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Posts Tagged ‘Governance’

Media & Tech firms on corporate governance and shareholder responsibility

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In this post we’ll be looking at a variety of firms in the media and tech sector as we examine how their vision impacts on the broader economy.

  • Short-termism and misdirection (Amazon and legacy players)

In March, Zeitgeist was privileged enough to attend an intimate dinner (well, fifty guests or so-type intimate), hosted by the CEO of a major media company. Much of his speech during our meal was focused on his relatively pessimistic outlook for global growth. One of the key causes of this, he noted, was firms and their fanatical focus on what is known as “short-termism”.

Much editorial ink has been spilled on this concept, one which is hardly new. The argument being that, because of a public company’s fiduciary responsibility to shareholders – who are becoming increasingly activist in nature – the C-suite in turn must increasingly focus on quarterly activities that deliver fat returns for said shareholders. This, at the expense of a longer-term vision or strategy that creates, for example, more sustained competitive differentiation, better margins or improved products. Indeed, in Zeitgeist’s view, many organisations, particularly those in legacy industries, are caught in a difficult Catch 22 situation; they need to maintain investor confidence in order to keep share prices stable while simultaneously investing heavily for the medium term in order to reinvent their business and avoid disintermediation from start-ups. Sony is a great example of this We won’t mention any names here of particular examples, of course…

However, what was interesting was that in February, The Economist published an editorial in its Schumpeter section, detailing how “short-termism” was not only a vague term but also misdiagnosed the root cause of the problem. One symptom of short-termism is share buybacks; the article argues that this is more to do with the fact that larger companies are growing more successful (a worrying trend we have touched on before, which puts paid to the idea that digital disruptors are in themselves value-laden orgs). As a consequence of their increasing success, they have more cash than they know what to do with (look at Apple), and so don’t spend it in a constructive way (look at Apple’s acquisition of Beats). These profits, as the article puts it, are “put to no use”. This won’t change unless competition policy improves; that is unbelievably unlikely to happen in a Trump administration.

Of course there are outliers to every argument. Thankfully there is one to be found here in the shape of Amazon. We mentioned The Economist earlier; the company appeared on the cover of last week’s issue, depicted as a fleet of enormous drones from some future time and place. Amazon’s investors seem to be made of an unusual crowd of people with an exclusively long-term outlook. As the article points out: “Never before has a company been worth so much for so long while making so little money: 92% of its value is due to profits expected after 2020“. While nothing seems to be getting in the way of Amazon’s approach for now, regulation will inevitably come into play (though, as mentioned above, perhaps less so in the US), as it becomes an ever more dominant, global force.

  • Accountability and Purpose (BuzzFeed, Snap)

While incumbents are hammering out an approach, newer firms are trying to wind their way to going public. News of an IPO for BuzzFeed recently has raised many eyebrows. As the Financial Times pointed out last year, the company has “missed revenue targets in 2015 and halved its projections for 2016 from $500m to $250m”. Not a shining endorsement. Even without its prior performance taken into consideration, its business model is not guaranteed to woo investors, who are not usually won over by ad-supported models, or by firms that make viral videos, which rely on the fickle interests of the masses to make them profitable.

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At the other end of the spectrum was the frothiness and exuberance that greeted Snap’s recent, enormous, IPO (albeit, as above, with some skeptical heads). This despite its existential challenges as platforms like Instagram et al seek to emulate what currently sets it apart from its rivals. In addition to this, there has been concern over the opacity of the company’s structure and shareholding rights, indicative of what the FT called a “21st century governance vacuum”. Snap’s IPO was the first ever in the US to issue shares with no voting rights at all. The newspaper elaborated,

By any standard Snap’s governance arrangements are flawed and its directors minimally accountable. Anne Simpson, a leading governance expert at the California pension fund Calpers, dubs this “a banana republic approach” to corporate governance.

Though the worst sinner, it is also indicative of a larger, worrying trend that is particularly common at tech companies (see Google, Facebook and Alibaba). The reason for going public has changed. As the FT points out, the principle reason for doing so now is so that “fresh equity fills the yawning gap between revenue and expenditure”. A lack of investor oversight means that accountability is less prevalent than ever.

On the bright side, some companies are looking beyond simply maximising shareholder returns to see how they can benefit society. Last year, Boston Consulting Group wrote an unusually whimsical thought piece on the impact businesses could have if they imbued themselves with purpose, acknowledging that with globalisation and technology trends, there are sometimes losers. Deloitte worked with the UK government to publish a report (also last year), detailing how businesses with a purpose beyond traditional financial returns – aka “Mission-led” – were more successful than those without.

  • Next steps

Such thinking and work needs scaling, and needs to be evangelised beyond the traditional boundaries of Davos seminars. Without it, increasing deregulation and opaque public offerings are likely to hasten the end of an already long-ish period of global economic growth. Media and technology firms of today tend to provide products that are mostly services, i.e. intangible to the end-user but imbued with value. It would be prudent for them to think about where transparency and accountability adds purpose to their vision, structure, strategy and communication.

 

Cyberattacks and espionage – Risks and Prevention

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It’s not quite as cool as Bond in his Tom Ford suit leaning on his wonderful Aston Martin while he plots his next move to unseat some despot. All the same, Germany’s recent apparent spate of typewriter purchases points to a renewed sense of fear of being overheard and compromised in an era of digitally pervasive content, vulnerable networks and indelible conversations. Spying and intelligence concerns coalesced with subject matter we’ve previously written about – including online privacy, governance, security and the internet of things – in a special report in last week’s The Economist, which produced eight articles on the subject of security in a digital landscape. Some highlights:

  • Cybercrime is costly. The Centre for Strategic and International Studies estimates the annual global cost of digital crime and intellectual-property theft at $445 billion – a sum “roughly equivalent to the GDP of a smallish rich European country such as Austria”.
  • Focus on prevention rather than reaction. As with many things, the best way to make sure cyberattacks aren’t too damaging to your business is to make sure they never happen in the first place. It’s more difficult (and costly) with digital security because the process can easily feel like a Sisyphean struggle; businesses invest in new technology only to see it circumvented by more hacking, perhaps exposing a different loophole or vulnerability. But an iterative approach is better than leaving the door open and spending more money after the fact.
  • Honesty is the best policy. After being hacked, a company can find it hard to admit it. This is understandable. Not only is it somewhat embarassing, it admits to customers and shareholders that the company is vulnerable, but it also suggests that their data is not safe with said company; perhaps they should shop elsewhere. However, transparency in such a situation is paramount if others are to learn how to combat such attacks. One suggestion is that the US government “create a cyber-equivalent of the National Transportation Safety Board, which investigates serious accidents and shares information about them”.
  • Who to complain to? The perpetrators of cybercrimes are no longer limited to the teenaged hackers of yesteryear. Though ideological groups like Anonymous serve as a disruptive influence, often the biggest problems are caused by the governments charged with protecting things like individual privacy, security and freedom of speech. From the US to China, authorities “do not hesitate to use the web for their own purposes, be it by exploiting vulnerabilities in software or launching cyber-weapons such as Stuxnet, without worrying too much about the collateral damage done to companies and individuals”.
  • External trends point to a worsening of the problem. The Internet of Things as a trend will have billions of devices connected to each other via the Internet over the next few years. With one of the fundamental ideas being that the user isn’t really aware of the connection, the likelihood of spotting a hacked device becomes all the smaller. This isn’t a huge problem in cases like a connected fridge receiving spam email, but it becomes more of a problem when hackers can gain remote control of your car. One of the barriers to improved security for everyday devices is that the margins are razor-thin, as are the chips to connected to the devices, in order to keep the product small. Any added security software or hardware and the cost and size of the product increases.

Zeitgeist believe the risk to IoT devices will be one of the key areas that businesses and regulators will need to focus their efforts in the future. Because it is still a relatively fledgling sector, the issue is not being discussed yet in many places. Deloitte, in association with the Wall Street Journal, recently reported on the nature of cyberrisks and how companies can help mitigate them. Well worth a read.

A Lack of (Virtual) Governance

October 31, 2011 1 comment

If you’ve been living in or aware of any of the news coming out of the Middle East of late, you’re probably cognisant of the fact that the status quo as we have, for generations, known it, is coming to an end. If you’re living in a major city somewhere in parts of the world governed by more democratically representative institutions, you’re probably aware that similar tremors of discontent our rocking the foundations there, too. Just as important, however, is the state of disarray the internet finds itself in currently.

What began in New York with the Occupy Wall Street movement has since spread, across the US and across the world, including the streets of London, where squatting protesters have led to St. Paul’s closing for the first time since World War II. Social media, as with the protests in Tunisia, Egypt and other regions, has played a significant part. The protests in the West, while photogenically and aesthetically pleasing (the artwork Banksy donated to the London protest being one such example), not to mention emotionally charged and influential, have thus far produced little in the way of results. Perhaps this is due in part to the incoherence of the messages being broadcast from the panoply of protesters.

There are, realistically and practically speaking, for better or worse, few immediately attractive alternatives to capitalism. What matters, however, is the way the capitalism is operated and governed. For though the protest in New York focused on the epicentre of the financial district in Manhattan, the focus is a misnomer. According to a poll shown recently on Meet the Press, more people apportion blame to the government than on financial corporations. So is the problem one of governance then?

While such debates rock the material world, discussions just as important are flaring up surrounding the digital world. Who should be in charge of regulating content in the virtual sphere? Moreover, should some content or users or providers be prioritised over others?

The net neutrality debate has been under discussion for years. Its concerns revolve around the notion that anyone, anywhere should be able to access any content they choose at at the highest speed possible. It favours no particular user or website. The risk is that your access is arbitrarily regulated, both in terms of just what you can see, and also how easy it is to get to it. Some major players, be they countries like China – which recently banned the search term “occupy” – or large media corporations like Comcast, are already breaking this unspoken rule advocated by the founders of the Internet. Last month, the FCC announced new net neutrality rules, which didn’t please either side of the issue very much. Mashable writes that “while new rules do prevent fixed broadband providers from blocking access… they are different for wireless providers”. This latter exception dovetails nicely with Amazon’s release of its latest product, the Kindle Fire, which debuted recently. An article published in Politico last week quotes various pundits who accuse the device – which uses Amazon’s cloud-based servers – of optimising Amazon content over others, essentially making it more attractive and easier to access. Proponents of net neutrality should be wary, but what is there to do without a centralised, independent governing body with teeth to reach out to?

A recent article in The Economist noted that the internet is “shambolically governed”. This is due in no small part to the fact that at its inception, those who founded the world wide web could never have dreamed it would grow to become the network of networks it is today. However that is no excuse for action not to be taken now. One drastic notion was recently mentioned in an article appearing The Financial Times. Ori Eisen of 41st Parameter, a security company that defends banks against online crime, believes that efforts to create a wholly secure environment online are “in the long run… essentially hopeless”. Vint Cerf, described in the article as “one of the fathers of the internet”, has voiced his own concerns about the lack of security online, saying that more should have been done at the outset. He concedes that he is “actually quite interested in the clean-slate ideas”. Mr. Eisen has set out plans for Project Phoenix that revolve around creating an Internet 2.

“Included in his blueprint are biometric identification, encryption of all keystrokes and virtual machines created for every transaction.”

Such a radical overhaul has piqued the interest of Michael Barrett, head of security at PayPal, and the Pentagon’s DARPA – whom Zeigeist have written about before – are also passing around ideas for a redesign. Any such redesigns though would “be doomed without a government mandate or a consortium of banks or telecommunications companies stepping in”. This leads us on to our investigation of governance.

While the regulation of the internet may be chaotic, it has also helped foster a great deal of innovation in the absence of restrictive regulation. In keeping with this freedom of expression, the 2,000 people from 100 countries who met in Nairobi this week for the Internet Governance Forum “all had the same right to take the floor… decisions are made by ‘rough consensus'”. While the American-baked ICANN currently regulates the internet address system, other countries such as China and Russia are pushing for alternative bodies to be created, the upshot being that national governments have more of a say in how the internet is run. This kind of thinking is dangerous, but it does remind us that currently the system is almost entirely under the purview of the US government.

For the world outside the internet, the opportunities for change and development in democracy are not encouraging. The protesters at St. Paul’s cathedral in London have been allowed now to stay until New Year. Then what? What will it take to happen for the inchoate protesters to consider their work done? Any such practical remedies to be taken will surely involve government investment and expenditure. Yet this is precisely what the government is in short supply of. In the US, the judicial system is becoming underfunded to the extent that the process and execution of the law is becoming weakened. Emergency loans are having to be made by courts, so that processes that currently take twice as long as they should, do not end up taking three times as long. This lack of government is effecting lives now. The situation is similar in China, where suddenly workers in the private and public sector are finding themselves without pay;

“Work has all but ground to a halt on thousands of kilometres of railway track, and many of the network’s six million construction workers have been complaining about not being paid for weeks or sometimes months.”

One bright light might be suggested, of all places for a democratic wellspring, in Russia. Wikivote allows users, with particular priority given to heavy users and invited experts, the chance to reshape, comment and question draft laws and vote on the suggestions.

What the internet needs, suggests The Economist, is “a proper constitution, complete with a bill of rights for stakeholders and a separate board of review”. The difficulty will be in first creating such a document and body that functions efficiently without drowning in compromise. More importantly, it will have to ensure that the rules it enforces do not hamper the very innovation that has made the internet one of the most creative, inventive and revolutionary mediums ever.