Trust must be rebuilt – PwC chief Sunday, May 10, 2009 By Ian Kehoe Sam DiPiazza’s office is located on New York’s prestigious Madison Avenue, but the global boss of PricewaterhouseCoopers (PwC) admits to spending little time in it. Since taking over PwC International in 2002, DiPiazza, 58, has spent much of his life jetting to meetings with chief executives, governments and senior colleagues at PwC.
The professional services firm employs 155,000 staff in 150 countries, providing everything from financial audits and tax planning to crisis management. DiPiazza’s role is to oversee the firm globally and to establish an international vision for the business.
The past year in particular has brought new challenges, stemming from the international recession and global financial crisis. Accountants, like the financial institutions that they audit, have come under heavy fire. Advisory firms like PwC have also been asked to come up with solutions - both by client companies and by governments.
In addition to his role with PwC, DiPiazza is chairman of the World Business Council on Sustainable Development, an executive committee member of the International Business Council of the World Economic Forum, and a former global chairman of Junior Achievement. During a visit to Dublin last week, he spoke about Ireland’s reputation abroad, the impact of Barack Obama’s new tax proposals and the new global financial order.
Ian Kehoe: Ireland’s reputation has been bruised and the international press has been negative about the Irish economy. What is the perception out there of Ireland?
Sam DiPiazza: Everyone understands that Ireland is going through a major correction, a structural shift. This was driven by the real estate bubble and growth that had simply gotten too exuberant. But no one I have talked to has suggested that Ireland is seriously out of bounds.
Ireland is going through a difficult time and the decline is at a higher level than most of its peers.
But it is responding well. Ireland still has its huge advantages: good infrastructure, bright people, the Anglo legal systems. Most people around the world are hesitant to throw stones right now. I would have a hard time thinking of one country that believes it is in so much better shape than everyone else that they can be critical. India tried it for a while, but they are struggling now. China and the US can’t throw stones. Ireland is going through a tough road but, after 15 years of extraordinary growth, you are going to have a bomb.
There are concerns in Ireland about the new tax plan Barack Obama outlined last week. How do you think the proposals will affect a small open economy such as Ireland?
When President Obama came out with his comments, we were not entirely sure what he was describing. It was painted with a pretty broad bush. He described tax havens as criminals, and he listed Ireland in the middle of that, which was very unfortunate and did not reflect what Ireland really is. Ireland is a source of human capital. It has structured its economy based on a very competitive tax structure, but it is not deriving its economy out of taxes, like havens do.
Now we know more about the proposals, the good news is that they have much less to do with this concept of deferral and much more to do with correcting some of the inconsistencies around the allocation of expenses. Is it a big change? Yes, it is a big change. It will be hotly debated in the US, because it will make US businesses somewhat less competitive. The question is whether US businesses can tolerate being less competitive in a world that is increasingly competitive.
From Ireland’s perspective, my view is that it is not as concerning now as it was on Monday morning when the president gave his comment.
But what about future investment? Will the new proposals lead to US companies staying at home, rather than investing in economies such as Ireland?
I think that is a bigger question than the Obama tax proposal. Ireland operates in a competitive world. Ireland’s tax regime has been to its advantage and Ireland has managed to grow, based on that regime. But its cost structure over the last ten years has become less competitive, and I think that will be addressed now.
Based on what I know of these proposals, I don’t see this as a significant change in the attractiveness of Ireland. I think Ireland needs to focus on what has made it an attractive place - smart people, reasonable cost of doing business, a pro-business government and a tax framework that is competitive.
Obama has spoken of ‘‘green shoots’’ in the economy, but this has been disputed by a lot of data and reports. What is your view on the global economy?
I think it is too early to declare victory. If I reflect on what I am hearing from chief executives and what our own economists are saying, I would say that, clearly, we have found more stability in the global economic environment today.
Whether that could be termed a ‘significant improvement’, I think it is too early to say.
We are not in the freefall we sensed last November. Demand has begun to stabilise. But it is a little early to suggest that the global, macro environment has moved into improvement.
There is still significant fragility, particularly around the true valuation of the financial assets in the US and the ability of China to really bounce back.
When do you foresee an economic recovery, and what factors will lead to it?
There is a consensus building in the US that there will be some growth by the fourth quarter [of this year].That will drive a lot of the reaction around the world.
In China, we are already starting to see increased manufacturing and production, and a stabilizing of their consumer demand. I think the third quarter in China will be better than the second quarter, and fourth quarter will be better than third quarter. China and the US are going to define this in my view. Europe, including Britain, is going to recover much slower. Japan may be the most challenging.
A lot, obviously, depends on the actions of governments. How effective have states been in responding to the crisis?
Governments, including Ireland, have responded pretty quickly. If you think about what has happened in the last six to seven months, as the financial institutions really began to deal with stress, the government interceded.
They put capital into the businesses, they changed governance structures, they have changed management structures. It does not feel good all of the time, but I have to give the regulators credit. They have not done everything right, but they have done more right than they have done wrong.
When do you think institutions will start lending again?
If you look back at October of last year, which is only six or seven months ago, the markets absolutely froze. Whether it was commercial paper, credit line extensions, whether it was simply access to money market funds, nothing was secured. The markets stopped.
That created huge confidence problems and a huge drop in demand throughout the supply chain of businesses. We have already begun to see the commercial paper market opening up. Lending is much more robust, thanks to the fact that interest rates are very low and lending rates are much higher, so banks can make money if they play right now. The challenge is that you have much less leverage. We are not using a 15:1 [lending] model any more, it is an 8:1 model. That means the entire flow of capital has reduced.
We can’t go back to 15:1. Has the scale and the pace of decline of the international economy taken you by surprise?
There is no question that the speed of this decline was unprecedented and surprised everyone from presidents to finance ministers to chief executives to consumers. It is very difficult to manage a business where your volume drops 30 or 40 per cent in 60 days. What do you do? How do you downsize your operations? What plants do you shut down?
But, in other respects, I am pretty impressed by the way businesses around the world have responded. Lots of jobs have been lost, but companies have moved rapidly to survive.
It was a quick change in volume demand, but a pretty fast response. The only real exception was continental Europe, which is slower to move on most of these fronts.
Why is that? Is there a disconnect between Europe and the rest of the world economies?
There are the obvious reasons - inflexible labour markets, social support systems. But I think it is more than that. The continental Europeans have a long commitment to measured growth and measured declines.
There is a discussion going on in the world at the moment: how much growth is good growth? Ireland was in double digits for a while. China has been in double digits for 25 years. How long can you sustain that, and is it really a good thing to try and sustain it?
Continental Europe took a decision decades ago that they could deal with moderate growth, but when the declines occurred they would have a more moderate decline. Frankly, they are having both. Declines are not as severe in most of continental Europe - Spain and Italy being the exceptions. But their recovery is going to be slow.
Do you expect more banks to fail or be nationalised this year?
The US government stress test has raised the bar again. Many people in the US believe this could have been done in a more subtle way. Why did the US government decide to create a new set of crises about the capital requirement of these banks?
I think the next six months are going to be a very sensitive time. A lot of that will tie in with what happens with the economy in China, what happens to consumer demand. The banks are making good money right now. The banks can work themselves out of this.
You wrote a book about rebuilding public trust seven years ago. It is a pertinent topic today. Will capitalism in general regain the trust it has lost?
Trust will be built through transparency, accountability and integrity; it is exactly what I wrote seven years ago. That accountability was missing, but it’s back now. The transparency was there but many of us believed the stories that the growth would never stop.
But you could see the leverage, the lack of saving in the US, the trade imbalances, the property bubble. It should not have taken a genius to say that there were problems in the systems.
As I said in the Enron days, you build trust over years, you lose it in days. We have lost trust and businesses needs to get it back.
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