Comment

After two years of lockdowns, restrictions and anxiety, Ireland is opening up. Three members explore how their goals have changed – both personal and professional – in 2022. Jennifer Nickerson Owner Tipperary Boutique Distillery Limited In 2021, our goals were focused on survival. We had been hit hard by COVID-19 and were trying to keep our heads down to make sure that we would make it through the year. Everything was about existence. Our focus has definitely changed in 2022. We are thinking about growth and opportunities; the conversation is about breathing life into new ideas and developing critical markets. We have some fantastic product ideas and interesting distillation projects, but I think the most interesting and novel opportunity will be tourism in 2022. Our distillery has been operating for over a year now but hasn’t been open for tours. I think the opportunity to welcome visitors will allow people to understand our distillery and allow us to tell our story naturally. We are an entirely authentic business, a true field-to-bottle distillery, and people will be able to experience this for themselves when they visit us. My main challenge this year is both personal and professional. I will be coming back into the business from maternity leave with fresh ideas and will need to figure out how to make these work with a small child in tow.  I poured my life into Tipperary Distillery for six years and barely took a day off – I took a laptop on every holiday and even worked on our honeymoon. We have been lucky to get a good crèche space for our little boy, but I’ll need to work smarter this year to make everything happen for our business and still be present for our baby when he needs me. In some ways, COVID-19 has helped in this regard, setting the stage for more online meetings and showing how much we can achieve remotely, but I still see this being the main challenge as we try to find a new normal. I’m feeling hugely optimistic about the year ahead. There are so many opportunities as life begins again in 2022, and while some challenges will crop up as we emerge back out into the post-COVID world, for us, they bring infinite possibilities. Mark Lawther Assurance Director EY I think it’s safe to say that we all hoped 2021 would be the year that we managed to emerge from the pandemic. While things didn’t work out that way, I feel a real sense of optimism as 2022 gets underway.  While challenging, the great ‘work from home’ experiment has genuinely proved just how effective we can be when working remotely. Before COVID-19, I wouldn’t have considered the possibility of delivering complex global audits in an entirely remote way! But by using cutting-edge digital technology and integrating that into our audit processes, we were able to continue to provide high-quality audits, enhance the way we look at risk and offer unrivalled insights to our client throughout the process. We haven’t just adapted our working approach with clients, we’ve also had to modify how we work internally. We have a fantastic culture of collaboration at EY, and of course, we are a training firm, so a lot is learned by observation. Having fewer days in the audit rooms meant our newer staff had fewer opportunities to learn by osmosis from senior colleagues, so we were mindful that we had to find creative ways to continue to nurture junior talent. Leveraging the latest tech, we were able to find plenty of opportunities for people to learn from each other while tapping into our extended networks to help people make valuable contacts.  My hope for 2022 is to fully embrace hybrid working and give our newer team members greater access to the ‘on the job’ learning that I was lucky to benefit from in my early career.  Overall, when reflecting on the past two years, the most significant benefit of the disruption has been the opportunity to be much closer to those that matter at home. I have spent two years at home on time for dinner with my kids, and my travel and commuting time has been virtually zero. As we move into 2022 and adopt a new hybrid approach to work, I plan to keep these benefits going a few days a week. Isabelle Cairns Tax Manager James Hardie International Finance DAC 2021 brought with it a new role in a new organisation, and although it’s been a year, we haven’t yet been working in the office at full-team capacity. Mastering the balance of the hybrid work model and building strong team connections are worthy challenges that lie ahead for businesses and their employees. The most significant change from last year is the specificity of my goals. What was previously pencilled in for ‘one day’ has now been given an actual timeframe. A positive taking from the pandemic was having time and space to reflect on what matters, which, in turn, helps decision making going forward. Working in tax in a growing global business, combined with the ever-changing international tax landscape, certainly keeps one on their toes! Right now, navigating international tax reform and its associated implications across business operating jurisdictions is a key focus. While some things are out of our control, it’s great to get back into planning for life beyond lockdown. Now that international travel is on the cards, adventuring to far-flung destinations is something I look forward to. Climbing Mount Kilimanjaro, a long-term resident on my bucket list, is a more realistic prospect this year. In 2022, I look forward to in-person meetings and other opportunities to connect face-to-face with colleagues.  Personally, I hope to get my foot on the property ladder. Aside from, I have signed up to cycle the Ring of Beara with a group of friends. Two very different challenges, both of which I look forward to with a degree of apprehension.

Could the underperforming Capital Asset Pricing Model be replaced by a new, shinier model? Cormac Lucey examines the theoretical contender – the Holistic Market Model. For decades, the Capital Asset Pricing Model (CAPM) has been the foundation stone of modern financial theory. Its cost of capital formula is routinely used to estimate the corporate cost of capital. And that, in turn, is used to value companies. It lies at the base of the architecture of asset allocation models and “efficient frontiers” that dominate investing today. The trouble is that the CAPM doesn’t work very well. Actual returns bear only a limited relationship to the CAPM’s predicted returns. The CAPM is a bit like a banger of a car that is still driven by an impecunious student. They don’t drive the car because it’s any good – they drive it because it’s the only car they’ve got. Modern finance sticks to the CAPM even though it isn’t very good for the simple reason that it has nothing better to put in its place. But that may be about to change. Jacques Cesar of the consultancy Oliver Wyman has spent the last five years working out an alternative to the CAPM. He and his firm have introduced the Holistic Market Model (HMM), which they describe as a radically inclusive blend of finance, accounting, analytics, economics, history, and sociology that explains the stock market’s past performance and frames the future. The HMM involves rejigging several key finance variables. Earnings The HMM moves EPS (earnings per share) from GAAP to what are called “Buffett earnings”. This refers to the surplus that can be distributed to shareholders once all reinvestments needed to keep the business going have been made. When Cesar applies a cyclical price-earnings multiple to the revised earnings numbers, the market is revealed not to have been as extremely cheap as it appeared in the 1970s and 1980s, and not as expensive as it appears now. Discount rate Cesar comes up with a Really Truly Risk-Free Rate (RTRR), which is the current risk-free rate converted into real terms by subtracting inflation expectations. It also removes what Cesar calls a “Treasury Risk Premium”, which reflects changes in the incentives to buy bonds. Equity risk premium Cesar reckons we can account for almost all differences in the equity risk premium (and therefore all variation in the valuation put on stocks relative to bonds) using five factors: first, business cycle and sub-cyclical variations in economic and financial risk – a quantitative risk-aversion indicator shows where market crashes will happen; second, inflation falling outside the ‘Goldilocks’ zone – extremes of inflation and deflation cause problems for equities; third, intergenerational increases in risk aversion driven by long secular bear markets (like the one from 1929–1942); fourth, “imperfect risk arbitrage between equities and Treasury bonds” – the equity risk premium tends to be even higher than it should be when the RTRR is extremely low, like it is today; and fifth, a factor that explains periods of speculative excess. Supply and demand for equities Recent decades have seen ageing populations and increased inequality in the developed world, both of which have sustained increased demand for equities. Model the moves in supply and demand for equities successfully, and you can capture an important influence on share prices. Oliver Wyman is now publishing a series of detailed research papers explaining and validating its analysis. Key questions that the model poses for the next decade are: whether the four-decade decline in the RTRR will be reversed; whether inflation will remain in the Goldilocks zone; and whether a change in the regulatory regime will put pressure on corporate profit margins. Maybe the world of finance is about to get a theoretical car it likes driving, as opposed to one it has to drive for lack of a better alternative.   Cormac Lucey FCA is an economic commentator and lecturer at Chartered Accountants Ireland.

It is fair to say that Brexit and COVID-19 have bashed small businesses over the past 18 months. But for many, the experience has made them more resilient and fit for the future. When the first lockdown was mandated in the UK, I read of people on furlough who took time to learn new languages and pursue long-forgotten skills. Not so for millions of business owners who were thrown into turmoil, first wondering how they and their teams would financially survive and then, having made it through the first tense months, figuring out how to stay connected to customers. It’s a remarkable fact that the UK witnessed a start-up boom during this time. Companies House recorded the highest number of new company formations in June 2020. This was, in part, necessity entrepreneurship as those who could not find work were forced to create their own employment. But mostly, it was opportunity entrepreneurship where people with time on their hands spotted gaps in the market or took a side-hustle (a business run alongside the day-job) and turned it into a full-time venture. The task now is to ensure that these lockdown start-ups get access to the right support and have every opportunity to keep trading. For existing businesses navigating massive change, the ones that have survived reacted fast and pivoted to serve the changing needs of customers – which mainly required going online. At Enterprise Nation, we saw high demand from small businesses for education and training on how to build websites, master social media, accept online payments, onboard to delivery apps and marketplaces, and achieve all this while being cyber-secure. When the economy and High Streets re-opened, demands changed again to where online sellers wanted to test physical retail and meet customers in person. When buffeted, founders showed strength by simply figuring out how to trade through. Challenges remain in the logistics of getting products into and out of the UK – and the cost of doing so. Added to this are rising energy and supply chain costs, while a changing landscape of health and safety restrictions causes confusion. Yet, businesses are in the position of having faced this before. As we start the New Year, small business owners feel more in control of their finances (as they had to take a closer look at the books when there was the risk of no funds coming in). They are digitally more capable of responding to shocks as work has been done to polish websites and plugin e-commerce capability. And possibly most significant of all, resilience levels are at an all-time high. Founders feel that if they can navigate lockdowns and Brexit, they can take on anything. This bodes well for the year ahead. Emma Jones is the Founder of Enterprise Nation, a business support platform and provider that operates in the UK and Ireland.

Dr Brian Keegan explains why the OECD’s Pillar 1 scheme (to have the largest multinational companies taxed in part in their market territories) is far more ambitious than Pillar 2’s 15% minimum effective corporation tax rate – and may achieve its goal without necessarily having to take effect. Governments across the EU will be watching the progress of the new directives to give effect to a 15% minimum effective corporation tax rate within the trading bloc. Few of these governments will be watching developments unfold quite as closely as the British government. While no longer obliged to adopt EU directives, the British government have, nonetheless, signed up to the essence of the 15% proposal. Given that the UK headline corporation rate is well in excess of 15%, every EU change might bring opportunity for the British economy. There were, however, always two parts (or pillars, in the jargon) to the OECD-backed grand plan for the taxation of the major multinational sector. The current focus of the 15% project (Pillar 2) has taken the spotlight off the far trickier topic of where the largest entities pay their taxes (Pillar 1). Large multinationals have created problems for governments since the time of the Dutch East India company. In the 1600s, the Dutch East India company quite literally became a law unto itself. Having an accounting period of a decade rather than a year was only one of its idiosyncrasies. Ever since, governments have walked the fine line between maximising revenue from their multinationals while not losing control of them. The Pillar 1 scheme (to have the largest companies taxed in part in their market territories) is far more ambitious than Pillar 2. It overturns the right to charge tax based on the residency rule – a fundamental principle of tax law. Pillar 1 was devised as a blocker for digital services taxes currently threatened, if not implemented, in many countries. A digital services tax is, in effect, an excise duty on services (and thus overturns another fundamental principle of taxation, namely that excise duties are charged on goods). Pillar 1 was sponsored by the US to sidestep a disproportionate burden on its largest digital services companies. From an Irish perspective, the proposed relocation of taxing rights under Pillar 1 may pose a greater threat than the 15% minimum effective rate. The threat extends beyond exchequer receipts. Large multinationals employ an unusually high proportion of Irish workers compared to most other countries. Pillar 1 may make it more efficient for some multinationals to relocate jobs to their market destinations to manage their overall tax bills. But before anyone starts checking their visas and work permits, I’d suggest that the prospects of Pillar 1 happening any time soon are poor. Pillar 1 implementation requires countries to change their double taxation agreements. Previous OECD-backed reforms have also required treaty changes to stop tax avoidance using mismatches in the tax treatment of so-called hybrid instruments and the like. Yet, the US, which is the principal architect of Pillar 1, has yet to sign up for this kind of treaty change for any purpose. This US reluctance to modify its own treaty network can be ascribed, at least in part, to Washington gridlock. Now, implementing Pillar 1 presents the additional political challenge of whether the US will be happy to lose tax to high-population market destinations like Brazil and China. It may well turn out that Pillar 1 is a proposal primarily designed to block a digital services tax without ever having to come into effect itself. If this is the case, the current focus on the Pillar 2 15% rate is well-placed. There will be opportunities, not just in the UK, but in Ireland as well. Dr Brian Keegan is Director of Advocacy and Voice at Chartered Accountants Ireland.

Despite persistent and difficult challenges, Dawn McLaughlin is bullish on the north-west’s prospects for 2022 and beyond. This time of year is often a natural time to reflect and contemplate what has happened over the past 12 months. 2021, for all its challenges and difficulties, has been a greater whirlwind than the preceding year in many ways. While still profoundly challenging, businesses have got to grips with issues like the pandemic and the Northern Ireland Protocol, adapting to the challenges before them and seeking new ways of working to meet their customer needs and obligations. I have witnessed the hardship and listened to stories of decimation and uncertainty. But I have also been heartened by how businesses reacted to the crisis, putting their people before themselves. As we look towards 2022 and consider all that it may bring, it is important to look at the challenges we have faced, what we have achieved, how we have progressed, and what still needs to be done. For the north-west, it has been a year of optimism and positivity as well as change and progression. February saw the heads of terms signed off on the £250 million Derry and Strabane City Deal, an investment package that will see 7,000 jobs created over the next decade and an extra £210 million in GVA (gross value added) generated in our regional economy annually. It is difficult to overstate the transformative potential this deal could have for our region – a part of the island that has historically been underfunded, underdeveloped, and under-prioritised. If we get this right, there is an opportunity to carve out the north-west as a leading location in Western Europe for technology, health and life sciences, diagnostics, artificial intelligence, and other emerging industries that will become increasingly important to the global economy over the next decade. It has been a joy to finally see future doctors and consultants training in the city, with the opening of Derry’s new School of Medicine in September. The further expansion of Ulster University’s Magee campus is something that City partners are committed to making a reality, and we will continue to work collaboratively towards this goal. We have welcomed new Executive ministers this year, new MLAs in Foyle, and new party leaders. Ahead of the next Assembly election in Spring 2022, we have been working hard to get our message out there and tell our local candidates precisely what they must support to see our region flourish and prosper. We hope that issues like our regional connectivity and infrastructure, the expansion of our local university, job creation, attracting new investment, and skills development will be front and centre for our elected representatives in May. Specific issues still linger as we look ahead to 2022. Continuing disagreement over the Northern Ireland Protocol does no one any favours, especially businesses. Companies crave certainty, and they thrive when things are stable. While the Protocol is by no means perfect and difficulties are still to be ironed out, these are not insurmountable. Both sides can come to a positive conclusion through committed dialogue, and Northern Ireland can begin to take serious advantage of access to both the UK and EU markets. With growing inflation, a squeezed labour market, and rising costs of materials, services, and utilities, businesses face persisting challenges as we go into the New Year. However, I have spoken regularly about my optimism for the north-west throughout the past 12 months. This optimism has not abated, and I still believe 2022 will be a year of opportunity and prosperity for our region. Dawn McLaughlin FCA is Founder of Dawn McLaughlin & Co. Chartered Accountants  and President of Londonderry Chamber of Commerce.

Dr Brian Keegan explains why less is often more when it comes to the written word, despite the innate tendency to elaborate rather than edit. The first draft standard from the International Sustainability Standards Board (ISSB) was published last month. Dealing with climate, it runs to a mere 39 pages. But then you have to add on the appendices, which run to well over 500 pages. Even though it is still in draft, that’s a lot of material for people to get their heads around. There will be changes before it is finalised, and I wouldn’t bet that those changes will make it shorter. James Joyce rarely cut sentences when he edited his own work; he just added more words. Many of us subscribe to the Joycean approach. The business and regulatory environment has undoubtedly become more complex. That has a bearing on the volume of information we need to process, but it is not the only reason. Annual reports are growing in length; witness the growth in the size of the published accounts the Leinster Society considers and awards each year. Senior figures in the profession are now predicting the emergence of a more narrative form of assurance on corporate results. More reporting reflects business complexity and stakeholder expectations, of which the new ISSB draft standard is a paradigm example. Much of what we write shows a desire to be seen to have written rather than showing that we want to be read. We may literally be the authors of our own misfortune. Copy and paste functions aid and abet the blossoming of word counts. In this age of email and social media, it is trivial to point out that it is easier to send than to receive; it is certainly quicker. By tolerating this growth, we all do ourselves a disservice. One distinguished senior member and non-executive director put it succinctly to me earlier in the year, as he glumly surveyed yet another multi-volume set of board materials. The bigger the pile of papers, the more it suggested to him that the board didn’t trust management, that management didn’t trust the board, and that everyone assumed that everyone else had too much time on their hands. Even if none of that was true, it would be hard to disprove given the evidence. The tide may be turning, at least in some quarters. Many websites and journals now advertise the length of time it will take to read an article. This tactic is not without its risks either, as it insults fast readers and panics slow ones. Yet, we communicate best when the reader is minded to hear what we have to say. An assurance that the communication won’t take up too much of their time is a good way of getting an audience onside. The French philosopher, Blaise Pascal, is credited with first making the excuse for something he wrote being too long – because he had no time to make it shorter. Time cutting the verbiage is time well spent; the reader is much more likely to hear the message, but it’s not easy. We need to stop hiding behind executive summaries and elevator pitches and instead manage better what we write in the first place. I propose to lead by example. This column is supposed to be 600 words long, but it will be a little shorter this month. I hope the editor is okay with that. I hope you are too. Dr Brian Keegan is Director of Advocacy and Voice at Chartered Accountants Ireland.