarter regulation coordination problem; it’s not just herding more cats, involves governments working more closely or in though that would be more difficult. The G20 is herding empowering multilateral organisations to act as global cats along with animals that don’t like cats.’ regulators (see figure 1.7). It begs the question: Where will effective supranational cooperation on economic and Among government officials, we also found support for financial policies take place? It is of increasing importance greater convergence as well as an acknowledgement of to business leaders. Sixty-five percent said they fear the challenges to get there. ‘It’s probably not realistic to governments will become more protectionist. These think that regulatory frameworks are going to be identical concerns are rising even as trade conditions were little across countries. It’s probably not productive to even try affected over the past year. The World Trade Organisation to achieve that’, said Robert Bhatia, Deputy Minister of (WTO) in its annual report released in November 2009, Alberta Seniors and Community Supports in Canada. while noting slippage on trade policy in most G20 countries, ‘But convergence – meaning moving closer together while said ‘the world economy is about as open for trade today allowing for somewhat differing approaches – yes, I think as it was before the crisis started.’ that is a positive. That has to help in terms of facilitating international transactions and trade.’ 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 It’s a bit too many Gs [G8, G20]. There is some inflation forum for international economic coordination in response of such institutions here. Their function is not absolutely to the financial crisis and in recognition of the growing clear, whether or not they for example should be a relevance of emerging markets in the world’s economy. 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 14 13th Annual Global CEO Survey – Main report
  • 17. Of course, global forums such as the WTO and the G20 are Regional trade agreements are largely thought to impede not the only outlet for national cooperation on economic global trade in the long-term. And some issues cannot truly policy. Even as the WTO’s talks have broken down, for be addressed with regional solutions; problems such as example, regional trade agreements have risen sharply, climate change or financial system stability would leak over accompanying a broader trend of rising intra-regional trade borders and undercut the desired outcomes of the and capital flows before the financial crisis. CEOs expect the regulatory cooperation. Yet regional agreements could trend to continue despite the downturn. ‘Right now I see a represent stepping stones towards global coordination and lot more trade agreements happening between countries that begin the process of harmonisation among neighbouring don’t include the United States’, said Dean A. Scarborough nations that are likely to have some interests in common. of Avery Dennison Corporation. 1.7 Global risks will be contained – but not by multi-laterals The G20 will be the new dominant economic and 78 19 The G8 nations will remain the dominant political power in the world economic, and political powers in the world Within nations, the gap between rich and poor Within nations, the gap between rich and people will increase 68 28 poor people will decrease The world will be more open to free Governments will become more protectionist 65 32 international trade The pressure on natural resources will Efficiency of resource usage will improve continue to increase 60 38 Regulatory insight will remain primarily the Multi-lateral organisations will increasingly provide remit of each nation’s own regulators despite 55 42 oversight on regulatory issues such as in financial increased co-operation services Government and business efforts will be unable Government and business efforts will mitigate key to mitigate key global risks like climate change, 39 57 global risks like climate change, terrorism and terrorism and financial crises financial crises 0% 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’. Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 PricewaterhouseCoopers 15
  • 18. pwc.com/ceosurvey Reshape
  • 19. Section 2 Reshape: The post-crisis environment As the process of economic stabilisation unfolded in 2009, we sought to discover what CEOs consider the lasting legacies of the downturn. Worst fears fail to materialise on regulations… yet 2.1 Regulation is a perennial concern for CEOs. This year, Only 15% of CEOs worldwide believe their government has reduced the regulatory burden 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 Japan 37 the financial system and by extension, the global economy, Korea 30 was so great. At that time, drastic measures to contain the China & Hong Kong 27 crisis and preserve national economies were a realistic prospect. Massive bailouts ensued and with them, Italy 16 expectations of radical regulation to prevent another crisis. Global 15 Spain 15 The alarmist scenarios of trade barriers and regulatory rewrites largely failed to materialise. Yet there remains a Germany 13 sense that more regulatory change is inevitable. CEOs see India 13 little encouraging news on compliance costs. Regulatory Canada 13 burdens on corporations were not addressed during the Russia 13 downturn. In fact, in this year’s survey, more CEOs cited a lack of progress on cutting red tape than a year ago, Mexico 13 67% to 57%. Only 2% of CEOs based in the US said the France 11 government has reduced regulations (see figure 2.1). Netherlands 7 Some governments are listening, at least when it comes to taxes. Our annual measure of the comparative ease of Australia 7 paying taxes in 183 countries found that 45 economies UK 3 had reduced the tax burden on SMEs, or made it easier US 2 for them to pay taxes, in the year through 1 June 2009.4 Brazil 0 Yet, few CEOs believe that trend will continue. 0% 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’. 4 ‘Paying Taxes 2010: The Global Picture’, PricewaterhouseCoopers and the World Bank (2009). PricewaterhouseCoopers 17
  • 20. pwc.com/ceosurvey We believe CEOs also worry that regulatory approaches 2.2 designed to deal with perceived problems in the financial Technology, entertainment, retail and consumer goods companies are likely sector will wend their way through the entire economy. to be concerned about permanent shifts in consumer behaviour... ‘There’s a tendency by government to tar every company with the same brush’, said Graham Mackay, Chief Executive Technology 66 of UK brewer SABMiller plc. ‘Certain regulatory reforms Retail & distributive wholesale 64 useful and necessary for financial companies – new Entertainment & media 60 approaches to risk, remuneration, or corporate governance – would clearly be intrusive if applied indiscriminately to Consumer goods 55 business as a whole.’ Other CEOs shared similar concerns Transportation & logistics 54 about the unintended consequences of regulatory reforms. Chemicals 52 Industrial manufacturing 49 Getting closer to consumers Global 48 Some of the strategic rethinking we uncovered – aside Automotive 48 from consideration of varying regional growth rates – is connected with what is happening to consumers. Insurance 46 Business leaders appear as split as economists on the Energy 44 lasting impact of the crisis on the consumer but they are Metals 42 changing company strategies to adapt. Business & professional services 40 Not surprisingly, consumer goods, retailers and wholesalers, Pharmaceutical/life sciences 38 media/entertainment and technology companies are the Banking & capital markets 37 most concerned that a permanent shift is underway (see Engineering & construction 37 figure 2.2). Nearly half of CEOs cite a permanent shift in Utilities 26 consumer spending and behaviour as a threat to their 0% business growth prospects. The concern is highest among CEOs based in North America, Asia-Pacific and Africa. 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’. Eighty-one percent of CEOs expect to adjust their strategies Base: All respondents (33-1,198) in response to changing consumer behaviours. Technology Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 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 We certainly don’t need more regulation in the media companies. Even less cyclical industries such as energy industry overall. In general, markets have to be free. companies and utilities are making those types of changes But we’ve also seen, in other industries, what can happen (see figure 2.3). 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 ostrowski Chairman and CEo, Bertelsmann Ag, germany 18 13th Annual Global CEO Survey – Main report
  • 21. 2.3 ‘What we do see is more down-trading to discount economy … and they are likely to be changing their strategies in response 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 94 Entertainment & media eventually come under threat from premium brands at the 91 Retail & distributive wholesale top and discounters at the bottom. The middle gets eroded.’ 90 Insurance 89 Consumer goods On the other hand, household earnings are expected to rise in emerging economies, fuelling an expansion of middle 85 Technology classes. A slow but steady shift towards more consumption 83 Banking & capital markets in emerging markets is an opportunity that CEOs are 83 Chemicals pursuing across segments. 81 Global 80 Automotive Sensing opportunity in new consumer habits 79 Metals Consumers are seeking more value, but ‘value’ manifests itself in a variety of ways in consumers’ eyes. The survey 78 Pharmaceuticals/life sciences shows that 64% of CEOs are sensing a shift in consumers’ 76 Engineering & construction preferences to associate with environmentally and socially 75 Transportation & logistics responsible businesses – consumers perceive value in a 74 Industrial manufacturing company’s reputation. And 60% of CEOs expect consumers will play a more active role in product development in their 71 Utilities companies, another dimension of value perceived by 71 Energy consumers and a trend represented by open source 69 Business & professional services computing and social networks. ‘After the crisis, consumers 0% will demand a very high level of quality’, said Pablo Isla, Deputy Chairman and CEO of Spanish fashion retailer Q: In the wake of the economic crisis, to what extent do you anticipate changes to any of Inditex. ‘There are also new communications technologies to the following areas of your company’s strategy, organisation or operating model? Base: All respondents (33-1,198) keep in touch with consumers, such as blogs, Facebook and Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 so on. Inditex has two million Zara users fans on Facebook, Note: Respondents who stated ‘some change’ or ‘a major change’ to their strategy, organisation or operating model in response to changing consumer purchasing behaviours. 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 Dominioni CEo, Benetton group SPA, Italy PricewaterhouseCoopers 19
  • 22. pwc.com/ceosurvey 2.4 Public trust is down in financial services and automotive, but much less elsewhere Banking & capital markets 35 26 13 4 Insurance 4 42 19 4 Automotive 4 34 10 6 Business & professional services 17 17 10 2 Industrial manufacturing 3 23 12 3 Global 8 18 15 4 Entertainment & media 6 20 11 3 Engineering & construction 4 19 19 4 Transportation & logistics 6 16 21 4 Energy 3 18 9 3 Metals 3 18 15 6 Retail & distributive wholesale 9 9 9 3 Pharmaceuticals/life sciences 18 18 Technology 3 15 12 2 Consumer goods 4 11 18 3 Utilities 2 7 14 7 Chemicals 4 20 15 0% Significant fall in public trust Slight fall in public trust Slight rise in public trust Significant rise in public trust 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) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Note: Responses of ‘Public trust stayed the same’, ‘Don’t know/Refused’ excluded. 20 13th Annual Global CEO Survey – Main report
  • 23. The interest in drawing in consumers at the product Yet most CEOs outside of financial services believe the development stage is not limited to companies in the economic crisis has not changed public perceptions of technology and consumer goods sector, which have long their industries, despite the broad-based job cuts and been in the forefront in collaborative product development other cost-driven measures in 2009. Most business leaders initiatives. Financial services CEOs are more likely than believe that problems of trust are restricted to the banks their peers to involve consumers in development, perhaps and countries that experienced the worst banking crises. as a result of regulatory initiatives on consumer financial ‘I agree with the view that the recent behaviour and actions protection in addition to the growing sophistication of of certain company managements has disillusioned the online financial products. 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 Public trust: A concern for the financial and acts cannot, and should not, tarnish the reputation of an auto sectors entire industry.’ Perceptions of a change in public trust in business as a result of the recession are driven by sectoral and regional It would be surprising for CEOs to report a steep drop differences. Globally, only 8% of CEOs believed their in public trust if they were based in countries where the industries experienced a ‘significant fall’ in trust. The figure downturn was muted. Accordingly, few CEOs based in China rises to over one-third of banking and capital markets CEOs and Hong Kong feel there has been a significant decline in (see figure 2.4). trust in their industry – and no CEOs in Canada or Brazil do. ‘In less developed countries, the private sector – and the The perspectives may come as a surprise to some in multinational corporation, specifically – is viewed as a Western Europe and North America, where a wave of bastion of wealth, power, and influence. Consequently, populist outrage prompted authorities to discourage we are very conscious of public opinion and go to great bonuses in the financial sector, the recipient of significant lengths to protect our reputation and build the trust of public funds. An FT/Harris poll of adults in six Western the local community’, said Graham Mackay of SABMiller plc. countries shows the recession negatively influenced views ‘Quite frankly, if there’s any clear erosion of trust, I think of business leaders. On average, 67% said they held a it’s directed towards the political establishment.’ worse opinion of leaders as a result of the downturn.5 5 FT/Harris Interactive Poll (April 2009). PricewaterhouseCoopers 21
  • 24. pwc.com/ceosurvey Executive compensation is a persistent and prominent discussions on compensation for all companies, according focus of public distrust. Yet, the furore over soaring to a 2009 poll of 1,007 directors. In the same poll, 60% of executive pay did not register widely. The view that directors conceded boards are having trouble controlling companies can rebuild trust through new remuneration CEO compensation levels.6 models appears to be held by a minority of CEOs from virtually every country. Overall, less than a third of CEOs In general, compensation and workforce practices are areas who recognised a decline in public trust said they were where CEOs would least like to see any change in regulation. changing compensation practices in response. Banks They are concerned that more regulation in this area will limit and capital markets companies are, not surprisingly, their ability to attract and keep good people and, in turn, the most likely to be changing compensation practices. hamper their ability to recover from the effects of the downturn. In the US, 44% of CEOs who experienced a decline in As for improving public trust in their industry, far more favour trust said they were changing pay practices. They appear to participating in industry initiatives or engaging in dialogue stand somewhat apart from their boards on the contentious with regulators (see figure 2.5). Overall, the financial services subject. A majority of US directors expect the heightened companies are the most active in adopting a variety of government focus on pay will impact board-level strategies to help rebuild trust. Globally, yes, the public’s trust in the private sector has One of the biggest lessons we have learnt is about risk certainly been shaken. But not so in India. Not a single management. In the past, we believed that it is the things bank in India went bankrupt and not a single investment that we ourselves do – or fail to do – that would hurt house defaulted. So there is a big difference. us most. But now we understand that the environment can also affect us significantly. So we now want to be Sunil Duggal in a position to shape and influence the wider banking CEo, Dabur India Limited, India 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 Mwangi MD and CEo, Equity Bank, Kenya 6 ‘What Directors Think’, PwC/Corporate Board Member Magazine (November 2009). 22 13th Annual Global CEO Survey – Main report
  • 25. 2.5 CEOs who are addressing issues of trust are split on their approaches Participation in industry initiatives to 64 improve the sector's reputation Proactive dialogue with policy-makers and regulators 63 A systematic approach to measuring 51 and managing reputation Expansion of your corporate responsibility programme 50 Media relations programme and advertising 49 Revisions to reporting and engagement 37 with investor community Engagement with NGOs to improve 31 practices that affect your reputation Changing executive compensation practices 30 0% 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) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 PricewaterhouseCoopers 23
  • 26. pwc.com/ceosurvey The regulation paradox: Seeds of a more effective engagement A year into the crisis, businesses are at a critical juncture in approach to regulation. We also extended the research their relationship with government. The broad effects of through interviews with senior decision-makers in coordinated monetary and fiscal measures to stimulate governmental organisations across the world.7 growth – and the measured approach to date on regulatory reform and trade policy – have set a foundation for a closer CEOs are more willing than in the past to step up to engagement with the public sector. the challenge. ‘I think there is much that can be done in partnership between business and government’, said At the same time, there is an increase in the negative Angela F. Braly of WellPoint Inc. They are not waiting for new perceptions of CEOs on the success of government regulation but increasing involvement to help shape it. intervention regarding the environment, access to natural Over two-thirds are prioritising cooperation with regulators. resources, availability of skills and the regulatory burden. Nearly 60% believe smarter regulation will stem from working more closely together (see figure 2.6). This reflects the ‘regulation paradox’ we encounter each year in the survey: CEOs express the desire for more Businesses and regulators cannot expect to agree on government leadership and action in certain areas (e.g. everything, yet we did find areas where CEOs acknowledge climate change and tax harmonisation) while also believing common goals with more activist regulators: government action is only positive when it helps their business. CEos favour better enforcement over new regulation for In an effort to highlight the gaps – and find where there is financial sector stability, and for social and environmental promise of a more effective public and private sector sustainability. They believe regulators have the leeway engagement – we asked CEOs for their views on a smarter to make use of powers they already have and thus that Some countries may impose protectionist barriers but The public’s disillusionment has moved beyond the banks I don’t think they’ll be very significant. In addition, in to the private sector in general, so that governments Brazil’s case, the appreciation of its currency (the real) are now talking about more regulation to stop a similar may offset possible protectionist barriers. crisis from ever happening again. But hasty regulation will be bad regulation and my concern is that creativity, Claudio Eugênio Stiller galeazzi innovation, and enterprise will be stifled at a time when CEo, Pão de Açúcar group, Brazil they should be encouraged Paul S. Walsh Chief Executive, Diageo plc, UK 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). 24 13th Annual Global CEO Survey – Main report
  • 27. heightened enforcement would be more effective than systemic change. Only 8% and 12% called for less It is incumbent on us to engage as much as we possibly regulation for financial sector stability and for social and can with government and with the civil service. The environmental sustainability, respectively. power sector does not speak with one voice, since it is a collection of individuals, all of whom have got a slightly Antipathy to regulation strengthens where regulation different agenda. I have some sympathy for government could harm job creation. Business leaders are more and opposition when they say, ‘What does the industry clearly opposed to new regulations in innovation, foreign want me to do here?’ and they get seven different replies. investment and access to capital. Phil Cox Most oppose new or more regulation on workforce CEo, International Power plc, UK 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 Work more closely with the private sector to maintain competitiveness 59 Ensure regulations are clear and stable 57 Work more closely with other nations to harmonise regulations 45 Place more emphasis on fairly enforcing existing regulations 39 Focus regulation on outcomes, not process 32 Make the representation of emerging 21 economies in global bodies more equitable Empower multi-lateral organisations to act as global regulators 15 0% 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. PricewaterhouseCoopers 25
  • 28. pwc.com/ceosurvey Government ownership: A strategic game-changer Rising government influence over the global business The relative acceptance of public ownership ends when a crisis environment in 2009 was marked by the increase in state fades away. More than two-thirds of CEOs have significant ownership and control in a whole range of companies. concerns about long-term state involvement in business with Our survey reflects the change: 14% of companies have important implications for government policies on competition government ownership or backing, up from 10% in the last and fair markets. Even those that are experiencing government year. Nearly a third of all companies said the government ownership have negative perceptions over long-term state owns a stake in a major player in their industry. ownership, although slightly less so. Government’s new reach in 2009 – largely a result of the While CEOs may desire a pull-back from government unprecedented measures to stabilise the financial system – ownership, popular support appears to be holding in some is changing the debate on government ownership in the polls. A GlobeScan/University of Maryland poll in 2009 of private sector. Nearly half of CEOs were positive towards government taking an ownership role in times of crisis, We’ve learned which conditions apply to China and including those in North America, whose dissatisfaction with which do not. With regard to this crisis, China is in a most issues involving government measures to improve relatively advantageous position and I attribute that to business conditions is evident elsewhere in the survey (see China’s monetary policy. But there are also conditions in figure 2.7). CEOs from two sectors that received considerable China that we must pay attention to. China’s economic support from governments around the world during the crisis development relies on exports and all over the world – automakers and banks – are among the most appreciative we’re regarded as a manufacturing country. However, of government ownership to stabilise a crisis. the raw material we use is mostly supplied domestically, and the products we produce are sold relatively cheaply. I am unable to say with any certainty how a regime for In fact, the products we sell seldom reflect a high controlling systemic risk will come about. I do know, technical content or value-added. So in my opinion, however, that this issue has many unanswered questions. China should reduce its volume of exports, but begin to In the case of a cross-border institution, when a failure manufacture products of higher quality and higher value- occurs as a result of systemic risk, who pays the bill? added. That would contribute substantially to China’s The treasury of one country or the other? economic development. The core issue is how much innovation is contained in your products. Alfredo Sáenz Second Vicechairman and CEo, SHEn Heting Banco Santander, Spain Executive Director, President, Metallurgical Corporation of China Ltd, China 26 13th Annual Global CEO Survey – Main report
  • 29. adults in 27 countries found that a majority called for less 2.7 active government ownership or control in just four of the Not all CEOs agree that government ownership is helpful in times of crisis countries.8 Indeed, given the range of experiences with public ownership in countries where the crisis was more 50 muted – from East Asia to the Middle East and Latin America 51 – state ownership is likely to endure for some time in one 61 Government ownership helps form or anther, be it state-owned enterprises, sovereign to stabilise an industry 34 in times of crisis 41 wealth funds or national oil companies. 54 40 And CEOs recognise this. They are shifting strategies to respond to other influences of the government over the 88 economy. ‘Government spending as a percentage of GDP 75 in almost every economy is going up. We’ll adapt to that Government ownership will 63 lead to political interference 78 environment. In fact, we need to look at government as more in the marketplace 56 of a customer’, said Dean A. Scarborough of Avery Dennison 54 Corporation. ‘Our strategy in the past was ’let’s just stay 65 under the radar’, and that’s not doable anymore. We need 83 to be an influence, certainly, so we’re going to step up our 69 Government ownership 69 involvement in the public sector to influence the outcome inherently creates a 78 conflict of interest with in a good way.’ its regulatory function 76 54 78 83 We should work to refine our model of regulation whereby 72 a merits-based review becomes part of the regulatory Government ownership 62 process and acts, if you like, as a self-managing check distorts competition in an industry 74 69 over the scale and scope of regulation and whether or not 61 it’s achieving its intended outcomes. 70 Dr. Paul Reynolds 0% CEo, Telecom Corporation North America Western Europe Asia Pacific Latin America of new Zealand Limited, new Zealand CEE Middle East Africa Global average Q: How much do you agree or disagree with the following statements about government ownership? Base: All respondents (28-442) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 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). PricewaterhouseCoopers 27
  • 30. pwc.com/ceosurvey Result
  • 31. 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. Conditions are improved but the cost pressure remains. Short-term cost focus Business leaders are also bracing for continued volatility. Despite widespread restructurings last year, many ‘Under the current situation, demand changes every day, businesses remain committed to further cost-cutting. In an and enterprises need to adapt rapidly. In fact, wide indication of the cost pressure they continue to face, 69% of fluctuations in market conditions have become very normal CEOs we surveyed plan cost-reduction initiatives in the next and we must be ready to respond to a whole range of 12 months, compared with the 88% who made cuts over the possible conditions: low market prices, strong demand, or past year (see figure 3.1). no demand’, Huang Tianwen, President of China-based Sinosteel Corporation, told us. 3.1 Price fluctuations are impacting recovery scenarios for Cost-cutting remains agenda item no. 1 some. ‘What makes this recovery atypical is the degree of volatility in commodity pricing. We are seeing demand come Implemented a 88 back. But demand might not fully recover because of the cost-reduction initiative 69 degree of volatility that still exists’, said Andrew Ferrier, CEO 35 of New Zealand dairy exporter Fonterra Co-operative Group. Outsourced a business process or function 34 In this environment, CEOs are less likely to explore new Entered into a new strategic 35 alliance or joint venture 46 markets. And an unrelenting focus on cash flow is likely to force CEOs to make hard decisions about where they ‘Insourced’ a previously outsourced business 23 allocate resources for the long-term and how they account process or function 17 for risks – including climate change – along the way. Divested or spun-off majority 20 interest in a business or exited a significant market 17 Completed a cross-border 20 We decided, going into this recession, that while we didn’t merger or acquisition 30 have a huge amount of debt compared to many people in the UK, we had to be very focused on cash generation Ended an existing strategic 18 alliance or joint venture 14 and reducing our debt. We’ve done that over the last 0% 15-18 months, and opted not to pursue an acquisition Have initiated in past 12 months Plan to initiate in coming 12 months strategy during this difficult time, given the risk it would bring to the business. Q: Which, if any, of the following restructuring activities have you initiated in the Paul Walker past 12 months? Chief Executive, The Sage group plc, UK Q: Which, if any, of the following restructuring activities do you plan to initiate in the coming 12 months? Base: All respondents (1,198) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Note: Responses of ‘Don’t know/Refused’ and ‘None of the above’ excluded. PricewaterhouseCoopers 29
  • 32. pwc.com/ceosurvey Organic growth for now An existing-markets focus is overwhelmingly favoured by The largest proportion of CEOs (38%) is positioning the largest companies; they are also the most likely to have companies for better penetration of their existing markets. operations in different geographies already. CEOs in Asia-Pacific Such an approach is expected when capital and resources and Africa are also more likely to take this view than those in are scarce and business managers have fewer margins for Western countries. An organic growth outlook for businesses error (see figure 3.2). However, the focus on organic growth in developing nations is not surprising; their home markets are captured in the survey this year fits a trend that predates the growing more quickly and many were less impacted by the economic crisis. The concentration on existing markets has downturn. In fact, if anything, it appears to have accelerated risen steadily since 23% of CEOs in 2007 cited it as the main longer-term growth strategies for some. ‘The recession in the vehicle for growth. It naturally follows that in each year since Western economies has prompted Indian IT companies to 2007, consistently fewer CEOs see more potential for growth re-examine their global delivery model and address weaknesses. in new geographic markets. And as a result, a number of these companies have moved up the value chain’, said Pawan Munjal of Hero Honda. 3.2 Existing markets remain the focus for growth Cash is still king Companies are relying heavily on internally generated cash Better penetration of existing markets 38 flow to finance growth. This is little changed from a year ago. With new customers proving difficult to acquire, businesses New product development 20 can be expected to increasingly focus on cash flows from New geographic markets 15 the existing customer base. Nevertheless, the heightened focus on costs and cash preservation likely signals continued Mergers and acquisitions 14 pricing pressure on suppliers and vendors in the near term. New joint ventures and/or 11 ‘People are thinking more about cash flow. If it lasts for strategic alliances 0% 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 Q: Which one of the following potential opportunities for business growth do you see as that I spend 50% now and 50% in 10 years’ time. This is the main opportunity to grow your business in the next 12 months? Base: All respondents (1,198) affecting the strategy on all of our products’, said Mikael Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Mäkinen of Cargotec. Note: Responses of ‘Don’t know/Refused’ excluded. I am concerned about the significant rally in the valuation I am more worried about the growing public borrowing of several businesses and corporations when this whole and its serious consequences. With all its seriousness, situation has not been completely absorbed or eliminated; the crisis has shown us some positive lessons which this could be generating another kind of economic we should take advantage of. The situation was worse bubble. Such high valuations do not match the reality in 2007, when there was heavy borrowing and a bubble of some countries’ markets and economies. I think we with no clear end. This crisis should teach us to be more might be seeing what we want to see – a kind of illusion. demanding of ourselves. Moreover, the bad credit or toxic investments that have caused so much damage in the financial systems haven’t Pablo Isla been assimilated or eliminated yet. So there is no real Deputy Chairman and CEo, Inditex, Spain 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 gonzalez Chairman and CEo, grupo Modelo, Mexico 30 13th Annual Global CEO Survey – Main report
  • 33. Slightly fewer expect to tap the bond markets, with 24% has accelerated in recent years. ‘Business development is planning to issue debt v. 28% last year. It may suggest that often funded not out of profits but through investments using the record-pace of issuance in 2009 in part served to satisfy debt or equity finance. And while it may take 10–12 years to immediate financing needs over longer term growth-related pay back long-term investments, technology often becomes plans. It is also apparent that business leaders are reluctant obsolete after three years. So investment in new technology to ‘over-finance’ in the near term. This is perhaps as much a may actually hinder profitability. So a question arises: How measure of lessons learned as it is conservatism in the face can companies shift away from development financed by of a period of slack demand. investment to development financed by profit generation?’ noted Tigran Nersisyan of Borodino Group. 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 Positioning for the long-term capital markets dictate a more conservative approach to In a sign of the times, when CEOs were asked about their one’s balance sheets, I would say that every business in investment plans over the next three years – ‘initiatives to the world has been affected’, Andrew Ferrier of Fonterra realise cost efficiencies’, cited by 78% of CEOs, was the Co-operative Group told us. ‘We plan to run our gearing at a most frequently identified target for a moderate or significant significantly lower level than we have traditionally. That is not increase in investment. Investments that are commonly to say that we ran a high-risk strategy previously. But we are considered vital for long-term growth, such as R&D and new feeling as a result of market uncertainties that it is better to product development, and advertising and brand-building, be more conservative going forward.’ lagged far behind. And capital investments were last on the list, with just 40% of CEOs planning to increase cap-ex Sourcing investments from cash generated by operations spending (see figure 3.3). This is true even in capital- is certainly not a new approach, but a renewed emphasis intensive industries, such as industrial manufacturing and could have profound implications for some suppliers as it automotive, which may reflect overcapacity relative to impacts the purchasing and capital investing cycle, which demand forecasts that have been revised downwards. 3.3 R&D and advertising are lower on the list of investment priorities No change Initiatives to realise cost efficiencies 13 41 37 17 Leadership and talent development 3 47 21 27 Organic growth programmes 1 6 46 18 28 Strategic technology infrastructure or applications 1 6 43 16 32 R&D and new product innovation 2 6 41 16 32 Advertising and brand-building 3 12 35 7 42 Capital investments 3 16 32 8 39 0% Significant decrease in investment Moderate decrease Moderate increase Significant increase in investment 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) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Note: Responses of ‘Don’t know/Refused’ excluded. PricewaterhouseCoopers 31
  • 34. pwc.com/ceosurvey Different strategies for growth emerge at the industry level. margin pressures for years, as their downstream customers Banks and capital markets businesses, for example, say shopped for cheaper suppliers and as raw materials prices they are more likely than others to focus on organic growth; fluctuated. Cost efficiencies are a fact of life. Rather, these they are also among the least likely to consider new CEOs are now more likely than most of their peers to be geographic markets as the best opportunity for growth, increasing investments in R&D. 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 Risk and strategy go hand in hand brand-building, in order to rebuild reputation and strengthen Business leaders are making changes ahead of what the franchises they already have. many expect may become a more restrictive regulatory environment once recovery sets in. Clearly, CEOs are more On the other hand, industrial manufacturers are now among risk aware: 41% anticipate a ‘major change’ to their risk the least likely to be investing in initiatives to realise cost management approach (see figure 3.4). efficiencies. Many of them have been living under intense 3.4 More CEOs are planning a ‘a major change’ to risk management than other elements of their strategy, organisation or operating model Approach to managing risk 15 43 41 Investment decisions 18 48 33 Responding to changing consumer purchasing behaviours 17 55 26 Strategies for managing talent 21 50 29 Organisational structure (including M&A) 23 49 27 Focus on corporate reputation and rebuilding trust 33 43 23 Capital structure 37 44 17 Engagement with your board of directors 42 41 16 0% No change Some change A major change 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) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Note: Responses of ‘Don’t know/Refused’ excluded. The bank has a social purpose which is that of financing When the market changes, you cannot simply follow the system’s growth. Ultimately, that became irrelevant. normal procedures or maintain outmoded strategies, What became relevant was what mechanisms one could management structures, or market positioning. put in place to try to earn more. New conditions dictate a quick response. gerolamo Caccia Dominioni HUAng Tianwen CEo, Benetton group SPA, Italy President, Sinosteel Corporation, China 32 13th Annual Global CEO Survey – Main report
  • 35. Risk is not only moving up the corporate agenda in response using a simple form of protection. Therefore, we are paying to the crisis, but is seen as something that needs to be more attention to our internal controls and management embraced by the organisation as a whole. That one in five mechanisms’, said Kong Dong, Chairman of Air China Ltd. say their board of directors is ‘significantly more engaged’ in assessing strategic risk indicates that for many, approaches The higher level of involvement by directors is not merely to risk are moving beyond controls-based risk management taking place in the financial sector, where risk standards are to corporate strategy and financial management. actively changing, but across all sectors. Directors are more focused on internal as well as external concerns, raising ‘We did not realise that the damage was going to be so their engagement on long-term key performance indicators great. What inspires me most is that an enterprise like ours and succession planning as well as compliance and cannot go through such difficulties by its own efforts or by strategic risk (see figure 3.5). 3.5 Board agendas are getting busier – with assessing strategic risks at the top No change Assessing strategic risks 1 3 51 20 25 Overseeing financial health 12 43 23 30 Constructively engaging the management team on strategy 1 3 44 17 34 Focusing on the long-term key performance indicators 1 4 45 15 34 Ensuring regulatory compliance 1 5 32 19 41 Enforcing high ethical standards 1 4 33 17 44 Assessing the leadership pipeline for succession planning 2 6 37 13 40 Aligning executive compensation with long-term performance 2 5 35 12 43 0% Significantly less engaged Less engaged More engaged Significantly more engaged 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) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Note: Responses of ‘Don’t know/Refused’ excluded. Currently, the M&A market is very sluggish and there are I believe that we will emerge stronger and with more few opportunities around. However, given the current influence. We have capital and a well-established business. climate, transactions that can represent the first step So I believe that there will be clear opportunities for us. towards strong future development are not out of the Alfredo Sáenz question. Crucially, we have a clear strategy and know Second Vicechairman and CEo, Banco Santander, Spain how to draw out and develop added value. Bruno Lafont Chairman and Chief Executive Director, LAFARgE group, France PricewaterhouseCoopers 33
  • 36. pwc.com/ceosurvey Risk management is a process for all Companies in sectors generally more reliant on the global Of those CEOs who said they plan some change or trading system are raising their engagement to address significant change to their approach to managing risk – risks in the supply chain and exposure to systemic or low- and 89% are – slightly more said they plan to integrate risk probability, high-impact events. Auto industry businesses management capabilities into business units than change are nearly unanimous in responding to potential supply chain other processes related to risk. They are assigning risk issues, and planning further collaboration with partners to functions to business heads, a process that aligns risk with collectively manage risks. They are also the most concerned strategic business planning. ‘We learned that we must over financially stressed suppliers, at 76%, compared with a further strengthen our internal controls and risk management global average of 47%. capabilities. The financial crisis has made it clear that all enterprises must be better prepared against future risks’, Setting the pace on climate change said Huang Tianwen of Sinosteel Corporation. The recession restricted corporate investment in many areas – but climate change wasn’t one of them. Indeed, climate No clear consensus emerges on what CEOs consider the change raised its position on the CEO agenda despite the first steps to take as they reinvigorate and reinforce risk severity of the recession. More CEOs said they were management in their organisations. Their focus ranges concerned about climate change this year than last. And from changing reward structures to improving risk-related among the slim majority of CEOs who had climate change information analysis. They are also collectively managing strategies in place before the crisis, more CEOs maintained risks with supply chain partners and working with other or even increased investment in their climate strategies than partners – regulators, customers, NGOs and even reined in spending (see figure 3.6). competitors – to prevent and prepare systemic risks.9 3.6 More companies raised their investment in climate change during the crisis than reduced Did your company have a climate If yes, how did the crisis impact change strategy one year ago? your climate-change strategy? Don’t know No Raised investment in climate change strategy 17 3% Had no effect on investment 61 Yes Delayed investment in climate change strategy 13 45% 52% Reduced investment in climate change strategy 7 Don’t know/refused 2 0% 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) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 9 ‘Exploring Emerging Risks’, PricewaterhouseCoopers (January 2009). 34 13th Annual Global CEO Survey – Main report
  • 37. Corporate responses to climate change are linked to 3.7 government policy and regulatory requirements: 61% of Three out of five CEOs are preparing for the impacts of climate-change CEOs were preparing for the impacts of climate-change initiatives such as emissions trading initiatives such as emissions trading or carbon taxes (see figure 3.7). This despite significant uncertainties over the Don’t know/refused direction and speed of climate policy. Only 25% of CEOs 4% 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. No 35% In this regard, then, the failure to produce a binding global 61% Yes agreement on climate change at Copenhagen was a setback for CEOs. Q: Is your company preparing for the impacts of climate-change initiatives in the Yet Copenhagen may not have affected CEOs’ plans that coming 12 months? dramatically. Many leaders are moving ahead despite both Base: All respondents (1,198) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 financial pressures and the regulatory uncertainty. ‘I think Note: Climate-change initiatives defined to include cap-and-trade or other carbon pricing that in 2009 sustainability has been less front-of-mind. But policies, energy efficiency standards, industry or capital markets reporting requirements, climate-change adaptation strategies, and other efforts to move towards a low-carbon economy. 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. It also makes good business sense to find innovative CEOs have to recognise that a lot of their long-term solutions to this issue [sustainability] and to create ‘green planning will need to be tossed out of the window. There growth’ long-term. We see a growing public interest in has to be a lot more volatility built into your modelling; ‘green topics’ and sustainability, which is catered for your ability to do your three- and five-year planning in by our books, magazines, TV programmes and also in that kind of an environment is diminished. You have to be our printing business. Overall we will further explore the much more tactical. market for green products and services. Ian Bremmer Hartmut ostrowski President, Eurasia group, US Chairman and CEo, Bertelsmann Ag, germany PricewaterhouseCoopers 35
  • 38. pwc.com/ceosurvey In a separate survey of executives with responsibility over 3.8 sustainability practices, two-thirds of large companies Reputational advantage is the leading driver of responses to believe their efforts, including publishing reports on climate-change initiatives environmental performance, go beyond legal requirements.10 So many leaders are beginning to craft a business case 51 64 for sustainability. The output from the World Economic Our response to climate-change 64 initiatives will provide a reputational Forum’s Task Force on Low Carbon Prosperity, a global advantage for my company among 66 key stakeholders, including 43 multi-stakeholder group, set the tone for proactive business employees 57 leaders to begin that process independently and in 70 collaboration with the public sector.11 ‘We have always 42 been interested in moving in this direction. But even for us, 55 even in this, it is important to get ourselves up to date and Climate-change initiatives will lead to 45 therefore perhaps to become less, I would say, provocative/ significant new product and service opportunities for my company 52 30 challenging and a little more specific’, Gerolamo Caccia 39 Dominioni, CEO of Italian fashion retailer Benetton Group 25 SPA, told us. 33 29 My company will benefit from Several business drivers underpin the business benefits government funds or financial 39 incentives for ‘green’ 23 of a climate-change strategy. More CEOs expect climate investments 15 change will lead to new products and services for their 25 companies than those who worry that climate change entails 23 a significant expense. And CEOs are attuned to the shift 26 in public perceptions of climate change and corporate 38 37 responsibility: Nearly two-thirds of CEOs in Western Europe, My company will need to reduce its emissions significantly 40 Asia-Pacific and Latin America expect a reputational 22 advantage from their climate strategies (see figure 3.8). 29 43 ‘As a consumer marketing company, our biggest concern is that consumers will choose not to buy our brands because 32 we have not done the right thing,’ said Paul S. Walsh of 34 37 UK-based beverage company Diageo plc. ‘But having done Compliance with climate-change initiatives will be a significant 38 the right thing, it’s invigorating to see how that can ignite the expense for my company 24 imagination of our employees and the communities in which 36 30 we operate. It also affords us the opportunity to get out ahead of regulation.’ 30 20 19 Climate-change initiatives will 41 slow growth in my industry 11 21 13 0% North America Western Europe Asia Pacific Latin America CEE Middle East Africa 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) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 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 36 13th Annual Global CEO Survey – Main report
  • 39. One driver that fails to register broadly – that is, outside At 53% and 55%, respectively, they are also more China – is government financial incentives and other concerned about the cost of climate-related regulation than measures to ‘go green’. China has been the major the global average of 34%, and acknowledge the potential beneficiary of the UN’s Clean Development Mechanism for slower industry growth as a result. Equally, however, they carbon offset programme and investments in low-carbon are more convinced that climate-related initiatives will lead technology over the past decade have accelerated as to substantial new products and services (62% and 67%, part of the government’s stimulus spending directed at respectively) than the global average (47%). infrastructure. These investments are seeding what one report estimates could develop into a US$500 billion to Interestingly, of all business leaders, those in energy and US$1 trillion greentech market by 2013.12 utilities are among the most likely to believe that efficiencies will improve natural resource usage over the next three years. Energy companies and utilities are more likely to have The sentiment is not shared by some of their greatest climate strategies in place and lead all sectors in preparing customers: CEOs in automotive and transportation and for climate initiatives in the near term. The two industries logistics are among the most likely to believe the opposite. are already heavily regulated on emissions in many nations. I would like to see greater focus by CEOs on long-term We do take full legal, economic, and social responsibility environmental issues. We must not be slaves of the to protect the environment, which – as a by-product – immediate. Otherwise, we will destroy the future. also benefits our public reputation. Compared to the US, Europe, Japan and other industrialised countries, Dr. James Mwangi China still has a long way to go in terms of environmental MD and CEo, Equity Bank, Kenya 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. SHEn Heting Executive Director, President, Metallurgical Corporation of China Ltd, China 12 ‘The China Greentech Report 2009’, PricewaterhouseCoopers (September 2009). PricewaterhouseCoopers 37
  • 40. pwc.com/ceosurvey Access to capital is a looming problem In the middle of a financial crisis and billion-dollar bank cash flow to help finance growth plans. Moreover, many bailouts, it may come as a surprise that an inability to finance companies have completed a round of cost cuts and moved growth does not score among the top-ten concerns for to refinance at low interest rates. 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 Post-crisis bank lending capacity is untested persistently weak demand for commercial loans through Look ahead, however, and it is clear that financing will become the first nine months of 2009. Chinese banks were a notable a more pressing issue. If liquidity was ‘last year’s problem’, the exception among the G20 economies. Bank lending surged survey responses suggest that access to capital is a strong as the Chinese government pushed stimulus measures contender for ‘next year’s problem’ – meaning it will rise in largely through the banking sector. importance as growth spreads in 2010 and beyond, and companies seek more funds to invest. Over half of CEOs Fund-raising pressures typically lag a recovery and capital expect access to bank financing and credit will become more spending remains subdued in most economies. Many difficult after the recovery sets in. Forty-five percent anticipate companies also rely on their own resources: 83% of more difficult access to capital through the debt markets, business leaders in the survey expect internally generated despite the healthy rebound in the bond market in 2009 (see 3.9 Access to capital is expected to become more difficult Same as before the crisis Compliance and reporting to meet capital markets requirements 2 10 39 15 28 Access to bank financing and credit 5 16 41 10 26 Access to capital through debt markets 4 17 38 7 29 Access to capital through equity markets 4 19 32 5 35 Access to capital from alternative investors 3 20 30 7 32 (e.g. private equity or sovereign wealth funds) 0% Significantly easier Moderately easier Moderately more difficult Significantly more difficult 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) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Note: Responses of ‘Don’t know/Refused’ excluded. 38 13th Annual Global CEO Survey – Main report
  • 41. figure 3.9). ‘Which ever way you look at it, the cost of capital purchases of securities, dropped over 80% in 2008, leading has definitely gone up’, said Paul S. Walsh of Diageo plc. to volatility in exchange rates and higher costs of capital ‘So we continue to try to level out our investment profile.’ in some emerging economies last year.13 Capital markets stability remains a highly ranked concern for CEOs, Expectations that access to capital will become more although not at the level seen last year. difficult stretch across industries and company sizes. Yet it is expected to weigh more heavily on smaller companies. In developed economies, weak demand for lending ‘First of all, for our SME customers, there are not many throughout much of 2009 has left the post-crisis capacity of options around finance. The old days of long-term leases, banking sectors to fuel and support growth largely untested. HP on assets, is something either they’re in or have done Banks are expected to remain risk-averse as regulations or would find more difficult, so a lot of them are restricted evolve and as they repair their balance sheets and the weak to the more traditional markets of banking’, said Paul Walker securitisation market continues to limit their own sources for of The Sage Group plc. ‘Even some of the venture capital loan funds. availability for SMEs has probably disappeared, so I don’t think they have the same options as the larger corporates ‘There is a lot of concentration on lower risk, higher strength when looking for finance.’ organisations. Unfortunately, what happens in that environment is that the people who don’t need the money Smaller companies in the survey are showing higher levels of are the ones who have the money easily available to them’, concern over financially stressed suppliers than their peers. said Michael I. Roth of Interpublic Group. Unlike the largest companies, they are more reliant on banks for financing. 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 Challenge comes when businesses start to grow more reliant on banks for credit are clear. Banks will seek to Several factors point to tighter capital conditions. Chief lend to customers they regard as a long-term and valuable among these is the prospect for higher interest rates as partner. ‘As far as our customers are concerned, capital is inflation rises. As always with interest rate cycles, it is a available, but not to everybody. That’s a huge difference question of when. CEOs anticipating a 2011 recovery in their now’, said Mikael Mäkinen of Cargotec. ‘Most of our ‘key industries are the most concerned over an inability to finance risk’ customers do get capital. However, a few years back, growth at an acceptable cost of capital. you could see all kinds of companies popping up like mushrooms and starting up businesses – that capital is not Other concerns surrounding capital costs are likely related available today. That should mean it is a better foundation. to global market conditions. Cross-border capital flows, The sources of capital that our customers go to are being including foreign direct investment, lending, and sales and much more selective than before. That is a huge change.’ 13 ‘Global capital markets: Entering a new era’, McKinsey Quarterly (September 2009). PricewaterhouseCoopers 39
  • 42. pwc.com/ceosurvey Post-crisis models emerge When we analysed responses related to threats to growth, Roughly one-sixth of business leaders fall into this category. engagement with boards and regulation, we found that two Adaptors come from all regions although 63% are based in sets of CEOs emerged from the others. Each represents emerging markets in Asia-Pacific and Latin America. They different attitudes towards achieving success in the post- are a mix of both small and large businesses. They are far crisis environment, spanning geography, industry and size. more concerned over a range of threats to growth: they are Both engaged in similar levels of restructuring activities last twice as concerned as Consolidators on their ability to year, and both also share similar outlooks on revenue growth finance growth, exchange-rate volatility and energy costs. prospects. Yet, the two clusters indicate that despite They are nearly three times as concerned as Consolidators universal relief that the worst of the crisis appears over, not over supply chain security. These concerns are leading them everyone is approaching recovery in the same way. Here’s a to take decisive actions to adapt to the new environment and look at where they differ on key points in our survey. mitigate risks to their business. Adaptors are aggressively changing operating models and investment strategies and they are not done with restructuring. More are planning Consolidators: Drawing on existing networks cost-cuts in the near-term than Consolidators. The first cluster, representing roughly a third of business leaders in our survey, we call ‘Consolidators’ for their Adaptors are reorienting strategies. (See figure 3.11.) conservatism: they are making few changes to their More are planning investments in technology, R&D and strategies and operations. Consolidators come from all capital investments. They are investing in people, including regions of the world, although two-thirds are based in North in training and leadership programmes. America and Europe. The majority are established businesses with a long tenure. They are far less concerned 3.10 about threats to business growth than the Adaptors, but they Adapters are more aggressively investing in a range of areas exhibit greater antipathy to regulation in general, particularly regulation surrounding foreign investment and innovation. Initiatives to realize cost 72 Consolidators are focused on strengthening their existing efficiencies 84 market position. They are also more likely to be planning to strike Leadership and talent 61 strategic alliances and to close acquisitions than other CEOs. development 80 Consolidators investment plans are restrained. Most Organic growth programmes 60 76 Consolidators will rely on internally-generated cash flow to finance growth. And fewer plan to raise or change spending Strategic technology 52 infrastructure or applications on technology, R&D or capital investments. (See figure 3.10.) 76 R&D and new product 49 Consolidators expect fewer organisational changes. More innovation 74 Consolidators cut workforces during the recession. While the 37 two groups were equally likely to have implemented cost-cuts Advertising and brand-building 54 in the past year, Consolidators are less likely to be planning cuts going forward. Consolidators are less likely to outsource Capital investments 35 55 and far less likely to collaborate with external specialists 0% suggesting a more traditional internal organisational approach. Consolidators Adaptors Adaptors: Concerns prompt radical changes to 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? the business model Base: All respondents (361, 215) Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 The other set of CEOs, whom we call the ‘Adaptors’, is taking Note: Respondents who stated ‘moderate’ or ‘significant increase in investment’. bold steps in many directions, to adjust to a new environment. 40 13th Annual Global CEO Survey – Main report
  • 43. Adaptors are highly risk-aware – and are pro-actively change drastically. For this set, too much change may be a addressing many of their concerns. They are more likely distraction from the market or departure from their business to be pushing risk management practices out into all business model. Or, they may have the luxury to be more conservative operations. And they are taking steps to prepare for as they wait for their competition to thin out. They will systemic risks. concentrate on finding ways to keep existing customers in a challenging environment and alliances and joint ventures 3.11 could be a smart way to offer customers more. Adaptors are more likely to be changing their strategy, organisation or operating model 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 76 Approach to managing risk 92 costs and investing relatively less in R&D, talent and organic growth programmes than Adaptors. Responding to changing 75 consumer purchasing 92 behaviours Regulatory simplicity and fairness are also a cornerstone 74 priority for Consolidators. They are aware that regulation Investment decisions 89 shapes growth strategies – regulations impacting innovation and foreign investment are particularly anathema. But are 69 Organisational structure (including M&A) 87 they equally attuned to potential change to regulatory frameworks as recoveries set in? They are less likely than Strategies for managing talent 66 Adaptors to believe government can improve policy by more 85 engagement with business. Focus on corporate reputation 57 and rebuilding trust 75 Adaptors are undergoing significant change to create a new basis for sustainable growth over the long-term. This may 53 Capital structure 68 signify a belief that as the market shakes out, this is the time to come forward and seize opportunity. For Adaptors, this Engagement with your 44 includes being more innovative about climate change, more board of directors 69 collaborative about regulation, and more agile. They want to 0% be ready to compete in the emerging environment, and Consolidators Adaptors potentially steal the lead over other organisations that might be taking a ‘business as usual’ approach. These businesses Q: In the wake of the economic crisis, to what extent do you anticipate changes to any of will be more resilient to change over the long-term and are the following areas of your company’s strategy, organisation or operating model? Base: All respondents (361, 215) creating a talent pipeline for the long-term, despite having Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 had to make some short-term headcount reductions. Note: Respondents who stated ‘some change’ or ‘a major change’. Yet there is no real comfort zone for Adaptors. Some are Our view acting from a position of strength; some may be under duress. Each may be as likely to boom as to bust. While It is too early to tell whether one strategy will be more successful most expect to finance growth from internal sources, their than the other. In fact, in our view, Consolidators and Adaptors wider ranging investment strategies may require additional, represent archetypal strategies that could both lead to lasting alternative sources of finance in a lending environment that success, building on particular organisational strengths and most CEOs expect is about to become more difficult. They environmental factors. Yet, clearly risks remain for both. recognise that capital is likely to be in short supply in the coming months and they may find it difficult to execute their Consolidators feel they are now on the right track for strategy for that reason. There might also be a danger that recovery, that the recession helped them ‘cut the fat’ and do they are changing too rapidly, before it is really clear what what they do better, but otherwise, they are not looking to the new environment will look like. PricewaterhouseCoopers 41
  • 44. pwc.com/ceosurvey Final thoughts
  • 45. Lessons learned and applied to 2010 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. One of the more consistent regrets was not acting fast Long-term planning is critical – but be prepared enough when conditions turned. ‘If I was to do it all over to change at a moment’s notice again, I would be more pessimistic. All the stuff I had to do, The importance of strategy, clearly understood by for example in cost savings, I would do at the beginning. customers, employees and business partners, cannot be Be more radical’, reads one fairly typical comment. underestimated in a crisis. Yet the speed with which market The idea that some businesses or entire industries can be conditions change today can render planning models moot. immune from or little changed by conditions appears to The key is embedding agility throughout an organisation to have taken some time to defeat. It is not easy to appreciate enable rapid reaction to changing trends while maintaining how a bankruptcy on Wall Street can so swiftly sap liquidity a strategic positioning. ‘Flexibility is the most important throughout the banking system. weapon’, said a CEO in Portugal. ‘Flexibility is the key to smoothing the effects of the crisis and is needed in Judging by the number of times certain words or phrases production, costs and commercial actions.’ 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 Lessons learned from the financial crisis Trust anymore’, ‘Be flexible’ and helpfully, from a CEO in revolve chiefly around gaining more control Uruguay, ‘Always have a Plan B’. over these newly appreciated vulnerabilities, CEOs are attempting to strengthen the resilience of their internal and external. 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 Stay disciplined on costs, but incur them to innovate from the financial crisis revolve chiefly around gaining more control over these newly appreciated vulnerabilities, internal The vigorous cost-cutting measures adopted over the past and external. 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 PricewaterhouseCoopers 43
  • 46. pwc.com/ceosurvey still remain profitable’, said a UK-based CEO. With so much Manage risk in good times and bad of the world’s growth expectations placed on demand from The importance of good risk management practices was by emerging markets, more heated competition is likely, with far the most frequently cited ‘lesson learned’. CEOs fault domestic competitors buoyed by relative financial strength their own approaches to risk as much as risk practices in to compete with Western multinationals. Innovation and the financial sector. ‘The regulations are fine, but it’s the ew product development are cornerstones for future companies that should evaluate the risks better’, concluded positioning. One CEO said the crisis taught his company not a CEO in financial services. ‘We thought the party of 2008 to outsource on innovation. ‘Don’t wait on another crisis for would continue forever. We need to take our risk change’, said a CEO in industrial manufacturing. ‘It’s with management seriously’, said a Czech CEO. Effective risk innovation than we can be strong.’ management cannot be done on the fly. The time to manage risks and address complacency is when conditions are Encourage banks to lend – but assume they won’t improving. ‘Risk management should be a long term systematic strategy. Not just implemented at the time of Companies are paying far closer attention to their own cash crisis’, commented a CEO in China. The alternative has management and leverage, and have learned not to rely on a proven daunting. ‘Managing risk in a changed environment single source for financing. ‘It had never been a big factor is a big challenge’, noted a Belgian CEO. 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 We thought the party of 2008 would continue expect to finance growth from internal cash, 40% also expect to turn to banks. Financing costs are rising as banks forever. We need to take our risk management become more selective; they will favour companies whose seriously. strategy and long-term outlook give them confidence. 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. 44 13th Annual Global CEO Survey – Main report
  • 47. Research methodology and key contacts 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. In total, we conducted 1,198 interviews with CEOs in 2009. Their insights cover a wide range of topics, from 52 countries between 24th August and 16th November prospects for recovery to new dynamics of post-crisis 2009. By region, 442 interviews were conducted in Western environment, balancing growth with risk management Europe, 289 in Asia Pacific, 167 in Latin America, 139 in and lessons learnt. Their interviews are quoted in this North America (39 in Canada), 93 in Eastern Europe and report, and more extensive extracts can be found in the 68 in the Middle East & Africa. CEO Story supplement. The full interviews and a selection of video bites are available on the dedicated website The interviews were spread across a significant range www.pwc.com/gx/en/ceo-survey/perspectives.html. of industries. Further details, by region and industry, are available on request. The interviews were mainly PricewaterhouseCoopers’ extensive network of experts conducted by telephone, with the exception of Japan, and specialists has provided its input into the analysis of the where a postal survey was administered and Africa, where survey. Our experts span many countries and industries. most of the interviews were conducted face to face. All the interviews were conducted in confidence and on an Note: Not all figures add up to 100% due to rounding of unattributable basis. The lower threshold for inclusion in percentages and to the exclusion of ‘neither/nor’ and ‘don’t the top 30 countries was companies with more than 100 know’ responses. employees or revenues of more than $10 million. This is raised to 500 employees or revenues of more than $50 For further information on the survey content, please contact: million in the top 10 countries. Sophie Lambin, Director of Global Thought Leadership +44 20 7213 3160 37% of the companies had revenues in excess of $1 billion, sophie.lambin@uk.pwc.com and a further 38% had revenues of $100 million to $1 billion. For media enquiries, please contact: The remaining 21% had revenues of less than $100 million. Mike Davies, Director of Global Communications Company ownership is recorded as private for 50% of all +44 20 7804 2378 the companies, with the remaining 47% listed on at least mike.davies@uk.pwc.com one stock exchange. For enquiries about the research methodology, please contact: To better appreciate what is underpinning the CEOs’ outlook Claire Styles, Thought Leadership Research Manager for growth we also conducted in-depth interviews with +44 20 7804 0115 27 CEOs from five continents over the fourth quarter of claire.e.styles@uk.pwc.com PricewaterhouseCoopers 45
  • 48. pwc.com/ceosurvey Further reading These publications can all be found on www.pwc.com/researchandinsights Re-thinking and Re-shaping the business Low carbon economy index (December 2009) environment: Government and the Global CEO This publication examines climate (January 2010) change issues and the challenges Low facing the world economy as it This publication assesses the changing relationship between Carbon government and business as the world emerges from crisis works to reduce carbon emissions. Economy and sets out on the road to recovery. The research carried Index The index looks at the period from out for the PricewatehouseCoopers‘ 13th Annual Global December 2009 2000 to 2050, and an intermediate CEO Survey is extended and deepened by including a timeframe to 2020. selection of interviews with senior decision-makers in governmental organisations across the world to understand pwc better the implications for government policy of the views of CEOs as we emerge from troubled times. Appetite for change: Global business perspectives The India competitiveness review 2009 on tax and regulation for a low carbon economy (November 2009) (January 2010) This paper shares advance findings A global study which explores the views of the business of PwC’s 13th Annual Global CEO The community on environmental issues and perceptions of India Competitiveness Review 2009 Survey for the Indian chief executives. the current environmental tax and regulation regimes. The analysis suggests that the Indian The survey comprises almost 700 interviews worldwide, CEOs remain optimistic despite the covering 15 countries. The paper is intended to help inform global economic crisis. Underlying the dialogue between national governments and Thierry Geiger, World Economic Forum Sushant Palakurthi Rao, World Economic Forum this confidence is their belief that the international institutions on tax policy in this arena and to In collaboration with country’s economy is well on its way to Confederation of Indian Industry recovery, with nearly two-thirds expecting PricewaterhouseCoopers ensure that the perspective of business is well represented and understood. recovery by the middle of 2010. Biodiversity and business risk: (January 2010) Rebuilding the global economy: Recently, the broad systemic Rebalance, Connectedness, Sustainability implications of biodiversity loss and (November 2009) Biodiversity and business risk ecosystem degradation linking to This survey of business leaders in the Rebuilding the Global Economy resource management, climate change A Global Risks Network briefing World Economic Forum APEC region explores the impact of the January 2010 Rebalance l Connectedness l Sustainability and population growth have been more financial crisis and the role of APEC in explicitly articulated. This briefing paper rebuilding the global economy going A briefing paper for participants engaged in biodiversity related discussions at the explores both specific and broader forward, with particular emphasis on the systemic effects and the associated World Economic Forum Davos-Klosters Annual Meeting themes of rebalancing, connectedness, Prepared by PricewaterhouseCoopers for the World Economic Forum business risks. and sustainability. 46 13th Annual Global CEO Survey – Main report
  • 49. 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) Extending Enterprise Risk Management (ERM) to address emerging risks Extending Enterprise Risk Management (ERM) to address emerging risks: This paper looks at how organisations Managing known risks identify, assess, and manage risks, Exploring what techniques they are using as emerging the basis for determining response risks strategies that align with their strategy and risk appetite and tolerance. PricewaterhouseCoopers’ 12th Annual Global CEO Survey (January 2009) 12th Annual Global CEO Survey Redefining success This survey sets out to further explore the pessimism that prevailed across all geographic regions, business sectors Fool proof plans and levels of economic development, painting a picture of how CEOs were Future proof navigating the time of extreme economic plans uncertainty while working to achieve enduring success. PricewaterhouseCoopers 47
  • 50. pwc.com/ceosurvey Acknowledgements The following individuals and groups in Editorial team Publishing and PricewaterhouseCoopers and elsewhere Emily Church Project management contributed to the production of this report. Sophie Lambin Angela Lang Larry Yu Irina Ruseva Suzanne Snowden Editorial board Alina Stefan Cristina Ampil Claire Styles Mike Davies Nick Jones Online content Christopher Michaelson Vhanya Barba Elizabeth Montgomery Lee Connett Oriana Pound Tracy Fulham Deepali Sussman Tim Kau Leyla Yildirim Design and layout Advisory board Studioec4 Hans Borghouts Tom Craren Research and data Dan DiFilippo analysis Moira Elms Glen Peters The research was David Phillips coordinated by the Tony Poulter PricewaterhouseCoopers Michael Rendell International Survey Unit, Mark Schofield located in Belfast, Jeremy Scott Northern Ireland. 48 13th Annual Global CEO Survey – Main report
  • 51. pwc.com/ceosurvey PricewaterhouseCoopers 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. 100% 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.
  • 52. Rethink State-owned Reshape Smart regulation Result Mutual prosperity Rethinking and reshaping the business environment: Government and the global CEO Setting a smarter course for growth
  • 53. 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? 2 Government and the Global CEO
  • 54. 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-Leaders PricewaterhouseCoopers LLP pwc.com/ceosurvey 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. PricewaterhouseCoopers 3
  • 55. 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 4 Government and the Global CEO
  • 56. 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%). Yet the unprecedented global coordination by governments Leaders in the public and private sectors know that they to stabilise the financial system last year has drawn qualified have important, and different, roles to play if systemic risks praise from business: are to be mitigated successfully. In our view, this year’s Survey highlights the need for governments to build on this • CEOs have reversed their opinions from last year about platform and focus on creating and delivering value in their whether businesses and governments can successfully different roles: mitigate systemic risk – a majority (57%) now think they can (compared with 46% last year). • as larger owners of business: with one in seven of CEOs surveyed having some form of government backing (up • Almost half of CEOs interviewed (49%) also believe that from one in ten last year), governments are altering the government ownership helps to stabilise an industry business landscape and becoming strategic ‘game- during a crisis. changers’ as owners, customers, competitors and regulators to different degrees in different markets. This optimism for international coordination, and for more effective governmental collaboration with business, • as credible debtors: with the rapid rise in budget deficits is one of the major findings in the survey this year, one which in many economies, particularly developed G20 we believe can reset the relationship between business economies (with debt to GDP ratios projected to rise to and government. 118% by 2014), credible plans are needed now setting out the exit strategy from government stimulus packages and Clearly, such collaboration is not easy – the recent subsequent actions to turn the tide of debt. Tough Copenhagen climate change talks demonstrated the decisions involving increasing tax revenues and reducing pressures created by competing national interests when spending will be critical to restoring the public finances trying to negotiate global frameworks. Leaders in back to health. Failing to fix these fiscal deficits, by government are well aware of the challenges that lie ahead contrast, would be a recipe for persistently high interest whilst business also worries about the consequences, as rates, more volatile currencies and a less certain environment shown by the rise in CEO concerns of protectionism in our for business investment, employment and growth. Survey (up ten percentage points from last year). • 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. PricewaterhouseCoopers 5
  • 57. Strategic ‘game-changers’ Credible debtors More than two thirds of the CEOs surveyed have significant With budget deficits rising in most economies, and with concerns about long term state involvement in business with critics of government policy challenging the cost and important implications for government policies on effficiency of economic stimulus programmes in creating competition and fair markets. Despite the antipathy of most jobs amid estimates by some commentators of high costs CEOs to state ownership, including a majority of the CEOs per job created, governments are facing a conundrum – how surveyed with government backing, there are also times to deal with ever more debt at a time when the needs of when government intervention is necessary to stabilise businesses and citizens for support are rising, with the industries as CEOs also largely agree. economic downturn resulting in greater numbers of unemployed and disadvantaged people needing state Given the increase in government stakes in business – an assistance. The lesson from history is that a focus on extension of last year’s trend – the challenge for government efficiency is rarely enough to turn around major fiscal deficits now is to make decisions on how long they will retain their – governments must transform their approach and seek stakes in business and, for those that it is decided should radically new ways of doing things. There is a need to revisit return to the private sector, set out their exit strategy the role of government, stop some activities, prioritise some alongside a realistic timetable. areas over others and re-design service delivery if radical cuts are to be achieved. Whether it is ideologically or economically driven, governments will still retain some stakes in businesses for Sustainable solutions require political will and ownership at the foreseeable future. For instance, in our report ‘Back to the highest level. This will, in our view, entail a combination the Future’, which focused on the relationship between of tax rises and spending cuts, where the decisions on both government and financial services, we anticipated that the are guided by the impacts on economic growth and social complexity of individual financial institutions’ situations, outcomes – progressive austerity is the order of the day. But, difficult market conditions and an unattractive disposal as any business or family household knows, balancing environment will combine to make the possibility of early budgets still requires tough choices and a robust, evidence- government exit from their stakes in the private sector highly based approach to prioritisation which balances the relative unlikely, perhaps taking five to seven years or more before importance of government programmes with the ability of governments are able to fully divest of their stakes and government to deliver. related guarantees. In the interim, clear objectives and governance Smarter, more collaborative regulators arrangements are needed to ensure governments act as The burden of regulation continues to grow in the eyes of good owners and manage carefully the potential conflicts CEOs – two thirds of CEOs do not believe governments have arising from their distinct roles as owners/shareholders, reduced their regulatory burdens – and business is also still acting on behalf of taxpayers, and supervisors/regulators, seemingly unconvinced by government’s track record on acting on behalf of consumers and businesses. 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). 6 Government and the Global CEO
  • 58. This year, we went further and asked CEOs and government Final thoughts: officials how best to achieve the goal of smarter regulation. Governments as intelligent investors The clear response was for dialogue and closer working between business and government – co-design. Business concern is currently focusing, rightly, on protracted recession. However, CEOs and governments around the Clearly, achieving a smarter approach to regulation world need to look forward. Governments must act as nationally is a challenge – whether this can be achieved intelligent investors: for growth to take off, governments at globally is even more open to question. Whilst harmonisation all levels must invest strategically and sustainably in the of regulatory approaches and increased collaboration is various ‘capitals’ needed by any society for long-term in vogue, with a desire expressed by both business and prosperity, with the priority being projects with a high social government for a more systemic approach to tackling global and economic return, which will assist private sector wealth risks, we have found little desire amongst business or creation, particularly in infrastructure. Equally, governments government for new supranational regulatory institutions. should be wary of cutting investment plans to balance the books – this will not solve structural fiscal deficits, and will There is no doubt that much stronger global governance only serve to solve today’s problem at the expense of is needed to safeguard the fundamentals of the world creating new ones for tomorrow. economy. The G20 is evidently seen by CEOs as the key forum for collaboration, although whether it has the capacity Most importantly, governments must continue to re-build and cohesiveness to make a real difference is as yet confidence and public trust, reduce uncertainty further untested, with a number of the reforms proposed at recent through intelligent and authentic leadership and vision and meetings yet to be fully followed through. As such, we create policies and mechanisms for collaboration that are believe that more needs to be done to strengthen its appropriate for today’s global flows of capital. Public sector capacity for effective decision-making and follow-through leaders must shift gear, from being reactive to events to by reforming the supporting infrastructure, including global being both proactive and interactive, with business and organisations such as the IMF and the World Bank. society. Governments must seize the opportunity to chart a way ahead, investing in the future as the global economy takes off towards growth. PricewaterhouseCoopers 7
  • 59. 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. Light at the end of the tunnel Business confidence is critical to economic recovery given So, there is light at the end of the tunnel. The majority (72%) the impacts on investment and jobs, so the views of CEOs of CEOs anticipate recovery for their industry before the end are perhaps of greater interest to government now than for of 2010 with CEOs from all industry sectors expecting to many years. We were therefore heartened to find that CEOs recover within a similar timeframe, even financial services were more confident in this year’s Survey but nonetheless (Figure 2). Recovery for countries is also expected before the cautious about revenue prospects (Figure 1): overall, 81% end of 2010, but fewer CEOs (13%) believe that recovery has of CEOs show some measure of confidence – responding already set in and 60% expect national economic recoveries ‘somewhat confident’ or ‘very confident’ – on revenue only in the second half of 2010 or later. Almost half (44%) of growth prospects over the next 12 months, with almost a CEOs in BRIC1 countries believe their countries have already third (31%) of CEOs ‘very confident’, in line with expectations experienced recovery. Recovery in G8 nations is expected for a moderate recovery. While CEOs are somewhat more to take longer. 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. 01 02 Confidence returns Expectations of recovery for industries and countries 60 Already recovered or 23 recovery expected before 50 the end of 2009 13 18 % Stating very confident 40 In the first half of 2010 21 30 31 In the second half of 2010 31 20 24 In 2011 29 10 5 Don’t know/Refused 0 5 2004 2005 2006 2007 2008 2009 2010 0% 10 20 30 40 50 60 70 80 90 100 12 months 3 years Industry Nation’s Economy 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? Ref: Q1c. When do you expect recovery to set in for your industry? Yearly comparison. Q1d. When do you expect recovery to set in for your nations’s economy? Base: All respondents (2009 = 1,198; 2008 = 1,124; 2007= 1,150; 2006 =1,084; Base: All respondents (1,198) 2004 = 1,324; 2003 = 1,386). N.B. Recovery is defined as stable and steady economic growth. Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 1 Brazil, Russia, India and China 8 Government and the Global CEO
  • 60. Size and place count Yet we’re all more worried now Confidence and recovery expectations are tied to geography Notwithstanding the return of confidence, particularly in the – where the CEO is based – and the size of the company. longer term, CEOs have a whole host of concerns which they A distinctive split emerged between CEOs based in the believe are a threat to their growth prospects (Figure 3). For G8 developed economies and those based in the other all CEOs, there is a level of unease with the broader forces members of the G20, including faster-growing China, India underpinning the relative strength of recoveries around the and Brazil. CEOs in the developed economies were far world. They are more concerned about a number of external more cautious on near-term revenue prospects, with 23% threats to business growth than they were in the previous ‘very confident’ versus 42% of CEOs in newer member G20 year’s survey as many pull away from survival mode and a nations. BRIC companies are by far the most optimistic over singular focus on the crisis. the short and longer-term, whilst CEOs in G8 countries have the lowest degree of confidence, particularly over the short- The top three business risks this year are also top of the term. The highest levels of confidence also emerge from agenda for many governments: CEOs from the largest firms (defined as having revenue of • Protracted global recession, where almost two thirds over $10 billion a year). (65%) of CEOs are extremely or somewhat concerned especially in Asia-Pacific (77%); indeed many of our Two-speed recovery government interviewees like Shelly Jamieson, Secretary A majority of CEOs also expect recovery to set in for their of the Cabinet and Head of the Ontario Public Service in industries by the second half of 2010. But CEOs believe Canada expect a ‘slow spring’ believing the worst is recovery for G8 nations is likely to occur much later than behind us but expecting a gradual recovery to moderate in the other G20 countries and non-G20 countries: 54% growth. of CEOs based in the wider G20 group of nations expect • Over-regulation, with the highest number of CEOs recovery to set in by the first half of 2010 compared to 26% extremely concerned (27%, compared with 18% last year) of CEOs in the G8 nations. For instance, China’s growth for any risk and especially in Latin America (75%), perhaps accelerated over the course of 2009 and is likely to exceed fearing a government reaction to perceived failings by the government’s target of 8% according to IMF estimates. business leading to global recession. In comparison, the output of developed economies is projected to have declined by 3.4% in 20092. This reflects • Lack of stability in capital markets, with 59% of CEOs economic reality and is re-inforced by the views from our somewhat or extremely concerned, especially in Asia government interviews where Asia is seen as a particular Pacific (66%). This is again mirrored by our government growth engine. 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) PricewaterhouseCoopers 9
  • 61. 03 Potential threats to business prospects Don’t Know/Refused Protracted global recession -6 -29 42 23 0 Over-regulation -12 -27 33 27 1 Lack of stability in capital markets -9 -32 43 16 1 Exchange rate volatility -15 -27 35 23 0 Low-cost competition -14 -31 31 23 0 Energy costs -17 -29 35 19 1 Macroeconomic imbalances (e.g. trade or fiscal) -10 -35 40 14 1 Availability of key skills -15 -34 35 16 1 Protectionist tendencies of national governments -20 -30 32 17 1 Permanent shift in consumer spending and behaviours -17 -34 33 16 1 0% Not concerned at all Not very concerned Somewhat concerned Extremely concerned Ref: Q3a and Q3b. How concerned are you about the following potential threats to your business growth prospects? Base: All respondents (1,198). Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 The rise of protectionism? is about as open for trade today as it was before the crisis started.” At most, post-crisis trade restrictions should There is also a significant increase in concerns about the rise amount to 1% of world merchandise trade, it said3. of protectionism (Figure 4), with 49% of CEOs somewhat or very concerned about governments’ protectionist tendencies Other significant increases in concerns featured climate (up from 39% last year). This is especially the case in Latin change (though less so for North America), pandemics America, where protectionism is second only behind and other health crises – again of concern to governments. over-regulation (70% compared with 75%), and across Indeed our government interviewees cited further specific the BRIC economies (63% of CEOs somewhat or extremely concerns over environmental and natural resource concerned). In Latin America several countries adopted degradation and depletion, air and water pollution, measures to increase tariff barriers on certain imports commodity price pressure and increasingly volatile weather as the crisis unfolded, but this trend is rising across patterns. all regions. However, alarmist scenarios of protectionist trade barriers Environmental degradation and the negative effects of largely failed to materialise in 2009: the World Trade climate change have worsened and could become even Organisation (WTO) noted in its annual report released in more pronounced in the coming years. Economic growth November that whilst there has been slippage on trade is necessary for poverty reduction… However, economic policy in most of the G20 countries, “the world economy growth must also be environmentally sustainable. Haruhiko Kuroda President, Asian Development Bank pwc.com/ceowsurvey 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) 10 Government and the Global CEO
  • 62. 04 Threats to revenue growth – Percentage change 09/10 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 Note: Comparison of concerns only maps concerns that were asked in both 2008 and 2009. Base: 2009 (1,198) 2008 (1,124). The evolving relationship between business and government Clearly, these global risks cannot be solved, or ameliorated, regulatory burden. CEOs are seeking concise and clear by businesses or governments on their own. But who should direction from governments on long-term environmental take the lead? CEOs have nuanced views on the role of policies but do not think governments are delivering these government: nothwithstanding the critical role of government policies (55%) or protecting biodiversity and ecosystems in avoiding recession turning into full blown depression, the (45%). A majority (56%), again this year, say governments views of CEOs vary significantly on the role of government should drive convergence of global tax and regulatory and its success in delivering on some of their fundamental frameworks but fear that governments are under pressure to requirements (Figure 5). raise more tax from them (47%), especially in the Americas. CEO views are also split on whether government is delivering In general, CEOs perceive a lack of progress by government basic infrastructure (Box 1) and are not convinced that the in many areas. There is a significant increase from last year’s bedrock of a skilled workforce (57%) or access to natural Survey in the negative perceptions of CEOs on the success resources (49%) is being delivered. of government intervention with regards to the environment, access to natural resources, availability of skills and the PricewaterhouseCoopers 11
  • 63. 05 The changing role of government The government should drive convergence of -8 -14 42 14 global tax and regulatory frameworks 19 -7 -13 39 18 The government is changing its tax rules and -8 -24 29 18 practices to raise more tax from business -10 -25 27 12 The government is taking adequate steps to improve the country’s infrastructure -14 -25 33 7 (e.g. electricity, water supply, transport) -13 -25 31 10 The government is working to improve -14 -32 26 4 healthcare access at lower cost The government has clear and consistent long-term environment policies -20 -35 21 4 -15 -33 20 8 The government effectively protects biodiversity and ecosystems -12 32 23 2 The government helps companies secure access -16 -33 18 1 to natural resources (e.g. raw materials, water, energy) -15 -31 20 3 The government has been effective in helping -21 -36 17 2 create a skilled workforce -14 -34 19 4 The government has reduced the regulatory -33 -34 14 2 burden on corporations -25 -32 18 3 0% 2010 Disagree strongly Disagree Agree Agree strongly 2009 Disagree strongly Disagree Agree Agree strongly 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). Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 12 Government and the Global CEO
  • 64. There are also strong national differences of view on the On the other hand, there is relative disdain from CEOs for effectiveness to date of governments addressing CEOs’ long government’s ability to create a skilled workforce in US, term priorities (see Table 1). CEOs in China/Hong Kong are Spain, Italy, Korea, Mexico and Brazil with 10% or less of the most positive about the role of government interventions, CEOs in these countries believing that government has been with a majority believing that government is taking adequate effective in helping create a skilled workforce. In addition, in steps to improve the country’s infrastructure (87%), improve the US a staggering 89% of CEOs believe their government healthcare access at lower cost (72%), providing clear and is changing its tax rules and practice to raise more tax, consistent long-term environmental policies (62%), along with UK (78%), Spain (76%) as well as a majority in protecting biodiversity and ecosystems (53%) and creating a Brazil (67%), Mexico (67%) and Russia (57%). Yet, apart skilled workforce (52%). However, the only other case where from China, Korea and the UK, a majority of CEOs believe a majority of CEOs believe government has been effective is government should drive the convergence of global tax in the provision of infrastructure – in Korea (63%) and and regulatory frameworks. Germany (54%). Overall, these mixed reseponses suggest a range of areas where government policy-makers and businesses can more effectively collaborate to stimulate economic growth. Box 1: Delivering infrastructure to meet business needs Infrastructure in many countries is reaching its natural investment floor) commensurate with the risks of a project. lifespan and is in need of replacement but there is Further action also needs to be taken to include increasingly a lack of public money. Raising taxes is maintenance as part of public-private infrastructure becoming difficult and unattractive given budget deficits contracts to extend the life and quality of assets. which are already requiring increases in corporate and personal income taxes across countries. The private One innovative option to overcome delays in financing sector has also become more risk averse and is struggling Public Private Partnerships is being tried in South America to raise private funds for infrastructure development in the where the Costa Rican government is creating a trust to current economic climate. receive funding from a private sector investor to essentially purchase – and own – a water treatment facility for a Governments need to re-start the market for infrastructure period of 20 years, during which time the trust would development by creating new incentives to the private lease the facility back to the government. At the end of sector given the risks involved in the current climate. Some the 20-year period, ownership would revert back to the examples include offering termination fees to protect government of Costa Rica. The government of Costa Rica businesses against failure of projects, which may re-kindle is therefore able to obtain financing for a period of 20 years interest in markets such as the US, and offering a at reasonable interest. guarantee of a minimum rate of return (or return on PricewaterhouseCoopers 13
  • 65. TABLE 01 Role of government 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 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). Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Summing up there be a closer dialogue between regulators and the regulated – smart regulation – both nationally and Clearly confidence is returning as are expectations of internationally? recovery within the next 12 months. But there are still risks – of protracted recession or slow recovery, of over-regulation • When will governments have to exit from their and of unstable capital markets as well as fears, as yet accommodative fiscal and monetary policies which were unfounded, of a wave of protectionism. necessary to overcome the very real threat of depression and deflation, but which if left loose too long will stoke This raises some important and uncomfortable issues for inflation? And what actions need to be put in place to deal government, particularly against mixed views of CEOs on with debt? their ability to rise to these challenges. In particular: We look in turn at these issues in the remaining sections • What are the implications of governments becoming of this report. 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 14 Government and the Global CEO
  • 66. 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. So, how is the landscape changing for business? Have those Popular support for government ownership in the post-crisis CEOs with the backing of government developed different environment also appears to be holding in some polls. A views from CEOs with an exclusively private boardroom? GlobeScan/University of Maryland poll in 2009 of adults in And what are the implications for government? 27 countries said a majority called for less active government ownership or control in just four of the A changing landscape for business countries4. This suggests an exit strategy may not be as fast as free-marketers might desire. Indeed, given the range of New government influence over the global business experiences with public ownership in countries where the environment in 2009 was nowhere so clearly marked as in crisis was more muted, from East Asia to the Middle East the increase in ownership in companies. A third of all and Latin America, state ownership is likely to endure for companies said the government owns a stake in a major some time in one form or another. player in their industry, rising to 43% amongst companies with revenue over $10 billion. The change is most The harmony between government and business ends for pronounced in financial services, where 56% of CEOs said CEOs, however, on the implications of longer-term public the government held stakes in a major player in their country ownership of businesses. Non-government backed CEOs which is second only to utilities (71%). perceive negative implications of government ownership across the board, particularly those based in North America Government’s new reach in 2009 is changing the debate (Figure 6). More than two-thirds of all CEOs agree that on government ownership in the private sector. Almost half government ownership distorts competition, leads to (49%) of CEOs were positive towards government taking an political interference and creates a conflict of interest with ownership role in times of crisis, including those in North its regulatory role, rising to over 80% across all of these America, whose dissatisfaction with most issues involving categories in North America. 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 It is the duty of a government to ensure that whatever less so amongst CEOs in Latin America (34%), Africa (40%) measure it takes to support the economy, that measure and Central/Eastern Europe (41%). Within Europe, where be as precisely targeted to the intended goal as possible, CEOs largely agree that government ownership in a time with as little collateral damage as possible. of crisis is a stabilising force, the most support came from French CEOs (68%) and the least from Italian CEOs (37%). Normand Bergeron Amongst industries, only a third (31%) of insurers considered Président-directeur général de l’Agence des short term ownership a stabilising force in times of crisis, partenariats public-privé du Québec, Canada against 56% of auto CEOs and 55% of banking and capital markets CEOs. 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/) PricewaterhouseCoopers 15
  • 67. 06 Views on government ownership Neither/Nor Don’t Know/ Refused Government ownership will lead to -4 -11 46 26 12 1 political interference in the marketplace Government ownership inherently creates a conflict -3 -11 47 25 12 2 of interest with its regulatory function Government ownership distorts competition in an industry -4 -12 41 30 12 2 Government ownership influences regulation and enforcement in the industry -4 -11 50 18 15 2 Government ownership discourages -6 -23 37 15 17 2 the entry of foreign competitors Government ownership helps to stabilise an industry in times of crisis -9 -22 41 8 17 1 0% Disagree strongly Disagree Agree Agree strongly Ref: Q17b. How much do you agree or disagree with each of the following statements about Government ownership? Base: All respondents (1,198). Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 07 08 Views of government-backed companies on government ownership Government-Owned companies’ strategies Government ownership will lead 53 89 to political interference Approach to managing risk in the marketplace 75 84 Government ownership inherently 53 84 creates a conflict of interest with its Investment decisions regulatory function 76 81 Government ownership distorts 51 79 competition in an industry 74 Strategies for managing talent 78 Government ownership influences 60 83 regulation and enforcement in Responding to changing consumer the industry 69 puchasing behavious 81 Government ownership discourages 38 Focus on corporate reputation 73 the entry of foreign competitors 55 and rebuilding trust 65 Government ownership helps 64 77 to stabilise an industry in Organisational structure times of crisis 48 (including M&A) 75 0% 10 20 30 40 50 60 70 80 90 100 73 Capital structure 59 Government Owned/Backed Non Government Owned/Backed Ref: Q17b. How much do you agree or disagree with each of the following statements 63 Engagement with your about Government ownership? board of directors 55 Respondents who stated ‘agree’ or ‘strongly agree’ Base: All respondents (166, 1,013). 0% 10 20 30 40 50 60 70 80 90 100 Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 Government Owned/Backed Non Government Owned/Backed 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) 16 Government and the Global CEO
  • 68. Even those that are experiencing government ownership There are, however, some important differences for CEOs have negative perceptions (Figure 7), although slightly less with some form of government involvement. There is some so with the results suggesting that experience of government indication from our results that government stakes provide involvement reduces concerns about interference, conflicts a cloak under which to take urgent actions e.g. making of interest and competitive distortions (though there is still more organisational changes and capital re-structuring, a majority of CEOs in state-backed companies who have whilst also enabling those companies to take a longer term these concerns in all cases). view on areas such as capital investments, learning and development and preparing for risks (scenario planning): A two-headed monster? • Government-Owned companies appear to be making But does government ownership make such a difference more changes to their strategy, particularly focusing on to the views of CEOs on a range of issues? From those corporate reputation and re-building trust as well as with experience it appears not – in general, the views of capital structures. There also appears to be somewhat government-backed CEOs mirror those of their private more engagement between Boards and their executives sector counterparts. For instance, like their private sector in state-backed organisations (Figure 8). counterparts, CEOs with some form of government backing are more confident in their short and long term prospects. • Almost half (48%) of state-backed CEOs are planning They also perceive the same threats to their businesses – moderate or significant increases in their long-term protracted recession, over-regulation and unstable capital capital investments (Figure 9). markets – although they are significantly more worried about • Government-Owned companies are also more likely to be energy costs (63% compared to 52%) and inflation (47% planning for systemic risk and high risk/low probability compared to 39%). Recession barely dents their momentum events, with a majority of state-backed CEOs (57%) with climate change strategies. making preparations (Figure 10). 09 10 Investment decisions Approach to risk management 81 Integrating risk management 63 Initiatives to realise cost efficiencies capabilities into business units 78 57 71 Reassessing your 57 Leadership and talent development 69 tolerance for risk 52 64 52 Organic growth programmes Collaborating with supply chain 64 partners to collectively manage risks 50 64 Creating personal accountability and 55 Strategic technology infrastructure reward structures for good risk or applications 59 management, including risk taking 49 60 Preparing for systemic risk and low- 57 R&D and new product innovation 57 probability, high impact events 45 41 Allocating resources to risk-related 54 Advertising and brand-building 42 information gathering and analysis 48 48 0% 10 20 30 40 50 60 70 80 90 100 Capital investments 39 Government Owned/Backed Non Government Owned/Backed 0% 10 20 30 40 50 60 70 80 90 100 Government Owned/Backed Non Government Owned/Backed 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’ Ref: Q8. How do you plan to change your long-term investment decisions in the following Significant at 95% confidence interval. areas over the next 3 years as a result of the economic crisis? Base: All respondents (166, 1,013) Significant at 95% confidence interval. Base: All respondents (166, 1,013) PricewaterhouseCoopers 17
  • 69. 11 12 Headcount reductions Approaches to people strategy 39 Managing people through change 81 Decrease 50 (e.g. redefining roles in organisation) 79 30 80 Stay the same Traning and development programmes 21 77 16 Staff morale and employee 80 Increase by less than 5% engagement programmes 75 12 5 64 Increase by 5-8% Remuneration levels 7 61 11 Flexible working 63 Increase by more than 8% environments 59 9 1 Collaborations with networks 63 Dont’t know/refused of external specialists 57 0% 10 20 30 40 50 60 70 80 90 100 Global mobility, including staff travel 55 or international secondments 56 Government Owned/Backed Non Government Owned/Backed Pension and healthcare 42 arrangements 41 Ref: Q14a.What happened to headcount in your organisation globally over the past 12 months? 0% 10 20 30 40 50 60 70 80 90 100 Significant at 95% confidence interval. Base: All respondents (1,198) Government Owned/Backed Non Government Owned/Backed N.B. Recovery is defined as stable and steady economic growth. 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) • Non Government-Owned companies have made greater To own or not to own headcount reductions, although the differences reduce The concerns stated around political interference and the looking ahead with both types of business planning similar impact of government ownership on competition clearly approaches in the next 12 months (Figure 11). necessitates transparent consideration by governments on • In addition, state-backed CEOs are slightly more likely to how active and long-term state investments in business be changing their approach to staff morale and employee should be and their associated exit strategies. engagement programmes and collaboration with networks of external specialists (Figure 12). 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. 18 Government and the Global CEO
  • 70. Box 2: Being a good owner Activism not interference The presence of government intervention can also create market distortions for example by creating differences Governments as owners can take a longer-term approach. in employers’ costs of capital, impacting remuneration In our view, the optimal role for government is to take the structures and creating unfair competition through state role of an activist investor, acting as a ‘critical friend’ by guarantees. Governments must ensure that, where they engaging and challenging the boards of state-supported are not full owners, they do not use their shareholdings to businesses on their strategy and encouraging a longer- abuse the rights of minority shareholders. Governments term approach to business. They should not, however, also need to guard against getting involved in operational interfere in day-to-day operation – such businesses decisions and using their (temporary) ownership of should be run in the same way, with the same attention to business inappropriately as a tool of activist business best practice, as any other business. policy, with the resulting accusations of political meddling. This needs to be done in the context of an appropriate governance structure, which recognises the unique Maximising economic and social returns involvement of government and where the roles of all There is an important distinction between maximising players are clear – boards, management, government and shareholder value within a context that is supportive to other shareholders. For example, the UK’s Shareholder wider economic and social goals and using government Executive applies four principles when working with ownership of business as a substitute for more management teams of government-owned businesses: appropriate policy mechanisms to achieve those social clarity, value, transparency and professionalism. objectives. Whilst in government ownership (in part or in full), the focus should be on developing and implementing Managing conflicts of interest a strategic plan to maximise the return, both financial (to shareholders) and economic/social (to the wider economy Governments need to manage carefully the conflicts and society), from their forced investments. In our view, an arising from their distinct roles as owners/shareholders, activist government’s exit strategy should aim to achieve acting on behalf of taxpayers, and supervisors/regulators, an economic and social return on investment (SROI) as acting on behalf of consumers and businesses. Where well as a financial one. For example, in the case of State government ownership, in some cases through sovereign Supported Banks by increasing lending levels to maintain wealth funds, is partial as opposed to full, governments economic activity at a higher level than would otherwise need to be particularly transparent on the extent of be the case. SROI, however, should not be used as a their backing for business: this is needed for markets to cover for politically expedient sales of shares at a low assess the riskiness or otherwise of business ventures, price or indeed state support of companies doomed to as demonstrated by the highly publicised case of Dubai fail. World and the concerns about the level of backing it eventually received from government. PricewaterhouseCoopers 19
  • 71. There is also an issue of who buys the former government Summing up stakes and their strategies and motives. Government It is clear that CEOs have significant concerns about long ownership of business needs case-by-case consideration as term state involvement in business with important implications different countries have different experiences and heritages for government policies on competition and fair markets. of state involvement. In general, however, CEOs and our Despite the antipathy of most CEOs to state ownership, government interviewees appear to believe that for most including a majority of CEOs with government backing, there sectors state ownership should be a last resort and are also times when government intervention is necessary a temporary, not permanent, solution. to stabilise industries, as CEOs also on balance agree. Nevertheless, whether it is ideologically or economically As such, the challenge for government is to make decisions driven, governments will still retain some stakes in businesses on how long they will retain their stakes in business and, for for the foreseeable future. For instance, in our report ‘Back those that it is decided should return to the private sector, to the Future’, which focused on the relationship between set out their exit strategy alongside a challenging but realistic government and financial services, we anticipated that the timetable. In the interim, clear objectives and governance complexity of individual financial institutions’ situations, arrangements are also needed to ensure governments act difficult market conditions and an unattractive disposal as good owners and manage carefully the potential conflicts environment will combine to make the possibility of early arising from their distinct roles as owners/shareholders, government exit from their stakes in the private sector highly acting on behalf of taxpayers, and supervisors/regulators, unlikely. “It will take two to three years to sell major holdings, acting on behalf of consumers and businesses. 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 The basic lesson is that the state should withdraw from medium term, governments should not therefore waste this private business because it is still true that the private opportunity for reform. They must clearly define their objectives, sector makes significantly better decisions than the take a positive role and seek to be ‘good owners’ (Box 2). state… I think that it is necessary to support structural Our research5 shows that this involves addressing three key changes, more market economics, better environment elements: managing conflicts of interest; taking an ‘activist’ for business, healthy state finances, less protectionism. role; and focusing on the wider returns of ownership to These are the things that should be done. society. There is also clearly a need for transparency when government has a stake in businesses and for governance Martin Tlapa Deputy Minister, procedures to be put in place to ensure that neither Ministry of Industry and Trade, Czech Republic customers nor minority shareholders lose out from government intervention. 5 See ‘Back to the Future’ for a full discussion of these issues in the financial services industry 20 Government and the Global CEO
  • 72. 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. This year, as well as taking the temperature of the relationship between business and government on regulation, we tested The public’s disillusionment has moved beyond the banks to see what CEOs want most from government, how to the private sector in general, so that governments are regulation can be made smarter and in what areas. now talking about more regulation to stop a similar crisis from ever happening again. But hasty regulation will be Is the burden of regulation still rising? bad regulation and my concern is that creativity, innovation, and enterprise will be stifled at a time when Over-regulation remains a perennial concern in our Survey, they should be encouraged. having been a top three issue for a decade. This year over-regulation moved back to the second spot, with a Paul Walsh significant increase over last year in those ‘extremely CEO, Diageo 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 CEOs have also been clear in prior years that a significant collapse could presage a wave of regulation could be issue for them is the compliance burden. Overall, two thirds expected to trouble CEOs facing weak demand. (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. 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 PricewaterhouseCoopers 21
  • 73. TABLE 02 I don’t think business will be all that accepting of a lot CEOs’ views of the regulatory burden more regulation. But I think it will be accepting of more effective regulation… The key is to establish non- 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 ideological consultation and collaboration between the burden on corporations (%) government and the private sector. The private sector must recognise that the government has legitimate aims Country 2008 2009 2010 in bringing about certain social outcomes. And those Global -39 -36 -52 social outcomes should be of concern to businesses, too. US -58 -59 -90 At the same time, the government shouldn’t play a larger Canada -57 -34 -54 or more prescriptive role than it has to. Mexico N/A -50 -70 UK -87 -68 -85 Robert Bhatia France -54 -35 -71 Deputy Minister of Alberta Seniors and Community Supports, Canada 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 13 Japan 35 18 6 Views of those experiencing a decline in the public trust India 20 -40 -60 Australia -69 -67 -76 Participation in industry initiatives to improve the sector’s reputation 64 Korea -44 20 -7 Proactive dialogue with policy-makers and regulators 63 The paradox is that whilst CEOs criticise the actions of A systematic approach to 51 measuring and managing reputation governments and perceive ever increasing regulatory Expansion of your corporate burdens, they are also ever more keen to collaborate with responsibility programme 50 them. CEOs are not waiting for new regulation but are Media relations programme 49 and advertising stepping up their involvement to help to shape it. They Revisions to reporting are prioritising cooperation with regulators as they seek and engagement with investor community 37 to rebuild trust in their industries (Figure 13). For example, Engagement with NGOs to improve practices that 31 nearly two thirds of CEOs (63%) plan to initiate, or have affect your reputation Changing executive already done so, a proactive dialogue with policy-makers compensation practices 30 and regulators to increase levels of trust, especially in None of the above 1 North America (74%) and Africa (79%), and sectorally in financial services (76%). Don’t know/Refused 3 0% 10 20 30 40 50 60 70 80 90 100 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) 22 Government and the Global CEO
  • 74. What does smart regulation mean to business? 14 So, what can government do to reverse this significant Smartening policy-setting and regulation deterioration in perception on a rising tide of regulatory Work more closely with the private burden? In last year’s report8, we set out our views on the sector to maintain competitiveness 59 need for a smarter approach to regulation (Box 3). Ensure regulations are clear and stable 57 Work more closely with other nations to harmonise regulations 45 Place more emphasis on fairly Box 3: Smart regulation enforcing existing regulations 39 Focus regulation on outcomes, 32 Many of the principles of better regulation are well known: not process Make the representation of regulation needs to be proportionate, accountable, emerging economies in global 21 bodies more equitable consistent, transparent and targeted. Yet last year we Empower multi-lateral organisations 15 found there was a missing ingredient – stability – and to act as global regulators a rapidly changing context – globalisation – as well as None of the above 0 a renewed purpose – to stop players in markets behaving irresponsibly. Don’t know/Refused 2 0% In our view, the key principles underpinning a smarter approach to regulation are as follows: 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 • ‘Think global, act local’ – define the right rules to possible options underpin success in a modern global economy, This year, we went on to ask CEOs for their views on the tailored to the national and local context; actions that could most impact a smarter approach to • Fair reciprocity – it is not enough to define a regulation (Figure 14). This revealed that whilst there is transparent set of rules, but to implement them in overwhelming concern that the regulatory burden is rising, a a fair and reciprocal way; majority of CEOs (59%) believe the key to smarter regulation • Outcome-based – focus on outcomes, not purely is for government to collaborate more closely with the private process, and make judgements on results, not just sector, particularly in Africa (70%). This approach – of box-ticking; and co-design – may mirror CEOs desire to work more closely with their customers. Elsewhere in the Survey we found that • Clarity and stability – ensure that the rules for 60% of CEOs expect consumers to play a more active role in regulation are clear and not subject to constant product and service development. In this sense, why should tinkering and change for change’s sake. 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 PricewaterhouseCoopers 23
  • 75. CEOs also argue that regulation needs to be more supportive of business: the clearest call is to ensure that regulation is Coordination minimises, if not eliminates, overlaps, above all else clear and stable – 57% of CEOs want this, improves synchronisation, and allows agencies to build rising to nearly two thirds (65%) in North America. It is also upon competencies and learnings of the others. worth noting that a slight majority of CEOs (51%) in Honorable (Hon.) Amando Tetangco Jr., the largest companies in our sample (over $10bn revenues) Governor, Bangko Sentral ng Pilipinas, Philippines 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 So from our point of view the best road to regulation is next section. through social dialogue. Our government interviewees also expressed concerns Dr Juan Somavia about the need to address overlaps and loopholes in Director-General, International Labour Organisation (ILO) 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 opportunities and particularly on workforce practices more closely with the private sector and for rules to be clear, (including pay) where 35% of CEOs want less regulation. consistent and stable e.g. on climate change, there are still • In other areas, CEOs favour better enforcement of existing varying business views by type of regulation. regulation: this particularly applies to financial sector Support from CEOs for new regulation is scattered and stability, social and environmental sustainability, consumer largely a minority view despite the evident lapses in the protection rules and safeguarding intellectual property financial sector (Table 3). More CEOs are instead seeking rights. For instance, CEOs favour better enforcement of either less regulation or better enforcement in areas where existing regulation to ensure financial sector stability over they perceive gaps in regulatory practices: less regulation by a factor of four. • 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 TABLE 03 Changes desired to regulation 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 Ref: Q18. Through what approach would you like to see regulation address each of the following areas? Base: All respondents (1,198). Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 24 Government and the Global CEO
  • 76. This diagnosis by business of the nature and impact of Critically important in the minds of our government regulation is significant – with governments under pressure interviewees is the involvement of stakeholders through a to create jobs in the economy, there is a need for actions proper dialogue on the practical issues of implementation to reduce the negative impacts of regulation in areas which and, where new regulation is needed, the importance of directly impact on the competitiveness of business whilst gradual, planned changeovers. The result in their view is a acting on behalf of consumers, employers and citizens to much better outcome: better informed stakeholders with a guarantee better societal outcomes. better appreciation of the rationale for regulation and so more likelihood of compliance. So, how can better dialogue be achieved? Our government interviewees were concerned about making Importantly, it is recognised that there is a need to engage sure that regulatory interventions are smart, flexible and better with Small and Medium sized Enterprises (SMEs). judicious. There is also a strong feeling that public risk Large companies have the resources to invest in engaging management needs to be strengthened along with system- with government and regulators whereas smaller companies wide (or macro-prudential) monitoring. are less able to do so and also to absorb compliance costs. It was noted in our discussions that there is a role However, our government interviewees were also cognisant for better use of new technology to facilitate this dialogue. of the need to avoid excessively inhibiting innovation and An interesting example quoted was in Canada where an place a higher priority on focusing on outcomes and specific e-risk registry has been created to enable public scrutiny of objectives (particularly creating jobs and wealth whilst new regulations (see box 4), allied to a willingness to get rid protecting the disadvantaged). In parallel, it is recognised of obsolete regulations e.g. though an Open for Business that the processes to achieve these ends should not be initiative. In many countries, there is also a drive to improve overly prescriptive and that there is a preference for better inter-agency co-ordination, as happens for instance in the enforcement of existing regulations rather than rafts of new Philippines where its financial regulators interact via its ones, which is in line with the desires of CEOs. Financial Stability Forum. It’s all about the ability or the art of developing regulations Box 4: Using new technology in Ontario that achieve specific objectives but don’t go beyond what is needed because overregulation brings creativity and Large corporate entities design ways to talk to government innovation to a halt… Regulation is needed to avoid falling – it’s part of their DNA. But our economy is actually made into crisis again but it has to be applied wisely because up of small and medium sized businesses that don’t have too much regulation can literally fossilize the innovative that same capacity. They’re busy doing their work so you side of the private sector. It has to be done but not can’t put these people on committees and meet every over-done. month; you can’t waste their time. So you have to find ways to interact and perhaps there’s a role for technology David Levine in that, and there’s a way to be more inclusive. We do Président-directeur général de l’Agence de santé et de have a regulatory electronic registry for new regulations. services sociaux de Montréal, Canada 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 PricewaterhouseCoopers 25
  • 77. Summing up Many Asian governments consult quite widely with the It seems that whilst business perceives further increases in private sector when considering new policies or the regulatory burden this year and, as we have seen earlier, strategies and that is, of course, absolutely correct. Input is unconvinced by government’s track record on achievement from the private sector is always quite useful. In the same of its priorities e.g. on environment, skills and climate change, vein, ADB can provide policy-makers with best practices there is a desire on both sides for collaboration to achieve and lessons learned from around Asia or even other a win:win for business and government when it comes to regions of the world. In this way, ADB aspires to become smartening regulation. This is particularly critical at the a kind of knowledge bank that policy makers can current point in the economic cycle when governments must draw upon. beware of imposing regulation which stifles innovation, competitiveness and growth of jobs. Most CEOs and the Haruhiko Kuroda government officials we interviewed believe that dialogue President, Asian Development Bank (ADB) 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 Regulations need to be dynamic and responsive to a international cooperation and information sharing but some changing economic environment. Dialogue is important. realism on the extent to which standardisation can occur, Dialogue between regulators and other stakeholders with a call for increasing harmonisation and alignment should therefore be continuing, cordial and of approaches to allow for country differences comprehensive... We believe that the more informed in implementation. We discuss this further in the stakeholders are, the better they are able to appreciate next section. the rationale for regulations. In turn this makes regulation (and policy) more potent in effecting the desired results. Honorable (Hon.) Amando Tetangco Jr., Governor, Bangko Sentral ng Pilipinas, Philippines 26 Government and the Global CEO
  • 78. 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. Is G20 the answer? This is further supported by a confidence amongst two thirds of CEOs (65%) that regulatory co-operation among There is a clear shift perceived, by both CEOs and our national governments will help successfully mitigate government interviewees, in the geopolitical balance – systemic risks such as economic crisis, particularly among the rise of G20 has been a symbol of a change in the world CEOs in Asia Pacific (72%) and the Middle East (75%). order. Most CEOs (78%) expect the G20 will become the A slightly lower proportion of CEOs (47%) expect this to dominant political and economic power (Figure 15). extend to the harmonisation of new regulations although there is more pessimism in North America where only a CEOs are also increasingly confident that efforts by government third (34%) see this happening (Figure 16). and business can effectively confront global challenges like climate change, terrorism and financial crises. As noted Strikingly, however, this trend to harmonisation stops short earlier, they have long sought more cooperation amongst of calling for regulation by multilateral bodies, with a split governments to harmonise tax and address other overlapping view from CEOs on whether national regulators will give regulatory burdens that stem from running an international more authority to global or regional bodies and with CEOs business operation. There is now an expectation from a in North America again more sceptical, only a quarter majority of CEOs (57%, compared with 46% last year) that (25%) thinking 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. PricewaterhouseCoopers 27
  • 79. 15 The rise of the G20 2010 2009 The world will be more open to Governments wil become more protectionist -65 32 -46 51 free international trade The pressure on natural resources -60 38 -72 26 Efficiency of resource usage will improve will continue to increase The G20 will be the new dominant economic The G20 nations will remain the dominant and political power in the world -78 19 -73 25 economic and political powers in the world Within nations,the gap between rich Within nations,the gap between rich -68 28 -70 27 and poor people will increase and poor people will decrease Government and business efforts will be Government and business efforts will mitigate unable to mitigate key global risks like -39 57 -50 46 key global risks like climate change, terrorism climate change, terrorism and financial crisis and financial crisis Regulatory insight will remain primarily the Multi-lateral organisations will increasingly remit of each nation’s own regulators despite -55 42 provide oversight on regulatory issues such increased co-operation as in financial services 0% 0% Note: *G20 is full G20, including G8 Base: All respondents (2009 = 1,198; 2008 = 1,124). Respondents chose a scenario from each pair, or the option ‘Don’t know/Refused’ Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 16 Regulatory cooperation Neither/Nor Don’t Know/ Refused Regulatory cooperation will help successfully mitigate systemic -3 -13 53 12 17 2 risks such as another economic crisis or climate change New regulations will largely be harmonised because of cooperation among governments -5 -22 41 6 23 2 National regulators will give more authority to global or regional bodies -7 -31 31 6 23 4 0% Neither/Nor highest in Asia Pacific and CEE Disagree strongly Disagree Agree Agree strongly 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). Source: PricewaterhouseCoopers 13th Annual Global CEO Survey 2010 28 Government and the Global CEO
  • 80. As CEOs are less certain that multilateral organisations The case for harmonisation will supplant oversight by national regulators any time Our government interviewees also highlighted to us the soon or that national government will empower multilateral need for a more systemic approach to global risks, borne organisations to act as global regulators, this begs the of recognition that countries are becoming ever more question: where will effective supra-national cooperation interdependent and the need to look at risks in aggregate on economic and financial policies take place? rather than at the level of an individual institution, sector or Given that most CEOs expect the G20, representing 85% country. Similarly the lack of congruence between individual of the global economy, will become the dominant political action and the collective good is spurring a move towards and economic power it might be expected that this will be greater information sharing across regulators to minimise the obvious forum for such supra-national cooperation. risks, allied to a push for stronger governance corporately Yet whilst the G20 set out an ambitious agenda in to manage risks more effectively and carry them down from September 2009 to work together on growth, climate change Board level to the front-line. Whilst there is recognition of and financial regulation, among other issues, the stresses the difficulty of applying regulations globally, there is also facing financial policy-makers representing nations from a evidently a willingness to try harder. wider range of growth and development stages are evident. How well national governments coordinate on regulatory Indeed, the G20 forum poses its own challenges for global reform is however less clear, even when regulators have policy coordination. In recent years, global negotiations have similar intentions. The day after UK authorities in December become more difficult as more parties, often with differing imposed a one-time, 50% tax on bonuses of more than perspectives and constituencies, come to the table, as £25,000 in UK banks, for example, France announced similar witnessed by the current stalled status of the World steps. Yet, Germany decided against a new tax, a move Trade Organisation’s Doha trade talks. Of course, global Deutsche Bank’s CEO said should strengthen the country forums such as the WTO and the G20 are not the only outlet as a financial hub9. The example highlights the link between for national cooperation on economic policy. Even as the national competitiveness and regulation, and the need for WTO’s talks have broken down, for example, regional trade harmonisation in order to reduce regulatory arbitrage. 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 I think it’s probably not realistic to think that regulatory thought to impede global trade in the long-term. Yet, they frameworks are going to be identical across countries. It’s could represent stepping stones towards global coordination probably not productive to even try to achieve that. But and begin the process of harmonisation amongst neighbouring convergence, meaning moving closer together while nations that are likely to have some interests in common. allowing for somewhat differing approaches, yes, Still, some issues require truly global frameworks, such as I think that is a positive. That has to help in terms of climate change, to prevent individual countries undercutting facilitating international transactions and trade. the desired outcomes of such regulatory cooperation. Robert Bhatia Deputy Minister of Alberta Seniors and Community Supports, Canada 9 Ackermann Sees German ‘Advantage’ Without Bonus Tax”, Bloomberg, 12 Dec, 2009. (http://www.bloomberg.com/apps/news?pid=20601109&sid=aLP_cZ3zUNw4) PricewaterhouseCoopers 29
  • 81. 17 Regional Trade Agreements 16 Number of regional free trade agreements 14 12 coming into force 10 8 6 4 2 0 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009* *through October Source: World Trade Organisation RTA database There is also a desire to increase collaboration between It’s a bit too many Gs [G8, G20]. There is some inflation multilateral governmental institutions (EU, UN, WB and IMF) of such institutions here. Their function is not absolutely to help to foresee future crises and mitigate their impacts. clear, whether or not they, for example, should be a If this does not happen, we may even see an acceleration of substitute for international institutions that don’t work. an interesting trend whereby world cities are taking up some It is definitely necessary to include economically strong of the responsibility by collaborating directly, bypassing states in these organisations, even when they do not national governments e.g. on climate change, energy have a status of market economies, such as China, management and a variety of other pressing for example, and non-members of OECD. cross-border issues. Martin Tlapa However, there is limited appetite, and indeed some healthy Deputy Minister, Ministry of Industry and Trade, scepticism, amongst our government interviewees for new Czech Republic global institutions – like CEOs, most favour more of a push to harmonise regulatory approaches. So are governments working together better? Yes, the G20 took the responsibility to take some central Summing up decisions. I believe that that was a good initiative but at It is evident that harmonisation is in vogue and a desire for a the same time we have to move in the wider context of more systemic approach to tackling global risks but through the United Nations system, the Economic and Social improving collaboration, and reform, of existing institutions Council so you have the force and the strength and the rather than a desire to create a new panoply of multilateral leadership coming out of the G20 but you also ensure oversight. The G20 is evidently seen as a more important that the rest of the countries feel that what we are doing forum for collaboration, although whether it has the capacity is something that is of interest to everybody. and cohesiveness to make a real difference is as yet untested, with a number of the reforms proposed at recent meetings Dr Juan Somavia yet to be fully followed through. Director-General, ILO 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. 30 Government and the Global CEO
  • 82. 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. Governments across the world are therefore facing the twin policy challenges of maintaining support for their economies One is the timing of the exit from the accommodative long enough to ensure a robust, private sector-driven monetary and fiscal measures... Late withdrawal raises economic recovery takes shape whilst at the same time the spectre of inflation and asset bubble as ultra low rates planning for a new era of much higher public sector debt may lead to inappropriate risk taking. Excess liquidity which will remain with us all for many years to come. Whilst remaining in the system longer than necessary can lead CEOs did not offer their views on these challenges, our to higher inflation. On the other the hand, too early government interviewees had some robust opinions. withdrawal of supportive monetary and fiscal policies could disrupt growth. Walking a tightrope Honorable (Hon.) Amando Tetangco Jr., Latest estimates, and the views of our CEOs, indicate that Governor, Bangko Sentral ng Pilipinas, Philippines 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. In addition, critics of government policy claim that economic The timing of exit from the accommodative fiscal and monetary stimulus packages are proving very expensive and inefficient policy is clearly a threat currently troubling administrations as a way of creating jobs, with Reuters estimating that in the at international and national levels. The concerns expressed US the economic stimulus package “has saved or created by our senior government interviewees expressed this as 640,329 jobs since it was enacted back in February through walking a tightrope between disrupting growth if support the end of October... That amounts to $246,436 per job is withdrawn too quickly and seeing inflation take off if based on the $157.8bn that has been awarded so far.”11 economic stimulus is maintained for too long. In some A separate study12 calculates that since 2000 Spain has regions, this is compounded by the need to re-balance spent €571,138 to create each “green job”. Although the economies away from export-led growth to more reliance on types of data, assumptions and criteria used in these domestic consumers, particularly in Asia. In most countries, examples are different with more substantive research there is also a need to re-build consumer confidence. 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. 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 PricewaterhouseCoopers 31
  • 83. Dealing with debt Governments, particularly in developed economies, need therefore to develop credible plans to return to sustainable Equally pressing is the build up of debt caused by a vicious public finances by a combination of tax rises and spending combination of bank bailouts with subsequent declines in cuts whilst being mindful of the impact of actions on growth, tax revenues and rises in social protection spending as well development and social outcomes e.g. better educated, as spending to stimulate a return to economic growth. healthier populations with less poverty and, in the long run, According to Robert Bhatia, Deputy Minister of Alberta mitigating impacts on climate change. Seniors and Community Supports, Canada, the result is a ‘fragility of government budget positions’. Many governments have a fiscal mountain to climb, as can Let me say first that I don’t think there is any government be seen from the trajectory of debt for G20 countries in in the world that wanted to get into this level of debt. Figure 18, particularly for those which did not build up They were obliged by the crisis of the financial system so reserves in the boom years. This applies at state, local I believe the financial system has a big responsibility in and city as well as national levels. 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 18 strategy to progressively exit from this level of debt? I Government debt of G20 countries as % of GDP would say you have to prioritise job creation or social protection, for the more vulnerable, anything that has to 140 do with increasing investment, sustainable enterprise, job 120 creation – and leave it to the last. 100 Dr Juan Somavia Director-General, ILO 80 % 60 We have a deficit that we need to address, which means 40 that we’re in the middle of an expenditure restraint exercise 20 where we’re looking at our core businesses across government and saying, ‘Which are the ones that we 0 fundamentally have to be in?’ ‘Who can best provide 2007 2009 2010 2014 these services? Emerging G20 economies Advanced G20 economies Shelly Jamieson Source: IMF staff Position Note, November 2009 Secretary of the Cabinet and Head of the Ontario Public Service, Canada 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 Yet a return to growth is fundamental because it is the drag on economic recovery requires credible, sustainable primary source of government revenue through personal plans to address the fiscal gap and avoid a return to and corporate income taxes. The priority for government, intensive care. 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. 32 Government and the Global CEO
  • 84. Doing more with less But while delivery efficiencies can save money and There are also important steps that governments can take improve service, they can’t save, say, 10 percent of your to do more with less. An obvious starting point is to focus overall budget. If you’re sending $1000 cheques to tens of on improving operational efficiency. The most politically thousands of people every month and manage to do that attractive areas are in the back office, through reducing more efficiently, you will save money. Instead of costing duplication, sharing services and re-deploying resources to you three dollars a month to send a cheque out, you may the front-line. The UK’s Operational Efficiency Programme get it down to one dollar. That’s great, but you’re still (OEP) is an example of this approach where the government sending $1000 payments. So, increased efficiency is is seeking efficiency savings in five areas: back office and only a small part of the budget challenge. IT, collaborative procurement, asset management, property and through local incentives and empowerment. The lesson Robert Bhatia from history, however, is that a focus on efficiency, is rarely Deputy Minister of Alberta Seniors enough to turn around major fiscal deficits – governments and Community Supports, Canada must transform their approach and seek radically new ways of doing things (see Box 5). Box 5: Lessons from international experience Netherlands Study Group on the Budget Margin Sweden’s Consolidation Programme 1995-98 The Netherlands experienced a period of successive Sweden’s programme was also prompted by poor finances budget deficits in the 1980s and early 1990s. The Study (debt at 84% of GDP and a budget deficit around 10% of Group on the Budget Margin proposed reforms including GDP). The programme introduced three-year ceilings on a medium-term framework and an agreement process for expenditure for each ministry. It was up to departments establishing policy and budget priorities for the duration of to fulfil service obligations whilst achieving budget cuts the parliamentary term. After implementing these reforms, of 11% from 1995-98. After 1998, public agencies had to net debt was reduced by 50% between 1995 and 2009. match private sector productivity levels. Debt fell to around 40% of GDP by 2006. Canada’s Programme Review 1994-99 Canada’s public finances were in crisis in the early 1990s, Ireland 2008-09 with debt at around 70% of GDP and a budget deficit Facing rising deficits, in November 2008 the Irish which peaked at 9.2% of GDP. This prompted a wide- government established a Special Group on Public ranging Programme Review, which started from the Service Numbers and Expenditure Programmes to make premise of “what is the Government’s role?” rather than recommendations for a return to ‘sustainable public “what shall we cut from the budget?” The Prime Minister finances’. The Group, comprising public and private sector was a strong champion for change and a public campaign representatives, reviewed each government department’s formed a consensus within Canada that the debt had to spend as well as cross-cutting issues and themes and be eliminated. Programmes were put through a common asked whether services were needed and, if so, whether Programme Review Test, and those that failed were marked public or private sector should provide them. The Special for abandonment or transfers. The biggest savings by far Group recently reported and identified €5.3 billion of were from “stopping doing things” – efficiency measures savings i.e. 9.3% of relevant public spending. 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. PricewaterhouseCoopers 33
  • 85. The single most important factor in unlocking significant, sustainable reductions in public spending is strong political Where you make the most progress with the efficiency leadership at the highest level. Without political will and agenda is when the political leader and the official leader ownership at the highest level, nothing will change. This sets are both clearly signed up. If one of them isn’t, you’ll make the tone for officials and Chief Executives across the public some progress, but not a lot – and if neither of them are, sector and puts doing more for less at the top of the agenda, you are not going to make any progress at all. alongside the delivery of services to meet public demand. Sir Peter Gershon UK Civil Service World, 30 June 2009 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 This, of course, is easier said than done, particularly if it is to need to look beyond traditional approaches to cost be done in a rational and robust way. It is far too easy to develop reduction and encourage new ideas and practices that will lists of activities to cut, programmes to stop and organisations transform service delivery. to cull, without thinking through the systemic consequences, or to focus on areas of spend which are ‘easy’ to cut. It is Private sector companies that are emerging from the also straightforward to call for (although harder to deliver) downturn as winners are those who have proactively across-the-board cuts of, say, 10 or 20% without assessing undertaken a strategic, financial and operational review, the relative priority of different areas of spend. while positively maintaining ‘business as usual’ and managing their varying stakeholders’ agendas. We believe These approaches risk incoherent decisions where some that these core principles are equally applicable in helping very high priority frontline services are cut, whilst some less public sector organisations to work through the current important activities continue. Similarly, cuts in one area economic downturn. made without consideration for the related services can risk worse outcomes. We believe that a consistent, robust, In particular, business has learnt through harsh experience evidence-based approach is the best way to achieve lasting that it is critical to set priorities and allocate the scarce consensus and success, and ensure a coherent approach resources available accordingly. Similarly, governments need to new, lower cost public service delivery. 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). 34 Government and the Global CEO
  • 86. 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 A strategic prioritisation tool for government out two important elements of decision making: the relative priority of different areas of spend (which is subjective and Evidence Base will often be determined politically) and the relative Cost-benefit analysis performance of the public sector in delivering the service Core competence analysis (as determined by an objective cost/benefit analysis). High Lower priority services which are delivered poorly are candidates to be stopped; if they are delivered effectively DO BUY there may be a case for privatisation, or possibly for consider invest, providing the service to a lower standard at a lower cost. In Strategic Priorities doing more do smarter Relative Priority 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. SELL STOP The technique is intended to take a ‘zero-based’ approach. or run cheaply sell any Indeed, the approach is as much a process as an outcome - it is essential to involve decision-makers and key for a return components stakeholders, as the conclusions should be theirs if they you can Low are to be subsequently implemented. The tool can be applied at any level, be it the whole of government or part High Relative Performance Low 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. Summing up Sustainable solutions require political will and ownership at the highest level. This must, in our view, entail a combination Governments are facing a conundrum – how to deal with of tax rises and spending cuts, where the decisions on both ever more debt at a time when needs are rising, with the are guided by the impacts on economic growth and social economic downturn resulting in greater numbers of outcomes – progressive austerity is the order of the day. unemployed and disadvantaged people needing state But, as any business or family household knows, balancing assistance. Efficiency improvements will be necessary, but budgets still requires tough choices and a robust, evidence- not sufficient on their own to fill the fiscal gap. It will also based approach to prioritisation which balances the relative mean revisiting the role of government, stopping some importance of government programmes with the ability of activities, prioritising some areas over others and government to deliver. 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. PricewaterhouseCoopers 35
  • 87. 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. CEOs and governments around the world need to look forward. Governments must act as intelligent investors: Public and private sector risk management systems must for growth to take off, governments at all levels must invest be sharpened. Coordination among government holistically, strategically and sustainably in the ‘capitals’ agencies must be improved. Dialogue between the private needed by any society for long term prosperity, with the and public sectors must continue. priority being projects with a high social and economic Honorable (Hon.) Amando Tetangco Jr., return, which will assist private sector wealth creation, Governor, Bangko Sentral ng Pilipinas, Philippines 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 The financial crisis and subsequent global recession has countries based on a need for enhanced infrastructure highlighted the central role of government in addressing between as well as within countries (‘joint capitals’) e.g. global and systemic risks. There is no doubt that much intelligent transport infrastructure and broadband, as well stronger global governance is needed to safeguard the as to solve debt problems. Yet this must be done carefully fundamentals of the world economy, particularly human given that, at the same time, many governments face and financial capital and natural resources. Public risk rising budget deficits. management must also improve with stronger mechanisms for mitigating global systemic risks needed, including reform It is striking also to reflect on the lessons of the global of institutions such as the IMF and World Bank financial crisis which our interviewees highlighted including and a greater role for the G20 as a real-time decision a need to: -making forum. • align policies and have a clear vision of what is being achieved, particularly avoiding asset bubbles, be they Most importantly, governments must continue to re-build in real estate, commodities or capital markets; confidence and public trust, reduce uncertainty further • sharpen public and private risk management systems; through intelligent and authentic leadership and vision and create policies and mechanisms for collaboration that are • improve coordination between government agencies; appropriate for today’s global flows of capital. Public sector • maintain a dialogue between the public and private leaders must shift gear, from being reactive to events to sectors; being both proactive and interactive, with business and • question the status quo on a continuing basis; and society. Governments must seize the opportunity to chart a • focus on social protection and going for job creation way ahead, investing in the future as the global economy and growth. takes off towards growth. 36 Government and the Global CEO
  • 88. Acknowledgements The following individuals and groups in Core editorial team PricewaterhouseCoopers and elsewhere Jan Sturesson contributed to the production of this report. Partner, Global Government & Public Services Leader Carter Pate Partner, Global Government & Public Services Co-Leader Nick C Jones Director, PwC’s Public Sector Research Centre Research Alina Stefan Global CEO Survey Team Claire Styles Global CEO Survey Team Hayley Rimmer Global CEO Survey Team Jill Haasan International Survey Unit Other contributors Egon de Haas Global Government Sophie Lambin Director, Global Thought Leadership Lindsey Ford Government and Public Sector Marketing, UK Join the debate. www.psrc-pwc.com The Public Sector Research Centre is PriceWaterhouseCoopers’ online community for insight and research into the most pressing issues and challenges facing government and public sector organisations, today and in the future. The PSRC enables the collaborative exchange of ideas between policy makers, opinion formers, market experts, academics and practitioners internationally. To register for this free resource please visit www.psrc-pwc.com PricewaterhouseCoopers 37
  • 89. Key contacts: PwC Government and Public Sector territories Norberto Montero Harry Kyriazis Jorge Bacher Argentina Greece SOACAT norberto.montero@ar.pwc.com harry.kyriazis@gr.pwc.com jorge.c.bacher@ar.pwc.com +54 11 4850 0000 +30 210 6874503 +54 11 4850 0000 Chris Bennett Marcello De Guisa Stanley Subramoney Australia Hong Kong Southern Africa chris.bennett@au.pwc.com marcello.de.guisa@hk.pwc.com stanley.subramoney@za.pwc.com +61 3 8603 2337 +852 2289 1922 +27 11 797 4380 Bernhard Haider Vedamoorthy Namasivayam Jose Luis Beotas Austria India Spain bernhard.haider@at.pwc.com vedamoorthy.namasivayam@in.pwc.com jose.luis.beotas@es.pwc.com +43 1 501 88 2900 +91 80 2559 0336 +34 915 684 522 Serge Loumaye Giovanni Mariani Lars Tvede-Jensen Belgium Italy Sweden serge.loumaye@be.pwc.com giovanni.mariani@it.pwc.com lars.tvede-jensen@se.pwc.com +32 2 710 9791 +39 06 570832426 +46 8 555 334 03 João Lins Luc Henzig Rolf Schatzmann Brazil Luxembourg Switzerland joao.lins@br.pwc.com luc.henzig@lu.pwc.com rolf.p.schatzmann@ch.pwc.com +55 11 3674 2000 +352 49 4848 2052 +41 58 792 4400 Mark Elliott Miguel Angel Castro Orhan Cem Canada Mexico Turkey mark.elliott@ca.pwc.com miguel.angel.castro@mx.pwc.com orhan.cem@tr.pwc.com +1 604 806 7539 +52 55 5263 6000 +90 212 326 6204 Ken Igbokwe Hazem Galal Jon Sibson Central Africa Middle East United Kingdom ken.igbokwe@ng.pwc.com hazem.galal@ae.pwc.com jon.sibson@uk.pwc.com +234 1 270 3119 +971 2 6946800 +44 20 7804 8068 Jiri Halouzka Peter van Driel Scott McIntyre Central and Eastern Europe The Netherlands United States jiri.halouzka@cz.pwc.com peter.van.driel@nl.pwc.com scott.mcintyre@us.pwc.com +420 251 152 042 +31 70 342 6079 +1 703 918 1352 Nora Wu Debbie Francis Olivier Mortelmans China New Zealand European Union Institutions nora.wu@cn.pwc.com debbie.j.francis@nz.pwc.com olivier.mortelmans@lu.pwc.com +86 21 2323 2517 +64 4 462 7182 +352 49 4848 4012 Christian Klibo Roger Mortensen Richard Golding Denmark Norway United Nations System christian.klibo@dk.pwc.com roger.mortensen@no.pwc.com richard.golding@ch.pwc.com +45 89 32 55 14 +47 95 26 06 99 +41 58 792 9100 Marko Korkiakoski Luis Ferreira David Hoffman Finland Portugal World Bank Group marko.korkiakoski@fi.pwc.com luis.s.ferreira@pt.pwc.com j.david.hoffman@us.pwc.com +358 9 2280 1220 +351 213 599 300 +1 703 918 3856 Jean-Louis Rouvet Judith V.Lopez Tony Kingsley France Philippines Development Agencies jean-louis.rouvet@fr.pwc.com judith.lopez@ph.pwc.com anthony.kingsley@uk.pwc.com +33 1 56 57 8578 +63 2 459 3004 +44 20 7804 2098 Wolfgang Wagner Mark Rathbone Germany Singapore wolfgang.wagner@de.pwc.com mark.rathbone@sg.pwc.com +49 30 2636 1111 +65 96753514 38 Government and the Global CEO
  • 90. www.psrc-pwc.com PricewaterhouseCoopers 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. 100% 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.