Below is the transcript of a CNBC Exclusive interview with Douglas Flint, Chairman, Standard Life Aberdeen. If you choose to use anything, please attribute to CNBC and Nancy Hungerford.
Nancy Hungerford (NH): Sir Douglas, thank you so much for taking the time to speak to CNBC as part of the Singapore summit. and there is a big discussion underway at the summit as to where we are in terms of this COVID recovery. And as we look forward, if we can just look back briefly, because in August, your company did highlight a pretty sharp fall in profits and withdrawals. And you did blame a big part of that the CEO at the time did on what was happening with COVID-19. And I’m simply curious to hear from you if you think the worst of the COVID-19 impact on the business is over.
Douglas Flint (DF): To be honest, I don’t think anybody knows. I mean, it’s not just COVID. At the moment, we’re in a very unusual period where we’re in the early stages of the run up to the US election. We have an uncertain situation in the UK around Brexit. We’ve had a bit of a bounce back in the in the third quarter in terms of the economy, but I think there is still a great deal of uncertainty as to whether we get a second wave or a recurrence of the pandemic in the UK and elsewhere that would put constraints on a resurgence of the economy. So I think it is too soon to say. And I think we’re entering a particularly uncertain period with those three factors dominant.
NH: And on top of all of that, I mean, there are concerns that some of the measures the government has put in place around the world, but also in the UK, where you are, such as the furlough scheme and additional stimulus measures, that when they wind down, we could be looking at a pretty harsh economic reality. Is that something that concerns you?
DF: It concerns me a great deal. I think that the many economies have become dependent on government support and while that government support was timely it was extremely heavy in terms of its impact, but it can’t go on forever. And I think the challenge for governments across the world is how to wean the economy of governmental support how to do it on a sector by sector basis. Some sectors will continue to require support, but how to get the economy functioning in an independent way, again, I think is going to be very important, and how to use the firepower that the central banks and governments may have left to target that very specifically and efficiently to those sectors that need it. It’s going to be it’s going to be a significant challenge, because as that as jobs begin to get lost, confidence will fall. And that had an has a sort of a multiplier effect on what happens in terms of people’s willingness to go out and spend and do the things that would bring the economy back.
NH: Do you think that perhaps all of this government support whether it’s coming from the fiscal side or predominantly it’s really coming from the central banks is leading to an unhealthy complacency among investors showing up in the market even today?
DF: No, I don’t think investors are complacent. I think there may be sections of the economy that believe that this can get can go on and on. I think there needs to be an education process that begins to let people understand that and to tell him unless people start going back to work consuming in a more a more traditional way, the economy is going to be in the doldrums and there will come a limit to the extent to which governments can support the economies and the limits of the extent to which the markets will continue to support ever expanding fiscal deficit.
NH: Yes, it does seem that that will be a worry for some time is what we keep hearing. But the question is when we wake up to these realities, and how to deal with them, I hear you on that. And if that weren’t worry enough, we have some self-imposed political issues as you as you may want to call them. I’m curious for your thoughts on what’s happening with Brexit right now, because it does seem as though Boris Johnson, the government are willing to flirt with this notion of a hard Brexit – I saw a study from Goldman Sachs recently, though, saying that a disorderly Brexit could be even worse for the economy than what we’ve seen with the pandemic. I mean, how bad would it be for business do you think?
DF: Well, I think business is prepared for a hard Brexit. Nobody knew how it would play through. And therefore you had to prepare for the worst possible and hope that it would be better. I think, as in any negotiation, things look very dark until the very, very last minute. But clearly, we’ve only got three and a bit months to go before the end of the transition period. And I think it could be a very difficult time if we end up with a very thin Brexit. So with a very thin deal or no deal, and we enter the winter period, if there were to be a resurgence at that time of, of health issues, I think the economy and the the confidence within the economy would be very dramatically bad. But we shall see. I mean, clearly, on both sides of the of the negotiations, there is a desire to have a deal that works for both sides, and it’s just a question whether politically that can be built up.
NH: Do you think it will come to that, a disorderly Brexit?
DF: No, I don’t. I think there’s too much at stake. I think it will be quite a thin deal with this deal. But I think both sides have a real necessity to get a deal both politically and economically. And I would like to think that that will drive behavior towards the end of the deal. As I said, I think these things always happen at ten to midnight. So I’m not too concerned about what’s happening at the moment. I think it’s an inevitability in a very complex deal like this, or a very complex negotiation like this.
NH: Sir Douglas, it wasn’t so long ago that there was talk of a post Brexit Britain, perhaps building even closer relationship with China and building closer ties economically with China. I know you have a keen view to this relationship, given your special envoy role to the Belt and Road initiative. And I just wonder, given the events of the last few months, what we’ve seen – a real deterioration, you might say, between the UK and China’s relationship – how detrimental is this?
DF: I think China’s hugely important to the global economy and to global trade. I mean, to me, it’s inconceivable that you can address the major challenges facing the world – whether it’s climate change, health issues, migration, demographic aging, inequality, terrorism, sustainability – all these things cannot be done without the US and China and Europe and the rest of the world all engaging and collaborating. The most important issues in the world, require people to work together, and I think the pandemic actually illustrates this incredibly clearly. Six months ago, seven months ago, every single company in the world virtually saw its growth opportunities in Asia led by China, I don’t think that’s changed. The emergence of a very strong middle class, the desire to consume in a different way, which means access to Western markets and giving access to Chinese goods into those markets, I think continues to be what will drive the global economy. I think protectionism would be a very bad thing. And I you know, I genuinely believe that the right answer is one of engagement. Of course, we won’t agree with everything that happens in every country in the world. But I believe that in history, we’ve dealt with these things through engagement. And I think it’s really important that as we enter into 2021, post pandemic, post American election that we we find a pattern of engagement, that enables us to address the shared issues that are so important to us.
NH: And, sir, as you were just explaining that relationship there. I do wonder, in the aftermath of what we’ve seen with the UK’s response to their concerns around China’s approach to Hong Kong, also the UK his decision around Huawei, has any of this changed the business environment for UK based corporations such as yours doing business in China. Has anything become more difficult as a result, would you say?
DF: Of course, it’s become more difficult because business operates under the umbrella of a geopolitical relationship and when that relationship is tense, it is more difficult for business to operate. Having said that, at the business level, our own relationships with our counterparts and clients and China continues to be very strong. It is not impacted at that level. But obviously there’s a an overriding political relationship that makes things difficult. I also think you have to think longer term again, if you look at the rhetoric and then you look at the actions, there are many elements in the Chinese economy that are continuing to open up, and we’ve seen many of the major US firms – BlackRock, Vanguard, JP Morgan – beginning to expand their operations even during this period in China, which illustrates at the business level, there continues to be progress towards the kind of ambitions for the economy and the integration of the Chinese economy into the global economy that both sides have aspired to. But the political rhetoric is somewhat distant from what’s happening on a commercial side, and I think we need to try and bring the two back together. And as I say, I think that should be done through engagement.
NH: And sir since you spent years in Hong Kong during your role at HSBC, I’m just curious for your thoughts on the new national security law and whether you think this could be the start of a path perhaps towards an erosion of the one country two systems policy.
DF: You know, we’re going to look back at it, and we’ll have a much better idea as to whether the risks that you described could happen, I mean, people who are in Hong Kong, businesses that are in Hong Kong are in Hong Kong because they want to engage with China. Hong Kong’s markets continue to be very strong. And I think that we see right away across the world – the US, France, the UK – that when there is civil disturbance, actions need to be taken. Basically everyone in Hong Kong – certainly in the business community says – we need to see a more stable social environment so that the economy can begin to grow and the fabric of society is fair and open. If this law contributes to that, then that is a great thing. If it doesn’t, then it’s not a good thing, but I think it’s too early to see what its impact will be.
NH: And if we can just put politics aside for a minute, put the COVID issue to the side, which I know isn’t very difficult to do these days in this environment. But looking at the Business Standard life Aberdeen I mean, there are some internal issues that shareholders are looking for some answers on and now that you have your new CEO taking over the helm, Stephen Bird. What would you say his priorities should be at a time when people are still worried about fee compression, and just a very competitive industry and active management?
DF: Well I think priority number one is to is to address the post COVID environment in terms of working practices, because clearly the way we will work going forward across all industries, but certainly ours will be different. The lessons that have been learned and a distributed workforce, I think have been very powerful. So that’s the first thing. But then it’s hard to grow the business. I mean, no business can be successful unless it has a path to growth. And I think that harnessing technology, moving more into the digital space, taking advantage of the extraordinarily strong brands on the geographic and product distribution capabilities that we’ve got. There are great opportunities for growth and we have a very strong balance sheet. So you know, we’ve got all the resources that we need, it’s a question of harnessing them. And I think in a world of very, very low interest rates, and in a world of very heavy concentration into the largest companies, there’s a real opportunity for active managers to demonstrate that they have something to bring to the table. I mean, this is the ideal condition for active management. So we’re quite excited about the future.
NH: And given that balance sheet position you just described, I mean, would you look at potential deal activity, even an additional merger to get scale in this environment, because it’s a conversation we’re starting to see take place, both when it comes to banking sector and asset managers and insurers as to whether further consolidation is needed in these tough times.
DF: I think there’s an awful lot we can do without dipping our toes into the M&A market again, but you never you never know what might happen and we are strong and we have capabilities, but I think the priorities in the in the near term are to maximize the opportunities with what we’ve already built from the merger of Standard Life with Aberdeen so let’s see where that goes first.
NH: I did see one top 25 shareholder quoted as saying that perhaps putting the payout on hold, holding the dividend would be some necessary medicine. We know that’s never popular with investors more generally speaking, but do you think this is something that is under consideration?
DF: Well, the dividend is just part of a capital allocation policy. I mean, the important thing is to decide when you got distributable money, how much of it do you spend on expanding your business, how much do you spend on rewarding shareholders for trusting you with their capital and giving them the returns that attracts their support. At the end of the day, all of these things have to be done on the back of a growing and profitable business. So the first thing we have to do is to make sure that the generation of capital is strong and then we will decide to what extent we can use the capital better than handing it back because we see great opportunities to expand, or whether there are other things we should do, including making sure that our shareholders are properly, adequately, and fully rewarded for the support that they continue to give us. And that’s what we’ve done historically.
NH: And in terms of what you can do in this environment to boost revenue streams and boost profits overall, to what extent are you looking at wealth management as an attractive area to expand upon? Obviously, Stephen Bird comes to the table with a lot of retail experience, do you envision that it is time to expand in wealth management?
DF: We’re very big in wealth management. It’s one of the stronger frustrations that we have a very big wealth management business, particularly if you look together at our platforms business, which is a business that deals with independent financial advisors, But that together along our wealth business is quite a big business. But wealth definitely is an area of focus, particularly digitally. I think that the democratization of savings demands that we move much more into that space. And also, one of the things that I think the pandemic has illustrated is that there is a lack of resilience in the individual space in corporates and in governments and therefore, helping people understand that both their demographics either living longer, and the fact that they need more resilience plays into the savings will be more and more important. So I think the wealth space is an area that we will, we will focus on
NH: And sir as you’re talking about this issue of resilience or lack thereof before going into the pandemic crisis, I’ve had a lot of questions from panels I’ve done at the Singapore summit already as to what the post-covid world will look like and as a business leader, throughout your career, thinking of various crises that you have been through, I mean, what do you think the biggest lesson we can take away from this crisis is?
DF: I think it is one of resilience. I mean, if you think of the focus that we’re now having of concentration in supply chains, in suppliers, in countries that we take services from I think that’s been huge. I mean, I think that, you know, coming from the banking side, as you said, you know, can you imagine what the pandemic would have been like if the strengthening of the resilience of the banking system that was done in the aftermath of the global financial crisis hadn’t been done. I mean, the banks enter the pandemic period with huge amount of capital, much more operational resistance, living wills, all these good things. That meant that we know one of the things we should be very proud of is the financial system didn’t break, the utilities didn’t break. You know, basically, the basic services of society came through an extraordinary stress test and came through it. Well, if we hadn’t had the financial system more resilient, I think we’d have had a financial crisis as well as an economic crisis. And if the amount of money that had been spent strengthening the financial system had been spent on strengthening the health service and other parts of the economy that have been severely tested in the pandemic, we probably would have been a much lower cost to society of dealing with this pandemic. So resilience i think is going to be hugely important, which is the S of ESG.
NH: That’s an excellent point and a good point for us to conclude on as well hoping to build resilience for the future. That’s for sure. So Douglas, thank you so much for taking the time to speak to me for CNBC. Really appreciate it. Thank you.
DF: My pleasure. Thank you.
END
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