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Understanding Apple’s implausible explanation

Apple has just announced that it will reduce the commission it charges smaller developers (those who earned less than $1 million last year through the App Store) from 30% to 15%.

As someone with an advisory role and financial interest in just such a business for the past ten years, the explanation provided by Apple’s CEO, Tim Cook, has a hollow ring:

“Small businesses are the backbone of our global economy and the beating heart of innovation and opportunity in communities around the world. We’re launching this program to help small business owners write the next chapter of creativity and prosperity on the App Store, and to build the kind of quality apps our customers love. The App Store has been an engine of economic growth like none other, creating millions of new jobs and a pathway to entrepreneurship accessible to anyone with a great idea. Our new program carries that progress forward — helping developers fund their small businesses, take risks on new ideas, expand their teams, and continue to make apps that enrich people’s lives.”

The suggestion that this is a natural evolution and being done out of the goodness of Apple’s corporate heart is implausible at best. The small businesses that rely on the App Store to reach iPhone customer have been “the backbone of the global economy and beating heart of innovation and opportunity” throughout the iPhone’s existence and have put up with being fleeced. The entrepreneurs have funded their businesses, taken risks on new ideas, expanded their teams and made apps that enrich people’s lives without any help from the black shirts* formerly of Infinity Loop, now Apple Park.

The likely explanation is provided by the threat of action from the European Commission, which opened an investigation into Apple’s anti-competitive behaviour in June, and potentially from the US, with Congressional hearings into the monopolistic conduct of the tech giants later in the summer. This is an illustration of the strategic solution space available to a company being reduced by the prospect of regulatory intervention.

In parallel with this reduction in the price charged to its small customers for using the App Store, Apple revealed at the Congressional hearings something about the shape of the market interface between the App Store and the “customers” who sell through it when it disclosed that it had agreed a 15% commission with Amazon for in-app charges within the Prime Video app.

The interesting question is what happens next. Apple has had to cave in to the threat of another web behemoth flexing its market power and potential to lobby against it. It has accepted, so far in part only with the new deal for smaller developers, the political reality of the forces gathering against its abuse of its power over a large slice of the market for apps on mobile phones. What of the middle-sized App Store developer customers? How long will it take Apple to develop an implausible but face-saving formulation to explain why it has reduced their commissions too? Or will it try to tough it out until competition authorities around the world run out of patience and take Apple, and potentially some of the other tech giants, apart in the way they did to the US rail and oil industry over a century ago?

* for the avoidance of doubt, this is a reference to the sartorial style of the late Steve Jobs and his successors and not a comment on either their conduct or politics.

Investors and consumers both need good sustainability reporting

The FT has been carrying stories for the past two weeks about improving the quality of information provided by companies to their investors on the environmental impact of their activities and the sustainability of their businesses in the face of climate change. It may just be a coincidence, or it may be a conscious decision of the editorial board, but the Fashion Editor writes in “Life and the Arts” section of the Weekend FT on the same subject under the headline “Sustainable fashion? There’s no such thing”

On 5^th November, Erkki Liikanen, Chair of the IFRS Foundation Trustees, delivered the keynote speech at the UNCTAD Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting, introducing the Trustees’ Consultation Paper on Sustainability Reporting.

On 9^th November, Rishi Sunak, Chancellor of the Exchequer, delivered a speech to the House of Commons on financial services. In the course of setting out his plans for supporting the City at the end of the transition period as the UK leaves the EU and plans to launch a Sovereign Green Bond, he declared:

“We’re announcing the UK’s intention to mandate climate disclosures by large companies and financial institutions across our economy, by 2025.

“Going further than recommended by the Taskforce on Climate-related Financial Disclosures.

“And the first G20 country to do so.

“We’re implementing a new ‘green taxonomy’, robustly classifying what we mean by ‘green’ to help firms and investors better understand the impact of their investments on the environment.”

On 10^th November, the Financial Reporting Council launched its Statement on Non-Financial Reporting Frameworks, opening with the preamble:

“Climate change is one of the defining issues of our time and, by its nature, material to companies’ long-term success. Boards have a responsibility to consider their impact on the environment and the likely consequences of any business decisions in the long-term. Our 2020 review of climate-related considerations in corporate reporting and auditing found that boards and companies, auditors, professional associations, regulators and standard-setters need to do more.”

before recommending that companies should try to report “against the Task Force on Climate-related Financial Disclosures’ (TCFD) 11 recommended disclosures and, with reference to their sector, using the Sustainability Accounting Standards Board (SASB) metrics” and setting out its own plans over the medium term to help “companies to achieve reporting under TCFD and SASB that meets the needs of investors”.

Today, 14^th November, the FT’s fashion editor writes about the dilemmas facing those of her readers who are concerned about the impact of their purchasing decisions. She recognises that the best way to live a sustainable life is to buy less, but also that her readers want to find ways, while supplementing and refreshing their wardrobes, to plot their way through the “greenwash” claims of the fashion brands. Both these consumers and some of the brands themselves want clearer and more reliable accreditation of products that come from supply chains that are, if not truly environmentally friendly, at least less environmental unfriendly.

Following up the themes in this article, I found a great piece written by Whitney Bauck in Fashionista, in April last year:

“If you’re aware that there are ethical issues baked into making clothes but don’t have time to do in-depth supply chain research every time you need a new pair of socks, there’s a good chance you’ve thought at some point: ‘If only someone could just tell me for sure if this brand is ethical or not.’

“You wouldn’t be alone in that desire. In years of writing about both sustainability and ethics, it’s a sentiment I’ve heard from fashion consumers a lot. While many people want to be more conscious with their consumption, they also wish it were easier to tell which brands are truly being kind to people and planet.

“If you fall into that category, there’s good news and bad news. The bad news is that a one-size-fits-all ethical fashion certification will probably never exist, partly because not everyone agrees on what qualifies as “ethical.” Should that word refer to job creation in impoverished communities or animal welfare? Should it mean making clothes from organic materials or recycled synthetic ones? Not every ethical fashion fan has the same standards or priorities, and that will always make a one-size-fits-all approach to ethical fashion certification difficult.”

I wrote in a blog post four years ago about the benefits that the team I led at WH Smith believed would arise from developing and selling green stationery ranges. The issues described by Lauren Indvik in the FT are nothing new. We faced similar challenges both in terms of selecting products and in terms demonstrating to our customers that buying these products would better than buying alternatives.

The challenges facing investors and consumers in taking environmental and other ethical considerations into account in what are otherwise commercial decisions are identical. Both investors and consumers want the best information, to put into the mix with the other things that influence their decisions – the complex trade-offs of exposure to multiple risks, timing, and return for the investor, or look, feel, comfort, durability, after sales support and cost* for the consumer.

The similarity between these challenges is evidence for the symmetry in all businesses – investors are customers for investment opportunities presented by the company, in the same way that consumers are customers for products and, indeed, that employees are customers for the jobs that companies provide. In an age when people – in their multiple roles as investors, consumers, and employees – want to invest in, buy from, and work for organisations that behave responsibly in relation to wider society and to the environment, they need reliable information to inform their decisions.

* and a host of other possible features depending on the product or service category

America decides……

Primed by Trump, militias gear up for 'stolen' election (Sunday Times — Primed by Trump, militias gear up for ‘stolen’ election (Sunday Times)

The US electorate (at least those who have not already cast their votes) goes to the polls today to choose a new president, senator, congressman, governor, mayor, and ratcatcher. The presidential campaign has been the most vituperative I can recall and has given rise to anxiety that the losing candidate’s supporters – whether militias driving pickups and toting semi-automatic weapons (including the Proud Boys who have been following the instruction to “stand back and stand by”), or masked rioters with bricks and molotov cocktails – will take to the streets.

The election itself and the accompanying scenario represent a living illustration of the “Three Sanctions” and their relationship.

One of the major underlying differences between the two parties is the view of the proper boundary between the cash and market-based sanction and the political sanction. The party of small government (and by extension, the dispute of states’ rights over federal responsibility, which goes back to the Founding Fathers*), is less inclined to recognise the market failures that others see requiring the intervention of government. On the other side, the interventionist Democrats recognise the merit of anti-trust measures need to curb monopolistic excess and deliver the benefits attributed to the market system; recognise that unfettered markets result in huge social inequality and that post tax income disparities in the US are way beyond anything required to provide incentives to maximise the nation’s overall material wellbeing; and fear for the future of the environment under a government that does nothing to address the externalities of unregulated commerce.

The threat of a violent response to the outcome of the election represents a potential failure in the political market-place, which depends on a degree of consent and recognition of the legitimacy of a constitutional settlement, anchored in a document drafted in Philadelphia in the summer of 1787 to meet the needs of thirteen small former colonies on the east coast in age bounded by limited horizons, communication, scientific understanding and technology. We will see in the next few days whether the political marketplace in the United States is operating under sufficiently favourable conditions – particularly consent for the constitutional settlement – for those who are disappointed by the outcome not to resort to resort to third sanction to address their sense of powerlessness and injustice. Even if they do not, the very fact of the threat that they might should prompt a deep search for an enhancement of the constitutional settlement to reduce the risk of political market failure.

*The diligent student of US history will recognise that during the mid 20^th century, the alignment of the parties on this issue switched over

“…… because they still do the same thing: they primarily serve shareholders”

Dame Vivien Hunt, until this year managing partner of McKinsey’s offices in the UK and Ireland, has written in today’s Financial Times on workplace diversity and equality under the heading “Change how boards work to achieve to true diversity”.

She asks why, when one third of the seats on the boards of FTSE 100 companies are now occupied by women, “those boards still look similar……still filled with people who have the same skills carved out of similar professions, networks and university degrees.” Her explanation is that it is “because they still do the same thing: they primarily serve shareholders.”

I am pleased that one of the current leaders of the organisation where I started my professional career takes such an unambiguous and very public position strong position on both the composition of boards and their purpose. Back in the 1980s, most of my colleagues were beholden to the orthodoxy of “shareholder value” and, although there were a small number of senior non-white consultants (including Keniche Ohmae, who led the Tokyo office, and Rajat Gupta, who became an office managing partner shortly after I left and subsequently global managing partner), the firm was anything but diverse.

Dame Vivien argues that “we need to find people who represent not only our investors but everyone else – from buyers to suppliers, to local communities, to our natural environment”. Her use of language and her argument is not entirely clear here: her article could easily be interpreted as making a case for a board of representatives of stakeholders as opposed to a board that understands the broader mandate of the company and the need to take all stakeholders’ interests into account.

I have argued elsewhere against boards being composed of representatives of stakeholders. As is implicit in Dame Vivien’s article, directors should have a duty to all stakeholders, because their wellbeing of all groups is critical to the wellbeing of the company. Furthermore, in UK unitary boards composed of executives and non-executives, at the board may be the executive directors responsible for sales and marketing who should be the effective advocates for interests of consumers if they are fulfilling their role understanding and satisfying consumer needs. Similarly, executive directors of workforce and of operations should be able to represent to colleagues, who may place a primacy on the interests of shareholders and customers, the interests of the people they recruit, support, and manage. Whether or not they are full board members, most large companies employ directors of communications and public affairs (or similar) whose primary role may be to advocate externally for the company but also represent to the board the case for taking into account the interests of local communities, the environment, politicians and lobbyists.

Her underlying argument for diversity on boards is compelling, not for the purposes of representation but because a genuinely diverse board “brings diversity of thought, skills and experience that will lead to better decision making”. However, better decision making also depends on boards understanding their purpose of their companies, which is the sustainable creation of value for all those the company engages with, by producing goods or services more efficiently than would be possible in the absence of the company. The purpose of the company is not the creation of shareholder value: shareholder value is the necessary return provided to shareholders in return for their investment and the sustainable creation of shareholder value is the result of serving the interests of all stakeholders.

I was thrilled to read Dame Vivien’s piece and pleased to see her continued work championing diversity in business. But, notwithstanding my concern about some of the logical flow and detail in her argument, I was even more encouraged to see her set out the case that genuine diversity on boards will not be achieved until shareholder primacy is consigned to the waste bin.

So, auditors can say “boo to a goose”

With their decision to resign as auditors to Boohoo after seven years, PwC’s partners have at last shown that they are willing to say boo to a goose. Ditto those at Deloitte, who quit as auditors to EG, the petrol station operator that has agreed to relieve Walmart of Asda (albeit with a big slug of vendor finance). And their colleagues at Grant Thornton who, prompted by a probe by the Belgian tax authority, decided that they had had enough of dealing with Mike Ashley at Fraser Group (better known as Sports Direct). And those at EY, who quit from auditing Finablr in May over weaknesses in corporate governance and links to troubled NMC Health.

This is welcome news, given that the Financial Reporting Council observed in November last year in its annual “Developments in Audit” publication:

“Audits are not consistently reaching the necessary, high standards required to provide confidence in financial reporting.

“A series of high-profile corporate failures has dented trust in the profession and highlighted the need for improvement……

“Our 2018/19 AQR inspections show auditors still struggle to challenge management sufficiently.”

The final point is nothing new. I worked alongside one of the big firms in the early 1990s, undertaking a review of branch level financial controls (which were not as good as they should have been) in the largest chain in a quoted retail group. I recall attending a meeting alongside the audit partner with the chief executive, a “strong personality”, and observed him forcefully objecting to proposals for qualifying the accounts. I understand his reasons for doing so, and have in the past made a similar argument to an auditor to persuaded them that my organisation passed the “going concern” test. However, the shocking aspect of this case was observing the chief executive drawing the commercial value of the advisory business attention of his company to the audit firm to the attention of the audit partner, that the subsequent audit opinion was not qualified, and that the company collapsed within six months.

Kate Burgess, writing in the FT today, suggests that the decision by PwC is a calculated commercial decision rather than motivated by principle. She suggests that as the revelations about Boohoo’s employment practices emerged the reputational risk from being its auditor exceeded the value of the £389,000 annual fee income. This may be harsh, but few in the audit profession can forget what the relationship to Enron (although it may have amounted to more than guilt by association) did to Arthur Anderson, and noting that EY’s partners must remain anxious about potential impact on the company of its involvement with Wirecard.

Irrespective of the motivation, the decision of audit firms to step back from working with clients who do not have adequate controls and who may well operate unethically can only be welcomed. And even if progress can seem glacially slow, the action of regulators in trying raise standards must be welcomed too.

Rio Tinto’s dynamiting of the Juukan Gorge: Jean-Sebastien Jacques’s solution-space implodes

Juukan Gorge caves after Rio Tinto dynamiting

What better illustration could there be of the Escondido Framework approach to understanding ESG investing described in last week’s blog than the defenestration of Rio Tinto’s chief executive, Jean-Sebastien Jacques, by the company’s shareholders?[1]

In relation to the distinction made in last week’s article between the impact of regulation on the solution space available to executive teams, one of the interesting aspects of the dynamiting of Juukan Gorge and the two rock shelters is that the company had previously negotiated native title agreements with the Puutu Kunti Kurrama and Pinikura people, giving it rights to mine the area and had also secured regulatory approval. In Escondido Framework terms, as illustrated in last week’s blog post, the company thought that it was operating within the solution space defined by the market transaction with the owners of the land and that the regulatory market interface had not reduced the solution space available to the company.

However, the executives had failed to appreciate the sensitivities of the company’s investors to such an egregious violation of the heritage of not only the indigenous population but humankind as a whole.

Perhaps the board and executive team at Rio Tinto paid too much attention to the likelihood that investors in mining stocks are already a self-selected group that is less sensitive to ESG considerations than the investment market overall.

It matters little whether the response of the investors whose pressure on the board finally persuaded chairman Simon Thompson (who previously had insisted that Rio Tinto would not fire Mr Jacques) was a reflection of the potential for the scandal to increase future regulatory pressure on the industry, or a concern for the response of the upstream investors in their funds, or the consciences of fund management executives themselves being pricked by comparisons between the dynamiting of the caves with the actions of the Taliban blowing up the Bamyam Buddhas in 2001.

Either way, the shape of the investment market interface was sufficiently different to that perceived by Mr Jacques and his colleagues for them to have placed themselves, not temporarily but at a personal level permanently, outside the solution space available to them.

[1] For anyone who missed the story, Rio Tinto blew up two 46,000-year-old Aboriginal rock shelters in Western Australia, offending not only the Australia aboriginal community for whom the sites were sacred but also a wider public sensitive to an ancient archeological heritage. Initially the board decided to withhold bonuses for the executives involved, but has now decided that Mr Jacques should go (albeit not until early next year and without any further financial penalties)

Understanding ESG investment

The Financial Times has published a flurry of articles and the occasional letter about ESG (Environmental, Social and Governance) investing recently.

For example, Geeta Aiyer, president of Boston Common Asset Management, was the subject of a profile on 29^th August. This followed the success of Boston Common and other investors to secure the change of name of the Washington Red Skins American Football team by applying pressure on FedEx, the logistics company which sponsors the team’s stadium.

On 1^st September the paper published an article about write-downs at BP and Shell in response to “scores of asset managers who have doggedly pressed the oil companies to set targets to reduce carbon emissions and recognise the financial impact climate change could have on their operations” . The article cites a number of leading fund managers who comment on the “explosion” in ESG investing. It also notes the role of regulation in changing perspectives, citing the requirement now placed on pension fund managers in the UK take sustainability issues into account in their investment decisions and the impact of the EU’s sustainable finance package which will, from March 2021, push asset managers to incorporate ESG risks in their decision making.

A day later, on 2^nd September, the FT published an article by Chuku Umuna, former Labour business spokesman and now lead for ESG with Edelman, the public relations consultancy, arguing that “a company’s ability to manage ESG factors is widely viewed as a proxy for prudent risk management, and with good reason”, citing work by Société Générale on the impact of ESG-related controversies that found that “in two-thirds of cases a company’s stock experienced sustained underperformance, trailing peers over the course of the following two years.”

A few months earlier, on 9^th July, Gillian Tett wrote an article that opened by observing that the major ESG indices in the US and in Asia had outperformed the equivalent all share indices in terms of the financial returns to shareholders and cited a report from BlackRock making the same case, not only in the past year but also in 2015/16 and in 2018. BlackRock put this down to two primary reasons: the momentum created by ESG investors pushing up prices as they seek to acquire these stock for their clients and beneficiaries; and the value to companies seeking to improve their ESG ratings the scrutiny to which they subject their supply chains and employee practices and the consequent benefits that arise to their businesses.

Does the Escondido Framework approach to understanding organisations help us understand what is going on?

The Escondido Framework approach to looking at the firm is described in detail elsewhere. In essence, it explains that firms exist as a virtual space defined by their market interface with the suppliers of capital, labour, suppliers of goods and services, and customers, plus others whose needs may need to be satisfied, such as government or the wider community who implicitly or explicitly provide the firm with a license to do business. Their survival depends on creating value through the efficiency of their internal operations for there to be such a space. Where the firm places itself within the space will determine the distribution of economic rent to the stakeholders, how much may retained by the executive management, and how is available for reinvestment either in assets or long term relationships with one of more sets of stakeholders. As the market interfaces changes – through changes in supply and demand, competition, or the trade-offs made by the other parties to the markets place exchange – the virtual space (which can also be considered as the solution space available to the management team) may expand or contract (increasing or reducing the range of options, strategies and potential profitability available).

If a new external party intervenes, for example a government agency imposes regulation, the virtual space will be reduced correspondingly. Indeed, even the threat of regulation will have the effect of reducing the space as the firm is likely to take the view that it cannot afford to provoke the regulator.

Impact of new regulation to reduce solution space

So what is going on with ESG investment? ESG considerations have an impact on investment decisions in multiple ways.

Some investors will choose only to invest in businesses whose practices meet certain standards in terms of environmental and/or social responsibility and impact. When I was trustee of a large medical charity, we initially had a relatively limited list of sectors that we guided our fund managers to avoid, but progressively widened the list to avoid those whose products were implicated in contributing to the ill-health we working to address. Other charities have much wider exclusion lists, and many private individuals also choose to invest in ethical funds. Such investors are making an explicit trade-off between such potential increased returns as may be available from investing in companies (eg defence, tobacco) that don’t satisfy their ethical criteria.

Other investors decide to invest in ESG funds and businesses that meet ESG criteria because they believe that companies that with sound governance, ethical approaches to the communities in which they operate and setting high standards in their supply chains, and responsible approaches to the environment will ultimately deliver higher long term returns and be sustainable. Such investors may also take the view that these approaches also represent good business. Working in retail management as a merchandise director in the 1980s, I certainly took the view that being as environmentally responsible as possible was good business. I led a team that decided to adopt policies towards sourcing products from sustainable raw materials, reducing packaging, and developing “green” product ranges making extensive use of recycled materials on the basis that it was good for the business. It was good for our brand as it improved our standing with increasingly environmentally conscious customers. It was good for our sales, since people appeared keen to buy less environmentally harmful alternatives. It was also good for recruitment and retention of good staff, who seemed motivated (as I was) by working for a company that was trying to be environmentally responsible.

High standards of governance should also be appealing to investors, and the evidence is strong notwithstanding the mercurial successes of a few mavericks. As chair of a committee investing £200 million for the charity on which I was a trustee, I was attracted to Edinburgh based fund managers, Baillie Gifford, precisely because of the demands that it placed on the governance of their investee companies and its willingness to vote the shares it held for client like us to improve governance of the investee companies – and we were rewarded for our confidence in the approach by returns that consistently exceed the benchmarks for the fund.

If, as the flurry of FT articles suggests, there is an increasing appetite for ESG investing for whatever reason, the impact on companies is that (at least for the visually minded) the shape and precise orientation of their interface with the investment market will change reflecting either the trade-offs (in the case of the first type of investor described above) or the beliefs about the sustainability and long term returns (in the case of the second type of investor). The consequence of the appetite for ESG investing on companies is that those with business practices that align with the demands and expectations of ESG investors will face a slightly lower cost of capital and consequently increase the size of the solution space for the management teams when looking at their strategies.

Advice from someone with “the heart of a luvvie and the mind of a suit”

John Tusa is an eminent former broadcaster, managing director of the BBC World Service, and managing director of the Barbican Centre. He is a veteran of a variety of boards of cultural organisations and proud of being described as possessing “the heart of a luvvie and the mind of a suit”. He has written an account of his experience of governance that should be on the reading list of everyone either occupying or contemplating appointment to a board. His experience may be drawn from not-for-profit organisations in arts, broadcasting and education, but it is as applicable to boards in the private and public sectors as it is to the third sector. As he remarks in the introduction to “On Board”[1]:

“It is sometimes assumed that boards in the business world are totally different from those in the not-for-profit sector. This is far less true than might first appear. Both kinds of board choose their chair and chief executive, both decide how they appoint colleagues, how they sell to or serve their public, their customers or their audiences; both are responsible for brand, communication and reputation; both supervise the internal health of the organization. Of course, one deals with profit, the other does not. But while ‘not for profits’ are not businesses, they must be ‘business-like in the way s they manage their resources.”

While Tusa does not have direct experience of private sector boards himself, he has sat on boards with plenty of people with this experience, notably Kenneth Dayton, founder of the Target retail chain in the US and Tusa’s chair at American Public Radio, who pointed out to him that “governance in the not-for-profit sector is absolutely identical to governance in the for-profit sector”, besides which that it can also be a lot more complex.

Tusa builds his account of governance around his experience on the boards of the National Portrait Gallery[2], American Public Radio, English National Opera[3], the British Musuem, English National Opera, Wigmore Hall, the University of the Arts London and the Clore Leadership Programme, each of which merit a chapter reflecting interviews with fellow board members, executives and other stakeholders. Tantalisingly, he also alludes to other experiences, such as his time as President of Wolfson College, Cambridge, but without the same detail. Most of these organisations faced major challenges during his time with them, some potentially threatening to their existence. His accounts of how the boards weathered their storms and his candour about the mistakes made along the way are pulled together with a short section ending each chapter drawing out his reflections on what he learned from each experience and provide a rich seam of learning not only for people joining boards for the first time but also for those with many board appointments already on the CV.

This book should be read for the lessons Tusa draws out at the end of each chapter. Board members would do well to reflect on each, and whether they are applicable to their organisations. But “On Board” can also be read for more: it provides anyone who has observed the ups and downs of some of Britain’s leading cultural institutions of what went on around the board room table. As someone with strong ties to the Isle of Portland, I was suitably scandalised by the failure twenty years ago to use Portland Stone for the Great Court development at the British Museum. Tusa’s first career was as journalist and tells a good story, about this debacle and much more besides, as well providing a required text for chairs, directors and trustees.

[1] John Tusa, On Board (London: Bloomsbury 2020)

[2] His chair at NPG was Owen Chadwick, from whom I took my first lessons in chairing. Chadwick was Regius Professor of History at Cambridge University and a masterful chair of the faculty Joint Academic Committee, on which I sat as first year undergraduate (along with Diane Abbott, whose approach to faculty politics was considerably more radical than than the one she adopted later in her career as a leading member of the Labour Party in the House of Commons).

[3] I have a small gripe. John Tusa, having studied history at Cambridge, should know better than to suggest (in the context of ENO which, despite a catalogue of errors made by the board in the 1990s, managed to survive, an achievement that he observes “should not be underestimated”) that it was the French politician Talleyrand who said of his part in the French Revolution “I survived”. Far from just surviving, Talleyrand’s extraordinary achievement was to serve just about every government in France between 1780 and 1834, from the Ancien Regime, through every stage of the Revolution, the Napoleonic Empire, the Bourbon Restoration and the Orleanist “July Monarchy”. It was not Talleyrand, but Emmanuel-Joseph Sieyès, usually known as the abbé Sieyès, a chief political theorist of the French Revolution, who is reputed to have said in answer to a question about what he did during The Terror of 1793-94: “J’ai vécu”

What happens to organisational “dark matter” when everything moves on-line?

Much of my working life moved on-line when Covid-19 hit. From time to time, I still go into the office although it feels as though a neutron bomb has hit: the building is there, but it is largely empty and most of those normally there are working from home. All the meetings that were conducted face to face before mid March now take place on video conferencing platforms (although half the time my colleagues have cameras switched off or their on-screen presence has frozen). Research appears to suggests that the productivity of most of the people now working remotely is higher than before. I miss my commute because it provided a welcome opportunity for exercise and included a delightful bike ride along the Grand Union Canal, but I am sure that I am in a small minority.

I miss the serendipitous conversations that take place in the corridor, making coffee, in the margins of formal meetings, and in the course of visits that I make as chairman to the front-line units and staff of my organisation. I have recruited a couple of new colleagues during the Covid-19 lockdown and we have had to manage their induction remotely, which clearly has its drawbacks. But other than these examples, I don’t get the feeling that the way that we do business has suffered much so far. However, is this sustainable?

David Robson has written an article in New Scientist[1], suggesting that “the coronavirus pandemic may be dismantling your social network without your realising it”. This echoes a concern of mine that the way most of us, and most organisations, have coped through the changes enforced Covid-19 has been only been possible as a result of the accumulated investment in relationships built up face-to-face. My board know each other well, know how to interpret each other’s contributions, will make allowances for each other and can generally anticipate how others will react to what they have to say. This has helped carry us through the past five months and will continue to assist through the next few months as, we all hope, we emerge from the crisis. This will apply to all sorts of established relationships around any organisation, will underpin day to day conversations and routine business, and will inform the diplomacy and political manoeuvring around the more tricky transactions. Assets on our balance sheet are liable to decay and, in our accounts for our business, we apply depreciation to them to reflect this. The intangible assets that are our social capital and which have carried us through new pattern of remote working are no different.

Robson’s article led me to a New York Times interview with Satya Nadella (personally heavily invested in video-conferencing, and consequently other people’s remote working, as CEO of the organisation that owns MS Teams and Skype). “Mr. Nadella said that raw productivity stats for many of Microsoft’s workers have gone up, but that isn’t something to ‘overcelebrate.’ More meetings start and end on time, but ‘what I miss is when you walk into a physical meeting, you are talking to the person that is next to you, you’re able to connect with them for the two minutes before and after.’ That’s tough to replicate virtually, as are other soft skills crucial to managing and mentoring.”[2]

Robson continues his article by summarising a wide range of research around social contact, and highlighting its value to us in terms of mental wellbeing and importance dimensions such as trust. In a sidebar to his main article, he quotes Peter Drucker writing in 1993 “It is now infinitely easier, cheaper and faster to do what the 19^th century could not do: move information, and with it office work, to where the people are. The tools to do so are already here: the telephone, two-way video, electronic mail, the fax machine, the personal computer, the modem, and so on.” Robson notes that it has taken the pandemic for people to realise that they can work with less face time and discusses why it has taken a crisis to realise the potential for more people to work remotely. But while he concludes that “the relative success of new ways of working in the pandemic would certainly suggest that we can get by with less face time” he acknowledges that it would be unwise to scrap it entirely.

I worked remotely for much of the 1990s (with a dial up modem and Compuserve email address that consisted of numbers alone). Consequently, the revelations about the productivity of people working from home come as no surprise. However, I was working as a consultant and on private equity projects at the time. The work from home was interspersed with face to face activity with clients, selling projects and ideas, negotiating deals and persuading investors to back me. I was operating on my own or in small teams rather than a large organisation that was creating a greater value than could be achieved by a series of discrete market transactions and with the benefit of what I have described elsewhere as organisational “Dark Matter”. Having moved in and out of varied working arrangements and organisations differing in size over the past forty years, I know the importance of face to face contact in building relationships that are strong enough to be effectively maintained at a distance.

The large, global consultancy firm where I worked in the early 1980s employed a variety of devices to build relationships within the local office and the world-wide firm: consultants were expected to return to the office on a Friday to lunch together and receive a short presentation about a colleague’s project and piece of training; at each stage in your career development you attended residential courses with your peer group; practice groups would hold regional conferences to share learning; and the international partner group would meet for an annual conference. All this contributed to building a shared set of values, common approaches to solving client problems, and the ability to work remotely while remaining part of the firm.

It is important to recognise the corollary of Robson’s thesis: with remote working there is a risk that the quality of relationships will decay over time, particularly if the context in which the relationships were developed changes, if you don’t make this sort of investment. The “new normal” may involve much more remote working, but organisations need to recognise that the success of this approach over the past five months has been made possible by years of investment in social capital by having people working together previously. They will need to invest in “maintenance social capital” by getting people to getting people together sufficiently frequently to address the depreciation in this asset if they want to continue remote working in the longer term.

[1] New Scientist, 20th August 2020, pp32-36. “Missed Connections”

[2] New York Times, Dealbook Newsletter, 14^th May 2020

Moody’s says Lloyds’ ethnic diversity plan is ‘credit positive’

The Financial Times reports today that Lloyds Banking Group’s plans for promoting more black employees have been described by Moody’s as “credit positive”, the first time that a credit agency has explicitly linked a company’s stability to ethnic diversity measures. Moody’s has not gone as far as to upgrade Lloyd’s credit rating at this point, but it clearly indicates that Lloyds’ plans are “credit positive [implying that they have the potential to reduce the company’s cost of capital, even if not immediately] because they will improve staff diversity at all levels and reduce Lloyds’ exposure to social risk”.

Lloyds has stated that it recognises that some groups are under-represented in its ranks. Anyone viewing the current TV advertising campaign for its domestic mortgage lending arm, Halifax, showing a diverse mix of staff ready to serve customers despite working under Covid-19 restrictions at home, can see that Lloyds is not talking about front-line staff in this instance. It has set a target to increase five-fold the number of black staff in senior roles by 2025 and will be publishing data on its ethnicity pay gap.

Investors and rating agencies have been taking increasing account of environmental, social and governance (ESG) risks, reflecting the importance of sustainability, on all measures, to the corporation and to those who invest in it or lend to it. The note about Lloyds published by Moody’s on Thursday is a welcome acknowledgement of the work Lloyds is undertaking. Action of this sort should improve internal culture, communication, engagement and ultimately operational performance and profitability. The motivation behind showing a diverse face to the TV audience is that it contributes to winning customers and increasing revenue. The response of Moody’s suggests that yields benefits in addressing the capital market interface, ultimately increasing access to capital and reducing its cost.

Let us hope that Moody’s response to Lloyds’ efforts spurs others to recognise that action on equality, diversity and inclusion is good for business.