The New Paradigm

Trends and tales in new business world

The summer of 1982 was a fine one in Venezuela, as I was chauffeured from party to party in Caracas and spent weekends lying in the sun on private islands or riding around estates the size of small countries. Not a word was said about my internship working in the office of a pulp and paper company, which was the reason for my visit.

President Hugo Chavez did not come to power until 1998. He destroyed the economy, a task ably carried on by his successor. But the seeds had been sown in the earlier decades amid the elite’s corruption, and failure to share the oil bonanza more widely.  

Comparing the West to Venezuela may seem far fetched. But even before COVID-19, the decimation of the lower middle class with stagnant wages and job insecurity, and the lack of hope for their children’s betterment, had already lead to riots from France to Chile, and the election of a proto-fascist party to the Spanish Parliament. This situation will be exacerbated by the tsunami of unemployed emerging from the worst economic damage since the Great Depression of the 1930s. The International Labour Organisation estimated the virus will destroy 25m jobs worldwide, probably  on the low side.

The usual 6-10 year time frame to develop a vaccine will be compressed, given the urgency and the funds thrown at it, but two years is as optimistic a time frame as any scientist could envisage, to which must be added delays in production and distribution. 

And yet, even as the death tolls climbs, this could be a time of great hope: a burning platform for change in the West.  

What are some of the trends?

Governments will be ascendant at the expense of the private sector. To keep businesses like airlines going they will be forced to take equity stakes. Although they aren’t doing so for ideological reasons, they won’t be able to sell these anytime soon, and so governments will influence how they are run. A side effect is that a career as a civil servant becomes an attractive proposition compared to the private sector, with more power and a wider remit.

Government will also have more control and more data on their citizens, as COVID-19 forces us all to have apps on our phones to determine our safety quotient and personal freedom takes second place to the safety of the entire population.  

To date, countries have taken fiscal actions, according to the FT, equal to around $8 trillion dollars to contain pandemic damage to their economies. That number rises every single day. The new normal for country debt will be well above 100%, with unimaginable consequences as they try and borrow in a saturated market. Thus income taxes will go up for the wealthiest and those with secure jobs and the Amazons of this world will be forced to pay governments a proper amount of tax – yes, finally. 

On a positive note, separatist movements have missed their opportunity. Who in Catalonia or Scotland will be pro-independence in the middle of more uncertainty than any of us have ever been exposed to? The transition period for Brexit will be extended, thus allowing a more sensible outcome on future trade.

Companies will rethink their supply chains. Outsourcing to China or the Philippines has been exposed as a major vulnerability to trade wars and now to pandemics. The surge in the unemployed –  including those with skills in urban locations – and automation may provide an opportunity to re-localise.  

Just as the banks became safer after the wake up call of the financial crisis, so companies will question the management mantra of just-in-time, cutting costs to the bone and squeezing suppliers till they squeak. Resilience will be the new by-word.  

Finance will change. The banks, already less interesting to invest in with their dozen years’ worth of regulation, are truly becoming un-investable because no dividend payments are allowed. This is bound to continue for the foreseeable future because the global economy will suffer for years to come, according to Raghuram Rajan, former Chief Economist to the IMF. Fintech will be the beneficiary. 

Tech in general will benefit, with a faster rate of innovation and take-up. A Magic Circle law firm, for instance, made tech changes to its processes, that it thought would take four years, in three weeks.  

All companies with an online presence, especially Big Tech, are gathering so much more information about us all as we switch wholly to interacting online that, pace privacy, new products and services will hit the markets much sooner than we might have expected. 

Workers Pope Francis in his Urbis & Orbis Easter homily spoke about a “dignified life”. That means earning enough to be able to save. In the US, inflation-adjusted average hourly earnings for ordinary workers are barely above 1970s levels. However well-intentioned, the plethora of programmes being set up by governments to help vulnerable workers have huge gaps in coverage and in execution – getting the money quickly to them.  Might some version of universal basic income, bandied about for years, be the result? Whatever solution is found, there will clearly be changes to our unsatisfactory capitalist system with its social inequalities and environmental disasters, pointed out President Emmanuel Macron of France in an FT interview. 

For professionals, working from home will no longer be the ‘mummy-track’ with its slower career advancement. This has huge implications for commercial real estate. A private equity firm just decided not to rent a few floors in a City high rise but instead only to meet in person four times a year around their Board dates.  

It is very easy to be seduced by the corruption of a comfortable life. My university self did not protest much – in fact, at all – at the transformation of a summer of work into a summer of decadence in Venezuela.

 We must all grasp this movement to modify the capitalist model to allow its survival. If we don’t, right wing populists like Donald Trump in the US and Victor Orban in Hungary, who are destroying the democratic institutions protecting our fragile democracies, will be replaced by extreme left wing populists, who will destroy our economies.

Overcoming tribal challenges

The LSE’s new Inclusion Institute

The most successful species on this planet revels in the comfort of conformity. Just think of the boost and subsequent bonhomie that comes from a ‘successful’ meeting where everyone agrees. Yet with instability as the defining condition of our times, executives must evolve to become comfortable with discomfort.

Who, in the City, would hire someone who had failed a Maths O level? Twice. Yet that is the case of Sir Robert Stheeman, one of the most successful and trusted CEOs of the Debt Management Office, which is responsible for issuing UK government debt. It didn’t seem to affect the £2 trillion – give or take a few billion – that he has issued over 17 years in the job.

He is not alone in believing that a contributory factor in the 2008 financial crisis was the increased conformity in the hiring of talent. ECB President Christine Lagarde famously quipped that if Lehman Brothers had been Lehman Sisters the crisis would have looked quite different. Studies from business consultants like McKinsey and respected academic institutions like Harvard Business School conclude that better business decisions result from more diverse and inclusive companies.

And yet how laborious and demanding it is to create this change. The overarching reason is biology. Humans are wired to align individual with group interest, to achieve hyper-sociality, in the words of Mark Pagel, head of the Evolution Laboratory at the University of Reading. Arguably as powerful as the Darwinian natural selection gene is culture, “that software collection of ideas, routines, rituals and behaviours written into our brains – it is the most successful way there has ever been of making more people.”

We are programmed to accept and celebrate the culture of our birth, our tribe, even though it is an arbitrary accident – not to mention the resilience of culturally defined emotions which range from healthy nationalism to xenophobia and racism, notes Pagel.

It is no coincidence that Ursula von der Leyen mentioned Winston Churchill, Soho bars and her discovery of the British sense of humour in the first speech she gave on British ground this year. Titled “Old friends, new beginnings: building another future for the EU-UK partnership,” the EU Commission President reminisced about her time as a student at the London School of Economics, suffusing the room in the warm glow of cultural unity, before delivering the harsh message that “the more divergence there is, the more distant the partnership has to be.”

So how to achieve the cognitive diversity that is necessary to deliver better company returns in a transformed digital marketplace? It is most likely to occur when you mix gender, generation, ethnicity and sexual orientation on boards and teams, and ensure they feel accepted, or included, and thus able to speak up. An uncomfortable meeting is more likely to deliver innovation.

The Financial Services Skills Taskforce report which was published at the end of January was damning of the City’s talent recruitment and retention. Mark Hoban, a former City Minister who chairs the FSST, put it bluntly: “There is no doubt that the financial services sector is facing an existential skills crisis.”

Alarmingly for a sector that depends on talent and innovation, it has the third lowest training spend per employee and the second lowest spend per trainee compared to other sectors of the economy. Meanwhile, fewer than 40% of students associate creativity and a dynamic work environment with working in banks, but highly value these in any future employer.

The demand for talent already exceeds supply and this trend is set to become more acute. “The lack of gender and ethnic diversity is both a social issue and a skills issue. Talent that the industry needs is not being utilised,” argues the independent review commissioned by HM Treasury.

A number of firms are working hard at changing this. Charles Martin, Senior Partner at City law firm Macfarlanes, is clear about the value of hiring a more diverse workforce. “Firstly, it feels right. It doesn’t feel sustainable to work in a market where we don’t look like our clients or the world around us. Secondly, more diversity makes for more balanced decisions and less group think. Thirdly, we need to have the best people working for us. If we are failing in diversity, we will fail in business terms.”

MI5 plans to hire 50% more behavioural scientists in 2020 to help it analyse the vast amounts of online data generated by terror suspects. Marrying psychology and the increasing amounts of data available on diversity and inclusion is just as relevant for City firms.

These are the reasons why, with Associate Professor Grace Lordan, I am co-founding The Inclusion Initiative institute at the London School of Economics. In association with some of the most advanced City institutions we seek to merge data and behavioural science to help change culture for future success.

The City is responsible for well over 10% of the UK’s tax revenues and continues to be one of the global go-to centres for finance. With just a bit of hyperbole, Byron’s lines about the importance of the Coliseum to Rome come to mind: “When falls the City, London shall fall; And when London falls - the World.”

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Can I take the opportunity to invite you on the 5th of March at 6pm to come to the LSE and join me for the launch of the Inclusion in the City report, which I am co-authoring with Dr Grace Lordan. This will be a panel discussion event, chaired by Dame Minouche Shafik, and feature four senior leaders from the City of London giving reactions to the messages in the report. 

The 5th of March event is ticketed and part of the LSE Festival. This year's Festival will bring together global leaders, innovators and change makers to investigate how we can learn lessons from the past, tackle the challenges of today and shape the future. You can get a free ticket online now by following this link.

It is also the night The Inclusion Initiative will be announced, a new institute at the LSE which I am co-founding. It will bring behavioural science insights to the City of London in partnership with City firms. Do get in touch if your company might be interested in exploring working together. Here is the pamphlet.

UK General Election 2019

Safeguarding the country

This edition of Karina’s Column is based on an interview with James Arbuthnot, a long-standing Conservative politician who now sits in the House of Lords. It is not representative of the views of Robinson Hambro Ltd.

With the UK’s momentous General Election a day away, yet another respected career politician is joining the chorus lead by former Prime Ministers Sir John Major and Tony Blair in calling for moderates to vote across parties, be it the Liberal Democrats in some cases, or a “sensible Conservative or a sensible Labour person.”

James Arbuthnot, a Conservative peer whose career encompassed the role of Chief Whip, Minister for Defence Procurement and a decade as Chairman of the influential Defence Select Committee, has a one-word answer when asked if he is still a member of the Party: “No.”

“I cancelled my subscription when Boris Johnson became leader, for two reasons,” he adds. “First, because I didn’t believe the policies the Conservative Party was following over Brexit. And the second because I didn’t have faith or belief or respect for Boris Johnson.”

Martin Wolf, Chief Economics Commentator of The Financial Times, argues that a hung Parliament would be the best result of the December 12th election, as it would make the major parties realise the damage arising out of their extreme positions and force them to rediscover their moderate souls.

“It definitely resonates with me,” says Lord Arbuthnot. “The country is being sold a type of Brexit that it was promised it would not have. We were told that we would get millions of extra money a week to spend on things. We weren’t told that it was going to cost us billions, the billions that it is now going to cost us in terms of lost growth, lost productivity and lost friendships with our closest allies.”

“I’m appalled at the notion that we ought to be doing things alone rather than with our closest friends,” he adds, speaking at a breakfast hosted by the Worshipful Company of International Bankers, a livery company in the City of London. 

A number of moderate members of Parliament from both major parties are not standing in this election. On the Conservative side it includes former Home Secretary Amber Rudd and veteran MP Sir Nicholas Soames. “A Conservative Party that has no room for [former Minister of State for Digital and the Creative Industries] Margot James, [Tory grandee] Ken Clark, [former Chancellor] Philip Hammond doesn’t strike me as the Conservative Party that I joined and worked for, for all of my life,” says Lord Arbuthnot, who calls the Labour Party “unacceptably Marxist, if there is an acceptable Marxism.” 

The father of four, married to Emma Arbuthnot, the Chief Magistrate for the UK and Wales, calls for curbs to the laddish culture that has become prevalent in Parliament, which he points out is awful for most men too.

“I must say I’m so thankful to be in the relative sanctuary of the House of Lords. My old people’s home. I bring the average age down, by the way,” he says with a twinkle in his eye.

Since stepping down as a politician, Lord Arbuthnot has taken on Non-Executive and consultancy roles that leverage his knowledge of the defence industry. At one point he was a Director of SC Strategy, whose directors include Sir John Scarlett, former head of MI6. He is currently Chairman of the Advisory Board of Thales UK, the defence and technology company and Chairman of Electricity Resilience Ltd.

He concurs with national security advisers like Lord Evans of Weardale, a former MI5 director general, that a parliamentary report into alleged Russian interference in the UK democratic process should be released to the public before the General Election. The government insists that it will take much longer to redact confidential information in the report.

“It’s a worry to me that the Intelligence and Security Committee (ISC) has produced a report about Russian potential interference in the referendum results and in the 2017 election. It was seen by the security services in March of this year, cleared by them, probably with some redactions and it’s been with the Prime Minister for some time. He appears to show no interest in publishing it before the election,” notes Lord Arbuthnot. “I think that it is relevant to the voters. I think they might like to see what Russia has been doing.”

In the summer of 1996, the IRA planned to blow up enough of the UK electricity grid to leave London and the South East in darkness for months. Their plot was foiled. However, since then our dependence on electricity has grown exponentially.

“I believe that if the Chinese or the Russians wanted to switch off our electricity grid, they have enough capability in place to be able to do it within the next 20 minutes, if they wanted to,” says Lord Arbuthnot. “But they don’t want to because if they did that, they would collapse the world economy and along with it, they would collapse their own economy. What I think they do want to do is make it impossible for that to be an existential threat against their country.”

He suppresses a smile while declining to respond to a question about whether we have the capability to close down the Russian, Chinese or Iranian grids: “I couldn’t possibly comment.”

As this interview is published, a Conservative majority is looking most likely. However we are living in unprecedented times, not only in the moderates deserting the two major parties, but in a new, hate-filled political tribalism. What is unquestionable is that the exodus of moderate politicians is already causing great harm to the British political system. May the winner move to heal the wounds of society and the body politic.

Lord Arbuthnot was interviewed as part of the Worshipful Company of International Bankers Talk & Toast power couple series sponsored by Streets Consulting.

Sustainable Survival

Future-proofing your firm

Academics and far-sighted business leaders can go blue in the face calling for modifications to the capitalist model that has prevailed over the last 30 years and left too many behind. It takes riots in Chile, votes for populist authoritarians like Donald Trump and the emergence of a proto-fascist party in Spain for reality to hit home.

The decimation of the middle class through stagnant wages and job insecurity and the increasingly visible inequality of wealth were missed amidst the congratulatory backslapping of Davos Man, more focused on the huge growth in spending power in large emerging markets.

Those companies that want to survive and thrive within a world of constant upheaval must concentrate on transforming themselves. Sitting back comfortably and assuming politicians will bear the brunt of the anger is not an option.

Douglas Lamont, the CEO of Innocent drinks, a healthy beverage company which is working on becoming a Certified B Corp, summarised it neatly in the FT when asked whether he aimed to persuade acquirer Coca-Cola to follow their example. They’ve potentially learned from us “that if you’re ahead of the issues, when they land you’re a little more protected from the consumer backlash because people know that you’ve been trying.” 

Whether a business decides to go for B Corp status, equivalent to the highest standards of environmental and social governance, or a bank decides to sign up to the UN Principles for Responsible Banking, is irrelevant. There are different models out there and lessons can be learned from all of them on what will undoubtedly be a long journey. The benefits are manifold, while the downsides of not acting now can threaten existence.

Consumer goods giant Unilever was far ahead of the pack under CEO Paul Polman. His decade-long tenure resulted in a company that, amidst a war for global talent, is inundated with CVs from the best and the brightest. Of note is its simple statement of intent. “At Unilever, our purpose is to make sustainable living commonplace. We are working to build a better business and a better world.“

This is not the only way it appeals to the different aims of younger generations. It highlights active (ie. flexible) working, mental and physical health support, and learning opportunities. Millennials — social media natives who have never lived separate lives at work and at home — don’t look for work-life balance, but rather work-life alignment, where they can be the same person, with the same values, at home and in the office, notes the Harvard Business Review.

Nor is the journey a simple one. Unilever, for instance, wrestles with conundrums like what to do with its skin-whitening product, a bestseller in Asia. The message that white is better than brown is anathema to the company. The obvious choice of closing it down would result in thousands of staff being left jobless while brands which are much less safe would take over the market. 

The tone from the top is crucial in setting the right attitude to disruptive change. Take gender balance.

Companies can look at the quotas for female non-executives and senior management prevalent in some countries as a time-wasting, regulatory imposition. Or they can see this is an opportunity to lower risk by changing culture, as well as increasing profits. According to a recent Wall Street Journal report, the 20 most diverse companies had an average annual stock return of 10% over five years, versus 4.2% for the 20 least-diverse companies. This is but one of the many studies undertaken by reputable bodies like McKinsey or the London School of Economics.

The transformation into an ethical entity is most complex for oil and gas and mining companies. However crucial to humanity’s current existence, they are becoming pariahs.

The cash-strapped Royal Shakespeare Company was forced to sever ties with BP and its generous subsidy of ticket prices for the young because of, ironically, the “strength of young feeling”. Institutional disinvestment in the sector continues apace, even though reallocating capital to renewables doesn’t work because it is still much too small and, being capital-hungry, cannot deliver the generous dividend streams.

Meanwhile, stranded assets (oil wells or mines that will become worthless due to environmental legislation) are a major worry. US coal companies have lost 90% of their value, notes Bank of England Governor Mark Carney. However, the newly appointed UN Special Envoy on Climate Change and Finance says: “It may make sense to invest in a company that is pretty brown today but intends to become beige, at least, if not green over the next five to seven years.”

A hefty $15.5 trillion of assets are now invested via the Transitions Pathways Initiative, set up by the LSE’s Grantham Research Institute and the Church of England to analyse a company’s carbon management quality and performance within a selected sector. Although vocal protesters do not yet distinguish between Exxon and Shell, the American and Anglo-Dutch oil companies, sensible investors do.

In fact, fossil fuel and mining companies have both the funds and the expertise – talented engineers – to redirect more of their investment towards sustainable opportunities as the state sector becomes more involved. Governments, however frozen in the headlights of public protests and divided nations, will be forced to invest substantial amounts in clean energy and related opportunities. Established companies are best set to take advantage.

To be a winner amidst the upheaval of the 21st century, firms need to be ahead of developments. Could this mean walking away from profitable endeavours which will be environmentally dubious a decade away? Putting a worker representative on the Board? Caps on the pay gap between the lowest paid worker and the highest paid directors? Knowingly choosing to lower margins in order to make the company more sustainable over the coming decades?

These measures will stick in the gullet of many CEOS and Chairmen. But exploring the unthinkable is surely the mark of a visionary leader. As is communicating the transformation forcefully, despite living in a black and white world lacking in nuance. At a time when politicians seem incapable of addressing the needs of deeply divided societies, business must take the lead. It already creates the jobs and makes the profits that support everything from hospitals to schools. Future-proofing the company is the next step: sustainability is profitable. 

The lightweight vs the heavyweight

A few simple truths on world trade

Getting to be a heavyweight boxing champion takes many years of training, a top coach and clear rules of engagement. Talent may well be the least of it.

The UK is sadly bereft of all of these as it bravely makes its way in a world where the boxing ring is riven with cracks and the ropes are frayed and broken. Trade giants of the likes of Peter Sutherland and Pascal Lamy built the global trade structure brick by brick, compromise by comprise, backed most notably and most crucially by the US.

But President Donald Trump’s disdain for traditional allies and alliances extends to the World Trade Organisation and its carefully wrought rules, which are in any case due for modernisation in a services and digital centred world. The application of unilateral tariffs on China, leading to an exchange of tit-for-tat, is not the worst of it. Rather, it is taking the fight outside the ring, as Mr Trump did by pressuring Canada to arrest the CFO of Huawei, the Chinese telecoms giant, or blackmailing Mexico with a progressive 5% tariff on exports if it did not do more to curb illegal immigrants from Central America.

Prime Minister Boris Johnson last week held out the exciting prospect of a trade deal with the US in 2020. Here are five home truths on global trade which he might wish to share with the nation.

• Number 1. Protectionism extends across both American political parties. It has been a recurrent theme in US politics since the founding of the country . The only time it has been superseded in the last few decades is when the sitting President was given Fast Track Authority by Congress, unshackling him from Congressional approval. Trump doesn’t hold it now, nor will he even if he wins a second term. Additionally, Democratic House of Representatives leader Nancy Pelosi has made it very clear that a bipartisan group in Congress will block any US/UK trade pact if Brexit imperils peace in Northern Ireland due to the removal of the Irish border backstop.

• Number 2. Countries closest to you are those you are most likely to trade with. Thus the UK’s largest trading partner is the EU – it may be growing slowly, compared to markets like China, but it is affluent, with trade and commercial trust well established. It also shares a world view which underpins domestic legislation in all EU countries on the environment, food safety and digital privacy. The US has what both the UK and the EU would call lower standards on these issues. Tales of US chlorinated chicken making its way into British supermarkets are not far off the mark.

• Number 3. The UK’s exports to China are not going to take off like a rocket when and if the UK leaves the EU. Former Prime Minister Theresa May may have spoken of “ambitious future trade arrangements” with China last year. From within the EU, Germany’s exports to China have been far superior to the UK’s at $110 billion compared to $22 billion. The simple truth is that they produce goods and services which the Chinese want more. Nor will the depreciation of sterling help. Despite a 29% fall in the pound’s value since 2000, the UK’s export market share of world trade has fallen, according to a recent Schroders report.

• Number 4. The EU signed a trade deal with South America’s Mercosur trade block earlier this year. It took two decades of on and off talks. This is not unusual for trade deals. And it may not see the light of day as approval is needed by the Parliaments of countries involved. President Trump’s tweet suggesting a trade deal between the US and the UK within a year was ludicrous.

• Number 5. Earlier this week Mr Johnson said he wanted trade liberalisation between the UK and the US in products including pillows, cauliflowers, wallpaper and railway carriages – odd that he failed to mention services, 80% of the economy versus 18% for manufacturing. He complained about “some kind of bureaucratic obstacle” stopping the sale of British-made shower trays and “some sort of food and drug administration restriction” stopping the sale of Melton Mowbray pies. These are exactly what trade negotiations are about. Regulatory agencies, like the Food & Drug Administration (FDA), are among the most powerful players at the table.

When it comes to the services sector, it is worth noting what happened at a friendlier time a few years ago when the EU and the US were negotiating a trade deal. The US Treasury adamantly rejected any market opening to the UK’s stellar financial and professional services sector. That won’t change in the more hostile and nationalistic “America First” that now prevails.

In a world of heavyweights, the UK (population 60 million) is a lightweight. As part of the EU (population 450 million), it is a heavyweight that could take on other heavyweights, like the US (population 327 million) and China (population 1.4 billion). On its own, I fear it will be KO’d.