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Hermes: Fixing Big Tech – saving the FANGs from themselves

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Hermes: Fixing Big Tech – saving the FANGs from themselves

Despite phenomenal long-term share price performance, Big Tech has been besieged from all sides – governments and regulators have been forced to increase scrutiny, investors are questioning the future economic consequences, while consumers question the FANGs’ social licence to operate. In response to the major issues faced by Big Tech, Sickly Tech, a report by Eoin Murray, Head of Investment at Hermes Investment Management, raises deep questions about Big Tech’s future, the risks for investors, and outlines the necessary steps to drive reform.

Even the market ruckus earlier this year failed to derail the trajectory of the Big Tech leaders. Instead, the market witnessed dramatic outperformance by Big Tech and the FANGs (Facebook, Amazon, Apple, Netflix and Google), which benefit from the ongoing growth in internet commerce. Indeed, if the FANGs (plus Nvidia and Microsoft) are stripped out, the S&P 500 has fallen over the year to date – such is the influence of their phenomenal momentum. Even from a global perspective, the FANGs are a vital positive story, with global markets overall having fallen slightly in 2018.

However, according to the report, concerns over data privacy have cast a shadow over the strong returns. The report highlights the Cambridge Analytica (CA) scandal as illustrative of the potential vulnerability of the FANGs. CA obtained data from 50m+ Facebook users and quite possibly used it for political purposes. What seems beyond doubt is that it used this information without either Facebook’s knowledge or consent.

 Eoin Murray, Head of Investment at Hermes Investment Management says: “Facebook claims this technically wasn’t a data breach, but it does bring into light the sophisticated algorithms used to target adverts – and similar tools in use at other Big Tech providers. It has not yet become clear exactly what CA did with all the data, but the public reaction thus far is largely one of incredulity that Facebook could fail to understand that the data could be used in dangerous ways.”

 Stewards of responsibility

What is increasingly obvious, is investors need to think more deeply about FANG stocks and question their standards of responsibility.

Murray continues: “They are an important part of US and global business, and influence the fortunes of a vast ecosystem of companies. They dominate consumer growth, technical innovation and economic trends. Furthermore, they influence our communication, are pre-eminent in logistics, and are looking to burgeon into new industries, including healthcare and insurance. However, the question is: are they are responsible stewards of the power they control?”

There are serious questions around accountability and this has been played out clearly in the realm of publishing. Companies such as Facebook and Google are disseminating content, but without the same checks and balances as conventional publishers. This has led to well-publicised issues around fake news and the promotion of rogue content, such as terrorist or paedophile activity.

In June 2017, the European Union fined Google €2.42bn after finding the technology giant abused its internet search monopoly, promoting its own shopping service at the expense of other price comparison sites. It was the biggest competition fine to date from the European Commission, and according to the report, Big Tech could not necessarily be trusted.

 The dominance of data

From shopping records to political affiliation – the prize for Big Tech is data. European policymakers have been worried enough to bring in the new General Data Protection Regulation (GDPR), which represents a robust set of requirements guarding personal data.

“This pushed Facebook to publish privacy principles for the first time and to roll out educational videos helping users understand and exert some control over who has access to their information. Moreover, Big Tech has the backing of a powerful lobby looking to limit future reform.  While it is less powerful in Europe, the US Federal Communication Commission’s decision to roll back ‘net neutrality’ rules demonstrates the power of this lobby,” says Murray.

Moreover, FANG stocks are increasingly monopolistic in their individual spheres and Amazon’s dominance has been implicated in the failure of high street rivals.

Murray continues: “US antitrust policy is clear: If a company brings clear consumer benefits, it can be as big and powerful as it wants. In the short-term, Amazon is pushing down prices and giving consumers choice, but will it have the incentive to do so if its monopoly builds? There are questions over whether antitrust legislation is fit for purpose in the digital age.”

 Poor engagement with shareholders

According to the report, shareholders can play an important role in holding companies to account, but only if a company needs to listen to them.

Murray says:“In many cases, big technology companies don’t need additional capital. They have vast cash flows and cash mountains large enough to support whatever innovation (or corporate acquisition) they choose to pursue. Many of these companies have multi-class share structures that make it harder for shareholders to call company management and boards to account, as voting control is concentrated around the founder.”

Technology companies’ aggressive tax planning arrangements are increasingly concerning. Many technology companies have structured their financial arrangements to avoid domestic taxation in countries in which they operate. For example, Amazon paid just €16.5m in tax on European revenues of €21.6bn reported through Luxembourg in 2016.

So what are the risks for investors?

While Big Tech has seen significant share price growth, sustainability issues pose a risk to its ability to grow revenues, profitability and – ultimately – its ability to operate effectively in a societal context.

The report outlines three major risks:

Increasing regulatory intervention

UK Prime Minister Theresa May acknowledged in September that Facebook and other tech companies had made progress in their efforts to tackle these issues, but added that they still needed to go “further and faster”. In particular, the speed at which terrorist-related material should be erased has been a contentious issue and signals the potential for intervention.

Growing disengagement 

Advertisers are sensitive. Wary of their reputation by association, advertisers do not want their products associated with rogue content. Ultimately, businesses such as Facebook or Amazon are dependent on consumer engagement. If they become disillusioned, or switch off, their business model will struggle.

Enforced breakup/nationalisation

This is a tail risk: low probability but with high potential impact. For the time being, most of these companies have not engaged in the type of anti-competitive behaviour that would bring them to the attention of antitrust legislation. However, there are signs of more aggression. Amazon named one campaign to approach small publishers “The Gazelle Project,” designed to target them “the way a cheetah would a sickly gazelle.”

Positive change in Big Tech can be achieved by collaborative action between companies, government and asset managers and outlines areas where progress needs to be made.

  • Checks and balances

The fortunes of many of these companies are wrapped up with those of their charismatic founders, who may or may not have political ambitions, but have philanthropic ambitions. For many companies, this is the main check to their power and ambition. But is it enough? After all, this still rests with one person. Given the prevalence of data, it doesn’t seem unreasonable to charge Big Tech with acting as an information fiduciary 

  • Digital Geneva Convention or Tech Magna Carta

It took until 2015 for the UN to follow Microsoft’s suggestion that existing international law applies to cyberspace. Microsoft, among others, has proposed a Digital Geneva Convention. Under their proposals, there would be ample scope for the involvement of all stakeholders, whether government, individual citizens or Big Tech. Agreement on a basic set of principles is an obvious first step. 

  • Engagement with governments

These companies are increasingly recognising that they need to engage with governments and tax authorities to prevent a more onerous and intrusive clampdown. Googleagreed a deal with British tax authorities in 2016 to pay £130m in back taxes and promised to bear a greater tax burden in future. However, countries may continue to arbitrage tax laws, so an international agreement may be difficult.

  • Changing business models

Apple and IBM recently launched public relations efforts to demonstrate their responsible use of data. Apple’s new privacy website shows features that differentiate it from, say, Google – algorithms that work at the level of individual devices rather than in the cloud. There is increasing mileage in being seen to use data responsibly.

  • Role of asset managers

As asset managers and asset owners, it is not good enough to simply place Big Tech on a banned list of companies unless they reform – asset managers’ role as stewards of capital must be to engage with those companies directly in order to help change their modus operandi, earn their social licence, and to seek the help of government in reclaiming ownership of our data.

Shareholders have the ability to reinforce the need to manage personal data more carefully, to be cognisant of the unintended effects on democracy, and to call into question the societal propriety of social media.

Murray states:Existing share structures with dominant founders make this challenging, but careful, well-structured engagement on these difficult, but vital issues, should be able to make a difference.

“It has been easy to see Big Tech as a one-way bet with a uni-directional positive societal impact, but sustainability considerations are its Achilles Heel and present an only recently acknowledged risk to investors. As it becomes an increasingly important component part of the US indices, investors need to consider whether these companies are adequately addressing governance and myriad other considerations.”

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Investing into a more sustainable future: changing businesses from the inside out

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Investing into a more sustainable future: changing businesses from the inside out 1

By Shawn Welch, Vice President and General Manager of Hi-Cone Worldwide

As industries across the world are facing unprecedented uncertainty and anticipating the economic implications of the current health crisis, business leaders have the unique opportunity to seize the chance to make lasting, positive changes and re-interpret the business challenges in a positive way – without forgetting or minimising the toll the pandemic has taken. When trying to identify a way forward, the future must be sustainable. We must take this opportunity to find a more sustainable way for businesses and manufacturers to survive.

Environmental and economic concern have only increased the gap on what consumers want – more sustainability – and how much progress businesses can make without risking their viability. However, rather than giving up on ambitious goals, maybe we need to reframe the way we look at sustainability. So far, businesses have tended to react to consumer demands, often without looking into the long-term implications and research-based due diligence one would expect. Therefore, now is the right time to be more deliberate: to continue on the path towards a truly sustainable ‘new normal’, businesses need to consider the bottom line impact more than ever before and truly invest in changing their business models to become more sustainable.

Shawn Welch

Shawn Welch

To meet the UN’s ambitious 2030 Sustainable Development Goals, businesses ultimately must thrive – working towards establishing a circular economy remains crucial. Instead of a linear ‘extract, use, dispose’ approach, materials need to be respected and re-used as many times as possible, which is only possible if products are designed for re-use, re-manufacturing, repair or restarting. After all, any and all consumption comes at a price. In manufacturing, processes draw on resources to produce items that, once they have served their purpose, become surplus to requirements. Yet, to ignore this is to take an incomplete view of sustainability: instead, materials are extracted from waste to re-enter production processes. Reuse and recycling initiatives are central to this and great strides have been made in raising awareness of this need. The full environmental cost of production and consumption includes the choice of materials themselves but also the level of carbon emissions generated, and energy consumed.

Once products and processes have redesigned for a circular approach, this initial investment will often easily be recouped, especially if we start with looking at the facts when starting this crucial process. To make the Circular Economy a focus for any business very often means changing the business model. Here, investing in research and development is vital. In the packaging industry, for example, we are seeing that customers and consumers are increasingly more focused on sustainability, and that surprising changes can unlock societal and business value. Through minimising a product’s carbon footprint or making recycling easier for consumers, lifecycle-assessment-based product redesigns or using recycled plastics instead of larger quantities of cardboard, companies are identifying these more creative options and enjoying the long-lasting benefits that come with implementing them. In any case, leadership is key. A research-driven approach gets everyone on-board and seeing management committing to these goals as part of business plans helps cement these. At a recent Reuters Responsible Business Summit virtual panel, I was part of an interesting conversation. Here, Yolanda Malone, Vice President Global R&D Snacks PKG, PepsiCo, discussed how leaders have to drive the behaviours within the organisation and the tone for the culture. She explained that her sustainable plastics vision is a world where plastics never become waste. Only through putting the mantra of “reduce, recycle, rethink and reinvent” can we bring circular products to consumer. She stressed that, if we don’t reinvent, we will fall back into old habits.

Of course, consumer behaviours play a part and the easier the solution, the more likely consumers will get behind it. End consumers are becoming increasingly conscious of packaging. So, to be truly circular, we need to take into account the entire lifecycle. Mindset change needs to continue to happen. Consumers need to be clear about what their choices are. To achieve this, we must change our businesses from the inside out, allowing for close collaboration inside and outside of our organisations. Other organisations – such as governments and recycling organisations – will need to be involved in businesses’ efforts, multiplying the impact our investments will have. We must address all aspects of sustainability and, for example, have better recycling, a focus on infrastructure and emphasis on consumer education. To recover, reuse and recycle, the R&D must be in place and dedicated to sustainability. Partnerships are important as we, as other leading global companies realise, cannot do this alone. Collaboration is key when investing in a more sustainable, more Circular, future.

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Securing Information Throughout the Supply Chain – Preventing Supplier Vulnerabilities 

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Securing Information Throughout the Supply Chain – Preventing Supplier Vulnerabilities  2

By Adam Strange, Data Classification Specialist, HelpSystems 

The financial services sector is experiencing extreme disruption coupled with rapid innovation as established institutions strive to become more agile and meet evolving customer demand. At the same time, new market entrants compete fiercely for customers. Increasing operational flexibility, through the deployment of cloud infrastructure or via digital transformation initiatives, is critical for future competitiveness but it has also driven regulatory and security challenges, particularly around working with suppliers.

That said, the benefits of a diverse, interconnected supply chain are compelling: agility, speed, and cost reduction all weigh on the positive side of the equation, prompting financial institutions to pursue close, collaborative relationships with suppliers, often numbering in the hundreds or thousands.

Weakness in the supply chain

On the negative side is the increased cyber threat when enterprises expose their networks to their supply chain. In our modern interconnected digital ecosystems, most financial organisations have many supply chain dependencies and it only takes one of these to have cybersecurity vulnerabilities to bring a business to its knees.

As a result, breaches originating in third parties are common and costly – a Ponemon Institute/IBM study found that breaches being caused by a third party was the top factor that amplified the cost of a breach, adding an average of $370,000 to the breach cost.

Concern around the supply chain was also evidenced in a recent report we have just issued, whereby we interviewed 250 CISOs and CIOs from financial institutions about the cybersecurity challenges they face and nearly half (46%) said that cybersecurity weaknesses in the supply chain had the biggest potential to cause the most damage in the next 12 months.

But sharing information with suppliers is essential for the supply chain to function. Most financial services organisations go to great lengths to secure intellectual property, personally identifiable information (PII) and other sensitive data internally, yet when this information is shared across the supply chain, does it get the same robust attention?

Further amplified by COVID-19

Financial service organisations have always been a key target for cyber attacks.  Our research showed that since COVID-19 hit, the risk has elevated further, with 45% of the respondents seeing increased cybersecurity attacks during this period. Likewise, hackers are rejecting frontal assaults on well-defended walls in favour of infiltrating networks via vulnerabilities in suppliers.

But financial services organisations must maintain reputations and ensure customer trust. Firms are keen to demonstrate that they are protecting customer assets, providing an ultra-reliable service and working with trustworthy partners. So, what can they do to better protect their supplier ecosystem?

At the very least, they need to ensure basic controls are implemented around their suppliers’ IT infrastructure.  For example, they must ensure suppliers maintain a secure infrastructure with a minimum of Cyber Essentials or the equivalent US CIS certification controls. Cyber Essentials defines a set of controls which, when implemented, provide organisations with basic protection from the most prevalent forms of threats, focusing on threats which require low levels of attacker skill, and which are widely available online.

Likewise, they need to ensure good information management controls are in place and this begins with accurate information/data classification. After all, how can you apply appropriate controls to your information unless you know what it is and where it is?

How ISO27001 helps organisations put in place a data classification process

The international standard on information security, ISO27001, describes the basic ingredients for data classification to ensure the data receives the appropriate level of protection in accordance with its importance to the organisation. It comprises three basic elements:

  • Classification of data – in terms of legal requirements, value, criticality and sensitivity to unauthorised disclosure or modification.
  • Labelling of data – an appropriate set of procedures for information labelling should be developed and implemented in accordance with the organisation’s information classification scheme.
  • Handling of assets – procedures for the handling of assets developed and implemented in accordance with the organisation’s information classification scheme.

Adoption of this methodology will help financial services organisations and their supply chain take a more data-centric information security approach. However, there are essentially four key stages for implementing a data risk assurance supply chain approach and these are:

 1. Approval – in organisations with complex supply chains senior management, vendor management, procurement and information security will all need to support a robust risk-based information management approach. Details of previous incidents and their impact alongside the business benefits will be essential to gain stakeholder buy in.

 2. Preparation – Organisations should start with Tier 1 suppliers and initially identify the contracts with the highest business impact/risk. They should identify and record information repositories and the data that they contain together with the responsible business owners. Define a business taxonomy based on information categories of that data and include supply chain factors such as what information categories are shared.

For example, they need to understand the business impact of compromise against each of the information categories. Have any suppliers suffered security incidents? What assurance mechanisms are in place? Once all this information is collated the organisation can create a data classification policy and define a set of controls for each data category.

 3. Discovery – Select each data category and identify the associated contracts. Then prioritise the data category based on the risk assessment and verify that the data security controls and arrangements for each data category and contract meet the overall requirements. Once complete, hand over the contract for inclusion in the vendor management cycle.

4. Embed process – the overall objective is to embed information risk management into the procurement lifecycle from start to finish. Therefore, whenever a new contract is created there are a number of actions required which embed data risk at each stage of the bid, tender, procurement, evaluation, implementation and termination phases of the contract.

To summarise, organisations should start by researching the information risk and security frameworks such as ISO27001 and others. They should then focus on defining their business taxonomy and data categories together with the business impact of compromise to help develop a data classification scheme. Finally, they should implement the data classification scheme and embed data risk management into the procurement lifecycle processes from start to finish. By effectively embedding data risk management and categorisation into their procurement and vendor management processes, they are preventing their suppliers’ vulnerabilities becoming their own and are more effectively securing data in the supply chain.

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Deloitte: Middle East organizations need to rethink their workforce in the wake of COVID-19

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Deloitte: Middle East organizations need to rethink their workforce in the wake of COVID-19 3

Organizations in the Middle East have had to take immediate actions in reaction to the COVID-19 pandemic, such as shifting to remote and virtual work, implementing new ways of working and redirecting the workforce on critical activities. According to Deloitte’s 10th annual 2020 Middle East Human Capital Trends report, “The social enterprise at work: Paradox as a path forward,” organizations now need to think about how to sustain these actions by embedding them into their organizational culture.

“COVID-19 has created a clarifying moment for work and the workforce. Organizations that expand their focus on worker well-being, from programs adjacent to work to designing well-being into the work itself, will help their workers not only feel their best but perform at their best. Doing so will strengthen the tie between well-being and organizational outcomes, drive meaningful work, and foster a greater sense of belonging overall,” said Ghassan Turqieh, Consulting Partner, Human Capital, Deloitte Middle East.

According to the Deloitte report, many organizations in the Middle East made quick arrangements to engage with employees in the wake of the pandemic through frequent communications, multiple webinars where senior leaders addressed employee concerns, virtual employee events, manager check-ins, periodic calls and other targeted interactions with the workforce.

The report also discussed how UAE and KSA governments have reexamined work policies and practices, amended regulations and introduced COVID-19 initiatives to support companies and the workforce in the public and private sectors. Flexible and remote working, team-building and engagement activities, well-ness programs, recognition awards and modern workspaces are among the many things that are now adding to the employee experience.

Key findings from the Deloitte global report include:

  • Only 17% of respondents are making significant investments in reskilling to support their AI strategy with only 12% using AI primarily to replace workers;
  • 27% of respondents have clear policies and practices to manage the ethical challenges resulting from the future of work despite 85% of respondents saying the future of work raises ethical challenges;
  • Three-quarters of leaders are expecting to source new skills and capabilities through reskilling, but only 45% are rewarding workers for the development of new skills; and
  • Only 45% of respondents are prepared or very prepared to take advantage of the alternative workforce to access key capabilities despite gig workers being likely to comprise 43% of the U.S. workforce this year according to the Bureau of Labor Statistics.

“Worker well-being is a top priority today, and similarly to the rest of the world, companies in the Middle East are focusing their efforts to redesign work around well-being by understanding workforce well-being needs,” said Rania Abu Shukur, Director, Human Capital, Consulting, Deloitte Middle East.

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