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.

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.

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.