Comment

One of the few silver linings of this pandemic, according to Dawn McLaughlin, is the evolution of leaner businesses that are better positioned to serve their customers.  I am always amazed at the resilience and determination of our business community. History has demonstrated our resolve over the years with businesses trading through all types of adversity. At every turn, we dusted ourselves down and got straight back to serving our customers and community. No matter what we faced, and there were some desperate times, we worked through them. It took a pandemic to stop us in our tracks. It therefore came as no surprise when a recent survey carried out by the Londonderry Chamber of Commerce revealed that 72% of members were optimistic about the future. Despite being in lockdown and having no clarity on the lifting of restrictions, the Chamber’s members see better days ahead. This was further brought to the fore at my recent President’s Lunch when the level of positivity was palpable. While the short-term challenges were acknowledged, the opportunities in healthtech and fintech beginning to bear fruit were noted together with the creation of spinouts from the collaboration between local health and educational establishments. So, what is there to look forward to? And how do we get out of the current situation? It is that entrepreneurial spirit that keeps shining through. Avoid the temptation to wallow in the problem; instead, look for the solution. And we have plenty to build on. There is pent-up demand in the market, surplus funds held by some, and financial assistance in the pipeline to kick-start the high street. For innovative and ambitious businesses, alternative and export-led markets are waiting to be explored. Invest NI is ready and willing to assist businesses with creative ideas and export potential. Traders who survive the pandemic must be poised to take advantage of the opportunities ahead. During the lockdown, owner-managers took a hard look at their business and made necessary changes. The fat has been shed and processes refined. We have leaner businesses that are better positioned to serve their customers in a more streamlined and efficient manner. When we look to the northwest, we see tremendous opportunity for the years ahead. Based on four pillars that span everything from tourism and digital innovation to employability and health and wellbeing, the City Deal will help create a thriving and prosperous region with equality of opportunity for all. It will also further cement the northwest as a top area in the United Kingdom and Ireland to set up a business, acting as a regional hub of enterprise and entrepreneurship that fosters innovation and development. All this, coupled with existing strengths like the high quality of life and low cost of living, makes the northwest more attractive than ever to foreign investors, start-up companies, entrepreneurs, students, and families looking to relocate. The recent government funding to support the vital air route between City of Derry Airport and London Stansted also helps keep our region connected to crucial business hubs across these islands. This, together with the A5/A6 upgrade, are vital factors for companies looking to invest in the northwest. Now is the time to look ahead to the future with confidence – a future that looks increasingly bright. Dawn McLaughlin is Founder of Dawn McLaughlin & Co. Chartered Accountants  and President of Londonderry Chamber of Commerce.

Dr Brian Keegan explains why having political deadlines isn’t always a good idea. Deadlines have always been a feature of commercial life, but the ubiquity of dates by which something must occur is a relatively recent facet of political life. Politics has always had its own cycles, from the duration of a monarch’s reign to recurring intervals by which general elections must be held. Mandatory due dates or precise intervals more often reflect an external rather than a domestic political imperative. In recent decades, commercial concerns over deadlines have spilt over into the political arena as government becomes bigger and more technocratic. Timeframes for decision-making are as much determined by foreign affairs as domestic factors. Having political deadlines isn’t always a good idea. While the obvious effect of imposing a deadline is to ensure the completion of a task, the act of establishing deadlines in itself may have a more subtle effect on the way we think about those tasks. Some years ago, researchers at the Carey Business School at John Hopkins University in the US carried out a study of how workers react to deadlines. They found that longer deadlines can lead people to believe that a particular assignment is harder than it actually is. That, in turn, can result in managers committing more resources to the work needed to meet the deadline. If this finding is correct, it suggests that the shorter the deadline, the less costly it might be to meet. The researchers also found that, when workers are faced with multiple deadlines (and few of us have the luxury to do only one thing at a time), people seem to prioritise less important assignments with immediate deadlines over more important pieces of work with more extended deadlines. There is an apparent human tendency to do what is urgent rather than what is important. While these findings have implications for management practice, they also have implications for the political system. The tendencies described by the researchers have been echoed in the handling by both the British and the European institutions of the Brexit process. The repeated extension of Brexit deadlines through 2019 created an impression that the process was more difficult than it actually was. In 2020, everything to do with the pandemic was urgent, so almost everything else received more political attention than the negotiations. Consequently, both sides allowed themselves extension after extension to negotiate the Trade and Cooperation Agreement, even though it should have been well within the capacity of Brussels and London to deal with both issues in parallel. The result was that we ended up with a barebones trade agreement between the UK and the EU, concluded on Christmas Eve. This outcome has been unnecessarily difficult for businesses to deal with. Customs and quality checks involve routine and paperwork – such processes may be unwelcome, but companies can generally cope with processes. The shortcomings are on the official side. The British Government is now repeating the same mistake by further pushing out deadlines associated with the Northern Ireland protocol and the checking of goods arriving into Great Britain from the EU. Far from relieving pressure on businesses, this will merely perpetuate the difficulties. It also makes the setting up of checks and controls by customs and trade officials and businesses alike appear more difficult. Political processes are rarely amenable to deadlines because the political process is not always about what should be done; it is also about what can be done. One of the lessons of Brexit is that we would be better served if the political process stopped trying to look like a business process.   Dr Brian Keegan is Director, Advocacy & Voice, at Chartered Accountants Ireland.

Although significant challenges remain, the north-west region can look forward to better days ahead, writes Dawn McLaughlin. After one of the most challenging years in business, 2021 provides some cause for optimism in the north-west city region. The vaccination rollout across the globe gives us the best chance to get back to normal and truly get our recovery efforts underway. As a Chartered Accountant in practice and in my new role as President of the Londonderry Chamber of Commerce, I have seen first-hand the extreme pressures on businesses. Cash reserves are depleted, cash flow is becoming a major concern, and confidence is gone. After a year of COVID-19, the strains on entrepreneurs and businesses of all shapes and sizes are only increasing. The need for a government-led recovery strategy, developed in collaboration with business, is greater than ever. However, I also see reasons for positivity on the horizon. While the double blow of the pandemic and Brexit seriously affected local businesses, I believe we can recover and rebuild better in 2021 and beyond, given the opportunity and support to do so. One of the rare highlights of 2020 was the announcement of the Graduate Entry Medical School at Ulster University’s Magee Campus in Derry. Representing the culmination of years of hard work and campaigning, the new medical school, which will welcome its first students in September 2021, illustrates the strength of the north-west’s higher education offerings. In the new post-Brexit world, cross-border cooperation and collaboration will be as important as ever. In collaborating with our neighbours in Donegal and beyond, we are working to make the north-west city region a more robust economy and the best place on the island to set-up a business. An Taoiseach’s new Shared Island Initiative provides the opportunity to maximise the tangible benefits of all-island cooperation. Committing €500 million over five years for cross-border projects, we are making a strong case for investment to fund infrastructure projects like the A5 Western Transport Corridor, funding to expand Ulster University’s Magee Campus and other cross-border research projects. Along with the full rollout of the City Deal project, the Shared Island Initiative can unlock our city region’s full potential and drive the post-pandemic recovery. By giving our leaders and businesses the tools to rebuild and create a more thriving and bustling regional economy, we can attract new investment and create new, secure jobs. But, in the short- and medium-term, this will require serious commitment and courage from the Northern Ireland Executive, the UK Government, and the Irish Government to get our struggling businesses on the whole island through this rocky period and ensure that they survive and thrive. With institutions like Ulster University Business School, North-West Regional College and Letterkenny Institute of Technology, the north-west is fertile ground for world-leading research and development, attracting more students to our region. Chartered Accountants in the north-west should prepare for this regional growth, and look to our local further and higher education institutions to provide a stream of high-calibre students who might well be the next generation of Chartered Accountants. Dawn McLaughlin is Founder of Dawn McLaughlin & Co. Chartered Accountants  and President of Londonderry Chamber of Commerce.

Do ultra-low interest rates justify ultra-high stock market values? Cormac Lucey shares his thoughts as US tech stocks continue their astonishing rise. Are we experiencing a stock market bubble? The question arises because of the startling rebound in global stock market indices since last March and, in particular, because of the astonishing rise in value experienced by US tech companies. Since their March lows, the Nasdaq has nearly doubled, the NYSE FANG+ Index has risen by 150%, and Tesla has risen to an astounding 12.2 times its starting position. The other factor that suggests we are in the middle of an equity bubble is valuations. The best measure of underlying long-term valuation is the Cyclically Adjusted Price Earnings (CAPE) ratio. It overcomes the weakness of the traditional Price Earnings (PE) ratio, that cyclically inflated earnings can make a cyclically inflated price look reasonable, by replacing one year’s earnings with average earnings over the previous 10 years, adjusted for inflation. The US CAPE is currently 35. That level has only ever been seen before as the Nasdaq bubble peaked in 2000. After that, the US tech index fell by three quarters before eventually bottoming in early 2002. On one hand, Jeremy Grantham, founder of the GMO fund management group in Boston, reckons that US stock markets are in the final stages of a speculative bubble worthy of comparison with the dot-com bubble, the Great Crash of 1929, and the South Sea Bubble. On the other, Martin Wolf, a Financial Times columnist, doesn’t believe that we are currently experiencing a stock market bubble. He contends that equity prospects depend on the future course of corporate earnings and interest rates. He concludes that, provided the former are strong and the latter ultra-low, stock prices look reasonable. There’s the rub. Do ultra-low interest rates justify ultra-high stock market values? And how long will interest rates remain ultra-low? On the face of it, the value of equity assets should rise as interest rates fall. Interest rates are a vital component of valuation models in general, and the Capital Asset Pricing Model in particular. When interest rates fall, the discount rate used in these models decreases and the price of the equity asset should appreciate, assuming all other things remain equal. Today’s interest rate cuts by central banks may therefore be used to justify higher equity prices and CAPE ratios. But John Hussman, a fund manager and former professor of finance, argues that when people say extreme stock market valuations are “justified” by interest rates, they’re actually saying that it’s “reasonable” for investors to price the stock market for long-term returns of nearly zero because bonds are also priced for long-term returns of nearly zero. “What’s actually happening today,” he argues, “is that investors are so uncomfortable with near-zero bond market valuations that they’ve priced nearly every other asset class at levels that can be expected to produce near-zero, or negative, 10-12 year returns as well.” I agree with Hussman: US stocks are in a bubble. While equities may appear reasonably valued relative to bonds, in absolute terms their ultra-high valuations today suggest ultra-low investment returns over the coming 10-12 years for those who buy them now and hold onto them for several years. However, just because stocks are in a bubble doesn’t mean that they are about to fall. As the then-Taoiseach, Bertie Ahern, said in 2006: the boom can get boomier. What should investors do? First, expect significant growth in short-term stock market volatility. The recent one-day 25% drop in the price of Bitcoin may be a straw in the wind. Second, the final market top may coincide with central banks allowing long-term interest rates to rise in the face of rising inflation expectations, perhaps in 2022. Until then, enjoy the boom getting boomier. Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland.

Rachel Hussey explains how well-defined and inclusive work allocation practices can boost your colleagues’ career potential. One of the most common and unconscious ways in which old hierarchies are preserved in professional services firms is through the allocation of work, often at the early stage of careers. A well-defined work allocation process ensures a balanced portfolio of experience for future progression. But suppose a person is consistently allocated more challenging projects involving novel issues or premium clients. In that case, their career path is likely to take quite a different course to that of a person assigned more routine tasks, which can result in tremendous and unintended damage to the career paths of individuals. Research conducted by McKinsey in the UK in 2012 across professional services firms found that a man was three times more likely to be made a partner in an accountancy firm than a woman and ten times more likely in a law firm. McKinsey made several recommendations to address the imbalance, one of which was that women have equal access to the right career development opportunities through a systematic work allocation process based on objective criteria, such as competencies or experience. Work allocation goes to the very heart of the operation of a professional services firm. Changes to work allocation practices are hard to implement, but can have a considerable impact on the progression of female talent. McKinsey conducted follow-up research in 2015 and found that work allocation was an ongoing challenge. 70% of women in both law and accounting firms said that their firm’s work allocation process was unfair, and 86% of law firms had no formal work allocation process in place. In the absence of a systematic process, work allocation is a subtle concept that can be difficult to do in a way that promotes diversity and creates a level playing field for men and women. In deciding to whom work should be allocated, partners can make assumptions about women’s desire or capacity to do certain kinds of work or transactions. The result can be to ‘kill women with kindness’ by allocating the more challenging work to men on the team so as not to put too much pressure on a woman. A woman can ultimately end up with less experience, weaker client relationships, and lower revenue – all of which are career-limiting in a professional services firm. This phenomenon is also referred to as unconscious benevolence. Research conducted by the 30% Club in Ireland across 14 of the top Irish professional services firms in December 2019 contained some fascinating findings. For example, 21% of equity partners in accountancy firms are women, and that figure is 40% at the non-equity partner level. The research found that only four of the 14 firms that participated in the research had a formal work allocation process in place. On foot of that research, the 30% Club recommends that where firms have not adopted work allocation policies, they should pilot the introduction of such policies. They should also review work allocation practices to ensure that equal opportunities to gain expertise and experience are available to all. Finally, it urges firms to ensure that family-related absence does not impact work allocation and recognise leaders who successfully manage work allocation on their teams. Across professional services firms internationally, work allocation processes are becoming more formal and technology-enabled. Many resource management consultancies provide services and systems to firms to assist in this critical aspect of a firm’s work. Formal processes can have a significant impact on the development of female talent in firms and should, therefore, be considered as part of a firm’s diversity strategy.     Rachel Hussey is Chair of 30% Club Ireland and a Partner at Arthur Cox.

Cormac Lucey explains why, as societal fissures and inequality grow, we must no longer be satisfied with unduly simple answers to complex questions. The biblical story of the Tower of Babel explains how humans across the world speak different languages. In the generations following the Great Flood, humans spoke a single language and migrated to the land of Shinar, where they decided to build a tower tall enough to reach heaven. Unhappy at this impudence, God intervened so that humans spoke several different languages, were unable to understand each other and were thus unable to build their idolatrous tower. Today, it is not different languages, but several other aspects of life, that risk pulling us apart. Specialisation has been one of the key ingredients of dramatic economic growth in recent centuries. But growing vocational differences and technical specialisation make it more and more difficult for national leaderships comprised of generalists to manage and control a society increasingly comprised of technical specialists. Consider the economic disaster of the financial crash just over a decade ago, and the failure of the Central Bank of Ireland and the Financial Regulator to take corrective action. Consider the current lockdown and reflect on the fact that, if everyone in the Republic contracted COVID-19 and we suffered the median fatality rate estimated by the World Health Organisation (0.23%), the resulting fatalities would equal around one-third of total fatalities that we suffered from all causes in 2019. Another serious societal fissure is growing economic inequality and the increasing role of education in determining an individual’s earning capacity. Here in Ireland, we are lucky that income inequality has not grown over recent decades. But it has grown substantially in the US. We can see the political polarisation that has followed and, increasingly, political affiliation in the US follows education. This pattern was very evident when the UK voted for Brexit. The political and media establishments may dismiss those who dared to vote for Brexit or Trump. But if the pandemic has taught us one thing, it is that in an ever more complex world, our fates are increasingly interdependent. In such a world, it makes little sense to dismiss large blocs of fellow citizens as if they are fools. Yet that is what has happened. This sneering reaction feeds another fissure, that which separates insiders from outsiders. We can see this in the rise and rise of monopolies and quasi-monopolies in the US. A paper published recently by two Federal Reserve economists found that the concentration of market power in a handful of companies lies behind several disturbing trends in the US economy such as a falling share of national GDP going to labour, a rising share going to capital, increasing inequality, rising financial leverage, and an increase in financial instability. Here in Ireland, we are confronted by a different monopolistic power, that of the State. At the end of Q2 this year, average weekly earnings in the Irish public sector exceeded those in the private sector by 32.6%. In the UK in 2019, (pre-pension) public and private sector earnings were approximately equal with public sector earnings 3% ahead before consideration of bonuses and 3% behind after their consideration. The stark public/private gap in Ireland arouses little public commentary, but feeds the fissures in our society. What can we do as we face this increasingly divided world? We should be careful of those who suggest simple answers to complex questions that generally don’t have yes/no answers but, rather, difficult trade-offs. Independence of judgement matters just as much for our public life as it does for our auditors. Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland.