From debt forgiveness to quantum

2021’s three unmissable trends

Empathy is the word that most marks 2020, a year in which companies worried about their employees’ mental health; the #MeToo movement forged ahead; #BlackLivesMatter took off, and Covid-19 lead to the rediscovery of community.

Empathy will continue to have an impact in 2021 by being present in two upcoming trends: debt forgiveness and supply chain responsibility. As for the third fundamental trend, quantum cybersecurity, its eruption onto the corporate scene as an applicable and commercial technology will ignite a bonfire of innovation.

Boards would do well to anticipate how these key factors will impact their companies in 2021 and ensuing years, even as the pandemic continues to upend business and politics.

TREND ONE: DEBT FORGIVENESS

Covid-19’s devastating economic effects will continue to disproportionally hit the less skilled. Many of them are BAME and the owners of small and medium sized businesses (SMEs), whose access to credit depends on government guarantees.

Debt for SMEs ties into discussions about inequality in society. These will ‘’continue to rise in volume and importance,” notes Alderman and Professor Michael Mainelli of the Zyen Group, who advocates a proper discussion by the financial services sector on the role of credit in the economy.

In the UK, for instance, the £43.5bn Bounce Back Loans Scheme consists of easily accessed, loans of up to £50,000 with no interest the first year and a constant 2.5% over the next decade, all available through banks but guaranteed by the government. They constitute most of the government’s business debt schemes.

Pumping funds out to help small businesses stay afloat was a forward-thinking policy akin to the furlough scheme to ensure businesses kept employees on the payroll. Other countries came up with similar programmes.

The alternative was, and is, massive unemployment – predominantly amongst those who lack savings in the hospitality and retail trade. The Bank of England (BoE) has admitted there is a chance the unemployment rate could rise to 10% mid-2021.

Most pandemic-associated loans are unrecoverable due to lack of ability to repay, or fraud. The government itself had already estimated losses of 25% to 75% when it launched the scheme in the spring of 2020.

Talk of a ‘bad bank’ to park loans, swapping the debt for equity or a tax obligation, restructuring or creating preference shares – some solutions put forward by TheCityUK’s admirable report on recapitalisation of business post the pandemic – should only be completed for large businesses.

None of the debt manipulation schemes make sense for SMEs, creating a layer of complication and obligation for (mainly) struggling and understaffed businesses. On a societal level, they would be perceived as clearly unfair and create social tensions. If the government does not act voluntarily to cancel the debts, there could well be a rising backlash through social media and public demonstrations.

(Fascinatingly, the Bible speaks of the forgiveness of all debts every 50 years, the jubilee year, note Alexander Adamou and Ole Peters in a Royal Statistical Society paper, resulting in a radical reduction in inequality).

Let the government and the banks admit the Emperor has no clothes and write off the debt for small businesses. The US financial sector didn’t pussy foot around after the financial crisis. As a result, it recovered faster than the European financial sector which kept unrecoverable loans on its balance sheet, a drag on new lending and growth. Although TheCityUK’s suggestions push much of the debt off-balance sheet, it would remain a burden on small business.

TREND TWO: SUPPLY CHAIN RESPONSIBILity

There is a slight whiff of manufacturing to the phrase ‘supply chain.’ But the network between professional and financial services companies and their suppliers of services is just as much a supply chain, and one that will gain added prominence this year and in years to come, mainly in two areas: people and planet.

How you treat those not directly employed by the firm is going to become as important as how you treat your own workers. The outsourcing model of the last few decades will be under threat, having delivered value to shareholders in parallel to subtracting rights from workers.

Worst-hit by the pandemic, the low-skilled are moving into the spotlight of social justice. Interestingly, hedge fund Chanos is shorting gig economy companies such as food delivery platform Grubhub, betting that there is going to be a greater political focus on low-wage, precarious workers.

In the UK, there is a designated NED on the board with responsibility for the workforce, a recent advance in corporate governance – and not enough directors are aware that the duties extend to the outsourced workers in the supply chain.

Meanwhile, a new taskforce led by the City of London Corporation aims to reduce the number of senior City roles held by people from privileged backgrounds. This was a Treasury and business department social mobility initiative. Governments are going to become more involved in the supply chain of people, just as much as they are in that of products.

On the planetary front, 2020 was the year where the Covid-19 pandemic brought home the cost of ignoring the environment. Shareholder activism is rising. Mining giant Rio Tinto changed course on its Australian imbroglio on the back of it. Prescient Unilever announced the decision to put its climate action plans to shareholders every few years. Before too long, institutional shareholders like BlackRock and Schroders will insist all companies do so.

TREND THREE: QUANTUM CYBERSECURITY

Cybersecurity is the central challenge of our digital age, tweeted Microsoft CEO Satya Nadella in 2019, a challenge amplified by the move to home working in the pandemic. The IMF calls it “the new threat to financial stability.”

Cyberattacks as a foreign policy tool are growing in importance and capability, highlighted by the recent Russian hack of the Orion software which is widely used by US government and companies like Microsoft. Without going into too much detail, the enemy is still within the computer systems of an unknown number of those attacked. Meanwhile, cybercrime is predicted to inflict damages of $6 trillion globally in 2021.

Kamala Harris was ahead of her time when in 2011 as Attorney General of California she began work on setting up the state’s Cyber Crime Center.

Years later as a US Senator, she served on both the Homeland Security and Intelligence Committees, giving her unparalleled access to threat intelligence (one of only two Senators) and put forward a bill to invest in quantum computing. In 2018 the National Quantum Initiative Act became law, providing $1.25bn in funding between 2019-23 for the industry.

Kamala Harris is set to be one of the most active vice-presidents in US history and she is committed to quantum.

Cybersecurity based on existing quantum computing to protect security systems, data, networks and communications will be 2021’s great technological innovation. Quantum is no longer a decade away, as has so often been the case, it is here now.*

CONCLUSION

Developing themes for the future in an unparalleled, disrupted world to help guide CEOs and Chairs is arduous work. For the record, Robinson Hambro crows with pleasurable self-satisfaction at having called the retreat of globalisation in a 2015 presentation to the International Advisory Board of a bank. In a pre-Trump, pre-Brexit world that was no mean feat. Nor was our 2017 forecast on the four tornados of change that would slam into Big Tech and social media.

We aren’t always right – calling the end for President Putin in 2014 when he can now stay in power legally until 2036 was a tad premature – but on debt forgiveness, supply chain responsibility and quantum cybersecurity, Robinson Hambro is confident these trends are here to stay.

 *I will dedicate a full column to quantum next month. Its importance to boards and companies cannot be overestimated.

From Competitor to Collaborator

Dealing with the S in ESG 

Rare it is to hear business call for more government regulation. Yet this is the plea heard in private conversations with some of the largest financial companies in the UK, as they face undeliverable expectations to be at the forefront of solving rising inequality, racism and environmental disaster.

“The To-do list for corporates will continue to grow. We are having to deal with issues like racial injustice [because] governments aren’t,” says the CEO of a FTSE-100.

The financial crisis led to an upsurge in regulation, ranging from capital adequacy to conduct rules. Regulators like the Financial Conduct Authority in the UK and the Securities and Exchange Commission in the US became ever more powerful. An unwelcome outcome for financial institutions, but one they fully understood and accepted, even as their compliance departments doubled and tripled in size.

Meanwhile, the E in Environmental Social Governance (ESG) became a major risk and reward factor for companies – consider the plummeting market capitalisation of coal companies and the general proliferation of environmental ratings. In this area, the change makers are the institutional shareholders rather than the regulators or government.

Covid-19 allied to Black Lives Matter has swung the spotlight onto the ‘Social’ aspect, ranging from the safety of employees in the pandemic, to key workers without proper contracts, to the minimal numbers of BAME executives in the City and Wall Street.

The backdrop to this is changes to the decades-old emphasis on an ‘efficient’ international economy.  Its weaknesses – gig economy workers who live pay check to pay check and an international supply chain too dependent on political goodwill – are now fully exposed. The shareholder-first approach is being subsumed into a multi-stakeholder approach.

The increased complexity of the new corporate model means that firms look more like universities, balancing the interests of a wide range of interest groups with the constant threat of a hostile social media campaign.

What happened at the London School of Economics a few years ago is a salutary warning. The union highlighted the appalling employment conditions of the prestigious university’s outsourced cleaners. The support of students and academics gathered pace. A couple of years later, in 2018, the cleaners won the battle to be taken on as employees of the LSE.

Interestingly, hedge fund Chanos is shorting gig economy comp­anies such as ride-hailing app Uber and online food-delivery platform Grubhub. It is betting that there is going to be a greater political focus on low-wage, precarious workers.

Boards of directors would prefer to have clearer regulation on ‘Social’ issues, such as outsourced workers. For instance, gender pay gap reporting, while not exactly welcomed with open arms by business in 2017, is now a regular part of the corporate landscape for all medium and large firms, helping highlight the continual need for action on diversity and inclusion. 

FTSE100 financial companies continually review and upgrade how they treat their permanent employees. In fact, boards at several banks have appointed designated Non-Executive Directors responsible for workforce relations in line with the revised UK Governance Code. More mental health support and flexibility on working from home are other measures implemented on the back of Covid-19 – with a decent salary as a starting point. Yet these benefits do not touch the outsourced workers like cleaners and security guards.

And yet one prescient FTSE-100 board director believes the rules are already clear: “The Board is accountable for the supply chain.” Speaking at a recent Oliver Wyman Forum event, where top executives and senior policy makers share experiences, she noted that issues related to multi-stakeholder capitalism had moved from sub-committees to main board level.

That includes tax avoidance schemes, with the most newsworthy instituted by Big Tech, yet just as prevalent at other large, global companies. Minimising tax through the use of complex schemes leads to jaw-dropping anomalies. Over 50% of the subsidiaries of foreign multinational companies report no taxable profits in the UK, for instance.

Paul Polman, the former head of Unilever, is not alone in believing that companies should embrace having to pay their fair share of tax on the back of a crisis which has seen massive spending by governments to avoid a 1929-style depression. This must include unlisted capital, such as private equity and hedge funds.

Building a level playing field and a sustainable economy means governments imposing tax reform and coordinating with other jurisdictions. The verdict so far: nul points.

Yet there are a few possible indicators of change: an OECD global tax rules blueprint might prosper if Joe Biden wins the US presidential election; the morally dubious sight of private equity firms accessing government cash could explode in a social media campaign; visionary CEOs are beginning to consider that a company’s approach to tax should be part of the ESG metrics by which investors judge them. 

Ensuring the heightened role of technology makes for an inclusive economic recovery is one of the biggest challenges facing financial services. Deepening social inequality, with Covid-19 disproportionately affecting women, BAME and those from poorer socio-economic backgrounds, sits uncomfortably alongside the accelerating digital take-up benefitting a small pool of winners. Many financial services companies are looking to cut their real estate footprint due to the permanent shift to increased home working, presaging waves of redundancies for their outsourced frontline workers.

Economist Noreena Hertz, in her recently published book The Lonely Century, writes about the neoliberal  mindset which dominated for four decades, leading to societies of unparalleled loneliness and the rise of right wing populism: “40 years of seeing ourselves as competitors not collaborators, takers not givers, hustlers not helpers.”

The effects of the pandemic have made even the most fervent small government activists mutate into advocates of big spending to stave off mass unemployment and depression. If that reversal is possible, so is the probability of legislation for the hidden workforce and international tax coordination. 

The future will involve collaboration, consensus and communication between government and the corporate sector to an unparalleled degree.  Not an easy way forward, but the only one to solve our societal problems.

Cybersecurity – the spies and the crooks

Collaboration key to minimising threat

What career advice do you give a young person leaving Cambridge with a double first in Classics and entering a graduate job market dynamited by Covid-19?

Heading into an industry with a Compound Annual Growth Rate (CAGR) of well over 13% has got to be an enticing option. Future projections are even more optimistic on the back of the coronavirus revolution in leisure and working practices. In fact, the cybersecurity market is already worth around $120bn, similar to the GDP of Morocco, while the cost of cybercrime is estimated at up to $2tr.

Back in 2019 Microsoft CEO Satya Nadella tweeted that cybersecurity is the central challenge of our digital age. His warning is amplified by the vast increase in online activity since the pandemic struck. The biggest vulnerability for companies is now a cyber breach via staff working remotely. For individuals, there has been a 667% increase in spear fishing attacks (a targeted scam) helped by the fact that “everyone’s grannie is now doing yoga online, a whole new population for cyber criminals to prey on,” quips Andy Bates, Executive Director at the Global Cyber Alliance (GCA).

In his 25-year career working with organisations ranging from the security services to NATO and telecoms group Verizon, he has seen cybercrime constantly mutate, adapting to where defences are easiest to breach and the largest opportunity lies. The unholy alliance of rogue states, criminal gangs, and individuals in their bedrooms is behind everything from the Facebook data breach earlier this year, where 267 million user profiles were hacked and then sold for a measly $540 on the dark web, to the TalkTalk hack in 2015 where two young men stole the banking information of over 150,000 customers. This was then followed by other criminals piling in to try and blackmail the CEO. Total cost to the company: £77m.

As financial services and other large firms build up their cyber defence at vast cost ($600m at bank behemoth JPMorgan Chase), criminals have moved to easier victims. “It is simpler to steal £100 pounds from 100,000 people or SMEs across hundreds of different legal jurisdictions than a million from a well-defended bank,” notes Mr Bates, speaking at a webinar hosted by the Worshipful Company of International Bankers.

In 2015 the proceeds of known cybercrime exceeded known physical crime, leading to the foundation of the Global Cyber Alliance in two of the largest financial cities in the world. The three founding partners, the City of London Police, the New York District Attorney’s Office and the Center for Internet Security, were soon joined by others including Bank of America and Lloyds Bank. Chaired by the head of Security Policy at Microsoft, Scott Charney, in its 5 years of existence this cybersecurity knight in shining armour has created free tools worth around £5000 per individual.

A not-for-profit organisation, GCA works across borders and sectors to enhance collaboration. It seeks to learn more about data to remove criminal web infrastructure. Its recently announced strategic partnership with ICANN is a case in point, aimed at cutting back on Domain Name System (DNS) abuse.  

The auburn-haired graduate mentioned earlier did not find his lack of a computer science degree an impediment to landing a job in cybersecurity. “Hiring the usual suspects into your IT department makes no sense because they don’t think like the Russian Mafia,” says Mr Bates. Whether a Cambridge education is the best training for understanding an uber-criminal is a subject for discussion; it has historically proved a great education to become a spy. The collaboration between the security services of countries like China and North Korea and professional crooks means a Cambridge education may not be entirely wasted.

A few years ago the military realised that to recruit in-house hackers they would need to relax military discipline and dress. Covid-19 has lifted the stigma from working at home, so hiring somebody who wears a Motorhead t-shirt and has dreadlocks may no longer be such a stretch for corporates, notes Mr Bates. This is essential given that the average time to hack a company is 56 days while the average time to discover the hack is 190. Individuals are attacked on average 150 times a day.

While we hear about the major hacks, such as the recent one that saw requests for Bitcoin donations emanate (purportedly) from the Twitter accounts of famous people like Kim Kardashian and Bill Gates, the press doesn’t cover the millions that occur to individuals, SMEs, and larger companies that manage to avoid all media coverage. GCA’s free toolkit, which already protects around 150m people, can reduce the risk of cyberattack by 85%.

The financial services sector is the most obvious one for criminals to attack, while the electricity infrastructure is most likely to be attacked by enemy states.  There were four failed attacks on the UK electricity grid last year, three by the Russians and one by the North Koreans. GCA, which counts a former head of European policing agency Europol on its board, is intent on encouraging intelligence sharing between the banks and the utilities to foster best practice and reveal more details on attackers.

Similarly, more collaboration between the private sector, the government and NGOs is crucial in the fight against crime and spying. Not least because distinguishing between criminal networks and country attackers is problematic: the latter often outsource their dirty work to the former, a shadow version of an economy’s supply chain.

And mistakes happen. Moller-Maersk, the world’s largest shipping container company, saw its computer screens go black on 27 June, 2017. To understand the scale of the disaster, it helps to know that every 15 minutes one of its massive ships docks in a port somewhere in the world, a complicated logistical and digital exercise. Recovery took ten days. The cost to the firm is estimated at $300m. To cap it all, the Danish company was not the intended victim. The Russian ransomware, known NotPetya, was aimed at Ukrainian businesses as part of the troubled relations between the two countries, but Moller-Maersk’s office in Kiev accidentally caught the virus.

A much larger issue for internet security over the next five to ten years is quantum computing, which would break all known encryption. Although quantum computers currently lack the necessary processing power, the industry is advancing in leaps and bounds.

With over 4 million unfilled vacancies and the demand for neurodiversity to understand better an ever-changing threat, the cybersecurity sector has opened its arms to bankers, doctors, and a host of other professions, as well as the auburn-haired Cambridge graduate, my stepson, who is due to start his new job for a top cybersecurity firm this autumn. I wish him well.

END

GCA is looking to partner with financial services and other firms to help them combat fraud and create a safer internet.  

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.