Month: April 2014

Central bank transparency: a delicate balancing act

Posted on by Ashton Wenborn

“I enclose a document describing some of MI6s operations against member states of the European Union,” reads a letter addressed to the Intelligence Services Select Committee in 1998 and written by the ex-MI6 employee Richard Tomlinson. Since his dismissal from the British Secret Services in 1995, the New Zealand-born, Cambridge University-educated individual has been hounded and even imprisoned by his former employer on account of spilling state secrets and making supposedly spurious accusations against the agency.

As a consequence, the former spy today ranks among the world’s most audacious whistle-blowers, and while his accusations fall short of Bradley Manning and Edward Snowden in terms of scale, the ramifications have been similarly impressive.

Intelligence as an economic tool
“I would like to draw your attention to MI6s operations against fellow member states of the European Union,” wrote Tomlinson in one of his many statements made against his former employer. “It is my belief that many, if not all, of such operations would be illegal under European law as it is illegal for UK government officials to bribe government officials of fellow European states.”

“His motive is entirely financial, and he is paid very substantially”

In the letter, Tomlinson went on to describe project “Jetstream”, which apparently encompassed the entirety of MI6s anti-European operations, alongside the specifics of the ORCADA operation. “ORCADA is a German national and a senior officer in the Bundesbank, with access to all of Germany’s most sensitive economic and financial information. ORCADA was recruited by MI6 in approximately 1986 and has since then been a fully conscious agent.

“His motive is entirely financial, and he is paid very substantially. Indeed, he is among the best paid and most important of any of MI6s agents. He provides regular and detailed intelligence on all German interest rate movements, and provided detailed information on the German negotiating position during the Maastricht treaty negotiations.”

Tomlinson’s ORCADA allegations came only a short couple of months after he fled Britain, having served six months in prison for breaking the Official Secrets Act, and served as an indication of the extent by which intelligence was being put to use as an economic tool by UK secret services. The simple fact remains that for as long as sensitive economic and financial information is hidden from view, there will be interested parties whose goal it is to expose this precious resource, with some even going so far as to employ illegal means to that end.

Agency experts have since claimed that the accusations fall within the remit of MI6, whose statutory task is to protect “the economic wellbeing of the UK”. Sir Richard Dearlove for one – who was head of the Secret Intelligence Service from 1999 to 2004 and then known as ‘C’ – made his feelings clear on the usefulness of intelligence as an economic tool in 2011. “I don’t think we should be squeamish about using all means to protect ourselves financially,” he said at the Global Strategy Forum in July of that year.

If Tomlinson’s allegations are true, then MI6 has almost certainly uncovered classified information by illegal means. However, the methods by which MI6 obtained sensitive data are not the biggest issue here, and the agency’s purported actions should be seen quite simply as a symptom of a time in which disclosure between central banks was frankly inadequate.

Lack of transparency
According to Tomlinson, ORCADA was recruited in the wake of Black Wednesday in 1992, at which time the then conservative government was made to withdraw pound sterling from the European Exchange Rate Mechanism (ERM), and the UK economy was forced to take a hit of £3.3bn. The incident here serves as a lesson of what lack of central bank disclosure can bring in terms of financial consequences, and goes some way to explain why MI6 would undertake such extreme measure in order to accrue classified data.

Known facts about M16:

During the First World War the British secret services were divided into sections: MI5 for counterintelligence and MI6 for secret intelligence services.

The Security Service (MI5) is the UK’s security intelligence agency and deals with homeland threats. The Secret Intelligent Service (MI6) operates globally.

Formed in 1909, the existence of MI6 was not officially acknowledged by the British government until 1994.

The MI6 chief is known as codename ‘C’.

MI6 is funded through a single budget called the Single Intelligence Account (SIA). The annual budget for the organisation has been near $2.3bn.

MI6 agents do not have the power to arrest, but rather are to work with law enforcement.

The National Security Council, chaired by the David Cameron, oversees all aspects of Britain’s security including the work of the intelligence and security agencies.

An unwillingness on the part of central banks to disclose pricing and portfolio decisions is understandable, taking into account their beginnings as privately-owned suppliers of credit to government. However, the changing role of the central bank and its present standing as a democratic institution has asked that transparency be improved upon in order to better reflect national interests.

In 1929 the then director of financial enquiries at HM Treasury, Otto Niemeyer stated: “In pre-war days a change in bank rate was no more regarded as the business of the Treasury than the colour which the bank painted its front door.” The perception of monetary policy has since transformed, and today the public demands that central banks disclose their objectives, outlooks and policy strategies in full.

“Transparency is the most dramatic difference between central banking today and central banking in earlier historical periods,” according to a report put together by Nergiz Dincer and Barry Eichengreen, entitled Central Bank Transparency: Where, Why, And With What Effects. “If financial globalisation and political democratisation are here to stay, then so too is greater transparency in the conduct of monetary policy.

“When a central bank is more transparent about its economic outlook and about how that outlook is related to its policy stance, monetary policy decisions are less likely to come as a surprise,” writes Professor Dincer. “Investors are less likely to be caught unawares by policy actions. Policy changes are less likely to cause sharp movements in asset prices that cause financial distress.”

One major development that has taken hold since the late 1990s was with regards to inflation targeting, which makes clear monetary strategy and requires central banks meet on a regular basis with government and the public to define their objectives. With this development and greater transparency has come the ability on the part of central banks to stabilise inflation expectations and inspire greater confidence in economic stability.

“Transparency gives credibility to the central banks,” says Dincer. “Therefore, when atypical conditions arise, central bankers would be more flexible to use unexpected monetary policy tools, since it will be clear to the public that the deviation is temporary and not inconsistent with the longer-run pursuit of the monetary policy target.”

Secretive tendencies from central banks serve only to heighten suspicions about the legitimacy of their intentions and outright willingness to act in the public’s best interest. In short, the very fact that central banks are governed in accordance with democratic principles means that they must make public their policy direction if they are to be held accountable for their actions and be trusted to act independent of political ideology.

“Democratic principles demand that, as an agent of the government, a central bank must be accountable in the pursuit of its mandated goals, responsive to the public and its elected representatives, and transparent in its policies,” agreed Ben Bernanke at the Institute for Monetary and Economic Studies International Conference in 2010. “Central bankers must be fully accountable to the public for their decisions, but both theory and experience strongly support the proposition that insulating monetary policy from short-term political pressures helps foster desirable macroeconomic outcomes and financial stability.” Put quite simply, increased transparency, accountability and independence protect against spats of public uncertainty and the many financial consequences that could lie in wait as a result.

Too much transparency
Many have, however, argued against the extent by which the public should be let in on the dealings of central monetary authorities, and posited that exposing sensitive economic information to outside parties could have disastrous consequences. What is most important is that central monetary authorities communicate clearly their objectives and policy decisions in order to uphold the democratic nature of central banking and inspire confidence that it is in fact aligned with society’s best interests.

Nonetheless, the fact remains that the business of central banking is a complex one, and something that very few individuals are qualified to pass judgement on, so institutions must take care not to give the impression that monetary policy is dictated by the masses. While greater transparency does have a number of notable benefits – among them being accountability – failing to deliver on previously stated targets could incur major consequences for central banks in that their credibility could be hit and public trust could fail.

The issue of disclosure therefore constitutes a careful balancing act, in that the public need necessarily be let in on monetary policy, without their financial decisions being overly swayed by the institution’s stated objectives. Whereas on one hand central banks have the power to settle uncertainties, they can on the other spark unrest and even financial downfall.

What’s more, “some suggestions for increased transparency, particularly a central bank announcement of its objective function or projections of the path of the policy interest rate, will complicate the communication process and weaken support for a central bank focus on long-run objectives. Transparency can indeed go too far,” writes Frederic Mishkin in a working paper entitled Can Central Bank Transparency Go Too Far?

What must be achieved is a happy medium whereby outside parties are made to feel as though their best interests are being met, while at the same time there is ample room for central banks to fall slightly short of their objectives without there being huge ramifications for the economy.

US deficit cut by almost half, according to CBO

Posted on by Ashton Wenborn

The US Congressional Budget Office (CBO) has announced that the government deficit is expected to shrink to almost a third of its 2013 value this year. The deficit is also expected to continue shrinking into 2015, before rising again by 2024.

According to the budget, the deficit will drop to 2.8 percent of the economy in 2014 – 32 percent lower than results for the previous year.

“This will be the fifth consecutive year in which the deficit has declined as a share of GDP since peaking at 9.8 percent in 2009,” the CBO said in the report. The reduction this year will also be larger than previously expected.

Deficits have been shrinking drastically over the past five years, partly due to a recovering economy, and partly because of cuts to future spending and changes to tax policies

The CBO is a non-partisan agency that provides advice for Congress on budget policy. According to its calculations, the 2014 deficit will drop to $492bn, $23bn less than the same agency had calculated two months ago. If estimates are correct, this will be the US’s smallest deficit since 2007.

“Though projected revenues are slightly below the amounts that were previously reported, projected outlays have dropped by more, largely because of lower subsidies for health insurance under the Affordable Care Act.”

Deficits have been shrinking drastically over the past five years, partly due to a recovering economy, and partly because of cuts to future spending and changes to tax policies. Since the 1980s the budget deficit has averaged at about 3.2 percent.

The CBO has also reviewed their estimates for the ten-year deficit, to 2024. The agency expects it to be up to $286bn lower than previously though, or close to $7.6trn. Savings are largely connected to the reviewed healthcare subsidies. The CBO concluded that deficits will begin to widen again as early as 2016, and will peak at about $1trn between 2022 and 2024.

According to the report, the US government will spend $3.523trn this year- 20.4 percent of the GDP. Most of the spending is earmarked for military expenditure as well as Medicare, Social Security and Medicaid.

However, though the deficit is shrinking, government debt ratio is approaching record highs at 73.8 percent of GDP. It has been increasing sharply over the past six years as government revenues plummets in the wake of the global financial crisis.

Nigel Stanley: Osborne’s pension reform ‘destroyed a very carefully built consensus’ | Video

Posted on by Ashton Wenborn

George Osborne’s 2014 budget marked the end of compulsory annuities for pensions. Was this a move too far? Nigel Stanley, Head of Campaigns and Communications for the Trades Union Congress, believes the Chancellor’s decision has “destroyed a very carefully built consensus.” He talks to World Finance about what the problem with ending compulsory annuities is, whether people can be trusted to plan for the future, and if collective decumulation could be ideal for retirement.

World Finance: Now the main fixture of this policy of course is ending compulsory annuities, now why wouldn’t you invite such a change?

Nigel Stanley: Well I think the problem with what the chancellor did is, he swept away annuities, but he didn’t put anything in its place. The great thing about how we’ve done pension reform in the UK is, it’s been slow, careful, and been done through consultation and consensus building. And yet suddenly in the budget this big rabbit was pulled out of the hat, and suddenly we don’t quite know how pensions are going to work. And it’s destroyed a very carefully built consensus.

And yet suddenly in the budget this big rabbit was pulled out of the hat

World Finance: Based on these reforms, what do you think the intention was of the government?

Nigel Stanley: Oh I think it was a bit of a political trick. I mean, we are in a tight electoral situation, we have an election coming up. This was a, “Oh, let’s challenge the opposition to do something! Let’s ask them a question they don’t want asked! Are you against personal responsibility?” Well actually, we’ve built a whole pension system in this country around the idea that personal responsibility doesn’t work in pensions!

When we had personal responsibility, leaving it up to people to make decisions about their future, to run an internal discount rate in their own personal economic model, so they could calculate the value of deferred consumption against income today, then it didn’t work! And so this is just political rhetoric.

Yes we should give people more freedom, but we need to think about how we should do it.

World Finance: But I have to attack that a little bit, because the idea of having an annuity system that just doesn’t work – in some ways has even exploited people who perhaps wouldn’t know any better – doesn’t that make the model just show cracks in it all together?

Nigel Stanley: Oh the annuity model in this country was broken. I think everyone agrees with that. The fact that insurance companies’ share prices tanked as soon as it was announced just showed how much of their profit streams were coming from annuities. And I think one of the problems with annuities is that because people live longer, the annuity is a guarantee that can go on for decades in the future – guarantees are expensive! What we need is a system which has target return, but not guaranteed returns.

What is new is this destruction of annuities, this destruction of pensions

World Finance: Well what about those pro-reformers who say, okay, you want to take a big chunk of cash and perhaps invest it in real estate in the city, or perhaps put it in a fund. Are those not also long-term plans?

Nigel Stanley: For sure! I have no objection to people who’ve saved a huge amount having the freedom to do what they want with it. And we’ve always had that. That existed before the budget anyway, so there’s nothing new about that. What is new is this destruction of annuities, this destruction of pensions as some kind of risk-sharing, risk-pooling vehicle, with the objective of providing an income in retirement, which is what the members of unions want, it’s what ordinary workers want.

If we go out of the studio today, walk down the street, and ask passers-by “What do you mean by a pension?” they won’t say “A huge bank account when I’m 55,” they will say “A regular cheque every month. That’s what I want from a pension.”

World Finance: But when you have this big pot of money it sounds like you just don’t trust people to share their money wisely in their retirement.

Nigel Stanley: I don’t trust people not to be ripped off. If we trusted people there wouldn’t be any rip-offs, because people would make the right decisions. And you know, I’m not being kind of left-wing trade unionist here, I’m simply understanding what goes wrong with markets. And what goes wrong with markets is asymmetries of information. We also know from behavioural economics, if there’s one thing people are really really bad at, it’s planning for the future.

I don’t think the danger is they’re going to rush and splash it all out on something stupid. But the danger is they will not know how to decumulate. And the trouble with the chancellors’ proposals is, he’s destroyed an insurance principle -based argument which is a good one, but he’s not put anything in its place. He’s thrown away the risk-sharing baby with the market-failure bathwater.

I don’t trust people not to be ripped off. If we trusted people there wouldn’t be any rip-offs

World Finance: Well you’ve got a plan that you think would be ideal for pensioners in the UK, and that includes collective decumulation. Tell me what is that all about?

Nigel Stanley: Well with collective DC, the advantage is that you pool longevity risk when you retire, but you also share out the gains and losses of investment both when you’re saving and when you’re decumulated spending, so that you can guard against volatility, but still take some risk in your investments.

World Finance: The government is moving forward with their sweeping reforms; how do you propose that they now reassess what they’ve put in place?

Nigel Stanley: What the chancellor has done is create a vacuum. I would rather that we built patiently and constructively, but I think it’s up to unions, it’s up to responsible people in the pensions world, it’s up to employers to work together to put something in its place. Now the government – actually it’s probably fair to say another bit of the government – is also keen on this collective DC approach I’ve described. And we are going to get a change in the law to make it easier to do that.

And it works in other countries. It works for employers, because we’re not asking them to take on extra risk. It works for members because they can smooth their returns and take the risk out, the volatility out, that they don’t like. And it provides them with a better income in retirement than the DC that we’ve introduced following the automatic enrolment of everyone into schemes. Which is progressive, but the schemes could probably be made better by this risk-sharing approach.

World Finance: Well thank you very much for joining us today.

Nigel Stanley: It’s been a pleasure, thank you.

Investment bankers: have we got them all wrong?

Posted on by Ashton Wenborn

When it was revealed in February that the hugely popular Twitter account that supposedly documented conversations overheard in an elevator at the offices of Goldman Sachs was a spoof by someone who’d never worked there, the reaction was one of shock. People had enthusiastically followed the account, believing it to be an insight into, and confirmation of, the absurdly arrogant, misogynistic and cocksure attitudes of the world’s investment bankers.

Detailing what were supposedly genuine conversations between people working at one of the world’s most notorious financial institutions, the tweets confirmed the prejudices that many outside of the industry had built up towards those within it. Apparent comments included ones that mocked the poor, “poor people eat so much food you’d think their time was valuable,” to boasts about wealth, “when life gives you lemons, order the lobster tail.”

Uncovering the truth
It says a lot about people’s attitudes towards investment banks that Goldman Sachs conducted a thorough investigation to find out which member of its staff was tweeting the messages. Such has been the criticism levelled at Goldman Sachs in the media in recent years that the company frantically sought to put an end to what it deemed was a damaging public relations slip up.

The New York Times uncovered the Twitter account in February as belonging to a John LeFevre, a man who had not in fact ever worked at Goldman Sachs. He was, instead, a former bond executive who had worked at Citigroup for seven years and was apparently once offered a job at Goldman Sachs. However, despite increasing scepticism over the validity behind the comments, he maintained that they were true accounts he had either overheard or been told about by others.

A six-figure book deal with Simon & Schuster followed, although it was later cancelled as a result of the controversy over whether the tweets were true. He has since signed a deal with an independent publishing house called Grove Atlantic. LeFevre said the spoof account was not solely directed at Goldman Sachs, but more a comment on the wider culture within banking. “It wasn’t about a firm. The stories aren’t Goldman Sachs in particular. It was the culture in general,” he told the New York Times.

#Someofthemostcolourful from @GSElevator

#1: The lottery is just a way of taxing poor people who don’t know math.

#1: If I could choose between world peace and a reasonable fortune, my first Lambo would be an orange.

#1: Thanks to the economic crisis, bartending got upgraded from a job to a career.

#1: Almost time for children to learn a valuable life lesson. Santa loves rich kids more.

#1: [At the gym] What machine should I use to impress the girls?
#2: The ATM.

#1: Fact. Nearly 50 percent of all American workers have less than $10k saved for retirement.
#2: Damn. That wouldn’t cover a ski weekend.

#1: Getting laid off from Goldman is like being traded by the Yankees. You’ll probably still make millions, but it’s just not the same.

#1: Money might not buy happiness, but I’ll take my chances!

#1: Handshakes and tie knots. I don’t have time for someone who can’t master those basic skills.

#1: I never give money to homeless people. I can’t reward failure in good conscience.

#1: Groupon… Food stamps for the middle class.

#1: If you can only be good at one thing, be good at lying… because if you’re good at lying, you’re good at everything.

#1: My garbage disposal eats better than 98 percent of the world.

He added, “I went into investment banking and I saw a group of people that aren’t as impressive as I thought they were – or as impressive as they thought they were. They defined themselves as human beings by their jobs.” Grove’s publisher Morgan Entrekin added in an interview that the Twitter account revealed a good deal about people that play a big part in society today. “Honestly, I think it offers a window into that world of these people who, whatever you think of them, they’ve had a pretty big impact on our society.”

Missing the point
Martin Scorcese’s recent film, Wolf of Wall Street satirised the excesses of those operating in the financial services industry during the 1990s, taking the extreme case of former stockbroker and fraudster Jordan Belfort. While drawing on the lavish extremes of a decade in which opulence was in abundance in many industries, the film does much to castigate an industry that has been forced to clean up its act – particularly since the financial crisis.

The film depicts the American dream gone wrong –a young trader takes advantage of an unregulated corner of the market. Without requiring a spoiler alert, the protagonists go on to relish and profit in their misadventures. While there may at one time have been room in the market for such exploitation to occur, the post-Lehman Brothers regulatory requirements have – one would hope – created a far safer and more sustainable environment in which the Belforts of the world are driven from business. The film echoes the first Wall Street film in the late 1980s, in which Gordon Gekko’s “greed is good” mantra became the assumed tagline of traders everywhere.

The public perception of the banking industry has become more sensitive in recent years. It is perhaps because of the crisis that led to the success of both the @GSElevator Twitter account and the Wolf Of Wall Street, with the public seemingly keen to keep the industry on its toes. According to a survey by the CFA Institute and research firm Edelman conducted last year, public perception of the investment management industry in particular is at an all time low.

“Though it exists, investors’ trust in the investment management industry is fragile; only 53 percent of investors trust investment management firms to do what is right.” The report goes on to say that retail investors are even less trusting than institutional ones, and in both the US and UK markets things are particularly bad.

A number of reasons for the decline in trust were given, but most stems from the crisis of 2008. “This limited amount of trust reflects a lack of confidence in the broader financial services industry. Hit by the shock of the 2008 financial crisis and on-going scandals around money laundering, rogue trading, rate manipulation, and insider trading, the industry lost the faith of its key constituents – the clients, investing public, and other participants that help it function on a day-to-day basis.”

While the financial crisis and the unfortunate truths that unfolded from it have done much to improve the industry, the heightened scepticism of the financial services industry has forced regulators – both national and international – to react and intervene in a more informed and positive manner. On the institutional side, banks and financial service operatives have attempted to raise the bar in terms of transparency and thorough governance.

Collectively, both sides of the industry have much to do in terms of keeping things on track, ensuring that pre-agreed frameworks are respected and adhered to. A concern as a whole should be the ways in which the public see their behaviour. Reversing the perception that those working in financial services take excessive risks has been and hopefully will continue to be a key part of the agenda for the foreseeable future. If the industry is going to regain the trust of the public, and therefore the use of their money, then it needs to ensure that society looks at investment bankers as custodians of wealth rather than glorified bookies as depicted in pop culture.

G20 urges US to stop pussyfooting over IMF reforms

Posted on by Ashton Wenborn

The future of the IMF hangs in the balance as the package of reforms, agreed in 2010 and already ratified by most countries in the group, could be torn apart if the US does not push the bill through Congress. The changes are aimed at making the institution friendlier to emerging economies and giving it more power – under the current package the IMF’s resources would be doubled to around $739bn. The BRICS would receive more voting power also, to reflect the changing shape of the global economy.

The G20 ministers are believed to be “deeply disappointed” with the US delay. Australian Treasurer Joe Hockey, speaking to reporters at the preliminary meeting in Brisbane, stressed the importance of the reforms, saying “I take this opportunity to urge the United States to implement these reforms as a matter of urgency”. The formal meeting of world leaders at the G20 summit will take place in November.

So far Congress has been bullish about the reforms, with some Republicans saying the changes would cost too much at a difficult time for the US economy. This, coupled with growing isolationist sentiment in the party, has hampered the progress of the package. If the measures are not agreed on by the end of this year, the rest of the G20 have now said they will approach the IMF to find the next steps in the process.

Speaking to Reuters, an anonymous official who has been taking part in the talks says that the package is now at a “dead end”. “If you pull the 2010 package apart, you will have to start anew”, he said, expressing that no member state wanted to repeat the process.

US Treasury Secretary Jack Lew has said that the US government was committed to pushing the reforms through Congress this year. Meanwhile, Christine Lagarde, Managing Director of the IMF, has said it is still too early to think about other options. “Plan A is going to be explored to the end and in depth and if that doesn’t work, we’ll worry about plan B, but it’s premature”, she said. It is hard to see how any reforms would go ahead without US approval, however, given the size of the nation’s economy and the power they hold at the IMF.

[P]ositive sentiment towards US involvement in the IMF remains at an all-time low

The timing of the deadline puts it beyond US midterm elections, which both the G20 and the IMF believes will make the package easier to pass through Congress. A major reshuffle in the House of Representatives, the lower house of Congress, could break a Republican majority and make it easier for the reforms to come to fruition.

There are now concerns that the delay could undermine the IMF – while the US lags behind, regional funds like the Asian Development Bank are seeing an upswing in activity and fund levels. Although these regional institutions are on a much smaller scale than the IMF, the cumulative effect of all of them working at once could seriously damage the future of the fund.

Last week’s statement comes as positive sentiment towards US involvement in the IMF remains at an all-time low. The anonymous official said that the group was hopeful that the deadlock in Congress would be resolved by the end of the year. However, he also showed frustration at the level of the country’s power in the IMF, asking why “at a time when the world has become multi-polar, why should one country should have the veto power?”

This echoes a statement made to the IMF’s steering committee from Brazil’s Finance Minister, Guido Mantega, who argued that the organisation simply could not “remain paralysed and postpone its commitments to reform” because of the US. “Alternatives to move forward with the reforms must be found while the major shareholder does not solve its political problems”, he said. Mantega argued that the reforms would only require a 70 percent majority to be enacted under IMF rules – a figure that has already been obtained by the fund.

Meanwhile, French Finance Minister Michel Sapin has also spoken out about the “frustration” of emerging markets in the group at the lack of progress from the US. The now four-year wait for changes to the IMF has been tough on emerging economies like Brazil, who use aid from the institution to further stimulate economic growth. Proposed changes to the IMF’s emergency borrowing mechanism could help these countries and may go ahead, with or without US approval.

Activist investor Carl Icahn continues to make demands

Posted on by Ashton Wenborn

Shareholders telling management how to run their companies has always been a contentious issue, with battle lines often drawn between those who think firms should be run for their own success and those that say the ultimate beneficiaries of a business should be its financiers.

Allowing management to get on with the strategy they deem is best for the company is often at odds with what shareholders might want. One particular case that highlighted this problem was seen in recent years, when Apple – a firm famous for never paying dividends to its shareholders – came up against notorious investor Carl Icahn.

Apple has for years been sitting on a colossal pot of cash that it occasionally dips into for strategic acquisitions. However Icahn, one of the firm’s largest shareholders, has repeatedly called for the company to buy back as much as $50bn worth of shares.

Disagreements over the issue carried on for over a year, until February, when Icahn conceded defeat. He has since switched his attention to another of Silicon Valley’s biggest companies, (see Fig. 1) eBay, but this is certainly not the first time that Icahn has been in the news for disrupting the way a company he has a stake in operates.

Corporate raider
Born in 1936, Carl Celian Icahn was raised in New York by his opera singing father and schoolteacher mother. Graduating from Princeton with a degree in philosophy, Icahn would briefly study medicine before joining the army.

In 1961 he would start a career as a stockbroker on Wall Street, which would lead to him founding his own firm, Icahn & Co, seven years later. By the late 1970s, having amassed considerable wealth, he would begin taking large positions in a diverse range of companies, including Texaco, Western Union, Viacom, Marvel Comics, Blockbuster, Time Warner and Motorola.

Silicon-Valley
Source: Silicon Valley SV150. Notes: 2013 figures

His reputation soon became that of a ‘corporate raider’, and he was particularly criticised for his hostile takeover of Trans World Airlines (TWA) in 1985. The TWA deal would see him sell off many of the company’s assets in order to fund the acquisition, leading to accusations of asset stripping, and the firm was ultimately taken private in 1988 in a deal that saw him personally profit by $469m.

Around the same time, Icahn would launch an ambitious attempt to buy US Steel for $7bn, although this would be rejected by the shareholders.

Icahn’s successful navigation of the stock markets, and his eye for an opportunity, has led to him amassing a fortune of $24.5bn, making him one of America’s richest men. His forays into the markets over the last decade, most notably in technology firms, have made him a notorious – and controversial figure once again.

After the failure to persuade Apple to issue a share buyback, Icahn quickly turned his attentions to eBay. He has frequently been in the press, telling anyone that will listen that the management of eBay is not doing a good enough job, has conflicts of interests, and that he wants a greater look at how they are operating.

The main area of contention for him has been the company’s sale of video conferencing service Skype in 2009 to an investor group that included a venture capital firm owned by eBay board member Marc Andreessen.

Campaigning against conflicts of interest
Skype was sold to a group of investors, which include venture capital firm Andreessen Horowitz, for $2.75bn. Two years later, Microsoft would acquire the firm for the sum of $8.5bn, representing a huge profit for Andreessen. Icahn believes that Andreessen got an advantageous deal because of his role at eBay, but the company dismissed it.

His issue with the deal appears to be that it was conducted behind closed doors between board members, and that eBay’s other shareholders lost out on what ultimately amounted to billions of dollars.

Silicon Valley is a pretty incestuous industry, with many senior executives sitting on numerous company boards, sometimes leading to accusations of a conflict of interest. Many point towards former Apple board member and Google Chairman Eric Schmidt, who some felt passed on many Apple ideas to his main employer. Icahn feels that some at eBay, especially Intuit founder and board member Scott Cook, have a conflict of interest.

Silicon Valley is a pretty incestuous industry, with many senior executives sitting on numerous company boards, sometimes leading to accusations of a conflict
of interest

According to Icahn, Intuit and eBay are competitors; particularly in terms of eBay’s Paypal payment system and Intuit’s Swiper pay facility. Icahn has since called for eBay to spin off of Paypal, which was rejected by the board. He has since demanded that the company conducts an IPO of Paypal, offering 20 percent of it to public investors. Icahn was particularly scathing of eBay’s management in a letter to investors in March.

“While the board and its advisors may try to use tricks and technicalities to keep documentary evidence of malfeasance out of the hands of stockholders, I believe that ultimately truth will win out. It may not be in time for this year’s annual meeting and it may even take years, but I believe that we will ultimately be successful in forcing eBay to come clean with its stockholders and disclose publicly all documents relating to the Skype affair, only some of the sordid details of which we recently exposed.

“And when that day comes, I believe that eBay, CEO John Donahoe, director Marc Andreessen and Chairman and founder Pierre Omidyar will be forced to recant their statements that my claims were ‘false and misleading.’”

eBay shot back, however, that Icahn’s demands for information on the Skype deal were unwarranted and they would refuse to cooperate, unless he agreed to sign a confidentiality agreement.

“We don’t believe he is legally entitled to what he has asked for. But we told him that we will give him relevant documents if he sings and customary and standard confidentiality agreement. We have not heard back from him. Relevant facts about the Skype transaction are publicly available on our website for everyone to see.”

The CEO of eBay John Donahoe argued in an interview in early March that the accusations were unfounded. “I think what every company wants to do is build a board with relevant experience and expertise and diverse experience that can add value to the company. “Inevitably, in a fast-moving technology world – and even outside of technology – there are going to be conflicts. Potential conflicts.

“And that’s particularly true with people who do investments as a full-time living because they’re investing in multiple things. So a private equity person is sitting on a board, a venture capitalist or any other hedge fund person. And it’s standard practice. The reason why they’re on the board is because they have such good exposure.”

Out with the old?
Icahn, however, continued to point out the failings of eBay’s management structure, and how he wanted them all to be replaced. “The Skype debacle represents in my mind a complete and utter breakdown in the system of checks and balances that a properly functioning board should provide and proves to me that new blood is need in the boardroom immediately.”

eBay’s headquarters in Silicon Valley – San Jose, California. eBay has been of interest to Carl Icahn since he failured to persuade Apple to issue a share buyback
eBay’s headquarters in Silicon Valley – San Jose, California. eBay has been of interest to Carl Icahn since he failured to persuade Apple to issue a share buyback

According to Donahue, eBay take any potential conflicts of interest among board members very seriously, and ensure that regulators are aware of any such issues.

“We look every year. The SEC has something called the Materiality Test. The competing portion is less than one percent of our revenues. So Carl’s going to come out and show the PayPal Here swipe and Intuit’s Swiper. For us, that’s less than one percent of our revenues. PayPal Here is part of what we do.”

The ins and outs of the affair show what impact an activist investor can have on a company. While Icahn has mostly failed with both his campaigns against the management decisions of both Apple and eBay, he has made both boards answer some serious questions about conflicts of interest and their attitudes towards shareholders.

In the case of Apple, Icahn was largely unsuccessful, although it has begun moderate share buybacks of a few billion dollars, spreading some wealth among its shareholders. It also spent around $100bn last year on dividends for its shareholders, although that is seen as a one off. With eBay, he has shone a light on the company’s board and how it has operated over the years.

The technology sector, in particular, is one that has seen a great deal of collaboration between certain individuals in a relatively close-knit community. Ensuring that boards are transparent about the way they operate is surely a good thing, even if the motives of Icahn were largely for his own personal gain.

Beyond corporate profits and towards new model capitalism

Posted on by Ashton Wenborn

“Today is an historic day,” reads the opening line of a public letter penned by B Lab to celebrate Delaware’s decision last year to enact benefit corporation status. “Until recently, corporate law has not recognised the legitimacy of any corporate purpose other than maximising profits. That old conception of the role of business in society is at best limiting, and at worst destructive.”

On signing the law into being, the east coast state joined the company of 18 others and, as home to the vast majority of America’s venture-backed businesses, 50 percent of its publically traded companies, and 320 of the Fortune 500, marked a major milestone for the benefit corporation movement.

Put simply, benefit corporation status represents a new legal structure whereby participating firms are legally obliged to consider social and environmental concerns on an equal footing to financial gains. Under the Benefit Corporation Law (BCL), those at the company’s helm must explicitly outline, among other things, a commitment to “general public benefit,” otherwise defined as “a material positive impact on society and the environment, taken as a whole.”

Renewed focus on responsibility
The movement comes, quite unsurprisingly, off the back of a sharpened focus on matters of corporate social responsibility (CSR), as well as increasing consumer concern about social and environmental affairs. And while the idea of a socially responsible enterprise is by no means a recent one, what is new is a concentrated effort on the part of third parties such as B Lab to instigate a legislative framework through which responsible businesses can be held to account.

Source: Edelman Trust Barometer 2014
Source: Edelman Trust Barometer 2014

The concept of CSR first gathered momentum at the turn of the 21st century, and picked up pace again once the financial crisis broke and corporate malpractice was discovered to have underscored the crash. The Edelman Trust Barometer 2014 (see Fig 1), which surveyed 33,000 people in 27 markets, found that the percentage of respondents who trusted businesses “a great deal” came in at just 10 percent, representing a seven percent drop on the year previous.

What’s more, just over half of the respondents – 56 percent – trusted that businesses would do the right thing in their day-to-day operations, which is again indicative of a severe lack of trust between company and consumer.

The perception that firms – financial or otherwise – chase profits irrespective of the consequences is one that many enterprises have taken major steps to shake off, and as a result, no self-respecting company today would dare deny their commitment to CSR for fear of a consumer backlash. A recent KPMG report serves to illustrate this point, finding that as many as 93 percent of the world’s biggest 250 companies publish corporate responsibility reports on an annual basis (see Fig. 2).

The perception that firms – financial or otherwise – chase profits irrespective of the consequences is one that many enterprises have taken major steps to shake

However, illegitimate claims of social responsibility have resulted in an incredibly confusing marketplace for consumers, and as a result many remain unconvinced by what appear to be overly ambitious CSR initiatives. The circumstances above all else have made for a contradictory state of affairs, in which customers are happy to pay more for socially responsible goods and services, but are also increasingly mistrustful of the companies who claim to offer them.

One GreenBiz Group report released in January and entitled 2014 State of Green Business found that while the number of green initiatives has risen, companies have been unable or unwilling to make good on their promise of growth, which demonstrates the importance of putting a legal framework in place in order to shape CSR initiatives and hold companies to account.

This dilemma represents perhaps the most important aspect of benefit corporation status, in that the legal certification establishes a yardstick by which consumers can gauge a company’s legitimate commitment to corporate social responsibility.

Benefit corporation criticism
In order to qualify for benefit corporation status, the party in question need only state an explicit social or environmental-based mission, and enter into a vague contract ruling that they take into account environmental and social causes alongside worker and shareholder interests.

csr-reporting-graph

In addition, the company must also produce a social responsibility report, to be verified by an independent party, and publish it alongside their financial results. The process is a relatively simple one and requires very little in the way of compliance, which can be seen as either a positive or negative point.

The relative ease by which a company can arrive at benefit corporation status has provoked a great deal of criticism from some, who claim the laws lack teeth and cannot enforce social or environmental gains ahead of profits whatsoever. After all, in accordance with the laws that be, shareholders can justifiably sue corporate boards for failing to maximise profits.

A perfect example of the system’s shortfalls can be seen in the case of the 2001 takeover of Ben and Jerry’s, when the ice cream company rejected a generous Unilever bid in favour of a lesser party who promised to uphold the firm’s socially responsible values. Ultimately, Unilever sued the Burlington-based company for failing to uphold their legal obligation to maximise shareholder profits, and from thereon effectively forced the corporate takeover.

Herein lies the fundamental failing: the power ultimately lies with the shareholders, who, by-and-large, are concerned with financial gains ahead of environmental and social initiatives. And although benefit corporation laws are intended to protect against these sorts of circumstances, the law lacks the power to enforce anything otherwise.

Regardless of whether there is a written commitment to non-financial affairs, shareholders still hold the power to remove directors if they see fit, which means that any decisions contrary to financial gains, although plausible in theory, are entirely unenforceable without shareholder support.

B Corps are better
In an effort to address some of the wider issues at hand, there does exist a second and stricter certification for socially responsible corporations entitled B Corp certification. Although the terms ‘benefit corporation’ and ‘B Corp’ are often used interchangeably, there are in fact fundamental differences between the two, the majority of which pertain to enforcement and oversight.

Number of certified B Corporations

125

2008

503

2011

As of today, there are over 950 so-called B Corps from 32 countries and 60 industries, all working towards shifting the focus from shareholders to stakeholders.

“By voluntarily meeting higher standards of transparency, accountability and performance, certified B Corps are distinguishing themselves in a cluttered marketplace by offering a positive vision of a better way to do business,” writes B Lab, the organisation responsible for certifying B Corp status.

“B Corps create higher quality jobs and improve the quality of life in our communities. And as the movement grows, it has become an increasingly powerful agent of change. We are passing laws. We are driving capital.”

In opposition to the vague promises required of benefit corporations, B Corps must comply with an altogether more rigorous ‘impact assessment’ in order to qualify. The B Lab-sponsored impact assessment takes into account a broad array of criteria, including the percentage of female employees, financial transparency, energy efficiency, and overseas facilities.

Once the assessment is completed, B Lab awards the company with a rating out of 200, with anything over 80 deemed eligible for B Corp status.

While the certification is subject to many of the same problems, the fact that the checks are more rigorous and the standards much higher means that B Corp certified companies by-and-large demonstrate a greater commitment to public good.

Stakeholder-led capitalism
A concerted effort to develop a new for-profit business structure and mentality has not been the only result of changing consumer confidence, but represents a broader shift away from short-terminism and onto sustainable growth. Benefit corporations are not simply responding to consumers, but recognising that they do in fact owe a certain responsibility to the communities in which they operate.

The mistrust born of the financial crisis and a newfound willingness on the part of consumers to pay a premium for responsible products and services is emerging as a huge market opportunity. And although benefit corporations are without the tax breaks offered to non-profit organisations, they do boast a certain appeal for the rapidly expanding aspirational consumer class – which constitutes some 2.5 billion people across the globe.

In addition to the opportunities to be had in terms of sales, studies also suggest that employees are far more willing to consider working for a company whose ethics they feel align with theirs. What’s more, researchers at the University of California found that 88.3 percent of MBA students would take a pay cut to work for a firm they felt had ethical business practices.

Although benefit corporation status and B Corp certification both fall short of enforcing sustainable and environmental gains over financial performance, the two should be seen as a sign of changing business dynamics. Whereas in the past, corporates were required only to maximise profits and please shareholders, the focus today has extended to stakeholders and encompasses all manner of environmental and societal goals.

B Corp Ratings

Revolution Foods
Overall B Score: 117
Founded in 2006, Revolution Foods provides healthy school meals to over 1,000 US school programmes, which equates to one million meals every week – two-thirds of which are offered to those from low-income households. The company is driven by a desire to combat the obesity epidemic sweeping the US, and does so by offering healthy, nutritious meals, along with education programmes and encouragement to those affected. What’s more, employees receive paid time off to volunteer and over 50 percent of suppliers are either independent or local.

Better World Books
Overall B Score: 113
The company’s triple bottom line business model means that social consciousness is not merely an add-on component, but a go-to stance in all of its dealings. A certified B Corp since 2008, Better World Books has so far distributed in excess of $11m to literacy initiatives, donated over six million books to those in need, and reused or recycled over 70 million books. The company does not conform to the belief that socially responsible business isn’t profitable, and it demonstrated 33 percent growth during the recent global downturn.

Warby Parker
Overall B Score: 108

Warby Parker co-founders Neil Blumenthal and Dave Gilboa
Warby Parker co-founders Neil Blumenthal and Dave Gilboa

Warby Parker was founded by four close friends on the premise that premium prescription eyewear should not cost in excess of $300. What’s most distinctive about the company’s social contributions is its one-for-one give back programme, which offers a pair of glasses to someone in need for every pair sold. Warby Parker pays the living wage to 100 percent of its staff and offers every one of its full-time employees an annual bonus.

Patagonia
Overall B Score: 107
A certified B Corp since December 2011, the outdoor clothing company was also one of the first in California to adopt benefit corporation status when in came on board at the beginning of 2012. What’s more, the company’s board consists of independent community and environmental representatives, and more than 40 percent of the management is female. Social and environmental consciousness permeates all things Patagonia, and the company lends an especial focus to matters of employee activism and responsible sourcing.

Ben & Jerry’s
Overall B Score: 89

An employee serving Ben and Jerry’s ice cream. The company is known for donating a portion of its profits to charity, and for paying above the living wage
An employee serving Ben and Jerry’s ice cream

Ben and Jerry’s lowest paid worker hourly pay exceeds the living wage by 46 percent, which represents but a fraction of the ice cream company’s commitment to the greater good. The company’s mission is to make the best product they can and be economically sustainable, while at the same time instigating positive social change. All-in-all, Ben and Jerry’s has partaken in over 5,000 hours of community service, and more than five percent of its profits are donated to charitable causes.

FCA pension report leaves insurance market reeling | Video

Posted on by Ashton Wenborn

The rip-off pension enquiry report that led to a massive destabilisation of insurers is continuing to rock the industry. But is putting more power in the hands of the public really the right move? And who stands to gain the most? Head of Pensions Research at Hargreaves Lansdown, Tom McPhail, shares his insight on the subject.

World Finance: First let’s talk about some of the most dramatic events that have taken place over the last couple of days. Of course we had the Financial Conduct Authority put out its report, saying it was going to closely review 30 million policies sold from the 1970s to 2000, and of course that led to a massive destabilisation of many insurers, they saw their stocks plummet by as much as 3.5 percent. Afterwards the FCA decided to go back and clarify a bit… What do you think of their handling of this situation?

Tom McPhail: I think the FCA perhaps with hindsight recognises they didn’t handle this particularly well. And of course this comes in the context of the budget announcement only a couple of weeks earlier, when the chancellor’s announcement that he was going to change the rules on how people draw their pension pots out had already caused a lot of disruption in the insurer market, with some insurance company share prices falling up to 50 percent on the day of the budget!

So they were still feeling pretty sensitive. With this FCA announcement, which again caused disruption in the insurer market, and several hours later the FCA came out with this clarification to explain that, perhaps they’d overstated a little bit. It’s been a pretty turbulent time for the market as a whole, and we’re still trying to work through the implications of it all.

World Finance: Moving on from the announcement, let’s look at some of the potential implications this could have. Could we see a PPI level payout in the near future?

Tom McPhail: I think it’s unlikely it’s going to go that far. But it is still very significant, because it will encourage investors to take a closer interest in that stagnant money, those zombie policies as they’re sometimes called. These old investment and pension plans that have been sold over the decades, which are in many cases levying fairly high charges, not delivering particularly good investment returns.

So stirring that all up is potentially good news for investors, and potentially bad news for those insurers who are banking on the profit stream they’re getting from that back book of business. So any destabilisation there is unsettling for them.

World Finance: Now it appears that there might be some sort of antagonistic relationship that’s set up by the government, that wants to do right by the public, and then of course we have these insurance companies that are facing a lot of criticism. But in a perfect scenario where you have an ageing demographic that the government says it’s not able to fully support, shouldn’t we have a robust insurance industry that’s able to provide for them?

We actually need people to save more money, because we probably don’t have enough money in the system to meet all the bills

Tom McPhail: Absolutely we need a robust insurance industry, and stability in the system is very important. And this was the concern about the way that the FCA’s announcement was handled last week: it created disruptions in the marketplace, it was unsettling. So stability is highly desirable. But it is also highly desirable that we have a competitive marketplace so that consumers are buying good quality products that are competitively priced. The best products possible to meet their needs, and also that they’re buying the right products. That they’re making good investment and buying decisions.

So we need market competition, we need consumers giving guidance where they need it, or good information where making their own decisions. Bottom line? We actually need people to save more money, because we probably don’t have enough money in the system to meet all the bills.

World Finance: Well speaking of that guidance that you just mentioned, let’s look at people who may draw pensions early. Do you trust them to make the right decisions with so much of their hard-earned cash?

Tom McPhail: Our experience at Hargreaves Lansdown advising clients is typically, yes. People in their 60s and 70s are by nature fairly cautious, and are probably not going to go and be reckless with the money. But of course people are retired for 20 or 30 years, maybe more! And what starts off as a good intention can still end up with them drawing down their money and perhaps running out of money as they get into their 80s and 90s.

So we do have concerns about that, and there’s a real challenge there for the industry as a whole to help people to do the right thing. And if we fail at that then there is a real risk that we’re going to see lots of money wash out into the economy; in the short term that’s great, but in the longer term we end up with a lot of poverty-stricken pensioners, and that’s clearly not good.

World Finance: If we do see people getting those big lump sums, that’s a lot of money. We could be talking in the thousands, sometimes even more. Fund managers would stand to gain, don’t you think?

Tom McPhail: Yes, potentially. I think we are going to see a lot of money washing out of the pension system, into the marketplace. It’s going to be looking for a home. In some cases people who would have been buying annuities are going to choose to keep the money invested in funds, so there are opportunities there.

People in their 60s and 70s are by nature fairly cautious, and are probably not going to go and be reckless with the money

In some cases they will pull the money out of pension funds, reinvest it into other tax-exempt products like ISAs, and again therefore opportunities for fund managers there. But the interesting bit of all of this is we don’t know what the behavioural response from all these investors is going to be. And we’re talking about huge sums of money here, so there’s a lot to play for!

World Finance: Of course we don’t know what’s going to happen, but what would happen if they have these options open to them? Do you think this is a good thing from the consumer’s perspective?

Tom McPhail: It’s potentially a good thing from the consumer’s perspective, because it sends a very clear message. This is your money, you need to take an interest in what’s happening to it. Now that’s a great starting point, because that typically gets people’s attention. The challenge then for the industry is to make sure that they help people to do good things with the money. And so the government’s already said the industry should look to give people guidance at the point of retirement. But again: is there adequate regulation in place to make sure that people are encouraged to do the right things with the pots of money when given the opportunity to do so?

World Finance: Okay, do you think pension liberation is a good thing for the economy?

Tom McPhail: No I don’t. I think the real risk is if you get people pulling money out too early, that when they really need the money further down the line, there’s nothing left to live on. So it’s about good financial education, it’s about putting in place the right rules and structures to protect people from taking negative actions, and trying to encourage them, perhaps, to save a bit more. So that when they do get into their later life they’ve got enough to live on.

World Finance: Okay well thank you so much for joining us today.

Tom McPhail: Thank you.

Asset managers in high demand as economy recovers

Posted on by Ashton Wenborn

Leaving a record year behind, the asset management industry has seen a boom in expansions and hiring levels. As firms have continued to grow, thriving on the economic recovery and investor bullishness on global markets, the need for hiring the best, compliance-oriented managers has increased. In the new post-crisis financial services landscape, competition is steeper than ever when trying to put together the strongest employee team.

Now, the asset management industry is gearing up for a year of further hires as several major banks and IFAs have announced the significant bolstering of investment teams for the year.

According to PwCs 17th annual CEO Survey, asset management companies are in expansionist mode, with more than half (58 percent) of the CEOs surveyed expecting to take on more staff in the next year. This is a slight increase from last year, when 55 percent of CEOs would increase headcount, and a marked change from 2012, when only 25 percent planned to hire externally.

The potential hiring spree is driven by increased bullishness in the global economic outlook, as 52 percent of respondents said that they believe the economy will improve over the next 12 months – up from just 19 percent last year. It also comes down to more firms adapting to and putting into place the regulatory changes, which have been introduced over recent years, the PwC report revealed.

“While previously people have been focused on headcount and how to get it down, now people have accepted regulation and are now focused on growth and finding the right people with skillsets around operational risk”, said PwCs head of UK asset management, Paula Smith.

Hiring sprees
This outlook follows announcements from a slew of firms all looking to bolster their asset and wealth management divisions significantly. US firms BNY Mellon, JP Morgan and Bank of America Merrill Lynch have been aggressively bolstering their US teams throughout 2013 and now, all three are looking to strengthen their European investment divisions, with JP Morgan’s current hiring spree set to culminate with 3,000 new recruits, in addition to further hires worth $2bn in 2015.

European firm’s Coutts, BNP Paribas and Old Mutual have been bolstering their wealth and asset management units, with the former targeting Singapore and Hong Kong in 2014 as it looks to double the number of senior bankers there as part of a major emerging markets push. Furthermore, Japanese firm Nomura is hiring assertively as it continues to forge its way into the US market.

The increase in demand and growing pressure on salaries is forcing firm’s to think of new hiring tactics

All in all, the 2014 hiring landscape for asset management is looking busier than ever, says the associate director of asset and wealth management at the specialist financial services recruitment consultancy, Bruin Financial.

“We actually started hiring some quite key roles towards the end of 2013, which were due to be 2014 hires. The idea was for some clients to get ahead of compensation season and make hires for 2014 ahead of bonus rounds taking place.

“This year has continued to be really busy as clients have had a very clear idea of headcount, the increase on 2013 numbers and the increasing positivity in the market. 2013 was still a little uncertain in terms of market sentiment, this year most clients are more bullish in their expectations of 2014,” explained Kirsty Pineger.

According to research from Bruin Financial, product development and management continues to be a huge area of focus within asset management, as roles at the £65 to 75k range have increased in popularity level for recruitment. Consequently, this range of manager has been the hardest level to recruit at as promotions within this range has created a real shortage of candidates.

“As hiring has increased, the market has become ever more candidate short. More and more we are finding that candidates are receiving offers from at least two firms during their job search. To overcome this, clients are making their interview processes efficient, and have to make competitive offers as soon as they identify the preferred candidate,” Pineger said.

Dan Mannix, CEO of the asset management firm RWC, says he has not experienced a shortage of candidates – but that this comes down to his firm’s hiring tactics.
“Confidence increased in 2013, and with that comes a renewed sense of urgency in order to build for the future,” says Mannix.

“We hire on a long-term basis by avoiding popular investment areas, which larger firms engage in. At the moment, it’s harder to recruit in hot areas of the market like fixed income, so we allow for a natural process rather than pursuing aggressive headhunting. For us, candidates need to be a good cultural fit first and foremost,” he explains.

Fixed income and compliance requirements
As Mannix suggests, demand for talent is especially great within certain asset classes, as fixed income continues to be the area of focus and candidates with knowledge of equities become a new, hot commodity. This does however, not even come close to comparison when it looking at the incredibly high demand within compliance.

“Demand is strongest in compliance and any roles that have a regulatory focus. Risk has seen an increase in appetite to hire, which makes sense based on the increase in pressure from regulators and the increased focus on compliance,” said Pineger.

The extreme shortage of skilled compliance professionals has, for instance, resulted in more than 90 percent of financial institutions in Hong Kong and Singapore, to worry about their ability to retain their most capable staff and not lose out to competing firms in the coming year.

“There has also been a greater increase in more investment-aligned positions as people have started moving in the market. We have seen clients create new opportunities and build new teams and this has lead to some strategic senior hires as well,” explained Pineger, referring to the expansionist plans that many asset management firms have set out for 2014.

RWC has on average hired one to two fund management teams annually in recent years and plans on adding at least one more team in the second half of 2014. Similarly, data from the global financial services recruitment firm, Roberthalf, revealed that more than 40 percent of firm’s in the UK, Singapore and Hong Kong where looking to recruit new staff this year. When asked for the top three reasons behind the planned increases in headcount, 63 percent of respondents’ selected new projects and initiatives as their top priority for hiring, followed by new market penetration and product or service expansion.

[F]irms are now looking at more junior options for hard to fill roles, as this gives them the opportunity to create home grown talent for the future

To this end, PwC’s Smith said she did not believe that there is a danger that asset managers will start to overstretch themselves as they move further into expansion.

“Asset management CEOs are confident about their prospects and getting more so,” Smith said. “What’s more, their optimism is taking root as they actively invest to stimulate future growth. They’re voting with their pocket books.”

However, the hiring trend might not be entirely suited for asset managers’ budgets. As salaries have started to soar, almost two-thirds of firms have raised salaries for their top employees, data from RobertHalf revealed. Bolstered by their own renewed confidence or possible dissatisfaction with their careers and remuneration prospects in recent times, financial services professionals have been demanding higher salaries across the board.

Not long ago a five to eight percent increase from previous roles was the norm – now that figure stands closer to 10–20 percent as candidate demand increases. “We are seeing more pressure on salaries in higher demand areas and candidates’ expectations are increasing in terms of what they expect to receive as they perceive the recruitment market to be improving,” Pineger said.

The increase in demand and growing pressure on salaries is also forcing firm’s to think of new hiring tactics, the recruitment firm’s reveal. Now, asset management firms will need to increase salaries to attract top talent, as well as employ competitive tactics, such as hiring entire portfolio teams in an improving recruitment market, Pineger added.

Finally, firms will need to think of long-term solutions for roles where candidate demand is high. In many instances, firms are now looking at more junior options for hard to fill roles, as this gives them the opportunity to create home grown talent for the future. Mannix agrees with this strategy.

“The availability of people below senior level is still really strong and here, we’re still experiencing an amazing level of response. This is partly because a lot of people are coming out of banks and sell functions as they continue to cut costs in these areas. So people are eager to get in to asset management, which at the moment offers more long-term security,” Mannix said.

With the asset management industry set to grow exponentially in 2014, fostering junior talent could very well be advice to live by, as more firms look to strengthen their investment teams now that the markets are picking up.

Silicon Roundabout: is London’s tech hub a silly con?

Posted on by Ashton Wenborn

Once hailed as a shining beacon of British technological innovation, the unofficially titled Silicon Roundabout area of east London is starting to resemble an expensive neighbourhood dominated by some of the world’s biggest tech firms. Where its cheap rents and unique warehouse spaces once attracted hundreds of start-ups and entrepreneurs, the area around Old Street and Shoreditch is now becoming so expensive that only the wealthiest businesses can afford to set up. For example, in 2012 online retail giant Amazon opened an eight-storey the hub close to Old Street Roundabout.

Young creatives have traditionally flocked to the area, with Shoreditch being a popular hub for artists for decades. At the turn of the century, shortly after the first tech bubble, many technology savvy creative types moved to the cheap warehouse spaces to develop all manner of online projects. From music radio and recommendation site Last.fm to Twitter desktop client TweetDeck, Silicon Roundabout has seen a number of the world’s most popular tech firms make their first tentative steps. Last.fm was even sold to US media giant CBS for £140m in 2007. It has since moved out of the area.

Government Tech City branding
The current government, like all others, was quick to jump on the bandwagon of all these successful tech businesses and grasp a share of the entrepreneurs’ glory, promising a swathe of investment and infrastructure support. While in 2008 there were roughly 15 technology firms located near the roundabout, Prime Minister David Cameron announced two years later an initiative to speed up the growth of the burgeoning industry in the area.

Rebranding the area Tech City UK, the government has tried to present the area as an initiative that sprung up with the full support of the state. Consultants were brought in to work for the newly formed quango, and the area quickly saw an influx of new companies. By 2010 there were 85 new businesses, which grew to around 200 the following year. This figure apparently soared to almost 5,000 by 2012, including the wider surrounding area.

entrepreneurs-are-drowning-in-incubators-says-tech-expert-of-governments-silicon-roundabout

Watch the video interview

Entrepreneurs are ‘drowning’ in incubators, says tech expert of government’s Silicon Roundabout

Joanna Shields, Facebook’s former head of Europe, was appointed head of the quango in 2012. Earlier this year Gerard Grech, a former head of marketing at Blackberry, replaced her, becoming the third CEO of the group in three years. It suggests that the organisation is little more than a marketing tool for a government desperate to appear to be fostering technological innovation. It has also seen many of its responsibilities given to London & Partners, the marketing agency of Mayor Boris Johnson.

Cory Doctorow, a technology writer based in the area, wrote recently of the slow death of Silicon Roundabout as a creative hub. He says that property developers, as well as local and national governments, wanted to get in on the action after the initial successes seen before 2008. “Before long, Silicon Roundabout had indeed been adopted by estate agents, local councillors and even No. 10 [Downing Street]. Silicon Roundabout became the cornerstone of the government’s new Tech City strategy, whose idea was to nurture our little home-grown tech district to see if it couldn’t be fanned into full flame.”

Failed initiatives
Last year Tech City launched a Future Fifty initiative that would shortlist the top 50 start-ups and provide them with mentoring, strategic advice and export assistance from the government and its partners. Some of the firms that have enjoyed this honour include taxi-app Hailo, property-search website Zoopla, and mobile-game maker Mind Candy.

However, for all the successes, there have been plenty of failures, with companies going out of business, talent fleeing to other jobs, and investment down the drain. A huge number of start-ups have emerged across the area over the years, promising revolutionary new services based out of their trendy new offices, only for them to be packing their boxes six months down the line, having squandered their investment.

Tech City’s trumpeting of the industry seems misguided. A competition for a £1m investment could not find a single appropriate winner out of one thousand entrants last year. Indeed, despite its official report claiming that 40 percent of employment growth in the tech industry has come from the Silicon Roundabout area – including 88,000 tech firms across London – it neglects to mention that many of these tiny firms will have crumbled within a few months.

Even though there have been a few larger successes, the government hasn’t really acknowledged the many, many failed projects that have fallen by the wayside in the area too, says Doctorow. “Almost everything that start-ups do comes to nothing. A tiny fraction of all that activity pays off in ways that beggar the imagination. It’s the kind of thing that governments like to pay lip service to, but rarely have the patience for. Governments like to boast of a portfolio of large, nationally identified, successful firms – not thousands of hare-brained schemes whose doom is near certainty.”

Another issue that has been raised is the government’s investment fund that is potentially crowding out private investors from the tech industry. While few people will cry over a few venture capital firms losing out on business, many in the investment community feel that the government run Business Growth Fund (BGF) is putting in bids for tech companies that are deterring them from doing the same. While the fund was intended to fill an investment gap, it is valuing deals high enough that funds that are answerable to shareholders feel they can’t justifiably compete.

Developers driving up prices
While the reason for this surge in rental prices could be seen as a natural consequence of the areas success, there are a number of underlying issues that have caused many start-ups to flee the Silicon Roundabout, not least the meddling from the British government. Promises to support the areas infrastructure – in particular by boosting the broadband speed and reliability for offices – have not been delivered. A £50m pledge in 2012 by the government to boost broadband speeds to and build a high-tech institute has still not been released by the treasury over concerns about the viability of the plans. The T4 broadband speeds are seen as crucial for allowing developers to compete with other tech hubs around the world.

Despite the appearance of independent, small start-ups, many world-renowned tech firms have invested in the area, including Cisco, Facebook, Google, Amazon, and Intel, as well as consultancy firm McKinsey & Company. Property developers have also sought to capitalise on the popularity of the area, including Alan Sugar’s arm Amsprop, which acquired three large buildings adjacent to Old Street roundabout towards the end of last year.

sky-high-rents-force-tech-start-ups-to-leave-london’s-silicon-roundabout

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Sky-high rents force tech-start-ups to leave London’s Silicon Roundabout

The rise in property prices and influx of bigger tech firms echoes what has happened in San Francisco and the original Silicon Valley. Stories of wealthy Facebook employees being abused in the street because they moved into once-cheap neighbourhoods in San Francisco have been reported in recent months. This may not be happening just yet in Shoreditch, but people are certainly concerned.

One local entrepreneur tells World Finance he has was forced to move his young tech firm out of the area because of the rise in rents. Charlie Pool, founder and CEO of location-based marketing platform HitMeUp, says that small firms would struggle to pay the rents in the area. “I know there have been some people annoyed about not being able to afford the rent. The rent is high there and you would be hard pushed to get an office in Shoreditch now as a pre-revenue start-up. In fact, we moved to Exmouth Market for that reason, we were on Rivington Street but the landlord cashed in and moved us out. So you end up with a few places left in Shoreditch aimed at start-ups, like Google Campus.”

Google Campus is one of a plethora of ‘incubators’ that house lots of start-ups under the same roof, supposedly fostering a collaborative and creative culture. Incubators like Google Campus seem like a good idea, but critics have suggested that they’re as beneficial to the housing company as they are to the entrepreneurs and creatives. Pool describes it as a “battery hen farm full of over-enthusiastic, totally delusional, people who have no idea their dreams of creating a ‘Spotify for yoga’ are about to be crushed by reality.”

An industry growing up
While successful tech start-ups have caught the attention of the business community over the last decade and a half, it seems all too often that there are many young people that assume that all they need to do is head towards a place like Silicon Roundabout with a half-baked idea and within months they’ll be the new Mark Zuckerberg. The government seems to be equally deluded in thinking that a marketing exercise like Tech City could capture it the glory of one of two tech success stories, while neglecting the colossal amount of failures.

Despite this, Pool thinks that the industry itself is not on its deathbed. While his firm is no longer running, he says that he has learnt a lot from his experience of trying to get a start-up off the ground. These lessons are being learnt elsewhere, and the youthful enthusiasm will fall away, which he says is a natural consequence of a maturing market. “I’d say we’re seeing the next stage in the cycle as you would typically expect in any maturing market – consolidation as the rubbish gets filtered out. The dreamers, like I was, are starting to realise through failure that you don’t create an app and become a billionaire, but you do start to learn what works and what doesn’t. That means standards go up and proper companies emerge. They can afford to mop up other companies, make more money, pay proper salaries, and the whole thing grows up a bit. The excitement is commercialised and inevitably the whole thing loses a bit of the magic.”

Big US banks protest against call for higher capital levels

Posted on by Ashton Wenborn

US banks have decried the announcement that from 2018 new federal rules will require them to increase their capital levels to increase security and prevent a repeat of the financial crisis.

The new rules require banks with more than $700bn in assets to increase their leverage ratios – the amount of capital a bank holds in reserve against its assets – from three to five percent. Smaller banks that do not have over $700bn in assets will still use the old rules.

[T]he rule puts “American financial institutions at a clear disadvantage against overseas competitors”

America’s eight biggest banks including JPMorgan, Bank of America and Morgan Stanley, amongst others, will all have the new rules applied to them to cut down on risky transactions and reduce exposure.

Regulators agreed on the rule as part of wider tightening to close loopholes banks used before the crisis.

“In my view, this final rule may be the most significant step we have taken to reduce the systemic risk posed by these large, complex banking organisations,” said Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation (FDIC), speaking to Reuters.

The new rules represent a modest increase, says the FDIC. The banks say the new measures will damage competition as banks abroad will still be able to operate under less regulatory pressure.

The Financial Services Roundtable, a trade group for large banks, said in a statement that the new rules would be a “competitive disadvantage”. Tim Pawlenty, CEO of the group, said that the rule puts “American financial institutions at a clear disadvantage against overseas competitors”.

The group had previously sent a letter to regulators calling for them to delay new leverage ratio rules, saying they had “very serious concerns about the timing and substance” of the proposal. The banks will now have until June to comment on the new rules.

Wealth management ‘the growth engine’ of banks – study

Posted on by Ashton Wenborn

Banks are set to become bigger players in the wealth management space, as large finance houses are looking to boost revenues by focusing on wealth management and private banking. In a recent study, over half of bank executives said that they expect to grow their revenue from wealth management practices by 25 percent in the next five years.

After dealing with the financial meltdown and the effects of regulatory change, banks are focusing on new revenue opportunities, with a particular interest in fee-based business, the Fidelity Bank Wealth Management Study said. “The last five years elevated the position of wealth management in banks – it’s become the growth engine,” says Mike Norton, head of the banking segment for Fidelity Institutional.

In a survey of more than 140 executives at regional, national and community banks, Fidelity found wealth management was a key growth target, with 42 percent saying that their company increased focus on wealth management over the past five years.

Nordic banks taking the lead
The phenomenon has been particularly strong in the Nordics, where banks have been struggling to improve overall liquidity. Denmark’s largest retail bank, Danske Bank announced a new, somewhat unpopular, corporate strategy in the autumn of 2012. By closing teller services across the country and implementing high fees on retail banking services, the bank shunned the broader public in the hopes that a renewed focus on advisory services would pay rich dividends.

As such, the bank launched the strategy ‘new standards’ which led to the closure of a number of branches in exchange for 80 new advisory centres catering to the wealthy. “These centres will offer personal customers expert advisory services from specialists in all aspects of personal finance,” the firm said when announcing the new strategy, which aims to attract more private and corporate clients.

This shift in focus is an issue that has faced other European banks looking to change their client segmentation policy, such as going after higher-value clients by raising minimum deposit amounts, to increase overall profitability.

Danske Bank decided to focus on services that would attract high net worth clients, while introducing fees for the broader public when for example, opening a checking account

The move came at a time when Danske Bank’s returns and overall performance was less than impressive. The bank had to take drastic measures to increase revenue, explains one of Denmark’s leading financial commentators.

“Danske Bank’s return on equity has not been good enough in recent years. In particular, the other major bank in Denmark, Nordea, has fared better,” said Morten Jeppesen, former editor of Denmark’s leading business publication, Borsen.

“As such, Danske Bank has been forced to improve earnings, and in this respect, the new customer strategy is an attempt to increase the profitability of each customer.”

Over the course of 2012, Danske was losing the revenue battle to major competitors in Scandinavia. The Nordic financial powerhouse Nordea and the Swedish banks SEB and Handelsbanken performed significantly better on returns on equity than Danske Bank.

Notably, Stockholm-headquartered Nordea puts its relatively good results down to a strong revenue stream from its enhanced wealth management business. Despite low growth and interest rates giving the banking group a slight dip in income for 2013, its wealth management division shined as assets under management reached an all-time-high of €233bn.

According to Nordea’s Executive Vice President and Head of Wealth Management, Gunn Waersted, the seven percent year-on-year gain from 2012 was driven by the firm’s focus on revenue-generating business.

“A key driver for Nordea’s focus on wealth management is regulation. At the moment, there’s a lot of focus on capital build-up. So from a bank perspective, it is of course very interesting to have an area that provides growth and does not consume any capital. So it’s in the interest of the group to focus more on wealth management.”

As a result, Nordea is bolstering the wealth management division with new hires and offices in order to boost revenues further, as Nordic retail banking and high costs continue to provide tepid incomes.

Tricky strategic move
Similarly, Danske Bank decided to focus on services that would attract high net worth clients, while introducing fees for the broader public when for example, opening a checking account. Such practices are generally uncommon in Scandinavia, where banking clients often enjoy free services and accounts and subsequently, Danske’s move was considered extremely unpopular by the press and public alike.

“In Denmark, the bank was met with a lot of criticism. In particular, the Danes have been very critical of the model where it now costs money for the weakest customers to have an account with the bank,” continued Jeppesen. Since the move, client trust has fallen drastically and even though the bank still has about two million retail clients, the first quarter of 2013 alone saw 30,000 clients leave the bank for other firms.

Danske Bank

$266m

Net profit, 2nd quarter, 2012

$1.29bn

Net profit, end of 2013

However, there is no question that the shift in strategy was the right thing to do, said Jeppesen. “The bank had no other option. If not, Danske Bank’s market status would have been beaten by competitors. The question is more whether the bank’s way of doing it, has been the right one,” he added.

“Danske Bank’s ambition is to increase the profitability of each customer, thus increasing return on equity. It is still too early to tell whether the strategy will succeed. In the short term, however, the bank has improved its ability to make money, while it has managed to take control of write-downs.”

Since Danske implemented the new strategy in the third quarter of 2012, results have gradually improved. At the second quarter of 2012 its results revealed a net profit of $266m. Since then, revenue gains helped increase profits by 51 percent year-on-year to $1.29bn by the end of 2013. Similarly, one of the few units not suffering from customer dissatisfaction is Danske’s private banking business, which saw its assets under management rise six percent to $56trn, as an increase in customer numbers significantly bolstered the division throughout 2013.

Growing trend
Interestingly, Danske is not the only bank considering the advantages of a change in their customer base. “My impression is that many other banks work with a similar strategy,” said Jeppesen, who has followed the Scandinavian banking and wealth management industry closely.

The Fidelity survey noted that a third of the surveyed banks’ wealth management units contributed, on average, 28 percent to the institution’s overall revenue. That revenue contribution has increased 40 percent at these banks over the past two years. As mentioned before, Nordea has long since improved revenue thanks to an impressive growth in wealth management clients since 2011. This essentially comes down to a well-functioning elevation model, which sends complicated clients from retail to private banking – within the Nordea group.

“In this model, we see that the customers have higher satisfaction, higher returns on their portfolios and from an financial perspective, the group earns more. We also saw that the income increase for the customers moved from retail to private banking was 160 percent,” said Waersted, when referring to the group’s 2013 results.

Nordea-Bank
Nordea Bank’s growing wealth management division is yielding good returns, with assets under management reaching €233bn in 2013

Such elevation models might be the key to banks successfully pivoting towards wealth management. According to Fidelity, banks are in a particularly good position to build a reoccurring revenue base through wealth management. Almost half of the bank executives interviewed, said that clients feel comfortable in the bank setting, and 44 percent felt banks offered more personalised services than larger brokerage houses.

“As banks move forward in the wealth management space, their ability to transition over that relationship and transition the trust that has been built up over the years, will broaden their ability to increase wallet share,” Norton explained. For other banks, the elevation process is not just from retail to private banking, but from investment to wealth management.

Major Swiss banks UBS and Credit Suisse recently announced that they plan to cater increasingly to ultra high net worth clients, as both firms look to scale down their investment banks and reinforce wealth management in order to boost earnings and make future profits more reliable.

In this respect, both banks explained that wealth management is a steadier business with “lower costs and significantly less costs”. The latter becomes particularly important, as capitalisation needs to actually continue to climb. The hope is that increased co-operation between private and investment banking will strengthen client flows in investment banking and boost overall group numbers.

It is worth noting that as regulatory requirements continue to become more complex, smaller RIAs are increasingly challenged by the demands of the wealthy in conjunction with large-scale compliance issues. In this respect, larger banks are to some extent better equipped to deal with legal requirements as well as provide the holistic approach that investors and private clients are increasingly looking for.

Moving Kiruna: what does it take to relocate a city?

Posted on by Ashton Wenborn

As the northernmost city in Sweden, Kiruna is used to seemingly endless winters, short, cold summers, and relative isolation in the vast expanse of Swedish Lapland. Its population, just shy of 20,000, has learned to expect adverse weather and the long dark night that descends on the city between December and January – all things that are part and parcel of living some 90 miles above the Arctic Circle. They could not have expected the gravity of the newest challenge that the city faces – a problem that simply must be overcome, before it swallows it whole.

When state-owned Luossavaara-Kiirunavaara Aktiebolag (LKAB) – one of Sweden’s biggest mining companies – told the residents of Kiruna it needed to dig deeper into the mountain near the city to extract more iron ore, some eyebrows might have been raised. Veterans of the city would remember that in the 1970s rampant expansion forced the city’s Ön district to be vacated and the residents moved elsewhere.

[T]he very vein that brought Kiruna to life is now threatening to
destroy it

What they probably didn’t realise was the scale of what would have to happen this time. LKAB didn’t want one district to be vacated. They wanted at least a third of the city moved to a different site – every house, hospital, school and shop in the chosen areas – and every citizen affected would have to relocate with it.

Already the effects of the digging can be felt around Kiruna. Cracks and fissures tiptoe closer to the city every month, threatening apartments and homes. The townspeople simply cannot afford to stay put any longer, that much is certain, but the alternative seems an impossible and costly task.

The call of the earth
LKAB’s mine at Kiruna is the largest iron mine in the world, extracting 75,000 tonnes of iron ore every day, and the prospect of even richer veins made digging deeper an easy decision for the company. LKAB believe that the orebody stretches below much of the existing city and is more than 2000 metres deep and four kilometres in length – the largest known continuous body of iron ore in the world – and enough to ensure mining operations will continue in Kiruna until at least 2035.

There is some irony in the situation: the very vein that brought Kiruna to life is now threatening to destroy it, unless the relocation plan succeeds. This sort of situation is not entirely new for the company – on a much smaller scale LKAB have been moving residents away from their mining operations in the nearby town of Malmberget, literally “The Ore Mountain”, for the best part of 60 years. The relocation of Kiruna, however, is a much greater test for the company.

The value of the orebody below the city also makes the decision more of an economic certainty, but it is entirely possible that the true cost of the relocation for LKAB will never emerge

The current population are desperate for stability – both above ground and under it. Moving all the residents to new houses will be a big endeavour. Where LKAB can they will try to move the properties themselves to a new lot, but otherwise the company’s normal policy is to compensate by purchasing the house for the market price plus an additional payment for a variety of factors, including the value of the ore beneath the land. The exact nature of the compensation package is extremely fluid and depends on a variety of factors, including property value and market movements.

The Swedish Minerals Act puts the responsibility on the mining company who causes the damage to compensate for it, but the law has never been applied to such a large swath of properties before now. LKAB themselves admit that there “are hardly any comparable situations from which we can learn.” This is obviously a massive financial undertaking; at the end of the 2010 financial year the company had spent €2.1bn on the transformation so far and had made a further provision for €3.4bn more to be spent.

The company believe they can handle the cost, citing the prolonged period of the relocation. The value of the orebody below the city also makes the decision more of an economic certainty, but it is entirely possible that the true cost of the relocation for LKAB will never emerge.

Fresh start for the city
Architects White Arkitekter AB won the competition to design ‘New Kiruna’ with their ‘Kiruna 4-Ever’ campaign. Their vision is impressive. The new city will capitalise on the move by becoming more pedestrian friendly and less reliant on cars. The new buildings will try to preserve as much of the city’s original aesthetic as possible. There are select buildings from the old city that are simply too valuable to be demolished. The church, voted in 2001 as Sweden’s most beautiful, will either be dismantled and rebuilt brick by brick on the new site or lifted and transported in one piece.

The transformation will take place over several years, first by extending the main street to the east to accommodate the new developments while also maintaining some structure for the city. Bigger building projects, such as the new city hall and railway station will be sited where land deformations will never damage them.

The architects confess that some developments in the mid-term will be earmarked from the very beginning to be removed as the mining continues. As Kiruna’s municipal government concede on the town’s website, planning for the city is difficult with this “permanent uncertainty”, but the current plans aim to future proof the city as much as possible.

Some things - like signs - may be easy to transport to the new Kiruna. Convincing people to relocate, however, does not come without its challenges
Some things – like signs – may be easy to transport to the new Kiruna. Convincing people to relocate, however, does not come without its challenges

The planners also see this as a possibility to give Kiruna a new social identity. As their plans outline, “Kiruna’s true nature will always be related to iron extraction, but it is precisely the collateral effects of this enterprise which opens [the city] for opportunism”. Architect Mikael Stenqvist, speaking to World Finance about the implementation of the project, said that White were “very confident, but still the survival of the town is at risk”.

He emphasised that “a 100 percent guarantee can’t be made…there are several aspects making the project complex. The world demand on iron will have an effect, and there is a risk in the execution, of how people will react.” Stenqvist remained upbeat about the project, however, saying that it has “a force of expertise that is covering every aspect of the relocation.”

Several developments are already taking place. The city’s local lake, Luossajärvi, has had a dam built and its southern section drained in anticipation of more ore excavation. A new railway has been built to service the mine and provisions have already been taken for the rerouting of the E10 road – a major link between Kiruna and the Baltic port of Luleå.

The world is watching
The project will also be keenly observed by those planning the future of some of the world’s most vulnerable cities. If rising sea levels force whole towns and cities from their current location, what is happening at Kiruna will surely be seen as the first real-life instance of the relocation of a major urban area. That means there are high stakes for the success of the project, because no matter the outcome for Kiruna it will become an example of what works and what does not for the rest of the world.

If rising sea levels force whole towns and cities from their current location, what is happening at Kiruna will surely be seen as the first real-life instance of the relocation of a major urban area

In a press release, CEO of White, Monica von Schmalensee, said the company was aware of the gravity of the project. “To design what basically is a completely new city is a historic task and an unparalleled opportunity for us as architects. It is a great acknowledgment of our unique way of working with sustainable urban planning.”

Comprehensive public transport will underline the architects’ desire to give ‘New Kiruna’ a more cohesive and environmentally friendly identity. The new parts of the city are slightly closer to Kiruna’s airport, which is a vital hub for tourists looking to explore Lapland. Also planned is a cable car system that will service key points in the city and LKAB’s mine, reducing the need for workers to take their cars.

An ambitious plan to link the city’s energy use with the mine’s is also on the cards – Kiruna will be in part heated by enormous waste heat from the mining operations to create a carbon neutral city.

If everything goes to plan, and Kiruna can execute these grand plans, it will be nothing less than a new lease of life for the mining community, and it will be a landmark case for town, city and environmental planners around the globe to learn from.

However, in their plan, published online, the architects also admit that Kiruna may simply be fated to never stay in one place: “Kiruna is an urban settlement under unprecedented pressure for transformation, a process that, with the continuing global demand for iron, will most likely not stop at the year 2033. More than any other city in the world, Kiruna will never achieve completeness or an ideal state.”

What’s Tesla’s secret?

Posted on by Ashton Wenborn

Tesla Motors is a Palo Alto, California-based automobile manufacturer, a 10-year-old start-up that only rang up its first profit in the first quarter of last year. Its total array of models comes to just two, with two more in the offing, and 2014 sales are projected at a modest 35,000 units. Indeed, the company is the smallest and youngest manufacturer of publicly-used vehicles in the US.

Yet in February, Tesla’s market capitalisation leapt briefly to $31bn and it hovers consistently around the $25bn mark. As analysts point out, at that price the automobile manufacturer is valued at more than one third of General Motors and twice that of Fiat, which is slowly absorbing Chrysler.

What’s Tesla’s secret? It’s the pin-up boy of electric cars, the brave new world of the automobile manufacturing industry, as it reinvents itself after some 130 years of the internal combustion engine. Tesla’s flagship vehicle, the racy-looking Model S, has a basic sticker price of $63,000 (£50,000) including a $7,500 federal tax credit, and is coveted by wealthy greenies.

Although hardly a global manufacturer, the Model S went on sale in Europe in mid-2013 and will be launched in China in 2014. Nobody seems to mind that one of Tesla’s cars caught fire late last year.

Battery powered
Yet it’s not so much the car but the technology that has pushed Tesla’s valuation into top gear. When analysts from Morgan Stanley judged in late February that the company was as much a manufacturer of next-generation batteries as a producer of high-powered automobiles, its stock jumped 14 percent overnight on the Nasdaq.

It’s the pin-up boy of electric cars, the brave new world of the automobile manufacturing industry

The trigger for the take-off in the share price was the announcement by Tesla’s founder and Chief Executive, Elon Musk, of plans to build a ‘gigafactory’ designated simply as ‘+’ for making lithium-ion batteries. Not only does he intend to disrupt the global automobile industry, this South African-born visionary entrepreneur – he also founded PayPal – is aiming for a big slice of the electric utility industry as well.

Such is investor interest in green power that a few days after the announcement Tesla raised $2bn in convertible bonds, the biggest such sale in the US in over two years. Bond buyers are betting on a bright future for the automobile/battery manufacturer – instead of banking just a stream of interest as with standard corporate bonds, they will be able to convert the paper to shares at a trigger price.

Changing attitudes
Suddenly, after years of doubt and derision, electric cars are seen as the future. Although they could only putter about, those funny little box-shaped, plug-in vehicles driven by earnest, elderly greenies really were the pioneers of a new age of automobiles.

“The time is right for electric cars – in fact the time is critical”, argues Carlos Ghosn, Chief Executive of Renault-Nissan, who has gone out on a limb with electric technology, notably with its Leaf model.

Tesla car sales revenue

£385m

2012

$2bn

2013

It’s statements like these that are making electric cars cool. Certainly, nobody sees anything strange in Google embracing battery-powered cars – officially known as EVs – by buying up hybrids and converting them into plug-ins so it can see whether its engineers can do better.

The company is reportedly investing heavily in its own driver-less cars. And Apple, which was rumoured last year to be considering a buy-out of Tesla, is said to be working on its own EV. When – or if – it unveils an iAuto, it would surely make a much bigger splash than a new version of the iPhone or iPad.

The giants of the historic industry are fighting back. The Renault-Nissan partnership has a formidable line-up of electric cars, albeit of three-star appeal. And in late 2013, BMW went up-market with the launch of the i3, a compact that has been an instant success. According to the Munich-based manufacturer, its assembly lines cannot keep up with demand even at a starting price of £25,680.

Other manufacturers are waiting on the sidelines, nervously watching sales figures for their rivals’ electric cars. The holdouts, such as Fiat, are unsure which way the market will run. Some – like Toyota with its Prius and Lexus – are covering their bets by putting faith in hybrids: semi-electrics boosted by small engines.

Of these, the most recent version is the Cadillac ELR, General Motors’ first top-drawer electric automobile that entered showrooms just before Christmas 2013. The ELR is a premium version of the Chevy Volt with much the same form of propulsion – a T-shaped, 288-cell, 16.5-kWH lithium-ion battery pack allied to a 1.4 litre Ecotec four-cylinder engine.

The base price of $75,000 could prove a stumbling block though. According to the website Green Car Reports, a straw survey of potential buyers was not promising. “The common reaction when we revealed the $82,000 sticker price of our test car was stunned silence,” the site reported.

A fully-electric Tesla car on an assembly line at a Tesla Motors factory in Tilburg, Netherlands
A fully-electric Tesla car on an assembly line at a Tesla Motors factory in Tilburg, Netherlands

But Mercedes-Benz believes the money’s out there. Its B-class all-electric car will come on to the market at an estimated European price of about €30,000 (£25,000). With a range of 115 miles, it’s another premium model that is a giant leap forward from the battery-powered tin cans of yesteryear.

Even the supercar industry is joining the trend. Jaguar’s C-X75 – a 900bhp 2010 concept vehicle – was a marvel of technology that employed two diesel-driven micro-turbines to charge the batteries. These in turn drove four electric motors distributed between the wheel hubs. The Mark II version currently in the works is driven by a 1.6-litre engine mated to a pair of electric motors and a lithium-ion battery pack.

Power shift
The implications for the world of motoring are transformational. Historically traditional manufacturers dominated the automobile industry because they had a monopoly on the development of the internal combustion engine – and they still have. But now that the propulsion derives from the stuff that drives electronic devices, the balance of power has shifted to new industries. Though electric vehicles have been slow to catch on, analysts believe the market turned the corner last year.

In January, Navigant Research, a specialist in green technology, predicted that by 2022, there would be more than 35 million EVs on roads worldwide. And that’s almost from a standing start.

Apple, which was rumoured last year to be considering a buy-out of Tesla, is said to be working on its own EV

It was Tesla that shook up the industry. In 2007, General Motors’ then-vice chairman Robert Lutz, a legendary figure in automobiles, saw the light. After taking a long hard look at a Tesla Roadster, the company’s debut model, Lutz put General Motors to work on the Volt, a plug-in hybrid sedan.

He told The New Yorker: “All the geniuses here at General Motors kept saying lithium-ion technology is 10 years away, and Toyota agreed with us – and boom, along comes Tesla. So I said, ‘How come some tiny little California startup, run by guys who know nothing about the car business, can do this, and we can’t?’ That was the crowbar that helped break up the log jam.”

Although an enclosed, silent battery power unit may lack the drama of a gleaming, rumbling petrol-driven engine, the science behind electric cars is immense. Huge advances had to be made to get where we are now. Tesla has gone its own way by packing its lithium-ion batteries with thousands of what are known as 18650 commodity cells, roughly the same as those found in laptops and other mobile electronic devices, while other manufacturers have gone for larger single-purpose cells.

Elon Musk named his cars after the great Nikola Tesla, the electrical engineer, physicist and futurist who designed an electrical motor as long ago as 1882.

To get around the hefty weight of the current generation of batteries, Tesla spent a decade working with its battery supplier Panasonic, a major investor, on producing cells that are lighter and cheaper. The result is that the company probably has the edge in costs – it is estimated that Tesla prices its batteries at $200 per kWh.

The California company has also got a jump on the opposition in another crucial issue: the location of the space-hungry power unit. In the Model S, Tesla has buried the battery in the floor instead of in the normal place behind the seats or in the boot. Finally, there was the challenge of making electric cars run further than around the block before they ran out of charge. The Tesla Roadster was the first electric vehicle with a range greater than 200 miles (320 km).

But where do you charge it up? Tesla is busy creating its own chain of Supercharger stations. With 65 in the US and just 14 in Europe, it has a long way to go.

The next big thing
On the way to a brave new world of EVs, there have been casualties. Israeli start-up Better Place, a company that banked its future on battery-swapping rather than recharging stations, collapsed in 2013 after burning up $850m in private capital. And Fisker Automotive, a 2007 partnership between former Aston Martin and BMW designer Henrik Fisker and German industrialist Bernhard Koehler, also declared bankruptcy in late 2013 but was bought in early 2014 by China’s auto parts conglomerate Wanxiang Group.

The next big thing could be hydrogen-powered cars. Nissan and GM, among others, are already pushing along this route

Another brave new world is coming in the automobile industry and it’s in ‘connected’ cars. That is, connected to everything. Apple has just embedded a proprietary in-car operating system in a new wage of models produced by Ferrari, Mercedes-Benz and Volvo.

This is much bigger than mere ‘always-on’ communication technology. The grand plan is to install software and related engineering that will ultimately enable automobiles to drive themselves. Germany’s tyre giant Continental has high ambitions for its own similar technology.

Britain’s Jaguar-Landrover group could be ahead of the game here. The latest Landrover will automatically turn the steering wheel and apply the brakes if the software thinks the driver is getting too close to adjacent vehicles or immovable objects.

The next big thing could be hydrogen-powered cars. Nissan and GM, among others, are already pushing along this route and the first production models are due out in 2015 or soon afterwards. A big handicap of hydrogen power, though, is that charging stations are few and far between, even in the US, which is the flag-bearer for these EV alternatives. And, fanciful though it sounds, automobile manufacturers are experimenting with ways of using the family car as a kind of generator.

Last year, Ford announced a partnership with SunPower and Whirlpool that aimed to show how EVs can be hooked into the domestic power supply in a way that reduces electricity bills.

But right now the main challenge is to make EVs more affordable. With the help of his new factory, Elon Musk believes the company can develop a luxury model that will sell for around $35,000, less than half the price of today’s $72,000 basic model. At that point the internal combustion engine could be destined for the scrap heap.