Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 340 - 352)

TUESDAY 15 MAY 2007

SIR MARTIN SORRELL

  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 point—and maybe this is an opportunity for WPP and its constituent agencies—that 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 companies?

  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 exploited.

  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 it—and you may not like what I am going to say—is 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 available.

  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 creation—maybe 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 the growth.

  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. Unequal—they are very concerned about that and they will try to get balanced growth. So I think there are disadvantages but, overall, the advantages overwhelm them.

  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 view—and this is a narrow interest of mine—business 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.





 
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