We’re delighted to welcome you to our Annual Report for 2013. In this question-and-answer section, Ian Powell provides you with an overview of how our firm has performed against our strategy in the past year, and outlines our position on a number of important business issues.
Overall, it’s been a good year and we’ve stayed on course in challenging market conditions. Despite continuing economic uncertainty across Europe, we’ve achieved responsible, profitable growth.
We’ve also made improvements to help us deliver a better service to our clients through ongoing investment in our people, technology and office environments. This has helped us to win business across a range of different sectors including work with iconic brands such as HSBC, Royal Mail, Direct Line and Wrigley.
Our total revenues grew by 3% to £2.7bn – a solid performance that reflects our strong and balanced portfolio of businesses, the high quality of our work and the depth of our people’s expertise.
Our strategic alliance with the Middle East firm is also paying off, with the Middle East territory now one of the fastest-growing PwC member firms worldwide and very close to achieving our objective of becoming the leading professional services firm in the Middle East. We’re committed to investing in the relationship and making sure that we continue to support our clients that operate in the region.
In this report we provide more detail on how we’re improving our performance against a range of key measures including our community involvement and environmental impacts. A highlight is our work to encourage and support the debate on trust in business and fulfil our responsibility to help restore confidence to the capital markets.
There’s no doubt in my mind that the strong year we’ve had is largely down to the hard work and commitment of our people. We continue to focus on our very clear and proven strategy, founded on staying close to our clients and potential clients to gain a better understanding of what they need from us. This strategy also involves setting ourselves several challenging targets – both financial and non-financial – and continually measuring our performance against them.
For me, being the market-leading firm is not just about scale. It’s about how an organisation behaves, and how this behaviour translates into the way our firm is perceived across a range of audiences, now and into the future. In other words, it’s about our reputation and our legacy.
Our firm’s reputation is nothing less than our licence to do business – and we don’t take our standing in the marketplace for granted. Reputations take decades to build but can be destroyed in a fraction of that time, so we take the management of our reputation extremely seriously. At Executive Board level, Margaret Cole, our recently appointed general counsel, is responsible not only for our quality and risk teams, but also our reputation strategy.
It’s also important to remember that being market leader brings its own responsibilities. In my view, these include an obligation to build a lasting legacy that is founded not on short-term revenue growth, but on wider long-term objectives – including continually improving the quality of our work, achieving greater diversity in our talent base, building ever-deeper client relationships and making a positive economic and social impact. Growth is clearly important to maintaining a market-leading position: after all, if any organisation is to lead then it must first be sustainable and profitable. But if it takes actions with only a short-term agenda and objectives in mind, then these can often be at odds with its enduring values. How we train and develop our people is one example of how we focus on long-term results. We operate like a leading business school which instils a sense of independence and professionalism that helps shape the leaders of tomorrow.
The simple answer is no. Despite having implemented a number of mentoring, sponsorship and development programmes, I don’t believe it’s good enough that only 16% of recent partner promotions were women. While we have three women on our Executive Board, I’m still disappointed that we aren’t seeing the pull-through in terms of more women moving into leadership positions in the firm. We’re working hard to address this issue. We have set diversity targets for each of our business units but we also know that targets alone won’t drive the necessary change: what’s needed is action. The diversity debate is wider than gender and that’s why we’re holding open discussions across the firm about why the rate of progress is slower than we’d like. This includes discussing new ways to tackle the unconscious assumptions which may prevent some of our people from fulfilling their potential.
There are both tangible and quantifiable financial measures, but we also mustn’t forget the wide range of less tangible benefits that we help to generate.
Starting with the financial contribution, of our UK firm’s total revenues during the past year, 16% was for work performed and billed to clients outside the UK, bringing revenues into the country. And as well as making a significant tax contribution to the UK, we also believe in being fully transparent about it. For example, last year was the first time we published the effective rate of personal tax for our partners on their distributable profit share. This year it’s 43%, down from last year’s 47% as a result of the recent reduction in the top rate of tax. Our total tax contribution to the UK Exchequer amounted to £960m. Our commitment to transparency is also underlined by the fact that we publish a code of conduct in respect of tax work, which we have done for many years.
Turning to our impact on UK society, this year we’ve taken on more than 1,200 students. Over 60 were school leavers who joined our firm as part of our Higher Apprenticeship programme.
Through programmes like this, we can support social mobility in the UK. We feel there will be an increasing number of school leavers who are unable to, or simply do not wish to attend university. We are keen to employ talented individuals, whatever their background or ethnicity. That’s why I’m committed to our firm taking a lead on widening access to the highly skilled professions such as those that we have within PwC. As an organisation, we look to undertake initiatives that have a positive economic and social impact. We are excited to be working with UK government as part of the GREAT campaign, particularly in our role as the Proud Technology Partner for the 2014 GREAT Festivals of Creativity.
"In my view, we need a common understanding, founded on trust, shared honesty and integrity, and an embedded culture of doing the right thing.”
This government initiative showcases on the international stage the very best of what the UK has to offer, encouraging the world to visit, study in, and do business with, the UK. In 2014, we will be working with UK Trade & Investment to deliver a series of private-sector-led, government-backed Festivals of British creativity, which will create commercial opportunities for a wide range of UK companies and institutions. As headline sponsors of The Old Vic Theatre’s Under 25s Club, we’re helping bring the arts to a new generation who might not otherwise be able to afford the average West End ticket price of £50.
Another example that I am particularly proud of is our support for Wellbeing of Women, a charity dedicated to improving the lives of women and babies. As well as providing information to raise awareness of health issues, Wellbeing of Women also funds medical research and training grants, which have developed and will continue to develop better treatments and outcomes for tomorrow. We’re supporting new research projects of two exceptional clinicians: Dr Leo Gurney in Newcastle who is looking into developing new treatments for premature birth and Dr Vanitha Sivalingam in Manchester who is looking into developing new non-surgical treatments for womb cancer. Our partnership with Wellbeing of Women also means that our people can get access to a wealth of health information.
UK business does many fantastic things. It creates jobs, growth and wealth. It pays wages and generates the profits from which tax revenues are drawn. It innovates to improve people’s lives. Yet rather than being seen as benefiting society, business today is all too often depicted as selfishly pursuing its own interest, regardless of the costs to others. I believe this sentiment is at odds with the actual values and behaviours of the vast majority of people working in commercial organisations across and beyond the UK.
Our Building Public Trust awards, now in their 11th year, recognise trust and transparency in corporate reporting.
This widening gap between the reality of business and how it’s perceived is creating an increasingly pressing need for a new settlement between business and society. In my view, we need a common understanding, founded on trust, shared honesty and integrity, and an embedded culture of doing the right thing. I see PwC as having an important role to play in restoring that trust. This is why, through our Building Public Trust Awards and broader activities around what we describe as the ‘trust agenda’, we’re seeking to support an informed debate on the role of business across society. We want to map out the route to a new type of ‘responsible capitalism’, an environment where business fulfils its obligations to society – and society in turn recognises the positive contribution made by business.
In the current economic environment, it’s hardly surprising that the subject of tax is under the spotlight. Governments need to continue to attract international businesses to their shores while at the same time making sure companies pay their fair share of tax. It is a delicate balance and one that rightly exercises governments and policymakers around the world.
Because governments are competing in an international market for business investment, many have implemented tax policies aimed at attracting such investment. At the same time, businesses are becoming increasingly international and mobile. This is a fact of life in a complex global economy. Companies have looked to our profession to help them navigate their way through this complexity, so I understand why the debate over tax avoidance has included close scrutiny of the role of the large accountancy firms. We believe we have an important and positive contribution to make to this debate. But there is clearly scope for modernisation of an international tax system that is now outdated for today’s business world, and we support reforms that will help to rebuild trust in the system.
In the UK, for example, a simpler tax regime and more resources for HMRC would help the tax system to run more smoothly and efficiently, which can only be a good thing in helping businesses grow and create jobs. Our firm operates under a clear code of conduct and professional guidelines, and we work closely and constructively with HMRC. We also provide technical insight to government – but only when asked to do so. And we are never involved in deciding tax policy, which is clearly a matter solely for government.
At the G8 Summit in June 2013, the participating countries reached an accord that should see a higher level of international agreement on the shape of an international tax system fit for the 21st century. As an economy, the UK needs inward investment to keep our country competitive on the world stage, but we also need a tax system that’s fair to everyone. The UK government is working hard to get this right, but it’s a delicate balance to strike, and transparency is vital.
We think that the moves to increase transparency between regulators, auditors, audit committees and shareholders are positive. We are also very supportive of those remedies that aid competition, increase transparency between auditors and shareholders and, most vitally, improve audit quality.
Yet despite recognising the effectiveness of tenders as thorough, fair and transparent, we were surprised that after only nine months of the Financial Reporting Council’s (FRC’s) game-changing ten-year tendering regime being in place, the Commission concluded that there was a need to increase the frequency of tendering even further.
We believe there will be significant cost burdens and disruption for companies, regulators and firms. However, we believe we have the right people with the right skills to rise to the challenge that any change brings.
We have strong governance arrangements in place which include a Supervisory Board and an external Public Interest Body chaired by Matthew Thorogood and Sir Richard Lapthorne, respectively. Both boards provide oversight through formal and informal mechanisms such as regular meetings and ongoing dialogue and discussion. The relationships between the Executive Board and the Supervisory Board and Public Interest body are constructive and valuable, particularly in respect of strategic decision-making.
Our Executive Board continues to focus on achieving our vision to become the iconic firm – one that does the right thing for our clients, our people and our communities.
After fifteen years on the Executive Board, Keith Tilson will retire on 30 September 2013, and Warwick Hunt, currently Senior Partner of the Middle East firm, will be taking over from Keith as Chief Financial Officer. Richard Sexton took on the role of Global Assurance Leader in April and stepped down from the UK Executive Board on 30 June 2013. Owen Jonathan retired at the end of December 2012 after 10 years on the Board as General Counsel, with Margaret Cole taking over from 1 January 2013.
Keith, Owen and Richard have made very significant contributions to our firm over many years and I am grateful to them for their support as my colleagues on the Executive Board.
Our network is vitally important, consisting of 180,000 people across 158 countries around the world, working with many thousands of clients across industries and regions. Throughout the network we aim to deliver consistently high-quality work and contribute to the stability of global capital markets.
We’re also continually seeking out opportunities across our network to enhance our client offerings and improve our impact on the societies and communities we work with. At the same time our global network opens up myriad opportunities for our people, including offering them the chance to go on secondments around the world.
In the last year 491 of our people went on assignment or transferred to other countries in our international network and 475 came here from other territories in the PwC global network.
On secondment from PwC China
Our firm is in great shape. Our strategy is robust and is working, both in the UK and internationally. Our continued investment, the hard work of our people and the support of our clients have enabled us to strengthen our business. But the business environment and the competition are tough – and we can’t afford to be complacent.
As one of the leading territories in the PwC global network we’ll continue to play a leading role over the coming year. This includes using our capabilities to support the network’s growth in other territories, and providing exciting development opportunities for our people.
I’m confident that we’ll continue to add value through our rock-solid commitment to quality and doing the right thing for our clients, our people and our communities.