A shifting playing field | KPMG | IE

A shifting playing field

A shifting playing field

The world has become a more complex and unpredictable place in the past year. The global economy and the direction of geopolitics look remarkably different now and “Business as usual” no longer applies.

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Cautious optimism about the bigger picture

In 2017, CEOs are broadly confident about the prospects for the global economy, but their optimism is more modest than it was last year (see below). There are, however, marked differences in outlook depending on geography and the sector. According to our survey, approximately two in three (65 percent) of global CEOs are confident about global economic growth during the next 3 years. Our survey also highlights that CEOs in the Republic of Ireland (67 percent) are somewhat more confident about global growth than their Northern Ireland counterparts (48 percent).

The Wider World

On a country basis, CEOs in the US are notably more confident than their non-US peers. They are, in fact, the only regional grouping whose confidence has increased since last year. Brian Moynihan, CEO of Bank of America, is optimistic about the economy. “Consumer and business confidence in the US is solid,” he says, “The US economy continues to steadily perform and Europe and Asia are growing.”

In Europe, the outlook among CEOs remains positive overall, albeit less pronounced than in 2016. The biggest change is in ASPAC, where optimism about global economic growth, especially from the vantage point of Australia, China and Japan, has dipped during the last 12 months.

While confidence among US respondents may reflect their assessment of the hoped-for impact of the new administration’s economic plans, the results among ASPAC respondents could suggest a wider trend toward uncertainty.

It would be premature to describe the mood as pessimistic. However, the data suggests a ‘wait and see’ attitude. In Japan, for example, where confidence has dropped the most since 2016, 46 percent of CEOs say they are neutral in their outlook for global growth in the next 3 years, compared with 33 percent who say they are actively not confident. Similarly, in Australia, 39 percent are neutral while 19 percent say they are not confident.

Meanwhile, as the chart below highlights, globally CEOs from a small number of industries – notably banking, consumer and retail, and energy – are more upbeat about sector growth than their peers.

Optimism at business level

Despite reduced levels of optimism about the overall outlook for the global economy, our survey suggests that CEOs remain confident about their own businesses. They appear to have faith in their ability to make adjustments as required, innovate to solve problems and withstand difficulties ahead.

Our survey points to optimism among CEOs worldwide. Globally 47 percent of CEO’s are “very confident” in their company’s growth prospects for the next 3 years (70 percent in the Republic of Ireland and 48 percent in Northern Ireland).

KPMG Corporate Finance partner Michele Connolly elaborates; “CEO’s are always on the lookout for opportunity, balancing both risk and reward in what can be quite volatile circumstances. Whilst the Republic and Northern Ireland are highly susceptible to external influences, in relative terms both remain very attractive places in which to do business.”

Nor does Connolly believe CEOs are complacent; “It’s a question of balance – we have great talent, pro-business policies and a record of successful, ambitious companies on both sides of the border”. However there are policy issues to be addressed; “Deep uncertainty about Brexit, the need to play catch up on infrastructure in both jurisdictions and ensuring for example that housing strategies are fit for purpose are just some of the priorities to be addressed.”

Geopolitical uncertainty

Geopolitical shocks can have serious consequences for business and CEOs are keenly aware of the new strategic and operational challenges they may face in the years ahead and are influenced by the political events of the last year.

Our respondents understand, for example, that they may have to structure and conduct their overseas businesses differently depending on the manner of the UK’s exit from the EU. This is particularly pronounced in Ireland where respondents believe that the uncertainty of the current political landscape is having a greater impact on their business than they have seen for many years compared with 52 percent globally. (97 percent in the Republic of Ireland and 80 percent in Northern Ireland).

Most CEOs have already taken steps to manage their exposure. The vast majority (93 percent in the Republic of Ireland and 96 percent in Northern Ireland) are bringing new specialists into the management team to help them better understand potential threats. Three in four tell us they are spending much more time on scenario planning to plot a course through the shifting climate. With this in mind, we could expect geopolitical risk to rise up the list of businesses’ top risks over the coming year.

According to Brian Daly, KPMG’s Head of Brexit; “At this stage CEOs are well versed in the broad issues created by Brexit. However there is a greater challenge in developing specific actions whilst not knowing the final outcome.” Daly highlights issues such as the rights of people, regulatory status, supply chain and indirect taxes as a practical examples of scenario planning that can pay dividends. Johnny Hanna of KPMG in Northern Ireland elaborates; “Take the example of a Northern Ireland company using components from Germany that may have in part originated elsewhere before being sent to say Asia via an EU port. Getting an insight into the potential post Brexit tariff impact in this scenario is really important and is a practical example of what many CEOs should be already doing.”

Geopolitical implications for tax

One of the short-term impacts of geopolitical uncertainty for businesses could be around taxation. Conor O’Brien, Head of Tax with KPMG in Ireland says businesses are mindful for example of the potential impact of a shift in US tax policy “It’s ultimately too early to gauge the extent to which the US administration will succeed in lowering corporation tax. It’s politically complex and those involved in making the decision have many competing priorities to address before we may see anything significant.”

A check on globalisation

CEOs tell us they anticipate further growth in globalisation, but this is more pronounced in Northern Ireland (80 percent) and the Republic of Ireland (73 percent) than it is worldwide (64 percent). Locally and worldwide CEOs also expect a rise in the number of protectionist policies adopted in their home market and this ranges from just under a third globally (31 percent) and in the Republic of Ireland (30 percent) to one in four in Northern Ireland (24 percent). This is noteworthy considering the rise in populist, protectionist rhetoric in the political realm, as well as growing debate about the wider impact of labour, capital and trade flows.

The research suggests that recent trends are already influencing operating decisions. CEOs in both the Republic (87 percent) and Northern Ireland (72 percent) are far more likely to be reassessing their global footprint as a result of the changing pace of globalisation and protectionism when compared with their global counterparts (43 percent).

The evolving risk landscape

As uncertainty increases, businesses have reviewed their register of key risks. CEOs in both the Republic of Ireland (93 percent) and Northern Ireland (84 percent) report that they have increased investment in governance and risk management in the last year. Operational risk is rising to become the highest concern for CEOs overall.

Reputational risk

One of the most striking issues in this year’s survey is the number of CEOs who cite reputational and brand risk as a top concern given that it wasn’t even in the top 10 last year either globally or in the Republic of Ireland. Whilst there was no Northern Ireland data last year, such risk is now ranked fourth as a risk concern for Northern Ireland CEOs.

Conall O’Halloran, Head of Audit with KPMG in Ireland, believes the role of the CEO is changing at a pace never previously experienced. “CEOs have grown up with a fairly standard list of governance related competencies that they were generally familiar with,” he explains. “Now they are being challenged by additional, often technology driven risks that they may not have significant prior experience of.”

This issue may be amplified by compositional changes to the labour force, where a larger proportion of employees are hired “on demand” and may not necessarily represent the brand’s values as consistently as full-time employees.

The cyber connection

Considering the high-profile nature of many recent cyberattacks, and the catastrophic damage they can cause, it may seem surprising that cyber doesn’t rank higher on either global or local rankings. This may be explained by CEOs’ growing confidence in their management of the risk, as we explore in Section 3. It is also worth noting that there is a cyber dimension to all the risks in the chart above to some degree – particularly operational, emerging technology and reputational risk – confirming that CEOs’ perception of the risk is maturing.

We see strong signals that many CEOs are moving beyond a generic view of cyber risk to develop risk, resilience and mitigation plans in the context of the parts of their business that could be most seriously affected. The risk remains very much top of mind. “With cyber you will never be safe,” asserts Mark Wilson, Group CEO of UK based Aviva, a multinational insurance company. “It’s always going to be a red flashing light. We wouldn’t have a board meeting where it isn’t discussed; there wouldn’t be an executive meeting where it isn’t discussed. We are paranoid – and rightly so.”

Self-disruption: Finding a fresh perspective

As CEOs prepare to meet new challenges, our survey suggests that a significant proportion are also focusing on their own skills and the roles they perform. For many, disruption is as much a personal challenge as an organisational one.

We see CEOs evolving their role and the attributes they need for success. This may mean relying more heavily on soft skills – as is the case for 50 percent of respondents in the Republic of Ireland and 44 percent in Northern Ireland.

CEOs also tell us they are constantly learning new technical skills, which may not have been as critical when they set out in their roles. Almost all (93 percent in the Republic and 96 percent in Northern Ireland) have taken steps to challenge themselves, often through formal training, during the last 12 months. CEOs are also considering different ways of working. The vast majority (93 percent in the Republic and 100 percent of Northern Ireland respondents) say they are more open to new influences and collaborations than at any previous point in their career.

KPMG partner Gillian Kelly observes that CEOs are acutely aware of a growing range of risk and governance issues that have changed beyond recognition. “Everything they do takes place in a more transparent environment than ever before. For example, the growing risk and impact of social and mainstream media spreading damaging news on a global scale, and at a pace never seen before, is increasingly well understood by CEOs – for example harmful videos of poor customer service can rapidly “go viral.” in a way that was scarcely comprehensible even a few years ago."

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