Examination of Witnesses (Questions 340
TUESDAY 15 MAY 2007
Q340 Peter Viggers: There is an article
in today's Financial Times by someone from the World Bank
indicating that globalisation has led to an uneven growth in wealth
and prosperity. It has allowed some individuals to have enormous
wealth but the growth is not evenly spread. It may not perhaps
concern you as a businessman but is it something which should
concern us, if you agree with the comment?
Sir Martin Sorrell: It goes back
to the point I made before, which is politicians and businessmen
and governments have been unable effectively to communicate to
unemployed workers the benefits of globalisation. That inequality
is another issue that makes it very difficult for people to accept
politically. I would agree with the pointand maybe this
is an opportunity for WPP and its constituent agenciesthat
we have to work more closely in explaining the economic/social
benefits from globalisation. It is something the Chinese Government
themselves worry about. They worry about the lack of growth in
income in rural communities, the imbalance between the coastal
regions and the hinterland, so it is something that everybody
has to grapple with. I read that article as well and I agreed
with it. They were recommending not protectionism but a greater
focus on (a) explaining to people the benefits and (b) taking
concrete measures to ensure that there was redeployment of labour
if there were structural changes. It got back to the issues of
education and reskilling.
Q341 Mr Gauke: To what extent do
you think the consolidation amongst companies which you have written
about in your annual report, for example, is driven by globalisation
or is in response to globalisation. Also, conversely, to what
extent do you think globalisation is driven by consolidation of
Sir Martin Sorrell: Private equity
is the biggest employer as a group in the UK already. It is whether
you are running a private equity company or you are running a
public company. What is the key parameter for growth for total
shareholder return or growth in value? It has to be top-line growth.
Not growth by acquisition. This would be like-for-like, top-line
growth. That is the key metric. If our growth is greater than
forecast, top-line, like-for-like, our share price will rise;
if it is not, it will fall. That is what analysts and the institutional
investors look at. So it is not absolute growth, it is relative
growth. Given that, if you are running a multinational company
and you look around the world, it is obvious: push on an open
door. I think you grow, whether by consolidation or by organic
growth, in those markets which offer the greatest return. To be
very, very correct about it, we are investing greater amounts
of money in two areas: one is the new technologies and one is
the new markets and the new geographic markets. I think those
two issues confront every company for the reasons I have just
said, because that is what drives returns. Interestingly, in the
annual report that comes out in a couple of weeks' time, we have
taken incremental growth and then we have aligned it by country
or by technology. The two things you see are Asia and the internet
or China and India and the internet. Of incremental growth every
year, those two things are taking a very significant proportion,
about 50%. Of all advertising growth in the world, the internet
is taking 50%. What do you do? You invest in those countries which
have a greater growth rate and you invest in technologies. There
is one other thing. In the earliest stages of growth in our industry,
the GNP grows by 10%, as it is growing in India and China by that,
and advertising and marketing services grow by 20%. I do not know
whether there is a statistical rule, but it is twice the rate.
That gives us the opportunity that we want.
Q342 Mr Gauke: Could I come back
to an issue you touched on a moment or so ago, which was outsourcing
and offshore and so on. What sort of impact has that had on WPP?
Going forward, do you see that increasing and what sort of impact
will that have on the UK?
Sir Martin Sorrell: Limited so
far but it is starting to have an impact. For example, some of
our market research operations we have moved to Bangalore. I mentioned
the talent officer deployment to Singapore. I think we will be
doing increasing amounts of that. It is not just a question of
cost. Our Indian market research bureau company based on Mumbai
and Delhi is amongst the best research companies that we have
in the world. The quality of the research done, the thinking,
the academic ability, is as good as you will find anywhere else,
so I think it will have more impact on our business. It is limited
so far but it will have greater impact.
Q343 Angela Eagle: Martin, you are
obviously driven by your top-line and shareholder return to go
out and forge new markets in new dynamic areas where the growth
potential is the highest. That is what is exciting for you. That
does not mean that the mature economies cease to exist or that
they cease to have extremely profitable markets that could be
Sir Martin Sorrell: Absolutely.
Q344 Angela Eagle: Whilst we have
been looking at the frontiers, which are tremendously exciting
and attract particular sorts of people with particular sorts of
interest, are we not missing rather a large bit of the jigsaw
if we do not then remember that the matured, advanced economies
that are left behind have quite a lot of profit to be had although
it might be done in a slightly more sedate, less exciting way.
Sir Martin Sorrell: Absolutely
right. There is one $10 trillion economy which is the US. There
is one $3 trillion which is the Japanese market. I believe we
are averagely intelligent at WPP. I do not think we are better
than anybody else or worse than anybody else. I like to push on
an open door. I would far rather, very simply, expand in markets
where I am getting 10% growth.
Q345 Angela Eagle: I can understand
that. But there is this whole other world, is there not, that
we must not forget while we are getting very excited by what is
going on on the frontiers.
Sir Martin Sorrell: Yes, but people's
attitudes are different. If you are growing at 3% and you are
having difficulty in growing at 3% and you are trying to get your
business to integrate and people to work together, there is a
tendency for people to squabble more. The way I would put itand
you may not like what I am going to sayis that in China
people smile. I do not see much smiling here. It is too much of
a fight. One or our competitive advantages is getting people to
work together. It is much more difficult to do that in an economy
which is growing at 3%, when people squabble over the revenue.
Q346 Angela Eagle: Is it not the
difference between new, exciting, green-field site development
and boring old brown-field development but do we not need boring
old brown-field development? And is that not also an area where
there is some comparative advantage for the company that would
be interested in it with quite a lot of shareholder-tingling profits
Sir Martin Sorrell: The answer
is you do both, but if you said to me, "What is more attractive?"
It is just like technologies. It is just like traditional media
and new media. What is hip, cool, trendy and sexy, right, is something
that is very attractive to our people.
Q347 Angela Eagle: Yes, and it is
old hat in a couple of weeks' time.
Sir Martin Sorrell: I know that.
I think the answer is you would like to do both but I think you
have to deal with the reality that some of these new areas are
much more attractive to our people.
Q348 Angela Eagle: I understand that
but there is this other area that we must not forget. You asked
a very interesting question earlier on. You were worried about
the political support for globalisation and open markets being
eaten away. We saw that in the G7 or G8 protestors, who suddenly
appeared out of nowhere worried about real things. What are the
benefits of globalisation to a Detroit car worker? Is it not important
that we manage to keep a political commitment to the benefits
of open markets and also the benefits of the role of the state,
so that we can make sure that this economic growth is sustainable
into the long term? And we have not even talked about environmental
sustainability, which is another huge issue.
Sir Martin Sorrell: You are going
to get, for good or bad reasons, tremendous support, I think,
for CSR, CR initiatives or global corporate citizenship. Three
things have happened recently: the Gates/Warren Buffett deal over
Berkshire Hathaway; the initiative by Richard Branson, up to $3
billion profit; and James and Rupert Murdoch's initiatives with
BSkyB and News Corp. Those are high profile events which have
meant that no self-respecting CEO of any company or chairman of
any company will not be interested in these areas of carbon neutrality,
environmental concern. Again, whether it is for the right reasons
or not, these events I think have had a tremendous impact on people's
thinking. The private markets, private industry and public industry
are going to be much more focused on that. Coming back to the
question about free trade, free trade drives growth. It drives
employment, it drives wealth creationmaybe unequal wealth
creation, but it drives creation.
Q349 Angela Eagle: In general, but
the problems tend to come about in particular if we go back to
our Detroit car worker. If you lose the support that is expressed
politically of the people who are involved, sometimes as victims,
then a lot of the potential that are in these economies is threatened.
Sir Martin Sorrell: I can understand
that point of view. My point of view, running a company like at
WPP, would tend to be narrow. But let me draw an analogy with
Latin-America. Latin-America has not shown the growth that everybody
has predicted for many years, 200-300 years, and one of the reasons
is that governments there are not prepared to deal with the interest
groups, trade unions or whatever, in an aggressive way or in a
direct way because they are frightened of losing their political
base. If you look at the growth of Brazil and Mexico, for example,
one of the reasons why it has not grown as rapidly as perhaps
it could do is that governments have been unwilling to deal with
some of the issues, some of the structural issues, some of the
attitudinal issues in as vigorous a way as is necessary to get
Q350 Angela Eagle: Sir Martin, you
can look at that on an individual country basis but it is surely
not only up to governments to deal with the victims of globalisation.
If the entire process is to continue and to be beneficial for
as many people as possible, surely everybody in the end has to
deal with it, or you consume your potential simply because you
then lose the places in which you can operate from the map.
Sir Martin Sorrell: I am not worried
about the lowest common denominator; I am worried about the highest
common multiple. I see the benefits of globalisation outweighing
the disadvantages. There will be dislocations; there will be industries
that come under pressure. I think those things will happen in
any event, whether people pursue protectionist policies or not.
The Chinese system, which I would describe as state directed capitalism,
is a very powerful system. The Indians say, "We're the fastest
growing democracy in the world to differentiate themselves from
the Chinese." I will not bore you with the stories I have
seen, for example, in the growth and development of Shanghai,
Pu Dong and the Expo there. The decisions that the municipality
in Shanghai make, which are well thought through and planned,
do cause disruption, do cause concern about human rights and the
like, but the direction of that country and the growth of that
country has been very significant overall. Unequalthey
are very concerned about that and they will try to get balanced
growth. So I think there are disadvantages but, overall, the advantages
Q351 Chairman: Sir Martin, I would
like to thank you very much for your attendance. Maybe next time
you go to Shanghai, you can say that you were in the UK and you
went to a forum where everybody smiled for a whole hour.
Sir Martin Sorrell: I hope they
were laughing with and not laughing at!
Q352 Chairman: Before you go, tell
us in 10 seconds, from your point of view, one thing we should
be putting in this report.
Sir Martin Sorrell: From my point
of viewand this is a narrow interest of minebusiness
education. I would put it in the context of education and investment
in education. Business education and the development of well-educated
businessmen and women I think is critically important.
Chairman: Thank you very much.