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CNBC Transcript: Interview with Carolyn Fairbairn, Director General of the CBI

Following are excerpts from a CNBC interview at Davos with Carolyn Fairbairn, Director General of the CBI and Tania Bryer.

TB: Carolyn thank you for joining us on the CNBC Conversation. I want to begin with something set to dominate the headlines and what must be a big concern for CBI members. The UK's referendum on EU membership. What is the CBI's position?

CF: We did an independent consultation over two years. 130 face to face meetings with our members and they told us they want to be in a reformed Europe. But the world reform is very important at the moment because the PM is negotiating with Peer countries in Brussels for a better deal on a number of fronts and our member and some of our members are watching that very closely and they are saying to us they want to see the deal before they make up their mind. But the overall view; the single market very valuable, but reform is wanted. And we will go an ask our members again when the PM comes back with his deal.

TB: Are you seeing any divergence of opinion on the issue from your members?

CF: There are members who want to leave the EU and they are vocal. They are members of the CBI and we welcome their views and we listen to their view and actually the frustrations that they have in Europe, you know we understand. So they are about, you know, areas of excess regulation and standards that are complex. But they are a minority and we would say they are no more than about 10% of our members would actively like to leave the EU.

TB: You talked about the reforms that UK prime minister David Cameron has try and negotiate - do you think he'll be successful?

CF: I'm very optimistic. The main areas that British businesses care about is in the area of competitiveness. And what we have seen over the last year to 18-months is actually growing consensus in other member countries - we work very closely with other CBIs, sister federations if you like in other countries - and there's been a strong movement towards wanting more trade deals and faster. Less regulation. Actually we've seen a tailing off in regulation a bigger commitment to competitiveness. So actually we think that some of the things, that we think the PM is asking for in terms of the competitive agenda are pushing at an open door. So we are hopeful. And another thing I think that is worth saying that this is not the end of the journey, this is an ongoing process of reform, that if we do decide to stay in, it bodes well for the future and we can have ongoing moves towards greater competitiveness going forward?

TB: Do you think the country's economy can thrive and prosper outside the EU?

CF: We have a terrific economy. One of the reasons I was so enthusiastic about this role is, I think this is a very good time for the British economy. We've come out of the recession well. We have low inflation, high employment; there are lots of things that are really strong about our economy. And I am in no doubt that the UK could succeed outside the European Union. Another big uncertainty is around the 50 or so trade deals that the UK has through the EU with other countries, they would fall away, so we would be in a position of renegotiating them. Now, I would be optimistic on some of those, that we would negotiate new deals, but having also been quite close to the T-TIP negotiations with the US, they can be complex deals to negotiate, trade deals are not easy, again as anybody who has worked on them will tell you. So I think that the UK could continue to be a strong economy and we are the fifth largest, most successful economy in the world, but gosh the uncertainty about what kind of arrangement we would have, certainly gives me pause for thought.

TB: Do you think David Cameron should step-down if it's a vote to leave?

CF: That would obviously be a decision for him. It is not the only issue by any means facing the British economy. Indeed one of things that I think is quite interesting for me is that as I've gone around talking to businesses, you know I got my rail card out two months ago when I joined the CBI and I went around the country talking to businesses and actually one of my questions, which is a very open ended one is, 'what matters most to you at the moment' and it's interesting but Europe is very rarely the number one issue. Usually it's around skills and skill shortages. It's about infrastructure in the local region. When I was up in Sheffield the real issue was having a trans-Pennine rail link to Manchester and being able to create a single population and, so this is an agenda that the government is gripping really effectively and the fact that we do now have a national infrastructure commission, there is a focus on productivity, the skill agenda is at the forefront of a lot of people's mind. You know these are things that I think the PM could carry on with. So Europe isn't everything, so it would it would be a decision for him, but there would be very many other valuable areas of leadership that he is bringing into the economy at the moment.

TB: I want to talk about the current state of the UK economy - growth slowed in the third quarter compared to Q2, the manufacturing sector is in recession - latest output data showed its 1.2% lower year on year. Will things improve in 2016? What's your outlook for the UK economy?

CF: You're absolutely right to pick up on manufacturing as being a very challenged sector and I think that's what we saw toward the end of last year is really sectors diverging, but the overall growth for the year was reasonably strong. But it was very differentiated, so manufacturing sector affected by high energy prices, affected by strong sterling, affected by competition coming from China, exporting at relatively low prices all of these have affected the manufacturing sector.There are obviously two areas of major challenge in world markets at the moment. One is China and the other is turbulence in the markets, particularly around oil prices. I think interestingly the UK economy is less exposed to those issues when compared with other economies; China, we export, only about 4% of our exports go to China. We are less exposed, for example, Germany which has a much higher proportion. And oil and gas, although I have to say it is very very challenging if you're in Aberdeen now, this is a very challenging market. And we have a number of businesses that we are helping and supporting, but actually the oil and gas sector is only 1.5% of our economy now and we are relatively less exposed compared to 20 years ago say when the North Sea oil was very strongly on stream, so we have a lot that is going well and if you add to that we have a strong innovation record, that we are able to attract talent to our country, it's a place that people want to come and live, that we are attracting FDI. The low tax environment that the government created around corporations is really paying off. We are attracting foreign investments, so there are reasons to be cheerful.

TB: What should the government's priorities be for the economy right now?

CF: So I think because we had a strong recovery, you know 2.2 million jobs created over the last three years, virtually no inflation, the highest employment rates since records began in 1971. These are strong foundations to be looking at the long term and some of the issues that are around, that we know are long-term problems facing the British economy. So what we know is that we have a serious issue around productivity.

And the figures are startling. Our productivity is 30% lower than the US. 28% lower than Germany, these are staggering gaps and they haven't just opened up since the financial crash, these have been in place now for a while and this is an opportunity to address them. And to be thinking ahead to 2025-2030 and what kind of economy do we want to build. What kind of economy do we want the UK to be then? And let's get back to work out what the problems are we need to fix now. And what we learnt at the CBI is to focus our thinking, and we've been talking very much to the government about this, is a prosperity agenda based on five pillars. Five priorities over the long term. Skills and talent. Infrastructure. Competitive tax and regulation. A culture of innovation; which is very interesting, it comes up a lot from our members, about how we create a climate that people invest and create, particularly in digital. And the final area is the capability to export and access to global markets. And if we address all of those five challenges, and there are areas of weaknesses, I mean all of those things are challenging, with the exception of we are a relatively low-tax environment, and that is a very important strength. In all of the other areas, there is work to do and a lot of those priorities, particularly skills and talent, appear in the government's productivity plan and we support them.

TB: The government plans to raise the National living wage and insists the extra burden this would put on businesses would be offset by a corporation tax cut and lower national insurance contributions for smaller firms. Does the math add up?

CF: Well it is very interesting, we at the CBI there is support to having a minimum wage. But this is a very major intervention in the economy and the trouble with major intervention like this is that they have unforeseen consequences. And what I feel we are seeing now is how the national living wage is playing out differentially around the country and in different sectors.

And it's going to start coming into effect in April and it will ramp up over time and the sectors that are most affected are retail, care, and the leisure industry where the risk of job losses I think are quite high and the other issue is that because there are significant regional differences in what people are paid now in areas outside of London and Sheffield is an example that was used the other day, the number of people affected by the national living wage is much greater, and therefore the cost is much greater and the risk of job losses is much greater. Just in parts of the country that the government is trying to help develop and grow through its devolution agenda, so I think it's the unforeseen consequences that I think are an issue around the national living wage. I mean businesses will be able to increase their productivity to cope and I'm hearing a lot of numbers focusing on that, so there will be some positives from it but there are going to be some unintended consequences that are going to be quite difficult to manage.

TB: Mark Carney, the governor of the Bank of England, has said that the UK economy isn't yet strong enough to withstand a rise in interest rates. What is your outlook for UK rates - will we see a hike this year?

CF: This is moving quite fast, I think we did, if you look at the end of last year, we said we were expecting a rate rise this year. I think global conditions are changing that perspective, even though we are not, as I was saying earlier, not exposed on these two areas of major uncertainty, our trading partners are, so the fact that Germany is exposed to China we trade with Germany, so I think there are real uncertainties, so it wouldn't surprise us now if there was a real case now for a delay to the rate rise and that is probably a good thing for the economy.

TB: Last year the OECD announced plans for a global crackdown on corporate tax avoidance. Is UK competitiveness under threat from these proposals?

CF: I don't think so, because most companies pay the right amount of tax, they really do. There are some cases where the rules don't entirely keep pace with the way that businesses operate, but I think the UK has done really well. The fact that the corporate tax rate is one of the lowest in the G7, I think it is the lowest in the G7 sends a very strong signal that we are open for business that we are attracting FDI in and I don't think the proposals will affect that.

TB: You became DG of the CBI back in Nov - how have you found the role so far?

CF: Oh I mean absolutely fascinating. I feel very privileged to be doing it. I think that the CBI matters. It is able to pool together the disparate voices of business from all these different sectors and parts of the country and hopefully shape them into some ideas and thoughts and arguments really to government really about what happens. So I've loved all that and I think it feels to me like a particularly important time. For all the reasons we are talking about in that we are coming out of the recession in a strong place. This is a chance to fix some of the problems. I do think that business holds the solution and holds the answer to quite a few of our problems. Strong business creates jobs.

TB: When it was announced that you were going to take the helm at the CBI there were some that expressed concern - did you have the day to day experience of running a business what would you respond to those critics?

CF: Well I would honestly say that I've had loads of experience, it's interesting. I started out in business 30 years ago almost to the day. My first job was to be out in the regions of the UK I started off working, I was a Mckinsey , and I worked with 20-30 businesses for the next subsequent years. So I cut my teeth at Mckinsey, got lots of experience of manufacturers, retail - worked for a DIY retailer and a bank and allsorts but then I got real operational experience when I went to the BBC and I ran the transmission business. So there I had 100 engineers working for me, we launched freeview, people said it wouldn't t work and it did. So I think I know a lot about business from different angles and then interestingly talking earlier about ITV, my experience at ITV for 4 years was when the advertising market collapsed and I was Long with the finance director, put in charge of the turnaround programme and so with our back against the wall we restructured the business - a lot of cost out, re-orientated the business towards production and ITV is thriving. So that was real….and that was really can we pay the bills at the end of the week territory so I think I know a fair bit about different kinds of businesses.

TB: You are the first female head of the CBI - have you faced difficulties because of that?

CF: I can honestly say I haven't. I have to say I have 2 daughters and when they discovered that I was the first female director general they said, really? Can't believe that and I think the amazement that they had - and I said well it's the beginning of a long line, there are going to be lots of us now. But no to be absolutely honest I really haven't. I've been welcomed. There is a terrific group now, and there are still too few but a group of CEOs out there who's been particularly welcoming. I think I've operated in a particularly male business environment for a long time now and I know a lot of people, they know me. I do think there are real issues around getting more women into leadership positons but I haven't ever and not in this role either felt any kind of 'what are you doing here' or antipathy or challenge on that front. But I am committed, one of the things I really would like to do over the next 5 years is really see how we can raise the number of women who lead our companies, we need them and its going to be a priority for me.

TB: Is one of your ideas to force corporations to have women in top roles and on their boards - should they be told that they have to?

CF: Interestingly I think coercion can backfire and there aren't many women I know who support the idea of coercion because I think they know what that can feel like and you're only there because somebody said that you have to have a woman.

I think what is really powerful and I've seen this with my own eyes at Lloyds bank where I was on the board for 4 years, is having a CEO who really really backs it. So what I would like to see over the next few years is more companies feeling comfortable with the idea of saying actually we're going to set this target for women at a certain level and by the way it's not just women its diversity across a lot of other dimensions as well, but the issue of women is a frontier we need to crack.

TB: What about the gender pay gap debate - everyone is weighing in from Jennifer Lawrence to Beyonce. Do you believe it should set in law - equal pay?

CF: I go back to thinking that information is power on this actually and I think legislation is, the trouble is the data is really noisy, you've got all types of funny things going on with part time, full time, is that job the exactly the same as that job, but if companies, and again going back to what they might publish in terms of targets. And just information, these are men/women at this level and this is what they are paid, the average, then you get the information out into the open and you can have a debate about it, and say is that justified if there is a gap? I'd rather go down that route because it's more powerful, because it comes from the CEO, it comes from the leadership team and it's got all of the actions behind it, rather than again coercion which I think can back-fire.

TB: What's left for you to achieve personally?

CF: so I care hugely about this role at the CBI, I care hugely about the organisation, I think it's a fantastic organisation full of people who just want to make a difference and the next five years, it's a five year fixed term, I'm just going to do all I can to really enable the people in my organisation to make a real difference I'd like us to really have helped on this long-term agenda, because I think that is the opportunity, and I think I'll probably look back over the five years and say, well, had I helped the organisation? And there are things I'd like to change about the organisation, I think CBI is fantastic, but a bit old fashioned, if I can say… you know it's a little bit behind on digital, and I think there are some things we could do a whole lot more to freshen it up, you know just to and there are sectors I think the CBI could just be fantastically relevant for, you know I'm from the creative industry and I'd love us to really sing the praises of the creative industries because it would be so good to have more members from the sector the same in tech, so I think there are some things about changing the organisation, not in its value or its heart because I think that is fantastic, but just a bit of modernisation I think and I'd like to do and as I was saying in the CBI really make a difference to that long term agenda. And personally well my family is growing up and I feel one of my biggest roles now is just to carry on helping them out into the world. And I care hugely about that. They are 21, 19 and 16 and they are fantastic, we talk a lot and they've got big decisions to take and I will be spending a lot of my time, along side this job, when I can, just to help them find their way and their ambition and their success in the world.

TB: CF thank you so much for joining me on the CNBC Conversation…..