Today, CEOs are increasingly focused on building the organisational resilience needed to master disruption and maintain growth momentum.
To be resilient, Kathy Warden, CEO of Northrop Grumman, a leading global security company, believes that CEOs need to consider a range of capabilities, from deep market awareness to agility. “I believe that we’re going to see the lifespan of companies continue to decline,” she says. “So, what do companies need to do? The first area is about market awareness. If you don’t see a disruption coming, you certainly aren’t going to be prepared for it. Second is being able to respond very quickly because the lead time to take advantage of a disruption is also accelerating and you have to adapt yourselves at speed. The final element is the ability to figure out how to monetize technology. Digital companies use technology in ways that more traditional businesses don’t even think about.”
This dynamic resilience is needed to master the significant challenges that face them. Firstly, CEOs face a range of big-ticket risks, from climate change and disruptive technology to economic nationalism. Secondly, while they are very confident in relation to their own businesses, confidence in the global economy is markedly weaker. While globally 94 percent are confident in their own business’s growth prospects, only 62 percent feel the same way about the global economy.
According to Emer McGrath, Head of Markets: Corporates, Government & Enterprise with KPMG in Ireland, CEOs everywhere recognise that business models that have lasted for decades are now under increasing threat as a result of digital disruption. “CEOs are acutely aware that the traditional business models that may be entrenched in their organisations need to be scrutinised to see if they are still fit for purpose.”
CEOs have to understand and cope with an increasingly unpredictable and fast-changing array of risks.
Concerns over environmental degradation, the disruption caused by new technology, and increasing geopolitical tensions are creating new levels of uncertainty for leaders as they look to meet or exceed their growth targets.
To lead an appropriate and strategic response, chief executives need to understand how risks are connected and ensure their boards and leadership teams are engaged. For James Bracken, CEO of Fortitude Re, a re-insurer, it also means that leaders must embrace and understand what are highly complex, multi-dimensional issues. “A big concern to me is regulation and public policy,” he explains. “And it’s a really difficult thing to get your arms around because, at the end of the day, it’s political. I think the ability to navigate those influences over the longer term - that 5-year plus time horizon - is extremely challenging.”
In 2019, environmental and climate change tops the risk agenda for global CEOs, climbing from its fourth-placed position in 2018. This is closely followed by disruptive technology risk and the threats posed by a return to territorialism.
Frank Gannon, Head of Asset Management with KPMG in Ireland, sees climate risk moving up the agenda as a welcome sign that CEO and investor views are coming closer together. “Asset managers and investors have long recognised that climate change is a major financial risk,” he says. “For investors, climate risk and other sustainability factors are a big factor in decision-making. They will increasingly move away from asset classes that they think are at risk. One area that CEOs are starting to think about is disclosures - meeting stakeholders’ demands for corporate reporting that provides meaningful information on climate risks that have a financial implication.”
As they look to manage this risk, CEOs’ attentions are turning to energy transition, and the need to move the world away from a reliance on fossil fuels. Over half of CEOs (52 percent in both the Republic of Ireland and Northern Ireland) say that their organisation’s growth will depend on their ability to navigate the shift to a low-carbon, clean-technology economy. As well as sustainable business practices being of value to society, they can also unlock growth and transform performance. For Mike Hayes, KPMG’S Dublin based Global Head of Renewables, the benefits are self-evident; “Transitioning to a low carbon economy can create incredible value through cheaper and greener energy solutions coupled with a focus on the potential that energy efficiency and the circular economy offers.”
Governments are making unilateral legislative changes and are also collaborating to tackle issues such as base erosion and profit shifting.
At the same time, organisations face increasing public pressure for greater tax transparency, and must therefore manage the threat of controversy and reputational risk. When we asked CEOs to identify the most important performance metric for their organisation’s tax function, on a global basis we found the strongest emphasis was on efficiency. Top of the list was that the tax function “effectively manages its department’s resources.” With respect to tax risk “tax risks are managed appropriately in line with organisational values and objectives” came in as the sixth-ranked priority worldwide however was ranked joint second in both the Republic of Ireland and Northern Ireland.
“The tax landscape is changing significantly. Focusing on tax risk as a key performance indicator has become increasingly important,” says Tom Woods, KPMG’s Head of Tax in Ireland. “This can range from measuring how the organisation is perceived by the public in terms of its tax affairs to measuring the effectiveness of its tax risk controls.”
In 2019, the CEO Outlook finds evidence of falling confidence levels in the global economy in many countries, however CEOs in both the Republic of Ireland (86 percent) and Northern Ireland (88 percent) are confident about global growth over the next three years.
This is in keeping with the US which shows a year on year rise from 52 percent to 87 percent of CEOs confident in the global economy, other countries have seen pronounced confidence drops since last year. In four major economies, less than half of CEOs are confident in the global economy including Australia (38 percent), the UK (43 percent), France (44 percent), and China (48 percent).
Gary Reader, KPMG’s Global Head of Clients and Markets, sees that CEOs are concerned about a potential slowdown in the global economy over a 3 year horizon, but this has not tempered the pressure on them or their desire to grow. “Leaders are reprogramming and retooling their organisations to not only withstand any economic or geopolitical challenge, but to seize on disruption and find ways to continue to grow,” he says. “This means having a clear view of early indicators and warning signals. Progressive companies with ambitious goals are working through different scenarios using technology to their advantage and ensuring response plans are in place. It is a new kind of resilience - one that incorporates agility and targets growth.”
It is a new kind of resilience - one that incorporates agility and targets growth.
In terms of where growth will come from, and the strategies that CEOs are using to build resilience, emerging markets have already become a critical factor.
Issues such as Brexit have encouraged business leaders in the Republic of Ireland to reconsider if they have an overdependence on the UK market, and whether to diversify beyond it, according to Brian Daly, Head of Brexit at KPMG in Ireland. However, despite a greater focus on emerging markets, he says “Britain will remain a vital market for Irish business regardless of the eventual outcome of Brexit.”
Overall, 76 percent of CEOs in the Republic of Ireland and 84 percent in Northern Ireland said their first priority for geographical expansion over the next 3 years is emerging markets. Growing their global footprint is seen as a key to resilience, with a significant majority of CEOs (82 percent in the Republic of Ireland and 84 percent in Northern Ireland) saying that they are building the company’s presence in emerging markets to become more resilient as a business.
“As companies look for ways to continue to grow, we find they are turning, or rather returning to focus on emerging markets,” says Andrew Thompson, KPMG’s Head of Deal Advisory and Private Equity in Asia Pacific. “CEOs are looking past the day-to-day geopolitical issues and seeing the long-term opportunities in emerging markets, especially in Asia Pacific, as critical to the future of their businesses. Regions such as ASEAN with a population base of 800 million people and rapidly rising middle class consumption, alongside China and India, are the powerhouses of future global growth.” The China initiated ‘Belt and Road’ initiative is also front of mind for a majority of CEOs worldwide, with two-thirds of them (65 percent) telling us that when expanding to emerging markets, they are prioritising countries and regions that form part of the initiative.
“More and more CEOs are taking a close look at the impact of the ‘Belt and Road’ initiative on their growth plans and market expansion strategies,” says Vaughn Barber, Global Chair, KPMG’s Global China Practice. “This is giving rise to more cooperation opportunities between Chinese and foreign firms in emerging markets along the ‘Belt and Road’, and not only in infrastructure investment but across a wider range of sectors, including financial services, logistics, trade and even digital technologies. This type of cooperation can help unlock the socioeconomic development potential of host countries, while allowing Chinese and foreign firms to access new market opportunities, achieve synergies and manage risks.”
CEOs of family businesses are equally as focused on agility and growth as larger corporates.
Complacency can be fatal in today’s dynamic markets. Business models that have lasted for decades are now under increasing threat as a result of digital disruption.
Large, traditional companies face not only the threat of new digital entrants, but competitors that have established a new digital edge.
Ryan McCarthy of KPMG’s Private Enterprise team in Ireland believes that privately and family owned businesses are matching their multinational peers in embracing uncertainty and having the courage to make bold decisions. Furthermore, they tend to have agility and innovation woven into their DNA. “CEOs of family businesses are equally focused on agility and growth,” he says. “Constant reengineering and coping with change is just what they do. They are rigorously questioning the central beliefs and cultures that have shaped their companies and sectors over many years, repositioning their operating models and revisiting how their businesses create value.”
Resilience requires companies to go on the offensive – disrupting their own legacy strategies and business models. Almost half of CEOs in both the Republic of Ireland and Northern Ireland - 44 percent - said that their company’s growth relies on their ability to challenge and disrupt business norms.
According to Michele Connolly, Head of Corporate Finance, KPMG in Ireland “Business leaders in Ireland are faced with exactly the same conundrum as their counterparts globally – how to protect existing revenue streams while looking ahead and answering the hard questions about where new and significant growth will come from. Standing still isn’t an option and it’s why we are spending an increasing amount of time with clients on issues ranging from assessing the disruptive forces facing their business to looking at new markets and reviewing their funding and financing strategies.”
We also saw a significant increase in CEOs worldwide saying that their company is actively disrupting their sector, rather than waiting to be disrupted. In 2018, 54 percent said they were being disruptive. In 2019, this had increased to 63 percent. Such attitudes were most pronounced in established technology companies who are making bold moves in response to significant advances in IT architecture, from mobility to cognitive computing, to ensure they stay ahead of fast-moving competition.