Note: some of the linked articles below require an FT subscription to read
Putin, political risk and the fall-out for business
For executives looking to get a better grip on political risk, Russia is always a good place to start. Over the past quarter century, the country’s twists and turns provide plenty of useful risk lessons. Perhaps the greatest shock to foreign investors—from the biggest banks to the smallest importers—came in August 1998. It was the moment when the chaotic reforms of the immediate post-communist period led to an economic crash, bond default, and a 75% rouble devaluation, paving the way for authoritarian rule.
The rise of President Vladimir Putin, whose 18 years in power now exceed that of any Soviet leader except Joseph Stalin, has created a new set of political risks. The President’s assertion of domestic control has inevitably led to political projection abroad. Rising tension regarding Russian influence in the West, especially following the recent spy poisoning scandal in the UK, could lead to another important inflection point, that should give investors pause for thought.
Many of the issues are covered in the FT Collections ‘How do you solve a problem like Russia?’ Philip Stephens, the FT’s chief political commentator writes: ‘The attempted murder of Mr Skripal cannot be seen in isolation. It is part of the pattern that includes fostering corruption in the former communist states of eastern and central Europe, fomenting instability in the Balkans, the spread of fake news and disinformation, and financial support for populist extremists.’
Gideon Rachman, the FT’s Chief Foreign Affairs commentator, notes that ‘much stronger measures aimed at Russian business and finance’ will affect the many ‘rich Kremlin-connected individuals who use London for both business and pleasure.’ But he asks how Brexit might affect the UK’s willingness to take a tough stance against an important non-EU trading partner, and whether the UK’s western allies will come to her defence?
Lex columnists argue that ‘London is the main overseas capital-raising venue for Russia, but other financial centres could be used. For now, financial markets regard the threat as minor; Russia is busy planning a new eurobond sale.…Similarly, the appetite for trade sanctions is limited. The UK is one of Russia’s smaller trading partners and estimates that less than 1 per cent of its gas comes from the country.’ It adds that ‘the UK can do more by targeting individuals.’
Retaliation against UK investors in Russia might follow. Political risk strategists will have to consider how, when and why they might be affected as the latest international spat plays out.
How to decide what to believe: advice on a postcard
How do executives decide what is really true – especially when their resulting actions are likely to affect others? Inevitably, there’s a strong temptation simply to endorse ideas that support your pre-existing views. However, applying a few simple tests can ensure your analysis is reasonable, rational and rigorous.
When it comes to statistics, FT economist Tim Harford has tried to simplify the task with six essential guidance points that 'can fit on a postcard.' These are: observe your feelings (defensiveness, triumphalism, righteous anger etc) and how these affect your decisions; understand the statistical claim (what it means, is it causal, and what is left out?); get the back story; put things in perspective (size, history, and significance); embrace imprecision; and be curious.
Renationalisation: fairness, efficiency or ideological capture?
The UK’s opposition Labour Party wants to bring key utilities back into public ownership—a marked policy shift from the free market model of almost four decades. The implications for senior executives are significant on many levels. For some, it is a simple issue of whether private-finance-initiatives (PFI) remains an effective way to manage utilities, such as water. To others, these are ideological waters—a siren call towards uncharted dangers. How business executives choose to analyse the implications goes to the heart of their understanding of the risks ahead. Two FT articles help to frame this discussion.
In his article, John McDonnell is right: Britain can easily nationalise water, Jonathan Ford, the FT’s City editor, considers whether renationalisation would be ‘cost free’ as the Shadow Chancellor (finance minister) states, or whether it would ‘dynamite the public finances.’ He writes: ‘The real issue is not whether Das Kapital could supplant private capital, but rather whether it would make sense. It is about what might work better for the public as both consumer and taxpayer.’
According to economist Dieter Helm, ‘governance issues posed by private capital dissolve if you replace self-interested financiers with public spirited bureaucrats. This ignores old problems such as union capture and the politicisation of pricing.’ But Ford warns that ‘private companies cannot simply dismiss nationalisation as impracticable.’
Another perspective is presented by FT’s Chief Political Correspondent, Jim Pickard, who suggests that ‘some investors in private finance initiatives might not receive any compensation if contracts are renationalised under a future Labour government.’ According to one of McDonnell’s PFI adviser, the issue of compensation would depend on the ‘balance of political forces’ at the time of nationalisation. Comparing the PFI industry to the 19th century slave trade, she explained that when ‘the slaves were freed, the slave owners got nothing. Why? Because they were in no political position to get anything.’
Equity prices and the global economy
FT reporters explain what’s behind US stocks which suffered their worst fall in more than six years, erasing gains for the year. Investors who expected a period of calm have been confounded, they write. Whether or not one views the recent falls as anything more than a technical correction is a matter for the chartists, as John Authers explains in several very useful charts.
For corporate strategists, the movement in US equities raises fundamental questions about the global economy, wages, inflation and productivity. The FT’s economics editor, Chris Giles, asks ‘whether the economic outlook in the US and around the world has changed sufficiently to justify weaker financial prices, or whether the correction has come without a definitive trigger.’
He cites 2.9% growth in hourly wages in January, the highest annual rise since 2009, as evidence that the US economy might soon run into the normal capacity constraints. This in turn would empower the hawks in the Federal Reserve to raise interest rates.
It’s not just the US. The Eurozone and China are also performing strongly, ‘suggesting long-quiescent inflation might be beginning to stir.’ The global economy overall is growing at a 4.5%, and advanced economies are expanding beyond sustainable rates. If market interest rates rise this would dampen bond and equity prices.
However, ‘if global economic prospects improve more rapidly than expectations of higher interest rates, write Mr Giles, ‘high valuations for equities would still be justified.’ Moreover, there may be some slack in the system, especially in Europe. Eurozone unemployment at 8.7% provides scope for non-inflationary job creation. According to analysts, the rise in hourly earnings might have been driven by an ‘unusually large’ drop in recorded hours worked.
What signs should business leaders watch out for? One important indicator would be more marked wage inflation in the US spreading to other tight labour markets, such as Germany or Japan, which would deepen fears about valuations.
All the Presidents men
The FT exposé of the Presidents club charity dinner has been FT.com's most popular read ever. It looks like a watershed moment for a certain type of corporate behaviour, and one that might reframe our expectations for certain corporate learning, not least diversity, ethics, talent and equality.
For some, the story was the perfect sting, revealing a hidden ugly side of powerful men in business. Others, especially in the letters pages, railed against ‘political correctness gone absolutely stark raving mad’ and declared that a story about rich powerful businessmen acting lewdly towards poor, unsuspecting waitresses was hardly newsworthy, especially from the FT.
But this is precisely the point. The revelations were not a surprise. It was the normality of the situation that was at issue. ‘Anger is a powerful tool for change’ writes Carolyn Fairbairn, director-general of the CBI, and the exposé screams: enough is enough.
If women in business are to be fully and fairly integrated into senior decision-making positions—which few doubt would be good for the economy—then traditional behaviour associated with a male-dominated environment must also change. The explosion of anger and dismay are signs of that change; the ground just shifted faster than the event organisers might have anticipated.
Moreover, it is entirely appropriate that female correspondents at the Financial Times – who help set the agenda for global business yet contend with its misogyny—should lead the charge. From corporate entertaining at the strip club, to casual sexualised comments in the office, to mansplaining in meetings, the red lines have been drawn. This is what change looks like.
Perhaps most remarkable of all is how easily the testosterone-fuelled event folded at the first assault. An FT female business correspondent marched into a bastion of brazen male privilege and blew it apart. There were some protestations about it being a private party (true only in the narrowest sense); or that it was all for charity (a highly dubious proposition); or that scantily-dressed seemingly available hostesses was a time-honoured way to get men to raise their donations, and women in the same position would act no differently. But there was no serious defence on any issue of principle. Instead, and with astonishing speed, the ‘masters of the universe’ mumbled a few excuses, and closed the organisation down for good.
Volkswagen learns its lessons from the emissions scandal
If corporate learning lies at the heart of strategic change, then there can be few better examples than that of Volkswagen and the lessons of the 2015 emissions scandal. In the FT’s Big Read What went so right with Volkswagen’s restructuring?, Patrick McGee, recalls how ‘some questioned whether VW would be forced to break up after admitting it installed software to cheat emissions tests in up to 11m cars worldwide.’ Under its new Chief executive, Matthias Müller, however, the German carmaker has become more profitable and innovative, outselling Toyota and General Motors and even grabbing market share in the US where trust in its brand had plummeted.
So how has the recovery happened? Cost cutting has played a part. New efficiencies squeezed out of existing operations have helped pay off the emission fines. Rising car sales in China, a major VW market, have also helped.
But more importantly, the scandal forced internal changes long deemed necessary. The appointment of Mr Müller, seen as less dictatorial than his predecessor, was a chance for a new direction. ‘The old, unquestioning, culture was diagnosed as a key factor in the emissions scandal. And Mr Müller claims his greatest achievement to date has been to reform it — by decentralising decision-making,’ writes McGee.
With 620,000 employees in 170 locations worldwide producing 43,000 cars a day, Volkswagen has always been a complex operation to manage. Its ‘completely dysfunctional supervisory board’ dominated by trade unions, government and the Porsche-Piech family, needed to be straightened out. Hans-Dieter Pötsch, a former finance head, now Chairman, has kept the union and family representatives working together. For example, in late 2016, unions and management agreed a ‘Future Pact’ that will see 30,000 jobs lost through attrition.
Perhaps most crucial, has been Mr Müller staking out a new direction for the company, involving the production of 50 new all-electric car models by 2025, and new technology partnerships, where previously the company was a ‘closed-shop.’
Tech trends, work tribes and bond bulls
Technological trends can have a big impact on the direction of corporate learning. Tim Bradshaw, the FT’s San Francisco correspondent, reports from the Consumer Electronics Show in Las Vegas about possible technological clues to the future. There are plenty of gimmicks, as this video suggests. ‘The “next big thing” of years gone by, such as 3D TV, is barely visible today,’ he says. Among the wearable health technologies and internet-connected monitoring devices, he notes that Virtual Reality still has not matched the expectations set in 2014 when Facebook paid $2bn to buy Oculus. But he thinks Google’s Daydream platform, which is wireless while retaining head-tracking is a good combination if still too pricey for most consumers.
Another, related question is who might adopt these technologies. Andrew Hill and Emma Jacobs offer readers a humorous portrayal of today’s various ‘work tribes’. The various types might even help companies better understand the thinking and attitudes of their managers. The ‘inveterate conference goer’ is typically seduced by latest technologies and constantly on the lookout to ‘meet new people, get a sense of the zeitgeist.’ The ‘Management guru,’ peddles absurd new business models (like comparing a company’s organisation to the workings of the human gut). The ‘Closet harasser’ is in denial about his own behaviour as he recalls ‘the time I placed my hand on a female colleague’s inner thigh during a performance review but honestly, I thought it was my own inner thigh’). And the Millennial manager, all bean bags, pods and emojis, who tries to win over older staff by giving them gluten-free granola bars.
Finally, many investors are getting more worried about financial markets. In the midst of talk about bubbles, tapering, inflation and politics, they are asking whether we are seeing the end of the bond bull market. The FT provides the best of it comment and analysis in a specially bundled set of articles and analysis.
Investors scan the horizon for new risks in 2018
Should investors brace themselves for a year of volatility and change, or MOTS (more of the same)? Among the wide range of opinions expressed by FT staff and experts, Merryn Somerset Webb, FT personal finance and investment columnist, argues that we are ‘coming to the end of one great 30-year cycle, and so everything has to change as it turns.’ Meanwhile, Robert Armstrong, FT Chief editorial writer, puts the case for the bears, speculating that a London house price crash might be the trigger for a wider downturn.
That would most likely occur should a hard-left government headed by Jeremy Corbyn come to power in the UK. Labour’s promise to rebalance the country’s lopsided housing market might have helped draw support from young renters, but investors and experts see the business consequences of a Leftward shift in government somewhat differently, and suggest ways that FT readers might hedge against the worst of it.
Ms Somerset Webb believes that fear of a Labour government rather than Brexit is already depressing valuations of domestically-focused UK companies, such as house builders, retailers and utilities. In particular, investors worry about a run on sterling and soaring bond yields as government debt balloons (by an estimated £37bn). Labour dismisses these concerns as ‘wild speculations.’ As for their personal wealth, higher income tax will hit those earning £80,000 – £200,000 most, while those earning more than £1 million may have their tax returns made public. Nor do the experts rule out new wealth taxes and curbs on tax-avoiding trusts.
But investors looking beyond the UK shores for safety might think twice about investing in big brands, long prized for their dividends and apparent stability, according to Miles Johnson, FT’s Capital Markets editor. ‘Could it be that today the very things the market judges as the most boring and dependable of them all will pose the greatest threat to investors’ wealth over the next decade?’ he asks. Their valuations are outpacing their sales, while barriers to entry whether in advertising, manufacturing, logistics and marketing are falling. Many ‘incumbents are being forced to buy challenger brands at high and dilutive multiples,’ he argues.
Practical ways to ease post-Brexit trade and combat US protectionism.
The Brexit trade headache is about to get worse. As the March 2019 deadline looms, a ‘wait and see’ option is no longer viable for companies trading across EU borders. Fortunately, Chris Giles, the FT’s Economics editor, sets out ‘Nine ways companies can prepare for life outside the EU’. None is straightforward; all involve endless bureaucracy. His advice includes: building a corporate customs infrastructure; gaining Authorised Economic Operator status; making use of EU free trade agreements; auditing supply chains and international contracts; budgeting for VAT and inventory; protecting your IP, and more. In some cases, a transition deal will ease the worst pain, but won’t make it go away. An example of the inherent complications can be found the inscrutable wording used to explain Northern Ireland’s regulatory alignment as explained by David Allen Green.
While EU leaders seem unimpressed by the UK’s Brexit preparations, they are none too happy with the US's own trade-restricting tax reforms either. The FT reports leading EU finance ministers ‘saying it would “be at odds” with free-trade international rules because it risked being discriminatory towards foreign companies.’ In a letter to US Treasury secretary Steve Mnuchin, the EU ministers write that ‘the 20 per cent excise tax on transactions, including a US company’s imports of products from its own foreign factory, would impact genuine commercial arrangements,’ and could ‘discriminate in a manner that would be at odds with international rules of the World Trade Organisation.’
Not that the US necessarily cares about the integrity of WTO rules. One can get a sense of this from the FT’s profile of Robert Lighthizer, Donald Trump’s trade Tsar, who ‘stands to be a more important and potentially disruptive figure in the global economy than either Mr Mnuchin or [Commerce Secretary Wilbur] Ross.’ A China hawk and WTO critic, Mr Lighthizer has fully embraced Mr Trump’s ‘America First’ philosophy. Perhaps naively, he also believes that it is possible to ‘construct a broad bipartisan coalition backing renegotiated agreements like Nafta.’
In Bitcoin we trust ... while it's going up
Bitcoin’s unprecedented, 30-fold, price rise in little more than a year has captured wider attention. Nasdaq and other US exchanges even plan to offer trading in cryptocurrency derivatives. As companies try to understand cryptocurrencies and how the underlying technology, Blockchain, might change their industry, FT | IE Corporate Learning Alliance has marshalled its own wide-ranging expertise to explain developments to its clients. Indeed, as noted in the FT’s European Business Schools special report: ‘More institutions would like to teach it now, but it’s a question of having a professor around to do it.’
Those looking for some perspective might start with the FT’s Big Read, Bitcoin: an investment mania for the fake news era. Critics point out that Bitcoin has no income stream and lacks a fundamental basis for valuation, making it more akin to a precious metal than a currency. It also resembles a classic bubble: an invention created during a period of loose monetary policy whose benefits lie in the distant future. Nevertheless, though some early adopters have cashed out with life-changing returns, demand remains as high as ever. This is particularly the case among those who have lost trust in—or in the case of money launderers who wish to circumvent—governments and banks, prompting calls from respected economists, politicians and investors to ban it.
Banning it misses the point. As the FT’s Capital Markets editor Miles Johnson explains: ‘Bitcoin is a faith-based financial asset for a populist era.’ Like other bubbles, Bitcoin reflects its time—in this case, ‘a collapse in confidence in traditional forms of authority and a disdain for experts.’ Indeed, ‘any criticism of bitcoin is greeted by this cohort as inherently corrupt in its motivations, while any alternative opinions are used as evidence that merely confirms existing beliefs.’ In years to come, Bitcoin might be viewed as ‘a speculative barometer of the political forces that are shaping our times.’