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.

The changing of the US political guard has been broadly welcomed internationally, and by Irish commentators in particular. However, a Biden presidency may not have an immediate impact on Irish companies, writes Barry Flanagan. Fans of Malcolm Gladwell’s Revisionist History podcast will know the answer to this one immediately: who is the only NBA player to score 100 points in a single game? LeBron James may have just won his fourth NBA Championship, but his career high is 61. Michael Jordan, widely regarded as the greatest of all time, once hit 69. The extraordinary Kobe Bryant sits second on the all-time list with 81 – 19 short of that magic 100. I’m not sure how many NBA fanatics read Accountancy Ireland, so it’s probably best if I share the answer now – it’s Wilt Chamberlain, who achieved the feat back in 1962. What is extraordinary about Chamberlain’s record is not just the number but, as Gladwell explains, how it was achieved. Chamberlain, a notoriously poor free-shot taker with a mid-40% success rate, had that season resolved to abandon the standard overhand free-shot technique used by all professional players. Instead, he used the underhanded or ‘granny shot’ method. It worked. Chamberlain’s 28 from 32 that night (87.5% success rate) doubled his average and endures as the NBA record – which is what made Chamberlain’s next move so surprising. Despite the new technique bringing him that historic record, the next season, Chamberlain went back to the old, inconsistent and trajectorially challenged overhand shot. Even though he knew it would cost him points and his team matches, he couldn’t stomach being seen as a “sissy”. The overhand technique was revived, and predictably his percentage dropped – perception over payoff. Donald Trump used that same overhand technique that when throwing out paper towels to a bewildered Puerto Rican press corps in the aftermath of Hurricane Maria, which devastated the island. Just like Chamberlain, Trump was far more concerned about looking good than making a difference. In fact, handing out paper towels in the aftermath of a hurricane could be emblematic for Trump’s entire presidency: ineffective and often damaging policies, enacted without any real concern for consequences but with a very real emphasis on how he was perceived while implementing them. Protectionism is probably the best example from a trade perspective. Protectionism and the pandemic There is little doubt that Trump’s protectionism cost America economically, but the policy was never about winning. Imposing tariffs and bringing the US to the brink of a trade war with China over the last two years was always more about how it would be perceived by his supporter base than the economic benefit. ‘America First’ was the slogan that propelled him to The White House in 2016, convincing Rust-Belters that he could protect and regenerate industrial jobs. It also demolished the ‘Blue Wall’ and delivered Michigan, Wisconsin and Pennsylvania in the process. Trump’s failure to fulfil those promises over the past four years is the reason those states flipped back. Whether that was because Trump’s tariffs rendered Chinese steel too expensive for rust-belt industries (Trump imposed tariffs on roughly three-quarters of everything China sells to the US) or because the COVID-19 pandemic swept away the economic gains of the last three years is moot. The interaction of those two factors – protectionism and the pandemic – will shape American economic policy for the next two years at least. Those expecting a Biden administration to implement any quick reversals to US foreign trade policy will be disappointed. Several agents are impacting, with none at present favouring a dramatic swing. Economic priorities For starters, students of Bidenomics will know that, like the candidate himself, pragmatism and prudence are valued over radical change. Biden has been an elected official for 47 years and like most career politicians, his innate inertia would counter any reactionary instincts. His tax plan seeks to raise taxes only on the top 2% who earn more than $400,000 per annum. Second, and perhaps more pertinently, both his own and the Democratic party’s views on protectionism are far closer to Trump’s than outside observers may realise. Don’t be fooled by the toxicity of US political ‘debate’. Republicans mock the Democrats as being ‘globalist socialists’, but the Democratic party is well aware which side its bread is buttered on. The Pew Research Centre revealed last year the depth of the consensus across the American political divide on this very topic. ‘Protecting the jobs of American workers’ was ranked as the second-highest bi-partisan priority out of the 30 options presented (only ‘preventing terrorist attacks’ is rated higher by the political establishment). Republicans and Democrats alike are keenly aware that their electability depends on both the perception and reality of protecting jobs. Third, notwithstanding that he may not wish to change much in this regard, the likelihood of a Republican-controlled Senate may stymie any change Biden does want to make (we will know more after the Georgia run-offs in January). While it is true that presidential executive orders can be used to effect change unilaterally, any such orders will likely focus on the more polarising issues facing the US Executive such as the perennial battleground of healthcare, Biden’s own cause célèbre of renewable energy and, most immediately, the domestic stimulus package that has eluded agreement so far. Lastly, as Biden and the impressive and progressive Vice President, Kamala Harris, clearly signalled in their victory speeches, getting the pandemic under control will be the first and only priority for the new administration. The administration’s focus will initially be internal, and Biden has pledged to avoid any new trade agreements “until we’ve made major investments here at home, in our workers and our communities.” All of this provides Irish companies with little reason for optimism, but there will be opportunities in the Biden era. The renewable energy, infrastructure regeneration, and healthcare industries will undoubtedly benefit from this regime change, and further trade deals will eventually follow. While Biden is by no means a globalist, the rest of the world can at least look forward to the Trumpian trend towards isolationism being halted with some moderate reversals deliberately deployed early. Biden has repeatedly stated his intention to re-join the Paris Accord on his first day in office. He has also indicated his intention to re-join the World Health Organisation, which Trump distanced the US from this year. Although Biden may reverse travel bans on Muslim countries and enact some degree of immigration reform, meaningful progress in these areas will depend on Republican consent, which will be hard-won. Irish opportunities From an Irish perspective, a particular area of interest will be the US corporate tax rate and any potential changes to US tax policy. Trump targeted tax inversion by US companies that relocated internationally by dramatically cutting corporate tax from 35% to 21% back in 2017, effectively eroding the delta a company gained by shifting its headquarters to Ireland to take advantage of the country’s 12.5% rate. Biden has proposed raising the corporate tax rate back up to 28% from 21%, reversing half of Trump’s cut. Such a move would again increase Ireland’s attractiveness as a destination for foreign direct investment, but it would be unwise to expect too much too soon. Tax reform in the US is notoriously slow. Trump’s Tax Cuts and Jobs Act was probably his signature accomplishment, but the parties had broadly agreed the basis for it before the 2016 election. A reduced corporate rate would therefore have been delivered in any event, regardless of the election’s outcome. Brían O’Cuiv, Tax Partner at PwC San Francisco, foresees opportunities for Irish companies independent of tax reform. “The reality is that US companies continue to be among the most innovative in the world. And with a seemingly endless supply of venture funding available, we will see new businesses with global ambitions emerge,” he said. “Irrespective of any changes to the US tax system, companies will need to establish operations overseas to access foreign markets and tap into the local knowledge base. Jurisdictions that position themselves as an attractive location for inward investment and provide some degree of certainty are likely to continue to benefit disproportionately from this trend.” Finally, once he assumes office on 20 January 2021, President Biden’s close ties to Ireland will at least deliver the perception of increased opportunity, even if his control over the payoff is not as strong as Ireland Inc. would like it to be. Ireland and Biden In 2016, Biden wrote in his ‘Letter to Ireland’ that “When I die, Northeast Pennsylvania will be written on my heart. But Ireland will be written on my soul”. A testament to this close relationship is the fact that An Taoiseach, Micheál Martin, was one of the first political leaders Biden contacted after his projected win. During their 20-minute call, they covered the global economic recovery, relations with the EU, and tackling climate change. Most tellingly, they also discussed the importance of a Brexit outcome that respects the Good Friday Agreement and ensures no return of a physical border on the island of Ireland. Ireland’s profile will benefit exponentially from having a US president that is favourably disposed to the country, which Trump most certainly was not. The annual St Patrick’s Day summit in the White House may not restart until 2022, and a presidential visit to Ireland is unlikely before 2023. That said, the negativity towards Ireland will cease almost immediately and in terms of Brexit, to use Biden’s favourite quote from Yeats, “all changed, changed utterly”. Cummings and goings The next few weeks will tell more, but it is already possible that almost two months before he has even been sworn in, we may have already witnessed the first effects of a Biden presidency on the global stage. The UK Conservative government courted Trump shamelessly and desperately hoped that a Republican-controlled government could deliver the holy grail of a US/UK trade deal. They hoped that it could be achieved in advance of any EU deal and sold to the British public as a significant victory. That hope has been utterly dashed. The resignations of Dominic Cummings and Lee Cain may signal a seismic shift in the UK’s Brexit strategy. Cummings had served as campaign director of the ‘Vote Leave’ campaign in 2016 and is credited with the memorable (if potentially misleading) slogan, “Take back control”. Cain had been tipped as Johnson’s next chief of staff, an important position as it would effectively have given Cain control over access to Johnson. Their departure may be the most immediate macro consequence of Biden’s election on the global economy. The likelihood now is that Johnson and Britain will be forced back to the negotiating table with the EU. At the time of writing, the chance of a last-minute UK/EU deal had increased, and this may be the most immediate payoff from Biden’s presidency. In terms of how that presidency might benefit Ireland, it might also be the most important. Barry Flanagan is President of US Operations and Global Head of Customer Engagement at Immedis. The importance of the Georgia run-off While the US waits for President Trump to accept the results of the presidential race, the focus of the political world has already shifted to Georgia where two run-off elections set for early January will determine which party has control of the Senate. The current state of play is 50-48 in favour of the Republicans, so the Democrats must win both to draw level. The result of the contests, which will take place two weeks before Biden’s inauguration, could lead to two distinct outcomes. On the one hand, two Democrat victories could re-centre power to the Democrats by giving Harris, as the new vice president, the casting vote. This would provide Biden with broad power to carry out his policy agenda and push through nominations as he sees fit. On the other hand, a Republican win could cement Republican control, thereby allowing Mitch McConnell to remain as Speaker with the power to continue his policy of obstructionism that was so effective during President Obama’s second term. Georgia may have flipped Blue for the first time in 28 years, but the margin of victory was a tiny 14,000 votes or 0.3% of votes cast. Accordingly, anticipating a double defeat for down-ballot Republicans who outperformed Trump is not advisable.