Pictured are (l-r): Mary Mitchell O'Connor (T.D., Minister for Jobs, Enterprise and Innovation) and Feargal O'Rourke (Managing Partner, PwC).
PwC’s 11th annual survey of the key issues of concern to Irish business leaders reveals confidence has wavered but growth remains the focus
PwC’s 2016 CEO Pulse Survey has revealed that confidence among the 250 national and multinational business leaders has fallen since 2015, but they remain sure that their businesses can thrive and that delivering beyond profits is an important commercial strategy.
The report into the survey’s findings comes against the backdrop of Brexit, and although CEOs were questioned before the UK referendum, they already felt less confident about the prospects for the economy, though there was positive sentiment around their own business prospects and growth was very much on the agenda.
Given the survey was undertaken in the run-up to the Brexit vote and with other external uncertainties at play, it is not surprising that Irish CEOs feel less confident about the economy and about their own businesses compared to last year. For example, 71% are favourable about the outlook for the economy in the year ahead compared to 92% last year. Confidence in their own businesses did not fall to the same extent with 76% viewing future prospects as positive compared to 82% last year.
At the same time, the survey highlights that many Irish CEOs are planning growth, although given the impact of Brexit, it is likely that some of these plans may not happen at the pace planned. A large majority (84%) said that they are planning to grow revenues; 62% are planning to grow the workforce – an 11-year high – and a similar proportion plan additional capital investment. Over a quarter (29%) are planning a new strategic alliance or joint venture. Some of this expansion will likely be financed by new borrowings (14%) or other sources of finance (13%). Cost competitiveness is high on the agenda with nearly a third (30%) looking to implement a cost reduction initiative.
Speaking at the survey launch, Mary Mitchell O'Connor, Minister for Jobs, Enterprise and Innovation, said: "The survey serves as a useful indicator on future trends in Irish business. It is positive to note that, despite the uncertainties, many Irish CEOs are planning for growth in their businesses, including plans to grow jobs. There is no doubt that Brexit is a key concern for policy makers and business leaders and Government has been working with international and local stakeholders to manage this uncertainty.”
The survey was carried out in April / May 2016 amongst CEOs in Ireland having 255 participants covering a range of sectors, and the results provide fascinating insights into the sentiment around the Irish economy and the prospects for their own businesses before the Brexit result on June 24, which Feargal O'Rourke, Managing Partner, PwC, feels will redefine the parameters for Irish business.
"There is no doubt that the vote by the UK electorate to leave the European Union has shook the markets and opened up a whole new set of business and economic circumstances for Ireland. While we hope that the post-Brexit relationship between the EU and the UK will remain open and close, we urge businesses to plan for every scenario and be prepared to manage new operational risks that may occur.
"It is important to remember that Ireland's economy has had a few years of solid growth and currently has a GDP growth rate well ahead of the Euro zone average. Despite the uncertainties, Irish businesses should focus on continuing their growth plans. Maintaining cost competitiveness and ensuring access to key talent will be fundamental. And with a pro-business environment, continuing FDI flows and access to a market of 500 million people, Ireland remains a great location in which to do business."
A vote by the UK electorate to leave the European Union (93%) was the top threat to growth. 87% of respondents said that it would have a negative impact on the Irish economy. Other economic and policy risks highlighted in the report are geopolitical uncertainty (84%); political uncertainty (83%); volatility in China (79%), over-regulation (78%) and the outcome of the US elections (74%).
The lack of availability of key skills is at an eleven-year high (81%) with pressure on skills being higher in Ireland than globally. With this stiff competition for key talent, 77% are concerned about rising labour costs. Other business threats include: cyber threats (78%); increasing red tape associated with tax and compliance burdens (77%), increased competition (76%) and the impact of digital on changing business models (63%). The inability to finance growth has eased over the last three year, perhaps indicative of more freely available capital from a variety of sources.
The survey shows that the UK is Ireland’s most important export market with 65% reporting to export to our nearest neighbour. Other important markets are the US, Germany, France and China. With 75% of survey participants saying that exchange rate volatility is hampering growth plans and 40% saying they are concerned about supply chain disruption, it is likely that Brexit may dampen some of their trading with the UK. Nevertheless, over a third (38%) of exporting companies are planning growth of over 10%.
• Corporate tax rate is key
Ireland delivers on its promises to multinational corporations. While countries everywhere will make a variety of promises to multinationals to attract investment, Ireland delivers on its promises.
The survey revealed that 19 out of 20 Multinational CEOs said that their investment in Ireland is a success. Over 18 out of 20 MNC CEOs plan to either increase or maintain their investment here. In this period of uncertainty, MNC CEOs crave certainty more than ever. The three factors, according to the survey, that will be critical to determine future investment in Ireland are:
While not an issue at the time of the survey, over the next year, multinationals will look to our status as a confirmed member of the EU as very positive. This provides businesses with access to a single market of 500 million consumers without borders and tariffs.
Joe Tynan, Head of Tax, PwC, said: “This survey shows that the top three threats to business all relate to uncertainty and in particular Brexit. Ireland can provide a degree of certainty to CEOs in three key areas:
“International companies are looking for a sustainable tax model. Their ideal location is one which provides certainty in relation to taxes, provides a low tax rate, provides access to a large market, provides access to a large pool of potential employees, allows them to develop, own and exploit intellectual property and has a stable political outlook. Ireland provides all of these advantages and we see the result of this as an increasing number of companies decide to locate here.
“However, we must ensure that we continue to have all of the key ingredients to compete internationally. For example, our personal tax burden is perceived to be high and the Government could focus on one of two things: It could consider enhancing tax reliefs provided to foreign executives, or alternatively, it could focus on reducing the tax burden on share based remuneration. The Government should also focus on increasing its spending on infrastructure, in particular, on housing and office accommodation as well as on connectivity in both transport and broadband, to facilitate balanced regional development."
The survey highlights a shift in the mindset of CEOs with a greater focus on delivering beyond just profits. Almost three-quarters of Irish CEOs agree that business success in the 21st century will be redefined by more than financial profit, recognising that wider stakeholder expectations will become increasingly more relevant. However, Irish CEOs lag global counterparts in some of the key areas that will make this happen, for example, in the areas of: redefining their purpose to create value for wider stakeholders; addressing wider stakeholder expectations; recognising that top talent prefers to work for organisations with social values aligned to their own and reporting on financial and non-financial matters. There is also less of a recognition amongst Irish CEOs that top talent prefers to work for organisations providing more than competitive compensation.
Ciarán Kelly, PwC Advisory Leader, said: "The survey confirms that the ability to be successful in the long-run will be determined by an organisation's impact on the wider society. We see CEOs now challenging themselves in terms of the contribution their company makes towards society in general, the communities they operate in, the environment and how they treat their employees, suppliers, customers etc. Irish CEOs, however, are more focused on financial metrics, while global CEOs use many of the non-financial metrics, particularly when it comes to retaining and attracting key talent. Now may be a time for Irish CEOs to rethink their broader purpose and contribution to society."
The top two barriers for CEOs as they seek to respond to wider stakeholder expectations are additional costs of doing business (41%) and customers' unwillingness to pay (34%). Such additional costs may include wage pressures, the rise in certain input costs and increased regulation but many customers are not willing to pay these additional premiums.
With so many uncertainties, it is not surprising that defining risks and managing the brand are top areas for change in response to changing stakeholder expectations. How they use technology is also a significant area for change including when it comes to interpreting the complex and evolving needs of customers in order to better engage with them. Data analytics, customer relationship management systems and social media communications are seen as the top technologies in delivering greatest return. The survey reveals that global companies expect more change while Irish business leaders perceive their return on investment in all emerging technologies to be less than global counterparts.
David McGee, PwC Technology Partner, said: "Business leaders' growing dependence on data and analytics signals just how far this scientific mindset has penetrated today's complex business world. And as big-data, FinTech, blockchain, cloud computing, robotics, and the Internet-of-Things are becoming even more important, the role that technology plays in helping understand the wider stakeholder expectations is also being applied to meeting and even surpassing those expectations. Digitisation is central to these efforts, allowing companies to obtain and utilise data about business processes that's necessary to support innovation efforts, and to remove costs from the system through greater efficiencies."
Two-thirds of CEOs understand that their company’s tax policy can negatively impact their company’s reputation.
Surprisingly, only 41% of CEOs said that their boards are actively involved in determining their business’s tax strategy. Given its potential impact on their reputation, boards should be involved in that tax strategy and indeed the Directors’ Compliance Statement in Ireland requires them to be involved in both setting the policy and ensuring that it is implemented appropriately.
Joe Tynan said: "CEOs are telling us that they want a sustainable tax model that they can easily explain to consumers, to government and other stakeholders. However, they have to balance this with the fact that tax is a very significant cost for most companies and 90% are very focused on managing this cost.
“Governments continue to impose additional tax reporting requirements on companies. Rather than adding incremental processes and incremental costs, companies should look to re-design their overall tax reporting capability. Done appropriately and with new technology, this can reduce cost and bring new insights to a company about their tax strategy.
“Most companies are telling us that the tax reporting requirements are driving up cost and complexity. Innovation is key and tax reporting processes should incorporate better integration of data and adopt analytic capabilities. We are working with companies who are rethinking their overall tax reporting strategy."
The top priority for Government is having a skilled, educated and adaptable workforce (69%) and has shot up from 30% last year. Other priorities are a co-ordinated plan to tackle the lack of housing (40%), greater efficiencies in the healthcare system (37%) and reducing the personal tax burdens (34%).