View, Issue 12 — Eyes wide open: Emerging-market business strategies for a new anti-corruption era

issue 12

62Interview with economist Kenneth Rogoff and more...

48The cleantech revolution

36From transaction to transformation

26Focusing on healthcare value

In this issue

viewEyes wide openEmerging-market business strategies for the new, anticorruption era 10

Eyes wide openEmerging-market business strategies for a new anticorruption era 10

Features

View points

10 Cover storyEyes wide open Corruption can have serious consequences for companies and executives. But it’s about more than establishing the best defense: How businesses develop and implement their anticorruption strategies will be the key to seizing global opportunities. Manny A. Alas, David Jansen, and Laura Laybourn

26 Focusing on healthcare value Employers understand that to confront the health - care problem, they must question every aspect of their benefits strategies. Learn about the challenges and solutions that proactive companies are pursuing this year and in the future. Michael Thompson, Benjamin Isgur, and Serena Foong

Departments 2 My view Are you ready for the recovery?Bob Moritz

24 Two views Fighting corruption

68 Your view Financial reporting

70 Rear view Are you prepared to combat corruption—and seize emerging-market opportunities?

4 Securing information in the downturn

5 Facing new risks in the boardroom

6 Investing in functional foods

8 Rethinking business fraud motivations

48 The cleantech revolution Businesses and investors have set their sights on the new smart-energy infrastructures. But some companies are missing out on opportunities they didn’t know existed. Are you among them? Tim Carey

62 Interview Taking stock and looking ahead A conversation with economist Kenneth Rogoff. Interview by Gene Zasadinski

Don’t let corruption-related risk halt emerging-market opportunities, page 10.

viewissue 12

36 From transaction to transformation As deal activity rebounds, leading businesses are seizing the opportunity to use a merger, acquisition, or divestiture as a spring-board for reinventing their companies. Gregg Nahass and Jim Smith Page 46: Alternate routes to M&A Donna L. Coallier

2 PricewaterhouseCoopers View issue 12

Are you ready for the recovery?

My view Bob Moritz

In such an environment, what are com-panies doing to position themselves for post-recession success?

For most executives, cost cutting remains a priority. A majority indicate that they will implement a cost-cutting initiative in the next 12 months. CEOs are also focused on mak-ing major changes to the way they manage risk and to how they allocate investments.

At first, this might appear to be an exten-sion of the “hunkering down” mentality present at many companies during the downturn. But other data contradict that assumption. For example, compared to last year’s survey, significantly more CEOs in the current study expressed confidence about achieving revenue growth in the next 12 months.

The dramatic impact of the recession on global business is clear, and for many, it was worse than expected. In response, most companies cut costs, reduced headcount, trimmed back plans for expansion, and began to rethink their approach to risk.

In my last column, I expressed cautious optimism about our economy and its prospects for recovery. I also drew out a few implications of doing business in a post-crisis world. Now that the recovery is at least on the horizon, I’d like to continue that discussion—this time with the benefit of data from our 13th Annual Global CEO Survey.

What will the post-crisis environment look like? We can’t be entirely sure, but based on our research, we can make some pretty good educated guesses.

In the post-crisis environment, consumers are likely to be much smarter about how they spend their money, and they will be more active in terms of influencing the products and services they’ll buy.

Additionally, access to capital will continue to be a challenge, the gap between rich and poor likely will increase, the G20 likely will become a more dominant political force, regulation is and will continue to be a top-of-mind issue, and governments will become more protectionist.

PricewaterhouseCoopers View issue 12 3

But is this optimism being translated into positive steps to position companies for success? I think so. Despite a challenging environment, businesses are focusing on existing markets for growth and investing in leadership and talent development. Our survey also shows that, over the next 12 months, organizations that will be adding to their workforces outnumber those that will be cutting.

This is not to say that CEOs do not have serious concerns. They do. Topping the list of potential threats is the possibility of a protracted global recession, which is followed closely by over-regulation. In addition, worries about protectionist ten-dencies are up from last year’s survey.

Even such concerns, though, can be viewed in a positive light, as they motivate companies to take stock of their strengths and weaknesses and build new capabili-ties. In short, by anticipating change, and proactively addressing it, companies are poised to cope effectively with today’s challenges, while positioning themselves to seize tomorrow’s opportunities.

Such companies are ready for the recovery. Are you?

If you’re ignoring such areas as R&D and new product innovation, leadership and talent development, strategic technology infrastructure or applications, and capital investments, you’re probably not.

But if you’re paying attention to the basics— prudent investment, focus on people, concern for the environment, attention to customers, awareness of risk, heed to reputation and brand—you most likely are.

This is what successful companies do all the time, regardless of economic circum-stances. These are qualities that transcend temporary economic cycles and see the best organizations through challenging times to long-term prosperity. Already positioned for success, when the recovery comes, they’ll be first to benefit.

That’s my view. What’s yours? We’d like to know. Send us your comments at pwc.com/view.

Bob Moritz is chairman and senior partner of PricewaterhouseCoopers LLP.

If you’re paying attention to the basics—prudent investment, focus on people, concern for

the environment, attention to customers, awareness of risk, heed

to reputation and brand—you most likely are ready for the recovery.


Technology and innovation

Securing information in the downturn

0 10 20 30 40 50 60

Regulatory environment has become more complex and burdensome

Increased risk environment has elevated the role and importance of the security function

Cost reduction efforts make adequate security more difficult to achieve

Threats to the security of our information assets have increased

Because our business partners have been weakened by the downturn, we face

additional security risks

Risks to the company’s data have increased due to employee layoffs

Because our suppliers have been weakened by the downturn, we face additional security risks

56

52

52

43

43

43

42

How does the economy affect information security?

Percent of survey respondents who reported on impacts the current economic downturn has had on their companies’ security functions

Source: PricewaterhouseCoopers, 2010 Global state of information security, 2009

View points

10101010101010101010101010101010101010110101010101010101010101010101010101010101010101010101010101010101

In the midst of one of the most significant economic downturns in decades, no company, department, or program has been spared. One would expect, then, that information security would be subject to similar cost-cutting measures. Surprisingly, though, a recent survey found that the security function is being spared. However, it is facing new challenges arising from the downturn.1

Tightening the purse strings on security is not on most chief information officers’ agendas; in fact, some organizations are investing more in information security. Of the senior executives surveyed, 63 percent expect information security spending either to increase or to stay the same. In fact, the economic downturn is one of the leading drivers of information security spending, ranking second after business continuity/disaster recovery. Companies that are cut-ting back are doing so with restraint. The majority are reducing their spending by less than 10 percent or deferring initiatives by less than six months.

With increased investment, information security initiatives are under pressure to perform. Because of more employee layoffs and greater risks associated with suppliers and business partners, many executives believe that information security is more vulnerable than ever. Threats include a more complex regulatory envi-ronment and other cost reduction efforts that could affect security performance.

The bottom line: In times of uncertainty, infor-mation security cannot be ignored. And companies that invest in protecting their data will not only limit damage to their assets and their reputations but also emerge stronger and more resilient.

1 PricewaterhouseCoopers, 2010 Global state of information security, October 2009.


Board members who want to devote more time to risk management

Percent of directors surveyed

Corporate governance

Facing new risks in the boardroom

For boards of directors, the current eco-nomic environment has brought its own share of challenges. In fact, according to a recent survey of directors, 59 percent agreed that the number one thing that keeps them up at night is unknown risks.1 With uncertainty prevalent in the current climate, do board members feel capable of meeting their responsibility to oversee significant, high-level risks?

The economic crisis has brought its own set of risks. With the ups and downs of the financial markets, corporate scandals, and

the public push for greater regulation, direc-tors are facing new challenges. In fact, 9 out of 10 directors believe there will be greater regulatory oversight stemming from the economic crisis, and 64 percent of directors believe shareholders will have an increasing influence on boards.

Not surprisingly, then, directors say their personal liability is increasing. Whereas in 2008 only 38 percent of directors thought their risk had increased during the prior year, that number rose to 69 percent in 2009.

Despite such challenges, the majority of directors surveyed—88 percent—say they are capable of monitoring corporate risk. And their cautious optimism is evident in their desire for greater focus on risk. In fact, 66 percent of directors surveyed in 2009 say they would like to spend more time on risk management, up from 34 percent in 2008.

In the end, the buck does stop with boards, and directors know that. Even though they are on the front lines of some new challenges, directors seem ready to spend more time monitoring significant risks.

1 PricewaterhouseCoopers and Corporate Board Member, What directors think survey, December 2009.

31%66% 34% 23% 29%

Source: PricewaterhouseCoopers and Corporate Board Member, What directors think survey, 2009

2009

2008

20062005 2004


Strategy and growth

Investing in functional foods

View points

shelves. Soft drinks and dairy products dominate the market, accounting for 60 percent of functional foods.

Consumers are increasingly savvy about the link between food and good health, a change that the food market is trying to capitalize on. In fact, functional food market participants have been drawn to the industry by the potential to charge premium prices to consumers. However, manufacturers have had to be mindful of the higher research and development investment, the ingredient costs, and the specialized technology associated with the fortifying of foods. Those manufac-turers are also being careful to select food-function combinations that would be relatively intuitive to the consumer—such as the popularity of functional yogurt, a food that has long been known to have healthy properties.

In an environment where consumers are becoming more health conscious and baby boomers are battling the aging process, functional foods—foods that are fortified with nutritional or disease- preventing supplements—are invigorating the food industry.1 With estimated yearly sales of $20 billion to $30 billion and projected annual growth rates of up to 20 percent, the fortified foods market could offer investors potentially high returns.

Fortified foods were initially introduced in the 1940s by public health officials to tackle mass health concerns. However, as preven-tative healthcare became more mainstream, control of the fortified food industry moved to the private sector. Cholesterol-lowering margarine, probiotic yogurts, and energy-boosting beverages are all examples of functional foods currently on grocery store

With such high demand and high returns, investors are looking at opportunities—for example, new segments and new niches—throughout the functional food supply chain, but investors in the functional foods market should be aware of potential risks. Barriers to the market include consumer skepticism and large multinational food manufacturers that can often control sig-nificant portions of the market.

Despite those barriers—as well as concerns that the sector is merely a fad—the market continues to grow rapidly. Interested investors could consider acquisitions, joint ventures, or partnerships that focus on the development of technologies to advance food-function combinations or that grow new or underpenetrated health or food categories.

1 PricewaterhouseCoopers, Leveraging growth in the emerging functional foods industry: Trends and market opportunities, August 2009.

The functional foods supply chain

Food and beverage companiesResearch and development; manufacturing and packaging

Agricultural and biotech researchersPlant yield and hardiness, inputs

RetailersDistribution to consumer

Ingredient suppliersFood processing research and development; synthesis and formulation

Source: PricewaterhouseCoopers, Leveraging growth in the emerging functional foods industry: Trends and market opportunities, 2009.


motiv

View points

Economic crime

Rethinking business fraud

Why do individuals commit white-collar crime? Is it because of financial need or anxiety at work, or simply because they can? According to a recent survey on economic crime in the United States, the answer is—all of the above.1

Most people’s perceptions of a typical fraudster may be off base. For example, 76 percent of fraudulent activity is inter-nal and perpetrated by employees. And despite the media attention given to several big cases of economic crimes committed by well-known senior executives,

76%of fraudulent activity is internal and perpetrated by employees.

only 11 percent of reported fraud in the past year was committed by senior management. In contrast, middle manage-ment perpetrated nearly half of the internal fraud suffered by US companies. Another myth is that larger companies are safer because they have more resources to devote to robust fraud detection tools and processes. In fact, 52 percent of all white-collar crimes are committed at companies with more than 5,000 employ-ees, whereas 12 percent of such crimes are committed at companies with fewer than 1,000 workers.

As one might expect, an economic reces-sion adds to the likelihood of economic crime. And indeed, less than 10 percent of executives expect fraud levels to decrease in the current downturn. In the United States, there is a striking relationship between declining financial performance and increasing incidence of reported fraud. The fraud incidence rate among companies suffering a financial decline is 42 percent, which is higher than the rate of fraud among US companies with stable financial performance (17 percent).

The recession has also impacted the perceived reasons economic misconduct is committed. Economic-crime experts point to the confluence of three underlying conditions when economic fraud occurs: pressure/incentive, opportunity, and rationalization/attitude. In other words, those who commit fraud often have an incentive for their misconduct (pressure), see gaps in a company’s fraud risk preven-tion scheme (opportunity), and are able to justify their actions (rationalization).

ations


The majority (53 percent) of US executives surveyed attributes the increased risk of fraud to increased pressures felt during the downturn. Those pressures include the fear of losing jobs, the difficulty of achiev-ing financial targets, and the withholding of bonuses. Those who say opportunities heightened fraud risk cite the top reasons as staff reductions, fewer resources dedi-cated to internal controls, and a shift in management’s focus away from fraud risk. Last, increased rationalization for justify-ing misconduct appears to be driven by the desire to maintain a certain standard of living when wallets are lighter.

Though the downturn has certainly affected fraud risk, most executives say the root cause of increased economic crime is related to corporate culture, as reflected in the pressures and attitudes that permeate an organization. When companies reduce their resources—thereby creating more opportunity for fraud—company culture can sometimes be their only line of defense, assuring that employees behave ethically while man-agement focuses on corporate survival. Strengthening that line of defense—by building a culture where fraud is not toler-ated and those who report it need not fear retaliation—can help companies better deter economic crime.

1 PricewaterhouseCoopers, The 5th global economic crime survey—US supplement, November 2009.

Staff reductions resulting in fewer resources deployed

on internal controls

Weakening of IT controls, resulting in increased vulnerability to

external penetration

0 25 50 75 100

Fear of losing jobs

Financial targets more difficult to achieve

Desire to earn personalperformance bonuses

Bonuses not paid this year

For senior executives to achievedesired financial results

Maintain financial performance to ensure lenders do not

cancel debt facilities

Belief that competitors arepaying bribes to win contracts

Shift of management’s focus toward survival of business

Transfer of operations to new territories

Increased workload of internalaudit staff

Reduced regulatory oversight

0 25 50 75 100

Factors that increase opportunity

Maintain existing standard of living

Others do it and so it’s okay

Reported bonuses earned byhigh earners perceived as unfair

Overlooked for promotion

Factors that increase rationalization

Factors that increase pressure

0 25 50 75 100

47

47

35

24

24

12

6

100

44

33

33

22

11

83

33

17

17

Why fraud occurs

Percent of respondents’ perceived reasons for the risk of fraud

Source: PricewaterhouseCoopers, The 5th global economic crime survey—US supplement, 2009

Eyes wide open

Emerging-market business strategies for a new anticorruption era

By Manny A. Alas, David Jansen, and Laura Laybourn

Cover story


Bribery used to be thought of as necessary to doing business in certain markets. Now, at home and overseas, governments are undertaking corruption crackdowns— with serious consequences for both companies and executives. Yet there’s more at stake than just liability under the Foreign Corrupt Practices Act and other global laws. Partner Manny A. Alas, Principal David Jansen, and Director Laura Laybourn, anticorruption specialists in PwC’s Forensic Services practice, believe that how companies develop and implement their anticorruption strategies will be the key to seizing global opportunities.

Emerging-market business strategies for a new anticorruption era


It’s a question that’s often asked: What are CEOs most concerned about? The company’s managers, shareholders, and suppliers probably run through this guess-ing game regularly. Not a day goes by when company leaders don’t assess their own short lists of unique opportunities and challenges. But there’s one serious risk that many may be overlooking: being unprepared for a new era of international anticorruption enforcement.

Doing business in emerging markets is the norm in today’s global economy, but the rules of engagement have changed significantly over the past few years. Governments around the world are taking tougher stances on corrupt business practices like bribery and money laundering.

For example, in the United States, long-standing regulations that saw little play are now beginning to be applied. In Germany, renewed focus on anticorrup-tion enforcement has sent shock waves throughout Europe.

While many companies have anticorrup-tion compliance programs in place, the programs are often outdated or merely “paper” programs that are not effectively implemented throughout the company. Many organizations take reactive approaches to situations; that is, only when a problem or, say, an enforcement inquiry arises do they mobilize resources and begin to address potential corruption issues. Such an approach most often results in a necessarily increased investment

of time and cost and also results in busi-ness disruption.

In a PricewaterhouseCoopers survey of executives of multinational companies, more than 70 percent of respondents say a better understanding of corruption would help them compete more effectively, make better decisions, improve corporate social responsibility, and enter new markets.1 And almost 45 percent of respondents say they have not entered a specific market or pursued a particular opportunity because of corruption risks.

What company leaders don’t know can hurt them. They are being held accountable even when they have no specific knowledge of the wrongdoing.

1 PricewaterhouseCoopers, Confronting corruption: The business case for an effective anti-corruption programme, 2008.


On the surface, the global emphasis on anticorruption seems positive, creating a more level playing field for those doing business in emerging markets. But here’s the rub: What company leaders don’t know can hurt them. Company leaders are being held accountable—potentially sentenced to jail time, debarred from future business opportunities, fined, and subject to per-sonal lawsuits—even when they have no specific knowledge of the wrongdoing by other company employees or third-party agents and distributors.

In one significant settlement in mid-2009 involving a consumer products company, one of the company’s subsidiaries was charged with paying bribes to customs officials. In the prosecution by the US

27%of those experiencing economic crime in the past 12 months encountered bribery and corruption, which was ranked third behind asset misappropriation and financial statement fraud, according to PwC’s 2009 Global Economic Crime Survey.

Triggers

Deploying corporate intelligence Companies use corporate intelligence—the focused collection and analysis of information for delivering key insights to decision makers—to help them make more-informed business decisions regarding corruption and other risks in emerging markets. In the global economy, business leaders are finding corporate intel-ligence to be an essential tool in regard to many of their new and ongoing business opportunities, including:

• Overseas operations

• Sales to foreign governments

• Business dealings with governments or state-owned enterprises

• Mergers and acquisitions

• Joint ventures and other investment opportunities

• Suppliers or licensees

• Import, export, and transport activities

• Third-party agents, distributors, or consultants

Securities and Exchange Commission (SEC), not only was the parent company fined, but so were two of its corporate offi-cers. The SEC alleged that the then chief operating officer and chief financial officer, as control persons, failed to adequately supervise management and other person-nel who were directly responsible for the company’s books, records, and internal controls. Additionally, the company was named in a securities class-action lawsuit and is in negotiations to settle a multimil-lion-dollar lawsuit by its shareholders.

Board members and senior manage-ment realize the importance of protecting their organizations, yet in an unfamiliar market, how should they manage risks of the unknowns, such as, Is the company

partnering with a reputable entity? Under what practices are competitors operat-ing? Should the company follow through on the acquisition? Is it risky to establish operations in this region or another? What supervision activities will be needed either as part of or after the deal? Should the company proceed with the deal or walk away? What controls will be employed to supervise business activities?

Answering those questions is never simple, but with the right strategy, controls, and due diligence, companies will be prepared to make informed decisions. Beyond that, they’ll be better positioned than competitors to pursue, assess, and take advantage of new business opportunities when presented.


The changing business landscape

Few businesses today can ignore the continued impact of corruption. No matter what the industry or business, the chances are good that when there is global reach—global risk follows. It’s an understatement to say that conducting multinational business is complex. Each region, government, and project has a myriad of variables that must be navigated. But going forward, one thing is certain: an enduring focus on corruption. In the post–September 11 environment, linkages between corruption, money laun-dering, globalization, and terrorism have intersected. There continues to be growing acknowledgment that corruption impedes economic growth, stifling market competi-tion and resulting in lower-quality products and higher prices. Pervasive corruption also hinders a country’s ability to improve its standard of living for its citizens and to sustain foreign direct investment.

In the United States, enforcement of the Foreign Corrupt Practices Act (FCPA) continues to proceed at a record pace. Since 2005, there have been more cases prosecuted than the number brought dur-ing the prior 28 years since the FCPA was enacted. In 2009 there were three FCPA-related trials and 11 companies and 33 individuals named in enforcement actions, with corporate fines totaling more than $600 million.2 Currently, there are more than 100 active FCPA-related investiga-tions under way. January 2010 saw the largest single investigation and prosecu-tion against individuals in the history of the US Department of Justice’s (DOJ’s) FCPA enforcement. In that case, 22 individuals were indicted for engaging in schemes to allegedly bribe foreign government officials in order to obtain and retain business.

Outside the United States, the numbers are much less impressive, but there is growing momentum as well. (See Figure 1.) Coun-tries are criminalizing acts of corruption, establishing anticorruption bodies, creating more transparency in government opera-tions, and instituting codes of conduct for government officials. Moreover, countries are feeling increased international pressure

Active enforcement

Germany 110

Norway 5

Switzerland 16

United States 120

Little or no enforcement

Argentina 1

Australia 6

Austria 0

Brazil 1

Bulgaria 3

Canada 1

Chile 0

Czech Republic 0

Estonia 0

Greece 0

Hungary 24

Ireland 0

Israel 0

Mexico 0

New Zealand 0

Poland 0

Portugal 0

Slovak Republic 0

Slovenia 0

South Africa 0

Turkey 0

Moderate enforcement

Belgium 3

Denmark 13

Finland 2

France 17

Italy 2

Japan 2

Korea (Republic of) 0

Netherlands 3

Spain 3

Sweden 2

United Kingdom 4

Figure 1: Foreign bribery cases in OECD Anti-Bribery Convention countriesEach year, Transparency International issues a report on the progress OECD countries are making in corruption enforcement. The 2009 report covered 36 of the 38 OECD countries and indicates the number of foreign bribery cases undertaken and groups the countries into three levels of enforcement activity, as shown below.

Source: Adapted from Transparency International, OECD Anti-Bribery Convention Progress Report 2009. Copyright 2009 Transparency International: the global coalition against corruption. Used with permission. For more information, visit http://www.transparency.org

2 FCPA blog, 2009 FCPA enforcement index; available at http://www.fcpablog.com/blog/2009/12/31/2009-fcpa- enforcement-index.html.

to combat corruption, as more of them have become signatories to the United Nations Convention Against Corruption (UNCAC)—140 currently—and there are heightened expectations of the 38 nations that have ratified the Organisation for Economic Co-operation and Development (OECD) Anti-Bribery Convention. In time, a sustained global anticorruption framework will inevitably emerge, but it could take decades in certain areas of the world for baseline criteria to be reset.

While the United States and the OECD have led the way in promoting and harmonizing antibribery initiatives, some countries still lag, sending mixed messages with inadequate records on antibribery

legislation, policing, and investigative rigor. Enforcement at times is sporadic and inconsistent, so the unlevel playing field continues. The absence of enforcement in a country does not of course mean that bribery is not expected in business; rather, no enforcement actions could be a red flag for endemic corruption conditions that exist within that country’s society.

Even an emerging market that has not demonstrated a strong record on anticor-ruption may begin to take incremental steps that will assist in setting the expecta-tions of its business partners. One such new tool that we expect to see in play more is the Integrity Pact, which was created by Transparency International, an advocacy

3 Transparency International, http://www.transparency.org/global_priorities/public_contracting/integrity_pacts.

and watchdog group dedicated to com-bating corruption.3 An Integrity Pact is, essentially, an agreement between the government and all bidders to not engage in corruption. The pact uses an indepen-dent monitor to ensure the protocol is being followed by all participants. Our experience in working with countries to set up and monitor such agreements has shown that Integrity Pacts benefit both the public sector and the private sector. For the public sector, an Integrity Pact can contribute to a better-quality project for less cost. It’s also a tangible indicator that the government is committed to reducing corruption.


Personal liabilities

For business leaders, the anticorruption emphasis is hitting very close to home, as both criminal and civil prosecutions have increasingly focused on individuals. As Assistant Attorney General Lanny Breuer stated recently, the prosecution of individuals continues to be a cornerstone of the enforcement strategy of the DOJ’s Criminal Division.4

A recent criminal conviction resulting from that strategy involved the co-founder of a US-based luxury goods company who became a major investor in a privatization venture to purchase a state-owned oil company. The investor was sentenced to a year and one day in prison for conspir-ing to pay bribes in the forms of several hundred million dollars in shares of stock, cash, and other gifts to senior government

officials. What is noteworthy is that the investor did not personally pay the bribes and it was not contested that the investor did not have knowledge of the wrongdo-ing. The enforcement standard that was applied essentially says that had the investor performed due diligence, the investor would have known about the brib-ery, and therefore this conscious avoidance does not diminish responsibility for the risk.5

In another ongoing prosecution, the Department of Justice pursued both the company and certain of its officers. A US-based industrial products company pleaded guilty to paying nearly $7 million in bribes in 30 countries during nearly a decade. In July 2009, the company was fined $18.2 million, was placed on organi-zational probation, and became subject to comprehensive monitoring. Additionally, eight former executives—including the

CEO, a division president, and sales leaders—were indicted. Two of the indi-viduals pleaded guilty, and the others are set to go to trial in late 2010.6

Beyond criminal proceedings, there’s another reason to take notice: Both com-panies and executives have been subject to serious follow-on actions and investi-gations, including shareholder litigation, tax investigations, and money-laundering probes. For example, in 2008 a technology company paid nearly $3 million in penal-ties, plus another $6.9 million to settle a class-action securities fraud lawsuit brought by shareholders.7

4 Speech at 22nd National Forum on Foreign Corrupt Practices Act, November 2009.

5 Department of Justice release.

6 Ibid.

7 PricewaterhouseCoopers, Corruption crackdown, 2009.

Both companies and executives have been subject to serious follow-on actions and investigations, including shareholder litigation, tax investigations, and money-laundering probes.


On the offense

Undoubtedly, these cautionary tales have made some companies rethink their anticorruption programs: Is our due diligence robust enough? Do we know the business activities of our suppliers? Do our employees understand the policies—and are they putting them into practice? But carefully developing the right compliance strategy is not solely a defensive move.

Getting it right up front can best position companies to take advantage of new opportunities while avoiding possible adverse consequences. With information regarding the competitive landscape, the political risks, and the track records of

potential third parties such as partners and suppliers in a region—information that often must be gained through local, on-the-ground inquiries—management can make more-informed strategic business decisions.

Companies are also beginning to use their anticorruption programs to position them-selves advantageously over competitors. They’re using such programs not only to protect reputation and brand value but also to enhance them. This might be compared to what organizations have done over the years with environmental initiatives: posi-tioning themselves as green companies in order to communicate to customers and business partners that they’re doing the right thing.

1.6 billion USD was paid out by a single company in 2008, in the largest FCPA settlement to date.

It is encouraging to know that consumers say they’re willing to pay a premium for products or services from companies that do not engage in corruption, according to findings from Transparency International’s Global Corruption Barometer 2009, a survey of more than 73,000 individuals in 69 countries. The survey explored the general public’s view of corruption, and half of those interviewed expressed their willingness to pay a premium to buy from a company they perceive to be corruption free. That willingness to pay more did not vary by age, gender, or even household income, but there were variations between countries. More than 64 percent of respon-dents from the United States say they would pay more. (See Figure 3.)


Figure 3: Does anticorruption pay? Percentage of respondents who reported that they would be willing to pay more to buy from a corruption-free company

Source: Adapted from Transparency International, 2009 Global Corruption Barometer. Copyright 2009 Transparency International: the global coalition against corruption. Used with permission. For more information, visit http://www.transparency.org. Percentages are weighted. Groups were defined using cluster analysis

Few businesses today can ignore the continued impact of corruption. No matter what the industry or business, the chances are good that when there is global reach—global risk follows.

highmore than

64%of respondents

COuNTRY/TERRITORY

Austria, Cambodia, Cameroon, Ghana, Hong Kong, Israel, Kosovo, Lebanon, Liberia, Morocco, Pakistan, Philippines, Senegal, Sierra Leone, Singapore, Uganda, United States, Venezuela, Zambia

upper-mediumbetween

46-64%of respondents

COuNTRY/TERRITORY

Armenia, Bolivia, Canada, Colombia, FYR Macedonia, Greece, Iceland, Indonesia, Iraq, Kenya, Kuwait, Luxembourg, Malaysia, Nigeria, Panama, Peru, Portugal, Russia, Thailand, United Kingdom

lower-mediumbetween

30-45%of respondents

COuNTRY/TERRITORY

Argentina, Azerbaijan, Brunei Darussalam, Chile, Croatia, Denmark, El Salvador, Finland, Georgia, India, Italy, Japan, Mongolia, Netherlands, Norway, Serbia, South Korea, Spain, Turkey, Ukraine

lowless than

30%of respondents

COuNTRY/TERRITORY

Belarus, Bosnia and Herzegovina, Bulgaria, Czech Republic, Hungary, Lithuania, Moldova, Poland, Romania, Switzerland

Figure 2: Total FCPA actions, 2009

Securities and Exchange Commission

17 Department of Justice

12

Sources: DOJ, PwC analysis, SEC


CPI 2009

9.0–10.0

No data

8.0–8.9

7.0–7.9

6.0–6.9

5.0–5.9

4.0–4.9

3.0–3.9

2.0–2.9

1.0–1.9

Figure 4: Which markets are perceived to be prone to corruption?Wherever companies do business, there is the potential for corruption. But some locales are more likely to pose a risk. Transparency International’s annual Corruption Perceptions Index (CPI) measures the perceived levels of public-sector corruption in 180 countries and territories around the world. Below is a representative sampling of country rankings and a map that shows global CPI rankings.

Highly clean (10)

5 9.4New Zealand

5 8.7AustraliaCanada

5 7.7JapanUK

5 3.7

BrazilColombiaPeru

5 2.8

EgyptIndonesia

5 3.3MexicoMorocco

5 1.9AngolaVenezuela

5 7.0

Qatar

5 6.7ChileUruguay

5 4.7

South Africa

5 4.5 Malaysia

5 6.1Israel

5 2.2

Russia

5 5.5

South Korea

5 5.0

Poland

Sweden9.26

Somalia1.16

Germany8.06

France6.96

CzechRepublic

4.96

PakistanPhilippines2.46

IndiaThailand3.46

Argentina

2.96

UAE6.56

Turkey4.46

Botswana Taiwan

5.66

Hungary5.16

China3.66

US7.56

Iraq1.56

Highly corrupt (0)

Source: Adapted from Transparency International, Corruption Perceptions Index. Copyright 2009 Transparency International: the global coalition against corruption. Used with permission. For more information, visit http://www.transparency.org


Getting with the program

For many companies, seizing new oppor-tunities requires building out existing anticorruption programs and moving them from a compliance-only focus to a truly functional and publicized one. For a smaller number of organizations that don’t have a program in place, it means starting from scratch.

When companies enhance their approaches to anticorruption, they’re laying a strong foundation to minimize risks and maximize opportunities in emerging markets. On the risk side, a strong anticorruption focus helps safeguard assets, revenue, invest-ments, and reputation. On the benefit side, it can help improve the efficiency of opera-tions. Additionally, a strategic focus can also strengthen a company’s competitive advantage among organizations, govern-ments, and consumers that want to be associated with business integrity.

For example, a company may be viewed as being better prepared to conduct busi-ness with state-owned entities. Or it may be able to more rapidly enter adjacent mar-kets given its well-established programs and processes. When conducting mergers, acquisitions, or divestitures, a company may be able to do so in a more timely manner and on more favorable terms.

Developing the right approach requires focusing on how organizations operate both inside and outside the company walls. This often starts with defining clear com-pany policies and procedures for global anticorruption compliance—with a view to establishing an overall compliance frame-work with a detailed underlying strategy. Such policies and procedures set forth expectations of how employees, business partners, and third parties are to conduct themselves; and they identify what is con-sidered unacceptable behavior that might violate company policy.

Areas addressed in leading anticorruption policies include protocols for dealing with third parties, payment processing, expense reporting, and training require-ments. Companies may also need to address how employees are expected to conduct themselves outside of their employment, including conflict-of-interest provisions, such as safeguards against employees involved in self- or side-dealing and consulting engagements. These areas can also impact a company’s anticorruption compliance.

Many companies find that before they can put effective controls in place, they must first take a close look at their business processes to determine where they interact with various third parties, including govern-ments, and where they may be most at risk. In particular, they may focus on the following areas: high-risk countries, state-owned or -controlled entities, excessive


commissions and/or compensations, cash payments required to entities or individu-als, and required gifts and donations.

Adequately monitoring and controlling the company’s third-party payments is a risk area. Regulations keenly focus on pay-ments that are on a company’s books but cannot be explained or that are insuf-ficiently detailed, or that are characterized falsely. Payments that may potentially be in violation of local laws as well as tax regula-tions are often overlooked because at first glance they do not appear to be material. Companies try to put in place policies and procedures to identify noncompliant payments that might uncover potential corruption concerns. One way to achieve better transparency is to streamline and integrate disparate systems and processes.

In addition to establishing policies, sys-tems, and controls, companies need to consistently train and test what they have put in place. Training is where the policies can take on true meaning for employees, who can thereby become equipped with skills for dealing with certain situations, for knowing where to turn for help, and

for being able to produce applicable responses. If employees don’t understand what’s expected and what’s at stake for the company and for individual employees, anticorruption efforts will not be effective. Companies find it beneficial to conduct training at regular intervals for all employees to review policy and address the impacts of international anticorruption standards. In particular, they may also customize the training specifically for employees in sales, accounting, internal audit, compli-ance, and legal.

Establishing accounting controls and conducting training provide employees with the necessary tools and knowledge, but there is little guarantee that employees will put the tools and knowledge into practice. Performing field visits to deter-mine whether employees truly understand and are following a company’s policies is a leading practice. Such tests enable com-panies to find out whether their programs and controls are working effectively. The tests also enable companies to continually refine their approaches and implement industry-leading practices, particularly in high-risk regions or countries.

For example, an electronics manufacturer we worked with wanted to determine just how effective its compliance programs were in two of its operations based in China. The assessment revealed that there was a gap between company policy and practice, particularly in the areas of training and expense reporting. Another manu-facturer sought to determine whether its current policies were inadvertently violating regulations. The company had routinely paid for government and state employees to come visit its sites, an accepted practice. Yet on occasion, the visitors often went on side trips to tourist locations. After an investigation, the company changed its processes and controls to avoid such conflicts in the future.

Due diligence the smart way

One way that companies make the right business decisions regarding corruption and other risks in emerging markets is through foresight and due diligence. The foundation for such efforts is corporate intelligence, which consists of the focused collection and analysis of information used for delivering key insights to decision mak-ers and advisers regarding a major business consideration or corporate action.

70%of global executives say a better understanding of corruption would help them compete more effectively, make better decisions, improve corporate social responsibility, and enter new markets.


Conducting due diligence and leveraging corporate intelligence are especially important when a company is acquiring entities or assets in new markets or enter-ing into new arrangements with local business partners. With the right informa-tion, companies are better prepared to negotiate favorable terms and limit risk. For example, a US energy company we worked with was interested in purchasing a manufacturer in Russia. The company wanted to identify potential business risks and determine what issues might be inherited in the acquisition. As a result of a thorough investigation, the company was well positioned to negotiate highly cus-tomized terms, address personnel issues at the outset, and establish appropriate mitigating controls as part of structuring this strategic business decision.

A US pharmaceutical company that planned to expand its product distribution into Mexico also benefited from this approach. The company wanted to hire a third-party representative to help navigate local Mexican government requirements and

procedures. Through corporate intelligence, the company discovered that though the representative had strong credentials and relationships with key government ministries, on-the-ground inquiries revealed a number of red flags. For instance, the representa-tive had no specific expertise in the firm’s area of interest, but more important, the individual required a contingency fee not in line with industry standards. Rather than walk away from the table at the first signs of corruption risk, the company was able to manage the local risks, seek out a more viable market-penetrating strategy, and pursue its business opportunity with deeper knowledge of the market.8

In an acquisition, due diligence is important both before and after the deal closes. In essence, businesses that buy companies with potential corruption issues are also buying the liabilities that extend to those risks. By identifying risk-relevant informa-tion—including legal, regulatory, financial,

ethical, or other potential issues—compa-nies can be better prepared. As part of due diligence procedures for a corporate entity, for example, the following areas would be analyzed: the general business and corpo-rate backgrounds, the shareholders and directors, any litigation or regulatory issues, and international and local-language media coverage. For due diligence on relevant individuals, the following might be analyzed: personal and employment histories, corpo-rate affiliations and ownerships, criminal histories, civil litigations, and international and local-language media coverage.

If a company is on the sell side of a deal—conducting a divestiture—due diligence can be highly insightful in regard to whether a deal could likely pass through the local regulators and at what speed and whether the deal would have nega-tive or positive reputational impact. Areas analyzed here include the purchaser’s past performance, strategies, key management, and ownership structure—all of which can play into accelerating or moving the deal along, so as not to lose out on the next bidder in line. It’s about being an informed negotiator regardless of which side of the deal you happen to be on.

The focus often shifts after the deal closes—for example, to establishing regular anticorruption communications from company leadership, rapid deploy-ment or streamlining of the anticorruption program’s components with rigorous training, adjustments of monitoring and enforcement procedures, and installation of compliance oversight and supervision of third-party intermediary activities.

Independent corporate intelligence collec-tion and enhanced due diligence not only make business sense by supplying busi-ness leaders with information critical for making sharper risk-based decisions but also serve to demonstrate to regulators that the company is committed to integrity and corporate governance.

45%of global companies say they have not entered a specific market or pursued a particular opportunity because of corruption risks.

8 PricewaterhouseCoopers, 10Minutes on combating corruption, 2009.


Leveraging corporate intelligence

Beyond transactions, corporate intel-ligence plays a vital role in highlighting potential areas of risk a company may face in emerging markets. These may include legal, regulatory, operational, security, personnel, intellectual property, and information technology risks.

Companies may be surprised at what they find. For example, medical device com-panies doing business with employees of state-owned hospitals in China may be working with individuals considered public officials. Or financial services firms may be working with a sovereign wealth fund without a full understanding of the fund’s ownership structure and therefore not be aware of whether they’re doing business with a public official. This need to take a second look to reassess relationships with individuals or companies with which an organization is already doing business is an important element of a successful compliance program.

A common agent from one investiga-tion set off a wave of other investigations involving many more industry companies. For example, after an oil services firm was found to have paid bribes to Nigerian customs officials through its freight forwarder, the DOJ investigated 11 of the firm’s competitors and an oil production company that used the same logistics sup-plier. In 2007, an industry-wide probe of orthopedic device makers was conducted, including payments made to public hospital healthcare professionals.9

Companies find that once they’ve collected and analyzed corporate intelligence, it is beneficial to continue this practice—continually providing for their management certain key take-aways and lessons learned about the local operating environment and the spectrum of potential risk they may face in the marketplace. For this protocol to have true utility and actionable potential, the find-ings are provided to appropriate decision makers and advisors so that they may

plan and take specific measures, formalize contingencies, or adapt their strategies or practices when necessary.

Facing the challenge

In today’s business environment, com-pany leaders are faced with laundry lists of competing priorities. Focusing on an anticorruption strategy may not at first appear to warrant the allocation of valuable resources when corruption enforcement or corruption-related business disruptions have never been issues before. Such focus gives little guarantee, however, that they won’t impede opportunities or tarnish a company’s reputation at a critical juncture when the organization is vying for favorable position, not to mention the tremendous financial impact they could exert.

Cultivating the right anticorruption strat-egy is about so much more than putting up the best defense. A sound anticorrup-tion strategy, which includes transparent and integrated systems with robust due diligence protocols, is crucial for compa-nies doing business in virtually any market. Opportunities in developing markets bring

inherent and unforeseeable risks; and bal-ancing the two with effective anticorruption programs prepares organizations to reduce the potential risks at the outset, to more effectively handle any risks as they arise, and to maintain uninterrupted focus on innovation and competitive positioning.

Moreover, while not a widely embraced concept to date, a well-wrought anti-corruption strategy can make for a real competitive advantage. More and more, governments and business partners are seeking to do business only with companies of the highest integrity. And consumers, as they did with environmen-tally friendly products and services, are beginning to take the corruption factor into account when making purchasing deci-sions. Companies that consider all of these factors in formulating their approaches to anticorruption will find themselves better prepared to take advantage of new oppor-tunities both at home and abroad.

Manny A. Alas is a partner, David Jansen is a principal, and Laura Laybourn is a director special-izing in anticorruption strategies in PwC’s Forensic Services practice.9 PricewaterhouseCoopers, Corruption crackdown, 2009.


“ Corruption is recognized to be one of the world’s greatest challenges. It is a major hindrance to sustainable development, with a disproportionate impact on poor communities and is corrosive on the very fabric of society.” UN Global Compact

Two views

Corruption is considered a global epidemic that costs the economy more than $1 trillion annually, according to estimates by the World Bank Institute. In recent years, the public and private sectors around the globe have begun working together to change that situation, attempting to level the playing field for citizens, nations, and businesses. Following is an overview of their efforts.

Public sector

Impacts of corruption

• Undermines social, economic, and environmental development

• Deters foreign direct investment

• Contributes to lower quality and higher costs of goods and services

Guiding frameworks to combat corruption

• OECD Anti-Bribery Convention

• United Nations Convention against Corruption

Actions taken to reduce corruption

• Criminalizing acts of corruption

• Collaborating with other governments to prevent transnational corruption

• Creating anticorruption bodies, such as a supreme audit board or specialized enforcement agencies

• Creating effective legal systems for seizing, freezing, and confiscating the assets or proceeds of a crime

• Developing transparency in government operations and public procurement and establishing enforceable codes of conduct for government officials

Benefits derived from an anticorruption focus

• Contributions to economic and social development

• Signals of real commitment to citizens and the international community

• Creation of a more level playing field for businesses evaluating opportunities in the market


“ The impact on the private sector is also considerable—[corruption] impedes economic growth, distorts competition and represents serious legal and reputational risks.” UN Global Compact

Private sector

Impacts of corruption

• Creates unfair competitive environment

• Limits business opportunities

• Increases risks and costs of doing business in certain markets

Guiding frameworks to combat corruption

• UN Global Compact

• Transparency International’s Business Principles for Countering Bribery

Actions taken to reduce corruption

• Issuing clear company policies on what constitutes unaccept-able behavior and enforcing the prescribed consequences

• Thoroughly and regularly training employees to address the enforcement of international anticorruption standards

• Routinely conducting due diligence on third parties, such as agents, sales consultants, distributors, and vendors

• Performing due diligence on business partners, personnel, and contracts

• Performing frequent field tests to determine whether employees understand company policies and testing the adequacy of existing programs and controls

• Streamlining and integrating payment systems to easily see where, why, and how much money is being spent

• Regularly testing payment systems and controls to ensure all expenditures are accounted for

Benefits derived from an anticorruption focus

• Protection—and enhancement—of reputation and brand value

• Mitigation of risk in new market activity, vendor relationships, and procurement efforts

• Operating within anticorruption and antibribery laws and regulations

• Safeguarding of assets, revenues, and investments

• Improvement of operational efficiency and lowering of costs

• Minimizing of sanctions and operational impact should an incident occur

• Increase in competitive advantage with those organizations, governments, and consumers that want to do business with companies of the highest integrity

Healthcare

Focusing on


Today, there’s no sure thing when it comes to healthcare—except ever-increasing costs. Employers understand that to confront the problem, they must question every aspect of their benefits strategies. And performance and results are becoming the new criteria by which everything is assessed. Michael Thompson, PricewaterhouseCoopers’ health industry leader for employers, and Benjamin Isgur and Serena Foong, research leaders with PwC’s Health Research Institute, discuss the challenges and solutions that proactive companies are pursuing this year and in the future.

The healthcare problem certainly isn’t new. But the recession, ongoing healthcare market changes, and the lingering pros-pect of healthcare reform have increased the pressure US businesses are feeling. Something’s got to give—and employers realize this means reevaluating everything they are currently doing as well as asking themselves, Are we maximizing the value of our healthcare dollars? Are we having a positive impact on our people’s health and their performance? How do we know?

By Michael Thompson, Benjamin Isgur, and Serena Foong

While federal analysts recently reported that US health spending grew only 4.4 percent in 2008—its slowest rate in nearly 50 years—overall health spending, which reached $2.3 trillion in 2008, or $7,681 per person, still increased faster than the overall economy. Health spending was 16.2 percent of gross domestic product, up from 15.9 percent in the year prior.1 For 2010, PwC forecasts a 9 percent growth in medical costs, which is slower than in previous years but which will still outpace both inflation and workers’ earn-ings increases.

Employers are taking a hard look at their benefits strategies. Here’s why performance and results matter more than ever.

1 Micah Hartman, Anne Martin, Olivia Nuccio, Aaron Catlin, and the National Health Expenditure Accounts Team, “Health spending growth at a historic low in 2008,” Health Affairs, January/February 2010.

To help offset those growing costs and help ensure they’re getting returns on their healthcare investment, employers are considering new approaches and revisiting existing ones. Strategies that top their lists include (1) developing a culture of health wherein employees are better engaged in their own health and produc-tivity, (2) realigning incentives to promote and reinforce better health behaviors and

more-thoughtful healthcare consump-tion, (3) reexamining healthcare delivery to reduce gaps in evidence-based care and channel toward higher-value models, and (4) collaborating with their vendors to drive better outcomes and help bend the curve in healthcare costs.

In a recent PwC survey, when employers were asked which strategies they plan to implement over the next two years, improving wellness, along with increasing cost sharing, led all responses,2 yet there was a high degree of skepticism about the effectiveness of these approaches.

Employers are considering new approaches and revisiting existing ones.

2 PricewaterhouseCoopers’ Health Research Institute, Behind the numbers: Medical cost trends for 2010.

Key drivers of healthcare value• A culture of health

• Realigned incentives

• Value-based delivery

• Performance management

Says Jim Greenwood, CEO of healthcare service provider Concentra, Inc., “The past year’s focus on healthcare reform has brought a lot of important issues to the forefront, most importantly the rising cost of care. Employers continue to seek ways to trim their healthcare costs while still being competitive in the market with a fair health benefit offering. Instead of eliminating benefits, more employers are implementing comprehensive health pro-grams that positively impact the health of the workforce and reduce healthcare costs for the company and the individual.”


Creating a healthy and productive culture

Employers are seeking ways of develop-ing cultures of health in which employees are intrinsically motivated to take care of themselves and lead healthy and produc-tive lives. Much as it has played a crucial role in transforming safety efforts, preven-tion, along with wellness, can mitigate the onset of chronic disease, thereby avoiding the high costs of treatment and the indirect costs associated with loss of productivity. When chronic illness does occur, it also needs to be managed with a mind-set of prevention to avoid the costly complica-tions of poor health management. Almost 75 percent of healthcare costs are now attributable to behavior- and lifestyle-induced chronic conditions, such as heart

3 The Henry J. Kaiser Family Foundation, U.S. healthcare costs, August 2009.

4 PricewaterhouseCoopers, Health and well-being touchstone survey, 2009.

disease and diabetes,3 representing a shift from the past, when catastrophic events were the leading cost drivers.

Another recent PwC survey indicated that 78 percent of large employers (those with greater than 5,000 employees) already offer wellness programs to eligible individuals, yet less than 40 percent of workers enroll in them; 83 percent said they offer disease management programs, but typically, only 15 percent of eligible employees participate.4

Failure to participate in these programs is symptomatic of the lack of engagement of employees in their own health. This is a missed opportunity—both for workers, who could be preventing or better man-aging disease, and for employers, which could be reaping greater returns on invest-ment via these programs. The low level of employee engagement has been a leading cause of concern for existing health and wellness programs. In fact, most of the employers that offer wellness and dis-ease management programs are not fully convinced their programs are effective in mitigating healthcare costs, in improving employee performance and productivity, in enhancing employee engagement, or in reinforcing their corporate image. (See Figure 1.)

Figure 1: Employer satisfaction with health and wellness programs Percent of respondents

How effective is your health and wellness program at:

0

100

20092008 20092008 20092008 20092008

8

40

46

6

7

46

44

3

16

43

36

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9

33

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36

11

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41

7

Mitigating healthcare costs Improving performance and productivity

Enhancing employee engagement

Reinforcing corporate image

Very effective Somewhat effective Minimally effective Not effective Source: PricewaterhouseCoopers, Health and well-being touchstone survey, 2009


Yet there are those companies that stand out from the rest, having succeeded at improving the health and productivity of their employees by creating a culture of health. At those companies, the critical ingredients often start at the top and are integrated into the fabric of the organiza-tion—not surprisingly, the same ingredients that have been essential in driving safe environments and quality-focused cultures. Furthermore, by leveraging data to better understand the diverse needs of their workforces, employers become able to personalize support and enhance the rel-evance and effectiveness of interventions.

Getting employee attention by realigning incentives

Leading employers are also reevaluat-ing the role of incentives. For example, consumer-directed health plans incent and enable employees to make cost-conscious purchases while maintaining financial incentives to focus on prevention. When incentives are aligned with desired behav-iors, employers have been more successful at fully engaging employees as active participants in those employees’ health

and wellness decisions—and the resulting costs. However, simply charging consum-ers high out-of-pocket fees may reduce costs in the short run but could lead to poorer clinical outcomes over the long run.

Value-based-benefits design brings consumerism forward to a new level, allocating reimbursable health costs in a way that leads to and helps optimize patient health. Value-based benefits do that by encouraging customer demand for high-value services, consisting of medically necessary utilization of evidence-based, cost-effective medical services, while also discouraging use of low-value services, which are those with weak evidence bases. With value-based benefits, employers use so-called nudge theory to help consumers in the decision-making process by (1) charging patients more in specific situations where behavior can be changed to save money and (2) lowering patient barriers for high-value services to optimize health outcomes. When employees share the burden—or the benefit—of making prudent healthcare choices, both the company and the employees win.

When employees share the burden—or the benefit—of making prudent healthcare choices, both the company and the employees win.


10%of employers surveyed already provide work-site clinics.

5 PricewaterhouseCoopers, Health and well-being touchstone survey, 2009.

Whether through premium reductions, benefit enhancements, or gift card pro-grams, incentives can also boost program participation, which in turn helps change employee behaviors and ultimately improve employees’ health and well-being. While most employers today focus such incen-tives on increasing participation in personal health-risk assessments, more are looking at how to target broader health behaviors and sustainable improvements in health. Some have made good behaviors the default options in their benefit plans by lim-iting availability of the richest plan to those who do the right things. There may also be help on the horizon through proposed healthcare reform, as some proposals would permit employers to offer premium discounts of up to 30 percent for employee participation in wellness programs.

In addition, 10 percent of the employers we surveyed in 2009 say they’re provid-ing work-site clinics, up from 1 percent in 2008.5 The characteristics of a work-site clinic vary depending on several factors such as number of employees, geographic work locations, and employer’s level of investment and services desired. Today, most work-site clinics, of which there are about 2,000 in the United States, fall into one of the following models: self-managed, contracted provider, third-party vendor, or shared resource.

Companies are discovering that establish-ing work-site clinics has many benefits, including the potential for on-site primary care, which improves access while reducing absenteeism and increasing productivity. In addition, by providing

Innovating delivery to improve value

New models of delivery are emerging that support higher quality and reduced varia-tion around best-practice medicine. The medical home model is increasingly being promoted as a back-to-basics approach whereby the individual’s primary physician offers more-intensive, more-individualized, and more-coordinated care to support the overall health of the patient. By improv-ing personal physician engagement and enhanced patient coaching of healthy hab-its, outcomes have been improved, costs reduced, and overall patient experience enhanced. Employers are increasingly looking at how to channel their employees and employees’ families toward higher-value providers.

nutritional counseling in the workplace, on-site primary care clinics provide a means of combating rising obesity, which is driving up employer health costs. Moreover, new studies show that influencers can have effects on patient adherence to medica-tions. According to a study published in the American Journal of Managed Care, adherence to medication is nearly 10 percent higher among patients who use work-site clinics rather than community clinics. That increased adherence can lead to a healthier workforce at a lower cost.6

Pitney Bowes is a good example. The company has set up on-site clinics and has also changed its pharmacy model so it can provide drugs for high-cost conditions like heart disease and asthma at low coinsurance levels. One of the

advantages for employees is the nurses and nurse-practitioners who assist employees in navigating the broader health system, helping them access services from primary care doctors and specialists. Through these and other efforts, includ-ing a focus on creating a culture of health in the workplace, Pitney Bowes has seen decreased numbers of emergency room visits and increased levels of medica-tion compliance, which have resulted in reduced costs for the company.7

Still other companies are increasing deliv-ery value through technology. Through online medical records, personalized reminders, e-visits, and e-prescribing, quality can be enhanced by reducing gaps in care while efficiently guiding consumers to take good care of themselves.

Raising the bar with payers and providers

As they consider their strategies for worker health, employers are looking to other key stakeholders to help forge solutions. According to PwC’s latest survey, employers’ satisfaction with their health insurers eroded during the past year. In fact, large-employer satisfaction decreased by an average of 5 percent, from 64 percent to 59 percent.8 (See Figure 2 for a breakdown of satisfaction levels by services.)

For the overwhelming majority of large employers, health benefits remain important links to their workers. We are seeing leading employers establishing productive dialogues with insurers, letting them know what is expected. For example, a productive dialogue could include discussions about the expectation that insurers will act as true partners rather than merely claims administrators.

Employers say they want insurers to address and reduce waste in the system. Nearly 80 percent of employers surveyed view administrative fees as critical/important. Insurers can look beyond the provider-discount strategy to demonstrate their knowledge of opportunities in the care delivery process and by educating employers that discounting isn’t the best way to reduce spending.

6 Bruce W. Sherman, MD; Sharon Glave Frazee, PhD; Raymond J. Fabius, MD, CPE; Rochelle A. Broome, MD; James R. Manfred, RPh; and Jeffery C. Davis, MBA, “Impact of workplace health services on adherence to chronic medications,” American Journal of Managed Care, July 2009.

7 PricewaterhouseCoopers, What employers want from health insurers in 2010.

8 Ibid.

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Figure 2: Percent of large employers that say they are extremely satisfied or satisfied with services

Source: PricewaterhouseCoopers, 2009 Trendsetter and Management Barometer surveys


9 US Department of Health and Human Services Handbook.

10 Ibid.

11 PricewaterhouseCoopers, Jammed acces: Widening the front door to healthcare, July 2009.

12 Ibid.

Value through innovation

Putting technology to workToday’s health technology innovations are designed to take cost out of the system and make access to healthcare more convenient for both healthcare providers and their patients. While some of these technologies are more mature than others, providers and employers are beginning to implement them to reap the benefits.

Electronic health records An electronic health record (EHR) is an individual’s record containing important information about personal health and treatment (for example, lab reports). EHRs, maintained and used by a patient’s doctors and hos-pitals, allow all of the patient’s providers to gain access to the same information re-garding conditions, tests, treatments, and prescriptions. EHRs not only are efficient but also help lower the chances of medical errors, thereby improving a patient’s overall quality of care.9

Electronic prescribing This is a quick and convenient way for doctors or other healthcare providers to send prescriptions to a pharmacy by using a secure computer. E-prescribing helps improve patient safety by reducing medication errors due to inac-curate dosing, drug interactions, and other issues related to human error, improving the quality of healthcare for employees. E-prescribing also enables prescribers to see which drugs an employer’s plan offers, including less-expensive generics that can save employees and companies money.

Personal health records A personal health record (PHR) is a record that holds information about an employee’s health. The employee maintains and keeps the PHR for easy reference. This user-friendly, online tool enables employees to quickly and conveniently manage their health information via the Internet. With a PHR, an employee can keep track of health informa-tion such as date of most recent physical, major illnesses, operations, allergies, and medications. The more informed employees are, the healthier they will remain.10

Consumer online tools Consumers who say they would use the Internet for health-care delivery indicated e-mail consultations as the most preferred method, followed by online consultations. One in two consumers surveyed say they would be likely to seek healthcare through online consultations. In Hawaii, more than 4,000 patients have already engaged in online consultations with physicians since the Hawaii Medical Service Association (HMSA) launched the service early in 2009. As of now, patients using HMSA’s

round-the-clock service can access physi-cians as needed through Web-based videoconferencing, secure chat, or web-site, and they may select physicians from more than 20 specialty areas.11

Telehealth Organizations are using tele-health technologies to expand patients’ access to specialists, to manage costs, and to increase patient satisfaction. For example, the Veterans Health Administra-tion has reduced health system utilization by 30 percent by using these technologies over the past six years and is now seeing satisfaction scores of 86 percent.12


Employers also want to partner with insurers that can improve the health of their workforces. Insurers can respond by becoming advocates for employers and their health strategies—managing relevant health information, profiling workforces to help employers improve outcomes by identifying early intervention points, and ensuring that the plans they provide work consistently year after year.

The number of employers that view disease management as critical to their businesses is up eight percent from a year ago. Employers want measurements that will help them determine whether inter-ventions work. Insurers can respond by collaborating with the patient, the doctor, and the employer to create an information exchange with an eye toward producing higher-quality outcomes for employees while saving money.

Participation in wellness assessments with the current financial incentives is hovering around 50 percent, with biometric- screening participation decreasing by an average of 10 percentage points from last year. Insurers can respond by updating engagement techniques where needed—for example, where prevention screenings or chronic disease management might

require instant and constant feedback and relatable stories of coworkers’ having over-come similar health challenges. In addition, they’re taking a fresh look at how incentives are being used.

Employers also want more-meaningful and higher-quality data to help them control costs and keep their workers healthy. Nearly 60 percent view reporting capabili-ties as critically important, yet 30 percent say their insurers don’t have such capa-bilities. Less than 30 percent say they are satisfied with their insurers’ ability to prepare risk profiles for certain popula-tions. Insurers can respond by improving their data collection capabilities to better analyze and triage member data, thereby helping employers to prioritize areas for cost control and to target different cus-tomer types with varying needs in order to increase participation in wellness.

Sixty percent of employers say it is important for insurers to offer online consumer tools; 45 percent say the same about personal health records (up from 38 percent in 2008). Yet overall satisfaction with those tools dropped by 10 percentage points over the past year. Insurers can respond by accelerating their adoption of such tools to make access to personal health information more convenient.

Companies are having similar conversa-tions with their healthcare providers. Since consumers say they prefer that their clini-cians practice as a team and since care coordination has been shown to reduce volume, increase access, and improve quality of care, companies have found it pays to encourage providers to engage in team collaboration. One-stop shopping is more efficient, more cost-effective, and more convenient for patients.

Also, since technology and data transpar-ency can increase patient engagement, physician productivity, and operational efficiencies, companies are encouraging providers to accelerate implementation of information technology innovations designed to reduce costs and enable both practitioners and patients to easily access various types of medical information right in the office. Not only is this a convenience for employees, but it can also be a boost to employee productivity.

Looking ahead

Employers continue to search for innovative approaches that will engage their employees and generate more value from current relationships. Companies that are proactive in their approaches today will position their organizations to better manage change as it occurs, to achieve significant improvements in the short term, and to reap higher returns on their investments over time.

Michael Thompson is PwC’s health industry leader for employers. Benjamin Isgur and Serena Foong are research leaders with PwC’s Health Research Institute (www.pwc.com/hri).

Employers continue to search for innovative approaches that will engage their employees and generate more value from current relationships.

75% 9%of healthcare costs are attributable to behavior- and lifestyle-induced chronic conditions.

is the expected growth of medical costs in 2010.

7,000USD is the amount of healthcare costs per active employee in larger organizations—those with 25,001 to 50,000 employees—according to PwC’s Saratoga 2009/2010 US human capital effectiveness report. Organizations with 1,001 to 2,000 employees have costs per active employee that are significantly higher: above 9,100 USD.

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Mergers & acquisitions


Like so many things affected by what’s coming to be called the Great Recession, corporate mergers, acquisitions, and dives-titures may never be quite the same. As deal activity begins to ramp up, companies are aware that the stakes have never been higher and are beginning to think about the right strategic moves: More than a third of multinational executives surveyed said that over the next 12 months their companies planned to purchase another business, pursue a spin-off, or sell part or all of a busi-ness.1 In a recent PricewaterhouseCoopers survey, 69 percent of respondents antici-pated increased levels of divestiture activity in the coming year compared with the previous 12 months.2

For some organizations, deals will be about survival; for more progressive companies, they’ll be about looking ahead to the inevitable economic uptick. Either way, the undertaking won’t focus merely on a timely,

well-executed transaction. Now, more than ever, a deal offers the chance to fundamen-tally alter an organization for the better. In short, it’s an opportunity for transformation.

Under the best circumstances, mergers, acquisitions, and divestitures offer possibility and uncertainty. However, the post-financial- crisis landscape brings increased deal complexity, longer timelines to close, and more-rigorous due diligence required by lending institutions. In such an environment, a deal can be the trigger that changes the way an organization conducts business both within and outside the company—from adopting new business models, overhauling operations, and strengthening its management team, to entering new markets and more.

If last year’s strategy was about back to basics and staying the course, for many companies 2010 will be different. One sure sign: deal activity is poised to heat up. In this article, Gregg Nahass and Jim Smith, leaders in PwC’s M&A Integration practice, look at how leading businesses across diverse industries are seizing the opportunity and using deals to reinvent their companies.

By Gregg Nahass and Jim Smith

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1 PricewaterhouseCoopers, Management Barometer, November 2009.

2 PricewaterhouseCoopers, Divestitures in difficult times, September 2009.


How can a company realize profound change through a deal? It takes strategic foresight, executive commitment, and relent-less planning and execution—a tall order, to be sure, but one that many companies are navigating and successfully managing.

Transformation through M&A

When companies consider mergers and acquisitions (M&A), they typically think in terms of deal value and synergies—that is, the advantages that can result from making the most of each company’s strengths, consolidating operations, and reducing costs. This mind-set is fundamental to any deal, but it is no longer the sole focus. More and more, companies are looking at how a merger or acquisition has the potential for transforming their front-office or back-office operations or, in some cases, both.

On the front end, a merger or acquisition can fundamentally change how a com-pany interacts with its customers and trade partners. A business might pursue such a deal in order to (1) keep up with its competition, (2) grow significantly, or (3) redefine the products or services it plans to

sell going forward. One US pharmaceutical company that we worked with conducted the acquisition of a European pharmaceuti-cal company in order to greatly expand its market reach. The US company realized that the deal would affect every aspect of its business. It couldn’t have a siloed approach to integration, so it looked at the transformational impacts on all depart-ments and functions: finance, human resources, global supply chain, commercial sales, legal, research and development, regulatory, and more. That broader and more holistic view helped the company navigate its transformation into a global pharmaceutical company. Prior to the deal, all of its operations had been US based, but with this large-scale acquisition, the company doubled in size overnight and began operating in 30 European countries where it had never done business.

On the back end, there might be transfor-mational opportunities for companies to change internal operations and redefine the way they conduct business. A software or technology company undergoing a merger or acquisition may take the opportunity to reinvent the way it sells products to and

interacts with its customers—an approach we refer to as digital transformation. By taking advantage of the Internet and other technologies, the company could inte-grate the disparate systems and business processes that govern its product devel-opment, sales and marketing, fulfillment, and service and support. The result? A unified customer experience that brings many potential benefits, including interac-tive relationships, customized products, new revenue streams, modernized delivery channels, and lower operating costs.

Transformation through divestiture

Divestitures can also be catalysts for profound organizational change. With divestitures becoming more complex and taking longer to complete,3 the realization of significant benefit can help make up for the more arduous process. To undertake transformation through a divestiture, how-ever, many companies will need to sharpen their focus and processes, because nearly half of executives surveyed admitted that their acquisition processes were more defined than were their established pro-cesses or methodologies for divestitures.4

In a typical transformational divestiture, a company is not only getting rid of under-performing assets, but it is often refocusing its future go-to-market strategy. In addition, a divestiture can present the opportunity to make significant changes to the compa-ny’s operations and processes. Executive leadership and the span of control can change, as can the organizational structure: Will operations be centralized or decen-tralized? Which locations or facilities will expand, and which will consolidate?

3 PricewaterhouseCoopers, Divestitures in difficult times, September 2009.

4 Ibid.


How many different business systems will be required, and what processes will the company use to support its go-forward sales and marketing strategy or support for its products? The responses to these ques-tions can transform an organization.

Consider the case of VeriSign, which is experiencing both market-facing and internally focused transformation through divestiture. During the last several years, the company has completed a few major acquisitions and purchased dozens of tech-nologies, but the initially anticipated benefits did not materialize. “VeriSign has gone through a lot of change,” said Brian Robins, the company’s chief financial officer. “About [two years] ago we decided to focus on our core strategy: the growth of our core products—naming services and authen-tication services. And in order to do that, we had to divest of the companies we had purchased over the prior four-year period.” By refocusing, the company is transform-ing itself—determining how to create a technology, a market, and an industry-sector strategy for growth. “We are coming to the end of a major transformation. We embarked on a divestiture strategy about two years ago in one of the worst financial markets to sell and market companies,” Robins said. “Obviously, the macroeco-nomic conditions that are facing most companies today made that process a little more lengthy than we would have liked.”

The divestitures at VeriSign were so significant that company leaders had to think about all of their functional areas and what the implications of the divestiture program would be to each of them. In cases such as this, a company determines what the financial model will look like, how that translates into the operating model, and how the company will develop plans

69%of executives surveyed are anticipating either similar or increased levels of divestiture activity in the coming year compared with the past 12 months.


to migrate those functional areas to an operating model that makes sense for the remaining business. The company consid-ers everything from what the information technology environment looks like to how the financial systems and processes operate, to whether alternative business models such as outsourcing should be considered. The company creates a road-map to move to something that will provide the right sort of operating model and agility for what it’s retaining versus the functional-ity it may have needed in its previous state. Very early on, VeriSign set its financial model, and then each of the functional owners developed what that picture would look like. And the company continues to work through that roadmap.

Transformation through a carve-out

Many of the transformational opportunities of a divestiture also apply to a carve-out.

These considerations guided Tenet Healthcare—a multistate healthcare provider with a network of hospitals— when it turned a best-in-class internal services division into a stand-alone business, Conifer Health Solutions.

The journey began more than six years ago when Tenet realized it needed better visibility into the financial performance of its revenue cycle. The company achieved this goal by creating a new shared service model of its revenue cycle, optimizing workflows, migrating to a single technology platform from six different ones, and establishing regional service centers instead of operating in 68 locations. It worked—very well.

“The light bulb went on and we real-ized we might have an actual business here. We began to think about this more strategically: Could we create a business? What would it look like? Would anyone

buy business office services from a Tenet healthcare organization?” recalls Stephen Mooney, President of Conifer and the former leader of Tenet’s Patient Financial Services (PFS) division.

To help answer those questions, the com-pany began the creation of a business plan and it conducted market research to deter-mine the appetite for outsourced revenue cycle services to include patient pre-regis-tration and claims processing for example. As it moved forward with planning for the carve-out, it considered which components missing from its in-house department would be required as a more stand-alone business and what resources it could still purchase from Tenet. Building a sales organization to serve a unique market proved to be more challenging than first anticipated and, look-ing back, the company ideally would have started the process earlier and been more targeted in its approach.

An ideal approach is to manage diligence and the upcoming integration as a single process, so the company can identify potential deal value issues as well as operational ones.


Conifer launched in November 2008, and, as is often the case, the business continued to refine its approach. The company initially targeted large hospital networks with a profile similar to Tenet. But the opportunity to successfully work with smaller customers such as individual hospitals enabled the company to expand its market potential. Explains Mooney, “We discovered that they were less expensive to serve than we originally thought, so, that changed our approach pretty dramatically.”

Conifer also learned that while establishing its distinct brand was crucial, it shouldn’t necessarily shy away from being associated with its parent company. “When we started we were almost too wary about using the Tenet name. But we found that everyone remembered the Tenet PFS organization, and we’ve developed a great reputation. Don’t run away from your parent’s brand

Achieving transformation

Strategies for successCompanies that seek to achieve profound organizational change through a deal, consider the following:

Manage diligence and integration in lockstep In a merger or acquisition, an integrated process for due diligence and integration can help companies better identify issues and opportunities. In a divestiture, companies tackling diligence at the same time as they’re planning their future state will reap similar benefits.

Envision and plan for Day One During the deal process, companies that focus on all of the operational details for their new company will be well positioned to hit the ground run-ning as soon as the deal concludes.

Secure leadership commitment When companies pursue transformation, it is essential to establish executive leadership both for the deal itself and for the organization going forward. This includes defining the span of control, responsibility and accountability, and reporting relationships.

Aspire to excellence in deal communication How companies communicate about a deal, both internally and externally, matters. This includes the deal announcement, inte-gration progress, and people plans.

Prioritize initiatives for maximum impact During a deal, companies that don’t try to boil the ocean but, rather, focus on those projects that either generate revenue or drive down cost tend to be more successful in their efforts.

Establish an integration management office Integration in particular requires rigorous program management and realistic timelines. Without a central governance structure and a methodology driving the integration, people may fail to complete important tasks.

Execute quickly and methodically Companies consider all areas touched by the trans-formation and engage the various stakeholders, such as finance, information technology, human resources, legal, operations, and sales and marketing. They also focus on speed, particularly during an integration.

Remember to put people issues first Especially during a transformative deal, it’s critical that the goals for individuals align with the goals of the overall company. People should understand where they fit, what they are being asked to do, and how what they do is associated with the value they provide every day.

too quickly, especially if you have a great legacy to build upon,” says Mooney.

Today, Conifer serves more than 100 hospitals and processes nearly $10 billion in annual net patient revenue, and the organization continues its transfor-mation, setting its sights on building what it sees as a new industry.

For Tenet, the carve-out has also been transformational. Looking at the success of Conifer, Tenet can now evaluate other competencies in the organization and con-sider ways that the company can further diversify itself.

Laying the groundwork

As a company works to define its integra-tion strategy in a merger or acquisition, it ensures that it knows what it’s getting

in the deal. It does that by conducting a thorough diligence effort that’s guided by a process. An ideal approach is to manage diligence and the upcoming integration as a single process. By putting the two together early, the company can identify potential deal value issues as well as operational ones. Knowing about such potential issues in advance helps a company plan and execute its integration strategy and prepares it for Day One— the point in time when both companies operate as a combined entity after a deal. And getting all of the issues addressed has proved to be crucial: What will the new organization call itself? In what ways will employees from both companies begin working together? What areas of the busi-ness will be integrated to capture value? Who are the best people to lead each function? Day One planning encompasses and considers all of those issues.


This is the approach a technology company we worked with took when it undertook a significant acquisition. While the due diligence teams conducted financial and operational due diligence, the integration-planning team captured integration issues and pushed the functional diligence team (which was examining each functional area in order to identify risks and opportunities) to start developing the integration work-plans and budgets. Additionally, each functional team was asked to identify tar-geted synergies they planned to capture.

Companies also carefully plan their deal announcements and consider what infor-mation to disclose during their analyst calls. On one hand, while synergies may be important, companies do not want to overcommit to the market regarding when those synergies will be realized and what the savings will be. On the other hand, if a company has already started integration planning while conducting diligence for the deal, then communicating that information is beneficial. It sets the tone by saying the company has thought the transaction through and has launched integration-planning efforts.

In addition to launching the integration-planning process early, setting priorities is critical. In any deal, companies run the risk of taking on too many initiatives in order to integrate two companies or to focus the remaining business after a divestiture. To improve the likelihood of success, they focus first on the initiatives that either generate revenue or drive down costs. Companies generally find that the 80/20 rule holds true here: They focus on the 20 percent of the activities that they expect will deliver 80 percent of the business impact.

Thanks to those efforts, the company was able to begin integration planning in earnest immediately after the deal announcement. When the transaction closed, the integration teams proceeded at a rapid pace. These actions put the company two or three months ahead of similar companies that complete mergers or acquisitions. With a deal that large, this approach positioned the company well to hit the ground running and quickly integrate the two entities.

23% of respondents to PwC’s Divestitures in Difficult Times survey said that executing the separation of the business is the most complex part of the transaction.


Considering the people factors

Another common pitfall is the insufficient involvement of executive-level leader-ship. When companies are going through a transformation, they find it critical to set leadership for the initiative, as well as to determine leadership going forward.

While many companies understand the importance of having sufficient resources to perform diligence and execute the activities required for a transformation, dealing with the complexities associated with comparing the people issues, busi-ness processes, and supporting business systems that would need to converge in an

effective change communication delivered in the first 100 days postclose positively impacted employee productivity, as well as employee energy, enthusiasm, and morale.5

Companies find it beneficial to engage employees in an ongoing dialogue about the change the organization is undergoing. This approach makes people feel that their views and concerns are being heard, and it communicates to them that critical thought and calculation have been given to the deal or transformation.

acquisition or would need to be in place to support a stand-alone business in a dives-titure or carve-out is very time-consuming. Those important activities often are slighted if enough attention and resources are not applied in the right way.

It’s also crucial to manage people effectively throughout the activity or the timeline. Com-panies must make sure that the goals for individuals align with the goals of the overall company. People should understand where they fit and what their future roles are within the combined entity. In a PwC survey of US companies that had completed mergers or acquisitions in the previous three years,

To improve the likelihood of success, companies focus first on the initiatives that either generate revenue or drive down costs.

5 PricewaterhouseCoopers, Speed of integration improves M&A success, 2009.


Managing methodically

Executing the transformation methodically is crucial, with companies considering all areas touched by the transformation and engaging the various stakeholders. Many groups are involved in helping shape a transformation, such as communications, facilities, finance, information technology, human resources, legal, operations, sales, and marketing. And the chances for success will increase if connectivity and interdependency get established among financial drivers, operational drivers, and people strategies.

The key here is rigorous program manage-ment, which enables a company to convert strategy into detailed actions and to man-age these actions across the combining or diverging enterprises. In acquisitions or mergers, companies we’ve worked with put in place a certain governance

91%of respondents to PwC’s M&A Integration Survey said they achieved “very favorable” or “somewhat favorable” profitability results if deal integration work got completed faster than their company’s typical pace of work, compared with only 62% when work got completed at a slower-than-normal pace.

It’s important to note that integration man-agement is not the same thing as project management. All too often, even the best senior management team can underes-timate the complexity and duration of an integration, particularly a large-scale trans-action that focuses on transformation.

Speed in integration is also essential; a good analogy is the concept of ripping off a sticky bandage. Companies strive to integrate quickly despite the pain involved. The majority of respondents to a PwC survey said they achieved favorable profitability and cash flow results when integration work was completed faster than their companies’ typical paces of work.7

structure—often called an Integration Management Office (IMO)—to align people, processes, and systems with objectives. The IMO is the nerve center of the integra-tion effort—serving as the central touch point for every function and individual involved—and it must be designed to specifically meet the needs of the deal it serves. An IMO with sufficient resources, experienced staffers, and a common timeline and methodology is necessary to ensure that an integration stays on course and that the people involved in the effort focus on the right things at the right times.6 The IMO is also critical for managing the large number of dependencies that arise from the various integration activities that take place across the functional areas.

6 PricewaterhouseCoopers, Integration management office: How to complete the M&A integration process, minimize disruptions, and achieve desired synergies, 2009.

7 PricewaterhouseCoopers, Speed of integration improves M&A success, 2009.


During a transformation, it’s especially important to avoid the disconnects that can occur between the executive team and middle management regarding the time required to achieve the transformation. For example, members of the executive team usually know what they want to do strategically, but many of the implementa-tion details fall to middle managers. Middle managers are the ones who have the level of knowledge to understand how difficult such a transformational set of activities is going to be. Often, the time required for those activities is not necessarily consis-tent with the timeline the executive team has in mind when it makes its initial deci-sions. This further emphasizes the need for robust communication and transparency in the deal or investment thesis throughout the organization.

Maintaining market focus during a transfor-mation is vital. The integration phase of a merger or acquisition can be incredibly dis-tracting. And in divestitures and carve-outs, transformation occurs in routine business as well as in the elements being sold.

Seizing the opportunity

Mergers, acquisitions, and divestitures will be back on the corporate agendas of many companies this year. On their own, such deals are instrumental, positioning some companies for survival and others for capitalizing on a newly changed market landscape. But beyond those fundamen-tals, companies are being presented with incredible opportunities to transform their organizations as they execute their deals, taking the companies to the next levels of operating excellence, market responsive-ness, and profitability.

While never losing sight of a deal’s goals and investment thesis, leading companies are seizing opportunities to use transactions as catalysts for real, meaningful changes both within and outside their organizations. Admittedly, not every deal will be ripe for organizational transformation—through new markets, new products, improved opera-tions and processes, or redefined corporate culture—yet many offer the possibility if it is considered at the outset. And companies that choose to pursue meaningful change will take considered, methodical approaches in order to get there.

Gregg Nahass and Jim Smith are leaders of PricewaterhouseCoopers’ M&A Integration practice.

Companies are being presented with incredible opportunities to transform their organizations as they execute their deals, taking the companies to the next levels of operating excellence, market responsiveness, and profitability.


Beyond M&A

Alternate routesAn acquisition or a divestiture isn’t the only road to transformation. Companies of all sizes continue to pursue innovative business alliances to accomplish their strategic goals.

By Donna L. Coallier

There’s generally more than one way to get something done, as Mark Twain so color-fully reminded readers more than a hundred years ago when he said: she was wise, subtle, and knew more than one way to skin a cat. The same holds true for compa-nies that are trying to execute on promised growth strategies—as has been the case during today’s economic uncertainty. As in the past, when financing is tough to come by and the merger-and-acquisition (M&A) environment less than favorable, compa-nies often turn to alternative transactions to execute strategies that might otherwise require M&A investment. Those alternatives, or collaborations, come in many shapes and sizes and include joint ventures, con-tractual alliances, and other noncontrolling investments. Collaborations may also be attractive in recovering or robust markets. Where they can be used to stimulate growth

while limiting cash outlays or permitting risk sharing with a partner, collaborations can be beneficial in any market.

Even now, as the credit markets loosen and more and more companies are recov-ering their ability to pursue M&A activity, collaborations can still be attractive. In fact, for certain strategies, collaborations may make more sense than traditional M&A pursuits. One example might be de-velopment arrangements for products with long life cycles that require considerable up-front investment. In this environment, collaborations are useful ways of teaming with a variety of partners to bring products through the development phase and to market. Collaborations take the form of risk-sharing agreements between suppliers and customers and are more flexible than M&A because different partners can team together for different products.

At other times, collaborations are useful or even required tools for doing business in a new market, such as establishing opera-tions in China or India with the help of a local partner. Still for others, collaborations offer ways to test the waters before fully acquiring a business or ways to permit another company to leverage and further develop a brand. And finally, some compa-nies simply have no choice: They lack the financing to complete acquisitions or are unable to find quality buyers for a disposi-tion and so use collaborations instead.

The right fit for right now

While collaborative approaches are not new, the context of their deployment often changes. The pharmaceutical industry has used collaborations for years, teaming with biotechnology companies to round out their pipelines and then moving on to team with overseas competitors to jointly launch established products in new geographies. While contractual supply arrangements have been more commonly employed in the aerospace and defense industries, con-sumer products collaborators tend to favor legal entities as the vehicles for housing their arrangements. Even so, deal makers are often willing to experiment, and we’re seeing consumer product industry interest in contractual brand-sharing collaborations, and revived interest in establishing legal en-tities overseas across a variety of industries.

The changing business landscape has also introduced new players and reintroduced old standbys. The sovereign wealth fund is a relatively new entrant on the financial investor landscape, particularly so for minority investments. Sovereign wealth funds have been particularly active in the financial services industry during the economic downturn. And while lack of financing may have sidelined many private equity and hedge fund investors for quite a


constrain the business alliance? How will decision-making conflicts be handled, and is the process specified in the contract or charter? How does the majority owner address minority owner concerns? Are there provisions for dissolving or exiting the alliance? Those and other questions need to be addressed well in advance of inking a deal to plan for and execute a successful collaboration.

Planning for success

In setting up a successful collaboration, there are a number of critical success factors for companies to consider. Negotiations around each partner’s stake, governance, and operational responsibilities, as well as profit-and-loss-sharing arrangements are crucial. And as with a traditional merger, acquisition, or divestiture, due diligence is the key to understanding the risks associated with a collaboration, and both parties are often required to submit to a diligence process. Companies sometimes underestimate the time it takes to negotiate and put in place a complex collaboration, which can take longer to complete than an acquisition. That’s not surprising, considering that two

while, their traditional credit sources have also begun to loosen, and private equity activity is again on the rise. Regardless of the players, financial investors continue to play an important role in collaborations.

Choosing a structure

Today’s business collaborations are as varied as the companies undertaking them but tend to take one of two forms: contrac-tual or structural. Those that fall into the first category include supplier, distribution, and outsourcing arrangements; technol-ogy or R&D cost sharing; and virtual joint ventures used for co-developing a product or service without necessarily creating a legal business entity. The second type of alliance involves a specific legal struc-ture, as in an operational joint venture that creates a new company (a so-called NewCo) or a minority equity investment arrangement. Collaborators that decide to use a legal structure for executing their strategies need to consider whether to use pass-through structures like limited liability companies and partnerships, or taxable corporations. Those that invest using foreign-based NewCos will need to consider whether similar international structures make sense.

Once a company opts for an alliance, it must match structure to strategy. In our experience, companies can often achieve the same goal through more than one dif-ferent structure. While the final approach may depend on a number of factors, the tax and financial-reporting impact of the structure is usually of keen interest to the deal makers.

During the establishment of an alliance, whether by contract or NewCo structure, there are many other questions that companies should consider: Will govern-ment regulations or shareholder rights

Degree of complexity

Degree of commitment

Figure 1: Alternative deal structures to M&A and divestitures

or more companies must undergo due diligence, negotiate price, share sensitive information, and decide up front the specific rights and responsibilities of each party to the collaboration.

That considerable up-front planning invest-ment helps get a business alliance off to a solid start. Even so, notwithstanding the considerable planning effort, as the busi-ness partners begin the journey together, they will likely find there will be ongoing negotiations and the need for flexibility.

Moving forward

Having options to choose from is welcome news for any company pursuing growth, especially during an economic recovery. While M&A may be the right course, other business structures may also prove beneficial. Whether entering a new market, launching a new product, or pursuing another type of transformation, companies today are more fully exploring collabora-tions as the vehicles for getting there.

Donna L. Coallier is a partner in PricewaterhouseCoopers’ Transaction Services practice.

Supplier agreement

Contractual alliances Structural alliances

Distribution agreement

Outsourcing

Virtual joint venture

Technology sharing

Minority equity investment by funding sources like a SWF or PIPE

Cost-center disposalR&D cost-sharing

Limited partnership joint venture

Operating joint venture

How smart-energy infrastructures are driving new sectors and alliances

Energy

The clean tech revolution

Driven by ecological and political concerns, and fueled by stimulus dollars, smart-energy infrastructures—the smart-electricity grid and the related electric-transportation ecosystem—are becoming realities. As PwC’s uS Cleantech leader Tim Carey observes, interest and support for these infrastructures are growing, and opportunities for a diverse group of partners—both large and small—are emerging at a rapid pace as the build-out accelerates. Both businesses and investors have taken notice and are poised to cash in on what could turn out to be a revenue bonanza. But some companies are missing out on opportunities they didn’t know existed. Are you among them?

By Tim Carey


How smart-energy infrastructures are driving new sectors and alliances

The clean tech revolution

On August 14, 2003, more than 50 million people were affected by a massive power outage that began in Ohio and subse-quently shut down over 100 power plants in the United States and Canada. It was neither the first time that the reliability of traditional infrastructures like the electricity grid has been challenged, nor the last.

Today, a convergence of political and economic events has set in motion an erosion among such infrastructures. Under strain for decades, the electricity grid is among the first to receive the attention of both large companies and entrepreneurs, which are revolutionizing the way electricity is generated, transmitted, distributed, and consumed.

This burst of innovation is in large measure a response to a national mandate to create a smart grid capable of supporting increased levels of renewable energy and a growing fleet of electric vehicles. This in turn is leading to new sectors that are fueling major convergences and cross- pollinations between and among a plethora of partners, including utilities, energy storage firms, automakers, telecommunications and information technology companies, and providers of renewable energy. Understanding these new convergences and the dynamics shaping them will enable companies to assess and seize opportunities that might otherwise be missed.


What is a smart infrastructure?

Smart infrastructures are characterized by technologies that enable two-way communication and monitoring between producers and end-users. Examples include the smart-electricity grid and the emerging electric vehicle (EV) transporta-tion infrastructure.

The backbone of the smart grid is the integration of two-way communications between utilities and consumers through advanced metering infrastructure (AMI), or smart meters and sensors, to deter-mine where and to what extent electricity is being consumed. Deployment of the AMI is aimed at providing both customers and utilities with real-time or near real-time energy information, including pricing, demand, power, quality, and so on.

With knowledge accessed through the AMI, customers could improve energy consumption patterns and save on their electricity bills. For example, customers who want to wash and dry their clothes will be able to determine if demand for

electricity is high by reading their meters to learn whether electricity is at a peak price-point. If this is the case, some customers may delay their washing and drying until such time as the price of electricity comes down. While customers save on their energy bills, the utility avoids additional strain on electricity distribution during times when the network is already stretched thin. At the same time, utilities would collect a new, rich stream of data, enabling a more seamless and timely rerouting of energy to where and when it is needed most—as well as a more accurate and detailed prediction of future energy demand.

Closely tied to the smart grid is the emergence of an electric vehicle infrastructure. Volatile gasoline prices and a push for clean energy at the federal, state, and consumer levels have spurred automakers to roll out a new generation of plug-in hybrid electric vehicles (PHEVs) and pure electric vehicles (PEVs). According to PwC Autofacts, automakers are planning to launch at least 11 new models of PHEVs

and PEVs in 2010, and 13 in 2011. (See Figure 1.) By 2015, annual assembly of PHEVs and PEVs is expected to reach nearly 600,000 units. (See Figure 2.) The degree to which consumers will adopt these electric vehicles will be driven largely by how quickly and widely a charging infrastructure becomes available to support them in a way that fits practically with their driving needs and behaviors.

If President Obama realizes his goal of having one million electric vehicles on the road by 2015, it would follow that the nation would require at least twice that, or two million electric-charging stations to accommodate the demand, according to Richard Lowenthal, CEO of Coulomb Tech-nologies, an EV-charging-station maker.1 To put this in perspective, in 2006, 116,855 gas stations existed in the US.2

11 billionUSD is the amount the American Recoveryand Reinvestment Act includes for a build-out of the smart grid.

1 PricewaterhouseCoopers, Cleantech revolution: Building smart infrastructures, 2009.

2 US Census Bureau press release, “A gas station for every 2,500 people” June 27, 2008.


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7

11

Figure 2: Electric vehicle adoption. Global PEV and PHEV: Forecast, 2009-2015Figure 1: Next year’s model. Estimated new global PHEV/PEV models: Forecast, 2009-2012

Source: PwC Autofacts Source: PwC Autofacts


��

�� Smart meter enables two-way communication,tracks energy use in real time

�Smart appliances talk togrid and can be monitoredand programmed

�Smart thermostats talk togrid and can adjust accordingto price signals

�Web-based programs andin-home displays add greaterenergy management capabilities

�Charging stations installed atresidences or by municipalities,private businesses

�Positioned where people park (shopping malls, parking lots) or drive (along roads and corridors between cities and towns)

�V2G (vehicle to grid): Car batteries eventually as viable mobile storage, supplying electricity back to the grid

�Collect nearly real-time data from smart meters

�Obtain more accurate data onpeaks and valleys

�Offer incentives to consumers(in the form of credits/rebates)to participate in energy-savingprograms during peak periods

�Wider adoption of smart-meter-based energy use diagnostic tools

�Improved ability to monitor/manage HVAC and lighting, for example

�Savings through more accurate demand response and dynamic pricing

�Introduction of electric-charging stations to residents of apartment buildings, employees at office buildings

Home area network

Renewable energy sources

Commercial buildings energy management

Power and utility companiesWind turbines

Distributed generation

Feeding electricity

Geothermal

Existing/incumbentpower plant

Solar

Electric vehicle infrastructure

(commercial and residential)

Figure 3: Smart infrastructure connections at a glance

Vice President Biden predicts that 40 million smart meters will be in US homes by 2015.


Emerging sectors: The smart grid

These smart infrastructures are spawning new sectors that in turn are driving major convergences. With regard to the smart grid, the major emerging sector is the smart-meter industry. About smart meters, Sunil Sharon, senior fellow at the Center for American Progress, said the follow-ing: “The smart meter will become like a BlackBerry, with all sorts of applications. In ten years, the global smart meter market alone could be about $100 billion.”3 And in a recent report, Vice President Joseph Biden predicts that 40 million smart meters will be in US homes by 2015.4

In its report titled “National Assessment of Demand Response Potential,” the Federal Energy Regulatory Commission (FERC) estimated that a fully deployed smart grid has the potential to reduce national peak electricity demand by up to 20 percent. The American Recovery and Reinvestment Act (ARRA) includes $11 billion for a build-out of the smart grid, including laying 3,000 miles of new or modernized transmission lines and installing 40 million smart meters. The following describes some sectors emerging as a result of the build-out of the smart-grid infrastructure and renewable energy industry, as well as the new sectors being driven by the EV ecosystem. As these sectors evolve, so will the numerous intersections among them. (See Figure 3.)

The smart meter as foundation

Advanced or smart meters serve as the enabling architecture for a smart-grid ecosystem. Smart meters allow for real-time meter reading and pricing, two-way communication, data collection, volt-age monitoring, and signaling of power outages, as well as remote control of the energy customers are using. Nationally, the deployment of smart meters is proceeding at a rapid clip, offering utilities test runs before they need to commit to full-territory deployment. (See Figure 4.) The smart meter as a foundation is enabling the emergence of the following new sectors.

Demand response enablers. Layered upon the smart-meter deployment is a suite of networking solutions that are help-ing utilities manage smart-meter data to unveil what was previously unobservable: a map of how much electricity is being used and where it is being used. Those solutions also provide utilities the ability to work with customers to change electricity usage patterns in ways that not only conserve electricity but also change energy pat-terns. Using energy at different times eases demand during peak periods (typically during the day) and shifts that usage to low-demand periods (typically overnight), mitigating the need for construction of intermittent power plants required to sup-port peak periods of demand.

Smart-grid information technology. Another opportunity to better support peak demand for electricity is through alterna-tive storage. As smart meters become the norm, new technologies will be required to store vast amounts of data and to manage and analyze data as quickly as it flows in.

Communications. Utilities can build their own dedicated communications networks when rolling out the smart grid, with most residential smart meters connected to radio frequency mesh systems. Alterna-tively, utilities can use an existing network. Communications companies are moving quickly to enter this space—for example, by offering cellular communications.

Next-generation storage of renewable energy. The market for creating more powerful and less expensive industrial battery storage could be considerable. Potential solutions include compressed- air storage, which, for example, could present a way to address challenges that renewable energy’s intermittent generation presents.

Home area networks and grid-enabled devices. These smart-grid devices (ther-mostats and appliances, for example) communicate with other devices (such as smart meters and home energy manage-ment systems) to monitor and program electricity use.

Figure 4: Advanced meter infrastructure deployment: Ten-year forecast

Pike Research

Expanded business-as-usual (FERC) scenario

Business-as-usual (FERC) scenario

Pike Research

Expanded business-as-usual (FERC) scenario

Business-as-usual (FERC) scenario

0

30

60

90

120

150

2019201120102009

In millions of smart-meter installations

0

30

60

90

120

150

2019201120102009

In millions of smart-meter installations

3 Cleantech, op. cit.

4 “Biden tells Obama that 40 million U.S. homes will have smart meters by 2015.” USA Today, December 16, 2009.

Source: Pike Research and US Federal Energy Regulatory Commission


Emerging sectors: Electric vehicle infrastructure

As the smart meter is the foundational new sector emerging from the smart grid, batteries make up the pivotal sector emerging from the EV infrastructure. Thus far, lithium-ion has been the prevailing technology, but government laboratories, universities, and private enterprises are clearly racing to develop the next best battery, including applying nano-technology to the process. Other emerging sectors include the following.

Hydrogen fuel cells. Although hydrogen fuel cell vehicles have been available since 2002, the cells themselves are not easy to mass produce. However, as portable elec-tricity storage becomes more critical to the transportation and smart-grid infrastruc-tures, next-generation transformational technologies like hydrogen fuel cells will continue to be refined and tested.

EV-charging infrastructure. Though in a very early stage, an electric-vehicle-charging infrastructure is growing not only

Figure 5: Smart infrastructure industry convergences

Clean carsPure electric, plug-in hybrid

electric, and hydrogen vehicle automakers

Wind and solar energy generation

Utility-scale and distributed

Smart-meter makers

Field network communications

e.g., process, integration, applications,

data/information

Computer networking

communications systems

Smart appliancesElectronics, white goods,

appliance makers

Smart buildings Home and commercial energy management

systems

Car batteriesLithium-ion, hydrogen, next-gen technology

Information technology

Data storage and software solutions

Electric utilities

around where cars drive (along highways and in city centers, for example) but also around where cars are parked (in home garages, municipal parking lots, and so on). The new infrastructure, then, is likely to be much more ubiquitous and tailored to drivers’ needs than is the existing gasoline-filling-station infrastructure.

Smart-charging technology. As more and more electric vehicles appear on the roads, the need for utilities to engage in load shifting—to prevent an overload in the event of too many cars needing to be charged at the same time—will increase. An advanced EV infrastructure will require smart-charging software to enable utilities to carry out these tasks.

The smart grid: Emerging sectors drive new alliances

The build-out of the smart-grid infrastructure and the new sectors it has spawned have formed a constellation of industries gravi-tating around electric utilities. (See Figure 5.) There are also myriad alliances within industries, as consortia of companies are seeking—and are beginning to receive—ARRA grants and loans to build out the smart grid. The growth of the smart grid is already enabling small start-ups to partner with established players in projects they may not have been able to win alone. Such part-nerships likely will result in some cleantech start-ups’ growing much faster than they would without these opportunities. For large, established players, these partnerships bring the speed, agility, and new solutions required to seize smart-grid-project opportu-nities that require those capabilities.

600Kis the projected number ofPHEVs and PEVs assembedannually by 2015.


Information technology. As utilities begin gathering data from the smart-grid ecosystem, their need to enlist data stor-age management and data center players will rise as dramatically as the amount of data they will gather. Pacific Gas and Electric Company (PG&E), for example, reportedly expects to collect 170 mega-bytes of data annually from each smart meter it installs.6 For example, taken as a whole, when the smart-grid infrastructure hits 40 million advanced meters, some 6.8 billion megabytes would need to be stored and managed. This will require a separate industry with its own network of data centers and data management and analytics to assist in arriving at intelligent decisions about how that data is utilized.

Energy storage. Energy storage, too, is creating a union between battery makers and utilities as they try to more efficiently connect renewable energy sources (such

as commercial-scale solar and wind power generation) to the grid through more-powerful battery storage to manage intermittent generation. Companies centered on electricity transmission and distribution networks will help bring about the modernization and expansion needed to create new energy transmission corridors, connecting renewable energy sources from where they are created (wind or solar farms) across long distances to where they are consumed (typically, urban areas).

Home area network. Another major convergence is developing around the evolution of smart houses and smart buildings. On the consumer side of the smart meter, a wide range of players is emerging to support the buildup of the home area network (or HAN), through which home products communicate with the grid. Those building out the HAN include makers of smart thermostats and in-home displays for monitoring and programming electricity and the communications needed to bring intelligence to electricity-using products such as water heaters, refrigerators, stoves, and pool pumps.

The following are among the new alliances emerging from what is becoming a distinct smart-grid industry.

Communications. An array of communi-cations technologies are being used in new ways to modernize power grids’ field net-works and connect the smart grid. These include fiber-optic and wireless com-munications, within which are traditional radio frequency mesh technologies and potentially WiMAX and Wi-Fi for communi-cation between, for example, grid-enabled appliances and smart meters. Software and computer networking companies, too, are integral to the enabling of the collec-tion and analysis of data flowing through smart meters along all points of the smart grid—from generation and transmission and distribution to industrial, commercial, and residential end-users.

Computer networking. Computer networking firms also have entered the smart-grid industry as central players. For example, both Cisco Systems and IBM have announced respective smart-grid initiatives, each enlisting a host of smart-grid players as partners. Cisco estimates the communications segment of the smart grid alone will create a market of $20 billion a year over the next five years.5 This space is also spawning convergences and partnerships. CURRENT Group, which produces smart-grid networking applications, including advanced sensors communications and analytics, has partnered with Tendril, which makes in-home smart-grid hardware and other home energy management products.

5 Cisco Systems press release, “Cisco Outlines Strategy for Highly Secure, ‘Smart Grid’ infrastructure,” May 18, 2009.

6 Jack Danahy, “The Coming Smart Grid Data Surge,” October 5, 2009; available at Smartgridnews.com.


Electric vehicle infrastructure: Emerging sectors drive new alliances

Some of the more potentially transfor-mative alliances resulting from smart infrastructures unite automakers with industries supporting electric transporta-tion, including electric cars, trucks, and rail, as well as the charging infrastruc-ture needed to power these. With major carmakers producing—or planning to roll out—new PEVs or PHEVs, auto producers are aligning with utilities to coordinate the deployment of a fleet of electric vehicles with anticipated electricity capacity. Battery makers and automakers form the second alliance, introducing an alternative to the century-old relationship between the internal combustion engine and hydro-carbon fuels.

EV-charging infrastructure. Automakers are also beginning to cast an eye on the build-out of an electric-vehicle-charging infrastructure, and that has led to some alliances between automakers and fledgling charging-station developers, as well as with utilities. “What you’re seeing is a divorce between the auto and the oil industries. Now, the utilities and auto industries will work together. And, if we continue to see innovations in plug-in car technology, we will see a lot of international interest in our technology,” said R. James Woolsey, former CIA director, currently a venture partner with VantagePoint Venture Partners, which invests in clean technology.7

Convergences

New partnersThe following are among recently reported examples of developing smart-infrastructure convergences.

Automakers + utilities

• Nissan partners with San Diego Gas & Electric to build out EV-charging infrastructure in San Diego.

• Ford Motor Company and American Electric Power partner to pilot vehicle-to-grid communications.

• Portland General Electric and Mitsubishi partner to test Mitsubishi’s i-MiEV, or Mitsubishi Innovative Electric Vehicle.

Communications + smart-meter makers

• AT&T and SmartSynch partner to roll out 10,000 smart meters for Texas–New Mexico Power, using AT&T’s public cellular network for meter communications as an alternative to conventional radio frequency mesh systems.

• Echelon Corporation and T-Mobile form alliance for using wireless network to connect smart meters to utilities.

Automakers + charging-station developers

• Nissan North America and ECOtality, Inc., partner to build out more than 10,000 EV-charging stations in the Phoenix/ Tucson area.

Automakers + car battery manufacturers/developers

• Toyota and Panasonic create joint venture to produce batteries for PHEVs.

Networking + utilities

• Cisco Systems partners with Duke Energy in three-year deal to assist in Duke’s smart-grid build-out.

The takeaway

The clean energy infrastructure is a composite of many indus-tries and will be built out through their interrelationships and convergences. At the forefront are alliances forming between the automakers, utilities, battery makers, and communications provid-ers. These companies are enlisting partners both big and small. As the grid takes shape, the incumbents’ changing strategies could very well spur further merger-and-acquisition activity in cleantech. Companies that identify their roles and opportunities and capital-ize on these convergences will establish early leads in nascent markets. The anticipated next wave of cleantech companies will begin to “horizontalize” the infrastructure, as more players both enter and fill in gaps and as both the smart-grid and electric-transportation infrastructures spread and diversify beyond today’s Balkanized pattern.

7 PricewaterhouseCoopers, Cleantech revolution: Building smart infrastructures, 2009.


Vehicular batteries. Clearly, one of the more advanced convergences is that between automakers and the fast-growing car battery developers, particularly devel-opers of lithium-ion batteries. The strong push by established automakers (such as Ford and Nissan Renault) as well as new entrants (such as Tesla Motors and Fisker Automotive) to roll out PHEVs and PEVs has created a new dynamic in the industry, caused by the potential for battery makers to assume a pivotal role in the automo-tive supply chain. The initial signs of this are already visible and are illustrated, for example, by Michigan’s drive to become the battery capital of the world. General Motors Company (GM) announced in August 2009 that it is building a 160,000 square-foot lithium-ion battery manufactur-ing plant in Brownstown Township, about 20 miles from Detroit. GM expects the plant to produce batteries for the Chevrolet Volt beginning in 2010.8

Privacy and other concerns: The downside of smart infrastructures?

There is no question that smart infrastruc-tures provide a range of advantages and benefits for energy suppliers and energy consumers. With smart-meter technology, suppliers are able to make better decisions with regard to energy demand, thereby bet-ter managing the potential for outages, and are able to advise consumers on the best times to use energy most cost effectively. As a result, consumers reduce their energy costs and live a greener lifestyle, contribut-ing to the ecological health of the planet.

However, as with all transformational technologies, including the Internet, seri-ous concerns have arisen around smart technologies and the issue of privacy. Smart technologies are capable of capturing vast amounts of data that reveal what is going on in a person’s home, his or her sanctum sanctorum. It naturally follows that con-sumers would be worried about how much information about them is being captured and reported, about the nature of that infor-mation, and about the keepers of that data.

At first, the nature of the information seems benign enough: When are certain appliances being used? When are people present in or away from their houses? Which homes are protected by alarm sys-tems, and when are they active or inactive? However, while it’s clear that anonymously and in the aggregate, such data are use-ful with regard to energy planning and distribution, once the information becomes specific and personalized, it could be used in ways that negatively impact privacy.

In a recently published report on smart-grid privacy concerns, Ann Cavoukian, Information and Privacy Commissioner of Ontario, Canada, and two coauthors illus-trate how certain smart-grid data can be interpreted. “For example: the homeowner tends to arrive home shortly after the bars close; the individual is a restless sleeper and is sleep deprived; the occupant leaves late for work; the homeowner often leaves appliances on while at work; the occupant

8 Nick Bunkley and Bill Vlasic, “100 Jobs? It Looks Good to Michigan,” The New York Times, September 9, 2009.

9 Ann Cavoukian, Jules Polonetsky, and Christopher Wolf, SmartPrivacy for the Smart Grid: Embedding Privacy into the Design of Electricity Conservation, November 2009; available at www.futureofprivacy.org, p.11. Citing Eleas Leake Quinn, Privacy and the New Energy Infrastructure, February 15, 2009; available at SSRN: http://ssrn.com/abstract=1370731.

10 Rebecca Herold, “Smart Grid Privacy Concerns,” October 2009; available at http://www.privacyguidance.com.

11 SmartPrivacy, op. cit., p.11.

rarely washes his/her clothes; the person leaves their children home alone; the occupant exercises infrequently.”9 The ways that such interpretations can be used in investigations, litigation, marketing, and advertising are obvious.

In fact, privacy expert Rebecca Herold has identified areas in which data derived from smart technologies can be misused to violate an individual’s privacy. They include identity theft, personal behavior patterns, use of specific appliances, real-time surveillance, home invasions, censor-ship, profiling, and unwanted publicity and embarrassment, among others.10

While solutions are difficult, they are not impossible and are certainly necessary. Cavoukian et al. advocate designing “pri-vacy directly into the Smart Grid by making it the default (no action would not be an option) in all physical, administrative and technological aspects of the system.”11


Center for Energy and Environmental Security research analyst Elias Leake Quinn proposes a regulatory and a tech-nological solution. The regulatory solution ensures that “databases are used only for their principle [sic] purposes: informing efficient electricity generation, distribu-tion, and management.” The technological solution “must come in two parts: one addressing the security of the database as aggregated and kept by the utility, and the other addressing the security of transmit-ted data.” With regard to the latter, “One possible approach might be to aggregate and encrypt the data being sent from smart meters back to the utility by putting addi-tional hardware on each transformer. This would basically anonymize an individual’s information to roughly the scale of a city block.”12 Whichever solutions prevail, it is clear that energy optimization and privacy need not be mutually exclusive goals.

Security concerns. While the privacy issue has naturally emerged as a major concern, there are other potentially serious chal-lenges to building out not only smart, but also secure, infrastructures. For example, the deployment of smart meters leads to enormous amounts of data sharing and interoperability of systems within elec-tricity grids. As this heightened two-way connectivity between energy producers and end-users grows, so, too, inevitably, will concerns surrounding the potential exposure of smart grids to cyber attacks. Such vulnerabilities could cover a broad spectrum—from an individual home’s smart meter being hacked by a petty criminal,

to a cyber-terrorist intent on blacking out an entire city. As smart infrastructures proliferate, steps are being taken to harden systems and add layers of security to best guard against cyber vulnerabilities. Clearly, proofing smart infrastructures against criminal or malicious attacks not only poses a serious mandate to utilities but also has emerged as a national priority.

Defining your role in emerging smart-infrastructure markets

For some companies, successfully entering a smart-infrastructure market has meant forming alliances or making acquisitions. The smart-grid and electric-transportation sectors will likely produce a new crop of major cleantech players, but a strong trend suggests that this will be achieved through cross-industry collaborations. Making the right alliance or acquisition at the right time during this dynamic phase will benefit companies intent on securing a foothold in the smart-infrastructure markets.

Sustaining cleantech’s second wave. Government support and incentives—in the form of tax credits, mandates, ARRA grants, and loans—have done much to grow the first wave of cleantech industries, including wind and solar energy genera-tion and biofuels. It may be that similar government support and, just as important, further consumer and commercial buy-in will sustain the second wave of cleantech players currently emerging. Key to compa-nies’ spotting and acting early on potentially significant opportunities in existing and emerging smart-infrastructure industry markets will be their fixing a vigilant eye on current and anticipated federal and state government support, as well as on con-sumer and commercial adoption of new and next-generation clean technologies.

6.8 billionis the number of megabytes that would need to be stored andmanaged once the smart-grid infrastructure hits 40 millionadvanced meters.

12 Direct quotes in this paragraph are from Privacy and the New Energy Infrastructure, pp. 40-41. Quinn attributes any merit to this approach to Jonah Levine at the Center for Energy & Environmental Security, University of Colorado Law School.


Customer is key. For smart infrastructures to grow, customers must accept them. Therefore, it is critical that all stakeholders who are building out these infrastructures develop programs that accommodate customers’ needs and preferences. If the build-out of these infrastructures is not focused on customers, they likely will not adopt them.

Smart infrastructures as a national indus-trial policy. As part of its drive to stimulate the economy, the Obama administration has focused on energy generation, manage-ment, and consumption as key beneficiaries of government stimulus money. Indeed, this administration has laid the groundwork to modernize the nation’s electricity grid as well as to spur growth in the electric-transportation sector. These initiatives follow cues already taken at the state level and signal the beginnings of a national industrial policy—with the development of smart infrastructures at its core. Going forward, continued momentum of this policy (in the forms of ongoing stimulus disburse-ment and a possible carbon cap-and-trade system) would likely open more opportuni-ties for companies—big and small—that can deliver products and services needed to create modernized infrastructures.

Choose the “smartest” partner. As the ambitious roll-out of these smart infra-structures begins, the need for companies to ally and partner with other companies is evident. This has created cross-industry convergences that might have seemed unlikely just a few years ago. However, as technologies develop, some will be the standard-bearers, and others will not. Therefore, choosing the right partners (and the technologies they represent) in smart-grid-related projects will be increasingly important—particularly when that choice means committing to a certain technology.

The winning technologies will be those that will be not only scalable but also easily adaptable to next-generation technologies and innovations. For example, successful smart-meter roll-outs are predicated on their ability to endure through generations of new technologies connecting to them at both ends—into the home and to the utilities. Alliances, then, need to be forged with partners whose technologies will most easily adapt to future innovations. And, as in any fast-growing industry, committing to certain technologies—as a producer or an adopter—will continue to be a challenging undertaking, as more and more players

enter the smart-infrastructure space, offer-ing still more technologies and solutions.

Wide adoption equals the tipping point. Finally, smart-infrastructure develop-ment likely will reach an economic tipping point when a Moore’s-Law-like cost reduction results from wide adoption of technologies—from sensors, to substation automation, to home energy management systems. Clearly, all smart-infrastructure players—from energy management software developers and start-up electric-vehicle-charging-station developers to utilities—will benefit from economies of scale. Companies entering smart-grid and electric-transportation markets are taking a lead and establishing early market share. However, the early and high-growth stages of these markets will likely be the most volatile. Wide and enduring adoption of these technologies will be the key to the maturing of the markets they are creating. Economies of scale will happen—and a tipping point will be achieved—only when industrial, commercial, and consumer adoption of smart-infrastructure technolo-gies becomes pervasive and ingrained.

Tim Carey is PricewaterhouseCoopers’ US Cleantech leader.


Investment

Follow the moneyThe momentum surrounding cleantech infrastructure investment and research and development has been driven in large part by the Obama administration’s call to create a smart grid, to grow a national fleet of electric vehicles (not only passenger cars but also commercial trucks, forklifts, and rail transport), and to provide seed investment for funding. At the same time, a recovery in venture capital funding in cleantech has occurred.

The following provides a good—if incom-plete at this early stage—indication of where government and venture capital priorities in this sector are heading.

Funding type and source Announced awards/selected recipients included

US Treasury Department through the ARRA’s Section 1603—which pays in cash 30 percent of the cost of a renewable energy project in lieu of tax credits.

Topped $1 billion in September 2009.

Ten of the 12 grantees in the first round in early September were in wind energy development projects.

The Department of Energy (DOE) created the Financial Institution Partnership Program (FIPP) to accelerate the DOE’s loan guarantee underwriting process by working with private lenders that would co-invest and carry out due diligence on energy projects eligible for government loans. Under the program, project sponsors would work through qualified private financial institutions that would apply for a loan guarantee to the DOE, with the loan risk shared by the DOE and the private lender.

$750 million available in funding to secure up to $8 billion in loans for conventional renewable energy-generation projects that apply through the FIPP.1

The DOE, as part of its Smart Grid Investment Grant Program, announced $3.4 billion in matching grants (with a maximum loan of $200 million) for electricity-grid modernization for projects related to integrating renewable energy and modernizing elec-tricity transmission and distribution infrastructure.

The grant program became oversubscribed, with utilities requesting at least $14.6 billion—through about 570 applications.2 On October 20, 2009, $3.4 billion in grants was announced for 100 projects in 49 states for smart-meter deployment programs (including 10 million smart meters), substation automation, and sensors deployment.

Smart-grid renewable energy


The DOE announced in March 2009 the selec-tion of 48 advanced battery and electric vehicle manufacturing projects totaling $2 billion in fund-ing3 (Electric Drive Vehicle Battery and Component Manufacturing Initiative).

Awardees included Johnson Controls, Inc. ($299.2 million); A123 Systems ($249.1 million) and EnerDel ($118.5 million).

Awardees announced for ARRA provision of $400 million in grants for transportation electrifica-tion or initiatives focused on electric vehicles and electric-vehicle-charging station infrastructure (Transportation Electrification Program).3

Awardees from this program of $400 million have been listed and include Electric Transportation Engineering Corporation (eTec) ($99.8 million), Chrysler LLC ($70 million) and Navistar, Inc. ($39.2 million).

Clean Cities grants, aimed at adding more than 9,000 alternative-fuel and energy-efficient vehicles and alternative-fuel and electric-charging stations to fleets.

$300 million granted to 25 cities (announced in August 2009).

In September 2009, the US House of Repre-sentatives passed a bill authorizing $2.85 billion in appropriations for the DOE over 2010–11 to support research and development for advanced-technology vehicles.

To be announced

Electric vehicle/charging infrastructure

1 U.S. Department of Energy, press release, “Energy Department Announces New Private Sector Partnership to Accelerate Renewable Energy Projects,” October 7, 2009.

2 Rebecca Smith and Ben Worthen, “Stimulus Funds Speed Transformation Toward ‘Smart Grid’,” The Wall Street Journal, September 28, 2009.

3 U.S. Department of Energy, press release, “President Obama Announces $2.4 Billion in Grants to Accelerate the Manufacturing and Deployment of the Next Generation of US Batteries and Electric Vehicles,” August 5, 2009.

Selected government programs funding smart infrastructure



US Treasury Department through the ARRA’s Section 1603—which pays in cash 30 percent of the cost of a renewable energy project in lieu of tax credits.

Topped $1 billion in September 2009.

Ten of the 12 grantees in the first round in early September were in wind energy development projects.

The Department of Energy (DOE) created the Financial Institution Partnership Program (FIPP) to accelerate the DOE’s loan guarantee underwriting process by working with private lenders that would co-invest and carry out due diligence on energy projects eligible for government loans. Under the program, project sponsors would work through qualified private financial institutions that would apply for a loan guarantee to the DOE, with the loan risk shared by the DOE and the private lender.

$750 million available in funding to secure up to $8 billion in loans for conventional renewable energy-generation projects that apply through the FIPP.1

The DOE, as part of its Smart Grid Investment Grant Program, announced $3.4 billion in matching grants (with a maximum loan of $200 million) for electricity-grid modernization for projects related to integrating renewable energy and modernizing elec-tricity transmission and distribution infrastructure.

The grant program became oversubscribed, with utilities requesting at least $14.6 billion—through about 570 applications.2 On October 20, 2009, $3.4 billion in grants was announced for 100 projects in 49 states for smart-meter deployment programs (including 10 million smart meters), substation automation, and sensors deployment.

4 Other includes the following cleantech-related sectors: business services, computer hardware/software, construction, energy conservation, industrial equipment and products, Internet specific, manufacturing, medical/health, oil and gas exploration, semiconductor, and utilities.

Venture capital investment flows back into solar, smart grid, and transportation in Q3 2009

0

100

200

300

400

500

600

Deals

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009

USD millions

Solar energy Transportation Smart grid (includes

energy storage)

Alternative fuels Pollution andrecycling

Wind and geothermal energy

Other4

23 17 23 24 17 18 233 5 4 3 1 1 18 9 15 6 7 3 411 12 9 11 8 8 715 7 7 11 3 11 134 3 3 2 3 3 36 19 18 12 3 5 6

517.

82

420.

1246

6.50

460.

05

344.

2410

0.63

43.7

510

.66

71.5

0

15.6

018

.35

115.

2310

7.80

108.

5328

.03

44.9

714

6.37

2.26

98.1

2

105.

23

271.

1916

5.95

125.

5687

.76

44.5

9

53.3

1 92.7

5

92.4

4

141.

7512

5.6

54.5

431

.63

1.11 23

.23

26.0

8

13.2

069

.34

6.98

4.40

3.00

0.14

120.

1913

3.14

136.

55

215.

6455

.94

106.

27

221.

28

81.1

4

Source: PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Report based on data from Thomson Reuters


Taking stock and looking

aheadEconomist Kenneth Rogoff assesses where we are and where we are going

Interview


GZ: In your new book, you suggest that well-informed people should have taken note of certain events that were predicting a coming recession. What were those events, and why do you think they were ignored?

KR: The two big things that were blinking red lights were soaring housing prices and the huge amounts the US was borrowing from abroad. If one looks at historical benchmarks from other deep post-war financial crises, the parallels between the run-up to the US financial crisis and other catastrophes in Japan, Spain, the Nordic countries, and elsewhere, it was all too apparent that trouble was brewing. I and other economists who viewed this as highly worrisome and unusual were dismissed by many, and particularly by American policymakers, who attributed these devel-opments to rapid growth in the US.

GZ: How could housing prices get so out of control?

KR: Prices were justified by complicated and erroneous explanations. People were told that thanks to deeper and more liquid financial markets, you can afford to pay more for your house, because you can always borrow on it later. Second mort-gages were common. Most of all, everyone seemed to believe that no matter how much you paid for your house, someone would be willing to pay even more in a year or two. So there was nothing to worry about.

GZ: So, in a sense, the financial crisis is, in part, related to false optimism.

KR: In a way, yes. But this is nothing new. When you look back in history, it is clearly human nature to want to accentuate the positive. But that’s not the only factor. It’s also about how political systems work, about the fact that money is power. When a lot of money is rolling into the financial sector, it’s very hard to put it in check.

Concerning the state of the economy, the chatter of pundits is deafening and often confusing. Only a few voices have been able to pierce through the noise with meaningful analysis and forecasting. Chief among them is Kenneth S. Rogoff. Economist, professor, best-selling author, and media commentator, Dr. Rogoff delivers a point of view that is provocative, cogent, and thought provoking. In this interview, he brings his unique perspective to questions about our economy and our future.

Interview by Gene Zasadinski

Former chief economist and director of research at the International Monetary Fund, Kenneth Rogoff is Thomas D. Cabot Professor of Public Policy at Harvard University. A prolific writer and sought-after media commentator, Dr. Rogoff is coauthor (with Carmen M. Reinhart) of the best-selling book This Time Is Different: Eight Centuries of Financial Folly, published by Princeton University Press.


GZ: You have used the terms arrogance and ignorance to describe a reaction com-mon to financial crises down through the centuries. Can you explain what you mean by those terms in that context?

KR: Well, the ignorance is that in the run-up to a crisis, many people think that it can’t happen to them. They believe financial crises happen to other people at other times in other places. The arrogance comes from the often mistaken belief that we’re doing things better than in the past. That kind of arrogance permeates history.

GZ: But hasn’t the world become more prone to financial crisis over the past three decades?

KR: No, I don’t think so. Take banking crises, for example. They’re pretty com-mon throughout history, and I mean severe crises, not just little ones.

GZ: What about sovereign debt crises?

KR: Some people say they’ve become more common, and there’s something to that. These things are happening more often, and

they’re getting resolved more quickly, but, you know, I actually think part of the reason we have more of these types of crises is because of the kinds of insurance we now have that creates moral hazard.

GZ: Can you elaborate?

KR: When a crisis occurs, the FDIC guaran-tees the banks, and the IMF (International Monetary Fund) guarantees the countries. Under such circumstances, people are less cautious, leading to more crises. I believe moral hazard is a very real problem.

GZ: When this recession arrived, the government responded with takeovers, bailouts, stimulus packages, and so on. Are those the right tools to deal with the crisis, or have they done more harm than good?

KR: By and large, these have been the right tools. There was a very real chance that we would have an epic recession, one people would write about for 200 years. We had a very bad recession, but there will be worse. So in that sense, government did a good job. There is one area, though, where we’ve fallen short.

GZ: What’s that?

KR: Our strategy with regard to banks. The basic strategy was, let’s be super-nice to the banks, and more to the point, let’s be super-nice to the bank bondholders. It would have been so much better if we had a somewhat deeper recession but allowed bondholders to lose money. Then we wouldn’t have to regulate the financial system in the way that we do now. We’re going to be bearing that cost for a very long time.

GZ: Are you anticipating a wave of new regulation?

KR: If we don’t have a huge amount of new regulation, we’ll get another financial crisis as bad or worse in 10 or 15 years. With significant regulation, another finan-cial crisis might be 50 or 75 years away. Right now, I am not sure where regulation is headed. But I do know this: Congress should be focusing on how to control short-term debt, how to drastically shrink the interbank lending markets and gener-ally shrink the short-term borrowing of the banks, which is really, I think, the key to reducing our crisis risk.

We’re going to come out of this with a greater sense of the limits on what we can have, which is probably a healthy realization.

GZ: Unemployment is one problem. The deficit is another. With regard to the deficit, are we on an unsustainable course?

KR: Clearly, yes. The question is, What are we going to do to fix it? The United States is in more danger than most Americans realize, not so much because of our economic situation—we’re rich; we ought to be able to manage it—but because of our psychological situation, our sense of entitlement, our sense of invulnerability.

GZ: What do you mean?

KR: Well, take Europe, for example. Europe is in a very similar situation made even worse by their aging problem. But they

accept it. The major European countries understand that growth is going to be less and are prepared to do what is necessary—tax hikes, and so on—to keep their budgets stable. In the US, we want more govern-ment services than we’re prepared to pay for through higher taxes. So, it’s about making choices. We’re on an unsustain-able trajectory because we haven’t even acknowledged that we have a problem.

GZ: Is it conceivable that at some point our creditors will decide that we can’t pay them back?

KR: Not exactly, but we may experi-ence the typical dynamic of an emerging market, where the world challenges you,

GZ: What role should taxes play?

KR: In the short term, I favor providing help to state and local governments to extend unemployment benefits. In the long term, we need to increase tax revenues without unduly raising the marginal rate. In order to do that, we’re going to have to devise a vastly simpler tax system, based, perhaps, on a two- or three-tier consumption tax or some other fair approach.

GZ: You mentioned unemployment, and we hear the term jobless recovery. What’s your outlook with regard to a turnaround in employment, and can a real recovery hap-pen without an increase in jobs?

KR: As long as we have double-digit unemployment, we can hardly talk about a recovery. Unfortunately, we may have diffi-culty producing the kinds of jobs we need. The credit markets are still very weak. Small and medium-size businesses espe-cially, which provide a lot of job growth, are having difficulty getting access to credit. In addition, the bubble fueled an artificially low unemployment rate. We should have realized that normal unemployment is closer to 6 percent, not 4.5 percent. I don’t see the unemployment rate dipping below 5 percent unless we have another bubble.


basically by demanding higher interest rates because they don’t trust you. If you respond aggressively and tighten your belt and show that you’re willing to respond as necessary, they’ll cut you a lot of slack, and interest rates will come down and you can go on for a lot longer. But if you don’t respond well because you’re politically paralyzed, things can close in on you very fast. So I don’t think default is likely, but significant inflation certainly is.

GZ: Some say that a weak dollar is good for the American economy. What’s your take on that?

KR: In the short term, a moderately weak dollar is good for the US. It boosts the competitiveness of our exports, and it also makes imports more expensive, which helps stabilize our trade balance. However, we don’t want the dollar to fall too far too fast. We’re by far the world’s biggest debtor. We depend on getting a lot of money at low interest rates, and if the rest of the world begins to see the dollar as rudderless, that would be a disaster.

GZ: Given its vulnerability, how long will the dollar remain the world’s reserve currency, and when it no longer is, what will replace it?

KR: I’d say another 50 years. Eventually, the yuan will replace it. In 20 years, China’s economy will be bigger than ours, and maybe it will take another 20 or 30 years before its financial markets reach maturity and it’s really ready to assume the mantle. The US had long surpassed England as a global economic power before the dollar re-placed the pound, and a long period will go by before China’s currency replaces ours.

GZ: In the US, what’s in store for equities and the housing market?

KR: Historically, in almost all cases—Japan being a notable exception—after deep financial crises, the equity market regains its precrisis high within a few years. Housing, however, never comes back. The only reason the housing market seems to be recovering is that the US is subsidizing it like crazy. Ironically, the policy for getting out of the housing crisis is the same as the one that got us into it.

GZ: What should businesses be doing in this economy? Should they be retrenching, waiting this recession out, or should they be looking for opportunities and taking prudent risks?

KR: Despite the fact that the overall economy is in recession, there are pockets that are doing great—for example, export- oriented businesses, health and technology sector companies. As the dollar depreciates, even manufacturing is doing better. Many businesses have been holding back, but many good investments are emerging as the economy recovers. So businesses need to look out over the landscape and think about how to move forward.

GZ: Will America come out of this a stronger or a weaker country?

KR: We’re going to come out of it a more European country. By that I mean a country with more lethargic growth, more redistri-bution of income, and a larger role for the state. We’re going to come out of this with a greater sense of the limits on what we can have, which is probably a healthy realization.


Perspectives

Kenneth Rogoff on . . .

Chess

I think part of my brain is hardwired for chess; I still think about it to relax.* I follow the top championship games and occa-sionally correspond with active top players. Deciding on economics over chess as a career was a very tough choice. While I have no regrets about having chosen economics, I think I could have been a professional chess player and probably been very happy.

Influences

My thesis adviser, the late Rudi Dornbusch, was a huge influence. He had this incred-ible enthusiasm about the interplay of policy and research in economics. He was just a very exciting, dynamic man, one who inspired a whole generation of economists, including Paul Krugman, Jeffrey Sachs, and Lawrence Summers, among others. Another was my undergraduate teacher the late James Tobin. He really conveyed the fact that economics matters, that these

things, which seem so theoretical, actually affect people. The late Paul Samuelson, one of the other great economists of the 20th century and one of my professors at MIT, was also a huge influence. Despite his great gifts, he was a humble man. He set a great example from which I’m still learning.

The future

By and large, the emerging markets can look forward to a very good decade start-ing next year. The United States will not grow at the rate it had been growing prior to the financial crisis because of increased regulation, higher taxes, and the aging of our population. We could be saved by technology, but the best bet is that we are entering a period of slower growth. As a result, we will need to make decisions about Social Security and Medicare debt that we’ve been postponing. But these are things we should be able to cope with as we mature into a new phase. We’re a rich country. We are still the greatest country in the world.

* Dr. Rogoff is an International Grandmaster of chess.


0

20

40

60

80

Sufficient Insufficient Not certain Not reported

77

15

3 5

% of respondents

Your view

For many companies, financial reporting is a fundamental part of doing business—and it is an issue that has been at the fore during the recent economic crisis. What are the most press-ing financial reporting concerns for uS companies? And what larger role do they see financial reporting playing in our nation’s economic stability? We explored these questions in our recent Management Barometer, which surveys executives on their business outlook and other hot topics.

In getting quality information out to your investors, which of the following financial reporting issues concern you most?

Do you believe the degree to which transactions’ economics are reflected in financial reporting is sufficient or insufficient?

Various blueprints to return the uS to financial stability have called for specific action related to accounting issues. How important to your company are regulatory and standard-setting developments in the following areas?

Do you believe the role judgment is permitted to play in financial reporting is too large, too small, or neither?

The following findings are from PricewaterhouseCoopers’ Management Barometer, a quarterly survey. They include responses from interviews with 124 senior executives in large, US-based multinational companies conducted between July 25, 2009 and October 23, 2009. For more information about Barometer surveys, please visit www.barometersurveys.com.

0

10

20

30

40

50

The volume of restatements

The volume of required disclosure

The role judgment is permitted to play

The degree to which transactions’ economics

are reflected

The complexity of US GAAP

Major Minor Not an issue Not sure Not reported

24

34 33

2

7

26

36

27

47

29

42

21

26

41

2623

37

28 2933

37

% of respondents

0

10

20

30

40

50

Disclosure of riskOff-balance sheet itemsFair value accounting

Important Somewhat important Not important Not sure Not reported

3735

15

0

13

2724

35

1

13

47

29

11

1

12

% of respondents

0

20

40

60

80

Too large Too small Neither

Not sure Not reported

12 14

65

27

% of respondents

Editorial

Editorial Director Tom Craren

Managing Editor Gene Zasadinski

Assistant Managing EditorChristine Wendin

View points Editor Reena Vadehra

Contributing EditorsDee Hildy

Ned Shaikh

Christopher Sulavik

Online

Managing Director, Online Marketing Jack Teuber

Designer and ProducerJoe Breen

Design

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Contributors

In addition to our authors, we thank the following individuals for their contributions to this issue of View:

Tom Archer

Catherine Bromilow

Maryanne Coughlin

Bob Dondero

Charles R. Hacker

Paul Hollinger

Mark Lobel

Bryan McLaughlin

Denise Messemer

Fred Miller

Glenn Pappalardo

Sandra Maria T. Parrado

Barrett Shipman

Deborah Volpe

Glenn Ware

Dana Weintraub

Bethany Williams

Photography

Corbis

Robert Galbraith/Reuters

Getty Images

iStockphoto

Jupiter Images

Hyungwon Kang/Reuters

The New York Times/Redux

Ian Spanier

Vincent West/Reuters

Jo Yong-Hak/Reuters

Jeff Zelevansky/Reuters

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The information contained in this document is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules, and regu lations, there may be omissions or inaccuracies in information contained in this document. Before making any decision or taking any action, you should consult a competent professional adviser. Although we believe that the infor-mation contained in this document has been obtained from reliable sources, PricewaterhouseCoopers is not responsible for any errors or omissions contained herein or for the results obtained from the use of this information.

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Is your company prepared to combat corruption— and seize emerging-market opportunities?

{ Are you aware of your exposure to global corruption risks?

{ Do your employees have a global understanding of all of the anticorruption policies adopted by the company?

{ How do you ensure your code of business conduct standards regarding corruption is met by your employees and your third-party providers, such as agents, sales consultants, distributors, and vendors?

{ Does your anticorruption program have all of the components needed to comply fully with laws and regulations?

{ When embarking on new business opportunities in emerging markets, do you utilize corporate intelligence to identify corruption risks?

{ What reporting and assessment controls do you have in place to monitor and address corruption-related issues before they become significant?

{ Does your due diligence process meet domestic and international regulation expectations with respect to the nature and thoroughness of the effort?

{ Do you regularly conduct due diligence on third-party providers?

{ Is anticorruption training mandatory for all employees?

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