John B Veihmeyer, chairman, KPMG International, feels India has been slower to focus on corporate governance compared to companies globally Image: Vikas Khot
The world of business is in the throes of a change, and constant change may well become the new normal. According to John B Veihmeyer, chairman, KPMG International, it has become imperative for CEOs to transform their company’s business model and make it agile. Speaking to Forbes India, he lists out what CEOs should do to stay ahead of the curve, the importance of corporate governance and what India must do to further accelerate the pace of economic growth. Edited excerpts:
Q. You have been advising global corporations for years. What should CEOs do today to deal with the anti-globalisation and protectionist tendencies that are taking hold globally? There has been a lot of discussion about protectionism and closing the borders. The reality is business is being done in a global context and that is not going to change. The US, in particular, has been talking of modifying trade policies. I don’t think it is anti-trade. It is intended to be smart trade. The folks that are saying globalisation is dead, I think, are missing the inevitable reality of the way we have got a global marketplace today. Companies are either looking for channels to distribute their products and services outside their home markets or part of their supply chain is located outside their country. Companies that we work with see the world as a global marketplace. I don’t see anything changing that.
Q. You don’t foresee any changes at all? I am not saying there will not be any changes. I am reacting to the overstatement of the situation. I can’t tell you how many times since the US elections I have been asked if globalisation is dead. There is no doubt that things are changing. This populist trend that we are seeing in a lot of countries is adding complexities from the trade and tax standpoint. Things are getting complex for companies that navigate/operate in a cross-border situation. Immigration, trade and tax policies are a lot more challenging in a world where, a few years ago, we were talking of greater consistencies in tax and trade policies. I am worried we are going in the opposite direction. However, nothing can stop globalisation.
Q. What should a CEO do under such circumstances? There are important implications about what is being discussed. After labour, tax tends to be the second or third highest cost for most companies. It may not be the ultimate driving determinant but is certainly one of the important factors to be considered just as regulatory policies, labour costs and infrastructure are in deciding the operating model and where to locate the facilities. It is more complicated for CEOs today because they make operating model kinds of decisions in a situation where everything is not black and white. If you, right now, sitting here today, try to make a decision on where to locate a facility or invest in a manufacturing capability, there are a lot of uncertainties out there. You do not know what the tax policies in the US will end up to be. Today, as a CEO, you are forced to make decisions based on the best information you can get access to. The key here is to make sure that you get the best input and advice. More importantly, as a CEO, you need to transform the operating model to allow the organisation to be more agile, recognising some of the changes that could happen in the marketplace dynamics. Such an operating model will help as every time there is an election in a country there could be a significant policy turn either to the right or left.
Q. What about the ground realities as well? Indian IT companies, for instance, are realising that even if they want to hire local engineers in the US, they do not have enough qualified talent to do so. Part of your job as a CEO is to make the best choice among what is often a set of less-than-ideal choices. You may have to sacrifice something in terms of additional tax costs as it is important for you to have the operations in the US. There are a lot of conflicting forces at play and your job as a CEO is to navigate those sometimes inconsistent and divergent forces. Q. These developments have only added to the wide variety of risks that CEOs grapple with… Every year, we do a survey involving 1,300 CEOs in more than 15 countries. This year, their response to what, in their opinion, is the most significant risk has changed: It is cyber security—something that wasn’t in the top five the year before. Regulatory risk is high on the agenda of the people I meet with. The other risk is the concern about their ability to retain customers. Companies are being attacked from all sides by their usual competitors, startups and other disruptors. CEOs are concerned about the things they should be doing to retain customers who have been with the company for some period of time. This is forcing companies to aggressively invest in innovation and all that they should be doing in order to ensure that they are not disrupted by someone whom they were not even paying any attention to two years ago. Q. Two of India’s iconic corporate houses—Tata group and Infosys —are under attack for issues involving corporate governance. How do you rate the quality of corporate governance in India? I have seen a whole lot of progress when it comes to corporate governance in India over the last five years. However, it is fair to say that India has been slower to focus on governance compared to companies in other parts of the world. It is still maturing and may not be as advanced as a few other economies. Corporate governance for companies is not solely about being the right thing to do. In the world today, there is a discount for bad governance and premium for good governance. This realisation is a further motivation for companies to embrace governance than just wanting to be a trusted organisation. Q. We see founders/promoters not letting go even after they retire. Is it an India-specific problem? This is one challenge that has been with us for ages and will remain so: Family-owned, family controlled businesses, or even long-term CEOs who find it difficult to pass on the torch to the next generation. It is human nature to not let go of control easily and it is hard to do that when it is your baby. I have seen this issue being dealt with in many successful ways. What is critical is how the companies and the owners, towards the end of their career, manage to navigate this transition of control and leadership. It is not just a challenge in India. In the US, family-controlled businesses that do well in passing the torch from the first generation to the next struggle in doing that from the second generation to the third. It is not easy and not a one-size-fits-all thing. It depends on the strengths and abilities of the people who are potentially going to assume that role and at what point they are going to bring outside leadership to supplement the family. Q. India is already the fastest growing economy in the world. What should be done to accelerate this pace of growth? Continuing to focus on governance, including ease of doing business that encompasses issues such as corruption, is important. As companies are looking to decide where they would invest, having a strong corporate governance as well as institutional capabilities around the ability to do business effectively in that marketplace and certainty around regulation/tax policies are critical. I will put those two at the top of the list. Continuing to digitally transform the country will be a huge competitive advantage. India has the ability to leapfrog a lot of countries that have already invested in older technology/capabilities and digitise the economy in a way that can be transformational.