At the beginning of the year, PricewaterhouseCoopers (PwC) International Chairman Dennis Nally made headlines across the Middle East as he announced aggressive growth strategies for the accounting and consulting firm in the region. PwC had spent US$50 million in the past year, and was planning to spend a similar amount in the coming months, he said. The goal was to increase fee income in the region to US$500 million in two years, reported The Times of London, also noting that PwC had hired a number of employees away from rival Ernst & Young for that purpose. Nally said his company would recruit another 250 people for the region.

It was a positive outlook for a firm that had been bruised in its global expansion efforts from another accounting scandal, accused in 2009 of falsifying accounts for India’s Satyam Computer Systems. Nally’s announcements for expansion were untimely followed by unrest breaking out across the Middle East, directed at some of the same governments that are among PwC’s clients.

Nally, in an interview with Arabic Knowledge at Wharton, reflects on the current unrest in the region as a time of challenges and new opportunities, and no barrier to his company’s aggressive growth plans. The public and private sector can work to solve the economic and social problems raised by protestors, he says, and stresses accountability will be essential to attracting foreign investment.

He also reflects on the corporate accounting scandals, noting the financial reporting model will continue to evolve, to be responsive to what the public demands. The good work companies like his do are never noticed, but the mistakes come out in these scandals, he notes, adding his "business is not for the faint of heart."

An edited transcript of the conversation follows.


Arabic Knowledge at Wharton: Clearly, this is a historic time for the Middle East. In your opinion, is the Arab region able to respond to the demands for change?

Dennis Nally: This part of the world has gone through a lot of change over the last 30 to 40 years. Not only changes from a political standpoint but also from an economic perspective. What we’re seeing is clearly going to bring a number of new challenges [which have] to be addressed as well as a lot of opportunities. Across all sectors whether it’s private enterprise, governments or society in general, it’s going to put a real spotlight on some of the real issues that have to be addressed.

Some of the reforms that are needed to deal with the unrest that we are seeing now, whether it’s jobs or jobs creation, for certain countries [there is] obviously significant need for reforms of education, and development diversification of economic platforms. And it’s with any challenge that you see. There’re tremendous opportunities here that [have to be] put on the table and looked at.

The biggest change that has to take place stemming from the events that we’ve been seeing over the last several months is a greater level of transparency in the marketplace, and from a governance standpoint. The way that governments conduct themselves, the way the business conducts themselves… clearly that enhanced transparency would go a long way to benefit not only the companies but also individuals in that part of the world. It is one of the biggest challenges that really exist. It is also something we’ve all learned from the recent financial crisis is that these markets are gullible and there is going to be increasing competition for cross-border investments. Without question investors are going to be looking for that enhanced transparency that will be the deciding factor, if you will, in terms of how these types of investments are really made in the future.

That’s a critical component to everything that we’re actually seeing not only in our practice, but also in view of some of the events that we’ve seen over the last several months.

Arabic Knowledge at Wharton: Do governments here have the capacity to find solutions to the problems that have caused this popular reaction across the region?

Nally: I think so. They have to, quite frankly. I think some of the issues that I alluded to, whether it’s the high levels of unemployment [or] the issues around education skills development, or the ability to prepare people to compete in a much more global market, governments have to be seeking the solutions to these issues. I think the private sector has a role to play as well. I don’t think this is a one-way street by any imagination. I think governments as well as the private sector need to work in a much more open, collaborative way to address some of these fundamental issues, these reform issues that clearly will be key indicators as to how some of these issues are effectively dealt with. I think governments and the private sector have no choice but to fundamentally address some of these critical issues.

Arabic Knowledge at Wharton: As far as the unrest in the region is concerned, do you think that we have entered into a cycle of protest and instability?

Nally: It goes to the heart of the issue when you have numbers of people who are not satisfied with the status quo [and] are not encouraged by what they see as their future. It forces people to be much more outwardly in expressing their views with regard to the levels of dissatisfaction that exists. Whether it’s economic, social or governance, all of those factors are contributing to the high levels of instability that exist in that part of the world.

I think it is important to note that we all have a tendency to generalize around on what the issues, problems are in specific countries. I’d hate to over-generalize because I think the patterns are in fact different, depending upon what the part of a region you’re really talking about. The common threads for me are some of the more fundamental issues that really have been developing over a period of years with youth unemployment, lack of job prospects, economic reform and diversification of any of these economies. That’s why I keep going back to the fundamental point that it’s really imperative that the governments address these key concerns given the levels of angst and frustration that we all have seen and read about.

Arabic Knowledge at Wharton: How do you see this changing the face of capital inflow and outflow in the region and also of competition?

Nally: I do think that we’re in a global marketplace today, whether you’re talking about the Middle East region or other parts of the world. It’s becoming so clear that the competitive environment today is not just what sits within a respective country but really what’s taking place in all parts of the world.

When you think about the ability for companies, and for that matter countries, to really compete in this new economy, It puts an incredible amount of pressure on governments and the private sector to really know their competitive positioning or standing not only vis-a-vis their own country or their own company, but also of those that are operating on a cross-border basis.

This is going to continue to increase and pick up speed into the foreseeable future and we’re beginning to see it. In our recent Global CEO Survey that we released in Davos in January this year, the degree of optimism that the CEO community is expressing today is almost at a record high, very close to the pre-crisis levels. What’s interesting to me is that level of optimism is really coming from all parts of the world.

So it doesn’t matter whether you’re in a particular emerging market or a developed market, the sense of the sustainability of this recovery, the sense of the growth potential for the global economic picture is fundamentally different today than what it was 12 months ago. Again, that puts real pressure on countries as well as companies to really be thinking aggressively about how competitive they are whether it’s attractiveness for foreign investment, whether it’s a competitiveness of products or services not only within a country but on a cross-border basis. The ability to really compete on that cross-border basis will be a real winner whether you’re a government or in the private sector into the future. It’s a huge challenge, but for those that are focused on this area it’s a tremendous opportunity as well.

Arabic Knowledge at Wharton: What do you see as the long-term and perhaps the short-term effects of the changes in the region?

Nally: I alluded to this whole issue of transparency. When you have multiple opportunities as an investor, whether it’s India, China and Brazil, the Middle East or other attractive emerging market, like Africa, as an investor, you’re going to be looking for a degree of transparency around how a company operates its governance, how secure the political environment is to protect your investment — rules and regulations of a judicial system that would give you comfort with regard to the recovery of your investment or the return of your investment.

And that’s why the playing field is much broader as it relates to the opportunities that are available there and how competitive one country is vis-à-vis another country or how competitive one company is vis-à-vis another company outside of that particular territory. I think is going to become increasingly important to attract the type of investment that is out there and that’s what investors are going to be looking for.

Arabic Knowledge at Wharton: You had planned on investing a large amount of money and effort into the region to expand your operations. Has any of this affected your plans?

Nally: It hasn’t. We still continue to believe that the region offers tremendous opportunity for growth. Obviously, as you would imagine, we’re monitoring the events taking place within the region on a daily basis. What’s taking place here is critically important to what I would describe as a longer term attractiveness and the longer term potential of that part of the world.

Hopefully, as the environment settles down, which I think we’re all optimistic about and hopeful for, it will confirm the real tremendous potential this part of the world offers not only for PWC but to other investors as well.

Arabic Knowledge at Wharton: At the Global Competitiveness Forum in Riyadh, you had made reference to the notion that there was a fundamental shift of power taking place from west to east. Can you elaborate on that, especially in light of the unrest in this region?

Nally: I continue to believe that coming out the economic crisis that we’ve been through for the last several years, we’re really seeing a fundamental shift into the emerging markets. What we’re looking at least for the immediate term — maybe calendar year 11 and 12 — are growth rates over 6% in the emerging markets and the growth rates probably a little over 2% in the developed countries.

We expect that to probably continue, especially when you think about the demographics that exist in many of these countries and what that translates into in terms of opportunities for growth, certainly vis-à-vis the developed markets. We describe it as a fundamental economic shift here that will continue into the foreseeable future from the developed markets into the developing markets and that’s a pattern that we think is real [and] sustainable.

When you look at the growth rates coming out of any of these countries around the world, that pattern continues to confirm the thinking behind this. It is a fundamental re-shift of economic power from the developed markets to the developing markets.

Obviously, [we’re] aware that it calls into question [the] new environment that has to be understood and addressed. We’re seeing some of that take place in the Middle East in terms of the political stability. What that could mean to one of these emerging markets is [the] same types of issues or concerns exist in anyone of these emerging markets.

If you take Russia for example and the significant desire to move away from oil energy economy into one that is more diverse [and] can stand the ups and downs a global economic picture. That’s got issues and that’s got challenges as well. So it’s not to say that these markets, whether it’s the Middle East, whether it’s India or China and Brazil, Russia, et cetera, don’t have issues and challenges that have to be addressed, it’s just that the potential for these markets is so much greater and so significant that the developed market that it is attracting the investment.

That’s what is attracting the desire for companies to really focus on their business model and how they do business in these markets therefore you can start to see why these markets are sustaining themselves from a growth standpoint vis-à-vis the developed markets.

Arabic Knowledge at Wharton: Turning to the research that you had done on family-owned businesses, what are the unique challenges faced by family-owned businesses in the Middle East?

Nally: One of the big challenges that exists before some of the family owned businesses [is how you] really capitalize on the opportunities. In many instances, you’re dealing with second, third, fourth generation of a family in a business. How do you effectively deal with that? Transitioning from one generation to another is another issue that presents itself as a challenge.

Secondly, as these businesses start to operate much more on a cross-border basis; how do they look at their competitive positioning vis-à-vis other companies operating outside their particular territory; how do they really encourage the type of investment to really grow their businesses, for example, bringing in outside capital to drive growth and capitalize on opportunities.

I think that gets back to one of my earlier comments around the need for more transparency, the need for more consistency around natural reporting standards, the need for more transparent governance and how these organizations and businesses really govern themselves because that’s what the outside investors are going to be looking for. Investors who are really operating on a cross-border basis, want to see a level of transparency that’s much more consistent with other parts of the world.

That is one of the real challenges that family-owned businesses have to make in terms of their transition to operating solely within a country and/or eliminate cross-border activities or one that could allow them to operate you know in this global marketplace.

Arabic Knowledge at Wharton: What are some of the challenges that are faced by companies working in other nations and how do you balance the demands of those countries as opposed to the needs of their stakeholders?

Nally: That is a great issue. One of the biggest challenges that many companies have operating on a cross-border basis is how do you attract and retain the talent who really understands the unique aspect of these local markets and at the same time allows the business to grow and to prosper. I think a lot of companies are really challenging themselves to refine their business model in order to do just that.

Whether it’s having R&D centers that [have] the capacity to develop new product and services in a local market, to be responsive to that market, is a much different way to think about R&D efforts than what has happened historically. It’s not only how you attract talent but how do you train talent to really operate in this global marketplace. Those are some of the things that are really front and center for many companies that are operating on a cross-border basis.

At the end of the day, there’s a real recognition that the companies that are going to win into the future are going to be the ones that really have the talented people who really are in the local markets, who understand the customs, who understand the unique aspects of these marketplaces and can really capitalize on the opportunities that are there. It’s no longer the model of just having people in from headquarters or having expatriates located on the ground really running these businesses. I think that model is dated. They will have to evolve and migrate to a model that is much more a locally driven in order to realize these tremendous opportunities that are there.

Arabic Knowledge at Wharton: Given the experience of Blackberry in the Middle East and in India and Google in China, it seems like governments expect different things from foreign entities. How do you balance those needs and the demands?

Nally: Well, I think that’s exactly right. The opportunities that we’ve been talking about are so great in a number of the markets as China, India, the Middle East, Africa, et cetera, that you really do have to understand the unique aspects of these markets and they’re all different. To generalize, I think, would be trying to oversimplify the challenges that are there. They’re fundamentally different than how successful companies have operated for years in the developed market.

It does place a huge premium on understanding the way governments form policy, the way they operate, having good, trusted relationships with senior people and government as well as the regulators. You’ve got to have people on the ground that can forge those types of relationships. It really does require having a specific knowledge and expertise on the ground in order to ensure that there’s an appropriate understanding of how best to operate in a particular part of the world.

Arabic Knowledge at Wharton: The events of 2002 [a year that witnessed numerous corporate accounting scandals] had a unique effect on your industry. Has the industry recovered? What are you doing different now?

Nally: I think the events of 2002 did have a significant effect on our business. I think about the significant reform that has taken place not only here in the United States but other parts of the world in terms of enhanced governance, the role of audit committees, the types of services we can provide to audit clients, a whole list of changes have come out of those events in 2002. To be fair, whenever any situation like that takes place, I think it’s incumbent upon everybody to step back and say, "What can you really learn from them? What should you do different? What could be done?"

I would say our profession is doing the exact same thing when it comes to this financial crisis that we’ve been experiencing for the last several years. What could be done differently on a go-forward basis to learn from the lessons? Whether that’s more enhanced disclosure, transparency around companies risk management process, whether it’s a more simplified audit report, for example in plain English; is it more around expressing qualitative use around financial reporting practices, not just a hard and fast opinion around the appropriateness or correctness of a financial statement.

I think there are a number of areas that certainly at PwC we’re encouraging to be looked at in the spirit of what can be done to really enhance not only our performance but also the enhancement of and the value of corporate reporting. We certainly welcome that dialogue and discussion and actively participating in them.

Arabic Knowledge at Wharton: Switching topics to leadership, what are some of the unique challenges of decision-making at the top level?

Nally: At PwC, we have 65,000 people operating in a 152 countries around the world. One of the most critical challenges that any leader has is setting the right tones, setting the right culture, making sure the values of the organization are appropriate and are communicated up and down the whole organization. That’s really essential to everything that we’re doing particularly given the nature of our business.

I can’t emphasize that enough. My leadership team emphasizes that as well. It’s really important to send the right messages about what an organization stands for and what are we really trying to accomplish in clear, concise terms so that every body can understand them. It’s a very important part of the culture at PwC and one that is absolutely essential to our sustainability in terms of what we’re trying to get accomplished.

Arabic Knowledge at Wharton: How do you handle the pressures of, say the public scrutiny or the shareholder pressure and what advice might you have for others who are looking to leaders?

Nally: Our business is not for the faint of heart. Typically, the good work that we do never really gets mentioned because in the nature of an audit or whatever debates and discussions that take place with the client, the management team or an audit committee, when those debates result in a satisfactory answer, that’s the end of the conversation and you move on. It’s only when you have the significant events of 2002, whether they’re business failures or financial reporting failures or frauds as the case may be, that when our profession is under intense scrutiny.

That’s just one of the challenges that we have to deal with. We serve a number of different constituents that have a lot of different expectations. The more we can do as a profession — and certainly the way we think about it at PwC — the more we can do to understand what those expectations are and how those are constantly changing or evolving, the more we can do to meet those changing needs. That is the way that we can really effectively deal with those challenges. One of the most important issues we have to do is we serve the capital markets, is continue to ensure that we are relevant to what the various users of financial report information is looking for. That’s a challenge that we all have and it’s one that we take pretty seriously in PwC.

Arabic Knowledge at Wharton: As leader of PwC, if you could pick one unresolved challenge, what would that be and how would you resolve it?

Nally: One of the biggest challenges we have is when we look at the financial reporting model today or when we look at the financial reporting model five years ago, maybe importantly what it is we see coming down the road over the next five to ten years, that financial reporting model is going to have to continue to evolve, to be responsive to what the public is really looking for. We have a very important role to play in that debate, in that discussion. It’s a very complex question particularly when you think about how different financial reporting is in one part of the world versus another part of the world. It’s fundamentally different in terms of legal liability systems and raises all kinds of interesting questions around what auditors can say and what they can’t say.

If we are going to serve a useful process for the financial and capital markets we have to continually challenge ourselves as to how relevance that process in making sure that we are responding to the needs of a very, very diverse group of people who are using financial information.

I don’t know that I can ever say that issue will ever be satisfactorily resolved because I think it’ll continue to evolve and change over time. But it’s very much something that is at the top of our radar screen, at the top of our priority list and one that we’re very much focused on.