Month: February 2015

Standard Chartered CEO to leave in dramatic shake-up

Posted on by Ashton Wenborn

London-based global banking group Standard Chartered has revealed it will undergo a dramatic shake-up of its leadership team in the coming months. This will include the appointment of Bill Winters, the former head of JP Morgan’s investment banking division, as its new CEO.

Sands has faced mounting criticism of his leadership over the last two years after a series of dismal results

Winters will replace the outgoing Peter Sands in June, bringing to an end a tumultuous period for the bank. Appointed Group CEO in 2006, Sands has faced mounting criticism of his leadership over the last two years after a series of dismal results. The Asia-focused banking group has faced a declining share price in recent months, alongside some hefty fines from US regulators over money laundering allegations.

The new CEO has developed a strong reputation during his time at JP Morgan, where he was widely expected to eventually replace CEO Jamie Dimon. However, a dispute between the pair in 2009 saw London-based Winters leave the firm. He would eventually set up his own asset management firm, Renshaw Bay.

Also departing is Chairman Sir John Peace, who is expected to step down at some point in 2016. Peace has faced considerable criticism for his role in overseeing the downturn over the last couple of years. However, no replacement as chairman has been announced yet.

Announcing the changes, Peace spoke of his admiration for Winters. “Bill is a globally respected banker and has the right experience and skills to drive the group’s new phase of growth. He brings substantial financial experience from leading a successful global business and has an exceptional understanding of the global regulatory and conduct environment. He’s also a proven leader with a strong track record in nurturing and developing talent.”

Other members of Standard Chartered’s board are also set to leave, alongside Jaspal Bindra, who currently heads up the bank’s Asian division. Bindra was criticised last summer when he complained that US authorities were treating banks like criminals.

Fossil fuel clampdown could finally be on its way

Posted on by Ashton Wenborn

In the summer of 2009, G20 leaders reached an agreement in Pittsburgh to phase out needless government-given support for fossil fuels – and so began a concerted global effort to rein in wayward emissions and focus instead on renewable development. “All nations have a responsibility to meet this challenge, and together we have taken a substantial step forward in meeting that responsibility”, said a fresh-faced Barack Obama. And in what was then a milestone commitment to tackle climate change, those in attendance pledged to “rationalise and phase out over the medium-term inefficient fossil fuels that encourage wasteful consumption.”

The pledge appeared to mark a turning point for the global energy market and a key stepping-stone to a low-carbon future (see Fig 1). “Phasing-out fossil-fuel subsidies represents a triple-win solution”, read one report, co-authored by the IEA, OECD and World Bank, outlining a roadmap for the fossil fuel retreat. “It would enhance energy security, reduce emissions of greenhouse gases and bring immediate economic gains.” However, while the optimism shared at that time led many to believe that G20 leaders were about to let up on the costly endeavour that is fossil fuel subsidisation, the inaction on the issue since has shown that the promises have come to nothing.

The main case against fossil fuel subsidies is that they distort energy prices and serve only to handicap the renewables sector

As it stands, any predictions that say major oil producing nations might soon turn away from fossil fuels are sorely misguided, and though the savings – financial or otherwise – are well documented, the obstacles standing in the way of reduced subsidies are too great. To the tune of only minor opposition, world governments have shied away from fossil fuel pricing policy reform, yet a number of individuals and organisations have recently taken it upon themselves to re-evaluate and re-present their findings on the subject.

Broken promises
In the period from 2009-12, global oil prices doubled, and in a desperate attempt to keep pace with the uptick, government money spent on subsidies increased to $544bn, from $312bn previously, according to IEA estimates. As opposed to “phasing out” fossil fuel subsidies, as was suggested in 2009 and again in 2013, G20 leaders have deemed it necessary to actually increase the already-colossal sums spent on subsidisation.

Worse still is that these same incentive systems are draining public finances at an alarming rate, and recent IMF findings show that the supporting costs, coupled with any tax losses, equate to some $2trn – or eight percent of government revenues. According to Chris Beaton, Research and Communications Officer at the International Institute for Sustainable Development (IISD): “Fossil-fuel consumer subsidies hamper economic growth by taking away scarce resources that could be put to better purposes.”

There are some countries, however, that have responded quickly to this new low price environment, particularly in the case of Indonesia, whose government has not only introduced a semi automatic pricing system but slashed petrol prices at the pumps.

At the turn of 2015, President Joko Widodo abolished subsidies on premium gasoline and introduced a fixed subsidy on solar diesel, for which the government is expected to fetch a budgetary saving of approximately $16bn in 2015.

India, meanwhile, is living proof that an inflexible fossil fuel pricing policy can bring with it economic and social consequences. According to the IISD’s second India Fossil-Fuel Subsidy Review, the government and any associated public sector enterprises lost $23.4bn to subsidising diesel, LPG and kerosene. Not only that, but the programme serves to distort prices, inflate demand, and boost emissions, while also disincentivising energy efficiency improvements and stifling the national appetite for clean energy development. This immovability is, of course, relative, and subsidies typically vary from year-to-year, owing chiefly to swings in fuel prices. Yet rarely do governments choose to roll back subsidy payments by significant degrees, and it is this decision, shared between G20 nations and beyond, that has created a fossil fuel market that nears on subsidy dependency.

Nowhere else is this overly generous support for fossil fuels more obvious than in exploration, which receives more in subsidies than oil and gas companies spend on the pursuit themselves. Collectively, G20 nations spend $88bn on an annual basis in supporting exploration, almost double what the IEA estimates the population needs for universal energy access before 2030. What’s more, the total amounts to more than double what the world’s top 20 private oil and gas companies spend on exploration in any given year, which suggests that the endeavour is propped up by public financing.

“The big problem with producer subsidies is that we can’t afford to use all of the fossil fuel still buried in the ground – not without triggering a runaway climate change”, says Beaton. “Claims that helping the fossil-fuel industry is good for the economy and jobs are often inflated, or simply not substantiated with published analysis.”

Carbon content of fossil fuel reserves

Distorted reality
The main case against fossil fuel subsidies is that they distort energy prices and serve only to handicap the renewables sector. However, should authorities rebalance the system in a way that more realistically reflects market conditions, subsidies can play an important role in aligning incentive systems with sustainable development. The fact that demand for coal is slipping and oil prices are plummeting reinforces the point that overly generous subsidies are painting a distorted picture of where opportunities in the energy market lie.

“Governments should price carbon to reflect the social, economic and environmental damage associated with climate change, and to reduce emissions to levels compatible with the globally agreed 2oC target”, according to one report co-authored by Oil Change International and the Overseas Development Institute, entitled The Fossil Fuel Bailout. “Governments in the G20 and beyond should act immediately to phase out fossil fuel subsidies to exploration.”

Still, exploration subsidies represent only a small part of a much wider debate on the role of fossil fuel subsidies in dampening economic opportunities, impeding growth and stalling renewable development. Whereas fossil fuel subsidies amount to a mammoth $550bn per year, renewable subsidies have barely tipped the $120bn mark. Many critics are of the opinion that the cost competitiveness of renewables is obscured by the imbalance, not least of these being Beaton, who believes wayward subsidies are “locking us into a high-emissions climate pathway.”

The criticism most often levelled at fossil fuel consumer subsidies is that they take away precious resources that might otherwise be spent on ‘better purposes’, namely infrastructure, healthcare and education. What’s more, overly generous sums spent on propping up fossil fuel consumption can negatively affect the way in which investors perceive any given country. Producer subsidies, however, “tend not to hamper economic growth particularly, but they do take up resources that could be spent on promoting new and green industries that may be the source of future economic competitiveness.”

The realisation that fossil fuels enjoyed a pick-up of around $550bn last year, four times the amount dedicated to renewables, sits uncomfortably with some – chief among them the IEA – who insist that the disparity between the two makes little economic sense. Chief conomist at the organisation Fatih Birol told a London news conference last year that renewables will account for close to 50 percent of new power generation between now and 2040, despite the subsidies thrown fossil fuels’ way.

Surely now is the time to re-evaluable the reasons for the imbalance that exists between fossil fuel and renewable energy subsidisation, and question the grounds on which the gap has widened. There is reason to believe that propping up the fossil fuels business is a thankless task, and with emissions gaining and oil prices plummeting, some are asserting that fossil fuels, at their current price, are being kept afloat only by subsidies.

What critics have been quick to overlook, however, is the influence of the political economy in blocking any attempt to reduce the handicap. Without support from all parties, reducing the said handicap will always prove difficult to implement, and campaign financing by those in the industry has succeeded many times in bringing proceedings to a standstill.

Impact of fossil fuel consumption

In the US, for example, Obama’s Climate Action Plan contained a distinct focus on developing sustainable energy sources ahead of fossil fuels, which the administration conceded would be ‘long and sometimes difficult’. However, following through on the actions set out in the plan looks unlikely in that the government has attempted to reform its fossil fuel subsidies policy in every budget since 2009, only to come unstuck at the hands of political process.

The figures show that the steps taken to phase out inefficient subsidies so far have been modest, yet there is a growing pressure to develop renewables and reduce dependency on fossil fuels. With a string of recent reports detailing the damage inflicted by rising emissions, individuals, organisations and governments are beginning to realise the importance of renewable investment.

Even the IMF’s Christine Lagarde and the World Bank’s Jim Yong Kim have outlined the economic case for removing subsidies that incentivise the use of fossil fuels, stating that the future of energy investment lies with renewables (see Fig 2).

By redirecting investments to mitigation goals, the landscape is shifting in favour of low-carbon alternatives, and the IPCC estimates that annual investments in fossil fuel technologies will decline $30bn, whereas the amount put into low-carbon electricity will rise $147bn. Divestment in fossil fuels, therefore, will play a crucial part in pushing much-needed reforms through and – more crucially – in levelling the playing field between the two. With the pressure mounting on governments to revisit unwarranted subsidies, doing so could finally spark the shift to a low-carbon economy.

Assuming that the gap between renewable and fossil fuel subsidies closes, the barrier that is cost competitiveness – or lack thereof – will begin to fall down, and the overwhelming appetite for carbon-intensive resources will subside.

Detail Commercial Solicitors on Nigeria’s PPPs

Posted on by Ashton Wenborn

PPPs in the power industry are burgeoning in Nigeria, with the government working to ensure the environment is more robust and welcoming. On hand to help companies negotiate the legal aspects of these sectors is Detail Commercial Solicitors. World Finance speaks to its representative, Partner Dolapo Kukoyi, to find out more.

World Finance: Dolapo: Nigeria has the strongest of all African economies. How well set up are the incentives and regulations surrounding PPP and foreign investment?
Dolapo Kukoyi: Foreign investment – I would say that investors are well incentivised. Our foreign exchange laws and regulations allow for foreign investors to repatriate their capital, our company law is also set up such that investors are actually able to own 100 percent of a Nigerian subsidiary or a Nigerian business.

Coming down to PPPs: first of all, the Infrastructure Concession Regulatory Commission, for example: it totally prohibits expropriation, which is the major, major concern for a new investor who is actually making an investment in countries like Nigeria or in Africa. And we now begin to see more to encourage investment; we begin to see that a lot of our agreements are looking a lot more at risk allocation, which is so static in current investment. And I’ll give you a few examples.

But in terms of the opportunities: the opportunities are ripe

In the power sector for example, you’d find that performance agreements: things like expropriation are actually events of default, or sometimes what we call local political force majeure. Expropriation is defined so that it’s not just the usual expropriation, but some things which could be termed expropriation. And in the event that there’s an expropriation, you’d actually have the private parties being compensated.

So I would say that right now, they’re well incentivised.

World Finance: How well developed is Nigeria’s infrastructure, and where are the main investment opportunities?
Dolapo Kukoyi: It’s clear that there’s currently a dearth of infrastructure. And this is across oil and gas, across power, bridges, transportation, even when you talk about health, education and housing. So there is obviously a dearth of infrastructure.

But in terms of the opportunities: the opportunities are ripe. But I think what’s most important is that when an investor is looking to invest in Nigeria, you need to look at where governments’ priorities are, and then be able to do a needs analysis on that basis.

World Finance: Security is of course a challenge in Nigeria; what challenges does this pose for your clients, and what advice do you offer in this department?
Dolapo Kukoyi: There is obviously a security problem, but I would say however that it’s predominantly in the south-eastern part, or the north-eastern part, of Nigeria.

That said, for everyone who’s investing in Nigeria… if you’re doing portfolio investment for example, I would say there’s really no risk. But if you’re actually investing in an operating business in Nigeria, then I would say investors need to look at where they’re investing, look at what risks exist, and then look at ways of mitigating those risks.

There are some things that you need to think about, that are key. One is choosing the right partners. And two is choosing the right professional advice; you know, advisors to help you navigate through the issues.

World Finance: You actually head Detail’s power practice; what does your firm offer in this area, and how established is the power sector in Nigeria?
Dolapo Kukoyi: The power sector in Nigeria is growing; it’s growing very, very quickly. And that’s because we are trying to get somewhere in a very short time, because we need to get somewhere in a very short time.

We offer advice around power sector development. So whether it is an IPP startup, or first of all the power sector privatisations which we’ve been involved in since 2010, since it was restarted. So we’ve been involved in the PCM privatisation; we are also currently involved in the privatisation of what we call the Nigerian integrated power projects.

We also do a lot of gas supply and gas transposition and gas purchase agreements. We also deal with the financing side and financing. So while we are on the project development side, we are also on the financing side as well, throughout the whole value chain.

And we’ve become known, very well known, for our power sector experience, and our power sector knowledge. So much so that as a testimony to that, we recently got engaged on the CBN intervention fund, which is about NGN 213bn, which is supposed to be across the power sector value chain. There’s been debt accruing in the power sector value chain, which needs to basically be dealt with so that we can have a power sector that’s viable, and can have proper investment in there.

It’s very interesting times for us at the firm.

World Finance: Looking to the future now, and how do you see Nigeria’s power and infrastructure sectors developing?
Dolapo Kukoyi: For me it’s very bright; the first thing that the present administration has done is that they’ve actually done what everybody else has been afraid to do. Which is privatise generation and distribution, and in the process also privatised to some extent our transmission.

So right now there’s a lot that is going on. The generation companies, which have been privatised now, are trying to overhaul their assets to make them more productive. The distribution companies are also trying to overhaul their assets and refurbish their assets. Also looking at how more private sector players can come in to invest in gas supply and gas infrastructure.

I would say that a lot is going on, with all the moving parts going on. We are likely to see exponential growth in our power generation, in our distribution, in our transmission.

Intercorp: Multi-jurisdictional legislation pays off

Posted on by Ashton Wenborn

Challenged daily by having to deal with the difficult task of preserving wealth by helping both individuals and corporations legitimately minimise their tax liability, the tax management profession in Brazil is not always plain sailing. Very few firms are skilled enough to contend with the many business, social and political challenges contained within, and, for tax management consultants, navigating national tax infrastructure is far from a trivial task.

Intercorp Group has set a high marker for others in the industry to aspire to, and World Finance named it the best tax firm in Brazil as part of its annual Tax Awards. Intercorp has a strong heritage in tax consulting, and the scope of its expertise has evolved and developed alongside ever-changing client requirements by keeping to a tradition of outstanding client service and intelligence.

Founded on the premise that consultants should be responsible and accept the risk of their own advice, Intercorp’s typical clients are high-net-worth Brazilian individuals and families who have international business operations, and therefore, a global – rather than purely domestic – exposure to taxation legislation.

Keeping assets a priority
Intercorp has a unique way of operating in how it addresses the issues of taxation, accounting and the international transactions of its clients. Once the firm has worked with its clients to ascertain their precise needs, the firm then proceeds to facilitate and co-ordinate a fitting strategy for the clients’ interests.

191,703

HNWI in Brazil in 2013

+17%

HNWI growth in Brazil by 2018

It achieves this objective by assigning to each of its clients a qualified co-ordinator, who acts in an advisory and consulting role in developing a customised solution and asset preservation strategy. Each of these co-ordinators has access to an international network of professionals and specialists, informed by a deep understanding of tax systems across the globe. Intercorp can guarantee that each of its consultants will guide the client with integrity, and present them with the best possible solutions in a transparent and efficient manner. Fundamentally, Intercorp decodes extremely complex approaches, ignites debate and encourages considered action based on often unique circumstances.

Owing to years of experience in the industry, the firm has developed an exceptional understanding of the solutions available to families looking to structure their assets across multiple jurisdictions in a way that is tax efficient, and preserves wealth for future generations. The firm’s consultants, therefore, work tirelessly to clarify any questions clients might have, and provide the best solutions they possibly can. Made up of a team with decades of experience in designing and implementing complex structures and instruments, Intercorp’s clients are safe in the knowledge that their assets are protected as best they can be.

This confidence derives in part from the firm’s co-ordinators, but also from the knowledge that clients enjoy direct or indirect access to Intercorp’s unique global network of specialists and professionals. The industry in which Intercorp acts leaves no room for obfuscation or lack of clarity, and the company prides itself on its transparent procedures and practices.

To further the firm’s cause, the Intercorp team has no allegiances or biases when it comes to the investments themselves, which puts it in a valuable and constructive position to advise objectively on the most suitable solutions. With a wealth of experience to its name, the firm’s shared expertise means that clients can be comfortable any decisions made on their part are backed by years of industry expertise. The consultants will ensure they assess and properly protect invested assets, and effectively structure any business to ensure the risks fall directly and solely on the investment capital.

As a highly experienced consultant, I specialise in international tax, real estate planning, wealth preservation, fiduciary advice, implementation and management of international structures and projects. I begun my career as a trainee at the consulting firm Arthur Anderson, and later became a Senior Manager in the tax consulting area, working in many significant parts of the firm and in collaboration with several international Arthur Anderson offices on very large global projects.

Today, I have built a strong network of specialists across the globe and led a number of milestone projects in various industries, including oil and gas, telecommunications, real estate, international services, investment funds and asset management.

Brazil’s tax system explained
Intercorp Group offers global services and expert advice. It has direct access to a unique network of professionals around the world that dedicate time to develop customised solutions, aiming to meet tax planning needs and asset preservation strategies for its clients. The fact is that taxes are an extremely significant element in the costs of doing business. As Brazil’s own economy, and the economies of the world continue to globalise, the proper management of tax costs have naturally become a priority for the executive teams of large corporations and also for business owners.

Since its foundation and over the years, Intercorp Group has been working hard at an international level to develop tailored techniques that can be applied to its clients’ businesses, allowing it to offer the most efficient, effective, and pragmatic solutions to major international organisations’ taxation needs.

Historically, a wide range of factors have driven the complexity of the Brazilian tax system. From different layers of tax jurisdictions (in Brazil this includes federal, state and municipal), to intense legislative activity; the significant time it sometimes takes for a view on the interpretation of tax legislation to be officially expressed by the tax authorities; and the fact that the tax administration is frequently seen as taking an aggressive position towards taxpayers, with poor channels of communication between the tax authorities and the business community.

Much of Intercorp’s work is – like the taxation situation in Brazil and beyond – highly technical, and demands only the highest intellectual abilities, as well as an in-depth knowledge of not only tax legislation and infrastructures, but also of how businesses maximise their success at a practical level. The firm has taken steps to understand the balance between the investment structures used by clients to make their tax situation more efficient, and the investors’ main investment objectives. It is vital that the investment vehicles used provide certainty to investors that their needs will be met, and transparency is a key part of Intercorp’s business in gaining the trust of its clients.

Naturally, legislation can change, and a major part of Intercorp’s time and expertise is dedicated to monitoring legislative changes and ensuring, at all times, that clients receive a highly effective service based on the current state of tax legislation in the jurisdictions that concern them.

Tax planning requires a detailed knowledge of multi-jurisdictional legislation. Tax efficiency is, in practical terms, only possible when accompanied by a very specific knowledge of clients’ operations and of the regulations in the corresponding jurisdiction. Intercorp Group has a highly strategic position that covers most of the tax-related aspects of multiple jurisdictions.

As for the future, the key issue for Intercorp is to build client relations and continue to grow in stature in the industry. Underpinned by in-depth analysis and extensive expertise on the subject, the firm will continue to offer tax-planning services and build its renown in the region and beyond.

How minimum wages can hurt employment

Posted on by Ashton Wenborn

The age-old argument surrounding minimum wages has long divided the crowds. While the political left argues that raising it would improve quality of life across the spectrum vastly, the opposing argument from the right – that it can be damaging to employment figures – is equally as convincing. Of course it’s a notion that always gets more or less full support from the public – few would argue against workers being paid a higher rate.

But the bottom line is that there’s so much more to it than each minimum wage worker getting a bigger pay slip one month and therefore having a bigger disposable income to inject into the economy, and a better life as a result of that. Many view raising the minimum wage as a tactic often employed by politicians in the run-up to elections in an attempt to win over voters, claiming that it’s an artificial method of raising the price of labour that is often impossible to sustain, as it cuts demand for workers and increases unemployment as a consequence.

It’s a complex debate, and the impact on employment is notoriously difficult to identify, fundamentally because there are so many varying factors that affect a firm’s ability or desire to employ staff, many of which are numerically immeasurable. When firms are forced to pay workers more, it obviously increases their outgoings and means that cost-cutting measures must be employed elsewhere to somehow make the money back.

Lifting the pay floor can often end up having the most negative impact on those it’s intended to help

Balancing the figures
Often that will be seen in a price rise across products or services, but the majority of the time, it will result in job cuts – and the part-time, entry-level and less-skilled workers are almost always the first to go. This is why when the pay floor is lifted and the squeeze is felt in a firm’s ability to hire, it tends to impact younger workers the most.

High youth unemployment is troubling for a variety of reasons. Younger, less skilled members of the labour force will eventually become the most skilled members, and if the opportunity to develop those skills from early on is not available to them, the quality of labour in the future becomes a worrying prospect. Because so many of those less skilled roles are held by younger people, any economic boost it may provide will often be felt only on a somewhat limited scale. In terms of price rises, getting paid slightly more per hour hardly makes a difference if the general cost of living goes up.

Essentially, lifting the pay floor can often end up having the most negative impact on those it’s intended to help. By increasing the efficiency and quality of performance expected from them and boosting competitiveness within the labour market, it raises the hurdle any worker has to jump just to earn the minimum rate. So considering 60 percent of people living on the breadline in the US aren’t in work at all, all it would do is make finding a job harder for them.

There are endless arguments for and against, but much of the research on the subject comes from advanced economies where the working classes make up a much smaller proportion of the overall population. However, new research from the IMF, which draws on evidence from China – the largest emerging market in the world accounting for 25 percent of the global labour force – could prove a more relevant representation.

The IMF found that on average across all firms assessed, a small decline in employment was detected: a 10 percent increase in the minimum wage rate led to a decrease in employment by just over one percent. For Beijing, the results could be a cause for concern: consistent minimum wage hikes have formed a central characteristic of its government, in the attempt to reduce the income gap and increase domestic demand as it tries to move away from its export industries. Plus, as Chinese demand for labour is so high, provinces are competing with each other to show they’re the most worker-friendly and prevent employees from migrating to more generous regions.

highest minimum wage countries

If the minimum wage continues to increase at the rate of recent years, it could eventually have a wider impact on China’s GDP. Some manufacturing firms have already begun moving operations further inland to less developed areas of China where labour is cheaper, and this could even see companies move overseas to low-wage locations in Southeast Asia – Cambodia, Vietnam and Indonesia are popular locations for textiles firms in particular.

Pre-emptive relocation
In more advanced economies, the research and results vary. A report by the Economic Policy Institute in 2013 claimed that raising the federal minimum wage in the US from $7.25 to $10.10 would create an additional 85,000 jobs, and as recently as September 2014, Britain’s biggest trade union Unite urged the government to lift the pay floor by £1.50 an hour, arguing that it would boost the economy and lift millions out of poverty.

Yet when the pay floor was actually lifted in the US in July 2009 by 10.6 percent, just under 600,000 jobs for teenagers were axed within six months. And if the squeeze isn’t felt in actual employment figures or price rises, that’s not to say it’s not there. Often companies find a way to bypass slashing jobs completely by cutting back workers’ hours, so while actual employment figures do not suffer, the average worker’s pay would either remain the same or even end up decreasing.

Even if employment levels do not suffer, insisting that companies pay minimum wage workers a higher rate can have further negative knock-on effects. If lower paid workers suddenly get a 10 percent pay rise it could encourage internal problems among staff, with higher paid employees demanding an increase at the same rate, for example. “Raising the minimum wage would be detrimental to employment. Forcing firms to pay a higher hourly wage would lead to fewer job opportunities and fewer hours, as companies would find themselves less able to take on extra workers, hitting the young and unskilled the hardest”, said Camilla Goodwin, communications officer at the Institute of Economic Affairs, a UK-based free market think tank.

A nationally enforced pay floor or ceiling in general is a difficult concept to manage and enforce. Living wages can vary dramatically from cities to more rural areas: London’s is £9.15 per hour at present, while for the rest of the UK, its £7.85. To counter this, Goodwin suggests regionalising the rate: “Regionalising the minimum wage would prove far more effective at helping those on low incomes without having a damaging effect on job creation, taking into account local economic conditions and the employer’s ability to pay.”

While the move to raise the minimum wage does more often than not come from a good place, it’s a fundamentally damaging policy that tends to pinch the people it’s intended to help the most. A blanket rule is evidently not appropriate as the effect can vary drastically between countries and even regions.

However, the situation in China is simply proof of how political tactics can be cleverly disguised as left-wing economic reforms.

IMF: Senegal emerging economy status ‘achievable’

Posted on by Ashton Wenborn

The West African nation shows promise for faster economic growth, particularly with regards to its highly educated population, level of political stability and advantageous geographic location. Although conditions are favourable, growth has been slow over the past decade due to a number of varying factors, including adverse business conditions and poorly managed public spending. The IMF’s Plan Sénégal Emergent (PSE) was unveiled in 2014 in order to provide a much-needed impetus to the economy and improve the areas that have held back the country’s development thus far. Implementing structural reform, increasing exports and encouraging foreign investment are key measures cited by the IMF for achieving the goals laid out in the PSE. The IMF’s comprehensive strategy will run until 2023, during which time it aims to guide the developing nation to achieve middle-income status. 

Experience of other countries across the world suggests that Senegal’s ambition to rise to an emerging economy status within the next two decades is achievable

The IMF’s Senior Desk Economist for Senegal, Alexei Kireyev, spoke to World Finance about how the Senegalese economy is fairing and its prospects of becoming an emerging economy. 

What are the most important areas of reform for Senegal at this stage of its economic development?
The most important areas of reforms are specified in the authorities’ recent development strategy, the Plan Sénégal Emergent (PSE). The plan aims for Senegal to become an emerging market economy by 2035 by making it a hub for West Africa. The PSE is articulated around three pillars: (1) higher and sustainable growth in the range of seven to eight percent, based on foreign direct investment (FDI), export-driven structural transformation and widening the circle of opportunity to provide space for SMEs; (2) human development and social protection; and (3) improved governance, peace, and security. The PSE calls for continued fiscal consolidation, constrained public consumption, and increased public saving to generate fiscal space for higher public investment in human capital and public infrastructure. It also envisages structural reforms to attract FDI and boost private investment.

To reach these objectives, 2015 must mark a turning point from the mediocre growth of the past to the higher, sustainable, and inclusive growth envisaged by the PSE. The PSE presents a unique opportunity to disentangle from lacklustre policies of the past and to unlock a broad-based and inclusive growth that will make Senegal an emerging economy. Economic policies and structural reforms included in the PSE should allow Senegal to achieve and sustain high and inclusive growth. Economic and social emergence requires the maintenance of a sound economic framework and the acceleration of reforms to enhance productivity and improve the business environment whilst improving public service delivery and raising the quality of public spending.

How can Senegal increase its export revenue?
The PSE identifies the path to success. Senegal can increase export revenue by crowding in private investment, including foreign direct investment, and improving the business climate to provide space for SMEs. In pursuing this goal, Senegal could learn from African middle-income countries that have succeeded in this transformation (Cape Verde, Mauritius and Seychelles), and foster joint action in West African Economic and Monetary Union (WAEMU) to achieve emerging market status. Moreover, the key differences between those countries that reached the middle-income status and those that just built debt and still have little to show for it is in the openness to FDI, facilitation of the entrance and growth of SMEs, and orientation to globally competitive production, particularly exports. Senegal’s many strengths include an open society and democratic traditions, political stability, a well educated labor force, a solid civil service and a good geographical location to export to the two largest global markets, the EU and the US. With the right policies, Senegal should be able to attract investors seeking platforms for global production, including those who may delocalise from China as costs of production rise.

Why has Senegal’s economic growth in the past decade been slower than other countries in sub-Saharan Africa?
Senegal’s growth was less favourable than that of fast-growing sub-Saharan Africa (SSA) countries, although it has been better than in a number of WAEMU countries. Also, Senegal’s growth was strong enough to ensure a modest increase in per capita income, but it has fallen short of the authorities’ target under successive poverty reduction strategies and has been much lower than that of fast growing SSA economies such as Cape Verde, Ethiopia, Rwanda, Tanzania, and Uganda.

The PSE provides a good diagnostic for this unfavourable outcome. It points out that the main contributors to below par growth have been a poor business climate and the low quality of public spending. The business climate handicaps new entrants, whether SMEs or FDI, through the lack of clarity on the rules of the game and too much emphasis on ex-ante authorisations instead of ex-post compliance. This has limited the rate of diversification of the economy and worked against increasing the value added per worker through insufficient integration into global value chains. Consequently, growth has been too dependent on public investment, which in turn has proved to be of low quality with a significant share more akin to public consumption than capital formation. Remittances have been significant but in the absence of an attractive regulatory framework have fueled private consumption rather than an expansion of SMEs. At the same time, the majority of population, in particular in rural areas have not been provided the incentives or the means for more active personal contributions to development or to improve their productivity.

A growth accounting exercise confirms this analysis of the PSE and suggests that growth is mostly explained by factor accumulation, rather than by increased productivity. Total factor productivity (TFP) actually declined before the mid-1990s, and again since 2006. It grew only modestly during the decade of robust growth (1995–2005). A number of factors could explain this poor productivity performance. First, the TFP decline in the past five years coincides with the deterioration of Senegal’s doing business and governance indicators, which could have affected the productivity of both public and private investment. Second, large and increasing remittances might have been invested in sectors less likely to spur growth (such as housing and informal trade). In addition, delays in critical reforms, such as the reform of the energy sector, and slow reforms of the public financial management and the business environment have also had a negative impact on growth. Finally, a series of exogenous shocks starting in 2006 (i.e., food and fuel global prices, global financial and economic crisis, the electricity sector crisis, and drought in the Sahel, and more recently regional security tensions and the Ebola epidemics), have led to growth deceleration.

The good news is that the authorities have begun to go from the diagnostic in the PSE to action to address these bottlenecks by measures to improve the quality of spending and to create a better business climate. These reforms need to be broadened, deepened and accelerated to reach the seven to eight percent growth achieved by fast growing economies in Africa and elsewhere and targeted under the PSE.

What risks exist for Senegal in opening up its economy more so to foreign investment and the global market?
The goal of a seven to eight percent annual growth is feasible for Senegal in the medium term but would require a broadening, deepening and speeding up of structural reforms as well as constraining public consumption to create the fiscal space for implementation of PSE-related projects. In parallel the quality of public spending will need to be raised, particularly for public investment. However, the danger for Senegal is that the required reforms are neglected whilst emphasis is on increased spending. The IMF encourages the authorities to broaden and speed efforts to improve Doing Business rankings and to identify regulatory changes required to attract investors who may currently hesitate to invest in Senegal. Accelerating electricity generation projects may require reconsideration of accountability and project responsibility. Reform implementation could be facilitated by peer learning arrangements with successful comparator countries which the fund could facilitate. None of the countries that have gone down this path have failed to unlock high growth but many countries have faltered by failing to embrace openness and have ended up with debt instead of growth.

What lessons can Senegal learn from other developing economies?
Experience of other countries across the world suggests that Senegal’s ambition to rise to an emerging economy status within the next two decades is achievable. Historically, countries that have embarked on important investment programmes have experienced mixed fortunes. Those that have embarked on ambitious structural reform to unlock foreign direct investment and create space for SMEs have become emerging economies. Those that ramped up public spending without sufficient accompanying reforms have just built up debt with little improvement in per capita income. Unleashing Senegal’s growth potential would require strong action on supply constraints, such as the regulatory framework and cultivation of a business climate friendly to FDI and small and medium enterprises (SMEs), together with investment in human capital and infrastructure; reduction in inequality by expanding private employment opportunities in the formal sector and broader access to education and health services; and planning for adverse shocks to ensure adequate fiscal space to sustain the PSE investment plan. Senegal can work with countries that have moved on the path to emerging economy status to adapt to its specificities the institutional and policy reforms that enabled these countries to move from low-income status. Again, it is encouraging that the authorities have begun to embark on this path.

How to navigate transfer pricing in Brazil; Deloitte advises

Posted on by Ashton Wenborn

The economic view of Brazil has always been two fold for investors: on the one hand, there are good opportunities for sustainable growth; on the other, there is suspicion and concern about the direction in which Brazil is marching, economically and politically.

The latest downturn decreased the country’s growth rates while bumping up inflation – just two of the uncertainties Brazilian investors face. With one of the world’s highest tax burdens, a complex tax structure, a highly bureaucratic environment, and continuous government spending, Brazil is stumbling through a period of high institutional risk and shrinking foreign direct investments.

The most obvious challenge is the fact that Brazil is not a member of the OECD, which often causes misunderstandings and unexpected tax and transfer pricing issues

Brazil only spends one-third of the average amount spent by other countries in infrastructure, even though the need for advanced investments in infrastructure is high. Generally, the country seems to focus more on keeping private consumption high, instead of having a strategic view of market development with a perspective of sustainable growth.

The most urgent problem Brazil must tackle is the steep decline in competitiveness; to do this, it will need private-sector involvement to improve its infrastructure. In spite of these issues, Brazil still offers one of the world’s best investment opportunities.

The country’s GDP growth is no longer thriving as it was five years ago (see Fig. 1), but the economy overall remains solid. It has a clean energetic matrix and a large domestic market. As the world’s seventh largest economy, the country also plays a leading role in South American economy and politics, standing out with increased attractiveness on the international scene. Brazil’s major competitive advantage includes social and economic growth, combined with stability and environmental sustainability; macroeconomic structure; a strong domestic market; richness of natural and cultural assets; open market; and democratic stability.

These positive factors helped Brazil benefit from sizable foreign investments over the last two decades. In 2012 the South Korean automaker Hyundai invested $273m, and established its first factory in South America in Piracicaba, São Paulo, Brazil. The global President of Hyundai, Chong Mong Koo, stressed the compact HB20 was developed exclusively for the Brazilian market. He said the new subsidiary will “contribute to the development of the Brazilian automotive industry and the local economy.” German automaker BMW chose the state of Santa Catarina as the site for its first factory in Brazil. BMW will invest about £249m in the initial installation, which started operations in 2014.

Driving Brazil’s economy forward
The automotive sector represents about 20 percent of GDP of the Brazilian economy, and the German and South Korean automakers’ investment will attract new companies in the automotive supplier industry. Those companies are often subsidiaries of international conglomerates, and engage in purchase and sale transactions for goods, services, and rights. Those related-party transactions are subject to Brazilian rules of transfer pricing.

These rules can substantially increase companies’ tax burden if not previously considered when making an investment decision, that is, before setting up business in Brazil. The additional costs of higher taxes or double taxation can substantially reduce the expected profit from investment in Brazil. When considering the Brazilian tax and transfer pricing regimes, the most obvious challenge is the fact that Brazil is not a member of the OECD, which often causes misunderstandings and unexpected tax and transfer pricing issues.

The transfer pricing methods for testing the pricing of intercompany transactions established by Brazilian law vary according to the nature of the transaction – for example, import or export operations – rather than according to the taxpayer’s functional profile. Brazil’s transfer pricing methods establish maximum import prices and minimum export prices.

To avoid transfer pricing adjustments, the import price charged should be lower than the parameter price; conversely, export prices should be higher. Brazilian legislation on transfer pricing has always given rise to discussion and controversy. The law has recently been changed to avoid misinterpretations of the rules and possible uncertainties in the future, reducing controversial topics.

However, the biggest and still remaining difference between the Brazilian approach to transfer pricing and the OECD approach is the consideration of single product prices, whereby offsetting is not possible. In practical terms, this means that as long as intercompany pricing on a single product line meets the transfer pricing requirements, the overall net profit at year-end does no longer play a role from a Brazilian transfer pricing perspective.

Unlike the OECD approach, under Brazilian law market conditions are predetermined and set by the authorities. That is, fixed margins are to be used for transactions, leaving changing market conditions and multiple-year analyses unconsidered. The economic circumstances of an individual company are not taken into consideration to determine whether transfer prices are at arm’s length.

The arm’s length rule
The basis of the OECD transfer pricing guidelines is the arm’s length principle, taking into account the individual analysis of each company in terms of economic circumstances and market conditions. Companies freely stipulate the structure of their business according to such market conditions. The OECD transfer pricing guidelines seek to achieve a transaction value established between related parties as practiced between unrelated parties under the same, or similar conditions.

While Brazil imposes fixed margins, the OECD transfer pricing guidelines consider variables, such as business risks borne, functions performed, market conditions of the area of operations, and especially profit margins of comparable third-party companies.

Intercompany pricing policies adopted by economic groups are often inconsistent with the Brazilian legislation. Pricing policies adopted globally are generally based on the OECDs transfer pricing approach and thus not accepted in Brazil, which at times can give rise to high transfer pricing adjustments.

For this reason, many multinational enterprises have set up different pricing policies for Brazilian entities, than those used for the rest of the group. When making the decision for or against business in Brazil, it is therefore important to adjust and align intercompany pricing policies according to the Brazilian requirements.

The alignment of two divergent systems is a challenging task for multinational groups. Sometimes companies accept double taxation, because the creation of an aligned policy would require a high degree of sophistication and professional involvement. For some companies, it might not be worth investing in this legal certainty, if the complexity of an aligned transfer pricing system would generate higher costs than the expected tax exposure.

The current transfer pricing rules have great potential to cause double taxation situations, which in turn would discourage investment in Brazil. One would expect the tax authorities to increasingly adapt to the economic approaches espoused in the OECD transfer pricing guidelines; however, when this may happen remains uncertain. Adoption of the OECD transfer pricing guidelines would facilitate business decisions, and the rates of foreign direct investment could surpass the expected. Moreover, this change would facilitate understanding of the rules and controls for both Brazilian companies operating abroad, and for international companies that invest in Brazil.

Ways to increase investment
High tariffs on imports and the complexity of customs procedures represent another major obstacle to foreign investment. From a Brazilian perspective, a reduction in legal uncertainties and protectionist behaviour may be less effective in the short term, but would certainly increase investment and sustainable growth in the long-term. Encouraging foreign investment would render business in Brazil more competitive, especially if commodity prices are unlikely to bail out Brazil’s economy with another growth spurt.

Mergers and acquisitions – as one possible form of foreign investment in Brazil – raise a number of issues in relation to tax and regulatory compliance, assessing and influencing the choice of business structure. The determination of the allocation price of tangible and intangible assets of target companies has a key role in the interaction between transfer pricing and purchase accounting.

Brazil's investment-to-GDP ratio

Determining an appropriate market price for asset transfers during restructuring operations requires consideration of transfer pricing issues in the countries involved. This includes the choice of financial structure, as well as finding a tax-effective business structure. When pricing assets – especially intangible assets – from a transfer pricing perspective, it is usually difficult to identify appropriate market prices.

Therefore, a hypothetical arm’s length range of prices – a maximum price that the buyer would be willing to pay and a minimum price the seller would be willing to sell for – may be considered. These can usually be determined using discounted cash flows of expected profits or losses.

The simple relationship between risk and opportunities for investments in the Brazilian economy is easy to confirm. Great potential opposes high levels of bureaucracy and complex tax structures, which in turn increase the risk of failure.

Brazilian transfer pricing regulations are no exception, but stress the importance of local tax and business planning when deciding whether to invest in Brazil. In the years to come, tax practitioners expect further changes to Brazilian transfer pricing legislation and harmonisation with the OECD approach applied in most other countries.

Meanwhile, despite the differences between the Brazilian transfer pricing rules and the OECD guidelines, it is possible for Brazilian taxpayers to mitigate double-taxation issues through proactive transfer pricing planning. Many multinational groups operating in Brazil are succeeding in mitigating transfer pricing adjustments by marrying – to the extent possible – the Brazilian transfer pricing rules to the international transfer pricing standards.

For more information email carlosayub@deloitte.com

Greece wins bailout extension, but faces tough road ahead

Posted on by Ashton Wenborn

The much-anticipated negotiations between the Greek state and the Troika concluded on February 20, as the latter agreed to extend the country’s bailout agreement. Despite this small respite granted to President Tsipras and Finance Minister Varoufakis, the complex steps that must be overcome over the next six months indicate a treacherous road ahead for the struggling economy.

Failing to reach each of these goalposts could result in a default of Greece’s bailout extension and a possible withdrawal from the Eurozone

The first and most pressing is the short-term bailout extension, which is currently under discussion and pending approval from the Eurogroup. As agreed, Greece submitted its proposed list of structural reforms on February 24 to Eurozone leaders in order to secure the bailout extension. The six-page document submitted to Brussels includes plans to combat tax evasion, which is rife across the country, along with much-needed improvements to the mechanisms for tax collection. Also promised is a concentrated effort to combat petroleum and tobacco smuggling, together with other pledges made by Tsipras during his pre-election campaign; raising a level of uncertainty regarding the document’s approval.

The next phase and obstacle to overcome involves agreeing upon the terms and conditions for completing the bailout agreement, as well as the resolution of pending items. The outcome of negotiations must be approved by the Greek parliament sometime in March or April, which has sparked fears of discord within the governing Syriza party and a potential governmental collapse.

In the event of a smooth ratification of the agreement, a new programme will be negotiated, which includes the adoption of stringent fiscal measures aimed at debt relief. This once again has to win the support of the Greek parliament, a difficult feat given the likely antithesis of such reforms to the populist promises made by Tsipras.

Failing to reach each of these goalposts could result in a default of Greece’s bailout extension and a possible withdrawal from the Eurozone. Such an outcome would be disastrous for the Greek economy and the country’s citizenry, who have lived with years of poverty-inducing austerity measures. Despite the difficult road ahead, many experts believe that a Greek exit will not transpire. This is further evidenced by the general consensus as shown by a survey published by Eleftheros Typos newspaper in January, in which 74.2 percent of those polled, agreed that Greece should stay in the Eurozone at all costs.

Lies and prejudice: The politics of austerity | Video

Posted on by Ashton Wenborn

Governments in both Europe and the US have succeeded in casting previous government spending as reckless wastefulness that has destroyed economies. In contrast, they have advanced a policy of draconian budget cuts – austerity – to solve the financial crisis.

World Finance: Mark your book was published in 2013, which basically says that austerity doesn’t work. However, fast forward two years, and it seems that he Uk measures, for example, have paid off, with our economy growing. Do you still stand by your findings?
Mark Blyth: The United Kingdom stopped doing austerity in late 2011, before they even got the warning from the IMF to tell them to do so.

If you look at central government consumption, it contracted in 2009 and 2010, and then balanced out in 2011 and accelerated at the end. They’ve been hacking away at the welfare budget, with one third of the cuts falling on disabled people, and that’s made for good press, but they’ve got a budget deficit of around four percent.

The eurozone has cut, and the ones that have cut the most have lost 30 percent of GDP and seen their debts balloon

So if the United Kingdom has been doing austerity, whilst doing quantitative easing, whilst doing help-to-buy, whilst doing funding for lending, it’s a funny definition of austerity.

World Finance: You book says following the financial crisis we were told that we had lived beyond our means, and now need to tighten our belts. This view conveniently forgets where all the debt came from, bailing out the broken banking system. But that’s a bit easy isn’t it, why doesn’t anyone ever acknowledge the huge borrowing of the former government. What about Gordon Brown selling all of our gold, what about that?
Mark Blyth: Well what about Gordon Brown selling gold when it was at an all time low? It seemed to be a rather pointless asset at the time and I believe that was 13 years ago and has very little bearing on the current moment.

We have to remember the United Kingdom had four banks that were over 400 percent of GDP, and two of them went insolvent. If it wasn’t for the Treasury bailing out those lenders, because you can’t have over-borrowing without over-lending, you wouldn’t have had this mess.

Simply go to stats.oecd.org or whatever database you want and plug in ‘oecd debt.’ Check when it rises. It’s kind of flat going in to 2007, and then it rockets afterwards as we start to cut, and the more you cut the smaller the economy gets and the more debt you have, which kind of explains Greece.

So this is ultimately still a story about the banks, particularly in Europe, and the lazy thinking is to go “well, isn’t Gordon Brown overspending?”

World Finance: You’ve painted yourself out of the picture, but these strike me as socialist views, so your book, is that just a reflection of your political beliefs?
Mark Blyth: What’s a socialist view on the economy? If it’s a socialist view to say that when the private sector is contracting and de-levering its balance sheet, and the public sector simultaneously does the same thing, the only thing that can happen is a recession, then sign me up as a socialist. But then you’d have to sign up half the phds of the University of Chicago.

World Finance: You argue that historically austerity has been done over and over without the best results, yet governments still turn to it. Is it the lesser of evils, or is there a better solution out there?
Mark Blyth: Well yes. We’ve run a giant natural experiment across the world over the past several years. The sequester apart, which was $7-8bn a year over ten years on a $17tn economy, which they eventually stopped, the United States at a federal level didn’t cut. It’s growth rate is currently five times that of the eurozone.

The eurozone has cut, and the ones that have cut the most have lost 30 percent of GDP and seen their debts balloon. I’d say that’s pretty much conclusive evidence, yet again, that this doesn’t stick. So why do we keep doing it? Because it’s easier than telling democratically elected governments that they have to bail out the banking sector yet again, which is what they’ve done already and what they’re continuing to do.

World Finance: Does austerity work better in certain countries, or would you say it’s flawed the world over?
Mark Blyth: What is often seen as austerity is when governments cut and then they have growth afterwards. The classical cases of this happening are in small open economies such as Sweden, Canada, and Denmark in the 1980s. The only reason that happened is because the rest of the world took their exports, and they did a massive devaluation of their currency at the same time, an option which is not open to the eurozone.

Once you look at the facts of this case, there is nothing left standing for it. It’s simple prejudice.

World Finance: So your book traces the rise and fall of the idea of expansionary austerity. So are we headed for another crash?
Mark Blyth: Well one doesn’t necessarily lead to the other. The expansionary austerity is a very simple idea called the confidence fairy, which goes like this:

You have a precarious job at the moment. Your wife has one too, and the economy is tanking. Nonetheless, you lie awake at night worrying about government debt, because of course it’s such a terrible thing, and you’re delighted to hear that the government is slashing the welfare budget and contracting the economy now, even though it’s about to cost you your job, because you will pay less tax ten years from now. Given this, you’re so buoyed by the confidence effects, you run out to Ikea and buy a couch.

That’s literally the horse manure that was being sold by the European Commission in 2009 as an economic theory. Now, if you continue to behave like this, you’ll find you’re in a crisis. Guess where Europe is just now. In a crisis.

The younger the better: millennials take over business

Posted on by Ashton Wenborn

Launching a start-up before hitting the tender age of 25 seems to have become common practice. And indeed one could reasonably argue that the traditional model, in which age equals success, has been turned on its head – thrown out the window along with the quill, the typewriter and, of course, the rule book.

Now entrepreneurial success requires first and foremost a comprehensive knowledge of the latest tech, and it’s generation Y – as the only workplace cohort to have grown up in the digital age – who has that. From exploiting social media effectively to being able to code, confidence with technology is an acquired talent, and it’s one that seems to be giving millennials an entrepreneurial advantage from the word go. That’s not least driven by the fact that tech is by far providing the largest number of opportunities for those looking to launch the next big thing. As a result the classic ‘older the wiser’ gem, once taken as an incontestable truth, seems to have morphed into a new deviant – the younger the better.

Those advantages, combined with a cultural shift, seem to be giving millennials a decidedly more entrepreneurial streak than past generations; a recent study by Bentley University (The Millennial Mind Goes to Work), found that 66 percent of millennials asked wanted to start their own business. In 2012, over 500,000 people launched start-ups in the US alone, according to statistics from Harvard Business School – and of those, companies with an average age of between 26 and 34 bagged the highest level of funding. Entrepreneurialism seems to be on the rise generally; a GEM Global report found that in 2011 there were 400 million ‘early-stage entrepreneurs’ across the world, up 22 percent from the previous year in mature economies (and markedly more in the US and Australia) – and 18 to 25s accounted for a substantial 41 percent of them.

66%

of millennials want to start their own business

One need only look at the list of digital successes to see the trend – Mark Zuckerberg was a billionaire at the age of 23. David Karp, Kevin Systrom and Daniel Ek were all in their 20s when they founded Tumblr, Instagram and Spotify respectively. A quick glance at the Forbes’ 30 Under 30 2015 list shows the millennial trend continuing, with everything from beauty product lines to medical companies being created by those barely out of the pushchair. Millennials seem to be taking over, and they could be threatening to push out their older peers entirely.

Cheaper than ever
It is clear that there is an increased desire for entrepreneurialism among generation Y – what’s interesting to look at is why. One of the biggest factors seems to be the increased ease and affordability of setting up a business, and that’s largely down to advancements in technology. Thus one of the key advantages that older people might have had in past times – savings – is no longer as relevant as before. That’s true even of businesses that aren’t directly related to the digital world; social media allows start-ups to promote themselves for next to nothing, for example.

In terms of digital companies themselves, costs have dramatically declined for a number of reasons. First off, millennials often have the skills that before would have necessitated large-scale, expensive teams. And if they don’t, it doesn’t take too long to pick them up, according to 26-year-old American entrepreneur Mattan Griffel, co-founder of Y-Combinator-backed start-up One Month. A magnate on the Forbes’ 30 Under 30 list, Griffel speaks from experience – he taught himself how to create apps and websites and used that knowledge to form the basis of his current business, which teaches other students how to do the same. The consequences of that increased ease is clear: “Companies used to require a development team of six to 10 people, because the languages were so much more complicated”, he says. “Nowadays you can build a start-up with one person and they don’t even have to be that good a developer.”

The advent of new, easier coding languages has helped to drive that. Among them is Ruby on Rails, an open-source web framework that’s made it simpler and faster than ever before for budding digital geniuses to develop websites and applications. It enabled Twitter to come to fruition in the matter of months, Griffel notes – compared to what would have once been a matter of years. He adds that 15 years ago, digital businesses needed their own physical servers – costing tens of thousands and requiring trained IT staff; now they can be run on an Amazon platform. It’s no wonder millennials are getting more entrepreneurial than their parents.

Foursquare’s Dennis Crowley. Mattan Griffel, co-founder of One Month, cites Crowley as an inspiration
Foursquare’s Dennis Crowley. Mattan Griffel, co-founder of One Month, cites Crowley as an inspiration

And these advancements have certainly driven change in the entrepreneurial arena since the pioneers of the early dotcom days. Steve Jobs and Bill Gates were arguably predecessors to the millennial wave of eager business tycoons – both achieved tech success in their early twenties. But they had to fight far tougher battles according to Fred Tuffile, Management Director of Entrepreneurial Studies at Bentley University. “You take Jobs. He couldn’t write code, he had to have somebody who could do that”, he says. “The whole notion of what it took to get something like that done… was astronomical compared to what it is today.” He adds that what once required several million dollars can now be done for $5,000.

Complementing those falling costs is the fact it’s become substantially less of a challenge to get funding, according to Griffel. The statistics speak for themselves; venture capital investors backed 1,500 start-ups in 2012, while angel investors funded more than 50,000, David Rose, Gust CEO, told Forbes. Added to that is the rise of crowdfunding platforms such as Kickstarter, which offer entrepreneurs the opportunity to source funding from members of the public without having to rely on a venture capital or angel investor giving them the nod. These platforms are having a notable impact, accounting for $1.4bn of the total $2.7bn raised for start-ups in the US in 2012, according to Harvard Business School. Once again, entrepreneurialism seems to be getting cheaper, if not easier.

Millennials seem to be taking over, and they could be threatening to push out their older peers entirely

The world’s your oyster
Aside from the cost and ease factor, there’s the very significant element of opportunity. The digital age has created more occasions for entrepreneurial activity than ever before, gratifying the appetites of the most ambitious wannabe magnates. That’s partly driven by the rapid pace of the tech world; its constant state of change means innovation is a necessity, and start-ups are among the best ways of driving that. Tuffile agrees: “I think certainly 10 years from now, something like a smartphone won’t exist, computers won’t even exist as we know them today, that world is all going to change”, he says – meaning young, budding entrepreneurs looking to create new things to replace the old are living at the right time.

Moreover, because digital phenomena now tend to be embraced so quickly – a lot more quickly than, say, the laptop, according to Tuffile – such businesses can grow rapidly. That growth and success is certainly being made apparent, with start-up valuations reaching a record high in 2013, according to a New York Times report. That evident success seems to be inspiring millennials to innovate, cultivating a certain optimism and ambition that extends beyond the confines of the more traditional, nine to five job-for-life route.

Millennial idols
That optimistic spirit marks part of an intriguing culture shift, and it’s perhaps being first and foremost driven by role models; that is, by the prevalence of digital success stories barely out of puberty and hitting the billionaire jackpot.

As an entrepreneur, Griffel is well aware of, and grateful to, their influence. He says everyone from Foursquare founder Dennis Crowley to Mark Zuckerberg has helped spur on his success, and he believes it’s having an impact on the generation as a whole. “You have the Twitter guys, you have all these companies, Snapchat and so on, and I think a lot of people, maybe misguidedly, think – I can do that.”

That can-do attitude is something far more common to millennials than it was to previous generations, according to Tuffile, and it’s an essential quality for any budding business creator. Krassi Popov, founder of US mobile charging start-up Veloxity, believes Generation Y also has a level of confidence, instilled through upbringing, that their older peers might not have had. “This is especially true in the United States, where young people think they are special because they are told that they are”, she told Slideshare. “People who think they are special don’t want to sit in front of a computer from nine to five doing cubicle work.” That combination of having the confidence to take risks, a sense of being “special” and a can-do attitude, seems – along with the tech knowledge imparted from a young age – to be driving this entrepreneurialism. It’s also likely to give millennials an advantage in succeeding, inspiring them to follow through with their ideas and pursue their passions – something in itself more common among generation Y than in previous cohorts, according to Tuffile.

David Karp, founder of the micro-blogging site Tumblr, stands in Times Square, New York City
David Karp, founder of the micro-blogging site Tumblr, stands in Times Square, New York City

Cultural rift
That marks an important cultural shift that’s arguably been compounded by, and perhaps in part fuelled by, the financial crisis, when long-held trust in companies started to falter with the collapse of companies previously considered stable. “Our parents had told us our entire lives, you want to get a job as an accountant or a doctor, and then we realise there’s not necessarily that certainty out there”, says Griffel, who adds that the changing tides made becoming a young entrepreneur more culturally acceptable. The tough job market the crisis sparked seemed to fuel entrepreneurialism as a solution, with such activity peaking in 2010 in the US – the same year that unemployment rates were at their highest. Essentially, the factors that once drew young people to big businesses – namely stability and security, the gods of past generations – were damaged, and entrepreneurs’ desire to start something new and separate from what was already out there began to grow.

When that situation is considered – along with the shift in cultural attitude, a background of inspiring young entrepreneurial idols, increased affordability of starting a business and more opportunities than ever before – it seems only logical that entrepreneurialism is growing among generation Y. Tuffile is cautious of ruling out older peers completely and he has a point; experience certainly still has its place and a successful team requires balance. But he’s aware there’s been an undeniable generational shift. “I think [the average age of an entrepreneur] is a lot younger now… in the old days it was mostly much older guys.”

And indeed it seems only natural that as the digital sphere takes on an ever increasing prominence in the world of business, so too do the millennials; the very people who grew up surrounded by that technology, and the very people who are helping to create, shape and redefine it, building the future of a forever changing world, even as we speak.

Seeing is believing: SeaWorld’s struggle with bad publicity

Posted on by Ashton Wenborn

“Inaccurate reports have recently generated questions about SeaWorld and the animals in our care,” begins an open letter from SeaWorld. “The truth is in our parks and people, and it’s time to set the record straight. The men and women of SeaWorld are true animal advocates.”

The release of 2012 documentary Blackfish sent seismic reverberations first through the (albeit relatively contained) world of animal rights activists, until it was debuted on CNN in 2013 and subsequently thrust into the mainstream. The film has now been viewed by more than 20 million people worldwide and has fed the public’s growing fascination in recent years with the ‘animals in captivity’ debate. It follows the violent behaviour of orcas, commonly known as killer whales, in captivity, focusing on the deaths of three trainers who had been working with the animals.

Since the film’s release, SeaWorld’s shares have tumbled by as much as 33 percent (see Fig 1), profits have plunged 28 percent, a Consumerist poll revealed it to be the third-most-hated company in the US, and anti-SeaWorld petitions have sprung up in their hundreds. Then, in a dramatic turn of events, CEO Jim Atchison resigned in December, confirming what so many were thinking: SeaWorld is in trouble.

18m

Number of shares stockholder Delaware has sold since Blackfish’s release

$8.4bn

Dolphin and marine animal parks industry in US

$2bn

SeaWorld’s current debt

350

Job cuts announced at SeaWorld since 2010

4.7%

Decrease in attendance since Blackfish’s release

28%

Profits drop in 2014

33%

Stock price drop since Blackfish’s release

Where there’s smoke
The biggest issue faced by the theme park operator is undoubtedly from a stakeholder perspective. STA Travel, the world’s largest travel operator for young people and students, chose to stop working with SeaWorld in May 2014. The move was part of a vast withdrawal from unethical animal trips, and set the wheels of an industrywide trend in motion.

In July 2014, it was announced that Southwest Airlines’ 25-year marketing partnership with the amusement park was also being terminated following alleged pressure from animal rights activists, though SeaWorld officials were quick to maintain that the decision was mutual. Further negative publicity brought about by the documentary came in the form of proposed legislation in California, known as the Orca Welfare and Safety Act, which calls for a ban on the holding of orcas in captivity.

Take a quick glance at SeaWorld’s official Twitter page, and you’ll see that more or less every other post is a response in some way to negative publicity brought about by Blackfish. Add to that the admissions – from which SeaWorld collects 60 percent of all revenue – having dwindled by 4.7 percent in the wake of the negativity and outrage surrounding the company, and it becomes increasingly clear just how powerful a voice one filmmaker can actually have.

The only party unable to see that, it would seem, is SeaWorld itself, which points to increased competition, a later summer holiday for many US schools and negative publicity solely originating from the proposed legislation in California, all the while vehemently denying that there could be any truth to the claims made in Blackfish.

Despite this, it was announced in mid-2014 that the park operators planned to upgrade its whale tanks in three locations, in what animal rights activist group PETA described as a “drop-in-the-bucket move”, along with various other moves that looked distinctly like crisis management.

But through all of this, one party is actually increasing its stake in SeaWorld, and it’s an unlikely one. While most investors are swiftly abandoning the fallen darling of zoological-themed entertainment parks, PETA is wading in. It claims that an increased stake would give it permission to attend SeaWorld’s annual general meeting, submit formal questions and propose future strategies: keeping its enemies close, some would say.

The human approach
In terms of dealing with a public relations crisis, James Brooke, Managing Director of Rooster PR, insists “it’s not rocket science”. He told World Finance: “People talk about it being an art form, and yes, there are nuances to it, but ultimately the overriding principles are the same. Be it an airliner crash, oil leak, tsunami, whatever it might be: you respond quickly, you have a dialogue, you have senior spokespeople on site as quickly as possible, and you gauge the use of social media correctly.”

Brooke pointed to the 1989 Kegworth air disaster as an example, which, against all odds, vastly improved public perceptions of flight operator British Midland. As soon as the incident occurred, the crisis management team was assembled and CEO at the time Michael Bishop was on his way to the crash site, briefing the media with what he knew and expressing his sincere condolences to all affected. By responding immediately and with a friendly, sympathetic and fundamentally human approach, the crash ended up doing little to damage the reputation of the airline, and sales eventually ended up rising in the aftermath.

On the other end of the spectrum is a social media campaign from DHL, following Jules Bianchi’s horrific Formula 1 crash in October 2014. An update posted on DHL’s Facebook account read: “Ghastly accident in Japan. Jules Bianchi is fighting for his life. By clicking ‘like’ on this occasion, you’ll be sending Jules your best wishes for a speedy recovery #ForzaJules.” Unsurprisingly, many of the page’s 600,000 or so followers saw straight through the poorly disguised marketing campaign, and news of it quickly spread. Such is the power of social media.

While it can be an incredibly valuable medium for communicating a positive brand message and identifying with customers, it also makes it extremely difficult to contain bad press. Instead, it acts as an enabler, allowing the negativity to spread like a disease. Torrents of abuse were directed at the delivery giant in the wake of the stunt, calling it “truly inhumane”, “cheap, pathetic and tasteless” and “ghastly”.

“These issues happen because the focus on the commercial side of the business overrides any PR and communications. Those people should be at the most senior level within businesses,” said Brooke at the time. “We’re best placed and trained to inform decision-makers about how to respond in a crisis. And while we’re gradually making our way into the boardroom, we’re not quite there yet.” Fundamentally, the issue is a lack of communication between marketing and PR departments.

It’s simply not possible to talk about exemplary spin doctors without mentioning the ultimate human face of a corporate behemoth: Richard Branson, who single-handedly manages to represent thousands of staff across a multitude of brands, has been quoted saying: “The head of PR is perhaps one of the most important people in a company, and a good chairman will have them by their side… They are critical for managing the brand and save millions in advertising; people talking about your company is much more important than anything.” As opposed to many Fortune 500 companies, where the CEO is largely kept at arm’s length from both internal operations and public statements, Branson’s name is synonymous with Virgin, and he himself is arguably as famous as the brand.

SeaWorld's share priceThe corporate drawbridge
Considering the recommended course of action by PR professionals, the absolute worst thing for a company to do following a crisis is nothing. However, this is the exact strategy that has long been adopted by Apple, most notably employed following the scandal that came to be known as ‘bendgate’ in October 2014, when the brand new iPhone 6 was discovered to be bending in users’ pockets.

That approach, in actual fact, worked very well in this case. In 2014, Apple upheld its top spot on Interbrand’s best global brand ranking for the third year running (see Fig 2), which also showed its brand value to have increased by 21 percent over the year. By refusing to pander to anyone – be that its customers or the press – Apple’s PR team effectively sparked the public’s curiosity, creating an air of mystery and intrigue. Of course, plenty see straight through the facade and take it for what it is: intentional elitism, verging on the impression that it takes its customers for granted.

Aside from a small and temporary drop in its share price at the time, no impact was detected across the board. In this circumstance, Apple is the exception as opposed to the rule – ignoring public criticism may work for the most influential corporation in the world, but that is one of very few companies capable of pulling it off. Smaller businesses with a far less loyal customer base simply cannot play hard to get with consumers and the media alike, especially in times of a crisis.

If advising SeaWorld, Brooke suggested: “They have to have a dialogue. The worst thing possible would be to pull up the corporate drawbridge. They’ve got to be seen to be sympathetic to what’s being said, and putting a plan in place for the long-term development of the park, and the welfare of the animals.”

He continued: “It’s got to be seen to be addressing all of the serious concerns in the documentary, which ultimately, only they know the truth about. So some pretty frank internal discussions need to be had, with the commercial aspect left at the door, and perhaps they should bring in external consultants who won’t just tell them what they want to hear.”

Weathering the storm
While things for SeaWorld aren’t looking great right now, and the documentary is likely to have a continuing impact as animal rights movements gain traction, full park closure is unlikely in the immediate future. A mind-boggling 400 million guests have passed through SeaWorld’s doors in its 50 years of operation, and there will always be a mass market for what it has to offer.

What’s interesting about this case is SeaWorld’s lack of resilience. As evidenced, companies are on the receiving end of bad press all the time. Granted, not all companies are the subject of a feature-length documentary, but a similar situation has happened before: the 2004 documentary Super Size Me saw filmmaker Morgan Spurlock eat only McDonald’s for an entire month, during which time he gained a significant amount of weight and developed heart palpitations and depression, among various other health deteriorations. While the film provoked a global public debate on nutrition and saw McDonald’s pull all ‘super size’ meal options from its menus just six weeks after the documentary was released, the effects weren’t really felt on the fast food giant’s bottom line. An overhaul of its menus, including the addition of salads and considerable rebranding – which the chain still insists had nothing to do with the documentary – eventually saw sales rise by 7.4 percent by the close of 2008.

Of course, there are two sides to every story, and SeaWorld was relatively quick to issue a response to the Blackfish documentary, in which it argued against almost every point and vehemently denied any truth in the accusations put forward. What would boost the company’s image, and its pockets, would be to fully communicate the good SeaWorld has done for animal conservation and rehabilitation in the past.

Interbrand's best global brand ranking 2014

Its response self-proclaims it to be a “world leader in animal rescue” and “often the first to be contacted” in times of natural or man-made disasters, having rescued more than 23,000 animals “with the goal of treating and returning them to the wild’”. If there is truth in these claims, SeaWorld executives simply must confront each individual issue head-on – perhaps in a public-forum-style debate, where, as Brooke suggests, the commercial aspect is left at the door, and each claim is fully supported with evidence.

A poll posted by the Orlando Business Journal asked ‘has CNN’s Blackfish documentary changed your perception of SeaWorld?’, and initially showed overwhelming support for the theme park, with 99 percent voting no. However, an investigation by the newspaper found that 54 percent of 328 votes had come from the same IP address, belonging to none other than SeaWorld.com. With the passing of time, the results have made a complete U-turn, with 86 percent of a total 11,183 voters selecting yes.

The silver lining
A 2011 study from Stanford Graduate School of Business found that on rare occasions, bad publicity can have a positive impact on sales. It employed various examples as evidence, such as when a 300 percent increase in requests for information about the nation of Kazakhstan was reported by Hotels.com after the 2006 film Borat mocked it, or when a wine described as ‘redolent of stinky socks’ by a well-respected website saw its sales rise by five percent. The study shows that if a product or company was relatively unheard of before negative publicity, it can be thrust into the public eye simply as a result of that bad press, raising product awareness.

“Whereas the negative impression fades over time, increased awareness may remain, which can actually boost the chances that a product will be purchased,” said Alan Sorensen, a professor of economics and strategic management, who authored the study along with Jonah Berger and Scott Rasmussen. The same was not found for more established companies: when a rumour that McDonald’s was using worm meat in its hamburgers circulated in 2000, a 25 percent drop in sales was detected.

It’s clear that while Blackfish hasn’t prompted the immediate closure of any of SeaWorld’s 11 parks, it has successfully tapped into an existing issue at the forefront of public debate and attracted a global audience. In terms of the future, it’s not looking too rosy for the theme park operator, which faces the mighty uphill battle of turning around public sentiment surrounding a particularly hot topic.

What exactly is money?

Posted on by Ashton Wenborn

According to the authors Lipsey and Ragan of Canadian textbook Economics, money emerged as a replacement for barter: “If there were no money, goods would have to be exchanged by barter… The major difficulty with barter is that each transaction requires a double coincidence of wants… The use of money as a medium of exchange solves
this problem.”

Fortunately the book was free, so in this case neither barter nor money were required. The authors went on: “All sorts of commodities have been used as money at one time or another, but gold and silver proved to have great advantages… The invention of coinage eliminated the need to weigh the metal at each transaction, but it created an important role for an authority, usually a monarch, who made the coins and affixed his or her seal, guaranteeing the amount of precious metal that the coin contained.”

Money is not just a facilitator for barter, but an active medium with powerful properties of
its own

Marked money
This seemed clear enough. Commodity money emerged from barter. The best commodities, for various reasons, were gold and silver. The only role of government was to come along at the end and put its stamp on the coins. I had seen the same argument made before, with minor variations, by 19th-century economists such as William Stanley Jevons and Carl Menger, and by Adam Smith in the 18th century. But to check it out, I decided to go right to the source, the origin of origin stories: the philosopher himself.

In Politics, Aristotle said: “More complex form of exchange [money] grew, as might have been inferred, out of the simpler [barter]… the various necessaries of life are not easily carried about, and hence men agreed to employ in their dealings with each other something which was intrinsically useful and easily applicable to the purposes of life, for example, iron, silver, and the like. Of this the value was at first measured simply by size and weight, but in process of time they put a stamp upon it, to save the trouble of weighing and to mark the value.”

So the official textbook story about the origins of money has remained essentially unchanged since antiquity. Which is strange, for two reasons. First, most textbooks have been updated since Aristotle’s time – we don’t still think the planets are set in crystalline spheres that rotate around the earth. Second, the theory – as a little more research showed – turns out to be wrong.

One thing that struck me about these accounts was the lack of dates, references, or supporting details. The British economist Alfred Mitchell-Innes had a similar suspicion: “So universal is the belief in these theories among economists that they have grown to be considered almost as axioms which hardly require proof, and nothing is more noticeable in economic works than the scant historical evidence on which they rest, and the absence of critical examination of their worth.” But Mitchell-Innes had more: “Modern research in the domain of commercial history and numismatics, and especially recent discoveries in Babylonia, have brought to light a mass of evidence which was not available to the earlier economists, and in the light of which it may be positively stated that none of these theories rest on a solid basis of historical proof – that in fact they are false.”

So how has this ‘modern research’ impacted the field of economics? Not much, apparently. Because Mitchell-Innes wrote that over a century ago, in 1913. According to anthropologists, economies based purely on barter don’t appear to ever have existed. Instead, money has its roots in a virtual credit system created 5,000 years ago in ancient Mesopotamia.

Coin money came later, and ever since, money has alternated between spells where it is based primarily on credit (the Middle Ages, modern fiat currencies), and on precious metals (ancient Greece and Rome, the gold standard). It is perhaps understandable that Aristotle got it wrong, since he didn’t have extensive research by anthropologists to draw on, but why are economics textbooks still repeating the same story thousands of years later?

Founding myth
One reason is that if money has emerged naturally from commerce rather than been imposed by government, then economics can be seen as a kind of natural science, divorced from its social and political context.

The economics version also reflects an inbuilt assumption that there is essentially no trust between parties, so exchange has to be immediate, in the form of goods or some form of money. Economics can therefore ignore the complex web of human relationships in which the economy is embedded.

Above all, though, the idea that money replaced barter by making it more efficient allows one to see the economy as something in which money is nothing more than an inert, passive intermediary – which means it can be ignored as a driving factor in the economy. Former Bank of England Governor Mervyn King noted: “Most economists hold conversations in which the word ‘money’ hardly appears at all”, which is particularly strange given the way the financial community hangs on every word of central bank governors.

The general equilibrium models relied on by policy makers treat the economy as a giant barter system. One reason the Bank of England failed to predict the banking crisis of 2007 was that the general equilibrium models it used to forecast the economy didn’t include banks.

The central, founding myth about the origins of money is one of the reasons why mainstream economists still, despite the countless number of books written on the subject, seem to be in denial about its true nature. Money is not just a facilitator for barter, but an active medium with powerful properties of its own. We need to start taking it more seriously – and a first step would be to update our Aristotelian textbooks.

A lack of dissenting voices holds boards back

Posted on by Ashton Wenborn

At the height of the financial crisis, the banking industry was widely condemned for its lack of leadership and the inability of boards to take responsibility. The repeated mantra of the crisis being the fault of ‘just a few bad apples’ didn’t wash, however, as many affected by the crisis saw a culture of malpractice that extended from top to bottom.

Many have criticised this apparent lack of leadership as being a consequence of groupthink – the term that explains the way in which people go with the flow as opposed to airing honest opinions and rocking the boat.

One of the primary causes of such groupthink is the distinct lack of diversity within boardrooms. Whether it is through gender, background, age or education, boardrooms throughout the world tend to be made up of very similar types of people. Certainly within the UK and US, the characteristics that make up a boardroom tend to be white, middle aged men that have been expensively educated. While a meritocratic system is obviously the most important way in which board members should be selected, sometimes those sitting within the boardroom are more likely to choose people much like themselves to join them.

Boardrooms without a diverse mix of members are unlikely to have particularly varied opinions. According to some, this is a trait that has caused many of the damaging management problems of recent years.

22.8%

Proportion of female directors in boardrooms of FTSE 100

Battling groupthink
At a recent talk at the UKs House of Commons, Helena Morrissey – leading financier, CEO of Newton Investment Management and founder of boardroom diversity group the 30 Percent Club – spoke at length about the need for boards to allow more dissenting voices into the mix.

Boardrooms around the world tend to suffer from the problems of groupthink, with members terrified of being seen as a dissenting voice within a group. However, according to Morrissey, this problem is neither a new phenomenon, nor one exclusive to the boardroom. The term itself was coined by William H Whyte in 1952 when he was writing for Fortune magazine. “It is a philosophy that holds that the group values are not only expedient but right and good as well. In a way what he [Whyte] was saying is it is something much more pernicious than people agreeing with each other and actually gets to the point where you believe any dissension is immoral and that your view as a group is the only one that is relevant and right. This self-belief that takes hold and restricts the listening and hearing of any dissenting messages is very dangerous”, said Morrissey.

“The more amiability and esprit de corps among the members of a policy-making in-group, the greater the danger that independent critical thinking will be replaced by groupthink, which is likely to result in irrational or dehumanising actions directed against out-groups. That is pretty strong stuff but it is a classic way of describing a state of mind that unfortunately can develop when people are among a group that they all know and like well and end up lacking the challenge.”

Time for change
Morrissey cited the example of the Space Shuttle Columbia accident in 2003, where all seven crewmembers of the ship were killed when it disintegrated upon re-entering the Earth’s atmosphere. “When you read the report of the accident investigation and then you read the report of the Challenger accident investigation (and of course the Challenger accident happened in 1986) it seemed then that nothing had been learned. Nasa had this strong cultural bias, an optimistic organisational thinking and, again, when one read through the analysis of what went wrong, there were engineers who were dissenting from the decisions to go ahead with both of those launches but they were overridden. No-one wanted to hear the dissenting voices.”

She adds that the financial crisis is the most obvious recent example of such groupthink. “The recent past just reinforces the point that we again lulled ourselves into a false sense of security. With hindsight now and obviously reports likes the Financial Services Authority Report into the failure of RBS which highlighted the homogeneity of that bank board, but it was not just the board, but senior management teams and, to be honest, policy-makers including, dare I say, politicians and generally speaking the in-crowd resulted in this collective delusion and arguably wilful blindness.

“Again, this is pretty strong stuff but I want to emphasise that we are not talking about just a group of people not noticing that something might be happening around them. This is behaviour that ends up excluding the dissenting voices. In the capital markets we have this problem in extremis. We had the problem in extremis and we still do. I have quoted here from a US female hedge fund manager who put it very eloquently: ‘Too many people are too similar, too connected and too insulated in this industry.’”

While the boards of financial institutions in the UK were in 2008 famously described by Lord Myners as resembling “a retirement home for the great and the good”, Morrissey believes there has been an improvement in recent years. “We have come a lot way from that, but at the time there was this compounding effect of conformity of the establishment, as it were, at every stage of the way. Also, as I mentioned, there is this penalty for dissension, the Emperor’s new clothes phenomenon, the idea that if you speak out of line you are silenced or exited.”

Eradicating these attitudes towards dissenting voices may well come through a generational shift, with a sweeping out of the old guard. “The average age of a FTSE non-executive director is still over 60”, Morrissey added. “That is lower than it is in the equivalent in the States but it is still pretty high. If you also think that companies need to work out how to get digital expertise, I would suggest that a whole other generation of potential board candidates might be something to think about. Educational backgrounds are still quite uniform.”

Gender dilemmas
Gender imbalances within boardrooms are certainly still apparent, but have gradually improved in recent times. In the UK, the proportion of female directors sitting in the boardrooms of FTSE 100 companies has jumped from 12.5 percent in 2010 to 22.8 percent currently. The aim of Morrissey’s organisation is for that number to hit 30 percent by the end of 2015, which seems more than achievable. As of October 2014, alcoholic beverage company Diageo is leading the way in the UK, with a 45.5 percent proportion of women on its board (see Fig. 1).

Morrissey says that while the issue of female representation within the boardroom will continue to need improving, it should, in time, lead to improvements in all areas of under-representation. “I think I would rather see at this stage a thoughtful discussion about how the progress on the women’s issue can evolve into other under-represented groups so you end up with some really radical thinking. We are not trying to create a rainbow of characters on a board. We are trying to create a board that will be in genuine disagreement and a real challenge to the management team.”

FTSE 100 companies with the highest proportion of women on boards

She concludes that the sort of disruption and dissent that was absent within financial boardrooms leading up to the financial crisis is still not being seen today. “With hindsight, the simple truth was that bank boards were too comfortable in the run-up to the financial crisis and therefore we need a degree of discomfort. Again, I do not see, as yet, much evidence that real out of left-field thinking, real disruption is welcomed.

“My own experience – because I have been a little bit disruptive some people might suggest in terms of trying to create change – again is sometimes people will be allowed a voice but I still do not see as yet people saying, ‘Actually we need to be keeping on questioning how we are setting ourselves up.’ So the idea of actually having a welcoming of dissension, a welcoming of challenge and time on the agenda to really challenge each other is still some way off.”

Ultimately, forcing companies to have diverse boards is not something that is likely to come about. While quotas have been discussed, few believe that people should be parachuted into senior management and board roles purely because they come from a different background to existing members. However, healthy debates invariably lead to better decisions, with people having to justify their opinions against dissenting voices. If this leads to better management decisions, then that is surely more important for companies than whether other members of the board share the same golf club membership and old school tie.

World Bank innocent in fraud case

Posted on by Ashton Wenborn

The independent review, commissioned by the World Bank’s president, Jim Yong Kim, questioned the way in which the loan was handled by Beijing after the bank’s treasurer, Madelyn Antoncic, raised concerns about its processing.

This tangled transaction was questioned by Ms Antoncic and her staff, prompting the review

Created by the International Development Association and International Finance Corporation, two arms of the World Bank, the loan was part of a 2013 fundraising exercise for the IDA to fund work with poor countries. Rather than taking the $1bn straight into the fund, a complex transaction took place with the IFC, which raised suspicion.

As the Chinese government did not have a formal system for granting concessional loans to an institution, the People’s Bank of China offered the loan at market rates. Beijing then added a $300m grant, $179m of which was to cover the interest payments for the loan, and the World Bank created a structure for the IDA by combining the Chinese funds and buying a $1.179bn bond issued by the IFC. This tangled transaction was questioned by Ms Antoncic and her staff, prompting the review.

In the report Locke Lord Edwards, the investigating law firm, wrote: “We found no evidence of fraud or dishonesty in connection with the IDA-IFC transaction or the China concessional loan, and found that IDA was authorized to enter into each of them.”

The law firm’s review only highlighted a lack of communication between the World Bank’s financial departments. They concluded: “Working to improve communications between the groups would help reduce the risk of issues such as these arising in the future.”