Building towards the future

FRIDAY INTERVIEW:Kieran McGowan, chairman of CRH

KIERAN McGOWAN has experience both in attracting multinationals to Ireland as a former chief executive of IDA Ireland and in growing an Irish multinational globally as chairman of building materials giant CRH. He occupies a unique vantage point in understanding the problems facing Ireland as the Government grapples with the fallout from the economic and financial crisis and tries to retain its reputation as a country in which multinationals should do business.

The theme of uncertainty features prominently in any conversation with McGowan at present.

Speaking ahead of an address last night to the Ireland-US Council business association in New York where he was being honoured, the 68-year-old businessman said the uncertainty in the euro zone was affecting both CRH’s growth and the view of multinationals in Ireland.

“Businesses don’t like uncertainty and they are constantly looking for as much certainty as they can get,” he said. “Unfortunately, Europe at the moment is a whole ball of uncertainty, and Ireland is trying to make our way as the good guys in Europe – that is the path we should be on.”

CRH is a good bellwether for the state of the global economy. Based in Clondalkin, Dublin, it employs 75,000 people in businesses across 35 countries. Since buying into the US market in 1978, the company has expanded into all 50 states.

However, profits have slumped in the global economic downturn and the €1 billion the company raised from shareholders in one of the largest fundraisings in Irish corporate history has sat largely untouched since 2009.

CRH has been criticised for not making more acquisitions – the value of its acquisitions has fallen from €2 billion in 2007 to about €400 million this year – but McGowan refuses to be railroaded on the issue.

“Our mode is to look carefully. It is just as important to know when to walk as to make acquisitions. That is the way we want to be,” said McGowan. “Are we going to start buying more? We will if there is value there, but we won’t be pushed into something that we won’t do.

“We could make more acquisitions, but if we had made the acquisitions in 2009 and 2010 people had pushed us into, we would be regretting them now, big time.”

CRH’s strong cash position and healthy two-times debt-to-earnings ratio means it is well placed to buy when it feels the time is right.

“While there is uncertainty, we will be careful,” he said. Projecting how businesses will perform beyond 2012 is “very difficult”.

CRH has a “bigger pipeline” of possible acquisitions being reported to the board from its various businesses around the globe than it had a year ago, he said. However, the acquisitions must clear several hurdles, including making a return on capital of at least 10 per cent and an assessment of whether business projections can be trusted.

An uncertain world means proposals fall early at these hurdles.

McGowan said the company had expected to find value in acquisitions during the financial crisis as more heavily-indebted rivals were forced to offload businesses, but things turned out differently.

“Banks have stayed with their clients, so they didn’t have to realise losses that are there. That is still the case,” he said. “We feel that, in 2012, there will be more pressure on lenders to actually realise the situation, and that will give rise to value.”

Including CRH’s operations in Poland, emerging markets account for about 15 per cent of CRH’s earnings. McGowan said these are countries the company will primarily target next year by growing its involvement in joint ventures in India and China.

CRH aims to buy cement businesses and then move “downstream” into building products, readymix and distribution in China and India, he said.

The plan for CRH in the US is to retain and strengthen its market share. “It’s not as if we are going to turn off the tap on the markets that we are in,” he said.

McGowan’s €405,000-a-year job as non-executive chairman of CRH – a company with a market worth of €9 billion – takes up 75 per cent of his time. He is also non-executive director of pharmaceutical company Elan and chairman of Property Industry Ireland, the umbrella and lobby group pushing for a recovery in that sector.

McGowan believes that to be an effective non-executive director, an individual should be on no fewer than two company boards – “one place might be of interest to another” – and no more than four, which would be “unsustainable”.

As chairman of CRH, McGowan has set out to “internationalise” the board by appointing overseas directors who have “experience of the kinds of places where we are going to be in the next few years”.

Checking out the backgrounds of unknown but experienced boardroom candidates is time-consuming, but appointing directors who are “known and friendly with each other” would be too cosy and bad for shareholders, he said.

McGowan said that if a board is well-structured, non-executive directors can be effective.

“The most important thing is trust. If there is trust, there can be very searing kinds of questions.”

Every year, CRH’s board reviews the acquisitions of the previous three years. “It is an honest way of doing things and it is brutal,” he said. “It leads to us saying, how did we get it so wrong and what can we learn from it, especially at a time of so much uncertainty.”

McGowan said that, generally, if the dynamic in the boardroom is good, non-executives can be “very influential in changing the way things are dealt with”.

As a non-executive board member of Irish Life Permanent for nine years until 2008, McGowan recalls “a very robust conversation” in its boardroom after rival Ulster Bank introduced 100 per cent mortgages in 2005.

The then chief executive David Went [who is now chairman of The Irish Times] spoke to the Financial Regulator, pressing that authority to intervene. “He telephoned to say that your role is to stop this when Ulster Bank did it. ‘If you don’t want this to get out of hand, you should stop it,’ he said. They said to him: ‘We are a principles-based regulator – we don’t do that.’ That conversation happened,” said McGowan.

But the competitive pressures of the market were too great, and this forced Irish Life Permanent to follow Ulster Bank with 100 per cent mortgages of its own.

“Irish Life Permanent had a certain market share. Market share was a big issue at the board and a big issue at the company, and they said that if we don’t follow, we are going to lose share all over the place to Ulster,” said McGowan.

If the company had failed to respond to Ulster Bank, “all of the various kinds of stakeholders would have been on your back” at the next annual meeting, he said.

Was this now a regret that Irish Life Permanent – the biggest mortgage lender during the boom – did not act differently?

“Ah yes, of course,” he said.

And could he have shouted louder as a director during boardroom discussions to stop it? “Probably . . . in relation to 100 per cent loans, I think we could have.

“I think we should have been more aggressive with the regulator really to say: ‘That is not good enough to say you are a principles-based regulator; this is what is going to happen.’ So I guess that is what should have happened.

“We should have really put our foot down and said, ‘Look, this is not good enough’, and maybe gone to [the Department of] Finance and said, ‘This is what’s going to happen; you need to step in here’.”

The collapse of Wall Street bank Lehman Brothers seized up the international money markets, where Permanent TSB borrowed more heavily than any other Irish bank to maintain its position as Ireland’s biggest mortgage lender. The cost of reducing this reliance on outside borrowing has ultimately led to the effective nationalisation of the company.

McGowan said the bank could not attract deposits at the same rate that it was growing its loans and this meant borrowing heavily in the international bond markets.

“I never thought, to be honest, that wholesale lending would just come to an abrupt stop like that. In all fairness, I don’t think too many people did because it was the way the world was,” he said.

McGowan remembers the two months prior to stepping down as a director of Irish Life Permanent in November 2008 as being a frenetic period for the banks.

“Anglo was frantic about trying to find a solution and we had the view that we were different and weren’t in that property [development] stuff,” he said.

McGowan said that, around this time, he was approached by a non-executive director of Anglo (whom he declines to name) about the possibility of a merger with Irish Life Permanent. David Drumm and Seán FitzPatrick were lobbying fellow Irish Life Permanent directors Denis Casey and Gillian Bowler around the same time.

“Anglo was really in a bad state and the view also at that time was that they were very closely connected to government, and that they were very good lobbyists on their own behalf,” he said.

Now the pressures are no longer on banks but on the sovereign, and McGowan believes Ireland should at all costs avoid following Greece down that road.

Speaking to The Irish Times earlier this week, McGowan said CRH constantly reviews whether to move its main market listing from Ireland, particularly given that it represents almost a quarter of the Irish exchange. The company is proud of its Irish roots he said, but a default by Ireland, like Greece, could raise concerns among investors and force a move.

Days later, and without any default, the company decided to relocate to the main market listing to London.

In his speech to the Ireland-US Council last night, McGowan spoke about how Ireland has “first-mover advantage” over many countries which are trying to replicate the country’s model for attracting foreign direct investment. He said the IDA should use the power of “Team Ireland” and multinationals operating here to promote the country overseas.

Many Irish staff working in multinationals have risen through the ranks to senior positions in their global operations. He pointed to the 400 Irish people working at the headquarters of Microsoft in Redmond, near Seattle.

He told an anecdote last night about how Intel chose Ireland for its European operations. While scouting around for the right location, Intel had narrowed the shortlist of potential locations down to Austria and Ireland.

Austria was centrally placed and had a better infrastructure, but Intel was concerned the country had not yet joined the EU and that opponents in Austria were arguing that membership would undermine its neutrality.

McGowan recalled asking Ireland’s then EU commissioner Peter Sutherland to have a quiet word with senior executives from Intel to give his views on Austria. He did, said McGowan, and Intel plumped for Leixlip in 1989.

Ireland’s message to foreign investors has remained the same since the 1960s and multinationals like that certainty, said McGowan.

“Dermot McAleese [the academic economist] says that around the 1960s and 1970s Ireland was rolling out the red carpet to foreign direct investment when most other countries were rolling out red tape,” he said.

“We have been consistently attracting inward investment when other countries have been turning it on and off.”

In his time at the IDA, McGowan played an active role in negotiations for the 12.5 per cent corporation tax rate with the then minister for enterprise, trade and employment Mary Harney and the secretary general at her department Paul Haran in Dublin and Brussels in the 1990s. Now he is fearful that if Ireland needed a second bailout, it would weaken its hand in EU discussions around a common consolidated corporate tax base.

“The 12.5 per cent is hugely important to the Government as much because of this question of consistency so that there are no unpleasant surprises,” he said.

“If it even went from 12.5 per cent to 13 per cent, it would be a very major issue – not so much because of the extra amount they would have to pay but the uncertainty that it would create.”

Ireland has come through tough times, said McGowan, but he believes the country is on the right path and that it could return to borrowing in the markets and self-sufficiency again in 2013. “If we can get to the point, which is what the Government is trying to do, where we are borrowing on our own account, then are going to be much more in charge of our own affairs.”

ON THE RECORD

Name:Kieran McGowan (67)

Position: Chairman of CRH

Family: Married to Breda with four children and six grandchildren

Home:Foxrock, Dublin

Hobbies:His grandchildren, and playing golf "badly", he says

Career:Has been chairman of CRH, the biggest company on the Irish Stock Exchange, since May 2007.

He is also a director of biotechnology company Elan.

Was chief executive of IDA Ireland from 1990 to 1998. Is formerly a director of United Drug, An Post and Drury Communications.

Was on the board of Irish Life Permanent for nine years, stepping down after the financial crisis struck in November 2008