How can you hold a global bank to account?

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The growing #ESG movement (Environmental, Social and Governance) influencing institutional investment decisions and AGM voting intentions is shining the spotlight on the ethical behaviour of corporates around the world – and none more so than the global banking organisations, who are seen by many to have still not atoned for their sins in recklessly causing the 2007/8 financial crash and seemingly getting away with it scot-free.

One such bank is the Japanese Sumitomo Mitsui Banking Corporation (SMBC) Group – a multinational banking and financial services institution which operates in 40 countries and is the 14th biggest bank in the world by total assets – the second largest bank in Japan.

Michael Woodford, in his book, Exposure: Inside the Olympus Scandal, has detailed the cultural difficulties in Japan which make effective Corporate Governance challenging, precisely because of the lack of independent challenge from Non-Executive Directors in the boardroom, and the story of Sumitomo and its treatment of the family of one of its most senior employees is another example of corporate intransigence, stubbornness and downright unethical behaviour.

Mr Akihisa Yukawa (Aki to family and friends) was managing director of Sumitomo Financial Group when he died on a business trip at the age of 56 on August 12, 1985.

Akihisa’s grandfather, Kankichi Yukawa, was one of the founding directors of Sumitomo when it was incorporated in 1912, so the family shared a long history with the Bank.

Akihisa Yukawa graduated from Tokyo University’s School of Economics and joined Sumitomo Bank in April 1952. He worked in international banking and was the head of the London Branch from 1976 to 1980. Akihisa was appointed Managing Director and Head of the International Office of Sumitomo Bank in 1981.

In 1984 he was offered the position as chairman of the World Bank in Washington but declined and instead accepted a new role to build the aircraft leasing arm of Sumitomo Bank and became Executive Vice President of the Bank’s leasing subsidiary, Sumitomo Leasing and Finance, where he lead the negotiations to provide the financing for Japanese Airlines (JAL) purchase of 9 aircraft from Boeing – the largest aircraft leasing deal in Japan at the time.

Tragically, Akihisa Yukawa was killed on a business trip from Tokyo to Osaka when Japan Airlines 123 Boeing 747 crashed on 12 August 1985, taking the lives of 520 passengers and cabin crew – still today the worst accident in aviation history.

After the accident, the bereaved family members of those killed in the crash were all compensated by Japan Airlines and their employers, if they were flying on business, for their tragic loss – all that is except two – Aki’s daughter and his partner, who at the time was 9 month’s pregnant with Aki’s second daughter.

Why were they not included amongst the bereaved? – because the Sumitomo Chairman, Ichiro Isoda, decided they were ‘not the bereaved’ and they were not allowed to make any claim for compensation to the bank or the airline.

Notwithstanding the fact that Ichiro Isoda later resigned from his position as Chairman of Sumitomo Bank after taking responsibility for one of the biggest financial scandals in Japan, the nature of Japanese culture with regard to Corporate Governance meant that having made his decision about the fate of Aki’s partner and his two daughters, that decision was final and can seemingly never be reversed.

Aki’s partner, Susanne Bayly-Yukawa, is made of sterner stuff, however, and has fought tirelessly for recognition, more than compensation, of her status and that of her two daughters to be recognised alongside all the others as the bereaved.

Her first success came in 2001, 16 years after the crash, when her persistence paid off and she managed to persuade Japan Airlines to make a token contribution to her daughters’ education – a small victory but an important step in her fight against Japanese bureaucracy

In 2012, Susanne managed to achieve the impossible – the Japanese government made the unprecedented decision to make a posthumous amendment to Akihisa’s important family record, including Susanne and their children as his family.

With a new Chairman having replaced the disgraced and deceased Ichiro Isoda at Sumitomo, this would have been the ideal time for the bank to have a change of heart and recognise the family of one of their most senior employees, Akihisa Yukawa.

But no, Sumitomo still refuse to recognise both British and Japanese proof of Akihisa’s family identity.

So the question remains – how can we hold a powerful global bank to account?

Further reading:

Exposure: From President to Whistleblower at Olympus by Michael Woodford

Secrets, Sex and Spectacle: The Rules of Scandal in Japan and the United States by Mark D West

Published by

Chartered Director, Chief Executive, Chairman, Non-Executive Director, Corporate Governance Expert, Keynote Speaker
Despite the current ESG movement to improve corporate ethics, this 35 year saga of one person’s fight for justice against a major Japanese Bank highlights that there is still a long way to go corporategovernance boardsofdirectors ethics

The risks of carrying on regardless

Business Risk

The need to identify, measure and mitigate business continuity risks has never been more relevant.

Strategic risks stop businesses achieving their strategic goals – they are the big risks, usually coming from outside the business, that are difficult to anticipate and mitigate for.

Key among them is the risk to business continuity: the ability of the business to continue to deliver its goods or services when the fabric of the business – its people or assets – have been affected by a major external event.

The current coronavirus pandemic is clearly one such major event which has brought into sharp focus the business continuity planning of those businesses which are able to continue to operate during the lockdown period.

Business continuity plans are commonplace in most businesses, and usually involve the technical aspects of running a business, such as making sure that the IT systems and stored data are available and accessible remotely. There are, however, some more fundamental risks to business continuity which are often overlooked until the worst happens.

The biggest risk to any business facing an external threat to its operations is financial – the business simply running out of cash while its operations are disrupted. To mitigate this risk, business need sufficient reserves to weather the storm.

Many businesses (and most charities) in the UK live a hand-to-mouth existence with very low levels of cash reserves – usually no more than would be needed to wind down the company, pay off debts and pay redundancy costs, and in some cases not even that.

When something like a pandemic-triggered lockdown occurs, the immediate plan is for as many employees as possible to work from home. But even large multinational companies have found that this is not as simple as it sounds, with emergency investment required in additional hardware such as laptops and increased bandwidth and server capacity.

The first mitigation for business continuity risk is to ensure that there is a “rainy day” fund in your reserves to cover the additional costs the business will face in order to stay operational.

The second mitigation factor is insurance. Make sure you know exactly what is covered, though – many businesses have discovered that they are not insured for the effects of a global pandemic. It may also take time for insurers to pay out so you will need to go back to your cash reserves or make sure you have sufficient borrowing facilities such as an overdraft in place.

Thirdly, you will need to look at your corporate governance arrangements, particularly your articles of association, to ensure that you are legally able to hold board and shareholder meetings electronically. You may need to hold more frequent, shorter virtual board meetings and they will still need to be accurately minuted to record any decisions taken during the crisis period.

The fourth aspect of managing business continuity risk is communication – make sure your staff, suppliers and most importantly your customers are aware of any new arrangements which may apply, even if it is just to tell them that you are still open for business. The ideal is that any changes which are made to the business as a result of a major external event should appear seamless to the customer or end-user. Where this is not possible, communication is vital to minimise the impact to the business.

The increasing reliance on IT systems, software and digital data has meant that most business continuity plans are the responsibility of the IT department, and will in general have little or no visibility at board level – other than to clarify if there is a business continuity plan in place, and whether it has been tested recently.

In fact, business continuity is highly significant in terms of its impact on the delivery of the business strategy and should be considered in detail by the board on a regular basis.

As will be shown by the current crisis, those businesses which have been able to carry on by finding innovative solutions to the delivery of their goods or services are much more likely to be successful post-lockdown – demonstrating the value of looking seriously at the risks facing the business and, where possible, turning them into opportunities and sources of competitive advantage.

First published in Business Reporter https://business-reporter.foleon.com/business-reporter/risk-management-insurance/the-risks-of-carrying-on-regardless/ 23 April 2020

Published by

David Doughty

Chartered Director, Chief Executive, Chairman, Non-Executive Director, Corporate Governance Expert, Keynote Speaker
Business continuity is highly significant in terms of its impact on the delivery of the business strategy and should be considered in detail by the board on a regular basis. As will be shown by the current crisis, those businesses which have been able to carry on by finding innovative solutions to the delivery of their goods or services are much more likely to be successful post-lockdown – demonstrating the value of looking seriously at the risks facing the business and, where possible, turning them into opportunities and sources of competitive advantage.

Where are all the well-paid, private sector, NED jobs?

One of our NEDworks subscribers recently sent us an e-mail asking where all the well-paid, private sector NED roles are?

There were just three December private sector vacancies .. Is that all the vacancies from across the whole country? Am I missing something here?

 If it is, what are you doing to improve this position as it is hard to believe that this represents the market for NED roles for the UK?

The truth is that the vast majority of private sector businesses do not have any NEDs at all and those that do rarely advertise vacancies – preferring to select from known associates and trusted advisors.

That is why most of the vacancies which are advertised are from the public and voluntary sectors – and competition for those is very keen.

Most of our members who have secured private sector NED roles have done so through the tried and tested route of working with businesses as a consultant, coach or mentor in order to establish themselves as trusted advisors before then naturally progressing to the board.

Despite what some of the other NED networks will tell you there is no secret seam of lucrative private sector NED roles that only they can unlock

What we advise is to establish yourself as an experienced NED on a public or voluntary sector board (many of which these days are paid roles) whilst cultivating your network of private sector businesses.

So here are some Dos and Don’ts to help you get started in finding your ideal NED role:

Do

  • Find out exactly what is involved in being a Non-Executive Director, Trustee or Governor. Even if you have served as an executive board member it pays to brush up on your knowledge of Corporate Governance – the Excellencia How to become a Non-Executive Director course is an excellent place to start (you can compare NED courses on the NEDworks website)
  • Spend some time on your CV and letter of application – being a Non-Executive Director requires a different skill-set to your executive roles so a NED CV will be different – there is advice on writing a CV on the NEDworks web-site
  • Make sure your LinkedIn profile is up to date and features any current or previous NED, Trustee or Governor roles you have had.
  • Spend time on your LinkedIn profile statement and headline
  • Expand your LinkedIn network – abandon any idea of only connecting with people you know well or have met in person – upload your contacts to LinkedIn and connect with as many as you can. Accept invitations from recruiters – especially those that specialise in NED roles.
  • Search your LinkedIn network for contacts who already have NED roles and message them to ask how they got them – particularly private sector roles.
  • Take up the opportunity to speak with the Chair or recruiter if it is offered – it is an opportunity to find out more about the role and you will be remembered when it comes to shortlisting for interview

Don’t

  • Restrict yourself to only considering private sector roles – public and voluntary sector roles are advertised much more often, public sector sector NED roles are often remunerated at similar levels to the majority of private sector roles and public and voluntary sector roles offer excellent Corporate Governance experience.
  • Assume that because you have had a successful executive career you will be a shoe-in for a NED role – there are many more applicants for NED roles than there are positions available even for pro-bono roles so it pays to take applications seriously with a well-written CV and letter of application.
  • Be put-off if you don’t get an interview after your first few applications – persistence is required in order to secure the right role. Always ask for feedback after an unsuccessful interview to help you with the next application.
  • Underestimate the time commitments for a NED role – where an advert says 1 to 2 days a month you can double or treble that figure in order to do the job properly especially if it is your first NED appointment – being a Non-Executive Director involves much more than just turning up for the board meeting and trying to read the board-pack as you go – most of the work is done outside the board-room and you need to allow sufficient time.
  • Think that you can replace your executive salary with NED fees. Recruiters will tell you that you can typically earn £1,000 per day as a NED which sounds reasonable but you can only realistically take on between 3 and 5 NED appointments at any one time and the time commitment is likely to be much more than advertised (see above)

Being a Non-Executive Director can be extremely rewarding, emotionally engaging and intellectually stimulating, especially as part of a portfolio career but it does require a significant investment of time and effort to establish a NED career.

Well-paid, private sector, NED roles are out there but there is no magic short-cut or secret path to finding them.

Good luck with your search, let me know if I can help you along the way and here’s to making 2020 the year you take the first steps in your NED career.

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What’s the risk? An inconvenient necessity or a source of competitive advantage?

Neil Woodford – cautious, conservative, contrarian, high-risk?

These words could all have been used to describe Woodford’s investment strategy at various times during his slow rise and sudden downfall – and they all give an indication of the degree of risk he was taking with his clients’ money.

It is well established in the investment industry that risk and reward tend to go hand in hand – the greater the risk, the greater the potential return on the investment – that is the positive upside to risk – the downside is that the greater the risk the more likelihood there is that investors may lose some or all of their investment.

Risks then are both a source of competitive advantage and a potential threat to success – they can make or break an organisation.

Did Thomas Cook stop taking risks or did they just stop managing their strategic risks?

Not only is it important to recognise that risk-taking is an essential part of building a successful business it is also important that everyone involved in running a business understands what risks are being taken, how they can avoid the downsides and more importantly, how they can exploit the upsides.

Successful enterprises, globally, are realising that risks are something to incorporate into their strategy, not as something to avoid – they recognise the dangers of standing still and avoiding risks and they have made the cultural shift needed to change their business leaders’ approach to taking more risks and reaping the rewards from the greater opportunities available for bolder organisations.

A good place to start with identifying risks is the Business Plan or overall strategy document for the business – a well written plan should be based on an analysis of the strengths and weaknesses of the organisation and the opportunities available to it and any potential threats to its success.

Although when people think of risks they usually focus on the negative aspects – what can go wrong, it is also useful to think of the ‘positive’ risks presented by opportunities.

Once risks have been identified they can then be prioritised to enable the Board to satisfy itself that the organisation’s risks are being managed effectively with regular reviews and discussion to ensure that the most likely or highest impact risks are kept in sight – there will still be shocks and crises for the Board to contend with but an organisation that has identified and mitigated its key strategic risks will be much better prepared to face them than competitors who have not.

risk
 

Recent changes in company law and Corporate Governance, in particular the UK Corporate Governance Code, have emphasised the need for companies to have better strategic risk management and leadership of change, to re calibrate their tolerance for well-managed and calculated risk-taking, to improve their capabilities in managing risk, to have better horizon scanning and the ability to address uncertainties and emerging risks, to place more emphasis on culture and behaviour and for their boards to focus on the things that matter with clear ownership/accountability for risks.

The culture and behaviour of the CEO and the Board with regards to risk is key to ensuring effective decision-making, which drives the success of the business.

There is a balance to be struck between taking measured strategic risks involving innovation and the reduction or elimination of undesired negative risks – a manufacturing plant cannot totally eliminate the production of faulty components but it can ensure that there is a relatively small number of them and they do not get as far as the final assembly line.

In addition to prioritising strategic risks then, we can introduce the concept of risk tolerance where the Board clearly defines and articulates the acceptable levels of risk that it will tolerate.This is analogous to the aphorism “not putting all your eggs into one basket” – a prudent Bank, for example, would not attempt to transfer all its customers from one software platform to another over a weekend – instead it would use pilot phases using batches of customers to ensure all wrinkles were ironed out before undertaking a mass migration of customer accounts.

Oil exploration is inherently a risky business, but it was the mismanagement of the reputation risk by CEO Tony Hayward which caused the most damage to the organisation rather than the environmental risk.

Operational risks, which usually arise from internal causes or known external factors, can be mitigated by using a rules-based treatment which ensures that appropriate policies, procedures and employee training are in place.

The speed with which crises go viral on social media means that it is reputation risk which is far more likely to impact on an organisation’s strategy than financial or environmental risks by themselves.The U.S. investigation commission attributed the Gulf of Mexico disaster to BP’s management failures that crippled “the ability of individuals involved to identify the risks they faced and to properly evaluate, communicate, and address them.”

This evaluation of the cause of the failure could equally well be applied to the failure of many financial institutions during the 2007–2008 credit crisis or Volkswagen and the ‘Diesel Gate’ scandal or indeed any of the high-profile corporate collapses that have occurred in the last few years.

Traditional approaches to risk management use formulaic analysis tools and rules-based systems to produce a risk-register and assurance framework where the Board’s discussion focus is too often on the numbers created by the estimates of likelihood and impact rather than the nature of the risks themselves.

Operational risks, which usually arise from internal causes or known external factors, can be mitigated by using a rules-based treatment which ensures that appropriate policies, procedures and employee training are in place.

Strategic risks on the other hand are much more likely to involve unknown or unknowable factors and therefore require a different approach.

We also see this in the financial sector with regulation and compliance, which is very similar to the management of strategic risks. Going from the familiar to the unimaginable is easier than just thinking of catastrophic outcomes as abstract risks.

These new ways of categorising risk enable Boards to decide which risks can be managed through a rules-based model and which require alternative approaches.

Key to successfully managing existential strategic risks is the ability of the Board, its executives and non-executives to engage in open, constructive, discussions about managing the risks relating to strategic choices and embedding the treatment of those risks in their strategy formulation and implementation processes.

Most importantly for organisations this includes identifying and preparing for non-preventable risks that arise externally to their strategy and operations such as significant swings in global markets, trade wars and global conflicts.

Taking Donald Rumsfeld’s Known knowns, Known unknowns and Unknown unknowns we can map those to the three main types of risks that organisations face, preventable risks, strategic risks and non-preventable risks.

Preventable risks are the internal “never events” that are controllable and should not be tolerated. A risk-based approach to running a business involves having an open management culture with clear recognition of the risks, mitigations and assurances needed to enable all employees to play their part in the company’s success.

There is also a need for Boards to learn from their mistakes – the Banks that failed in the 2007-2008 financial had relegated risk management to a compliance function with their risk managers having limited access to senior management and the Board, whereas the Banks that survived such as Goldman Sachs and JPMorgan Chase had strong internal risk-management functions and leadership teams that understood and managed the companies’ multiple risk exposures.

The future of risk and risk management will be a continuation of the trend to make consideration of strategic risk a key element in the development of corporate strategy – recognising its importance as a source of competitive advantage and a means to avoid the dramatic corporate failures that seem to be occurring with increasing regularity.

First published in Business Reporter Online • November 2019

https://business-reporter.foleon.com/business-reporter-2019/risk-management/whats-the-risk-an-inconvenient-necessity-or-a-source-of-competitive-advantage/

What are the implications of the #FinTech war for talent?

FinTech – the application of cutting edge technology in the Financial Services Industry, in particular the use of Artificial Intelligence, is pitching global corporations against startups in a war for talent in pursuit of the scarce digital transformation and AI skills.

Thought leaders from the #RefinitivSocial100 recently discussed the skills challenges surrounding artificial intelligence (AI) and innovation in financial services.

Xavier Gomez, co-founder of INVYO, says the fintech talent war is exacerbated by the education system, which is unable to produce enough students with AI skills.

Corporate governance expert David Doughty highlights the disconnect between the c-suite and data scientists in their perceptions of AI.

Advances in artificial intelligence (AI) have made hiring and retaining the best fintech talent one of the most pressing challenges facing the financial services sector today.

This race to attract the right skills is exacerbated because corporates and startups search for the same profile within a limited pool of fintech talent. It’s also apparent that the education system is not geared to producing thousands of students with the required AI skills.

And to make matters worse, there’s often a disconnect between the AI perceptions of the c-suite and those within the data science workforce.

The #RefinitivSocial100 are thinkers, conversation starters and connection-makers who create insightful content, share up-to-the-minute news and drive topical debate on Twitter and LinkedIn.

Their number includes CEOs, startup founders, keynote speakers, technologists, practitioners, and change-makers.

Here is what they’ve had to say about the fintech talent war:

JC Gaillard, founder and MD of London-based cyber security firm Corix Partners, highlighted that the current problem is not about hiring talent but retaining talent, as well as how the business operates as a whole. He said:

“Acquiring talent to build AI is only one aspect of the problem, retaining it is equally important and that revolves around leadership.

Personal leadership (i.e. the quality and nature of the interaction with the leaders; people leave if they feel ignored or undervalued) and thought-leadership (i.e. the cutting edge nature of the work and the tangible nature of the value it creates; people leave if the job is boring or feels useless).

To me, a lot of this relates to the way you build the data-driven (AI-driven) organisation.

Do you build the data skills and the data talent pool within the business units? (agile and close to the coal face, but with the risk of duplicating efforts) or do you draw from a centralised pool? (more cost-effective but bigger and mechanically more rigid).

My gut feeling goes with business alignment.”

Developing the fintech skills

Xavier Gomez, co-founder of Paris-based INVYO, which develops cutting-edge business intelligence tools, agreed that the struggle was in retaining talent (both new and current employees), but also pointed out that the education system needs changing:

“The corporates and startups are facing a double challenge ahead with digital transformation.

First, corporates and startups must attract the best talent and keep them, and in the meantime, they must sharpen the skills of current employees to adopt digital transformation and artificial intelligence.

Moreover, all sectors are concerned by the digital transformation that increases the pressure to develop a real corporate policy for the talent from HR departments.

We must adapt our educational system to provide the right skills concerning our students.

Our educational system was not prepared to face a skill you can learn by yourself, by Coursera or by developer community (geek community) on the web. How therefore can companies select the right people when they don’t have the skills themselves?” 

Competing for #FinTech talent

Xavier also pointed out that competition between companies is impacted by them all looking for the same skills.

He said:

“We should not forget that competition to attract talent is exacerbated because corporates and startups search the same profile. Our educational system was not prepared to produce thousands of student with AI skills. 

Corporates promise good salary and perspectives, but the reality is different.

Most of the students are disappointed by their jobs after a few months. They are given tasks asking for use of VBA [a programming language] or Excel, but nothing regarding their quality of coding or data science knowledge, because their bosses are old fashioned. 

The main reason is due to the top management, who wish to carry out policies of digital transformation but who have forgotten to form management which executes the orders of the top management (creation of Datacenter, innovation, and transformation departments).

The fact that fintech hubs are competing against each other is the best guarantee to have a healthy development of this young and innovative industry, but the regulator has to protect the individual customers using fintech services.”

Different perceptions of AI

Corporate governance expert David Doughty suggests that the war for talent has been exacerbated by the limited amount of people who understand AI and the amount of true AI being done by big banks vs. startups:

He said:

The Refinitiv AI report highlighted the disconnect between c-suite and data scientist perceptions of AI.

We have talked about the propensity for executives to buy into the latest buzzwords such as ‘blockchain’ and ‘AI’, leaving the people down in the engine room to do the more mundane tasks of implementing this new shiny stuff – which in the case of AI is more likely to be the automation of manual processes rather than anything more advanced such as machine learning or AI.

And the advanced stuff is more likely to be done in the fintech and regtech startups rather than in-house in the banks and other financial institutions.

So what that means is that there will be a bidding war for anyone with remotely any AI experience/qualifications at similar eye-watering salary levels to quants, but recruits will find that there is either no or very little cutting-edge AI being done in the big behemoths.

It’s all happening in the startups and challenger banks — so being millennials they will leave and go where the action is even if this means taking a significant pay-cut — thus exacerbating the shortage of AI people wanting to work for the big boys.”

Managing the #FinTech talent war

During the #RefinitivSocial100 London breakfast, we asked fintech speaker Liz Lumley the same question and she shared how her business is managing this challenge.

To summarize – while a #FinTech talent war, caused by the advances in AI and its impact on finserv companies, is focusing on recruiting new talent, a number of other issues have also arisen such as retaining and educating future talent at all levels.

Originally posted by Kelvin Lee, Director, Social Media for Financial & Risk, Refinitiv https://www.refinitiv.com/perspectives/ai-digitalization/how-to-win-the-fintech-talent-war/

How is machine learning impacting the financial services industry? Download the report.

But what exactly is an “executive”​ Chairman?

Congratulations to Sharon White on her appointment as the John Lewis Partnership’s executive Chairman to take up the role when Sir Charlie Mayfield steps down in early 2020.

Refreshingly, Sharon’s exclusively public sector experience was no barrier to her appointment – my experience working with boards in the private, public and not-for-profit sectors is that there is a lot the private sector can learn from the other sectors, especially with regard to Corporate Governance.

My question though relates to Sharon’s title – “executive” Chairman – what does that mean exactly?

One of the main principles of the UK Corporate Governance Code is that the roles of Chief Executive and Chair should be separated – no one person should have unfettered decision making powers.

Excellencia Governence Model

The Chief Executive is responsible for running the Business and the Chair is responsible for running the Board – which is why it is undesirable to have one person doing both roles.

As we have seen with another high profile “executive” Chair; Luke Johnson at Patisserie Valerie, confusion over governance roles often indicates failings in other areas of business acumen.

In Sharon’s case, she will have the Managing Directors of the John Lewis and Waitrose partnerships running their respective businesses – performing the executive function,so hopefully the confusion is just in her job title and not the role itself as being Non-Executive Chairman of two major brands at what is a very difficult time for the retail sector is a big enough job in itself without being expected to do the CEO role as well.

Machine Learning and Financial Services

 

Smarter Humans, Smarter Machines was the core theme of our closed-door #RefinitivSocial100 UK roundtable held in September 2019, with 10 of the UK and Europe’s most influential thinkers and thought-leaders on social media in the world of FinTech.

  1. Banks have been saying for a very long time that the data they have is messy and needs to be cleaned. It doesn’t matter if it’s going into AI, or any other system.
  2. There is a disjoint between C-suite executives and data scientists. The C-suite have grabbed onto AI and think it will solve all their problems. The data scientists, on the other hand, understand that there’s a lot of work to go before you get to those high end benefits.
  3. To read more about AI and the data quality challenge, download the Refinitiv report: Smarter Humans. Smarter Machines.

Hosted by Refinitiv CEO David Craig and Ben Shepherd, Chief Strategy Officer, and moderated by Amanda West, SVP Innovation Refinitiv Labs, we held a near 2 hour-long discussion on the future of artificial intelligence and the challenge of poor data quality in financial institutions. The main question that everybody was seeking to answer was: Is poor data quality hindering the deployment of machine learning (ML) by financial services companies?

How serious is the challenge of poor data quality in deploying machine learning in financial services?

Liz Lumley (@lizlum), Director of content and Fintech ecosystem at VC Innovations, kicked off the discussion by explaining that financial organisations have faced a data quality challenge since long before AI emerged:

Banks have been saying for a very long time that the data they have is messy and needs to be cleaned. It doesn’t matter if it’s going into AI, or any other system”.

While this was accepted around the table, FinTech entrepreneur, Xavier Gomez (@xbond49), stressed that AI is putting the problem of bad data into stark relief:

“When we imply that the data might be wrong, we are of course implying that the ultimate decision you make, the automated, autonomous decision made by the AI, having gone through machine learning, could be wrong”.

FinTech and digital payments advisor, Neira Jones (@neirajones) agreed that using bad data in ML somewhat defeats the object. She added that the problem is compounded by an increasing expectation that data should be accessible and usable immediately:

Years ago, when we had huge data warehouses… you would have time to clean up your data. Companies had many people doing just that. Now, we’re in an era where we’re moving to instant. We want real time payments – and dirty data is even more of a problem”.

Amanda West, SVP of Innovation at Refinitiv pointed the way forward:

You actually have to go back to basics and adapt the data into a fit state in order to be able to apply any of the sophisticated machine learning capabilities to your business”. She added, “We’re now seeing a lot of conversations in the market about how to prep your data to make it readily consumable”.

Agreeing with this approach, Neira Jones cited a different, but equally compelling, reason for cleaning up your data:

“Accuracy is also one of the fundamental principles of GDPR, so data needs to be clean. We’ve spent a lot of years not cleaning it. Well, now we simply have to do it.”

What is the cost of bad data?

Building on Niera’s point about GDPR, Xavier Gomez highlighted the legal risks that companies face by retaining or using bad quality data:

“You need to ask yourself, ‘Has the data been lawfully acquired? Do we need anonymize it?’ Complying with your legal requirements is an additional step in your data cleansing.”

Independent corporate governance advisor, David Doughty (@daviddoughty), echoed this view, suggesting that the cost of cleaning up data remains one of the primary blockers, regardless of legal obligations:

“The reason data remained dirty for so long is that the cost of cleaning it up just wasn’t justified. That position needs to change”.

Is the challenge overblown?

Timo Dreger of InsureTech Forum (@insurtechforum) had a different take on the question. While poor data quality is certainly an issue, he said, the scale of the problem is overblown due to massive levels of hype surrounding AI in financial services.

“Lots of start-ups say they are using AI. They say “we’re a tech company, we do things differently”, but when you actually look inside, they’re doing it manually.”

Timo quoted a 2019 survey from MMC Ventures which found that nearly 40% of European AI startups don’t actually use AI.

Smarter Humans. Smarter Machines. brochure from the #RefinitivSocial100 Breakfast Roundtable.

David Doughty agreed about the hype surrounding AI, but pointed a finger of blame at the board room:

“There is a disjoint between C-suite executives and data scientists. The C-suite have grabbed onto AI and think it will solve all their problems. The data scientists, on the other hand, understand that there’s a lot of work to go before you get to those high end benefits”.

David Craig, CEO of Refinitiv, wrapped up this particular part of the discussion succinctly, saying that he understood the excitement surrounding AI, but was in agreement that hype sometimes overtakes reality:

“Cloud computing is offering a degree of agility that we’ve never seen before, if you can only harness it. But sometimes the hype [around AI] is too great and the reality takes longer to arrive. This is a reality of modern business”.

To read more about AI and the data quality challenge, download the Refinitiv report: Smarter Humans. Smarter Machines.

Visit our website that ranks the full #RefinitivSocial100. We invite you to follow and join the conversation via #RefinitivSocial100 on social media.

Risk management is no longer just about financial risks

Risk in business is inevitable – in fact it is essential. A business which does not take commercial risks will not grow, and a business which does not grow is doomed to decline.

Yet, by and large, people in business, as in life, are risk averse, seeking where possible to follow the path which provides the lowest perceived risk.

That is not to say that business leaders should behave recklessly, taking unnecessary risks with little regard to the consequences. Rather, they should take managed risks, and it is the job of the board to ensure that the risks are managed robustly and rigorously.

Businesses need to identify the risks that they face, think of ways in which they might reduce the impact of each risk on the operation of the business and prioritise their focus onto the risks with the highest likelihood of occurrence and the greatest impact to the business.

Strategic, or enterprise, risks are the overarching risks the business takes when it sets or modifies the direction of travel of the business.

With the advent of the internet, social media and digital marketing, the main risks businesses face are no longer purely financial – business failures are much more likely to occur because of reputational, environmental or security risks.

Boards need to satisfy themselves that the business’s risks are being addressed effectively and that they have the expertise available to identify, mitigate and manage risks which are far more important today than they were two decades ago.

As we have seen, businesses which have gained significant market share by delivering innovative products or services can have their share values decline dramatically through an ill-considered tweet (Elon Musk and Tesla) or misuse of customers’ data (Mark Zuckerberg and Facebook) – reputations which have taken years to make can be lost almost immediately, and many boards are ill-equipped to build the reputational resilience for their businesses to survive in the digital age.

Cyber-security is also now a very real threat to the livelihood of many businesses, and it is not just a technical issue. Boards are investing in new technologies such as blockchain and artificial intelligence to supplement their use of cyber-security consultants, penetration testing and ethical hacking to make their data systems more secure, but unless they also tackle their internal security processes there is still the possibility that a disgruntled employee or sub-contractor will leak sensitive data to competitors or publish it on the internet.

We have also seen the rise of state-sponsored cyber-threats which have further damaged the reputations of companies such as Facebook and Twitter, where fake accounts and targeted advertising have been used to influence voters in recent elections.

In addition to these reputational and security risks, boards are also having to contend with the external risks brought about by volatile financial markets. Brexit in Europe and the threat of US trade wars have led to wide fluctuations in world markets and currency exchange rates, which can have highly significant and often detrimental effects on global supply chains – and even if businesses are not directly affected the associated loss of consumer confidence can have wide-ranging consequences.

My experience, based on working with boards of businesses in many different sectors, is that board members are often unprepared or ill-equipped to deal with these strategic or enterprise risks, and chairs should question the make-up of their boards and the effectiveness of the way those boards deals with risk.

Boards often fear articulating risks in the mistaken belief that somehow this will guarantee that they will happen. The reverse is closer to the truth – failure to recognise risks means that the business is not ready to address them and has not put in place the measures, controls or mitigations to eliminate or minimise the effect of the risks.

Risks are also not always negative, and a business that is on top of its strategic risk governance can turn a risk into an opportunity at the expense of its competitors.

If businesses are to avoid the dramatic failures that we have seen with companies such as Carillion, House of Fraser, Patisserie Valerie and, most recently, Debenhams, then their boards need to invest in the expertise to enable them to identify, understand and manage the key risks that they face in the first half of the 21st century.

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First published in Business Reporter Future of Risk Issue

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It’s an ill wind that blows no good for the EU

 

There’s an old Chinese saying that “when the wind of change blows, some build walls whilst others build windmills” – well there’s little evidence of either in the corridors of power in the EU according to Udo Baader, founder and head of German bank, Baader Bank, speaking at the Zagreb Stock Exchange Conference in Rovinj, Croatia, today.

He reckons that 2019 might blow up a storm as the bailout chickens come home to roost.

Just when the Eurocrats in Brussels thought that the financial crisis in the EU was over it looks like that is far from being the case.

Over the last 10 years, since the financial meltdown in 2008, the EU has poured €600 billion into the money pit that is Portugal, Ireland, Greece and Spain (PIGS) plus Cyprus – €400 billion going to Greece alone in 3 bailouts – effectively taking EU taxpayer’s hard-earned cash and giving it directly to the Banks by way of the Asset Purchase Program (APP), otherwise known as Quantitative Easing (QE).

Whilst there has been a general reduction in unemployment and an increase in growth in these countries and some Banks, particularly in the US, have done very well out of this scheme, other Banks, especially those in Greece have fared less well – with some of them having over 50% of bad loans on their books, guaranteed by government bonds which are either already high risk or are about to be re-classified so in the coming weeks.

And it’s not just the PIGS + Cyprus that are affected, Italian Banks are also sitting on high-risk collateral and the once mighty Deutsche Bank has lost 80% of its share value over the last decade.

With the possibility of further political instability in Germany following the next round of elections coupled with the perilous situation in Greece, 2019 is likely to prove a very bumpy ride for EU finances.

UK Corporate Governance Code 2018

A new version of the UK Corporate Governance Code was published in July 2018 and takes effect from 1 January 2019.

Of the 2,600 companies listed on the London Stock Exchange, only 1,200 are listed on the Main Market and of those around 850 have a Premium Listing and are therefore required to report on how they have applied the Code – though it is recognised as a best-practice guide to Corporate Governance which sets the standards of board leadership and effectiveness, remuneration, accountability and relations with shareholders and stakeholders.

The Code, which has developed over the last 25 years since the publication of the Cadbury Report, contains broad principles and more specific provisions that Premium Listed companies are required to report on as part of their annual report and accounts. They must state how they have applied the main principles of the Code and either confirm that they have complied with the Code’s provisions or provide an explanation where they have not.

Roughly half the countries in the world which have some form of Corporate Governance regulation have adopted a code approach, similar to the UK, whilst the other half have opted for legislation. The important difference between the two approaches is that with a code, it is the shareholders who are expected to exert pressure on the directors to comply rather than the courts.

Placing the onus on shareholders to ensure that their directors follow the code is a much more flexible solution than legislation and means that the code can be regularly updated to reflect changing needs in Corporate Governance. Unfortunately, the dramatic shift in share ownership from predominately private individuals to financial institutions over the last 40 years has resulted in less pressure on directors to comply with the code rather than more.

To combat this perceived lack of interest of institutional investors in the way the businesses they are investing in are run, the UK Stewardship Code was introduced in 2010 – though this has turned out to be relatively toothless and politicians will be looking for other ways to further influence the standards of Corporate Governance in the boardrooms of the major UK companies.

Both codes are ‘owned’ by the Financial Reporting Council (FRC) which consults widely before making revisions to the codes – in the case of the latest revision to the code, consultation started in February 2017 and concluded a year later in 2018. The transparency of this process has been questioned with some commentators saying that the resultant revisions bear little resemblance to the responses submitted during the consultation.

The new shorter and sharper Code seeks to re-emphasise the relationships between companies and their shareholders and stakeholders, which are enshrined in the 2006 Companies Act, and their importance for the long-term sustainable growth of the UK economy.

The main changes to the code include:

  • a new provision to enable greater board engagement with the workforce to understand their views. The Code asks boards to describe how they have considered the interests of stakeholders (that is anyone with a legitimate interest in the company including employees, customers, suppliers and the local community) when performing their duty under Section 172 of the 2006 Companies Act;
  • a requirement for Boards to create a culture which aligns company values with strategy and to assess how they preserve value over the long-term;
  • an assurance that boards:
    • have the right mix of skills and experience;
    • encourage constructive challenge and;
    • promote diversity;
  • an emphasis on the need to refresh boards and undertake proper succession planning;
  • consideration of the appropriateness of Chairs remaining in post beyond nine years;
  • strengthening the role of the nomination committee in succession planning and establishing and maintaining a diverse board;
  • conducting regular external board evaluations – Nomination committee reports should include details of the amount of contact the external board evaluator has had with the board and individual directors;
  • an emphasis on the need for remuneration committees to take into account workforce remuneration and related policies when setting director remuneration including performance-related pay to address public concerns over excessive executive remuneration.

FRC Chairman Sir Win Bischoff said about the new code:

“Corporate governance in the UK is globally respected and is a framework trusted by investors when deciding where to allocate capital. To make sure the UK moves with the times, the new Code considers economic and social issues and will help to guide the long-term success of UK businesses.

This new Code, in its new shorter and sharper form, and with its overarching theme of trust, is paramount in promoting transparency and integrity in business for society as a whole.”

Business Secretary Greg Clark said:

“Britain has a good reputation internationally for being a dependable place to do business, based on required high standards. It is right that we keep under review and update our corporate governance code to ensure the highest standards.

“That is why I supported the FRC in deciding to update their Corporate Governance Code, and I am pleased to see the revised Code.

“These changes will drive improvements in how boardrooms engage with employees, customers and suppliers as well as shareholders, delivering better business performance and public confidence in the way businesses are run. They will help the UK remain the best place in the world to work, invest and do business.”

Concern about the new Code was expressed by James Jarvis, Corporate Governance Analyst at the Institute of Directors, the Professional body that aims to improve standards of directorship:

“While the shorter and sharper nature of the code is welcome, along with the increased emphasis on the importance of a wide range of stakeholders, the IoD does have concerns over the relegation of professional development to the Guidance for Board Effectiveness. As we highlighted during the consultation period, the role of the modern director is increasingly complex and specialised, and there is an ongoing need for these individuals to take stock of their competencies. By removing reference to the professional development of directors from the Code and only mentioning it peripherally in the Guidance, the FRC risks indicating to directors that it is not important.”

At the same time as the FRC were producing the new code, they themselves were the subject of a review into their own effectiveness. This review, led by Sir John Kingman, the chairman of Legal & General Plc, which is the largest institutional investor in the UK, was set up in April 2018 by the UK government to assess the FRC’s governance, impact and powers to help ensure it is fit for the future.

The outcome of the review, which is due to be completed by the end of 2018, is aimed to make the FRC the “best in class for corporate governance and transparency, while helping it to fulfil its role of safeguarding the UK’s leading business environment.”

The FRC has two big jobs to do – in addition to being the guardians of Corporate Governance, the FRC is also the UK’s accounting and audit watchdog. Some argue that these tasks are too big to be undertaken by one body, whilst others ask if there is a conflict of interest between the roles? – the IoD has called for the creation of a new body to be responsible for promoting higher standards of Corporate Governance to leave the FRC free to concentrate on its core task of improving company audits.

Given the question marks hanging over auditors in the light of recent high-profile corporate failures such as Carillion there is an argument that Corporate Governance is the thing that the FRC does well and it is their perceived failure to improve auditing and accounting standards that needs to be addressed.

The IoD’s rationale for setting up an independent body to oversee the UK Corporate Governance and Stewardship codes is that the shaping of voluntary best practice for boards of directors and the setting and enforcement of accounting standards are very different activities

Dr Roger Barker, Head of Corporate Governance at the IOD said:

“Corporate governance has been swallowed up within a regulator that now urgently needs to focus its energies on improving the legitimacy of statutory audit. The FRC has for many years done a good job acting as the keeper of the UK’s corporate governance code, but we feel its centralised decision-making structure is not conducive to the differing regulatory approaches needed for governance and stewardship on the one hand, and statutory audit on the other. There must be a clear distinction between being robust on audit quality, while continuing to nurture the UK’s much-admired principles-based corporate governance regime”

The IoD is not the only Professional body with an interest in governance. The Institute of Chartered Secretaries and Administrators (ICSA), otherwise known as the Governance Institute – the professional body for governance has also made its views about the FRC known in its response to the Kingman Review call for evidence.

Unlike the IoD, the ICSA is firmly opposed to the suggestion that responsibility for Corporate Governance should pass from the FRC to another regulator given the expertise that has been developed by the FRC.

The ICSA’s concern with the implementation of both the UK Corporate Governance Code and the Stewardship Code is the lack of sanctioning powers open to the FRC to enforce them. This is a view shared by Labour MP Frank Field, co-author of the 60-page report into the BHS collapse by the parliamentary business, innovation and skills select committee with particular reference to Sir Philip Green who fails all but one of the section 172 tests but has not been prosecuted for failing to obey the 2006 Companies Act.

The UK Shareholders Association (UKSA) and ShareSoc have jointly asked for firmer and faster action to be taken against those who violate the integrity of reporting standards. They say that the general perception is that “in practically every financial scandal or financial crisis, the FRC seems to have taken far too long to decide and too often has concluded that nothing has gone seriously wrong”.

Partly this lack of bite for the FRC lies with its position within the regulatory hierarchy as a “Council” it has much blunter teeth than the Financial Conduct Authority (FCA), which might have more success in enforcement if it was given the powers to do so. The Companies Act has been law since 2006 but we have yet to see any meaningful prosecutions for failure to comply with section 172 and only now in 2018 is the new Code asking boards to specifically say how they comply.

With so many high-profile corporate failures being due to an inability to respond to reputational or environmental risks rather than financial ones, does it make sense for the Corporate Governance regulatory body to still have the word “Finance” in its title?

It will be interesting to see what the outcomes of the Kingman review are when the findings are reported at the end of the year.

One thing is for certain, regardless of who ‘owns’ the Corporate Governance and Stewardship Codes in the future and which political party is in power, the pressures on business leaders to improve the way they run their companies whilst avoiding scandals of corporate failures and excessive executive pay will continue to rise.

The 2018 UK Corporate Governance Code can be downloaded here

 

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