Quantum Matters

Why quantum is a Board issue

Quantum computing is a Board issue. Boards of Directors are, however, not aware of this, except in a minority of well-publicised cases.

Does this matter, even as billions of dollars pour into the industry, M&A is on fire – there are rumours that Alphabet is due to spin out its quantum unit – universities ramp up their teaching, and governments publicise their ever-larger contributions? It does. Without buy-in from the Boards of listed and unlisted companies, experimentation is held back, user cases are fewer, and progress in the quantum ecosphere is missing the firepower of the private sector, except for specialised venture capital firms.

There are several obstacles to Boards taking quantum seriously. These range from a lack of knowledge to it being seen as a purely tech matter with scarce impact on the business as a whole. However, the biggest impediment is a lack of time. The pandemic, regulation, geopolitical risk, and Environmental Social Governance (ESG) are the time-consuming priorities discussed at Board level.

To make inroads, the best strategy for governments and quantum firms seeking support and engagement is to emphasise how quantum can transform the sustainability and competitive position of companies, with cybersecurity improvements as the third leg of the stool.

SUSTAINABILITY

The outcomes of the recent United Nations Climate Conference (COP-26) Summit in Scotland were reported as positive. But environmental change cannot rely solely on countries and people polluting less.

The solution lies in technology, or in Bill Gates’s words: “innovation is the only way the world can cut net greenhouse gas emissions from roughly 51bn tonnes per year to zero by 2050.”

Quantum computing can help in myriad ways – see here. Already, in today’s era of noisy intermediate-scale quantum (NISQ) – when processors of over one hundred qbits are still not advanced enough to profit sustainably from quantum advantage – mobility firms like Volkswagen are experimenting on the optimisation of both their complex supply chains and bus routes in busy cities. These may not sound like ground-breaking trials, but the implication is a major cut in polluting footprints.

Or take the 100-year-old process for producing ammonia fertilizer, called Haber-Bosch. It consumes an estimated 3%-5% of all the natural gas produced on the planet. Quantum can help humanity understand how bacteria naturally produce ammonia using considerably less energy. The resulting ‘green ammonia’ would substantially reduce emissions in one of the major carbon dioxide polluting processes.

Over the last few years Boards of Directors of companies – from evident carbon polluters like oil & gas companies through to all others – have seen a sea change in how investors assess them. Larry Fink, who heads up the largest asset manager in the world, BlackRock, has stated that the impact of the environment will be transformational.

The CEO of the $9.5 trillion firm said in 2021: “I believe, more than ever before, that environmental issues and sustainability issues are going to become more and more dominant…”.

What this means in practice is that companies are having to disclose how their business model will be compatible with a net-zero economy, and “how this plan is being incorporated into your long-term strategy and reviewed by your Board of Directors.” (My italics).

And when the Board is involved, progress happens.

As an added bonus, Jon Hammant, Head of Compute for AWS in the UK, notes that quantum computing gives a helping hand to a sustainable future in another way. It has a smaller power consumption due to the exponential growth of its processing capacity via qbits, when compared to a classical computer, which in contrast uses ever more power.

COMPETITION

As well as the need for a sustainability transformation, Boards are focused on competition, alert to the possibility of a disruptive technology competitor which could make their company redundant in a snap.

The only defence is offence, or constant innovation, in which quantum stands to be a major helper. Intriguingly, there is no need to wait for the vast costs of building a quantum computer to come down – the cloud provides entry with variable, low costs.

Amazon’s AWS, Microsoft’s Azure and IBM’s Q all give clients access to a variety of quantum hardware from well-known names in the field like Rigetti, IonQ and D-Wave.

Alex Challans, Co-Founder of data platform, The Quantum Insider, sees huge growth in the quantum cloud confluence: “What we’re seeing is a market that could be worth four billion dollars by 2025 and 26 billion dollars by 2030.”

Diane Côté, the former Chief Risk Officer of the London Stock Exchange Group who now sits on the Board of French bank Société Générale, is adamant that firms need to be in the sandbox of quantum experimentation or be left behind as the technology ramps up exponentially.

HSBC provides a case study of how to participate at a minimum level to boost practical applications.  Through the Next Applications of Quantum Computing (NEASQC) partnership, which involves a four-year EU grant, the global bank is working with academic and corporate partners to develop open-sourced software using quantum technology by 2022.

Others are taking bigger bets. Participants at the November 2021 City Quantum Summit * at the Mansion House in the City of London, heard Rigetti’s Head of Europe, Marco Paini, and Oxford Instrument’s Managing Director Stuart Woods, elaborate on a project with bank Standard Chartered to improve volatility predictions in financial markets.

The numbers tell the story: total capital raised in 2021 up to November is around $2.8bn, compared to $1.0bn in 2020, and $300m in 2019, according to The Quantum Insider.

The data platform highlights that average deal sizes have shot up as the industry moves from Seed – Series A to Series B to D, with a notable Series D round this year being $450m going into PsiQuantum. Increasing numbers of $100m+ rounds are forecast for 2022-2023.

A step up in Mergers & Acquisitions and SPACS is also expected. In 2021 Honeywell merged its quantum division with Cambridge Quantum, to form Quantinuum, In December 2021, US company Odyssey Therapeutics bought London-based Rahko, which is developing quantum computer software for drug discovery.

IonQ and Arqit are now listed via SPACS, with Rigetti going through the SPAC process at the time of writing.

CYBERSECURITY

The third way to capture the attention of Boards is to note the cybersecurity implications of quantum. There is, however, a caveat. Too many Directors and Non-Executive Directors delegate to their Chief Technology Officer or Chief Information Security Officer, neither of which are Board roles. The rare exception to this is when there is a breach and a crisis.

Yet cyber risk is a critical issue for Boards in terms of business continuity, loss of reputation and regulatory fines.

The US-based National Institute of Standards and Technology (NIST) is due to announce postquantum public-key cryptography standards in early 2022. Given the institution’s dominance in the Western world, there is little doubt this will prove a wake-up call to firms that have ignored the need to upgrade – a tedious, complex and time-consuming process, but one that is mission critical.

CONCLUSION

In October 2021 the White House held its first ever quantum Summit, followed a month later by the US and UK government announcing a wide-ranging cooperation agreement in quantum technologies. Awareness of the increasing advances and importance of quantum is starting to permeate through the corporate landscape.

2022-23 can be the time where Directors of corporates in the financial, manufacturing and retail sectors, among others, start to ask the question at Board meetings: what is our company’s strategy to incorporate quantum technology? But for the question to be asked, governments, quantum firms and quantum enthusiasts need to focus on explaining the massive advantages of becoming involved in a mind-boggling technology that can drive sustainability, profitability and security.

*Redcliffe Advisory is the organiser of The City Quantum and AI Summit. To express interest in the October 11, 2022 Summit, please get in touch karina.robinson@robinsonhambro.com

This is a short version of an article that is due to appear in “Chancen und Risiken der Quantentechnologien”, to be published by Springer in Q1 2022, and which has articles by a variety of business and science leaders

Quantum Matters – Quantum Culture

Not just another brick in the wall  

“You think you are the messiahs!” cries out Lily, the super-hero of BBC series Devs, to the bosses in charge of the secretive quantum unit.

That slur can just as easily be applied to the Big Tech chiefs, who started out with missions encapsulated in Google’s motto “Do no evil,” yet proceeded to abuse their monopolistic powers, promote addictive behaviours and allow hate speech to flourish.

Can a different culture be created in the newly emerging quantum ecosphere?

This matters to the world. The Quantum Computing market is forecast to be worth $50bn by 2030, only nine years away. The pace of funds into the sector has already accelerated. Data platform The Quantum Insider (TQI) notes that total disclosed capital flows into the sector were $1.9bn in the first half of 2021, compared to $1bn in all of 2020.

And quantum computing’s capacity to change the world for good can best be harnessed through a diverse workforce working in an inclusive culture that supports stakeholder capitalism.

The key challenge – a decent culture – also matters to quantum companies themselves for three reasons: innovation, recruitment and funding.

Innovation

Similar to all nascent sectors, innovation is key to the development of profitable companies producing jobs and goods.

More inclusive companies are 1.7 times more likely to be innovation leaders in their field, according to a Deloitte report. Gender-diverse companies are 15% more likely to outperform their peers, while ethnically diverse ones are 35% more likely, according to a McKinsey report.

Even without citing hosts of corroborating studies, common sense dictates that the wider the range of opinions, the more chances of new ideas arising. The most productive meetings for transformative ideas are often those where disagreements flourish. The flame of innovation is often created out of friction; group think is the result of bonhomie.

Given that human beings have around 188 cognitive biases, ranging from the self-explanatory Familiarity Bias to the Just World Hypothesis, recruiting in one’s own image is difficult to resist. It behoves quantum company CEOs and their colleagues to diversify the mix, adding to the mainly white and male university PhDs and tech executives in order to bolster innovation.

Recruitment

There is a global war for talent in many sectors. Goldman Sachs, an erstwhile golden destination, is seeing some problems in recruitment. And those it does recruit are now surprisingly vocal. Young bankers complained to senior management about their workload earlier this year, a story avidly picked up by the media.

The UK’s mission to attract the best global talent is not helped by its expensive, time-consuming new immigration regime. One well known quantum start-up was forced to set up two subsidiaries in Continental Europe due to Brexit. On the plus side, the company was pleasantly surprised by the response to a recruitment ad there. Unfortunately, this stood in sharp contrast to its UK job advertisement, which received far fewer responses.

Employees and future employees are empowered, and they are demanding workplace cultures that align with their values. Over 85% of Gen Z believe companies should stand for more than just making a profit. Note that at Apple there was a successful petition to dismiss a well-known new hire with a sexist reputation, as well as a public letter demanding flexible return-to-work policies.

And yet, basic prejudice persists. A female student working on her quantum PhD at an Oxbridge university was asked by her professor: “How do you expect to progress if you keep smiling all the time?!”

Oxford Quantum Circuits (OQC) is doing all the right things and reaping the fruits: over 40% of its job applicants are women. One of its latest ads used these phrases: “We aspire to thrive…thanks to your diversity of thoughts and background…We are building quantum computers to enable life changing discoveries.” The company, led by Ilana Wisby, anonymises all the CVs it receives, posts roles on diversity-focused job boards (LBGT+, black engineers and others) and celebrates its new arrivals with photos on social media that highlight its diverse workforce.

Although helpful, a female CEO is not essential to enable a wider recruitment strategy. Cambridge-based Riverlane, for instance, headed by Steve Brierley, lists its first two values as being “supportive” and “collaborative” and posts a friendly group image of its relatively diverse company.

Denise Ruffner and Andre König of Women in Quantum (WIQ) and OneQuantum are the two major protagonists of the move to shake up the look of the industry and widen access. Their fast-growing mentoring schemes, online recruitment fairs and the setting up of free-to-use country chapters – from Zimbabwe to Nepal to Argentina – are inspiring a new generation.

TQD has been highlighting the issue, while The City Quantum Summit in November will host a special panel on the subject.

To create an inclusive culture, the Good Finance Framework is a good place to start. Designed by The Inclusion Initiative’s Director, Associate Professor Grace Lordan at the London School of Economics*, its 10 steps will also help boost staff loyalty and enthusiasm. This is crucial when quantum companies are competing for the best talent against other industries, as well as between themselves.

What is relevant for talent, is just as relevant for funding.

Funding

Political guru Frank Lunz predicts that how you treat your employees will be the single most important issue for companies over the coming years – above sustainability and shareholder returns.

It is an issue institutional investors are grappling with as part of their Environmental, Social and Governance (ESG) criteria.  Regulation will drive it. The US Securities and Exchange Commission (SEC) this year approved a proposal from Nasdaq, the stock market for tech, requiring its listed companies to publish, comply or explain on board diversity. They must have “two diverse directors, one identifying as female and another as an underrepresented minority or LBGTQ+.”

The UK’s Financial Conduct Authority (FCA) has proposals out for consultation on how it can accelerate the pace of meaningful change on Diversity & Inclusion, noting that it is relevant for risk management, good conduct, healthy working cultures and innovation (my italics).

The writing is on the wall: whether public or private, investors are going to be leading a push for the right cultures. Getting ahead of the game is the best bet for any quantum company.

Build back better is a much over-used phrase. But it encapsulates the desire to avoid the mistakes of the past. In the case of the quantum ecosphere, steering clear of Big Tech’s grave errors to create a better world, both within quantum companies and through quantum computing, is key.

*To note, the author is Co-Director of LSE’s The Inclusion Initiative for the City.

The City Quantum Summit at the Mansion House on November 10th is hosted by the Lord Mayor of the City of London and Redcliffe Advisory, and supported by the National Quantum Computing Centre (NQCC) with TQD as media partner. Diversity and Inclusion is at its core. Register here

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.

Can quantum save the City?

This month we comment in The Quantum Daily on why the City needs to become involved in Quantum Computing, a $10bn market over the next few years. There is a great opportunity in servicing the UK’s 73 quantum start-ups – the second largest number in the world after the US – with fundraising & consultancy, while machine learning for portfolio optimisation, and cybersecurity and MedTech are all going to benefit from it.

Quantum needs to be part of the the City Corporation’s recovery plan.

To note, I write this as a Senior Advisor to Cambridge Quantum Computing and a City champion.  

Read the article here

Artificial Intelligence and bookcases

Creating inclusion through AI

Humans host over 140 cognitive biases. These range from excessive reliance on the printed or digital word to confirmation bias – the tendency to recall information that confirms our pre-existing beliefs. How, labouring under such a bias burden, can companies overcome the human factor to create a more inclusive and diverse world?

As we celebrate International Women’s Day, and the advances that have been made in the corporate world, it is worth noting that not everyone believes that we are prone to prejudices (the brain’s use of shortcuts to help us deal with days filled with stimulation and choices). Only last month at a town hall virtual meeting of KPMG UK staff, Bill Michael said that discrimination caused by unconscious bias was “complete and utter crap.” The consulting firm’s Chairman has since resigned.

Mary Beard, the iconic Cambridge professor, writes that centuries of conditioning means that “our mental, cultural template for a powerful person remains resolutely male.” She uses the example of closing one’s eyes to conjure up the image of a professor. It is not just that most of us see a man, so does she: “the cultural stereotype is so strong that…it is still hard for me to imagine me, or someone like me, in my role.”

Margaret Thatcher, she notes, took voice training as she rose to power to lower her pitch by an octave and thus give her the (male) authority that her advisors felt she lacked when speaking in a high pitched, female voice.

To counter such cultural hard-wiring, Artificial Intelligence (AI) is key. It is, however, programmed by humans and prone to other biases as well, based on the data input and to what one might call algorithmic quirks. In June 2020 Amazon was forced by public opinion to ban the police from using its controversial facial recognition technology which was prone to racial bias in its surveillance technology.

Recruitment algorithms have been criticised for biases in favour of white, male candidates, given that the data set fed to them consists of successful candidates from the past. Even more subtle factors can influence the result. A Munich company’s algorithm was proven to favour candidates who had a bookcase behind them, helping them score more highly for “conscientiousness” and “agreeableness” and lower for “neuroticism,” according to a German public broadcaster’s analysis of the recruitment tool.

Yet it is not all bad news.

“We are in the early days of AI applications,” notes Richard Nesbitt, the former CEO of the Toronto Stock Exchange, speaking at a recent roundtable organised by the LSE’s The Inclusion Initiative (TII). “They will become more relevant and useful as they improve.”

Technological advances, including in Natural Language Processing via quantum, in essence the first step in true ‘Machine Intelligence’, is one way. Another is through more evidence of when AI works – negative examples always tend to dominate the news.

“A study of the academic literature on AI gives us evidence that it can improve efficiency in the hiring process, and likely also make better hiring decisions in terms of job performance and diversity of hires, depending on the type of AI,” says Paris Will, Researcher in Behavioural Science at TII.

One such type of AI is produced by MeVitae, an Oxford-based start-up which partners with Microsoft and Oracle, among others. Its algorithms anonymise CVs and cover letters by automatically removing over 15 key personal identifiers (such as gender, age, social economic background) directly from applicant resumes. This enables the human recruiter to focus on important matters like skills and capabilities.

“We have mapped out that 60% of the 140 human cognitive biases come into play during the screening process for candidates i.e. the moment someone sees a CV/cover letter,” says Riham Sattii, the clinical neuroscientist Co-founder and CEO of MeVitae,

AI can also be useful in tracking the words used in job descriptions and how they influence interviews and hiring.

Speaking on the TII panel, Deborah Lorenzen, Head of Enterprise Data Governance at State Street, points out that from existing evidence we can probably guess that using words like “battle” and “driven” will lead to more men applying for a job. “What is most surprising to many though is that using the word ‘manage’ is also more likely to attract male candidates to your job description.”

“Most hiring managers would probably shake their heads at that since we are so used to the word. AI can help us understand which of the things we are sure we know which don’t turn out to be true when you have data,” she concludes.

Despite this rather promising outlook, AI hiring is perceived more negatively on almost every outcome in comparison to human hiring.

Yet given that the financial and professional services industry has among the worst numbers for diversity in business, a reassessment of AI applications is due. A recent UK survey found that between 25% to 50% of senior managers in the global City came from independent or grammar schools, and almost 90% from higher socio-economic backgrounds.

The push for change is coming from many sources, including respected bodies like McKinsey, whose studies show that companies in the top quartile for ethnic diversity are 33% more likely to have industry-leading profitability. Regulators and governments are another source. In the UK, the Financial Conduct Authority (FCA) has linked diversity to its campaign on firms’ culture. It has reiterated that non-financial misconduct – meaning culture - remains a key factor in its supervision.

Meanwhile, the UK Government has launched a drive to increase the number of people from poorer backgrounds in senior positions in financial and professional firms, while the German government in January signed a bill to boost the number of females on its corporate Boards.

Creating a more inclusive corporate world, with more sustained profitability and innovation, will take many years and much effort. Artificial Intelligence has an important role to play, with the caveat that it must be used in conjunction with the human factor. In Satti’s words: “Technology is designed to enhance the way we live and work, not replace it.”

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 Along with Associate Professor Grace Lordan, I am Director of The Inclusion Initiative at the LSE, which uses behavioural science and data to create inclusive company cultures. Feel free to sign up to our monthly newsletter which details events and research.

A Tribute to Rupert Hambro 1943-2021

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Rupert Hambro in conversation with old friend Nicholas Soames in Armourers’ Hall

Rupert Hambro CBE was a knight in shining armour. Official obituaries write of a grandee, scion of a banking dynasty, and establishment figure. He was all of those things, but his serene manner and well-cut suits hid a man who was the ‘first feminist.’ He was a believer in female entrepreneurs, when those two words were rarely put together.

I well remember going out to lunch with him in 2010, in desperate need of career advice, having been made redundant by the Board Search firm where I had been employed for barely a year. He casually dropped a bombshell into the conversation: “Let’s start something together.” I said he should start it with someone more experienced. Rupert ignored the self-destruct answer and briskly told me to go off and put together a business plan.

His skill lay in spotting potential where it was least obvious; in my case a widow with a 10-year-old boy and few prospects of being hired by another headhunting firm.

A decade later, Robinson Hambro has not quite grown to the size of JO Hambro – Rupert’s first venture with his father and brother on the back of a larger family split. He kindly never held it against me, but it is a decent boutique business which owes its very existence to him. He loved the Robinson Hambro dinners at home in Chelsea, with wide-ranging guest lists, from CEOs of FTSE-100s to youthful environmental campaigners, to a captain of England’s rugby team.

He was hugely supportive and kind to all young people and drew energy from them. That was why his last major enterprise, a partnership with Dominic Perks in venture capital firm Hambro Perks, suited him. Mentoring young entrepreneurs like Devika Wood, who set up care specialist Vida, or Shahzad Younas, who set up Muzmatch, a Muslim match-making app with 3.5 million members, kept him buzzing with the creative potential of youth and business.

Rupert had no truck with hierarchy. I well remember sitting in a roomful of senior lawyers with him, all of them clad in pomposity and unctuousness. He asked the opinion of the junior in the room. And properly listened. In the words of another young man, Philip Palumbo, who knew him all his life due to Rupert’s friendship with his father, Lord Palumbo, “He was the most charming, curious, intelligent, interesting and loyal person I had ever met.”

Rupert and wife Robin were interviewed last year by the Worshipful Company of International Bankers at the Walbrook Club as part of a series on London’s power couples. American-born, Robin moved from London Editor of American Vogue, to set up corporate sponsorship fundraising at the Royal Opera House, and then to Christie’s Fine Arts and Board roles in the art world before her final incarnation as a painter. What was the secret to reaching their 50th wedding anniversary? “Good manners,” said Rupert in his honeyed tones, with a lift of a legendary eyebrow.

He always had a lovely turn of phrase. And his manners were legendary. Martin Taylor, Chairman of RTL and former Bank of England FPC External Member, once said that if everyone had Rupert’s manners, the world would be a better place.

I shan’t end this obituary to a dear friend with an endless list of his Chairmanships and Directorships, but with a tale told by another son of a friend of his. Damian Hoare, who runs Oliver Hoare Ltd, an art dealership of legendary artefacts, tells this tale of Rupert’s visit to the 2017 exhibition Every Object tells a Story:

“As we walked around, he asked me the price of an object. ‘150’ I replied, to which he said ‘I’ll take it!’. He then continued around the room and at each price he said ‘I’ll take that too!’. I couldn’t believe my luck. He continued to ask prices, to one of which I replied ’that is 20,000’. At which point he stood bolt upright, looked at me in complete disbelief and said ’20 thousand? Did you say THOUSAND? TWENTY THOUSAND POUNDS?! No no no that’s far outside what I’m prepared to pay.’ At which point I thought it might be an opportune moment for me to remind him he had spent upwards of 500,000 already. He took leave fairly soon after, and that was the last time I abbreviated a price for anybody, a lesson I hold dear to this day..!”

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.

Letter to Hugh

The Inclusion Initiative & a better world

Darling Hugh,

You saved me from isolation and irrelevance when we met at The Hotchkiss School in 1981. A bit of eurotrash from Madrid, raised in Dictator Franco’s traditional Spain, I was lost amid all the preppies in that Connecticut boarding school. You offered me your beautiful (like all of you) hand in friendship and I survived my oddity, with the help of our escape once a term for wild nights at Studio 54 in New York.

What I never realised till recently is how deeply you affected my life, all the way up to the present day. I thought the personal motivation for being a Diversity & Inclusion campaigner came from being a woman and an immigrant in the City. You, in fact were the springboard. Although I had guessed, it took a year for you to tell me you were gay, out of fear that I would turn away in disgust as others had. Your East Coast establishment upbringing did not help.

Only now am I aware that the horror of realising how cruelly you had been hurt and excluded has led me through the years to this week in 2020, with the launch of The Inclusion Initiative (TII) at the London School of Economics. The research centre, which I co-founded, will bring behavioural science and data together to create more inclusive cultures in the City for sustainable profits.

We are already working on a four-year project with Women in Banking and Finance, The Wisdom Council, and a number of firms ranging from BlackRock to Barclays, to evaluate the causes of gender difference in progression and then trial and evaluate solutions. And we are in talks with a number of financial and professional services companies on partnering in projects from making venture-funding more open to BAME entrepreneurs, to disrupting how new work projects are assigned and how employees are rewarded, to better measuring the link between culture and risk.

Words or acronyms like ‘data’ and ‘LGBT+’ seem so cold, and if I wrote about another project to use ‘AI’ to promote inclusion in the workplace, these terms would be meaningless to you. ‘Profitability’, however, would be a familiar word. The aim of The Inclusion Initiative is, ultimately, to create more inclusive workplaces in order to boost the bottom line, a point amply demonstrated in studies from McKinsey and others.

In a business sector dependent on innovation and collaboration, diverse voices need to be heard. The mark of a good meeting is not necessarily one filled with bonhomie and agreement, while the mark of a good Chair is to create the psychological safety to allow all present to speak up. Behavioural science teaches us that discomfort is often the prelude to learning. Discomfort was the least of my feelings as I sashayed into the school cafeteria in a pretty dress on the first Sunday in the school year, to find America’s young elite dressed for brunch in the oldest sweatshirts and jeans they could muster. Sunday best had a rather different definition in Connecticut than in the Madrid of that era.

There is a world of difference in LGBT+ rights in the developed world and in business compared to the early 1980s. The City now has its own Pride in the City organisation to promote Diversity & Inclusion. Yet only last year an openly gay candidate to be Lord Mayor of the City of London was asked in his interview process how he would prevent the role being “hijacked” by the gay community, while the US Labor Department proposed a rule cancelling an executive order banning anti-LGBT+ discrimination among federal contractors.

I last saw you, Hugh, in New York in 1988. You told me you were HIV positive and I asked what that was; its ravaging effects in the gay community had yet to be felt and chronicled in Europe, and you were ablaze with apparent health and on your way to being a successful painter. Over the next years you chronicled the AIDS era in figurative, bleak works which you described as having that ‘soft glow of brutality’ characteristic of American painters like Edward Hopper.

I called in 1995 to say I was coming over to New York again. But you had died at 32 years old of AIDS-related complications. I wish you could have lived on to find a partner, and to walk down the street hand in hand, to entertain at home and to call him your husband. The jargon of inclusion should not hide the fact that we are creating a better world.

Karina Robinson is Co-Director of The Inclusion Initiative at the LSE along with Associate Professor Grace Lordan. Hugh Auchincloss Steer’s work hangs in the Whitney Collection of American Art.

Green Finance Blossoms

The perfect storm is right now

The world is facing the perfect storm for environmental change. We are at the most exciting time to fight climate disaster in the last four years. The US is set to rejoin the Paris Agreement, China announced it will be carbon neutral in 40 years, and the mid-November Green Horizon Summit hosted by the City of London saw a handful of key regulatory and financial advances.

Despite weather-related catastrophes like wildfires in California and massive flooding in parts of Asia during his term, outgoing President Trump stuck to his early decision to withdraw from the Paris climate accord. Incoming President Biden, instead, affirms his intention to lead a diplomatic initiative to go beyond its current goals of keeping the temperature rise well below 2 degrees Celsius this century. Sustainability is central to the President-elect’s agenda. 

Biden has not simply jumped on the latest bandwagon: he was responsible for one of the first climate change bills ever introduced to the Senate. His goal is for the US to be net zero emissions by 2050, and he has promised to create an enforcement mechanism by the end of his first term. That is a crucial element in a democracy where those who deny climate change represent a substantial force and could back in power in four years.

Meanwhile, China may be the world’s largest emitter of greenhouse gases, but its leadership has now taken a stand on the issue.  A couple of months ago, President Xi Jinping announced at the UN General Assembly that his country will achieve carbon neutrality by 2060, only ten years after the US, not a simple achievement for a fast-growing economy that relies on coal.

In part, this plays into China’s narrative of being a responsible member of the international community, ably contrasting with US withdrawal under President Trump.  However, with a Democratic Party administration in place from 2021, one that will continue to stand up to China’s military and economic might, cooperation on climate change looks likely to be the one area where the two superpowers can work together and achieve major progress on tackling the environmental disaster.

The third part of the equation is not as headline-grabbing as the first two but is arguably as important for its private sector consequences. Last week the Financial Conduct Authority (FCA) announced that from January 1st all London-listed companies will have to disclose how climate change affects their business under Taskforce on Climate-related Financial Disclosures (TCFD) standards; the Bank of England announced the launch of its climate stress test for financial institutions in June 2021; Chancellor Rishi Sunak announced the launch of the first green gilts (UK green treasury bonds), in essence government borrowing for low-carbon projects.

London hosts the world’s most global stock exchange, while the City of London is, still, the centre of international finance. Thus although these UK rules may have arrived after those of the European Union, a leader in this sector, they will have global consequences.

In fact, it is indicative of the City’s aim to lead on green finance that China Yangtze Power plans to list on the London Stock Exchange (LSE). It will be the first Chinese company to receive the LSE’s ‘Green Economy Mark’ for companies that derive at least half their revenues from the green economy. Yangtze Power is the world’s biggest hydropower plant operator in terms of capacity.

Meanwhile, the carbon credit market – where regulatory allowances for emissions can be bought and sold – looks like becoming mainstream. This summer, the KFA Global Carbon ETF listed in New York. The exchange-traded fund tracks the performance of the world’s three most liquid markets for carbon credits.

Critics argue there is a plethora of standards on the environment, making it almost impossible to compare like with like and allowing ‘greenwashing’ of projects and companies. These are but growing pains that will sort themselves out. And the reality is that helping companies transition from high carbon-producing energy via ‘brown bonds’ is just as important for the world economy and jobs as the ‘green bonds’ that finance more fashionable endeavours.

A more meaningful criticism is of the asset managers who are slow to take action while their CEOs publicly take companies to task.

BlackRock, the world’s largest investor, is a case in point. A report released last year by Friends of the Earth and other activist groups concluded that the company’s investment in sectors like palm oil and rubber which generally encourage deforestation had increased by over half a billion dollars in the past five years, while its CEO Larry Fink sends out self-reverential missives.

Admittedly it is far from easy to steer a different course quickly when captain of a behemoth with over $6.5 trillion in assets. What will help move the dial is the FCA’s aim to introduce TCFD obligations for the largest asset managers, life insurers and pension providers by 2022. In the US, even with a divided Congress, the new President could use government procurement as a lever, while the Securities and Exchange Commission (SEC) can write mandatory rules for listed companies.

ESG funds already have $40 trillion under management, and growing apace.

A few other factors are critical. Generation Z and millennials form an ever-larger part of the workforce and are pressuring companies to make stronger commitments to change; living legend David Attenborough and environmental campaigner Extinction Rebellion and others are stepping up their activities; and the 2021 COP26 global climate talks in Glasgow will lead to more advances.

Last, zero interest rates allow governments to invest in a sustainable economy at a time when the pandemic-induced crisis demands job creation in new sectors. At the time of writing, UK Prime Minister Boris Johnson was due to announce a ten point plan to combat climate change, including new national parks, energy efficiency for homes and businesses and innovation funding to achieve net-zero.

Dealing with major global problems relies on collaboration between countries and between the private and the public sector, underpinned by dynamic and innovative financial systems. In a potentially more civil era ushered in by Joe Biden’s arrival in the White House, the next few years look like being ground-breaking in transforming how we produce energy – with outer space a distinct possibility for solar farms over the next decade.

In the words of Antonio Guterres, Secretary General of the United Nations,”Decarbonisation is the greatest commercial opportunity of all time.”

From Competitor to Collaborator

Dealing with the S in ESG 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cybersecurity – the spies and the crooks

Collaboration key to minimising threat

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

END

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

Power to the People

The merging of business and politics

GLOBAL TRENDS AND WHAT THEY MEAN FOR BOARDS OF DIRECTORS

This column was first delivered as a webinar to Z/Yen Group and the Financial Services club, which you can listen to here

Firstly, many thanks to my dear friend, Alderman, Professor and Sheriff Michael Mainelli for asking me to share some thoughts with you.

INTRODUCTION

Covid-19 and its economic effects are not going away anytime soon. We will be seeing a reconfiguration of our systems, ranging from geopolitical relations to the power of national governments, from company accounts to working patterns.

Some say the new paradigm is but an acceleration of existing trends. I wouldn’t disagree, but there is a point at which acceleration leads us into a new world, one where we must change our outlook. One where the responsibilities of Boards of Directors broaden out into the wider world. THAT is what I will focus on today.

For simplicity’s sake, I have divided this speech into three.

• THE RISK COMMITTEE

• THE NOMINATION AND REMUNERATION COMMITTEES

• THE AUDIT COMMITTEE 

What I am saying for each one equally applies to executives and entrepreneurs and, naturally, to the main Boards. 

RISK COMMITTEE

Black Swan Events

That famous phrase used by author Nassim Nicholas Taleb. Arguably a pandemic is not a Black Swan event when Bill Gates publicly – publicly! – talked about how unprepared governments were in a video a few years ago. But let us not quibble about definitions.

What matters is that Risk Committees need to expand the subjects on their agenda.

There will be other pandemics. There will be unseasonal flooding and bush fires like those in Australia. Climate change is a given and its effects on natural resources and economies are key. Take a recent catastrophe in Russia where the thawing permafrost lead to 20,000 tons of diesel spilling into the Norilsk River.

Geopolitically we are in a world of increasing nationalism and maverick leaders where the web of US-led, post-war institutions no longer function. Where does the dialogue and the negotiating happen now?

I will just mention three key countries.

RUSSIA. President Putin’s poll numbers are plummeting; Covid-19 deaths are more than the government’s corrupt statistics office will reveal; the oil-dependent Russian economy has been battered by record-low oil prices. Putin will need to engineer a distraction, this year or in 2021 – another invasion, perhaps Belarus? Or cutting off electricity supplies in some small corner of the West? Or a cyberattack in a port area…they (or perhaps another country like North Korea or Iran) have done it before in Rotterdam. 

CHINA – it is too large a subject to deal with in this webinar! Let me just say that China was never the West’s best friend, an assumption held by the government of David Cameron, but neither is China our worst enemy, President Trump’s current assumption. Bringing those supply chains back from China, the new ‘localism’, ain’t that easy!

THE US – Trump is embattled. There are major doubts that he can win the November election. Creating more division inside the US – the enemy within - isn’t enough. I would expect some new narrative and action around “the enemy without” – new tariffs, new trade wars, take your pick.

Rising Inequality

Pope Francis in his Urbis & Orbis Easter homily spoke about a “dignified life”. We are going to have millions…and millions… and millions… of unemployed. Whether the US unemployment rate is 13% or higher – you are all aware of the recent controversy about the numbers - it is bound to head up vertically. As will our numbers.

And the so-called full employment we had in much of the West was a lie, with zero-hour contracts, no ability to save, no margin for error. We left too many people behind on the back of globalisation and automation. Re-incorporating them (plus all those who falling headlong into unemployment now) into working society and a dignified life is an enormous challenge. If the corporate sector is not part of the solution, it will be perceived as part of the problem.

The divide on economic policy between left and right is fast disappearing. The evidence? President Macron of France spoke about the need to transform our capitalist societies due to their environmental and social inequality failures. A discussion about the Universal Basic Income is now mainstream. British trade union Unison saw a net increase of 16,000 in their members, which is 18% higher than in the same period last year.

I urge you to read a dystopian 1952 novel by Kurt Vonnegut, Piano Player.

Government

After the financial crisis, the pendulum of power for financial services and banks swung back towards government and the regulators. Even more so now. Big government is back.

To keep businesses like airlines going they will be forced to turn loans into equity stakes. After all loans, even at low rates, don’t do the trick when the revenues aren’t there.

Circumstances, not ideology, have put government in the ascendant at the expense of the private sector. With the best will in the world, they won’t be able to sell those shareholdings anytime soon, and so they will influence how companies are run, how they interact with their suppliers, how they deal with their financials.

Of course, the biggest risk and opportunity is Quantum Computing. I am no expert, but as a shareholder in a quantum computing company, I have been exposed to some of the mind-blowing possibilities and would urge any board to be constantly updated on advances.

THE NOMINATION AND REMUNERATION COMMITTEES

People

This section is really about people. How do you attract the most talented people? Speaking mainly to a City audience, let me point out we have a problem – and this is relevant for financial and professional services in other OECD countries.

The City was where the best and the brightest in my generation headed. Now, they more generally head to Google or start-ups, they join NGOs or set up their own.  Former City Minister Mark Hoban chaired a Financial Services Skills Taskforce which found a skills and talent crisis in the sector, issues with purpose and culture and not enough continuous education.

Attracting the best and the brightest is one problem. But the unemployed are also your problem. The deprived are your problem. Racism is your problem. There is no longer a separation between politics and business.

In the words of Martin Luther King: “In the end we will remember not the words of our enemies but the silence of our friends.”

From Larry Fink of BlackRock to UK CEOs, companies have spoken out on the back of the Black Lives Matter movement. Some have announced special schemes or are looking anew at their recruitment. Those that haven’t are probably making a mistake. Because if you consider the demonstrators, and those who have spoken up on social media – all races, including a lot of whites.

A larger proportion of companies’ workforces are made up of millennials and Generation Z, and they CARE. They look for work/life alignment, where they can be the same person at work and at home, and they want to be proud of the company they work for.

Diversity & Inclusion

Look at it like ESG (Environmental Social Governance). That ‘E’ no longer sits in some far-off office and is trotted out once a year. Mark Carney, the former Governor of the Bank of England first highlighted the financial risk from stranded assets and, in parallel, the opportunities. The Norwegian Sovereign Wealth Fund recently sold its Glencore shareholding for breaching it guidance on coal use.

Similarly, the ‘S’ in ESG, or Diversity & Inclusion, is now central. It is about risk and it is about innovation. To mitigate risk and think laterally we need diverse opinions which are encouraged and listened to.

That is why I am the Co-founder of the newest institute at the London School of Economics, The Inclusion Initiative, which uses behavioural science and data to improve innovation and the bottom line. My Co-Founder Professor Grace Lordan and I are in conversation with financial and professional firms about their becoming partners in this endeavour.

Do please get in touch if you think it might be of interest to you.

A few last words on people. Communication and collaboration are key skill sets. Empathetic leadership and the ability to understand what drives your many different stakeholders is something that no leader can do without. Chose them wisely.

“Build back better” is a phrase you may have heard. Understand what the impulse behind it is, for it will affect the future of companies.  

THE AUDIT COMMITTEE

Resilience

In the financial crisis, the banks were bailed out by the government. The regulators then forced them to increase their capital and work on changing their culture. That is why we are not facing a financial sector crisis, at least at the moment.

The corporate sector is different. Companies are being run in an “efficient” way. Cut costs to a minimum, carry as little capital as possible, get that ROE up.

That’s finished.

For two reasons. One, the realisation that the Black Swan world we live in demands higher capital sums and more focus on cash, or cash equivalents. The amplitude of the events we are facing is such that this is necessary.

Two. Treating employees as contractors, or outsourcing to India, and then focusing excessively on shareholders, is a discredited model. It now turns out to be a very risky one. One bank CEO said to me she thinks differently about employees in India whose circumstances mean lockdown and isolation aren’t possible.

And, as mentioned earlier, government and regulators will be much more powerful and involved in the private sector than before. They also don’t like that model. The new Stewardship Code, for instance, calls for more high-quality integrated reporting.

Costs still need to be cut, but automation, robotics and AI are now the focus, plus having 30% or more of your workforce on agile working, depending on your business, which will also save on real estate fixed costs – with  huge implications for commercial real estate.

Fraud

I have only one word. It’s going to be HUGE. I presume accountants are more than aware of this. Anecdotally I already know about one private equity-held company that took government furlough money in a month when it had no right to. When you have convulsions in funding, opportunities for misbehaviour increase.

Taxes

Look out for windfall taxes on some of the corporate sector. Governments are desperate for funds. They will hit individuals – a wealth tax perhaps, getting rid of the vestiges of the Non-Dom regime, a rise in income tax – but they can’t raise VAT as consumption needs to come back. That leaves the corporate sector in their crosshairs.

I hope, and perhaps this is more hope than reality, this crisis will lead to the proper taxation of the Googles and Amazons of this world. And not just taxes. Elon Musk, the Tesla and Space X entrepreneur, recently called for the break-up of Amazon. And I just read a convincing case for a digital advertising monopoly suit against Google, co-written by a Yale professor who’d been in the Anti-Trust unit of the US’s Department of Justice a few years ago.

Maybe, just maybe, the employees of the Facebooks and the Twitter’s will be the impulse behind proper corporate taxes on their employers? It is far-fetched as a theory, I will grant you that, but they aren’t afraid to be heard. In 2018, for instance, 20,000 Google employees – yes, 20,000 – walked out in protest at their company’s handling of sexual harassment.

CONCLUSION

In 2015 a client for the Robinson Hambro CEO Advisory service who was the Executive Chairman of a bank asked me to give a talk to his Global Advisory Board. My theme was that globalisation had peaked. Very prescient, if I say so myself, coming before Trump and Brexit. In case you think I have a crystal ball, let me say I also predicted Putin would be out of power in Russia. You can’t win them all!

The point of this story is that we cannot predict the future. But executives and non-executives can consider trends and responsibilities within Boards, within the Risk Committee, the Nominations and Remuneration Committees, and the Audit Committee, and act accordingly.

Thank you for listening. And now, the fun bit for me, I much look forward to your comments and questions.

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.

Speech at the Mansion House

Immigration is key to attract global talent

This is an abridged version of a speech given to a Mansion House packed to the rafters with 350 members of the International Bankers and their friends.

My year as Master (Chair) runs till October 2020. 

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Welcome all to the Annual Banquet of the WCIB and welcome to the Mansion House, the Heart of the City.

The Mansion House reminds me of the Villa Farnesina in Rome, built for Agostino Chigi, a banker who was treasurer to the Papal States in 1510 and a patron of great artists. He entertained his clients – Popes, Ambassadors, men of power – in such style that he was known as ‘the Magnificent’.  

I should hope we have entertained you in such style today, that you too will say the International Bankers are Magnificent!

At one banquet, in an extravagant gesture, the silver dishes were thrown into the Tiber River after use. I therefore ask you to pick up any silver left on your tables and we shall throw it into the Thames. Or perhaps not!

Rumour has it that il Magnifico’s servants had placed invisible nets in the river, and thus recovered the silver.

Banking, and financial services in general, is about covering your risk. As he did.

The City faces many risks. Today, I want to concentrate on one risk only. Arguably the most crucial one. The war for talent.

Mark Hoban, a former City Minister - who is present tonight - chairs the Financial Services Skills Taskforce, which published a damning report last month on the City’s talent recruitment and retention. I quote: “There is no doubt that the financial services sector is facing an existential skills crisis.”

The demand for talent already exceeds supply and this trend is set to become more acute. Additionally, “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.”

This is the reason why Professor Grace Lordan from the London School of Economics – also here tonight - and I are co-founding The Inclusion Institute at the LSE. The Institute arose out of a report commissioned by the International Bankers. In partnership with City companies, the Institute will use behavioural science and data to lead to more diverse talent recruitment and retention, to dynamism and creativity, and to changing culture for future success.

Cognitive diversity is necessary to deliver better company returns in a transformed digital marketplace. How does this innovation happen? It is most likely to occur when you mix gender, generation, ethnicity, sexual orientation and nationality, on your boards and in your teams. And ensure they feel accepted, or included, and thus able to speak up.

The City is working hard on its D&I. Yet it is already a world leader in one form of diversity. Nationality. We have a wider mix and more nationalities in the City than in any other major financial centre. 40% - that is four zero – of City workers are foreign-born – and they are fully included.

What other country would have a Canadian leading its central bank, a Frenchman till recently leading its stock exchange, and an American woman, leading one of its main financial derivative companies, IG? Plus, at a much lower level, voting in another foreigner – me - as Master of the Worshipful Company of International Bankers. I am grateful!

But the City’s USP is under threat. The government’s recently announced, hard core policy on immigration is undermining the City’s search for talent. They should care, because we bring in over 10% of tax revenues.

We would not have the strongest Fintech sector in the world, without the Open Door, Open City policy of earlier governments. We wouldn’t be leaders in Green Finance without that Open Door, Open City policy. Note that the UK Green Bond market is already worth $44 billion. There is so much more that we in the City need to do to help finance the environmental transition for our planet’s survival.

For that, we need the best talent in the world.

There are at least three things wrong with the new system.

In the first place, an immigration policy that gives way too much importance to higher education, such as PhDs, cannot be right. Skills are of as much importance as a university degree in our disrupted world. The Russian founder of Revolut, a City-born start-up which was just given a valuation of $5.5 billion dollars, doesn’t have a PhD. Let alone the Richard Branson’s of this world. Or even the Mark Zuckerberg’s.

Secondly, an immigration policy that harks back to an era of central planning cannot be right. Five-year plans surely went out with Stalin?!. Yet a Tory government believes in the future it will be able to figure out where the skills shortages are in the economy and make short term changes to policy to fill them. That’s in a world where we don’t even know what many of the jobs of tomorrow will look like.

And finally, an immigration policy which will only allow large, well-capitalised firms to import foreign workers, is not right. The cost and bureaucracy of work permits is such that SMEs, start ups and the like won’t be able to afford them – and they are the accelerator in the economy.

Let my last quote be from Catherine McGuinness, the CEO of the City: “We need an immigration system that works for the whole of the financial services ecosystem. This includes those supporting industries which keep the City ticking and we look forward to engaging with the Government on this particular issue.”

I am not sure she meant that last line…

The City understands that this government has an obligation to those who voted it in, a number of whom believe that immigration – rather than globalisation and automation - is to blame for inequality and the precariousness of modern jobs. But Boris Johnson’s government has a duty to destroy myths about immigration and a duty to care for the City, let alone the whole economy. Our tax revenues and our inventiveness will help in financing a better future for all.

The City is a British jewel, a European jewel, and a world jewel – in fact, it is a public good and I would ask that you join with me, in any way you can, in pressing this government to change its policy, and return to an Open Door, Open City.  

Overcoming tribal challenges

The LSE’s new Inclusion Institute

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

UK General Election 2019

Safeguarding the country

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sustainable Survival

Future-proofing your firm

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The lightweight vs the heavyweight

A few simple truths on world trade

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

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

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

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

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

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

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

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

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

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

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

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.