ePolitix.com speaks to Neil Sherlock at KPMG about its organisation and the economic crisis.
Question: Can you tell us a bit about your organisation?
Neil Sherlock: KPMG in the UK is a leading provider of professional services including audit, tax, financial and risk advisory. KPMG in the UK has over 10,000 partners and staff working in 22 offices and is part of a strong global network of members firms. As part of KPMG Europe we have merged with our German and Swiss firms. This makes us the largest integrated accounting firm in Europe.
Our vision is simply stated to turn knowledge into value for the benefit of our clients, our people and our capital markets. Each of these areas we take very seriously. The quality of our advice and independence with which we offer it is greatly valued in the investor and business community.
Our values and the principles on which we work are widely respected and lead to our people working in an environment where they can learn and develop whatever their particular backgrounds, skills or ambitions. This helps to underpin our diversity.
At the same time we are committed to putting back some of what we gain into the communities in which we work and for more than 12 years, KPMG in the UK has built a vibrant, far reaching and coordinated programme of corporate social responsibility.
KPMG has won 'Best Professional Large Firm to Work For' at the MPF (Managing Partners' Forum) 2008 European Practice Management Awards. The award recognises the way KPMG manages its people agenda alongside its financial performance. KPMG was also shortlisted for the MPF 'Best Sustainability Reporting' category. And for the third year running has been named as one of the UK's Top 50 places Where Women Want To Work.
Question: The past month has seen unprecedented turmoil in the economy. How do you believe the current financial crisis came about in a period of apparent economic stability? Do you believe that the government's banking bail-out has been sufficient to calm the financial markets?
Neil Sherlock: Recessions usually cause the financial system to weaken, but this time a weak financial system is threatening to cause recession.
Financial crises and recessions tend to go hand in hand, but which causes which? In the 1970s, the trigger for recession was an economic shock – a sharp rise in the oil price - which deflated demand in oil consuming countries while at the same time setting off an inflationary spiral. In the recession of the early 1990s, different economies suffered for different reasons, for example the aftermath of the German reunification boom in Europe and an overheating economy and housing bubble (yes, then as well) in the UK. In each case, though, it was economic problems which precipitated the strains in the financial system.
This time round, the financial system threatened to implode on its own – with knock-on effects on the economy still to come. How could this happen after a period of apparently unparalleled economic stability and in the absence of an external shock?
The economist Hyman Minsky put forward a simple model to explain why long periods of economic stability actually breed financial instability. In short, investors are lulled into a false sense of security which encourages them to borrow excessively and overpay for assets. The number of so-called "ponzi" borrowers, who cannot afford to pay either principal or interest but rely on ever-rising asset prices to stay afloat, multiplies. The "Minsky moment" comes when lenders realise that they, too, have taken on too much risk and cut back.
We are left with a mountain of under-priced debt (lenders have not charged enough to compensate for defaults), over-priced assets (which now have to find their own level), over-extended borrowers (who will have to cut back on spending) and potentially undercapitalised banks.
Governments have now taken decisive action to underpin the financial system, thus hopefully averting a re-run of the 1930s Depression or 1990s Japan. However, the adjustment to the deflating credit and asset price bubbles still has to run its course. The emphasis now must be on re-liquefying credit markets, via central bank cash injections, and further interest rate cuts, to ensure that businesses are not starved of funds and to ameliorate the worst effects on the real economy as consumers cut back.
In the US and the UK house price booms and associated debt levels have been the most excessive and require the largest adjustments. Other economies are less exposed on this count but, in a globalised world, trade and financial market links mean that no-one is immune to the fall-out.
Question: KPMG is highly regarded for its commitment to corporate social responsibility. How will Britain's economic downturn affect the business community's ability to commit to CSR?
Neil Sherlock: Undoubtedly there will be less cash available for charitable giving as the credit crunch hits people's disposable income as well as the distributable profits from corporates and the distributable income of charitable foundations whose dividend income has fallen.
For KPMG our most significant impact is the time and skills our people commit to their local community. This includes more than 100 acting as trustees of charitable organisations and another 100-plus acting as school governors as well as approximately 4,000 volunteers who contribute their time and skills in the firm's time. Everyone has an allowance of half a day per month and are encouraged to form long-term sustainable relationships with our community partners.
