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19th Annual Global CEO Survey / Azerbaijan

www.pwc.com/az

1,409 CEOs interviewed in 83 countries32 CEOs from 10 industries interviewed in Azerbaijan

Adaptability in turbulent times

Introduction from Movlan Pashayev

Dear Readers,

Dynamically integrating into the global economy, Azerbaijan plays an important role in the formation of mega trends and shaping up the country landscape. PwC Azerbaijan is proactively addressing this positive change and supports the Government by solving important problems of businesses and delivering quality thought leadership products.

I am proud to introduce you PwC Azerbaijan’s 1st Annual CEO Survey report addressing the insights of country CEOs on the economic growth prospects and mega-trends in the turbulent times.

This year our firm has been invited to participate in PwC’s 19th Annual Global CEO Survey presented on World Economic Forum in Davos. We are now a part of the global report covering the insights of 1,409 CEOs from 83 countries all over the world.

If we look at Azerbaijan landscape, more than the half of CEOs are still confident about their revenue growth even despite of devaluation and dramatic reduction of oil cost. Having said that, 75% of the interviewers recognize more threats today versus three years ago while most of them take in these threats as opportunities for development. Responding the crisis, the majority of CEOs are implementing cost-reduction initiatives concentrated on the decrease of headcount.

2 19th Annual Global CEO Survey / Azerbaijan

A number of CEOs in Azerbaijan were surveyed regarding their outlook on the growth in the global economy over the next year. They predominantly hold a negative outlook while their global counterparts are more optimistic. Furthermore, they believe that their companies will grow in the long-term but unlikely in the short-term.

I would like to thank 32 company leaders from diverse range of industries who have sat down with us and contributed to this survey. Their deep insight shaped a comprehensive and accurate report comparable with our global data and regional peers.

Movlan PashayevCountry Managing PartnerPwC Azerbaijan

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Contents

06

Growing in complicated times

Transforming: technology, innovation and talent

Moving beyond globalization

Measuring and communicating success

Addressing bigger expectations

Research methodology and contacts

13

10 18

11 19


CEO Survey Azerbaijan Key findings from this year’s survey

57% ofCEOs in

Azerbaijan feelconfident about

their revenue growth

42% of CEOsbelieve that the global economy will decline in

2016

75% of CEOs see morethreats today versus threeyears ago 81% 75% 72%

Availability of key skills

Shift in consumer spending and

behaviours

Readiness to respond to a

crisis

CEOs are considering for 2016:

81%

Implementing cost-reduction

initiatives

50%

Decreasing headcount

63% of CEOs think stableand effective tax system should be government priority

54% of them assessedgovernment to be ineffective achieving this target

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25%

of Azerbaijani CEOs does not relate climate

change and environmental damage to their

organisations’ growth prospects unlike their peers

globally (50%)

Growing in complicated times Today’s CEOs face a business environment that is becoming increasingly complicated to read and adapt to.

Seven years on from the global financial crisis, the business landscape still has not really returned to what it was. Will it ever? Exchange rate volatility, national debt, geopolitical uncertainty, an increase in interest rate as well as over-regulation topped Azerbaijani CEOs’ list of concerns about threats to business growth.

Concern about exchange rate volatility is the highest risk cited by 94% of CEOs in Azerbaijan (see Figure 1). This opinion is also shared by Russian and global CEOs as a top threat for their organisations’ growth prospects.

CEOs globally are keeping a very close eye on China given the continued importance they place on its economy for their own growth prospects. Its economic rebalancing, the fragility of its debt-laden local governments and its faltering manufacturing sector continue to spook investors and rattle a number of industries – not least the commodities sector that rode the wave of China’s rapid growth and now is bearing the brunt of the slowdown.

The second menace is the budget deficit with the debt burden cited by 84% of Azerbaijan CEOs and by 71% of CEOs globally.

Geopolitical uncertainty cited by 78% of business leaders. This comes at a time when terror attacks are increasing and touching every part of the world, many linked to the heightened conflict in Iraq and Syria.

Figure 1 CEOs are getting more concerned about a wide range of risks

Q: How concerned are you about the following potential economic, policy, social and environmental threats to your organisation’s growth prospects?

Top-three threats

Key threats

Note: Respondents who answered somewhat or extremely concerned

50%

51%

42%

56%

65%

46%

69%

79%

58%

74%

71%

73%

23%

26%

75%

62%

69%

32%

76%

81%

76%

84%

86%

92%

28%

28%

44%

50%

56%

63%

66%

72%

75%

78%

84%

94%

Climate change andenvironmental damage

Eurozone debt crisis

Access to affordable capital

Inadequate basic infrastructure

Social instability

Unemployment

Increasing tax burden

Over-regulation

Interest rate rises

Geopolitical uncertainty

Exchange rate volatility

Azerbaijan Russia World

Government response to fiscal deficit and debt burden

Growing in complicated timesToday’s CEOs face a business environment that is becoming increasingly complicated to read and adapt to.

Seven years on from the global financial crisis, the business landscape still has not really returned to what it was. Will it ever? Exchange rate volatility, national debt, geopolitical uncertainty, an increase in interest rate as well as over-regulation topped the list of concerns about threats to business growth of CEOs in Azerbaijan.

Concern about exchange rate volatility is the highest risk cited by 94% of CEOs in Azerbaijan (see Figure 1). This opinion is also shared by Russian and global CEOs as a top threat for their organisations’ growth prospects.

CEOs globally are keeping a very close eye on China given the continued importance they place on its economy for their own growth prospects. Its economic rebalancing, the fragility of its debt-

laden local governments and its faltering manufacturing sector continue to spook investors and rattle a number of industries – not least the commodities sector that rode the wave of China’s rapid growth and now is bearing the brunt of the slowdown.

The second menace is the budget deficit with the debt burden cited by 84% of CEOs in Azerbaijan and by 71% of CEOs globally.

Geopolitical uncertainty cited by 78% of business leaders. This comes at a time when terror attacks are increasing and touching every part of the world, many linked to the heightened conflict in Iraq and Syria.


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Lack of qualified personnel has been the most concerned issue for organisations globally over three years. Businesses have been increasingly adjusting their actions and development plans due to constant threat of shift in consumer spending and behaviours. Current economic downturn makes it urgent for organisations to be ready to respond to repercussions of a crisis (See Figure 2a). Thus, inability to react on time is deemed as one of the real risks for CEOs not only from Azerbaijan (72%), but also globally (61%).

Note: Respondents who answered somewhat or extremely concerned

44%

61%

52%

61%

50%

57%

57%

55%

57%

61%

60%

72%

19%

38%

41%

41%

47%

53%

56%

56%

56%

72%

75%

81%

Stock market volatility

Speed of technologicalchange

High or volatile energycosts

Cyber threats

Supply chain disruption

New market entrants

Lack of trust in business

Bribery and corruption

High or volatile commodityprices

Readiness to respond to acrisis

Shift in consumer spendingand behaviours

Availability of key skills

Azerbaijan World

Figure 2a CEOs’ top three business threat concerns

Q: How concerned are you about the following potential business threats to your organisation’s growth prospects?

Figure 2b CEOs’ business threat concerns

Q: How concerned are you about the following potential business threats to your organisation’s growth prospects?

On the global scale, cyber threats, speed of technological change as

well as stock market volatility are among the most burning

threats for business community, while the minority of the

respondents in Azerbaijan are worried about these risks

Lack of qualified personnel has been the most concerned issue for organisations globally over three years. Businesses have been increasingly adjusting their actions and development

plans due to constant threat of shift in consumer spending and behaviours. Current economic downturn makes it urgent for organisations to be ready to respond to repercussions of a crisis (see Figure 2a). Thus, inability to react on time is deemed as one of the real risks for CEOs not only from Azerbaijan (72%), but also globally (61%).

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These factors are having different effects in different places, but together they are increasing the level of uncertainty about the global economy. CEOs from Azerbaijan are less optimistic about global economic growth prospects for

the next 12 months than their peers globally. The optimists - those who think global growth will improve over the next 12 months – make up 23%. Overall pessimism among respondents is associated with continuing global economic challenges such as declining oil prices, stagnated economic growth of China as well as the end of the commodity boom.

As we might expect, there is no absolute majority of Azerbaijan CEOs confident about their own company’s prospects for revenue growth in the coming year. Only 13% of CEOs from Azerbaijan are “very-confident” about short-term business growth compared to 26% and 35% of those from Russia and globally, respectively. When it comes to the company’s revenue growth for the next 3 years, CEOs are generally optimistic about their companies’ future performance. To illustrate, 98% of respondents from the USA, 74% of those from Russia and 75% of CEOs from Azerbaijan believe that their companies will generate more revenues in the long-term period (see Figure 4).

Figure 3 The percentage of CEOs believing that the global economic growth will improve over the next 12 months

Figure 4 CEOs are confident about business growth prospects

Q: How confident are you about your company’s prospects for revenue growth over the next 12 months and three years?

42%

of CEOs from Azerbaijan believe the

global economic growth will decline over the

next 12 months

25%

of Azerbaijan CEOs do not know or refused

to comment on their company’s revenue

growth prospects over the next 3 years

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These factors are having different effects in different places, but together they are increasing the level of uncertainty about the global economy. CEOs from Azerbaijan are less optimistic about global economic growth prospects for

the next 12 months than their peers globally. The optimists - those who think global growth will improve over the next 12 months – make up 23%. Overall pessimism among respondents is associated with continuing global economic challenges such as declining oil prices, stagnated economic growth of China as well as the end of the commodity boom.

As we might expect, there is no absolute majority of Azerbaijan CEOs confident about their own company’s prospects for revenue growth in the coming year. Only 13% of CEOs from Azerbaijan are “very-confident” about short-term business growth compared to 26% and 35% of those from Russia and globally, respectively. When it comes to the company’s revenue growth for the next 3 years, CEOs are generally optimistic about their companies’ future performance. To illustrate, 98% of respondents from the USA, 74% of those from Russia and 75% of CEOs from Azerbaijan believe that their companies will generate more revenues in the long-term period (see Figure 4).

Figure 3 The percentage of CEOs believing that the global economic growth will improve over the next 12 months

Figure 4 CEOs are confident about business growth prospects

Q: How confident are you about your company’s prospects for revenue growth over the next 12 months and three years?

42%

of CEOs from Azerbaijan believe the

global economic growth will decline over the

next 12 months

25%

of Azerbaijan CEOs do not know or refused

to comment on their company’s revenue

growth prospects over the next 3 years

These factors are having different effects in different places, but together they are increasing the level of uncertainty about the global economy. CEOs from Azerbaijan are less optimistic about global economic growth prospects for the next 12 months than their peers

globally. The optimists - those who think global growth will improve over the next 12 months – make up 23%. Overall pessimism among respondents is associated with continuing global economic challenges such as declining oil prices, stagnated economic growth of China as well as the end of the commodity boom.

As we might expect, there is no absolute majority of CEOs in Azerbaijan confident about their own company’s prospects for revenue growth in the coming year. Only 12% of CEOs from Azerbaijan are “very-confident” about short-term business growth compared to 26% and 35% of those from Russia and globally, respectively. When it comes to the company’s revenue growth for the next 3 years, CEOs are generally optimistic about their companies’ future performance. To illustrate, 98% of respondents from the USA, 74% of those from Russia and 75% of CEOs from Azerbaijan believe that their companies will generate more revenues in the long-term period (see Figure 4).


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Given the plethora of uncertainties CEOs are facing, it is little wonder that they are divided about whether there are more threats or opportunities today. Three fourths of CEOs from Azerbaijan believe that their business faces more threats today than three years ago. Meanwhile only 44% see more opportunities, whereas CEOs globally are more optimistic (60%) (see Figure 5).

As a response to worsening global economic situation, in the coming 12 months Azerbaijani along with Russian and CEOs globally are concentrated primarily on cost reduction activities. Similar to the last year, the top two planned restructuring activities

in Russian and globally are cost-reduction initiatives and establishing alliances (see Figure 7). This is an indicator of CEOs’ long-lasting focus on cost efficiency of their companies.

It has become more difficult to pin down where growth will come from, but CEOs are still banking on familiar faces. The United States (39%) and China (34%), and to a lesser extent Germany (19%) and the UK (11%),

remain the countries that most CEOs globally cite among their top overseas growth markets. Azerbaijani CEOs cited neighbouring countries as the geographies most important for their business growth (see Figure 6).

Figure 5 CEOs see more threats to their business today

Q: To what extent do you agree/disagree that there are more growth opportunities/threats for your company than there were three years ago?

Figure 6 Top three countries for doing business

Q: Which three countries, excluding the country in which you are based, do you consider most important for your organisation’s overall growth prospects over the next 12 months?

Figure 7 CEOs are less confident about global economic growth prospects in the uncertain times

Q: Which, if any, of the following restructuring activities do you plan to initiate in the coming 12 months?

Azerbaijan was not cited by

CEOs globally as a country most

important for their overall growth

prospects over the next 12 motnhs

Mergers and acquisitions

both on national and cross-border

levels are not among top restructuring activities

for Azerbaijani and Russian CEOs though

this is on the agenda of their peers globally.

24%27% 28%

49%

68%

7% 8%

27%

43%

64%

9%

22%

31%34%

81%

Complete a cross-borderM&A

Complete a domestic M&A Outsource a businessprocess or function

Enter into a new strategicalliance or joint venture

Implement a cost-reductioninitiative

World Russia Azerbaijan

Given the plethora of uncertainties CEOs are facing, it is little wonder that they are divided about whether there are more threats or opportunities today. Three-fourths of CEOs from Azerbaijan believe that their business faces more threats today than three years ago.

Meanwhile only 44% see more opportunities, whereas CEOs globally are more optimistic (60%) (see Figure 5).

As a response to worsening global economic situation, in the coming 12 months Azerbaijani along with Russian and CEOs globally are concentrated primarily on cost reduction activities. Similar to the last year, the top two planned restructuring activities in Russia and globally are cost-reduction initiatives and establishing alliances (see Figure 7). This is an indicator of CEOs’ long-lasting focus on cost efficiency of their companies.

It has become more difficult to pin down where growth will come from, but CEOs are still banking on familiar faces. The United States (39%) and China (34%), and to a lesser extent Germany (19%) and the UK (11%), remain the countries that most CEOs globally cite among

their top overseas growth markets. CEOs in Azerbaijan cited neighbouring countries as the geographies most important for their business growth (see Figure 6).

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Moving beyond globalisation

This complicated world picture is not just being shaped by economic and geopolitical trends. There is a more fundamental shift taking place, namely from a globalising world to one with many dimensions of power, growth and threats – a transition that is called multi-polar. The majority of CEOs from Azerbaijan already anticipate this shift: 66% (World, 83%) predict differing fundamental belief systems underpinning societies, 63% (World, 79%) expect increasing role of regional investment banks, 63% (World, 81%) see increasingly divergent systems of laws and liberties, and 56% (World, 53%) sees growing trend of nationalism and devolving nations. No wonder there is so much concern about growth and where it will come from.

The one area where CEOs from Azerbaijan (69%) and globally (72%), in contrast, see greater convergence is the Internet – but even this plays a core role in highlighting divergent beliefs even as it brings the world closer together (see Figure 8).

This greater devolution of power brings both threats and opportunities. Different points of view, exacerbated by economic insecurities, are certainly leading to more conflict. However, regional trading blocs, for example, can lead to better quality trade agreements and policies.

CEOs globally including CEOs from Azerbaijan believe that technological advances are the main global trend, which will most likely transform wider expectation of business followed by shifts in demographics and global economic power. CEOs from Azerbaijan identified other global trends, which will influence the stakeholder’s expectations such as oil prices, health awareness of people and improvement of infrastructure (see Figure 9).

Figure 8 CEOs must navigate an increasingly complicated and multi-polar world

Q: For each alternative, please select the one that you believe the world is moving more towards

Figure 9 Technological advances are seen as the main global tend

Q: Please rank the top three global trends, which you believe will be most likely to transform wider stakeholder expectations of business within your sector over the next five years

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Moving beyond globalisation

This complicated world picture is not just being shaped by economic and geopolitical trends. There is a more fundamental shift taking place, namely from a globalising world to one with many dimensions of power, growth and threats – a transition that is called multi-polar. The majority of CEOs from Azerbaijan already anticipate this shift: 66% (World, 83%) predict differing fundamental belief systems underpinning societies, 63% (World, 79%) expect increasing role of regional investment banks, 63% (World, 81%) see increasingly divergent systems of laws and liberties, and 56% (World, 53%) sees growing trend of nationalism and devolving nations. No wonder there is so much concern about growth and where it will come from.



CEOs globally including CEOs from Azerbaijan believe that technological advances are the main global trend, which will most likely transform wider expectation of business followed by shifts in demographics and global economic power. CEOs from Azerbaijan identified other global trends, which will influence the stakeholder’s expectations such as oil prices, health awareness of people and improvement of infrastructure (see Figure 9).

Figure 8 CEOs must navigate an increasingly complicated and multi-polar world

Q: For each alternative, please select the one that you believe the world is moving more towards

Figure 9 Technological advances are seen as the main global tend

Q: Please rank the top three global trends, which you believe will be most likely to transform wider stakeholder expectations of business within your sector over the next five years

Moving beyond globalisation This complicated world picture is not just being shaped by economic and geopolitical trends. There is a more fundamental shift taking place, namely from a globalising world to one with many dimensions of power, growth and threats – a transition that is called multi-polar. The majority of CEOs from Azerbaijan already anticipate this shift: 66% (World, 83%) predict differing fundamental belief systems underpinning societies, 63% (World, 79%) expect increasing role of regional investment banks, 63% (World, 81%) see increasingly divergent systems of laws and liberties, and 56% (World, 53%) see growing trend of nationalism and devolving nations. No wonder there is so much concern about growth and where it will come from.



CEOs globally including CEOs from Azerbaijan believe that technological advances are the main global trend, which will most likely transform wider expectation of business followed by shifts in demographics and global economic

power. CEOs from Azerbaijan identified other global trends, which will influence the stakeholder’s expectations such as oil prices, health awareness of people and improvement of infrastructure (see Figure 9).


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We are expected to address wider stakeholder needs

We invest in a standalone CSR programme

Our customers seek a mix of cost, convenience and

functionality

Our investors are seeking ethical investments

Creating value for wider stakeholders helps us to be

profitable

Top talent prefer to work for organisations with social values

which are aligned to their own

Our purpose is centred on creating value for

shareholders

We’re focused primarily on financial matters in our

reporting

We prioritise short-term over long-term profitability

Addressing bigger expectations As technology and other factors create an environment of higher transparency, CEOs have set their radar on a wide range of stakeholders. Customers remain the top priority, with the majority of CEOs in Azerbaijan and globally indicating they have a high or very high impact on their business strategy. The government and regulators come in second. That’s higher than industry competitors and peers and no doubt reflects CEOs’ enduring concerns about over-regulation in the marketplace (see Figure 11).

We were not surprised to see that the majority of CEOs in Azerbaijan (66%) and globally (70%) feel their customers are most interested in cost, convenience and functionality. But we were surprised to discover that in five years’ time almost half of Azerbaijani CEOs believe that their customers will be seeking relationships with organisations that address wider stakeholder needs.

That is a lot of change in a relatively short time. And it is not just happening on the customer front. On the talent side it is even more pronounced. 41% of CEOs in Azerbaijan (World, 59%), believe that top talent wants to work with organisations that share their social values and 53% (World, 67%) feel it will be even more important in five years. Meanwhile, 44% of CEOs in Azerbaijan (World, 37%), believe their investors seek ethical investments and 53% (World, 45%) believe this will be the case in five years (see Figure 10).

Figure 11 Customers and clients are top priority for CEOs

Q: What impact do the following wider stakeholder groups have on your organisation's strategy?

Figure 10 CEOs believe customers are seeking relationships with organisations that address wider stakeholder needs

Q: Thinking about the wider stakeholder expectations you see, which of these statements best describes your organisation?

In the future it seems clear

that CEOs believe customers will put a premium on the

way companies conduct themselves

in both domestic and global society

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functionality



profitable




shareholders


reporting













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functionality



profitable




shareholders


reporting













Addressing bigger expectationsAs technology and other factors create an environment of higher transparency, CEOs have set their radar on a wide range of stakeholders. Customers remain the top priority, with the majority of CEOs in Azerbaijan and globally indicating they have a high or very high impact on their business strategy. The government and regulators come in second. That’s higher than industry competitors and peers and no doubt reflects CEOs’ enduring concerns about over-regulation in the marketplace (see Figure 11).

We were not surprised to see that the majority of CEOs in Azerbaijan (66%) and globally (70%) feel their customers are most interested in cost, convenience and functionality. But we were surprised to discover that in five years time almost half of CEOs in Azerbaijan believe that their customers will be seeking relationships with organisations that address wider stakeholder needs.


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In this increasingly complex world, are leaders altering their organisation's purpose in order to reflect greater expectations of business? We found that almost half (47%) of respondents in Azerbaijan (World, 45%) said that their organisation's purpose always had a broader purpose. The rest of CEOs’ opinions divided equally (16% each) admitting not changing and not considering (World, 16%), not changing but considering to (World, 12%) or having changed within last three years (24%). In total 63% of all CEOs (World, 69%) linked their organisation's purpose to a broad set of constituents in society (see Figure 12).

But what do CEOs really mean by purpose? For some, it’s why their business exists; for others it’s more around what their businesses do or aim to achieve, or how business is done. And how do they perceive their organisation’s broader impact on society? When asked to describe their corporate purpose, CEOs talked about value for one or more of a variety of stakeholders, including shareholders, supply chain partners, employees, customers and society at large – as well as their business itself, in terms of things like growth, productivity or cost.

Over half of Azerbaijani CEOs define their organisation by the value that is created for society. This acknowledgement of the changing needs of stakeholders – is reflected in other ways that CEOs describe their organisation. 75% of CEOs (World, 84%) believe their companies are expected to address wider stakeholder expectations; 94% (World, 82%) tell us their company prioritises long-term over short-term views; 53% (World, 64%) say that corporate social responsibility is core to their business rather than being a stand-alone programme; and 72% (World, 72%) say their company reports on non-financial as well as financial matters (see Figure 10).

Figure 12 A majority of leaders have an organisational purpose that reflects greater expectations of business

Q: In which of the following ways has your organisational purpose been impacted by stakeholder expectations?

59% of CEOs believe

the top talent prefers to work for

organisations providing

competitive compensation

In this increasingly complex world, are leaders altering their organisation’s purpose in order to reflect greater expectations of business? We found that almost half (47%) of respondents in Azerbaijan (World, 45%) said that their organisations always had a broader purpose. The rest of CEOs’ opinions divided equally (16% each) admitting “not changing and not considering” (World, 16%), “not changing but considering to”

(World, 12%) or “having changed within the last three years” (24%). In total 63% of all CEOs (World, 69%) linked their organisation’s purpose to a broad set of constituents in society (see Figure 12).

But what do CEOs really mean by purpose? For some, it’s why their business exists; for others it’s more around what their businesses do or aim to achieve, or how business is done. And how do they perceive their organisation’s broader impact on society? When asked to describe their corporate purpose, CEOs talked about value for one or more of a variety of stakeholders, including

shareholders, supply chain partners, employees, customers and society at large – as well as their business itself, in terms of things like growth, productivity or cost.

Over half of CEOs in Azerbaijan define their organisation by the value that is created for society. This acknowledgement of the changing needs of stakeholders – is reflected in other ways that CEOs describe their organisation. 75% of CEOs (World, 84%) believe their companies are expected to address wider stakeholder expectations; 94% (World, 82%) tell us their company prioritises long-term over short-term views; 53% (World, 64%) say that corporate social responsibility is core to their business rather than being a stand-alone programme; and 72% (World, 72%) say their company reports on non-financial as well as financial matters (see Figure 10).


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Transforming: technology, innovation and talent It is evident that most businesses today, in defining what they stand for, recognise the needs of a wider set of stakeholders – and their customers’ expectations about how they address those needs. Translating a broader corporate purpose into the everyday, however, is another matter entirely. Even the most committed can find it challenging in the extreme to reshape their company while facing day-to-day battles on every front to fight off competition, grow revenues and cut costs. There are a number of barriers that CEOs say they are encountering when responding to the changing expectations of customers and other stakeholders.

Chief among these are the additional costs of doing business, cited. Second comes the lack ofright capabilities. Compliance with unclear or inconsistent regulations, also incur costs, which are often passed onto customers via higher prices. This adds to the premium that customers often have to pay for

goods and services deemed sustainable (see Figure 13).

These barriers to execution are creating conflicts for companies trying to balance changing stakeholder expectations with pursuing business growth and profitability over both the short and long term. Nevertheless, CEOs are increasingly aware that they must overcome these barriers in order to transform their businesses and align them fully behind broader strategies.

Figure 13 CEOs are facing a number of barriers to execution when responding to changing customer and stakeholder expectations

Q: Which of the following barriers is your organisation encountering when responding to wider stakeholder expectations?

13%

of Azerbaijan CEOs see no barriers for

their business

It is evident that most businesses today, in defining what they stand for, recognise the needs of a wider set of stakeholders – and their customers’ expectations about how they address those needs. Translating a broader corporate purpose into the everyday, however, is another matter entirely. Even the most committed can find

it challenging in the extreme to reshape their company while facing day-to-day battles on every front to fight off competition, grow revenues and cut costs. There are a number of barriers that CEOs say they are encountering when responding to the changing expectations of customers and other stakeholders.

Chief among these are the additional costs of doing business, cited. Second comes the lack of right capabilities. Compliance with unclear or inconsistent regulations, also incur costs, which are often passed onto customers via higher prices. This adds to the premium that customers often have to pay for goods and services deemed sustainable (see Figure 13).

These barriers to execution are creating conflicts for companies trying to balance changing stakeholder expectations with pursuing business growth and profitability

over both the short and long term. Nevertheless, CEOs are increasingly aware that they must overcome these barriers in order to transform their businesses and align them fully behind broader strategies.

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Transforming: technology, innovation and talent

PwC8 February 2016Strictly private and confidential

Draft

Which of the following barriers, is your organisation encountering when responding to wider stakeholder expectations?

23CEO Survey

4 Section C (Leyla) Section D (Sedi)Section C (Leyla)Section B (Leyla)Section A (Vedad)Contents

19% 19%

28% 28% 28%

31%

38%

44%

33%

20%

24%

31%

23%

42%

31%

45%

Azerbaijan Global

Conflict between stakeholder interests and

financial performance and

expectations

Insufficient information about wider stakeholder

expectations

Customers’ unwillingness to

pay

Lack of the right

capabilities

Additional costs to doing business

Misalignment between stakeholder

interests and business strategy

Unclear or inconsistent standards and

regulations

Inability to effectively execute

on our strategy

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Figure 14 Marketing, brand, communications and risk management are the top areas in which CEOs are making significant changes to respond to stakeholder expectations

Q: To what extent are you making changes in the following areas in response to changing stakeholder expectations?

Figure 15 Most CEOs see data and analytics technologies as generating the greatest return for stakeholder engagement

Q: Select the technologies with the greatest return in terms of engagement with wider stakeholders

How we measure success and what we hold ourselves accountable for

How we partner and who we partner with

How we manage our brand, marketing and communications

How we manage our tax affairs

Our values, ethics and codes of conduct

How we define and manage risks

Workforce rights and wellbeing

How we minimise social and environmental impacts of our business operations

How we develop new ‘ethical’ products and services

Azerbaijan World

Social networks

listening tools

Data and analytics

Personal data security

Customer relationship

management systems

Investor relationship

tools

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Figure 14 Marketing, brand, communications and risk management are the top areas in which CEOs are making significant changes to respond to stakeholder expectations

Q: To what extent are you making changes in the following areas in response to changing stakeholder expectations?

Figure 15 Most CEOs see data and analytics technologies as generating the greatest return for stakeholder engagement

Q: Select the technologies with the greatest return in terms of engagement with wider stakeholders

How we measure success and what we hold ourselves accountable for

How we partner and who we partner with

How we manage our brand, marketing and communications

How we manage our tax affairs

Our values, ethics and codes of conduct

How we define and manage risks

Workforce rights and wellbeing

How we minimise social and environmental impacts of our business operations

How we develop new ‘ethical’ products and services

Azerbaijan World

Social networks

listening tools

Data and analytics

Personal data security

Customer relationship

management systems

Investor relationship

tools

At the top of CEOs’ minds from Azerbaijan is the improvement of risk definition and management (97%; World, 93%) in order to better assess upcoming threats and avoid them. The next priority have the brand, marketing and communications (90%, World, 92%), and the partners and the ways companies communicate with them (91%; World, 85%) (see Figure 14).

Every CEO in the survey says they are making changes to the way they use technology to assess and deliver on customer and stakeholder expectations. They say the technologies delivering the greatest returns are data and analytics.

72% of CEOs (World, 65%) ranked customer relationship management systems as generating the second greatest return in terms of successful stakeholder engagement.

Today, some of the most in-demand products reflect customers’ changing values. Digitisation is central to these efforts, allowing companies to obtain and utilise data about business processes that is necessary to support innovation efforts, and to remove costs from the system through greater efficiencies.


PwC 10

What are CEOs doing to develop the workforce they need for today and tomorrow? Almost three-fourths are making changes to the way how they develop their leadership pipeline.

Focusing on the leadership pipeline will also help ensure that future leaders can present consistent messages to the wider employee base, and the visibility and ‘tone from the top’ that is necessary to turn words into action. The ability to align the entire workforce behind business and growth goals, however, is also critical to execution.

Despite the importance of getting the right talent, just 34% of CEOs (World, 30%) are making changes to their focus on skills and adaptability in their people (see Figure 17). And despite their embrace of technology in all things customer-related, companies are doing little to change either how they use technology to improve productivity or their use of workforce analytics, with only 9% of CEOs (World, 4%) seeking change in that area.

CEOs also recognise the importance of tying workplace culture to behaviour; with 34% (Word, 41%) making changes to this aspect of their talent strategies (see Figure 17). Indeed, companies that are highly coherent – those with strong alignment between their value proposition, capabilities, and products and services – view their culture as their greatest asset.

Still only 31% of Azerbaijan CEOs consider increasing the organisation’s headcount compared to 50% globally, (see Figure 16).

Figure 16 Nearly half of CEOs expect to decrease headcount over the next 12 months

Q: Do you expect headcount at your company to increase, decrease or stay the same over the next 12 months?

Figure 17 CEOs are most likely to change their talent strategy to focus on their leadership pipeline

Q: What aspects of your talent strategy are you changing for attracting, retaining and engaging your key people?

21%

24%

50%

28%

48%

16%

50%

28%

31%

Global

Russia

Azerbaijan

50%

of Azerbaijan plan to decrease

headcount of their organisations

Increase in headcount

Remain the same

Decrease in headcount

PwC 10



Despite the importance of getting the right talent, just 34% of CEOs (World, 30%) are making changes to their focus on skills and adaptability in their people (see Figure 17). And despite their embrace of technology in all things customer-related, companies are doing little to change either how they use technology to improve productivity or their use of workforce analytics, with only 9% of CEOs (World, 4%) seeking change in that area.


Still only 31% of Azerbaijan CEOs consider increasing the organisation’s headcount compared to 50% globally, (see Figure 16).

Figure 16 Nearly half of CEOs expect to decrease headcount over the next 12 months

Q: Do you expect headcount at your company to increase, decrease or stay the same over the next 12 months?

Figure 17 CEOs are most likely to change their talent strategy to focus on their leadership pipeline

Q: What aspects of your talent strategy are you changing for attracting, retaining and engaging your key people?

21%

24%

50%

28%

48%

16%

50%

28%

31%

Global

Russia

Azerbaijan

50%

of Azerbaijan plan to decrease

headcount of their organisations

Increase in headcount

Remain the same

Decrease in headcount



Despite the importance of getting the right talent, just 34% of CEOs (World, 30%) are making changes to their focus on skills and adaptability in their people (see Figure 17). And despite their embrace of technology in all things customer- related companies are doing little to change either how they use technology to improve productivity or their use of workforce analytics, with only 9% of CEOs (World, 4%) seeking change in that area.


Still only 31% of CEOs in Azerbaijan consider increasing the organisation’s headcount compared to 50% globally (see Figure 16).

PwC Azerbaijan 15

PwC 11

When asked to cite top three outcomes most important to Azerbaijani society today, CEOs cited need for skilled workforce, improvement of a more understandable and effective tax system and new jobs for workforce (see Figure 18).

CEOs in Azerbaijan view economicfactors to be most important to society today. Besides top three, other economic outcomes they think society deems important are greater income equality, improvements in digital and physical infrastructure, support to private sector, development of export-oriented science industry. CEOs globally rated similar factors to be the most important to society today.

More than 50 % of CEOs indicated that the government’s actions in providing stable and effective tax system, a skilled workforce, greater income equality are currently ineffective or greatly ineffective. However, infrastructure received positive feedback as 95% of CEOs evaluated the government’s efforts as effective or greatly effective (see Figure19). When it comes to which of these outcomes need to be government priorities-they stated that clearly understandable tax system, high levels of employment and skilled workforce need to be government priorities in which they think most improvements are necessary. CEOs in Russia voiced slightly different concerns for government priorities, tax system received highest priority followed by skilled workforce. The third highest priority they thought should be digital and physical infrastructure.

According to World Bank Report on Azerbaijan in April 2015, Doing Business Ranking of Azerbaijan “improved to some extent however corruption still is a key concern, followed by access to finance, tax rates, and inadequately educated workforce.” These areas need to be developed significantly in the near future. Our survey also confirmed some of these concerns of businesses in Azerbaijan. Fall in oil prices and subsequent devaluation of currency have reinforced government’s focus on diversification of economy through developing manufacturing sector in the country and placing higher significance on agricultural sector in the regions.

Figure 18 All of top three outcomes cited by CEOs to be important to society are economic factors

Q: Which three outcomes do you think are most important to society today in Azerbaijan?

Figure 19 Tax system, income equality and skilled workforcewere rated by CEOs as priority for the government, but assessed the government to be ineffective in achieving these outcomes

87% of AzerbaijaniCEOs cited economic factors

as important to society, while social concerns like good

health and well-being of the workforce, inclusiveness,

reduced environmental impacts were mentioned only

by 13%

84%

Skilled workforce

63%

$

Tax system

41%

Employment

76%

Skilled workforce

40%

Infrastructure

35%

Employment

Skilled workforce

EmploymentTax system

Infrastructure

Income equality

0%

10%

20%

30%

40%

50%

60%

70%

0% 10% 20% 30% 40% 50% 60%% o

f CE

Os

who

thin

k is

sue

shou

ld b

e a

top-

thre

e go

vern

men

t pr

iorit

y

% of CEOs who think the government has been ineffective in achieving these outcomes

When asked to cite top three outcomes most important to Azerbaijani society today, CEOs cited need for skilled workforce, improvement of a more understandable and effective tax system and new jobs for workforce (see Figure 18).

CEOs in Azerbaijan view economic factors to be most important to society today. Besides top three, other economic outcomes they think society deems important are greater income equality, improvements in digital and physical infrastructure, support to private sector, development of export-oriented science industry. CEOs globally rated similar factors to be the most important to society today.

More than 50 % of CEOs indicated that the government’s actions in providing stable and effective tax system, a skilled workforce, greater income equality are currently ineffective or greatly ineffective. However, infrastructure received positive feedback as 95% of CEOs evaluated the government’s efforts as effective or greatly effective (see Figure19). When it comes to which of these outcomes need to be government priorities-they stated that clearly understandable tax system, high levels of employment and skilled workforce need to be government priorities in which they think most improvements are necessary. CEOs in Russia voiced slightly different concerns for government priorities, tax system received highest priority followed by skilled workforce. The third highest priority they thought should be digital and physical infrastructure.

According to the World Bank Report on Azerbaijan in April 2015, Doing Business Ranking of Azerbaijan “improved to some extent however corruption still is a key concern, followed by access to finance, tax rates, and inadequately educated workforce.” These areas need to be developed significantly in the near future. Our survey also confirmed some of these concerns of businesses in Azerbaijan. Fall in oil prices and subsequent devaluation of currency have reinforced government’s focus on diversification of economy through developing manufacturing sector in the country and placing higher significance on agricultural sector in the regions.


Azerbaijan

Global

PwC 12

Top priorities CEOs believe businesses should help deliver in Azerbaijan are skilled workforce, infrastructure, and taxes followed by employment, income equality, inclusiveness, end environmental impact. CEOs globally believe that skilled workforce, physical and digital infrastructure, and good-health and wellbeing of the workforce are important outcomes businesses should help deliver.

In terms of tax handling strategy and outlook, 80% of CEOs acknowledge that their business approach to tax and tax transparency are important for their reputation. 93% of them believe it is a business cost that should be managed efficiently. CEOs also stated that stable tax system is in fact more important than lower rates of tax. However, only 44% of businesses actively determine business’ tax strategy. On the other hand, CEOs also do deliver outcomes they believe that are not fully measured or appreciated by society, yet.

Figure 20 There are numerous outcomes CEOs believe they deliver to society that are not fully measured or appreciated

Q: What does your organisation bring to society, which is not currently measured or is measured but not fully appreciated?

Figure 22 CEOs believe delivering skilled workforce, contributing to digital and physical infrastructure, and paying taxes are what businesses should help with.

Q: Which three of the following outcomes do you think should be priorities for business to help deliver in Azerbaijan?

Figure 21 CEOs acknowledge the importance of tax and see it as a factor that affects their reputation.

Q: With wider stakeholder expectations in mind, to what extent would you agree with the following statements on tax?

30%

10%3%

14%

26%

10%

7%

24%

17%

44%

80%93%

72% 69%

Our board is actively

involved in determining

the business’s tax strategy

Our business'sapproach totax and tax

transparencyaffects ourreputation

Tax is abusiness costthat needs tobe managedefficiently (as

per otherbusiness

costs)

A stable taxsystem is

moreimportant than

low rates oftax

Reducing theburden of taxadministrationis as beneficial

as reducingthe rates of

tax

Disagree Neither/nor Agree

81% of CEOs in

Azerbaijan believe delivering skilled workforce

should be one of its top priorities, followed by

digital and physical infrastructure (44%) and

paying taxes (38%).

“We create social inclusiveness & opportunity for all customers through connectivity.”

CEO from a telecom company

“We increase population's welfare by stimulating business development.”

CEO from the financial sector

“We provide reliability and tailored-solutions for our partners.”

CEO from the chemicals sector

“We are financing students’ overseas education and bringing world-class asset management principles and practice to Azerbaijan.”

CEO from an asset management company

“We display quality governance of contracting, and investing in skills development of the workforce.”

CEO from an Oil & Gas company

PwC 12









30%

10%3%

14%

26%

10%

7%

24%

17%

44%

80%93%

72% 69%







per otherbusiness

costs)


moreimportant than

low rates oftax



tax


81% of CEOs in




paying taxes (38%).











PwC 12









30%

10%3%

14%

26%

10%

7%

24%

17%

44%

80%93%

72% 69%







per otherbusiness

costs)


moreimportant than

low rates oftax



tax


81% of CEOs in




paying taxes (38%).











Top priorities CEOs believe businesses should help deliver in Azerbaijan are skilled workforce, infrastructure, and taxes followed by employment, income equality, inclusiveness, and environmental impact. CEOs globally believe that skilled workforce,

physical and digital infrastructure, good-health and wellbeing of the workforce are important outcomes businesses should help deliver.


PwC Azerbaijan 17

30%

10%3%

14%

26%

10%

7%

24%

17%

44%

80%

93%

72% 69%

Our board is actively involved in determining


Our business's approach to tax and tax

transparency affects our reputation

Tax is a business cost that needs to be

managed efficiently (as per other business costs)

A stable tax system is more important than low

rates of tax

Reducing the burden of tax administration is as

beneficial as reducing the rates of tax


PwC 13

Measuring and communicating success More than half of CEOs in Azerbaijan agree that the business landscape is changing in a way that firms will not be sustainable with only having profit-driven business model (see Figure 23).

Most Russian CEOs also agree with the view that the success of the business in the twenty-first century will be defined not only by profit. This view is supported by more than two-thirds of the CEOs in the United States, as well as nearly two-thirds of business executives around the world.

PwC’s Strategy& recently studied some of the world’s most successful companies, noting that a key part of their success was committing to an identity and aligning their entire organisation around that. Therefore, besides profit maximisation, the companies should be able to define what they stand for, how they add value to all internal stakeholders and build their identity around it. Having such purpose is what should help define success in the long run.

Over half of CEOs globally (53%) define their organisation by the value that is created for customers. But of those CEOs, over a third (35%) also talk about value for wider society, employees and/or supply chain partners, reflecting a clear recognition of the changing expectations of their customers.

This acknowledgement of the changing needs of customers – as well as those of other stakeholders, including their employees – is reflected in other ways that these CEOs describe their organisation. 84% of CEOs globally believe their companies are expected to address wider stakeholder expectations; 82% tell us their company prioritises long-term over short-term views; 64% say that corporate social responsibility is core to their business rather than being a stand-alone program; and 72% say their company reports on non-financial as well as financial matters.

Figure 23 Majority of CEOs in Azerbaijan also believe that in the long-run success of business will not be only about seeking financial profit

Q: To what extent do you agree that business success in the 21st century will be redefined more than financial profit?

56%65%

76%

16%14%

13%28% 21%11%

CEOs in Azerbaijan CEOs in Russia Global CEOs

Agree Neither Disagree

Measuring and communicating successMore than half of CEOs in Azerbaijan agree that the business landscape is changing in a way that firms will not be sustainable with only having profit-driven business model (see Figure 23).

Most CEOs from Russia also agree with the view that the success of the business in the twenty-first century will be defined not only by profit. This view is supported by more than two-thirds of the CEOs in the United States, as well as nearly two-thirds of business executives around the world.

PwC’s Strategy& recently studied some of the world’s most successful companies, noting that a key part of their success was committing to an identity and aligning their entire organisation around that. Therefore, besides profit maximisation, the companies should be able to define what they stand for, how they add value to all internal stakeholders and build their identity around it. Having such purpose is what should help define success in the long run.


PwC 14

Research methodology and contacts In total 32 CEOs took part in the Azerbaijan Survey this year. The CEOs of Azerbaijan state companies did not take part in the Survey. To obtain a comprehensive picture we selected CEOs from different industries represented in the country, including O&G, financial sector, telecom, etc. The CEOs were asked questions regarding development prospects for the world economy, their companies and different markets, changes in business practices, and business development trends. They were also asked to express their opinions on government's policies. All the interviews in Azerbaijan were finalised by the end of November 2015. Confidentiality was maintained throughout the research. Information obtained in the study was not attributed to any particular company, but referred to only in relation to the industry as a whole, the size of organisation and other demographic data.

Figure A Profile of CEOs from Azerbaijan who participated in the Survey

7

3

2

9

11

Refused to answer

More than 500 mln

251-500 mln

50-250 mln

Less than 50 mln

Companies' revenue

25%

15%

60%

38%

9%

53%

Type of companies

Subsidiary of a parent company which is based in this countrySubsidiary of a parent company which is based outside of this country

Standalone company

1%

87%

12%

78%

22%

Don't know/Refused

No

Yes

Business has government ownership or backing

World

Genderof CEOs

Azerbaijan

6% 94%

100%

PwC 14

Research methodology and contacts In total 32 CEOs took part in the Azerbaijan Survey this year. The CEOs of Azerbaijan state companies did not take part in the Survey. To obtain a comprehensive picture we selected CEOs from different industries represented in the country, including O&G, financial sector, telecom, etc. The CEOs were asked questions regarding development prospects for the world economy, their companies and different markets, changes in business practices, and business development trends. They were also asked to express their opinions on government's policies. All the interviews in Azerbaijan were finalised by the end of November 2015. Confidentiality was maintained throughout the research. Information obtained in the study was not attributed to any particular company, but referred to only in relation to the industry as a whole, the size of organisation and other demographic data.

Figure A Profile of CEOs from Azerbaijan who participated in the Survey

7

3

2

9

11

Refused to answer

More than 500 mln

251-500 mln

50-250 mln

Less than 50 mln

Companies' revenue

25%

15%

60%

38%

9%

53%

Type of companies

Subsidiary of a parent company which is based in this countrySubsidiary of a parent company which is based outside of this country

Standalone company

1%

87%

12%

78%

22%

Don't know/Refused

No

Yes

Business has government ownership or backing

World

Genderof CEOs

Azerbaijan

6% 94%

100%

Research methodology and contactsIn total 32 CEOs took part in the Azerbaijan Survey this year. The CEOs of Azerbaijan state companies did not take part in the Survey. To obtain a comprehensive picture we selected CEOs from different industries represented in the country, including Oil & Gas, financial sector, telecom, etc. The CEOs were asked questions regarding development prospects for the world economy, their companies and different markets, changes in business practices, and business development trends. They were also asked to express their opinions on government’s policies. All the interviews in Azerbaijan were finalised by the end of November 2015. Confidentiality was maintained throughout the research. Information obtained in the study was not attributed to any particular company, but referred to only in relation to the industry as a whole, the size of organisation and other demographic data.

PwC Azerbaijan 19

Working group and key contactsEditorial and writing: Movlan Pashayev, Yodgor Gafurov, Aysel Suleymanova, Leyla Aliyeva, Vedad Rzaly, Zumrud Mammadova

Face-to-face interviews: Movlan Pashayev, Petko Dimitrov, Yodgor Gafurov, Aysel Suleymanova, Zumrud Mammadova

Research and data analysis: Yodgor Gafurov, Leyla Aliyeva, Vedad Rzaly

For further information on the survey content, please contact:

Movlan PashayevAzerbaijan Managing [email protected]

Emin Shikhgayibov Azerbaijan Advisory [email protected]

Nazim Hajiyev Azerbaijan Deals Leader Director [email protected]

Aysel SuleymanovaMarketing & Communications [email protected]

The Landmark Office Plaza III12th Floor, 90a Nizami StreetAZ1010, BakuTel: +994 (12) 497 2515www.pwc.com/az


PwC Azerbaijan 21

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