Quantum Matters: The Good, the Bad and the Ugly of Quantum Cybersecurity

With a US inteligence report confirming that President Putin authorised a pro-Trump influence campaign in the latest election, China and the US in a stand-off, and the recklessness of ransomware groups tolerated, and at times abetted, by state actors, geographical risk is at its highest in a long time. See my latest column in The Quantum Daily on how we are skirting the edge. And what steps can be taken to mitigate risk.

An assassination in Sarajevo. The subsequent chain of events ultimately leads to a world war. An estimated 20 million people die.

A small US bank succumbs to a cyberattack. Amidst carefully placed misinformation campaigns, bank runs and riots, the repercussions start to drag down the financial system. The US blames Russia, calls on NATO under Article 5, where an attack on one is an attack on all, and step-by-step the world explodes into the Third World War.

What unifies these two scenarios is that we are living in an era reminiscent of pre-World War I: the seeds of conflict are sown, irrigated by mistrust, and one spark can start a wildfire.

Last month at their Geneva summit Joe Biden made clear to Vladimir Putin where the US red lines in cybersecurity lie. “Certain critical infrastructure should be off-limits to attack, period,” said the US President.  One of the 16 sectors mentioned was financial services. It is a given that the message was also aimed at China, Iran and other hostile states with a track record of cyberattacks.

The US government has been in contact with American banks this year to chivy them into increasing their cyber defences, while Federal Reserve Chairman Jerome Powell stated that cyberattacks are the biggest risk to the system. They can trigger a liquidity run and lead to solvency issues.

One of the most worrying possibilities is a supply chain attack. In a little-publicised paper published by the New York Federal Reserve, Cyber Risk and the US Financial System: A Pre-Mortem Analysis, the authors note that an attack on a significant service provider which connects small and medium sized banks has the potential to cause a systemic event. The concentration of banks using the few existing cloud providers, like AWS or Microsoft’s Azure, for instance, is a clear risk.

The authors also note that in a five-day cyber attack, nearly half of US financial institutions would run out of reserves by day five.

The top concern is not so much a provocation, as a misjudgement, ultimately leading to WWIII. Take the recent Colonial Pipeline attack by DarkSide. They planned to attack the business side, not the operational side, which is responsible for transmitting roughly 45% of East Coast fuel. They knew the latter would be perceived as an attack on infrastructure, bringing the might of the US intelligence services down on them for straying into the political arena.

“We are apolitical, we do not participate in geopolitics, do not need to tie us with a defined government and look for our other motives,” they swiftly posted on their Dark Web page, as they sought to excuse their error and distance themselves from suspicions of links to the Russian government.

There is no easy solution to the uncertainty of who is behind a cyber attack, nor to mishaps prevalent in a digital world.

But there is a clear need for key sectors to take a big step up in cybersecurity. Not least with China – which just celebrated the 100th anniversary of the Communist Party amid Taiwan fly-overs – on what looks ever more likely to be a collision course with the West.

Paradoxically, the quantum industry may be the answer to cybersecurity, while also being its biggest threat. The creation of quantum keys which are certifiably random – unlike the current RSA encryption and other standard ones – could provide hacker-free security. At least eleven global banks are exploring quantum safe protocols for security, ranging from JP Morgan to BNP Paribas and RBC of Canada, as reported here by The Quantum Daily (TQD). Around thirty-five quantum companies in countries ranging from Poland to Singapore are working on quantum cybersecurity products.

A handful of years down the line powerful quantum computers may be able to decrypt the data already being harvested by ransomware gangs and hostile nation states – yet another reason to experiment with current quantum cryptography.

Although information is hard to come by, China reportedly has quantum key distribution technology over fibre optic cable between Beijing and Shanghai. In essence, a quantum internet, providing hundreds of kilometres of totally secure communications.

The West is intent on catching up, with governments and companies spending large sums. Germany, for instance, announced in May a €2bn investment in quantum and related technologies, while a month later British start-up Arquit announced a link with defence company Northrop Grumman to explore its own end-to-end quantum encryption.  Meanwhile, the US Department of Energy last year unveiled a blueprint for a quantum internet.

The Cold War arms race mostly involved creating weapons of destruction, the so-called Mutually Assured Destruction (MAD) doctrine which, arguably, kept the peace over many decades. In the 21st century, the most important advance in keeping world peace will be security and protection: Mutually Assured Defence – not as MAD.

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.

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.

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.

The world awaits you

My LSE graduation speech

This is an edited version of a graduation speech given at the London School of Economics in July 2019.

Good afternoon, Graduates of the London School of Economics and Political Science. It is your day, and your careers, and your new lives, which start today.

 “I was at the LSE. I graduated from the LSE. I’m an LSE Alumnus.” Those words are like saying “Open Sesame.” For the world lies open to you. You will end up working for the Government of China, for NGOs, for PWC or Goldman Sachs or Google. You will be entrepreneurs, social impact investors, data scientists, academics, prime ministers and presidents…we would be here all day if I kept on going. 

I have spent most of my life involved with the City of London. I am proud to say, we are awash with LSE graduates. I can’t quite get away with saying that is the only reason the City is a centre of global excellence! But it is certainly a big one.

Despite its small size, the LSE is the second best university in the world for the social sciences. And Social Scientists are those most crucial to solving deepening inequality, health crises, resurgent racism and global conflicts. All amid the collapse of the international rules-based order.

We have graduates from many departments present today, ranging from Accounting to Anthropology to Behavioural Science. But don’t be distracted by arbitrary distinctions. Cross-silo collaboration, a blending of your different skills and knowledge, is the way forward.

And for those of you going into the City, or into finance anywhere, remember that capital and innovation are crucial in all fields – from Green Finance to deal with climate change, to upgrading asset management so that it delivers value to all.

Shareholder primacy and the Washington Consensus on economic growth had their time in the sun. Today, a couple of years after the election of Donald Trump, we see an avalanche of books with titles like “Democracy and Prosperity – the Reinvention of Capitalism in a Turbulent Century” and articles in the mainstream press headlined “Populists have a point, the system has to change.”

At the end of last month Christine Lagarde, former Managing Director of the IMF, quoted Aristotle on the need for a personal sense of purpose to be linked to a social purpose. Speaking in the heart of the City at the annual World Traders’ Tacitus lecture she called for the financial sector to develop “broader social responsibility.”

She noted that Fintech is producing cheaper and more accessible products to drive an inclusion revolution; that a higher share of women on boards correlates to more financial stability and sustainable growth; that the younger generations prefer to invest in financial instruments with social impact.

[At this moment Boris Johnson was walking into number 10 Downing Street. I could not resist a partisan ad-lib.]  Taking power today is a new Prime Minister who is intent on saving the Conservative Party, rather than working for the good of of the greatest number in the UK. These are not LSE values.

Achieving social cohesion in our societies is key. The widening of the net of financial and societal gains of the last forty years is essential to support democracy and sensible government.

I shall finish with the most memorable sentence in American President John Kennedy’s inauguration speech, adapted for you, my audience, on this special day. Of course he attended the LSE – many global leaders have, and will.

“Ask not what the LSE can do for you, but what you can do for the LSE.”

Huge congratulations, graduates of 2019. The world awaits you.

Vintage heaven; vintage hell

The transformation of Fine Wines

As you raise a glass of Chêne Bleu Rosé on a sizzling hot summer’s day, spare a thought for the wine industry, which is facing a perfect storm.

Global warming, increasing regulatory pressures, and disinvestment, are set to dent if not destroy what had seemed a simple story of emerging markets growth and increasing quality which would lead global wine consumption to reach $207bn in 2022.  

But the overall global wine and spirits market has slipped by -1.4% in the last five years, according to industry body IWSR, and disruption of the status quo is set to accelerate.  In the US, 54 per cent of the population chose to abstain from alcohol, driven largely by 21-34 year olds, according to a 2018 Nielsen Survey.

Parallels with the tobacco industry are not an exaggeration. Imagine a photograph of a liver riven by cirrhosis on a plainly packaged bottle of wine, along with a warning that alcohol can abet breast cancer. Inside, the magnum of Château Kirwan lies, un-drunk and unloved.

Demand for wine in developed markets is under pressure from older generations who are drinking less and younger generations who prefer cocktails and don’t buy into the elitist, obfuscating language used by connoisseurs. Millennials and Generation Z are in any case also drinking less, as evidenced by the drop in turnover at university bars and the increased availability of non-alcoholic cocktails and beers. Hashtags such as #sobersaturday are trending. The ever-widening legalisation of cannabis is another factor in wine substitution.

Health is on the global agenda, with the World Health Organisation (WHO) using increasingly alarmist language about the effects of alcohol, and cash-strapped governments looking more closely at the costs of ill-health from excess use and, in parallel, the benefits of increasing so-called sin taxes. This is affecting investor behaviour too.  KLP, Norway’s largest pension fund with $80bn under management, announced in May that it would divest from any company that made more than 5% of its revenues from alcohol. French champagne and wine house LVMH and beer giant Heineken are among those affected. It is likely that this policy will spread as Scandinavians generally lead the way on Environmental, Social and Governance (ESG) investing.

Meanwhile, climate change is harming crops, disrupting supply chains and eroding corporate profits. This summer’s European heatwave is likely to be the norm, not an exception, while global cooperation on climate change lies moribund amidst the wreckage of the post-Second World War order. Disorderly trade patterns – be it between China and the US or Britain and the EU – add to the confusion. The door to the fastest growing wine market in the world slammed shut in the face of the US wine industry when President Donald Trump imposed tariffs on China.

Can the industry adapt? Over two sun-drenched days in Bordeaux, 70 winemakers, technologists and reviewers from around the world, came together for a convivial brainstorming on Fine Wine’s evolution. Organised by ARENI, a wine institute, many of its conclusions were just as relevant for the broader wine industry and, potentially, for other consumer companies.

Navigating a future where sustainability and inclusiveness are among the paramount values is crucial to its survival. That means clarity on everything from the wine-growing process to the treatment of the seasonal labour who pick the grapes, along with an openness to sharing information via blogs and tech solutions like the Global Wine Database (GWDB).  Even information that may seem ridiculous. “Your millennials want to know the name of the wine maker’s dog - it’s true!” exclaimed a 27-year old sommelier from New York.

Websites like Wine Folly use straightforward language and by so doing are creating new enthusiasts, as are wine bars with top wines by the glass via the clever Coravin system, which doesn’t damage the cork, and apps like Palate Club. Champagne houses like Moët & Chandon are enlarging their offering to a younger clientele by offering a cocktail-like experience. Ice Impérial, a sweeter champagne poured over ice, is the result. Wine makers are exploring lowering the alcohol content without compromising on taste and signing up to wider industry campaigns to advise consumers on drinking responsibly.

China is set to become the second largest wine market after the US and by 2022 its value will be over $19.5bn, reports IWSR. Prestigious winemakers are taking the opportunity to make local wines to feed the increasing appetite of the growing middle class. Château Lafite is launching its first Chinese wine, Long Dai 2017, later this year. In India, private equity group Visvires Capital expects wine tourism to be a source of revenue. The business plan for its four vineyards includes an estimated 300,000 visitors over the next three years for wine tastings, restaurant meals, hotels stay, and wine buying.

 Global warming is an opportunity, as well as a challenge. English wine evoked sniggers when it started; wines like Chapel Down from Kent are now classified as Fine Wine and sell at premium prices. Spain’s Bodega Torres has been buying land at higher altitudes. Nordic wine could be the next discovery. 

On the back of an uncertain future, the Fine Wine industry is acclimatizing to a new world. Let’s raise a glass of Château Talbot to toast its journey. 

How can the City recover its political capital?

The good news? The financial sector is no longer enemy number one. Its place has been taken by our fumbling politicians. The bad news? The City has not regained its political capital.

Post the financial crisis the City, meaning financial and professional services in the UK, lost the trust of the nation. A perfectly understandable and justifiable result, but one that must change because of the harm that is being done to our economy when the City has no advocates beyond its own members.

As the country grapples with Brexit, assembly lines of MPs appear on television defending the UK’s manufacturing base. Not one talks about the need to defend the City, despite it being responsible for over 13.5% of tax revenues – that’s a lot of hospitals, infrastructure and schools. It is also responsible for around 2.3m jobs – jobs that aren’t just in the Square Mile, or London and the South East, but also in Liverpool, Glasgow and Bournemouth.

A lot of work is going on to regain the trust of the population, but it doesn’t make the headlines. UK Finance and The City UK are coordinating their members (banks and other professional services companies) with politicians to deal with the issues that generally fill the inboxes of MPs, most notably fraud and the finances of small and medium-sized enterprises (SMEs).

The £4mTake 5 campaign against criminal money transfers, an initiative between financial services companies and the Home Office, has raised awareness of smooth-talking criminals asking for PINs and passwords. Meanwhile, a new ombudsman scheme, plus a complaints review and redress policy, will be in place by September this year to deal with dispute resolutions between the banks and SMEs. Less than a year ago, 22 banks were forced to publish the results of their customer service ratings on their branch walls.

Yet none of this represents a positive campaign to clarify the City’s national role and international role. Those who see press reports on mega-bonused bankers or financiers in court for rigging Libor need to see other images which are just as real. Kevin, the bank worker in Bournemouth, where financial services is the biggest employer.  Sue, the elderly lady in Somerset who relies on her pension. Lucas, the toddler whose parents have bought him a Junior ISA. And the hundreds of sports grounds and start- ups, coffee shops and corner stores, that rely on finance to survive and prosper.

The City’s human face should be shown in granular detail. It is never more in evidence than on September 24, City Giving Day, an annual event where businesses raise money for charitable causes. It began with tea and cakes in Guildhall Yard, the centre of City government, in 2015. Last year, 313 companies participated, from Bank of China’s renown market stalls selling home-made Chinese specialties to Tour de City, a team effort on static bikes where enthusiasm and buckets of sweat abound. Insurance brokers and lawyers in City Giving Day red t-shirts race around the streets on a treasure hunt. The initiative was so successful that it was taken up by Birmingham and is set to spread to other cities later this year.

The City’s creative energy and its ability to implement change should be celebrated. This isn’t only in Green Finance, or Fintech, where we are the world’s leader, or Social Impact investing.  A few years ago, Barclays posted a 5-minute video on its intranet in which an employee detailed their mental health struggles. The reaction in the bank was so positive in encouraging conversations around mental health and broadening the mental health offering that This is Me, as it was called, was taken up by the Lord Mayor’s Appeal and publicised. By the end of 2018 the initiative had reached over a million employees in over 500 organisations and was launched in the North West and Scotland.

What should also be showcased, not least at a time of national division, is the City’s nearly 2,000 years of history, from its Roman beginnings to its famed coffee houses, the precursors to markets like Lloyd’s of London, and the huge contribution immigrants like Sir Sigmund Warburg made to its success. The Lord Mayor’s Show dates back to the 16th century. It is still the longest and most grand annual civic parade. Yet it is barely marketed in London or the regions, let alone abroad. This is surely a wasted opportunity. 

Over the last two years the City has lost an estimated 75,000 jobs and a trillion in assets as companies seek to guarantee seamless access to the European Single Market by moving parts of their operations abroad. But it is still a European jewel. supplying half the debt and equity to EU business and over a trillion a year in direct lending. And its position as a global jewel -with difficult-to-replicate regulation, rule of law and a wide pool of talent – must be defended.

Whatever happens in the next few days in politics, the uncertainty is likely to continue over weeks and months. It is time for the City to stop hiding its lights under a bushel. With humility and humanity, and an acknowledgement of its wrongs, the City should use storytelling to regain its rightful place in the national narrative.

This article was published in the Daily Telegraph on Tuesday 30th April 2019.

Hank Paulson’s take on the financial crisis

JP Morgan’s Dimon on trial; business opportunities in Libya

Reading former US Treasury Secretary Hank Paulson’s gripping account of the 2008 financial crisis while playing at cowboys in Colorado’s Rocky Mountains was perhaps not as much of an incongruity as it seemed.

As we rode by a vertiginous cliff, I ruminated about On the Brink, the former Goldman Sachs CEO’s aptly titled memoir of the race to stop the collapse of the financial system.

What emerges from the book is how close we came to a total breakdown, how well the team of Paulson, New York Federal Reserve President Tim Geithner and US Federal Reserve Chairman Ben Bernanke worked together, how irresponsible Congress was and what an outmoded mishmash of regulatory bodies governs the US financial system.

What is worrying is how little has changed, not least the fact that the largest financial institutions have become even larger, more interconnected and more complex, posing unimaginably big risks to the global system. JP Morgan Chase, which acquired Bear Stearns and Washington Mutual during the crisis, now has a market capitalisation of $206bn compared to $157bn in 2007, before the financial crisis. Its total assets are $2.3tr.

That makes it all the more disquieting for Jamie Dimon to have held on to his dual roles of CEO and Chairman in a shareholder vote in May via the implied blackmail of his departure from the bank.

We learned a lot about cowboys at glorious Vista Verde ranch. The lone Marlboro man from the old advertisements is a myth. Herding cattle is a group exercise, as is running a bank. Dimon may have been brought up on the East Coast but he would do well to head West for a lesson, accompanied by supine shareholders and, for that matter, some regulators.

A harsh judgement? If Fred Goodwin, the former boss of bailed-out Royal Bank of Scotland, had not been as powerful, his shareholders as greedy and his regulators as unwitting, he might still be Sir Fred.

Timely excerpts from the book include Paulson’s account of how in August 2008, while in Beijing for the Olympics and severely preoccupied about the health of government-sponsored mortgage finance duo Fannie Mae and Freddie Mac, he learned that Russian officials had made a top-level approach to the Chinese suggesting that together they might sell big chunks of their holdings to force the US to use its emergency authorities to prop up these entities.

The Chinese declined to cooperate with such reckless stupidity.

Last week President Barack Obama cancelled his planned summit with President Vladimir Putin as the Cold War continues, albeit in a rather more farcical way with the delicious irony of National Security Agency whistleblower Edward Snowden’s political asylum in Russia.

Still, the Chinese are not always the good guys. A large agricultural vehicles manufacturer from the West was launching a new model at a trade show. Two stands down, it found the Chinese had produced the same one at half the price. The company had hacked into their computer systems and stolen the blueprints, according to Mark Shepard, Head of EMEA for iSIGHT Partners , a cyberthreat intelligence agency.

When I put to him that boutiques like Robinson Hambro were surely not on anyone’s radar, he noted that we had a very juicy database of the great and the good.

“We’ve all got something that in the dark cyberworld market has value,” he said.

There is a lot of value in the Middle East and North Africa (MENA) even as the press focuses on Syrian carnage and the Egyptian upheavals. Arabia Monitor one of the most influential research companies on the region, has just published a report titled “Algeria, Libya, Iraq: the next big spenders.”

Highlights include the fact that with a combined population accounting for a third of MENA, and an average GDP growth of 9% this year, Algeria, Libya and Iraq together are set to emerge as the next big retail spenders. Founder Florence Eid notes that “as an expanding middle class becomes more sophisticated, opportunities emerge for international retailers to offer new shopping experiences, with sales growth expected to reach 14% per annum in 2012-2016.”

Although she does not dismiss the security risks, Eid believes the retail market in these countries will offer substantial rewards for early movers able to absorb operational risks.

New Bank of England Governor Mark Carney said last week that he found the dearth of females on the Bank of England’s influential Monetary Policy Committee “striking”. He aims to help change this to pave the way for a qualified female governor in years to come.

Things are different on the other side of the pond. The US, if the best candidate is chosen, will see Janet Yellen take over from retiring Federal Reserve Chairman Ben Bernanke in January. Although no-one can dispute rival Larry Summers’s brilliance, he is a controversial figure with a penchant for outspokenness and a reputation for freezing out those he does not agree with. These are not sought-after attributes in a central bank governor.

Federal Reserve Vice Chair Yellen, however, is an exceptional forecaster who is not afraid to disagree with the majority view and is steeped in central bank culture. As an added bonus, Yellen would be an outstanding female role model at a time when research has proven the benefits of having women in senior positions.

This is one of the reasons I sit on the judging panel of Women in the City an organisation that aims to promote talented women. We are currently seeking nominations for our annual Woman of Achievement Awards in sectors ranging from law to banking. We are looking for women with proven leadership abilities who have gone out of their way to help other women in their organisations prosper.

If you know of any, do please fill out the short form by clicking on this link .

Nominations close on September 20.

Lands of Opportunity: China & the City

Osborne the hero

Readers suggested that the last column’s negativity deserved a positive riposte. Herewith 6 reasons to be cheerful.

China’s Chance China looks set to grow at between 7% to 8% annually, a drop from decades of higher growth stretching into double digits. As the Financial Times pointed out in an editorial a couple of weeks ago (and subsequently ignored in all its doom-laden articles that day), when the world’s second largest economy is projected to grow 7.5% a year this still implies an enormous addition of both capacity and demand.

While China reorients its economy towards consumption and away from investment and exports, increased opportunities arise for foreign firms to sell more goods into an expanding middle class. Gucci and other luxury brands have prospered, even with Chinese consumption growing at a slower pace than output over the last decades, The fact that the emphasis is set to change is an exciting prospect.

It is no coincidence that earlier this week China’s top legislature started studying draft amendments to the country’s 20-year old consumer rights law. The government is aware that providing urban jobs and a measure of rural growth is no longer enough to uphold social peace and with it the continuance of the Communist Party’s power. The Chinese consumer is a new constituency to be kept pacified. Consumer rights protection can now be added to the list of priorities, as was seen in the government-sponsored attack on Apple’s after-sales services a few weeks ago.

City Callings Perhaps it is an exaggeration to call a career in the City of London a calling, a word generally used for those who wish to follow a religious path. However, the City is still a preferred prospect for many despite the fact that around 100,000 jobs are said to have been cut since 2007. Continuing cuts will bring job levels to a 20-year low in 2014, according to the Centre for Economics and Business Research (CEBR).

Yet there is an area of great opportunity: compliance. Some banks have tripled the number of staff involved in that function. Financial firms will pay up to 24% more for the new regulatory bodies that take over from the now defunct Financial Services Authority. The Bank of England’s new Prudential Regulatory Authority (PRA), for instance, said its staff costs will rise 34%.

Meanwhile, the lack of global coordination in bank regulation – we have Volcker in the US, Liikanen in the EU and Vickers in the UK – means that a universal bank active in the UK, EU and US would be subject to all three regimes, notes Simon Hills from the British Bankers’ Association (BBA) in the magazine of the Worshipful Company of International Bankers’s (WCIB)

It is true that this epidemic of regulation is an unproductive use of funds; it is true that it raises the cost of capital; it is true that it does not necessarily make the world a safer place. But look on the bright side, dear reader: the compliance departments of banks and insurers are not likely to suffer from generalised and ongoing job cuts, lawyers and accountants involved in the sector are busy, and the sector is booming.

Cash for Claptrap There is still enough money around to fund a university professor’s study into whether bras are beneficial to women’s breasts. Professor Rouillon of Besançon University spent fifteen years on this topic. His conclusion: “Medically, physiologically, anatomically – breasts gain no benefit from being denied gravity.” The article was published on April 11, not April 1, so one presumes it was not an April Fool’s joke. In academia, as in life, there are always enough funds around to finance rubbish. Daily Telegraph

Dictator Deaths The era of Chavismo in Venezuela is drawing to a close. It matters little whether Henrique Capriles, the head of the Opposition who “lost” the general election by 235,000 votes manages to overturn the rigged result. Infighting within the ruling United Socialist Party of Venezuela will probably see it fragment into factions and no longer hold a monopoly on power.

Meanwhile, the centre-right elite which ruled for decades and never allowed the country’s oil riches to make it beyond the confines of the Caracas Country Club has morphed into an Opposition that looks to have learned enough over the last fourteen years to avoid the same mistakes. (For informed opinion on the Venezuelan Economy, see Veneconomy)

Fidel Castro will, at some point, follow Chavez. He turned Cuba into an island where, irony of ironies, the dollar is king and his much-vaunted educational drive counts for little. The most coveted jobs are those of a doorman at an international hotel in Havana, or a prostitute consorting with tourists. Both have access to dollars. Doctors and erudite officials don’t.

Obliged to Osborne The more one looks at the finance ministers in a number of European countries, the more grateful one is for UK Chancellor George Osborne. Keeping in mind that his austerity is not as austere as critics would have it, he thankfully has the guts to resist the siren calls of those who advocate spending money that is not there. It will take time for the UK economy to emerge from current circumstances. The short cuts proposed would be counterproductive. In the meantime, Osborne’s critics are growing at a quick pace – unlike the UK economy – with even the IMF joining the chorus.

(IMF Managing Director Christine Lagarde and Chief Economist Olivier Blanchard are now at the forefront of UK economic policy critics. A conspiracy theory has it that it is no coincidence that the two are French. The only way to save France, which is refusing to face up to its need for reform, is by having the German and the Northern European contingents loosen their purse strings. (See Why France will fall next).

Stanislav Petrov, a Russian military officer, saved the world two decades ago. One day in 1983 his computer screen indicated that a single missile had been launched from the US. Four more missile attacks subsequently appeared on his screen. He did not report directly to the USSR High Command that the country was under attack because his insight told him it made no sense. Petrov averted nuclear Armageddon by using his ability to think independently and thus override what to anyone else would have seemed clear evidence. In fact, the “attacks” were a series of computer errors.*

Comparing Osborne to Petrov is excessive. But one should never underestimate the guts it takes to stand up to conventional wisdom.

Reading Riot The last item on my gratefulness list is the existence of sublime reading material. I shall mention three.

The Financial Times continues to be the best source of news and comment in the West. We live in a world where the breadth of available expertise and opinion is mind-boggling – literally – and thus the continued existence of a coalescing centre of excellence on international economics and politics is to be welcomed.

Professor Christopher Coker’s Warrior Geeks is inaptly subtitled How 21st century technology is changing the way we fight and think about war. My former tutor’s book, published this year, encompasses infinitely more than that. Read it and you will be proud to be human. (*The anecdote about Petrov comes from this book).

Sheryl Sandberg’s Lean In is the book of the moment. Unlike others, it will last the course. Her analysis of the internal and external barriers to women advancing in their careers and what needs to be done to overcome these is masterful. The COO of Facebook has written a book that will truly help women, as long as all fathers and brothers and sons read it too.

The Tale of a Whale

The precariousness of JP Morgan Chase

The New York tourist sitting next to me with the map of London spread out on his lap asked where he could find the London Whale. Seriously. Unlike the London Eye, I told him, the London Whale was a human being, albeit a metaphorical landmark.

The London-based JP Morgan Chase trader’s nickname derived from his large positions in the credit market, which in the summer of 2012 resulted in the bank declaring a $5.8bn loss. It subsequently faced major fines from both the UK and US regulators for, among other things, its lax supervision and for not “adequately updating” its audit committee on the findings of an internal review, in the words of the Securities and Investment Board (SEC). The bank agreed to around $20 billion in legal settlements in 2013, almost equal to a typical year’s profit, for a range of misdemeanours.

Bereft of its gobbledygook, SEC’s phrase can be translated as “deceitful behaviour.” In other words, culture.

A recent survey highlighted that two thirds of global banks agree that a big part of the financial crisis was due to culture but only one third of banks thought there was anything wrong with their culture (my italics).

Transforming an institution’s culture is a lengthy journey, rather like chasing Moby Dick, the symbolism-laden whale in Nathaniel Hawthorne’s classic book of that name. As well as obvious factors like overhauling compensation, banks need to exercise integrity through sound judgement and rewarding decision-makers who have the guts to say no.

A very sensible suggestion on culture put forward in the Salz Review (an assessment of what went wrong at Barclays Bank pre and post the financial crisis ) was for bankers to spend two years on secondment to the financial regulator and vice versa. It appears to have sunk without a trace, despite the fact that there is a model for how to do it in the Takeover Panel, the UK’s M&A regulator, which regularly hosts top bankers and lawyers who then return to their firms.

Box-ticking is not the way forward. Unfortunately, though, the plethora of rules spewing forth from different regulators, like water from a whale’s blowhole, makes it overwhelmingly necessary. How else can universal banks active in a number of countries deal with the US’s Volcker Rule, the UK’s Vickers, the EU’s Liikanen, let alone Basel III, which appears to already be disintegrating? In fact, each country seems to be setting its own rules and banks are retreating home, capital in tow.

To add insult to injury, no sooner have banks complied with a rule that the regulator changes it. The Basel Committee admitted this autumn that perhaps securitisations per se were not “bad.” Without saying it in so many words, the implication was that forcing banks in 2009 to post higher capital requirements against them – as though all securitisations were similar to sub-prime mortgages – was wrong. The Committee is set to review the issue sometimes in 2014.

Meanwhile, the absurdity of zero or very low capital requirements on holding sovereign debt has steered banks to load up on it. This may be very useful for over-indebted governments, but as Jens Weidmann, President of the Bundesbank noted late last year, “the current regulation’s assumption that government bonds are risk-free has been dismissed by current experience.”

In truth, it doesn’t take familiarity with the last few years to realise that ‘risk-free government bonds’ has always been an oxymoron. In the best of cases their value has been damaged by inflation or currency devaluation; at the worst it has been destroyed by restructuring or default.

Moby Dick evaded his pursuers, but most of the crew of the Pequod, the whaling ship, met their death because they dared not stand up to Captain Ahab and his lack of judgment.

JP Morgan Chase’s Chairman cum President cum CEO Jamie Dimon – yes, truly three titles – admitted a few weeks ago that some investigations into the bank were just beginning, which does not bode well for 2014 results.

In May Mr Dimon fought off a shareholder revolt that would have seen him lose his position as chairman by letting it be known he would walk from the bank if this happened. The blackmail worked. He kept his triumvirate of titles and continues to lead the largest bank in the US.

This is a sell notice. It has the same whiff of omnipotence that marks the reigns of presidents who succeed in changing constitutions to allow them yet another, and another, and another term in office.

The Pequod had a problem of culture. We shall see how the tale unfolds for some of the banks, not least JP Morgan Chase. But the omens are not good: absolute power really does corrupt absolutely.*

*This column originally appeared in The Dialogue Review, an academic journal.

Christmas reading: Churchill & Huxley

Consumerism, compassion and resolve

As we forcibly surf into the holiday season on a wave of consumerism, spare a thought for Aldous Huxley’s Brave New World, which has somehow been overshadowed by another futuristic novel, George Orwell’s 1984.

Yet the parallels with our society are more insidious. In Huxley’s 1931 book, genetically-modified babies born from test tubes are brainwashed in special centres to believe that the old is bad, the new is good and thus buying things is central to their lives. Electric shocks turn them off from simple – and free – natural objects like flowers. Instead, they are conditioned to love anything that will keep them on the consumerist running track and keep the factories busy, such as certain country sports that involve the use of elaborate apparatus. Under-consumption is a crime against society.

It is worth noting that the current UK recovery is consumer-driven, while the world as a whole still relies hugely on the US consumer. And, at a micro-level, I confess to a little thrill when I buy something fresh and glossy. Our brainwashing may not be as organised as in Huxley’s Brave New World but it is extremely effective.

Having said that, it is true that the phrase “Big Brother is watching you,” is more than relevant, given recent revelations of US spying on all global communications. The dictator of Oceania in Orwell’s novel, known as Big Brother, is alive and well in a number of countries.

Spain’s tax inspectors have announced they will now be monitoring weddings, christenings and First Communions to help determine wealth and tax avoidance tendencies. Spaniards are braced to see a man in a mac and a trilby fingering the bride’s dress in the back of all wedding photos.

Think that doesn’t happen in the UK? Her Majesty’s Revenue & Customs (HMRC) has in the past years stepped up its recruitment of inspectors. Meanwhile, a UK private bank earlier this year sent out letters to clients mentioning that the tax authorities are pressuring it about the large cash amounts taken out by customers. HMRC asks for their “help” in diminishing cash withdrawals.

This does bring home the fact that money in a bank is not really ours – how soon before we have to justify large cash withdrawals? We are not at the point of having 47.5% of the money in our accounts stolen by the authorities, as happened to those with over €100,000 in Cypriot banks earlier this year, but one should beware highly indebted governments – right now, most of those in the developed world.

Of course this rather desperate scrabbling around for tax suffers from the persistent sidelining of Laffer’s Curve, which shows that when tax rates rise too far, tax revenues will not rise as people work less, or cheat the system because they perceive it as unfair. If after the financial crisis governments had dropped tax rates substantially, in essence putting money into people’s pockets, consumption would not have fallen off a cliff.

If VAT in the UK was 7% as it currently is in Singapore, we would all be spending more, the incentive for cash payments would decrease substantially, and the tax intake could well be larger. VAT at 20% turns everyone into a criminal.

The presence of so many world leaders at Nelson Mandela’s 2013 memorial was last matched at Winston Churchill’s 1965 funeral. Both men shared a dogged determination in pursuit of their aims and a super-human capacity for compassion towards the erstwhile enemy. Mandela saved South Africa, which appeared destined for a civil war of epic bloodiness. Churchill saved the Western World.

In The Gathering Storm, which analyses the causes of the Second World War, Churchill lambasts the Treaty of Versailles, whose economic clauses demanding huge reparations from Germany were “malignant and silly to an extent that made them obviously futile…. Germany only paid the indemnities later extorted because the United States was profusely lending money to Europe, and especially to her…. All this is a sad story of complicated idiocy in the making of which much toil and virtue was consumed.”

I wish my readers a consumerist high and a compassionate heart for Christmas. They are not mutually exclusive.

Investor opportunities: Spain and China

The 686th Lord Mayor & Women in the City

If I were a man, I would spend my money on women and wine and wandering.

I am, however, most definitely a woman and one who had occasion to feel immensely proud of her sex last Saturday, as fifty City women marched in the Lord Mayor’s annual parade, amid the driving rain and horse poo left by a mounted regiment. (The attached photo has little to do with reality). Perhaps the circumstances were a metaphor for what it takes to succeed in the City as a woman. But that was all forgotten as we waved at the half a million people lining the route and then passed by the Mansion House to salute Fiona Woolf, the second woman in 800 years to be elected Lord Mayor of the City of London.

The historic role for Lord Mayor number 686 involves being the Ambassador for the City (in fact, the whole of the UK’s financial services sector), giving more than 100 speeches and travelling nearly 100 days to promote the City in over 25 countries in the year in office. For the current Lord Mayor, a partner at Cameron McKenna, this may well represent a diminution of her usual travel schedule, given that she is the head of the law firm’s global energy practice and a renowned expert on privatisation and the environment.

Unlike some other women at the top, she is willing to stand tall (literally, at 5 feet and 12 inches) and be counted on to push for more women to join the City and make it to board level. “The City’s diversity and openness is one of the keys to long-term success so it is vital we work hard to move to a new normal by freeing up the talent pipeline. Businesses need to capture the innovation and ideas that difference within the talent pool generate,” she says.

The Lord Mayor speaking next to Prime Minister David Cameron at the Lord Mayor’s Banquet

Our group was as diverse as could be in the Lord Mayor’s Show that Saturday, with women who were born in India, Sri Lanka, Rumania, the US, China and Latin America. No better proof exists of the global nature of the City. As we ate our sodden sandwiches during the lunch break, we inspected some of the 130 vehicles in the parade, including 20 carriages, a tank and 50 horses, while beaming with pride at being involved in a ceremony that dates back to 1215.

Only 6% of managing directors in the City are women, when at university graduate level the division can be almost equal between men and women. Conscious bias has become less of a problem; unconscious bias more of one, which is why the Lord Mayor’s Diversity Advisory Panel, to which I belong, has a 12-month programme (www.fionawoolf.com) to bolster the position of women in the City.

It was not just our faces and languages that evidenced the City’s global medley. So did the handbags we wore as we marched, courtesy of a Chinese retailer. In 1996 entrepreneur Shunyuan Guo bought Powerland an Italian brand, and took it to China. There are now more than 200 stores on the mainland, plus 2 in Hong Kong. The luxury handbags are designed by a former Chief Designer from Gucci. 

Chairman and Ceo Guo listed the shares in Frankfurt a few years ago, raising €95m to finance the continued expansion of the retail network. He is now exploring locations for a shop in London and Paris, albeit he is adamant that “the price and opportunity has to be right.”

Powerland AG may be a good investment. So is Spain. A few weeks ago Bill Gates took a punt by buying a 6% stake in construction company FCC, making him the second largest shareholder. He is not alone in seeing value in Spain and its battered sectors like banking and construction. The IBEX 35 main stock market index is up 25% in the year to date. The country came out of recession officially in the third quarter with a return to growth, albeit a measly 0.1% increase.

On a visit to Madrid last week you could smell the first whiff of optimism. You could also smell the rubbish strewn on the streets due to a rubbish collector strike. Private companies were planning to lay off up to 20% of all sweepers. After 12 days a compromise was agreed whereby there would be no redundancies, but workers agreed to take 6 weeks of unpaid leave every year through 2017.

This is indicative of the drop in internal wages that is making the country competitive again. It has recovered 65% of the competitiveness lost during the credit bubble, while its strength in world class infrastructure and a large and skilled labour force make it the 35th most competitive economy in the world, according to the World Economic Forum. Spain is held back mainly by the bureaucracy and corruption of its unimpressive governing class.

Additionally, the government has been ineffectual, if not inept, in marketing to investors its new fund of funds, FOND-ICO. Launched in March with €1.2bn, the state’s anchor investor will invest in foreign and national private funds over a four year period to help with the non-bank financing of existing and new SMEs.

Ramon Betolaza, a London-based financier who returned to Spain this year, is raising a €500m fund via Black Toro Capital and Trea Capital to leverage FOND-ICO funds and invest in medium sized companies alongside existing management. He notes that although some companies are facing strategic challenges, others are solely suffering from cash flow problems on the back of a country-wide liquidity squeeze.

If FOND-ICO doesn’t tempt you to Spain, gentle reader, then what might do so are revelations this week that sofrito, a special tomato sauce used as a base in Mediterranean cooking, is the secret to longevity and a healthy heart. The women and the wine aren’t bad either. Nor are the boys and the bullfights.

The CEO’s case for rocketing equity markets

Middle East and Korean peace in the offing

A year after writing about the unsustainability of the French economy, I found myself this August once again amidst the glory-on-earth that is inland Provence. The economy is in worse shape, even more of the profit-making elite have left the country and President Francois Hollande is beyond a blancmange.

Demand for places in the South Kensington Lycée is such that a new one is being built near Wembley football stadium. London’s gain is France’s loss.

And yet I join a select group of forecasters who have to date been proved wrong. We continue to hammer away at our theme of the bankruptcy of the French state while enjoying the delights of long lunches with saucissons de sanglier, the local rosé and the dream of owning our own estate. The head and the heart do not always move in sync. Why France will fall next.

The time to invest in equities is now. Ignore the pundits who declare them overpriced. Dismiss the majority view which emphasises these five certainties: anaemic world growth is set to persist for the foreseeable future; China is set to become a superpower; the North-South Korea stand-off is unlikely to change anytime soon; US supremacy is at an end; the Israel-Arab conflict will endure.

Instead, read the fascinatingly contrarian world vision that a well-known, cerebral CEO recently shared with me.

“China will struggle more than many investors expect, particularly in the context of what could be the Asian strategic surprise of the next few years: Japan. Chinese growth well under double digits at 7-8% will not be enough to sustain the socio-political compact which has kept it as a unitary state with a quiescent population. The subversive power of the internet, growing income inequality devoid of the hope that a rising tide will lift all boats, local corruption, Muslim extremism in some provinces and regional separatism, will lead to domestic problems which the Communist Party will not be able to contain. It could lose power while the country messily breaks up into smaller areas of influence, although it is worth keeping in mind that “smaller” in Chinese terms is still large by any other.

The Koreas will unify as the Chinese reconsider the cost of supporting the existing North Korean regime. South Korea will pay for re-unification, just like the West Germans paid for the East. After a decade or two of domestic integration focus, Korea will be born as an even more powerful economic entity, playing a much larger role on the world stage.

The US looks set to continue as a superpower. With the Republican Party in a mess, Hilary Rodham Clinton could be elected on a landslide at the next election, bringing the House along with her. The US will continue its upward trajectory, based on cheap shale gas and its flexible, innovative economy, with no one country able to challenge it.

Peace is due to break out in the Middle East within the next 3-5 years as the Shia axis surely will be broken when Bashar is ousted. He may not be out of power yet, but the prospects of continued Alawite domination of Syria (12% of the population) grow dimmer by the day as Sunni support for the rebels continues to grow. Syria’s fall would effectively defang Hezbollah and creates much improved prospects for peace with Israel. The new military government in Egypt may transition into a civilian government over time, but likely will continue to curtail arms trafficking across their border into Gaza, further weakening Hezbollah. Shia Iran, the main backer of Hezbollah, would end up being further isolated and surrounded by Sunni powers.

The Arab Spring has brought to the surface the main threat to existing regimes in the Arab world: a lack of growth and diversification with its consequent unemployment, especially youth unemployment – under 25’s being the largest (and growing) segment of the population in the Arab world. The monarchies and dictatorships have used the conflict with Israel as an excuse for their lack of progress, but this is no longer enough.

Peace with Israel will allow the focus to shift to growth. Informal approaches to Israel from the Saudis have already been made. For Israel, which does not have the military capacity to fully disable Iran’s nuclear capabilities, a comprehensive peace settlement may have allure. Not least because Arab Israelis are set to be a majority of the population within a decade.

The confluence of these unexpected factors, including the enhanced power of the US and the shock of a Middle East and Korean settlement, means equity markets will take off on the back of the boost to world growth.”

Hopefully, this radical vision will more likely happen than this Column’s dire French predictions.

The Tyranny of Numbers

Criminal bankers, interest rate spikes & mythical holidays

I assume we will be seeing bankers in court, as UK Chancellor George Osborne is set to implement a reform suggested by the Parliamentary Commission on Banking Standards, namely introducing a new criminal offence: “reckless misconduct in the management of a bank”. Pandering to populism, it is aimed at capturing bank CEOs and directors.

But should not our new, state-of-the-art regulatory system be in the dock right now? The prosecuting lawyer would surely argue there was “reckless misconduct in the supervision of a bank” when the Co-operative Group’s bank was rescued last month. After all, there were plenty of warning signs when in 2012 the bank plunged to a £674m loss amidst almost £470m in write-downs due to commercial property loans acquired via a takeover in 2009.

And why restrict the accusation to financial services? I can envisage “reckless misconduct in the management of a nation’s health” which would apply to all junk food company CEOs.

The list of company directors accused of “reckless misconduct” could be as endless as it would be pointless.

Watching Quentin Tarantino’s classic Pulp Fiction the other night underlined how anaesthetised we have become to violence. Released in 1994, it was a byword for violence. Now, in 2013, it appears endearingly quaint when compared to the blood-spattered Call of Duty: Black Ops II and other ghastly video games played by teenagers.

In a similar fashion, we in the West have become inured to low interest rates and a negative return on savings. We are assuming a few years of them – witness the market panic when the Federal Reserve suggested mid-June it would soon taper off its stimulus programme of buying government securities.

New UK Governor Mark Carney is expected to give guidance next month to push UK rates lower. Interest rate markets currently estimate the first rate increase for 2015, not late 2016, which was their May forecast.

However, say the US economy accelerates faster than expected and the Fed eases off its quantitative easing in line with new circumstances. Sterling plummets. Might not Carney be forced to raise rates unexpectedly early in order to combat a sterling crisis?

Black Ops II would be nothing compared to the carnage unleashed then.

Leadership is about taking decisions without the evidence to back them up.

At a recent Pi Capital event, Lord John Browne, former Group Chief Executive of oil company BP, voiced concern about the current culture of “evidence-based decisions.” He noted that we live in an age of data overload, which leads to an unhealthy reliance – a decision appears to almost “make itself” based on the facts. Most great leaders have made judgements which appeared irrational at the time, with wartime hero Winston Churchill and steel magnate Andrew Carnegie among classic examples.

German philosopher Friedrich Nietzche was right to warn about the “continual falsification of the world by means of numbers.” His words two centuries ago are even more true today due to what Professor Christopher Coker calls “the unstoppable onwards march of mathematics.” Even when the limitation of numbers is shown up – viz risk systems and the financial crisis – the belief system continues.

Boardrooms are often populated by those who hold unconditional faith in numbers, a delusory substitute for religion, most of which at least admit that God’s plan is a mystery.

Two Prussian military commanders, Carl von Clausewitz and Helmut von Moltke, understood the self-contradictory absurdity of scheduling the movement of divisions and battalions in carefully calibrated master plans. The former admitted that the very nature of interaction is bound to make war unpredictable, while the latter put it in a rather more down to earth way by remarking that “no battle plan survives contact with the enemy”.*

The language of the Boardroom is increasingly financial. Yet the world does not operate according to a mathematical formula. In Non-Executive Searches too much emphasis is placed on all board members having deep financial skills, be this a career in finance or an accounting qualification. This is often at the expense of imaginative, creative thinkers, with careers that probably will not include the initials “CFO”. They are often women. There is no arguing that financial skills are crucial in a number of key roles, such as Chair of the Audit Committee; however a partner in a law firm in charge of Competition and Antitrust, or the head of marketing at a multinational may provide other relevant skills to the team.

Financiers formed the majority of the board of Royal Bank of Scotland in 2008. They were of little use in halting its downfall. Diversity is more than just a politically correct catchphrase.

Conventional wisdom in this country has it that southern Europeans are always on holiday. Discussing the topic recently with various Spanish and Italian compatriots who now live in London, we grasped that this was a myth.

In Spain, holidays consist of a week at Christmas, a week at Easter and a month in August, with a few days off in between for Saint’s days. In London – and even more so in the City – they consist of two weeks at Christmas, half term in February, three weeks at Easter, half term in May, half time over the month of June between all the social events like Glyndebourne, Wimbledon and Henley, a why-don’t- we-deal-with-this-in-September attitude in July followed by the month of August off, and capped by two weeks of half term in October.

Robinson Hambro, as an enterprising Anglo-Spanish boutique, is never on holiday.

*Warrior Geeks by Christopher Coker, a fascinating tour d’horizon on the changing face of war and its philosophical underpinnings.

Of heroes and superheroes

Foreigners and the City

As soon as I find it, I shall briskly dust off my Canadian passport and claim kinship with Mark Carney, the next Governor of the Bank of England. It is now fashionable to come from the frozen north, while interlocutors express condolences at an admittance of warm Spanish blood. Yet this hero worship of the Goldman Sachs alumnus will not last.

A couple of years ago Sir Howard Davies, former chairman of the FSA and deputy governor of the Bank of England, co-authored Banking on the Future. His book called for the end of the central bank and central bank governors as we know them.

“The past model – a secretive institution little inclined to explain itself and maintaining an air of mystery, cloaked in constructive ambiguity, and led by a philosopher king – has run its course… The new model central bank will be led by an individual who is skilled in chairmanship and communication and one who has a deep understanding of the financial sector and the wider economy, on a global scale. Taciturn autocrats need no longer apply (my italics).”

Mr Carney fulfils these conditions and is the antithesis of outgoing Governor Mervyn King. Yet before we elevate him to superhero level, it is worth remembering that he has been in charge of the straightforward Canadian financial system. He will soon be overseeing the most international financial system in the world.

Having said that, his work as Chairman of the Financial Stability Board, which attempts to coordinate disparate financial sector regulatory reforms, will have given him a taste of the global complications involved, while his appetite and awareness of the scale of the task is evident.

“I’m going to where the challenges are greatest,” he said.

Another difference in scale is that Canada’s financial sector employs 274,000 people. The UK employs around a million.

Many of them are foreign, proof of the City’s meritocratic nature and of openness. At a couple of Robinson Hambro dinners, I looked around the 10-seater table at what others might call the Financial Establishment. At least half were not English. We had a French Chairman running a major part of the global financial system, an Indian economist working as the head of an important unit within the regulator, an Israeli founder of a financial boutique, the South African CEO of a natural resource company, the American Chairman of a UK-based hotel group and the Anglo-Danish Chairman of a number of companies. The wine came from the vineyards of the Group CEO of the London Stock Exchange, Xavier Rolet, a Frenchman (Chenebleu).

Yet UK immigration policy is a shambles.

At a 2010 gathering for FTSE-350 chairmen soon after the UK government took power, the consensus was that the Coalition had already made two major mistakes that would harm business. One was its stance on immigration, which continues to be a rampant sore. The government needs to stand up to those who believe that kicking out foreign employees at Pret-a-Manger and the like will result in a rise in UK employment. Too many CEOS of both local and larger businesses swap tales of bending over backwards to employ British low-skilled labour and of the sorry consequences.

The government also needs to sort out its cap on visas for qualified professionals. Lastly, it must allow students who come to the UK for degree studies to work in this country. Many will go back to their countries of origin after a few years, attracted by the positive growth prospects lacking in the UK. From their positions of influence they will favour a BUY UK policy due to familiarity with the system and, naturally, the rosy glow which generally surrounds those university years.

The Germans and other states have been following this policy for years.

The second criticism at the 2010 gathering was on aviation policy. The incoming government had ruled out a third runway at Heathrow airport. As a West London resident who is regularly woken at 4:50am by BA 12 from Singapore or BA26 from Hong Kong – not that one cares which it is at that hour – I am well aware of the downside. But ask any UK or foreign businessman where they prefer to land in London and the majority answer Heathrow, with City Airport a close second.

In any case, setting up an aviation enquiry led by Sir Howard which will not report until 2015 is a cowardly and harmful move. It is extremely doubtful that the decision will be politically easier after the next election, whatever the political make-up of a new government.We need political leaders with the guts to stand up for what they believe will benefit their country. The popularity of many of them is at historic lows even as they equivocate on many crucial decisions for fear of losing votes. Surely it might be worth a try to take a stand? The result might surprise our representatives. Voters are not as naive as politicians assume.

One man with enough guts to spare for a whole political party is Michael Woodford, the President and CEO of Japan’s Olympus Corporation who turned into a whistleblower in 2011 when he discovered a $1.7 scandal. Speaking at a Pi Capital (Pi Capital) lunch, he took us through his personal hell when the Chairman of the company fired him and he feared for his life and that of his family due to Yakuza (Japanese gangster) involvement in the company.

As he himself writes in his thrilling autobiography Exposure: Inside the Olympus Scandal: “I thought I was going to run a health-care and consumer electronics company but I found I had walked into a John Grisham novel.”

The Japanese establishment had never been that welcoming of the gaijin (alien) from Liverpool. Following the disclosures, it slammed the door in Mr Woodford’s face. With only a handful of foreigners running companies in Japan, this tactic was possible. If we tried the same thing in London, the financial sector would close down while the racket from the slamming doors would cause an earthquake

Why France will fall nextft

A French family tale

This summer I met a French couple who work amicably together in their vineyard. They are raising their two boys good-humouredly. They socialise harmoniously. But when under a Provencal sun she grabbed a piece of baguette from his plate, he erupted. Unjustifiable behaviour? Perhaps. But a Frenchman and his food are not to be separated.

What is truly unjustifiable are the negative real interest rates being paid on some French government bonds, while Spain and Italy’s are only being kept from record highs by the promise of action by the European Central Bank.

This situation is coming to an end. France is going to have to pay a risk-adjusted return on its bonds, at which point its precarious balancing act will collapse. There are three reasons why this looks likely to happen sooner rather than later.

The first is that the eurozone’s newly launched rescue fund, the European Stability Mechanism (ESM), will have to borrow money in the continental bond markets to fund countries in need of help. Goldman Sachs believes it could crowd out other borrowers like France, the so-called “soft core”, which have benefited from investors fleeing the periphery countries. Meanwhile, the continued existence of the European Financial Stability Facility, its predecessor, which still has to fund programmes for Ireland, Portugal and Greece, will add to the supply of lower risk bonds in the euro market competing with French sovereign ones.

The French couple, Herve and Claudine Bizeul, run Clos des Fees, a vineyard named after the fairies. It produces magical wine .

France’s fairy godmother has been Switzerland, but it may be stepping down from that role, the second reason for France to fall.

Switzerland has been one of the main buyers of bonds issued by the core eurozone economies as it battles to keep the Swiss franc at a ceiling of SF1.20 against the single currency. This costly policy has been a blessing to France. It began in September 2011 and has resulted in the tiny Alpine state becoming the fifth largest holder of foreign exchange reserves in the world, with 60% of its SF418bn held in euros, according to Standard & Poor’s. France’s abysmal economic fundamentals have been brushed aside by the Swiss National Bank’s largesse and resulted in untenably low or negative yields. However, domestic opposition to an already controversial Swiss policy is rising and the central bank is under pressure to decelerate its euro bond buying programme.

Thirdly, assuming Spain asks for a rescue in the next couple of months and the ESM takes action to buy its bonds, the market’s attention will shift away from the periphery and onto France, whose borrowing requirements are rising steadily while its ability to pay debt back is declining just as steadily.

(Some market participants and executives argue that the reason the French central bank has been so hard on Italy and Spain is to distract from its own country’s abysmal state. Others accuse Frenchman Michel Barnier, the Internal Market Commissioner, of being soft on reform of the rating agencies in an unspoken pact to ensure downgrades of his country’s debt are not as severe as they should be. Conspiracy theories abound, some more credible than others).

In 2013 France will need to borrow €171bn. At 56% of GDP, it already has the highest annual public spending in the eurozone. Germany spends €163bn less on its population which is 17m larger than that of France. Public and private debt in France is 160% of GDP (125% in Italy, 128% in Germany). In fact, according to a US fund, if you add in all the off balance sheet items – saving Dexia, the TGV, pensions, healthcare, and the like – the number escalates to around 600%.

The last few governments, of whatever persuasion, have refused to confront reality – as evidenced by nearly 40 years of accumulated annual budget deficits and an anti-private sector bias which has led to an avalanche of social security costs, taxes and regulation. The result is a stymied private sector.

At the creation of the euro in 1999, France’s exports as a percentage of world trade were 6.5%. They have since plummeted to 3%. Its manufacturing margins have followed the same downward plunge to 5% from 12%. Germany’s have increased from 12% to 14%. The majority of the companies in the CAC-40, France’s main stock market index, post losses in their domestic businesses which are somewhat camouflaged by their profits abroad, notes outspoken economist Nicolas Baverez in his latest salvo to save France*.

France’s disinclination to change is disheartening. “The will to erect Maginot lines against Europe and globalisation is both dangerous and a chimera,” writes Baverez, referring to the defences put in place against the German army in the 1930s. Considered impregnable, they were proved useless. France is an accident waiting to happen, and paradoxically, a borrowing crisis may well force the country to reform, not unlike what has happened to its southern neighbours.

Herve and Claudine have chosen to stay in France and defy a state which batters entrepreneurs and SMEs. Meanwhile, 50,000 of the best and brightest graduates emigrate annually. Whether in the future the two Bizeul boys stay or go may will be a telling indicator of the health of the nation.

*“Reveillez-vous!” (Wake up!) by Nicolas Baverez, an outstanding call to arms.

The Bank of England’s Tucker time

Asian crisis lessons for Spain and Italy

Knees to chest in the womb position, I bounced in the harness attaching me to the two- inch thick, descending cable. Picking up speed, I accelerated to more than 70 kilometres per hour over the Costa Rican valley open before me.

The finish, 750 metres away, was lost amidst faraway trees, as was the tiny body of the fool who had zip lined across before me.

“I am a widow with an 11-year old child and a thirst for life. WHY AM I DOING THIS?!” I screamed. Perhaps I only imagined the scream as my lips were frozen in petrification. I was powerless to stop the horrific experience. There is no rational reason to be separated from the earth by 200 metres.*

The lookout point from which we started the zip lining faced a colossal volcano. El Arenal is known as Costa Rica’s most active volcano, spewing large amounts of ash, lava and gas. However from 2010 it entered an indeterminate resting phase. An erupting volcano was not the issue. Thus the obvious risk in our zip lining was not the most important one.

Likewise, Spain and Italy are residual risks for the euro. Banks from other countries have had enough time to lower their exposure to the two countries. Wholesale financial markets have been inaccessible to the Mediterranean nations for some time. They are relying on the ECB.

In Spain, a full bail-out is needed, not least to take over from a government whose economic and financial chiefs (Minister Luis de Guindos and Minister Cristobal Montoro) are apparently too intent on throwing poisoned darts at each other to focus on the crisis. Prime Minister Mariano Rajoy cannot bear the humiliation of asking for help. Every day that passes the debt burden on Spaniards becomes heavier. For this he will be judged.

Meanwhile, neighbouring technocratic Prime Minister Mario Monti, who started with a bang, now has his hands tied by a squabbling Italian parliament.

They both need an authority from outside the domestic and European political mess, which can only be the International Monetary Fund.

During the Asian crisis, the IMF stepped in with a heavy tread. With hindsight, it would undoubtedly do some things differently. But all in all, its presence was sufficient to remove the political obstacles to structural reforms while its resources were put to use in Thailand, Indonesia, the Philippines and others.

The complexity of the factors and players involved in the solution to the Asian disaster defies a short column like this one. Still, the need for an authority separate from the crisis-ridden countries is paramount. The European Central Bank is too involved and too political a body: it should play a junior role to that of the IMF, like the central banks in the Asian countries being rescued at the time.

There are those who dismiss Western Europe’s future as that of a Disneyland for tourists from the Bric and other nations in Asia. Beware facile judgments. Many voices were heard being equally contemptuous of Asian nations during their crises. Within only a few years, the Asian tigers rose even stronger.

Only two months ago, the Philippines extended a $1 billion loan to the IMF to help in stabilising the developed world economies.

Transparency has become the sacred cow of our days. Justifiably so. Shining a torch into the hidden recesses of financial institutions has revealed the murkiness of Mexican money laundering, risk exposures being fudged and clients being consistently ripped off.

But there are times when obscurity is necessary, as in the following case. Until the spring of 2012, Paul Tucker, Deputy Governor of the Bank of England, was a strong contender to inherit the governorship from Mervyn King, whose second term finishes in June 2013.

As part of the recent scandal over LIBOR, the ever-more-powerful Treasury select committee called on Paul Tucker to give evidence. They quizzed him over a 2008 email from Bob Diamond, where the (now former) ceo of Barclays alleges that the Deputy Governor told him over the phone that “it did not always need to be the case that we [Barclays] appeared as high as we have recently”.

This was understandably interpreted by Barclays Capital, as an instruction to lower the bank’s Libor submissions.

Now, there is a big difference between the unethical manipulation of the Libor rate for profit – which had been going on for awhile at Barclays and other banks – and the example in question.

The phone call took place a few weeks after the fall of Lehman Brothers, when the world was zip lining with an untested harness. The biggest fear for the central bank and the government was a bank run, which would probably have spread, leading to panic on the streets. There were already rumours about Barclays’s shaky finances in the markets. These could not be allowed to spread to retail depositors. The central bank was simply doing its job in nudging Mr Diamond, via an innuendo-laden sentence, to lower Barclays’s Libor rates so as to shore up its shaken credibility.

There may well be reasons Mr Tucker is not the right person to take over at the Bank of England. But it is incorrect to judge him negatively for doing his job as he did in that now-famous telephone call. Shadows are just as necessary as light in economic management.

A short week in Costa Rica was followed by a leisurely ten days in France. Our summer holidays moved from zip lining, monkey tribe attacks and white water rafting, to Provencal pools surrounded by the smell of lavender. Appearances to the contrary, the risk increased. France is the real risk to the euro, as will be explained in next month’s column.

*For those foolhardy enough to replicate the Costa Rican adventure www.skyadventures.travel.com.*