Transcript: EY’s new leader has her work cut out for her

This is an audio transcript of the FT News Briefing podcast episode: ‘EY’s new leader has her work cut out for her’

Sonja Hutson
Good morning from the Financial Times. Today is Friday, November 17th, and this is your FT News Briefing.

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Alibaba’s stock tanked after it announced some bad news yesterday. And EY has a new CEO. But can she solve the firm’s biggest challenge?

Stephen Foley
It was planning to do a very big transaction. It was going to sell off its consulting business, but that plan collapsed.

Sonja Hutson
Plus, low-income households in the UK are getting hit hard by the Bank of England’s rate rises. I’m Sonja Hutson, in for Marc Filippino, and here’s the news you need to start your day.

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Alibaba announced yesterday that it was ditching plans to spin off its cloud computing business. This didn’t go over well with investors. US shares in Alibaba fell almost 10 per cent. Here to talk more about this is the FT’s China technology correspondent Eleanor Olcott. Hi, Eleanor.

Eleanor Olcott
Hi.

Sonja Hutson
So what were the main takeaways that we learned from Alibaba’s announcement yesterday?

Eleanor Olcott
So Alibaba’s business is in a really difficult position. Alibaba was the poster child for China’s explosive economic growth. Year in, year out, we saw double-digit growth, mostly coming from its booming ecommerce business. But over the past few years, it’s become the unwanted poster child of the country’s sluggish economic growth. So in March this year, following China’s reopening, Alibaba embarks on an ambitious restructuring to turn this whole narrative around. And it announced plans to split up its $220bn empire into six separate business units. But what’s really happened in the intervening months is investor enthusiasm for China’s reopening story has really fallen off a cliff as it’s become clear that lockdowns were papering over more systemic problems with the economy. And so it’s cancelled plans to spin off its cloud business and also cancelled plans to list its grocery business as well.

Sonja Hutson
Yeah. What happened with the plans to spin off the cloud business?

Eleanor Olcott
So Alibaba said that they wanted to unlock shareholder value. And so the plans to spin off the cloud business, which was once feted as a big kind of growth driver for the company, was supposed to make it more dynamic. What’s happened in the intervening period is you’ve not only seen a huge amount of difficulty for small and medium enterprises who are an important customer for Ali Cloud, but also US’s tightening export controls on crucial semiconductors that go into cloud computing services. And Alibaba has just said that this will impact their future ability to service their customers.

Sonja Hutson
And like I mentioned earlier, this announcement had a huge impact on the share price. What about it specifically got investors so spooked?

Eleanor Olcott
The announcement is confirmation that the break-up isn’t going to plan and the company is going to have to go back to the drawing board to find a new growth story. And quite frankly, I think given the amount of headwinds that Alibaba is facing, investors are just not convinced that they can create a new growth story. To add to the share prices difficulties, Jack Ma, the enigmatic founder of this company, his family trust announced that they were selling 10mn shares, which didn’t help investor sentiment on Alibaba yesterday.

Sonja Hutson
Does this tell us anything bigger about the Chinese economy or doing business in China?

Eleanor Olcott
I think it tells you that investor confidence in the China growth story is really weak right now. The Hong Kong listing environment has been anaemic this year and it’s just very, very difficult to get investors after they’ve dealt with such a bruising regulatory crackdown on tech two years ago. Plus, all of the negative news you’re seeing on economic growth, to buy into China tech, despite the fact it was such a persuasive investor story for a good two decades.

Sonja Hutson
Eleanor Olcott is the FT’s China technology correspondent. Thanks so much.

Eleanor Olcott
Thank you.

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Sonja Hutson
The Bank of England’s interest rate increases are starting to leave their mark, and the people getting hit the hardest are low-income borrowers. New research shows that more than half of UK mortgage holders who are less well-off have fallen behind on at least one of their bills. Inflation is also putting a lot of strain on these low-income households. The vast majority of them said they were going without basic necessities like food and warm clothes.

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EY picked a new leader this week. Janet Truncale is the first woman to lead a Big Four firm, and she’s taking over at a rocky time for EY. I’m joined now by the FT’s US accounting editor Stephen Foley. Hey, Stephen.

Stephen Foley
Hi there. Great to join you.

Sonja Hutson
So give us some background on this selection. Why was EY picking a new leader to begin with?

Stephen Foley
OK. Well, EY has just been through the fire. It was planning to do a very big transaction. It was going to sell off its consulting business, which is more than half of the business. It was going to spin it off as a separate company, something that would reshape the accounting profession for a generation. But that plan collapsed in some acrimony back in April. And Carmine Di Sibio, who has been the global CEO, has decided to retire a year early. And that’s what has caused this quite exciting leadership race.

Sonja Hutson
So what do we know about the new CEO, Truncale?

Stephen Foley
So Janet Truncale is currently in charge of the Americas Financial Services Organization, which is the consulting and audit practice that deals with EY’s financial services clients, the big banks and the like. So that’s a large part of EY’s business in the US. And she’s an ally of Carmine Di Sibio. She was in favour of the split. So now the question is: how will she approach picking up the pieces, trying to heal some of the divides inside this firm and thinking the strategy going forward?

Sonja Hutson
Yeah. How do you think she’s going to approach that?

Stephen Foley
Well, everyone tells me that people internally would like a period of healing, and certainly building fences between the global leadership and the US is going to be vitally important for getting any agreement on a new strategy. But some of the logic that led to the global leadership wanting to split this firm in two still stands. There are lots of rules that prevent conflicts of interest and stop this firm from selling consulting services to its audit clients and vice versa. And the logic suggested that both sides of the firm would grow faster separately. So the question is, can another kind of deal be done?

Sonja Hutson
And that part of the business, the consulting business, has been hit hard across the board recently. You know, we’ve talked on the show about how the Big Four have all had lay-offs in this area. What sort of position is Truncale walking into in that regard with EY?

Stephen Foley
Well, as you say, it is a very difficult time for some of these consulting businesses. Audit — that’s great. Every company in the world has to audit their figures. That bankrolls these companies. It’s the consulting side of the business that’s much more cyclical. The question is whether or not these firms can be reshaped to take advantage of an upturn when it comes. Very competitive landscape when it comes to IT consulting, for example, and EY in particular feels like it’s got its hands tied behind its back. It audits most of the large technology companies, and that means it can’t sell consulting services that involve those. That’s one of the reasons we keep looping back to this question about whether the company should be split in two, and we’ll be following it in the coming months and years.

Sonja Hutson
Stephen Foley is the FT’s US accounting editor. Thanks, Stephen.

Stephen Foley
No problem. Thanks very much.

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Sonja Hutson
You can read more on all these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news.

The FT News Briefing is produced by Kasia Broussalian, Marc Filippino, Fiona Symon and me, Sonja Hutson. Our engineer is Monica Lopez. We had help this week from Josh Gabert-Doyon, Manuela Saragosa, Sam Giovinco, David da Silva, Michael Lello, Peter Barber and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio, and our theme song is by Metaphor Music.

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