Business Times - 09 May 2009
Seeing around the corner
Even in challenging times, don't let the urgent get in the way of the important, says Ernst & Young chairman and CEO James Turley. By Anna Teo
ALL in a day's work, James Turley flew into Singapore in the wee hours from Beijing, had a full day of meetings, and jetted off the same night back to the United States, for a date the next day on the ski slopes of Park City, Utah, with new hires of his firm.
That's been the itinerant life of the Ernst & Young global chairman and chief executive officer since he took the helm in July 2001 - he's officially based in two cities, London and New York City, but actually spends 75 per cent of his nights in neither, he says, but 'in some place like Singapore'.
Both he and his wife, being empty nesters, 'have kinda settled into this', he says, with Lynne as happy to travel with him as she is about staying put herself in London for a month or two. And the dual-city management works great as well for Ernst & Young, Mr Turley, 54, tells BT.
'It actually works very well, because obviously we've got major practices all around the world, we lead our global operations in a pretty virtual way, but we've got many of our global leadership team members in London and several of them in New York.'
Chirpy even at the end of a long day, Mr Turley, whose extra-curricular appointments include a seat on the board of Boy Scouts of America, characterises his peripatetic lifestyle as 'a lot of miles!', adding: 'A lot of miles, and a lot of smiles.'
That said, there hasn't really been much to smile about on the business front of late, with the world's top accounting firms certainly not spared the ravages of the economic downturn.
'Well, I wish I can say Ernst & Young's not affected, but we are. No organisation gets to avoid the impact of this,' says Mr Turley, who joined the firm in 1977, fresh out of university in Houston.
'When you see a world in which the merger and acquisition market has largely shut down, when the initial public offering market has largely shut down, when discretionary spending gets put off, all of these things have an impact on us, and obviously, the clients need us to still do an awful lot of work.
'But their budgets are tighter, and so there is much more pressure around fees of all types. So all these things have impact. Having said that, we're growing, still growing in revenue, still growing in market share, still growing in headcount. And so we'll close the year with more people than we started the year, and there are not that many organisations that actually can say that, so we feel very good about that, both because of how it reflects on our business performance and also because it's good for the economies and the families.'
That doesn't mean, though, that Ernst & Young hasn't had to have tough discussions with individuals within the firm, he adds. In normal years, the usual churn sees a number of graduates that the firm hires off campus each year moving on after a period to join, in many cases, clients. 'And as you can imagine, in this economy, the clients and the marketplace aren't hiring very many people, so we have to be just very thoughtful in how we talk to our folks. So we scaled back a little bit on the university hiring, but also we've had (fewer) people leaving us, which has left us with more people at the end.'
But 'it has been a very stressful time, around just the performance audits, to be really clear', he says.
'The valuation issues, impairment issues, the going-concern questions, all those require a great deal of internal consultation, a great deal of judgement on the part of our teams. We've very effective, I think, in giving upfront guidance to all of our people on how to operate on the audit side of our business during what is the most difficult audit season we've been through in years. Similarly, the environments in which we're delivering tax services, advisory services, transaction advice, have all changed. And so we've had to make sure that our people are prepared to respond to the changes.'
What Ernst & Young emphasises, particularly now internally, is being with clients, he says.
'Clients need us more today than they have ever needed us before. They're experiencing things they've never experienced before, times they've never lived through, and so they need someone to counsel with, someone to talk to, they need many of the resources and skill sets and capabilities that Ernst & Young has, so we're trying to encourage all our people, in our audit business, in our tax business, in our advisory business, in our transactions business, to be out with their clients, because that's the place where we can have the most impact. When we're with our clients, good things always happen.'
Getting the balance right
Today's business climate is the most challenging yet that he's been through in more than 30 years in the profession.
'Oh yeah, believe me, these are times that I've never lived through either,' he says, chuckling. 'But I think that if you stay focused on getting the balance right, between the short-term issues and the longer-term issues, you'll come out ahead.
'For our clients, the short-term issues today are often about liquidity, capital, financing, and when we help our clients focus on short-term issues, that's important. The longer-term issues that are driving the economies will be the demographic shifts and the shifts in capital, and those are things that we at Ernst & Young really are, and want to remain, leaders in. We want to be the most diverse and inclusive organisation in the world, and we want to be the most globally-thinking organisation in the world, and so, keeping those things in front of us, and at the same time focusing internally on all the cost-containment issues and people management issues, is really important. You've got to get that balance right.
'You can't let the urgent get in the way of the important. And it is important that we be the most diverse inclusive organisation in the long term, and it's important that we be the most globally-thinking organisation in the long term, and we're staying focused on those.'
Over the past year, the firm restructured towards its vision of becoming the most globally integrated firm in the profession - integrating operationally, and 'financially where permitted'.
Says Mr Turley: 'Here in the Far East we've had all of the country practices strongly integrate and work together as a single business unit across 15 countries, and we've really done the same thing across EMEIA (Western and Eastern Europe, Middle East, India, Africa), and the same thing too in the Americas.
'Because what we found is that really working together globally, and being really integrated, is great for our clients and great for our ability to deliver the right resources to the right client needs at the right time. The regulators look at us and say - it really helps deliver consistent quality around the world. And very importantly, it's great for our people. Because if you think about the people joining Ernst & Young today, nobody wants to be constrained by a boundary, even a country boundary. So opportunities now are truly global.'
The integration of Ernst & Young's Far East Area, for instance, which took effect on July 1, 2008, created a US$1.2 billion organisation with more than 20,000 people. Worldwide, the firm has some 135,000 people in 140 countries.
The Big Four firm is also more than midway through a four-year programme to invest US$1 billion in mainly the emerging markets - a plan that Mr Turley says is squarely on track despite the economic downturn.
Focused on people, 'around bringing in great people at all levels in the organisation, with deep competencies and skills sets our clients need', the investment funding is especially driven around China, Korea and the Far East markets, he says.
'There's one thing that I'm convinced of, and that is that these financially difficult times in the economies won't impact the longer-term trends in business. The longer-term trends that drive business would be the demographic shifts taking place, and the other big driver is the shifts in capital, from west to east, from north to south, from developed to emerging markets. And so, I think, in many ways, the recession might well accelerate that shift of capital. It might in the longer term be something that actually makes this part of the world even more important globally than before.'
While Asia has no doubt been hurt in this recession, Mr Turley believes the region will be among the first to come out of the downturn, along with the Middle East and the US.
'A combination of factors will drive this. Part of it is the stability of governments, part of it is the fiscal stimulus that's being put in, but a big piece of this is the spirit of entrepreneurship that the people have; the sense of optimism, the ability to innovate. And I see that as being quite strong across this region.'
He's generally more optimistic than pessimistic, he says.
'That optimism in some ways has been reinforced by listening to many of our clients, listening to many economists, who are beginning to feel that there is a good possibility that by the end of 2009 - this isn't anytime like next week, but the end of 2009 - you might see the United States economy, you might see some other economies, actually turning back upwards.
' You know, GDP growth in the case of the US would be the hope, and more GDP growth or growth returning to more normalised levels in places like China and some of the emerging markets that have been hit pretty hard. On this swing, I came through the Middle East, China and Singapore, and I'm feeling some of that again - part of the entrepreneurial spirit that comes alive in those places, and so it's something that I'm hopeful for.'
Bullish on Obama
Mr Turley - who is a member of the Business Roundtable, an association of CEOs of leading US corporations, and the Transatlantic Business Dialogue, a coalition of US and European CEOs - is roundly supportive of the Obama administration's economic rescue efforts.
'I do believe it's important that we get more specificity around cleaning the balance sheets of the banks, but well, they're doing everything they can to try and stimulate the economy, and I believe that much of what is being done is needed.
'Frankly, I think at some level now it's just for us to take some time for all these to take hold and take effect. And almost sadly, with the 24/7 news cycles that the world has become accustomed to, the patience of the populations around the world to let these stimulus packages take effect isn't as long as it once was. I think we need to give it some time; I think it'll end up working.'
For himself personally, one of his most difficult tasks as CEO in the past eight years has been to continually ensure that his firm stays 'out ahead of trends', he says.
'The hardest thing to do is to sort of see around the corner as to what's happening next, and ... we have a team of people - it's not just me - who are wanting to do that. It's really important to always try to understand our future.
'Probably, when I think of the most difficult time, during these eight, nine years, it was in the immediate post-Enron period, when the profession was under great strain, when we lost in the Andersen organisation one of the fine organisations in the Big Five. But frankly, out of that circumstance, we became a new Ernst & Young, because in 57 countries around the world, about two-thirds of the countries in which Andersen had operations, the practice joined us intact. And so we had remarkably talented people join us to make Ernst & Young not just bigger but better. And so you go through all these challenging times, ups and downs, and you try to keep learning, you try to keep focused, on sort of the long-term ending.'
Meanwhile, the recent spate of accounting-related scandals, starting with Satyam at the start of the year, has been 'discouraging, to say the least', Mr Turley says.
'Yeah, we went through a number of years where there weren't the big accounting scandals. In fact, in the first 12, 15, 18 months of the banking crisis and the economic recession, there weren't accounting scandals at all. And then Madoff hit, then Satyam, and now Stanford, a mini-Madoff, not so small, US$8 billion losses in a similar-type ponzi scheme.
'One of the interesting things, when you look at these ponzi schemes - the larger audit firms haven't been present. Madoff was audited by a three-person firm: one receptionist and two accountants, I gather. You look at this and you ask yourself, how could red flags that had been waved in front of regulators not been seen? It's hard to fathom.'
Following the spate of scandals this year, the six largest audit firms in the US have got together - jointly with 'regulators, investors and the outside world' as well - to try to 'get a better understanding of the drivers of fraud, and what audit proceedings could be better done to detect frauds earlier', Mr Turley tells BT Weekend. 'It's a key priority for the profession as we work together with the investors that we serve.'
But there's no unwinding the reforms introduced post-Enron, which Mr Turley sees as 'extraordinarily positive' and which have 'dramatically strengthened the culture of client organisations around the world, and the quality of both the reporting they do and the auditing that we do', he says.
The systemic credit issues and sub-prime losses in the financial crisis of late reflect more the volatility and business severances in the marketplace.
'What we're seeing now is an area where countries all around the globe are looking very carefully at what laws and regulations need to change to help address these systemic issues, the systemic risks that we've seen cripple economies around the world, what institutions are so large that they themselves present systemic risks, what product classes across institutions have such risk elements that they need to be better regulated, what's the impact of the currently largely unregulated sort of shadow banking environment of hedge funds and alternative investments. All those things are being looked at around the world.
'One of the things that Ernst & Young is focused on is trying to encourage policymakers to look at the regulation in a coordinated way, because if you think about an environment where laws and regulations will change around the world, those changes drive us apart or drive us closer together. And as global as the economy is today, I think it's really important they drive us together. If we get driven apart, I think it will just prolong the recession and not encourage a return to normalcy.'
JAMES S TURLEY
· Chairman and CEO of Ernst & Young
· Born in St Louis, Missouri, in 1955
· Education: BA (Economics and Management), Rice University, Houston. MA (Accounting), Rice University
· Career: Joined Ernst & Young in its Houston office in 1977. Made partner in EY's St Louis office in 1987. Named Metropolitan New York area managing partner in 1998. Appointed deputy chairman in 2000, and became chairman and CEO in 2001
· Co-chairs Russia Foreign Investment Advisory Council
· On the board of directors for Boy Scouts of America; Catalyst; National Corporate Theater Fund; and on the board of trustees for Rice University
· Member of the Business Roundtable; Transatlantic Business Dialogue and IBLAC (International Business Leaders' Advisory Council for the Mayor of Shanghai)
· Appointed chair for the governing board of the US Center for Audit Quality in October 2007