The European Financial Review December/January 2020 edition by EBR MEDIA

World Economy on the Brink

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Millennials and their Money

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Facebook Money & Climate Change

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From Follower to Leader: China’s Special Economic Zones

December - January 2020

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Exclusive Interview with

Mr. Graham Bright JP HEAD OF COMPLIANCE AND OPERATIONS EURO EXIM BANK

Accelerating GLOBAL TRADE ECOSYSTEM with Compliance, Innovation and Efficiency

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The European Financial Review empowering communication globally DECEMBER - JANUARY 2020

Sustainability

World Economy 8

World Economy on the Brink Graham Vanbergen

Venture Capital

Great Britain 11

With the general election out of the way, the government needs to refocus its efforts on housing reform Paresh Raja

Innovation

Atradius and Kemiex Shake up the Raw Material Trading Landscape in Pharma, Veterinary, Food and Feed

Accelerating Global Trade Ecosystem with Complience, Innovation and Efficiency Interview with Mr. Graham Bright JP, Head of Compliance and Operations, Euro Exim Bank

New Opportunities in Old Markets: the Changing World of Global Trade Finance Chris Newman and Andrew Fraser

Risk Management Managing Risk in a Modular Economy Kamil J. Mizgier

The Challenge of the ‘Shifting Sands of Model Risk Management’ for Banks Tony Bethell

China and the World series 60

Interview 26

Trading with Trust: what does it take to provide the best trading experience? Exclusive interview with Ms. Farah Hawilo Executive Director, Trust Capital TC

Millennials and their Money: Predictions for the Great Wealth Transfer Ben Revill

Interview 39

Trading Forex on the Wings of an Eagle Exclusive Interview with David Muscat, Head of Affiliates and Marketing, EagleFX

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From Follower to Leader: China’s Development of Special Economic Zones and Its Global Impact and Lessons Xiangming Chen

Executive Compensation 68

Wealth Management 33

Security vs. Convenience: Delivering seamless, secure service experiences John Watkins

Trade Finance 26

Time to Fix the Broken Investment Model Kevin Monserrat

Data Security

Accelerator Series 18

How Facebook Money Could Counter Climate Change Shann Turnbull

Why Do So Many People Think That CEOs Earn Too Much? Rainer Zitelmann

Family Business 71

Portrait of Darius Forbes Denise Kenyon-Rouvinez

Leadership 75

If Transformational Leadership Comes First, Knowledge Management and Financial Performance Will Follow Mostafa Sayyadi

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From the Editors

s we approach the start of an entirely new decade, there is no better time to bring innovation at its peak and sustainability as a top priority. With this in mind, the year-end issue of The European Financial Review features a brand new series “The Accelerators”. In this special feature series, we want to highlight the top innovators who accelerate the positive development of different sectors. In the inaugural episode, and also our Cover Story, we are delighted to focus on the Trade Finance industry, and we have an exclusive interview with Euro Exim Bank’s Head of Compliance and Operations, Mr Graham Bright. He provides revealing insights into the exciting innovations and developments in the trade finance industry and beyond. He further shares his views on the broader ethical, social and people issues that are interconnected and indispensable elements in making the bank a global success. Another fast developing industry is the world of Forex. To discover the latest trends and innovation in this sector, we have the pleasure of speaking with Trust Capital’s Farah Hawilo and EagleFX’s David Muscat. We talked about their unique features and offerings, and the story behind their respective company’s journey to the top. More on innovation in the financial industry, Shann Turnbull offers an intriguing proposition on how Facebook money can be used to combat climate change. He argues that the value of money in the more sustainable regions needs to have a higher value than money in less sustainable regions. This means the

value of money in each region needs to be tethered to a Sustainability Index, which can be implemented by collecting the data from each region of the world, and all the large corporations (like Facebook) are already doing it. Another highlight of this issue is the return of our China and the World Series. Started in 2012, Professor Xiangming Chen has taken our readers to discover the local and regional development and transformation deep inside China and their echoes and extensions across varied places and boundaries around the world. The article in this edition takes the trans-local dimension of “China and the World” further by tracing how China has evolved from a follower to a leader in building special economic zones (SEZs). Turning our focus back to Europe, the recent general election in the UK has made a significant impact across the region. With the Conservative winning the majority, the new government now needs to manage the remainder of Brexit negotiations, and Paresh Raja suggests that it is also vital to refocus its efforts on housing reform. Further in the issue, we explore trending subjects including risk management, executive compensation, the millennials’ financial behaviour, identity security, as well as leadership and transformation. We hope that you find inspirations from the pages of this year-end issue for your new year’s resolution, and we want to send you our best wishes for a beautiful and restful Christmas holiday, and a blessed and prosperous new year. Happy Holidays!

Production & Design: Angela Lamcaster Print Strategy: Stefan Newhart Production Accounts: Lynn Moses Editors: Elenora Elroy, David Lean Group Managing Editor: Jane Liu Editor in Chief: The European Financial Review Publishing Oscar Daniel READERS PLEASE NOTE: The views expressed in articles are the authors' and not necessarily those of The European Financial Review. Authors may have consulting or other business relationships with the companies they discuss. The European Financial Review: 3 - 7 Sunnyhill Road, London SW16 2UG, Tel +44 (0)20 3598 5088, Fax +44 (0)20 7000 1252, info@europeanfinancialreview.com, www.europeanfinancialreview.com No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission. Copyright © 2019 EBR Media Ltd. All rights reserved. ISSN 1757-5680

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World Economy

WORLD ECONOMY ON THE BRINK BY GRAHAM VANBERGEN

2019 has already proved to be the weakest global expansion in a decade and another fracture in the financial system is producing yet more rising dangers in shifting political economies – ill-prepared for a second assault like the last. Graham Vanbergen makes the case that there is a lot more at stake than just another recession.

t was Benjamin Franklin that opined that in this world nothing can be said to be certain, except death and taxes. Both, of course, are the normal

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consequences of living and since the birth of money – so are economic recessions. And it appears that no matter how much meddling and tinkering we humans do, even with the advantage of our collective history and technical advances – all three are as assured as each other. It was not so long ago that the global banking system suffered its near-death experience. In its death rows, flashbacks of the 1920s depression years came and slowly went. The lessons of these and other recessions

December - January 2020

have still not been learned though. Our species is, after all, inherently flawed as are the financial systems we build around us. Last year, in an article for The European Financial Review (The Predicted 2020 Global recession Oct 2018), I wrote that by late summer 2019, economists all over the democratic West would be talking of another financial crisis. They are, but with ever more shrill warnings of a repeat of the most ruinous economic slump in history, which is yet still to fully recede. The IMF reports that that global economy is in a synchronized slowdown and is now performing at its slowest pace since the global financial crisis. In its October report – rising trade barriers, increased geopolitical tensions, low productivity growth and aging demographics in advanced economies are the key issues. Investor confidence is also draining away. All these issues are a problem, but they were not unexpected.1

The real problem is that the world has not faced up to the real aftermath of what happened in 2008 and unexpected events now dominate global growth as a result. The impact of the last crash has been far more devastating than the financial ruin of millions. In its wake, the democratic world is seeing a shift of ideologies – the rise of populists, the far-right and religious conservatism. Isolationism, nationalism and racism are some of the hallmarks of its progress and declining middle-classes along with austerity is its ringleader. Steve Bannon, the architect of Donald Trump’s ascendency to the Whitehouse likes to brand it “economic nationalism.” The falsity of this is that its ideology takes greater control of the markets – far from the free-market system he espouses. Mervyn King, the former governor of the Bank of England has recently made the point that another global financial crisis is not just inevitable but actually en-route. The Western banking system has proved beyond doubt that it was neither robust nor disciplined enough to make the necessary adjustments to future-proof markets and as King asserts – the democratic West is strolling blindfolded straight into a new slump, turning the Great Recession into an epoch. King rightly warns that – “Another economic and financial crisis would be devastating to the legitimacy of a democratic market system - and sticking to the new orthodoxy of monetary policy and pretending that we have made the banking system safe means we are sleepwalking towards that crisis.” King goes on to say that – “No one can doubt that we are once more living through a period of political turmoil. But there has been no comparable questioning of the basic ideas underpinning economic policy. That needs to change.” Nouriel Roubini the economist that advised the IMF, the US Federal Reserve and World Bank also warns of the rising dangers of these shifting political economies.

Roubini makes the point that there are four global collision courses being played out. First, is the zero-sum game of chicken represented by the US-China trade war. Then, the escalating and highly divisive political trench warfare in the UK over Brexit and its effects upon the European Union – (just as America starts prodding it with tariff barriers to force the EU to comply to its own standards reductions). Then, there is the potential fallout in the Middle-East as American influence wanes and finally, the economic implosions of South America.3 Roubini says that additional economic pressures are building into political outcomes and King asserts that the institutions put in place to protect global economies from another bank-led crisis don’t have the firepower to insulate from another emergency. Roubini: “A full-scale trade, currency, tech, and cold war between the US and China would push the current downturn in manufacturing, trade, and capital spending into services and private consumption, tipping the US and global economies into a severe recession. A failure to compromise would lead to a collision, most likely followed by a global recession and financial crisis.” King: “Following the Great Inflation, the Great Stability and the Great Recession, we have entered the Great Stagnation. It is the failure to face up to the need for action on many policy fronts that has led to the demand stagnation of the past decade. And without action to deal with the structural weaknesses of the global economy, there is a risk of another financial crisis, emanating this time not from the US banking system but from weak financial systems elsewhere.” The lethal combination of Trump’s global trade wars, Britain's democratic failure to contain Brexit alongside, Europe’s fragile euro and the aforementioned triggers of economic difficulties almost guarantees another fracture in a system ill-prepared for a second assault like the last.

In its wake, the democratic world is seeing a shift of ideologies – the rise of populists, the far-right and religious conservatism. Isolationism, nationalism and racism are some of the hallmarks of its progress and declining middle-classes along with austerity is its ringleader.

The real problem is that the world has not faced up to the real aftermath of what happened in 2008 and unexpected events now dominate global growth as a result. europeanfinancialreview.com

World Economy

2019 has already proved to be the weakest global expansion in a decade. Last month's United Nations trade and development body, Unctad warned that – “A spluttering north, a general slowdown in the south and rising levels of debt everywhere are hanging over the global economy: these combined with increased market volatility, a fractured multilateral system and mounting uncertainty, are framing the immediate policy challenge.” The UN argues that the slowdown in growth in all the major developed economies around the world are relying on easy monetary policy and asset price rises to stimulate demand. This failure to act on the crisis of the last decade will produce, at best, “ephemeral” growth, while tax cuts for corporations and wealthy individuals is failing to trigger productive investment. Rising economic and political failure The result of this failure of economic management is evidenced all over the world and even in historically stable countries. From months of rioting in France to mass public protests in Britain. The ʻjust about managing’ are reacting against a political economy that is not working for them. Anti-government protests or one-sided political economies have ignited protests in a dozen other countries around the world – and as the saying in Chile goes – “If there's no bread for the poor, there's no peace for the rich.”

The decade long economic perfect storm was passing but political ripples are once again turning into the breaking waves of economic shocks and dramatic political change with far-reaching implications. Today, we are witnessing the failure of neoliberalism to deliver its “trickle-down” promises and as this 40-year project of failure continues, the liberal global order is disintegrating. Autocratic rulers, demagogues and populists are now leading countries that contain well over half the world’s population.4 Our system of financing the global economy is the very cause of its own demise – with democracy now at threat even in places like Britain. Britain is a burning example of economic failure where vulture capitalists now circle and hedge funds are backing its decline and shorting its currency. Brexit is nothing more than the accomplishment of disaster capitalism – itself nothing more than evidence of economic mismanagement. Neoliberalism is crushing its most revered jewel where tolerance, freedom and economic prosperity has quickly been replaced with its ugly twin – Steve Bannon’s economic nationalism, not just in America but of all places in the world – in Britain. It is not just the world economy that stands on the brink but the social democratic political systems that underpinned it.

Graham Vanbergen is the founder and contributing editor of TruePublica and author of Brexit – A Corporate Coup D'état. References 1. https://blogs.imf.org/2019/10/15/the - world - economy synchronized - slowdown - precarious - outlook/ 2. https://www.theguardian.com/business/2019/oct/20/world - sleepwalking - to - another - financial - crisis - says - mervyn - king 3. https://www.project-syndicate.org/commentaryplaying - chicken with - global - economy - trump - china - iran - argentina - by - nouriel - roubini - 2019 - 09 4. https://www.hrw.org/world-report/2017/country - chapters/dan gerous - rise - of - populism

The European Financial Review

December - January 2020

Great Britain

With the general election out of the way, the government needs to refocus its efforts on housing reform BY PARESH RAJA

he general election campaign in December was a vociferous, intense political duel. With the dust still settling, Britons now look to see how this new government will manage the remainder of Brexit negotiations and our withdrawal from the European Union. Many, especially business leaders, hope it will come to some kind of conclusion in the coming

weeks – not least to draw a line under the ongoing political hostility and economic uncertainty. Indeed, one of the government’s main tasks will be to lead national healing; Brexit has been a traumatic saga for the national consciousness. Thereafter, it needs to set a clear agenda. Sajid Javid’s Autumn Budget was cancelled in November, leading

to business consternation over what direction things were going. Of paramount importance is the next fiscal statement, where those in property are hoping various reforms will be pursued. Positive action is needed to inject optimism and growth into the sector. Indeed, according to Nationwide, the market stagnated for most of 2019; in October the average rate of house price growth remained below 1% for the 11th consecutive month. The question beckons: what reforms should this new government implement now it has the opportunity? Stamp duty is perhaps the area that springs to mind most easily. Boris Johnson previously touted that the tax was an area he was considering making changes during his leadership campaign. Whilst Sajid Javid went on to backtrack

Positive action is needed to inject optimism and growth into the sector. europeanfinancialreview.com

Great Britain

For reform to be fully implemented and have its desired effect, stakeholder buy-in is critical. As such, the government needs to consider educating landlords, tenants and property investors before changing things further. on that suggestion, there was value in it. Market liquidity can certainly be improved and making it easier for people to get on and move up the property ladder could pay dividends to the entire sector. Further, the duty is one of the least popular taxes in the UK, second only to inheritance tax, so reducing its burden – or even abolishing it – could be a major political win. Due to the dominance of legislative time by Brexit over the past two years, there is also work to be done in regard to new development guidelines and planning rights. New builds are often regarded by the public as less desirable than urban homes and detached, countryside properties, leading to reduced marketability. As such, the announcement at the Conservative Party Conference last September of new design guidelines was welcome. These rubrics were revealed as part of the ‘Building Better, Building Beautiful’ inquiry, and include proposals for how developers can create dwellings that appeal to traditional motifs. Although the policy lacks regulatory teeth, it still has the potential to set positive precedents for the homes of tomorrow. On the broader theme of new build improvement, Mr Javid also touted a new infrastructure investment package that could lead to £29 billion being spent on roads. Increasing the marketability of new builds will be an important part of tackling the housing crisis, and the preconception they are inconveniently located is widespread, so this government would do well to consider significant investment. Considering how both parties agreed to massively increase spending after the election, this hopefully will be a matter of some consensus.

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December - January 2020

Finally, the government must recognise and address the dearth of policy understanding in the private rental sector. Recent research conducted here at Market Financial Solutions has found that as many as three in ten (28%) landlords do not understand what the end of Section 21 means. Almost as many (25%) say they are not up to date with the latest changes to reduce tax relief on buy-to-let mortgage repayments. It goes almost without saying, but for reform to be fully implemented and have its desired effect, stakeholder buy-in is critical. As such, the government needs to consider educating landlords, tenants and property investors before changing things further. The level of uncertainty over the years since the referendum has dampened the property sector. Whilst this has ensured the sector has not overheated (which was a risk) there is now a need reinvigorate things. This may come naturally, as per normal cyclical market phases. However, to ensure the sustainable building of homes and the overall health of property in the UK, this new government must take a multi-pronged policy approach that approaches the problems from all sides.

Paresh Raja is the Founder and CEO of Market Financial Solutions (MFS). Through his guidance, leadership and expertise, MFS has successfully become one of the most prominent bridging lenders in the industry, renowned for its ability to address complex cases through a tailored and transparent lending service. Prior to establishing MFS in 2006, Paresh was a senior professional consultant whose experience extended from working in one of the top 5 management consultancy firms to setting up an independent investment group.

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Innovation

Shake up the Raw Material Trading Landscape in Pharma, Veterinary, Food and Feed

An online trade platform designed and introduced by Kemiex and Atradius is revolutionising the B2B global trade landscape for APIs, vitamins, and other food and feed additives by integrating digitalisation and credit insurance in a sophisticated network ecosystem.

he annual trade volume for active pharmaceutical ingredients (APIs), vitamins, and other food and feed additives is estimated at USD 300 billion, of which approximately 90% are traded based on long-term contracts. With a secular shift of production to China and India and increasingly volatile markets, the share of spot transactions is growing. zzinto a rather secretive spot market brokerage industry. Current trading processes are often time consuming, opaque, and limited to personal networks. In this complex environment, trading network Kemiex and credit insurer Atradius are the first to offer

In this complex environment, trading network Kemiex and credit insurer Atradius are the first to offer an online trading platform that helps to easily identify reliable and compliant counterparties and conduct trade in a safe way at the click of a button.

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December - January 2020

an online trading platform that helps to easily identify reliable and compliant counterparties and conduct trade in a safe way at the click of a button.

Trusted and Secure Nowadays, technology and digitalisation are disrupting multiple and traditional trade ecosystems progressively and at a faster pace. In line with this trend, the partnership between Atradius and Kemiex is setting new and unparalleled standards for security and trust in B2B marketplaces for raw materials in the life sciences industries by means of a revolutionary online platform. With this digital solution, the future of exchanging raw materials between buyers and sellers on the global spot market are brought in today. The platform aims to decrease the number of touch points in the sourcing process, and yet, secure that all stakeholders comply with restrictions and regulations accordingly. Combined Expertise The Swiss-based Kemiex is an independent online trading platform for commerce of commoditised additives, vitamins, amino acids, APIs, and other substances for the human and

The platform aims to decrease the number of touch points in the sourcing process, and yet, secure that all stakeholders comply with restrictions and regulations accordingly. animal health and nutrition industries. Kemiexâ&#x20AC;&#x2122;s success and market acceptance are noteworthy and outstanding. The platform has already attracted hundreds of B2B companies in the respective sector by now, and its premium network is flourishing rapidly. Atradius, operating across 54 countries, is one of the worldâ&#x20AC;&#x2122;s leading credit insurers and an avid supporter of innovative technologies to serve customers in the most efficient way. Apart from credit insurance, Atradius is also leading in other financial services such as bonding, collections, and reinsurance. Through the first of its kind strategic partnership with Atradius, transactions occurring on the platform can be insured right away. Atradius will provide Kemiexâ&#x20AC;&#x2122;s customers credit risk insights and invoice credit insurance for single transactions between traders, sellers, and buyers.

The Swiss-based Kemiex is an independent online trading platform for commerce of commoditised additives, vitamins, amino acids, APIs, and other substances for the human and animal health and nutrition industries.

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Innovation

In a world where trade increasingly takes place online, Kemiex and Atradius offer the comfort of doing this in a trusted environment that is ready for the future. In order to build a holistic network and assure a high level of trustworthiness and product quality among stakeholders, Kemiex has outlined strict onboarding rules and a quality management system overseen by a qualified person. In addition, the platform has a systematic monitoring structure that renews members’ trade excellence scoring after every finalised transaction. This provides a meticulous account of the entire trade stream by continuously assessing the behaviour and reliability of the transaction counterparts throughout the transaction.

Added Value Being a Kemiex stakeholder minimises transaction lead times and allows businesses to offer more competitive prices while staying in full control of trading activities from A to Z. Simultaneously, Atradius is using its years of

Atradius, operating across 54 countries, is one of the world’s leading credit insurers and an avid supporter of innovative technologies to serve customers in the most efficient way.

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December - January 2020

risk mitigation expertise to provide, through Kemiex’s platform, single invoice insurance and financial insights, supporting Kemiex’s customers in making smarter decisions across their trade deals. The platform has already benefitted multiple buyers in the acquisition of raw materials, and they have been able to increase product availability and reduce purchase prices in parallel. At the same time, sellers kept their margins stable. Both effects have positively influenced the short- and long-term growth of businesses. In a world where trade increasingly takes place online, Kemiex and Atradius offer the comfort of doing this in a trusted environment that is ready for the future.

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Accelerator Series

Interview with

Mr. Graham Bright JP HEAD OF COMPLIANCE AND OPERATIONS EURO EXIM BANK

Euro Exim Bank is an innovative global financial institution with head Office in St. Lucia and representative office in London. In this exclusive interview with their Head of Compliance and Operations, Mr Graham Bright, he provides revealing insights into the exciting developments in the trade finance industry and beyond. He further shares his views on the broader ethical, social and people issues that are interconnected and indispensable elements in making the bank a global success. Good day, Mr Graham Bright! It is such an honour to have this interview with you. In todayâ&#x20AC;&#x2122;s fast-paced business environment, what do successful leaders such as yourself have at the front of their minds each and every day? What is important? For me, not profit or income, but having defined purpose and direction, trying new things, being adaptable and open to change, encouraging talent, and, importantly, appreciating the most precious commodity of all, namely time, and making the best use of it. Common traits of successful people include reading and learning, appreciating and creating lasting trusted relationships, sharing experiences, doing things right and doing the right things, philosophies to which I fully subscribe in my role as a sitting UK magistrate, and in my private and work life.

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December - January 2020

Above all, one should be able to look back over a day and say, “I achieved something of note and made a difference. Euro Exim Bank is the world leader in trade finance solutions for global corporates and trade companies. Can you tell us what sets you apart from other trade finance companies? Which sectors and industries will benefit most from your services? We differentiate ourselves through a number of aspects, namely time, cost-effectiveness of our products, specialisation, locations and people. Primarily, our aim is building long, lasting relationships with clients. Finding and keeping clients is key to cash flow and ongoing business supported by our advanced technology platform, accessibility and participation with payments technology leader, Ripple. Coupled with our competitive rates and market focus across Asia and Africa, we, along with our agents and partners in strategic locations, serve corporate clients in connecting the players in the trade ecosystem both economically and efficiently. Big data, distributed ledger technology and AI are on the rise in today’s era across diverse industries. Can you tell us about their different roles and impacts on the trade finance industry? Our understanding of big data is a massive volume of both structured and unstructured data that exceeds the processing capabilities of traditional database and software techniques. In trade, with the complexity and scope of the ecosystem, it is easy to see how multiple parties, goods, services, buyers, sellers, freight specialists, insurers, inspectors, customs regulation and compliance across over 200 cultures and jurisdictions can create data on a massive scale. And volumes are growing year on year. We have identified 12 distinct big data “Vs” common to our business, namely Volume, Variety, Veracity, Velocity, Viability, Value, Variability, Visualization, Validity, Venue, Vocabulary and Volatility. Finding individual data elements and understanding the impact on operations and

management is challenging, and we are fortunate in that today we deal with relatively small trading volumes, where identification, measurement and management are relatively simple. For larger companies, having a meaningful high-level view, understanding all the elements and getting value from the data is a major challenge. The only way to ensure effective management is investment in and implementation of technologies where standardisation, data normalisation across platforms, rationalising of systems and reusability of information are commonplace. The use case for distributed ledger technology in payments where structured data is standard is well proven, and we see that it may be successfully applied when assessing the issues and possible remedies in tackling fraud with KYC/AML and compliance. DLT can also provide the technology to improve heavy, non-standard, data-bound processes. Addressing the fundamental issues of internal, intra- and interbank data sharing, DLT may assist submissions and oversight with regulators, and more rapidly identify activity in foreign accounts used for illegal and fraudulent drug- and terrorist-financing transactions.

Our aim is building long, lasting relationships with clients. Finding and keeping clients is key to cash flow and ongoing business supported by our advanced technology platform, accessibility and participation with payments technology leader, Ripple. For KYC, AML and due diligence across an enterprise, proliferation of paper, identification of false positives, multiple submissions of data, uncertainty in identity assurance and manual reconciliation times may be drastically reduced. Coupled with more efficient verification of KYC data, rapid, cost-effective client onboarding, faster loan servicing and efficiency in creation, communication and one-touch handling of trade documents will enable banks to offer long-lasting, cost-effective customer experience.

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Accelerator Series

refinement ensures a better operating experience internally, expanding the use of digitisation and advanced analytics.

Whilst banks should not underestimate the investment and commitment in terms of budget and resource to implement such DLT/ blockchain technologies, failure to plan, act and compete will have a serious impact on long-term institutional viability. As part of our ‘future-ready’ system capabilities, our Simplex trade platform embeds DLT/blockchain technology, with payment APIs, more automated and integrated processes covering identity assurance, real-time company data access, PEP and sanction lists with the benefits of full compliance and due diligence. Artificial intelligence is intelligence demonstrated by machines, in contrast to the natural intelligence displayed by humans. At EEB, AI is used within applications to aid our staff in reviewing trade transactions faster, identifying exceptions and supporting complex riskbased decisions. Unlike the programmed, automated trading systems prevalent in high-volume, real-time derivatives and equities markets employed to capitalise with competitive advantage, our ultimate decision process remains in experienced human hands. AI has helped to streamline time-consuming, highly manual processes associated with reviewing growing volumes of global trade transactions. Its implementation and continual

Euro Exim Bank offers friction-free and instant trade solutions through its partnership with Ripple. Can you tell us how blockchain technology enhances the transaction speed, while ensuring security and safety? Can you tell us more about your partnership with Ripple and the development it has brought to Euro Exim Bank? Ripple is not just about cryptocurrency. It is an innovative technology company with a financial network capability (RippleNet) handling real-time, frictionless transmission of payments across a secure decentralised DLT infrastructure, covering both fiat and non-fiat currency. We have implemented Ripple xCurrent, speeding up and ,securing real-time payments, and On-Demand Liquidity, enabling immutable payouts in local currency without the need for exchange into dollars or for traditional correspondent banks, through use of the Ripple XRP digital asset, which is a game-changer in reducing capital liquidity requirements. Whereas in the past, client access to funds and foreign currency meant competition in world markets was impractically expensive and restrictive, through service delivery with other RippleNet participants, customers can achieve high-volume, frictionless, low-cost, secure, fast, guaranteed payments and instrument movement across the globe. Euro Exim Bank has earned an excellent reputation for its comprehensive compliance policies. What are the unique features of Euro Exim Bank for anti-money laundering and fraud prevention? AML and fraud prevention are just some of the challenges rising in importance to all financial

As part of our ‘future-ready’ system capabilities, our Simplex trade platform embeds DLT/blockchain technology, with payment APIs, more automated and integrated processes covering identity assurance, real-time company data access, PEP and sanction lists with the benefits of full compliance and due diligence. 20

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institutions and combating these has grown into a lucrative industry with a level of seriousness that permeates throughout all commercial operations. Fraudsters and dedicated cyber attackers follow the money, and banks by their very nature are such a target that, even with extreme vigilance and significant investment across all parts of the organisation, it is no longer a question of “if ” an organisation is compromised, but “when”. UK banks have not been immune to system attacks, with client data stolen and online account access denied. And we are seeing more sophisticated attacks from multiple parties, all with the purpose of maliciously controlling computing environments and, in some cases, complete infrastructures, or destroying the integrity of the data or stealing controlled information. With a dedicated IT team, we continuously review and enhance our systems, preferring our own controlled, protected development environment. Accordingly, we have implemented security with a formal policy, countering IT, operational and communications risks through pervasive use of backups, firewalls, antivirus, limited-authority access, truly private intranet and password change frequency. Vigilance is key, and is supported by an experienced board-level team who understand the implications of threats and the ongoing need for investment to ensure protection and the measures needed to safeguard people and process as effectively as possible. What do you think are the unique challenges of compliance from a trade finance perspective? Despite diverse geographies, regulation, sanctions and transport issues, underpinned by Incoterms guidelines first issued in 1936, compliance in trade, where millions of transactions take place daily between importers and

With a dedicated IT team, we continuously review and enhance our systems, preferring our own controlled, protected development environment. exporters around the globe, has never been more challenging. Trade finance is a safe form of finance but it is commonly perceived that the terms and conditions of the trade itself are subject to high risks. Moreover, whilst SMEs make up the majority of players, they are still more likely to have requests for finance rejected than any other category of firm. And in twothirds of rejection cases, traders do not seek alternative financing, simply because it is not available. In terms of unique challenges, primary checking and responsibility for due diligence does not stop with the buyer, as KY3P (know your third party) and increasing FATCA (Foreign Account Tax Compliance Act) requirements now demand more documents and proofs. Coupled with more intense accounting, tax and reporting obligations, the need

for technology and education, and the overall lack of finance options, many companies are actively discouraged from starting their trade journey. Recognised by the WTO and IFC, trade finance has been vulnerable to international banks reducing their exposure to, and relationship with, market participants, namely de-risking. Since the global financial crisis, major institutions have steadily reduced and, in some cases, completely ceased their trade finance activities, especially in supporting emerging markets in developing countries. Originally, de-risking was driven by the burden of regulatory compliance related to money laundering and terrorism financing. However, the significant costs of maintaining relationships is now a main driver, as banks rationalise the quantity and quality of active correspondent relationships and nostro accounts. Ultimately, servicing global, regional and local businesses necessitates a strong active participation and view of the market, ‘feet on the ground’ to cope with different jurisdictions and understanding local culture, keeping up with regulations, focusing on specific markets and understanding the flows and infrastructures that support those markets.

Euro Exim Bank Limited is an innovative global financial institution with head Office in St. Lucia and representative office in London. They hold a "Class A" international banking license from Financial Services Regulatory Authority (FSRA) of St. Lucia. This license provides authorisation to conduct business with third parties across industries and geographies worldwide, exercising strong due diligence, full compliance and operational excellence in our processes. Euro Exim Bank is an associate member of the Caribbean Association of Banks Inc (CAB). Being a member of CAB offers them opportunities and knowledge sharing with industry leaders that are applied to modernise their operations and customer service.

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Accelerator Series

Uncertainty cultivates opportunity. The volume and value of global trade is growing, with an increased awareness of new origins of goods, free trade agreements and growing trust and confidence in emerging markets. Whilst the rewards in emerging markets and the new world of truly global trade may be lucrative, new participants should not underestimate the effort, resources, obligations and risks involved. As an innovative financial institution that uses advanced technology, how does Euro Exim Bank assess the importance of balancing and incorporating the human element amidst the digitalisation? Our key business asset is our people. We maintain close personal relationships with clients and know our people very well. With the volume of documents and general data on the rise, whilst the vision of a paperless office in trade is some years away, integrated, information-rich systems are fundamental to servicing global clients. Digitalisation will normalise and allow full integration of standard and non-standard data, resulting in golden records which can be analysed and reused, without the need to store multiple versions in many locations. However, institutions should not underestimate the time, effort and investment needed to achieve true digitalisation. When implemented correctly, benefits include rapid movement, data authenticity, accessibility and more efficient storage of trade documents. In future, we would expect automated document handling, information gathering and the ability to interrogate and derive value from content to increase, whilst reducing physical handling times and aiding exception processing. Until that time, as sectors of our industry create more standard documents, share data in common formats and agree more international standards, we will still see a blend of technology and physical handling of documents for some time yet.

Our key business asset is our people. We maintain close personal relationships with clients and know our people very well.

Trust is a difficult attribute to measure and a delicate dynamic to maintain. How do you maintain this with your employees?

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Our staff are professionals, and are treated as such, with a policy to match their experience and ability. And we are currently undertaking a major recruitment drive in India from the established finance industry, which will result in doubling the size of the company in a short time frame. Their previous experience will allow fast onboarding and rapid training, ensuring that teams are as effective as possible in the shortest time. We do not micro-manage, such that staff are empowered regarding sales, creating trade instruments and generally in their daily activities to complete tasks diligently. We have developed training materials and a strict employee handbook, mandating adherence to policies, which provide professionalism and a consistent clientoriented approach with humility and trust, ensuring that reputation is maintained and that our business continues to grow dynamically in challenging times. Amidst the uncertainties of Brexit and the trade war between China and the US, how do you see the dynamics of global trade changing? Uncertainty cultivates opportunity. The volume and value of global trade is growing, with an increased awareness of new origins of goods, free trade agreements and growing trust and confidence in emerging markets. Past restrictions to market entry included costly access to exchange-traded currencies, corruption and theft, low in-country liquidity and difficult-to-navigate transport links (with many landlocked countries restricted from port access).

The phenomenon of the rapid economic growth of East Africa, with access to muchneeded metals and agricultural goods, cannot be ignored, nor can the ease of doing business in Singapore and Dubai, making them ideal areas for efficient trade. Whilst trade wars and tariffs persist between the US and China, new trade agreements are being sought, with attention turning to new supply routes. And, as evidenced by the result of the recent UK elections, a new mood of optimism is being touted in regard to significant UK/US trade deals. What are the other challenges facing the trade finance industry? Where do you see opportunities for growth? Tomorrow’s winners will be those that read trends, adapt working practices, embrace the challenges of change, and look at new markets with greater margins which were once perceived difficult to work with, e.g. in Africa. The opportunities in working with developing nations providing raw materials and technology are immense, driven by increased experience, acceptance and trust, a drive for higher financial inclusion, innovative free trade agreements, trusted low-cost applications delivered through smart phones supported by Ripple-enabled real-time payments in fiat and cryptocurrency transactions. Financial inclusion remains a challenge, with ease of access and delivery of services to an estimated 3 billion adults currently unbanked. Rural economies deal mainly in cash, physical banks are remote and costs of maintaining low-value accounts are high. The impact of cost-effective, secure mobile technology, linked with innovative payment challengers, is changing the dynamics of trade across the financial landscape. The winners, apart from the account holders, will be institutions able to scale up operations with low-value, high-volume transactions. The next key deliverable will be the ‘value-add’ of simpler transfers, cheaper savings and pensions products, not just for day-to-day transactions,

but also safeguard and promote long-term financial welfare. How do you keep up with the changing needs of your customers? What are your top priorities when it comes to customer relationships? Our clients, the global buyers arranging imports of goods and services across multiple jurisdictions, require the keenest price, guarantee of document delivery, secure payments and unhindered receipt of goods. From our perspective, gathering client requirements and listening to local, national and international trends is fundamental to our business. We are very active participants in industry events, international conferences and exhibitions, and contribute to the financial press as thought leaders and trade specialists, and closely liaise with our local teams as they meet their customers personally. With the span of your successful professional career, can you share some tips or advice for those aspiring to enter and succeed in the financial industry? I have been fortunate to work in various roles across the industry, and it is important to accept that where you start or where you think you wish to be is not where you may ultimately find your niche. There is a huge variety of roles across the different parts of the financial ecosystem, from front-office activities, including sales personnel and corporate finance, middle-office roles managing risk and IT resources, and back-office functions providing administrative, support and payment services. Each is a vital component to the efficient running of an organisation and suitably skilled people are required at each stage and level. Whilst trade finance may be perceived as a ‘grey’ industry, with most employees being ‘more mature’, the industry is dynamic and should appeal to a wider range of younger entrants. As it spans gaining experience in legal,

Tomorrow’s winners will be those that read trends, adapt working practices, embrace the challenges of change, and look at new markets with greater margins which were once perceived difficult to work with.

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Accelerator Series

GROWING A BUSINESS, KEEPING CUSTOMERS AND PROTECTING IT ARE NOW KEY PRIORITIES, AND THAT REQUIRES THE RIGHT PEOPLE AND MINDSET. compliance, transport, insurance, quality inspection, sanctions, regulation and client-facing sales, it is an ideal industry sector in which to build and hone effective skills and a long-term, fulfilling career. Experience is everything, from understanding the importance and availability of cash flow, implications of cleared funds, e.g. efficient nostro reconciliation processes, ultimately knowing what funds are available and where they are. Also, in today’s fast-moving financial environments, continuous learning is vital in the use of efficient payments channels, FX and funds settlement with same-day obligations, customer and deal onboarding, risk profiling and all-important due diligence, KYC, AML, PEP and sanctions processes. Growing a business, keeping customers and protecting it are now key priorities, and that requires the right people and mindset. Lastly, can you share any stories or examples of how Euro Exim Bank is making a difference to others, or how you’re making an influence in your sector? As an international bank with representation in St Lucia, India, the Far East, the Middle East and the UK, our management were keen to demonstrate our

Executive Profile Graham Bright is the Head of Compliance and Operations at Euro Exim Bank. He has more than 35 years of experience in the finance industry in a number of roles, working collaboratively with industry utilities, regulators and central banks, and in consulting and partner/channels management. He holds a BA (Hons) degree in Business Studies, and is also a serving UK Justice of the Peace in the magistrates’ court, having sat on criminal and proceeds of crime trials, and he also sits on Crown Court appeals. Graham is a regular contributor to trade journals (GTR, TFR), with published thought-leadership articles in the financial technology press, and a speaker at international trade industry conferences, such as SIBOS, GTR and Ripple Regional events.

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commitment to good causes and to making a difference for underprivileged, disabled and disadvantaged communities and the environment across the globe. In addition to our stance on working with clients, dealing in goods of ethical origin and looking to reduce carbon emissions and footprint, we are ever mindful of the wants and needs of others. Over the past three years, we have sponsored major fundraising events with themed concerts in London, resulting in donations of thousands of pounds to local and international charities. Some of the organisations which have already benefited include the Cerebral Palsy Association of St Lucia, Montgomery Heights Children’s Foundation in Zimbabwe, UK Downs Syndrome charities and Great Ormond Street Hospital, and the Maa Kupa Foundation, who assist local charities for the poor and needy in the UK, India and Africa. Regarding our influence in the trade finance sector, we have achieved recognition and industry awards (CFI – 2 years running, Mirror Review, International Finance). We are featured in fintech finance online videos on industry challenges, open banking and the culture of innovation, and quoted on the GTR website regarding articles on African fintech during the Cape Town Conference, (see https://www.gtreview.com/ supplements/gtr-africa-2019/african-fintech-showcase/), and other industry sites. We also provide YouTube updates on trade finance instruments. EEB are contributors to a number of highprofile international magazines, including The World Financial Review, CEO Insight and European Business Magazine, and EEB Head of Compliance and Operations, Graham Bright is a regular keynote speaker at GTR, TXF and Gulf Trade events, where we are also main sponsors. Thank you very much Mr Bright. It was a pleasure speaking with you.

Trade Finance

New Opportunities in Old Markets: the Changing World of Global Trade Finance BY CHRIS NEWMAN AND ANDREW FRASER

ith the decade rapidly coming to an end, risk indicators suggesting an impending economic downturn, and the market’s attention focused on heightened geopolitical risk, it is no wonder investors are seeking uncorrelated strategies in their hunt for return. For some, this means reshaping portfolios with alternative strategies that offer better protection for investors’ capital. Looking ahead to 2020, where should investors turn to find strong, risk-adjusted returns from liquid investments when opportunities in traditional markets have been exhausted? We believe the answer can be found in one of the oldest, and least fashionable, corners of the global economy: Trade Finance. The search for return has led many institutional investors to alternative investments in private markets – and at staggering rates. This year alone, US$778 billion of new capital has flowed into the space due to a growing belief that private markets are essential for diversified participation in global growth1. Direct lending, in particular, has surged as funds continue to fill the space left by traditional banks, which have been forced to scale back as a result of post-crisis regulations. This shift has led to some of the largest capital flows into corporate credit right at a time when corporate credit risks may well be

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The trade finance industry experienced its greatest developments during the Renaissance, when the Medici family pioneered the letter of credit as a financial instrument

December - January 2020

increasing. Meanwhile, competition over loan origination is pushing down yields at the very moment investors should be demanding greater returns to reflect the risks being taken. We believe there are certain areas of private credit that will continue to offer secure, uncorrelated investment opportunities should a recession hit in the new year. Specifically, we see compelling openings in Commodity Trade Finance, which has – until now – remained relatively untapped by investors. Trade Finance is a longstanding pillar of the global economy. While its roots can be traced back thousands of years, the industry experienced its greatest developments during the Renaissance, when the Medici family pioneered the letter of credit as a financial instrument2. Remarkably, this innovation continues to form the key part of collateral for trading opportunities today. And now, more than ever before, institutional investors outside of the realm of banking can access it. Large financial institutions and trading houses have historically supplied the majority of credit needed to finance the flow of trade. The implementation of Basel III in January 2019 and the pending requirements of Basel IV have changed this, creating significant challenges for the

For those looking towards alternative private credit strategies, we maintain that trade finance should not be overlooked. European banking landscape. As methodologies for determining banks’ capital requirements are being pressurised and revised, innovative managers have stepped in to fill the funding gap, recognising the attractive characteristics of Trade Finance and the opportunities it offers investors. A general lack of understanding of Trade Finance often means it is viewed as a ‘niche’ asset class. In reality, the opportunity set is broad; in fact, the term ‘trade finance’ covers a huge range of activity valued at over US$16 trillion annually2. Trade Finance investment strategies facilitate economic growth in developing economies by providing financing to many family-owned SMEs and supplying global consumers with foodstuffs and energy. Despite its global impact, most investors remain unaware of the depth of the opportunity. Growth of this investment class has been largely hampered by false assumptions about the investment risks in Commodity Finance. Investors’ hesitance stems namely from the belief that they are taking big risks through exposure to price movements in the cargo of commodities, to emerging markets and currencies, or to the credit worthiness of the SME.

In actuality the risk is low. The risk profile measured by defaults is better than BBB-rated corporate bonds, with overall default rates of between 0.04% and 0.21% 2. More importantly, the recovery rates are far superior. To illustrate the diversification benefits for investors, these statistics remained virtually unchanged during the financial crisis, where the financial markets collapsed at the same time as the world commodity prices collapsed. Additionally, investors often fear that investing in alternative credit means capital is tied up for years, but Trade Finance offers liquidity (on average 15-50 days duration) and can be accessed via open-ended structures. By their very nature, trade finance transactions are self-liquidating, asset backed and transparent, allowing an investor to understand the returns and tenure before allocating capital to the transaction. This will be valuable if a downturn does come. The threat of a global recession may continue to loom, increasing anxieties for advisors and their investors. For those looking towards alternative private credit strategies, we maintain that trade finance should not be overlooked.

Chris Newman, Prior co-founding Audentia 2018, Chris established energy company Singapore delivering

to in an in oil

products globally to the major oil companies. Chris began his career in energy in 2008 at BNP Paribas’ commodity business, responsible for originating all new business within BNP Paribas’ trade finance franchise and creating an integrated strategy combining derivatives with the physical financing business globally. He then went on to establish a team that pioneered technical derivative structures within physical pricing contracts, enabling BNP Paribas to offer effective risk management solutions to their clients. Andrew Fraser joined Audentia in 2019 from Wake Trade Technologies, an investment firm applying machine learning technology that he co-founded in 2014. Since 2014, Andrew has served on the investment committee for Perspective Investments, an investment business offering a range of liquid and illiquid investments. Between 2008 and 2014, Andrew worked at Winton Capital Management as Head of Americas and Institutional business development. Prior to Winton, Andrew was the Director of Institutional Business Development and a member of the Executive Management team at Henderson Global Investors. References 1. https://www.mckinsey.com/~/media/McKinsey /Industries/Private Equity and Principal Investors/ Our Insights/Private markets come of age/ Private-markets-come-of-age-McKinsey-GlobalPrivate-Markets-Review-2019-vF.ashx 2. https://www.cambridgeassociates.com/research/ trade-finance-an-expanding-opportunity-for-institutional-investors/

A general lack of understanding of Trade Finance often means it is viewed as a ‘niche’ asset class. In reality, the opportunity set is broad; in fact, the term ‘trade finance’ covers a huge range of activity valued at over US$16 trillion annually. europeanfinancialreview.com

Interview

Regulated by CySEC, Trust Capital TC is committed to providing the most trusted and secure trading platform for their clients. Among the innovative features that characterise the company is its educative approach to its client base, which includes providing them with trading seminars, personal mentoring and webinars. In this interview with their Executive Director Ms. Farah Hawilo, she tells us more about this unique feature, and describes the ethos that drives the company. Ms. Hawilo, thank you for sharing your valuable time by doing this interview with us. To start with, can you give us a glimpse of what a regular workday for you looks like? Unlike the sleepless market that governs our business, I try my best to get my rest before waking up at 6 a.m. to put in a quick 30-minute workout. My dose (or two!) of espresso is a must before I head to the office. My driving route happens to come with a sea view, and this makes the ride to work even more enjoyable. Once in the office, the first half of my day is comprised of quick follow-up meetings with the

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December - January 2020

team, debriefings with shareholders, and getting up to speed with unanswered emails. The second half of my day is all about overseeing the day-to-day operations, along with setting strategies to take us to where we want to be in the foreseeable future. Itâ&#x20AC;&#x2122;s all about setting short-, medium- and long-term milestones to achieve. Our lunch break is at 4 p.m. and usually takes place in the office, followed by one-on-one and group meetings with my team members.

As we are a company dealing with vast volumes of customer investments, we prioritise our services with the utmost safety and security, while ensuring that our customer portals are designed with firewalls and adhere to every safety regulation. As a relatively new company in the trading industry in Europe, established in 2018, what do you think are the unique features and advantages offered by Trust Capital TC that set it apart from its competitors? We put the client first and provide top-notch 24/5 service. We value our clients’ assets and take it upon ourselves to make sure we educate our client base as much as possible. As rewarding as the industry can be, risk and reward are forever correlated. So we try to hold our clients’ hands and show them how these risks can be minimised by providing educational seminars and webinars on the best trading practices. Moreover, we provide each client with constant live updates on their trading account status in order to assist them in making optimal trading decisions. We offer a more personalised family-officestyle experience by dedicating a staff member to each client, but going about it with the highest global standards. Whether it’s responding to in-depth queries or simply assisting first timers, our team is ready to help. Our business is strongly regulated by CySEC, so that our clients’ funds are segregated from the company’s funds. Moreover, our clients’ accounts are insured with negative-balance protection, basically implying that they can never lose more than they initially invest. Trade responsibly! We have a knowledgeable team, one that is always learning how to service clients better. Given the client-oriented nature of our business, we ensure that every Trust Capital TC member has years of experience under her or his belt, and we are expanding our skillsets constantly.

success for the group in the forex market in Europe and globally? As we are a company dealing with vast volumes of customer investments, we prioritise our services with the utmost safety and security, while ensuring that our customer portals

With the fast-changing technologies and innovations in the financial industry, what are your strategies for achieving greater

europeanfinancialreview.com

Interview

are designed with firewalls and adhere to every safety regulation. With the assistance of our analysts and experts, we’re always striving to innovate and advance our trading environment.

Trust Capital TC is a financial intermediary specialising in online trading on a variety of investment products such as FOREX, Metals, OTC Futures and Equities. It is authorised by Cyprus Investment Firm CIF and regulated by the Cyprus Securities and Exchange Commission (CySEC).

Similarly, would you share with us your current challenges and observations on the latest trends and developments in the trading industry? The forex industry is becoming more demanding and challenging with all the new regulations. Nevertheless, we use this to our advantage and it motivates us to break boundaries, while committing to our regulatory requirements. This helps Trust Capital TC to stand a mile ahead in the industry, due to our strong regulation and customer security. The age-old maxim says, “The customer is king.” What is your focus when it comes to ensuring the satisfaction of your clients? How do you deal with their changing demands and behaviours?

One of the key focuses of Trust Capital TC is offering the highest level of customer satisfaction. We ensure complete transparency with the client at each stage, and clearly explain every aspect of trading with Trust Capital TC. We provide education to all clients with no cost, whether they’re beginners to the world of forex, or advanced. One of the unique approaches of Trust Capital TC is the use of trading seminars, personal mentoring and webinars to attract and retain clients. Could you tell us more about these initiatives? Like in any other realm, in trading too, it’s important to get your basics right. To start trading, you need to have at least a surfacelevel knowledge of forex and some essential trading terms. We believe that people should be educated and made comfortable with the technical aspects before they start trading. Otherwise, it’s going to be just like playing football without a warm-up. It’s important to understand the rules of a game you are interested in learning. That’s why we developed our training programs to be highly customised to satisfy all levels of traders and help them understand every corner of trading. We host live seminars and offer live webinars (on demand). Trust Capital TC recently launched the latest Affiliate Marketing Program. Could you tell us how it works and the benefits and values it offers? Trust Capital TC’s recently introduced Affiliate Marketing Program allows clients to partner with us in our marketing campaigns. An affiliate can drive traffic from their website to Trust Capital TC and receive competitive compensation rates. The steps to register as an affiliate are simple. Just fill in and complete a questionnaire, and once it’s approved by the team, we begin the partnership.

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With your commitment to providing the best trading experience for your customers, what are the short- and long-term plans for Trust Capital TC and what else can your clients expect from you in the coming years? The short-term plan is to make sure that all our clients are satisfied and engaged with our services and our commitment to delivering a smooth trading environment. The long-term strategy is to listen to our clients and create plans that will be more attractive and personalised. We are always aware of the gradual shift towards technology solutions and AI, and the positive implications it will bring to the industry in terms of facilitation. We also acknowledge the risks that come with it; therefore, we’ll add more focus on enabling each trader to “grow gradually with TRUST”. Being a successful female leader, how do you achieve a work-life balance? What are your tips for women leaders in achieving the life they desire?' Being organised and setting priorities are the important ingredients of achieving a vibrant work-life balance. Time management is another important aspect in order to cover all the checkpoints within deadlines. We don’t find time, we make time; this is what I follow when it comes to effective time management. On a lighter note, we are interested to know what the top things or activities are

The core value of Trust Capital TC is to work as a full-fledged team and achieve our ultimate goal: customer satisfaction.

Executive Profile Ms Farah Hawilo is the executive director of Trust Capital TC LTD. She has obtained her diploma in business, the core direction of which was in finance. She has proceeded and succeeded on professional examinations related to risk management (Certification in Risk and Investment), anti-money laundering (Certificate in Compliance and Anti – Money Laundering) and CYSEC’s Advanced exam (CN 4204). She has hands-on experience working in the financial services sector specifically in the FX industry since she has been involved from early age in many departments of FX entities, such as back office and marketing whereby she had the chance to promote products taking into consideration the applicable legislation and procedures.

that a high-calibre business leader like you does to recharge during their day off from work? I don’t believe in a “perfect” work-life balance, as I commit to work and don’t stop till the task at hand is done. However, time management and prioritising – that’s the key. We all have the same 24 hours in a day, and it’s all about micro-managing your activities. I organise the schedule of my day the night before, and make sure I commit to the timings. My alone time is sacred, and I make sure to disconnect for a while, outside the work environment, as it empowers and recharges me for work every day. Exercising, yoga classes and a nice-quality dinner add more flavour to my life and fill me with positive vibe. Lastly, can you share with us the most significant core value of Trust Capital TC that you and your colleagues live by? The core value of Trust Capital TC is to work as a full-fledged team and achieve our ultimate goal: customer satisfaction. Working as a team brings us together and helps us grow stronger. Loyalty, honesty and friendliness are some of the key words that we want our team to feel strongly about within the company. Thank you very much Ms. Hawilo. It was a pleasure speaking with you.

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Wealth Management

Millennials and their Money: Predictions for the Great Wealth Transfer

the UK are not the young, Instagramobsessed teens they’re sometimes assumed to be. In fact, by 2025, Millennials will comprise three quarters of the global workforce.

by 2030. This ‘Great Wealth Transfer’, the considerable wealth Millennials are due to inherit, means firms need to assess their current digital capabilities and honestly evaluate how ready they are to meet the expectations of this next-generation of investor. And whilst some firms have recognised the need to pivot and update their client experience offerings, many firms are still lagging behind. Why is the client experience important? As the first generation to grow up surrounded by the internet, Millennials are digital natives. As such, they have a very close relationship with technology that previous generations do not. With the transfer of wealth to the younger generation already happening,

The Great Generational Wealth Transfer Though Millennials currently hold a smaller percentage of investable assets than Baby Boomers and Generation X, estimates suggest that Millennials are positioned to receive more than USD68 trillion of inheritable wealth

Some firms have recognised the need to pivot and update their client experience offerings, many firms are still lagging behind.

BY BEN REVILL

verything you think you know about customers’ experiences with money has changed. This is due to the 17 million people dominating the job, housing and money market – Millennials. They’re leading and founding businesses, buying their first, second and third homes and dominating the financial market as Baby Boomers enter retirement age. Aged 21-39 (though it is hard to determine an exact, globally agreed timeframe), Millennials in

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Wealth Management

Despite concerns from some quarters regarding the sharing of data and how much organisations today know about clients, overall, Millennials are generally happy to share their data as long they receive a modern, tailored client experience in return. Millennials expect that the experiences they have with their wealth management firm of choice will mirror the experiences that they have with the multitude of other companies they interact with on a daily basis. For example, from retailers and restaurants, to taxis and travel agencies, Millennials expect to be able to go online whenever they choose, access their account details, speak to a customer or client service representative (or even a chatbot that uses the latest AI to replicate the behaviour of a human advisor), and conduct all of this on their phones, tablets, smart watches or laptops. There’s no reason for them to assume that interactions with their wealth managers should be any different to the that an ‘always-on’, 24/7 digital engagement they experience in other industries. Regardless of location, Millennials expect a modern client experience when interacting with their wealth manager. Those firms that are not embracing the latest technology and implementing it effectively to deliver high-level, competitive

services, risk losing out when competing to win new clients. Likewise, those same wealth managers will also test the loyalty of the next-generation of investor. Unlike older generations, Millennials are less likely to stay loyal to a particular brand if a better offer or service can be found elsewhere. If a client does not feel that the customer experience meets their expectations, they will simply take their business elsewhere. ‘Traditional’ wealth management experiences might have been enough for Baby Boomers and Gen Y, Millennials want more from their wealth firms. From greater flexibility and streamlined onboarding processes, all the way to proactive, personalised financial planning recommendations, there is no more room for a one-size-fits-all approach. And if you’re used to dealing with businesses who are happy with the status quo in regards to financial management – think again. Millennials are not just getting started in their careers. They’re already CEOs, MDs, CFOs, founders and decision makers. If you don’t adapt and provide a superior service that meets their preferences, you could easily lose a business client as well as an individual client, and with it, a significant amount of wealth. So just how will money management change? More Data, Better Experience Issues surrounding data security regularly makes the headlines and for good reason. But despite concerns from some quarters regarding the sharing of data and how much organisations today know about clients, overall, Millennials are generally happy to share their data as long they receive a modern, tailored client experience in return. In order for wealth managers to effectively deliver the type of client experience the new generation expect, investments in the latest technology and strive towards towards digital transformation are essential. A ‘digital-first’ wealth management

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December - January 2020

firm will find it can gain increased visibility into their clients full situation, tying in much of their personal information, their interactions with the firm, their investment preferences and more. This increase in data leads to more in-depth conversations and more opportunities to offer clients the solutions that are right for them, and at the right time, each tailored to their specific wealth goals. All of this intelligence is held in a Customer Relationship Management (CRM) system. A CRM is a powerful digital solution that collates client data and provides firms with the ability to drill down into specific client profiles and effectively analyse the data. An advanced CRM solution enables wealth managers to offer a far more bespoke service, meeting the clients needs and expectations and in doing so, also helping their firm stand-out from the competition. The better the service offered, the closer the relationship and the higher the level of retention. The Wealth Management Landscape is only Going to get Busier People are no longer sticking with the same financial institutions for long periods of time out of simplicity. With the advent of new technology in financial services, 57% of Millennials have said they would change firms for another if that one was to provide a superior technology platform. Historically, wealth transfers from one generation to another have also resulted in 90% of heirs changing their advisors. And in another recent study, 73% of respondents indicated that they are already engaged in a relationship with more than one wealth manager. Clearly, the more you can do to to showcase your understanding of the next-generation of client and evidence your efforts in investing in the latest technology to meet their needs, the greater your chances of reducing clients transferring to a competitor. There’s no doubt the landscape is getting busier. With the advent of ‘challenger banks’ - those which focus purely on app-based, digital offerings and invest heavily in customer service such as Monzo and Revolut – you need a USP which will position you as a leader in an increasingly competitive sector. The Hybrid Advisor Model will thrive Advancements in automation and artificial intelligence are helping organisations of all kinds and it’s

no different in wealth management. For example, the latest AI capabilities, can help relationship managers and advisors better serve every client by surfacing intelligence that helps firms proactively provide advice regarding future investments and what clients should do next. And despite some fears in some quarters that AI will eventually replace human advisors, or that ‘robo-advisors’ will take over, the reality is AI and automation will help firms enrich the client experience, but it won’t replace human advisors. There will always be a requirement for experience and the ‘human touch’. Take the 2019 survey by Wells Fargo/Gallup for example, that showed 84% of investors believe human advisors will be always be needed. The future of financial advice in wealth management is the ‘Hybrid Advisor Model’; the emergence of experiential human advisors supported by the latest AI, automation and CRM capabilities. The Hybrid Advisor Model enables firms to find a synergy between technology and human, combining the best of both worlds. So whilst it is easy to think that in a world obsessed by technology, everything must be digitalised, in the wealth management industry, where experience and expertise is a valuable commodity, the human touch will always be welcome.

Millennials are always on the go - there’s a reason that they are the champions of flexible working.

A successful Hybrid Advisor Model takes effort and time, but the rewards are worth it. Of course, establishing a successful Hybrid Advisor Model takes effort and time, but the rewards are worth it. For example, with a customised CRM solution tailored to a firm’s specific needs, advisors will be able to access detailed intelligence that surfaces the best opportunities and provides advice on how best to approach the new opportunity based on historical data points. Modern CRM solutions also help break down the silos that often exist in wealth management firms, meaning more data is shared amongst teams which leads to a more comprehensive view of the client and in turn, more bespoke services that can be offered. Technology also provides firms with more

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Wealth Management

and technology strategy in order to appeal to the next-generation of investor so that they may retain the wealth that already exists within their firm and ‘market their appeal to new clients in this increasingly competitive market. From smart challenger banks to the rise in cryptocurrency and Bitcoin investing, Millennials are exposed to more diverse and technologically advanced financial opportunities every day. When it comes to digital transformation, financial institutions are battling it out to try and stay one step ahead of the competition, but many are being left behind due to a misguided belief that what worked in the past will work for future generations. Add to this senior management and boards of directors that may be resistant to digital transformation, and the result is a firm that only realises their mistake not to evolve to meet the needs of a new generation when it’s too late. As Millennials take centre stage, firm must rethink their digital strategies now in order to appeal to a new generation of investors. A generation poised to benefit from the greatest wealth transfer in history.

intelligent marketing, communication and event automation tools, again helping to strengthen client relations. And the right technology can help streamline the onboarding process, turning a usually laborious paper-driven process into an efficient, digital task that minimises frustration for both the client and the firm. Firms Need to be More Accessible Millennials are always on the go – there’s a reason that they are the champions of flexible working. As such, they’re less inclined to want to meet their wealth advisor in a specific boardroom, at a specific time and in a specific location that might not be suitable for them. And with mobile banking poised to overtake high street banking in the next two years due to rapid uptake, and two thirds of British high street banks already having closed in the last thirty years, clients and advisors need to take note. Whilst not in direct competition with retail banks, this shift in the client/ financial institution interaction provides a strong indication that clients want to be able to receive, access and discuss their finances whenever, and wherever, they are. Other wealth management firms are offering a modern, holistic client experience. Yours needs to too. As the generation of investors in their 70s start transferring their finances to the heirs, it will be the wealth managers who are already showcasing their digital prowess who will thrive. Others need to urgently shake up their current digital

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Millennials are exposed to more diverse and technologically advanced financial opportunities every day.

December - January 2020

Ben Revill, Business Consultant at Xpedition. Xpedition Wealth Management has already helped firms better understand the millennial mindset, build a winning CRM business case, and help deliver a modern, digital, holistic client experience. References 1. http://blog.coldwellbankerluxury.com/a-look-at-wealth-mill ennial-millionaires/ 2. https://www.thedrum.com/news/2018/10/05/research-revealswhat-online-value-exchange-means-millennials-and-gen-z 3. https://www.efma.com/study/detail/26945 4. https://www2.deloitte.com/content/dam/Deloitte/lu/Docume nts/financial-ser vices/lu-millennials-wealth-management-trends-challenges-new-clientele-0106205.pdf 5. https://www.ey.com/Publication/vwLUAssets/EY-theexperience-factor-the-new-growth-engine-in-wealth-manage ment/$FILE/EY-the-experience-factor-the-new-growth-engine-inwealth-management.pdf 6. https://www.finextra.com/pressarticle/78039/majority-of-investors-favour-human-touch-over-technology---wells-fargo 7. https://www.theguardian.com/business/2019/jul/01/mob ile-banking-to-overtake-high-street-branch-visits-in-two-years

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Interview

Exclusive Interview with

David Muscat

HEAD OF AFFILIATES AND MARKETING, EAGLEFX

A relative newcomer to the world of forex, EagleFX has landed firmly and securely in the sector, with a range of innovative options to make trading accessible and secure. Here, David Muscat, Head of Affiliates and Marketing, explains how the company’s offering is of interest to beginning and advanced traders alike. Good day, Mr. Muscat, and thank you for the opportunity to have this interview with you! First off, for a business leader like you, how do you jump-start a busy day, and what are your quick tips to improve productivity for a day’s work? Thank you for having me. It’s great to be here! Well, I start the day like most people, I suppose. The alarm goes, I get up, take a shower, get dressed and prepare myself a cup of coffee. Coffee is always very useful early in the morning. My mornings are pretty straightforward, to be honest. I think the key to being productive during any day is planning. I like to plan my following day

the night before to give me that extra edge in the morning, as I know my team and I are ready to dive into our set tasks right away. This is a fantastic way to save time and it motivates my team in that they are prepared for the day ahead with clear aims and objectives. EagleFX was founded just this year, in 2019. How has it been so far? Could you share with us the story behind how the company started, and what is the vision and mission of the firm? I am a trader myself and have been for some years now. My favourite assets to trade are forex and trading forex with high leverage. I started to get fed up trading with unregulated brokers who would always hold on to withdrawals for no real reason, and often these withdrawals never came! I was in a position where I had to take risks like trading with these brokers because it was the only way to gain access to high leverage. As a result, we decided to create our own

EagleFX is an online Forex and cryptocurrency STP broker providing CFD trading on hundreds of assets and optimal trading conditions within the award-winning MT4 platform.

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Interview

We are a true STP ECN broker, so we can assure our users that orders will be filled, and filled quickly. We offer a maximum 1:500 leverage on forex and 1:100 on cryptocurrencies, with instruments backing into MT4. trading environment to start trading in, which was directly connected to liquidity providers. We loved it so much that we opened it to the public, so anyone in the same position as I used to be in wouldn’t get ripped off. As a new company in the trading industry, would you tell us more about your competitive services? What are the unique features and advantages that set you apart from other established forex and trading companies? We are very proud of the fact that we offer a range of products and services that are more commonly associated with tiered accounts – accounts with certain set rules and ongoing costs. We offer highleveraged trading with ultra-fast execution, tight spreads, and low deposits, with free registration. We are a true STP ECN broker, so we can assure our users that orders will be filled, and filled quickly. We offer a maximum 1:500 leverage on forex and 1:100 on cryptocurrencies, with instruments backing into MT4. An innovative feature that sets us apart from most brokers is that as well as USD, GBP and EUR, our clients can use BIT as their baseline currency with their accounts. This in effect means that our clients can speculate on the price of bitcoin without necessarily having to trade.

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December - January 2020

Additionally, we have just launched a brand new affiliate scheme, where you can not only refer traders but they can, in turn, decide to be an introducing broker and the original IB can earn a commission from the referred people of your IB. Master IBs can potentially earn an additional $1.00 on top of the standard $4.00 commission, all thanks to our multi-tiered commission structure. This helps our affiliate programme to stand out from the crowd and enables our users to truly boost their earning potential. That’s not all; we offer media packs where we can help you boost your ad campaigns, free of charge. EagleFX operates with the goal of making forex trading easily accessible, secure, fast and profitable for traders throughout the world. What are your plans or strategies to better serve your customers and to achieve this goal? Good question! Well, we have existing strategies in place when it comes to account finance. Our primary deposit method into EagleFX is bitcoin. Deposits can land within minutes but are subject to the speed of the blockchain. That being said, this deposit method eclipses outdated payment methods such as wire transfers, which can leave traders waiting days or weeks for deposits to land and with the added risk of getting “stuck” due to incorrect banking information submitted by the client. This, in turn, can result in charges attached to submitting missing credit reports. Bitcoin transfers enhance user experience in that our traders can get involved in their trades, with little delay. We also guarantee our clients same-day withdrawals via bitcoin, and we store all client funds in cold storage – meaning it is offline, away from potential malicious online threats. In terms of profitability, I touched earlier on the fact that we offer up to 1:500 leverage with no ongoing costs, and EagleFX registration is completely free. With regard to accessibility, our clients have the option to download MT4, or use the web trader version, should that client not wish to download

software to their PC. Our traders can also use MT4 iOS and Android, meaning our product is always available for our clients when on the move. EagleFX offers access to an impressively wide range of trading options, which includes 53 forex markets, 31 cryptocurrency markets, 11 equity indices and 7 commodities markets. Can you tell us more about the type of traders and investors that are most likely to be attracted to your offering? One of the appealing factors about our platform is the accessibility to trading. We offer a trading platform where beginners, intermediates and experts alike can all trade in the same conditions. We show great flexibility in that the minimum deposit is $10.00 via bitcoin and we allow microlot trading starting at 0.01, targeting traders in their infancy. When we look at the other end of this spectrum, we have no maximum deposit and the largest lot size we allow is 1,000, targeting more-experienced clientele. We want to make trading with high leverage and fast execution easily accessible and I believe we achieve this, thanks to no sign-up fees, fast execution, and deposits starting at just $10.00. In terms of our products, we have over 50 forex pairs, including many of the exotic pairs that you wouldn't necessarily find in other brokers. We have the pulling factor to attract more-experienced and, dare I say, older traders who like to trade on the better-known pairs, such as EUR/USD. That being said, the range of crypto pairs we have on offer helps us to tap into the more-modern and emerging market of crypto trading, which is encouraging a new wave of users – users who would not traditionally be associated with trading. One of the main selling points of EagleFX is its competitive spreads. Would you elaborate more about how this would benefit potential traders? Traders need to be aware of spreads, as they are the principal cost of trading currencies. As we know, the spread is the difference between the bid and ask price. The tighter the spread is, the more beneficial to traders. The tighter the spread, the

24/7 Support The EagleFX support team are on hand 24/7 to support you through Live Chat, Email or Phone when you need it most.

24/7 Trading Trade a variety of assets at EagleFX and take advantage of uninterupted 24/7 trading.

Same Day Withdrawals EagleFX prides itself on processing withdrawals within the same day to ensure you have rapid access to your funds.

less the pip value, the less the cost of the spread. A low spread generally indicates that volatility is low and liquidity is high, whereas a high spread would indicate high volatility or low liquidity – two aspects of forex trading that are not ideal. Innovations within the financial sector are emerging continuously, and EagleFx is already at the forefront of this innovation curve. Can you tell us more about your plans in upgrading your platforms and quality of services? We are always trying to improve our products and take into consideration feedback from not only our team members but from our clients too. We are more than happy with the fact that EagleFX backs into the MT4 server, so there are no plans for change there. This has been tried, tested and is trusted by thousands of traders around the globe. Most recently we have incorporated some educational materials into our platform. This includes a “daily analysis” page which gives our clients an insight into what is happening in the global economic markets and details of which important meetings are coming up in the world of business, government and much more. Our clients can make use of charts and even edit existing charts themselves with indicators of their choice. In terms of quality service, we have a 24/7 support team contactable through the LiveChat platform, as well as email, and our clients can request a call back at their preferred time of day, any time. Our support staff are dedicated and highly professional, giving us a truly rounded product from registration to withdrawals. On the subject of payments, we aim to process all withdrawal requests within 30 minutes. There

One of the appealing factors about our platform is the accessibility to trading. We offer a trading platform where beginners, intermediates and experts alike can all trade in the same conditions. europeanfinancialreview.com

Interview

is no need for brokers to hold on to client funds and we like to show our integrity by offering our clients a truly speedy and professional service. EagleFX is registered in the Dominican Republic and is in the process of examining which regulatory body to align with, since the laws of the commonwealth of Dominica do not provide a regulatory framework for forex-related services. Can you tell us about the challenges and opportunities this entails, and how do you ensure the security and safety of your trading platforms against the threat of fraud? The real challenge is finding a regulatory environment that allows traders to trade with very high leverage and that doesn’t restrict certain countries. We take client security seriously. All of our clients have the option to enable two-factor authentication on their accounts. As well as this, all client funds are stored completely offline in cold storage, meaning that funds are kept away from potential online threats. You have been working in the trading industry for quite some time. What excites you most about this industry and what are your views on the important trends that may emerge in the coming years? I think the main emerging trends are coming in the shape of digital asset trading. There are so many coins in the marketplace, which makes it such an exciting environment to be involved in. Not only buying and selling cryptocurrencies, but having a place where you can trade on their performance is thrilling. So, to answer your question, I think what excites me most is the evolution of trading and the evolution of how goods are being purchased generally. It is fascinating to think of how financial institutions will operate in the next 20 years. On a lighter note, could you share with us the top things or activities that you do to recharge during your day off from work? I am an ex-footballer, so I have always made an effort to keep fit and stay healthy. As I do not play so much anymore,

Executive Profile David Muscat is the Head of Affiliates and Marketing at EagleFX. A tech-savvy individual with a wealth of experience in Forex Trading and the iGaming sector alike drawing on skills built up from over 8 years in marketing and business development.

I stick to activities that will have less impact on my knees. I particularly enjoy yoga, which helps me to relax and clear my mind. When I feel like stepping up the intensity, I will go to the gym and go hard for 30 minutes or so, which is a massive stress reliever. Staying active helps me to keep clear thoughts. Other than that, I enjoy reading to build on my existing knowledge and I can’t resist taking a peek at the latest market trends on my “days off ”. What message or advice can you give to people who would like to venture into the forex and trading industry? Research! It is important to educate ourselves on anything that we choose to get involved in. This is especially important in the world of forex trading. There are so many different strategies traders adopt, as well as different types of analysis that can be used. We offer a free-to-use demo account for our users to develop a trading strategy before ‘going live’ and depositing. For a clearer picture of how the markets might move, it’s important to use a balance of fundamental and technical analysis and to research and develop strategies which would be best suited to your personality and style. It is impossible to say which strategy is ‘‘best’’, as there are simply too many permutations. So, to summarise, I would advise making use of a demo account, making use of daily market analysis and taking a look at some educational materials. Knowledge is power, after all. Thank you very much Mr. Muscat. It was a pleasure speaking with you.

There are so many different strategies traders adopt, as well as different types of analysis that can be used. We offer a free-to-use demo account for our users to develop a trading strategy before ‘going live’ and depositing. 42

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Sustainability

How Facebook Money Could Counter Climate Change BY SHANN TURNBULL

o counter climate change, official currencies need to be replaced with money tethered for sustainability. Official currencies have exacerbated climate change by ignoring the pollution costs of burning carbon. This makes burning carbon cheaper than renewable energy. Lord Stern reported to the UK government that: “Climate change is the greatest market failure the world has ever seen”1. Stern is a former World Bank Chief Economist. Official currencies also carry out too many functions. These are being the unit of account, a store of value, and a medium of exchange. Technology now allows these functions to be separated. Money can now be simplified to become only a medium of exchange.

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The value of money should be tethered to a Sustainability Index (SI) with the existence of money being time limited. This would make money “ecological” and unsuitable as a store of value. There are better ways to store value in procreative assets. The band-aid approach to correct market failure has been to introduce carbon taxes, trading and even more government regulations. A superior solution is to change how the value of money is determined as suggested below. A fundamental problem of major currencies is that their value has become disconnected from reality. We have standards for weights and measures but no standard for economic value. The value of money

December - January 2020

has become self-referential. There is no tether. Relative values of major currencies have become volatile and unpredictable. This inhibits trade and investment. Ideally, the International Accounting Standards Board (IASB) should set standard units of value2. It will be a surprise to many that it does not already perform this task. When I asked the IASB chairman in 2014 why they had not set such a standard he replied that it was “too hard”3. However, technology now allows this task to be automated as described below. Automation minimises opportunities for manipulating monetary values, or the politics involved in using a basket of goods as tether, or as proposed by Facebook, governing a basket of currencies. Economic values have become subject to natural disasters, threats of war, war, political announcements and Presidential tweets. These actions explain how and why markets fail as noted by Lord Stern. It means that a belief in markets allocating real resources efficaciously is either a religion and/or a sign of mass insanity. Because the value of money is self-referential, a failure in one currency region can be transmitted to others creating a global crisis. This insane

arrangement was described as a “Doom Loop”4. Doom Loops could be constrained with currencies tethered to regional IASB standards. Each region of the world could possess a different standard to take into account: its endowments of nature, and support by its citizens for a circular economy. A circular economy is one that only consumes renewable and/or recyclable resources. Only in this way can humanity exist on our planet indefinitely. If there were no humans, then there would be no need to define economic value. The use and meaning of economic value depends upon human existence. Economic value must therefore be tethered in each region that can sustain humanity indefinitely. The ability of humans to exist in each region of the world is dependent upon four main variables: the natural endowments of each region to enable sustainability, population size, commitment to renewable/ recyclable practices, and trade. The last three variables are subject to change. So economic value needs to be defined in a way to nudge the distribution of humans and their total number in each region to a level where they can be sustained. In addition, to provide incentives for regions to increase the domestic reliance on renewable/recyclable goods with appropriate trade. To create market incentives to further these objectives, the value of money in the more sustainable regions needs to have a greater value than money in less sustainable regions. This means the value of money in each region needs to be tethered to a SI. Competition could then arise between regions to manage the size of their populations and the nature of their activities to increase the value of their index. There are many factors that could be included in a SI. An example is the need for bio-diversity. However, fine-tuning of an index could be deferred to avoid delay in initiating action that is now urgent. To allow immediate action the SI could be based on the total energy consumed from benign renewable resources in each region divided by the total energy consumed in each region from all sources. As a region becomes more dependent upon benign renewable energy then the greater will become the value of their money. This would reduce the cost of imports from regions with less sustainability. Unlike carbon taxing and trading this approach could be developed to include numerous determinants of a circular economy.

The Internet of Things (IoT) provides the means for collecting all the data required. It could also continuously update the SI tether for each region without human intervention. There should be little opportunity for the value of tethers to be manipulated. Manipulation becomes possible when a basket of goods or currencies are used as a tether. To provide slow and predicable change in the value of tethers they could be based on five year rolling average of data. Economic value would become much more stable and investor friendly than with any current forms of official money or crypto-currency. The cost of collecting the data from each region of the world would be trivial for corporations like Facebook, Apple, Amazon, Netflix and Google (FAANG). These corporations are already involved in online banking. Some are proposing to offer banking services and Facebook has proposed creating its own proprietary currency called “Libra”. One way for governments to control online banking, crypto and other digital forms of private currencies is through the IASB. It has more than 120 member organisations covering most jurisdictions around the world.5 Most member governments have made IASB standards mandatory. If the IASB does not act to create standards for value then governments should. Another condition for governments to approve private mediums of exchanges is that any such money cannot become a store of value competing with other real assets. The ability of official money to be store of value is another reason why it is not

Because the value of money is self-referential, a failure in one currency region can be transmitted to others creating a global crisis.

facebook crytocurrency called "Libra"

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Sustainability

The only way society can increase productivity without humans working longer or harder is by employing “procreative:”

fit for the purposes of increasing human productivity, wellbeing or equality. The only way society can increase productivity without humans working longer or harder is by employing “procreative:” assets “that allow nature to yield her resources more productively”6. It is counter-productive for any type of money to become a competing asset class. Increasing productivity provides a way to improve human wellbeing. But aggregate wellbeing is reduced by inequality exacerbated by official money earning interest. It makes the rich richer without necessarily increasing nature’s yield. Monetary assets have become a huge unsustainable bubble that respected commentators think will create an even bigger crash than in 20087. The time has come to build financial lifeboats as soon as possible. This means facilitating trials of digital limited life ecological tethered money. Limited life money was privately introduced in Europe and the US when banks closed during the Great Depression8. Local communities issued one year promissory notes accepted to be used as money that required a stamp of two percent of their face value to be affixed on the back of the notes each week. The sale of stamps provided the issuer with an income of two per cent each to create a gross income of 104% over a year. The issuer incurred a cost of 100% to redeem their money but obtained a gross profit of 4% even if the money was initially given away! The negative interest may appear unrealistically excessive. However, this forced the notes to circulated very quickly. The notes became known as “speed” money. This reduced the cost of terminating money to become less than the transaction costs of modern digital money9. Negative interest rate money has been circulating in Germany again since 200310. This has occurred in competition with official money without having an incentive of the Great Depression. Ideally, all money should carry a negative interest rate as supported by Keynes11. Current ultra low official rates and the need to stimulate economies create a supportive situation for their introduction. Government “helicopter” drops to citizens would avoid counter-productive unconventional banking policies.

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December - January 2020

Alternatively, any community could issue ecological currency as required. Market forces would limit excessive issue of money because it cannot be used as store of value. In a major financial collapse there would also be need to possess a creditable IASB or government tether. Governments and regulators possess many ways to encourage the private creation of IASB acceptable standards for defining economic value. Some ambitious corporations could initiate the creation of such indexes. It would provide unprecedented respectability with ever lasting global kudos for underwriting the future of humanity.

Shann Turnbull PhD has been a serial entrepreneur founding enterprises and re-organising listed firms. In 1975 he co-authored the first educational qualification for company directors in the world. His PhD research established the science of governance for evaluating and designing organisations by using bytes as the unit of analysis. (sturnbull@mba1963.hbs.edu ) References 1. Stern, N. 2006, The Economics of Climate Change: Stern Review, 30 October, p. viii, https://webarchive.nationalarchives.gov.uk/20100407163608/ http://www.hm-treasury.gov.uk/d/Summary_of_Conclusions.pdf 2. Turnbull, S. 2019, ‘How might standard units of value be defined?’ Journal of Modern Accounting and Auditing, 15(5): 221-231 <https:// ssrn.com/abstract=3429726>. 3. Conversation in Sydney with Hans Hoogervorst, 10th April 2014. 4. Haldane, A. G. 2009, ‘Banking on the State’, p.7, https://www.bis. org/review/r091111e.pdf 5. https://www.iasplus.com/en/news/2019/10/ifac-survey 6. Moulton, H. G. 1935, The formation of capital, pp. 11-12, Brookings Institution, Washington D.C. 7. King, M. 2016, The End of Alchemy: Money, Banking, and the Future of the Global Economy, Little Brown: London. Wolf, M. 2016, ‘Will there be another huge financial crisis?’ The Irish Times, June 1, <https:// www.irishtimes.com/business/economy/martin-wolf-will-there-be -another-huge-financial-crisis-1.2668834>. 8. Fisher, I. 1933, Stamp scrip, Adelphi & Co., New York, <http:// userpage.fu-berlin.de/~roehrigw/fisher/>. 9. Turnbull, S. 2016, ‘Terminating currency options for distressed economies’, Athens Journal of Social Science, 3(3): 195—214, <http:// www.athensjournals.gr/social/2016-3-3-3-Turnbull.pdf>. 10. Gelleri, C. 2009, Chiemgauer Regiomoney: Theory and Practice of a Local Currency. International Journal of Community Currency Research 13: 61-75 11. Keynes, J. M. 1936, The general theory of employment, interest, and money, Chapter 23, part VI, <bit.ly/1NaDFen>.

Venture Capital

Time to Fix the Broken Investment Model BY KEVIN MONSERRAT

In the era of unicorns and highprofile IPOs, it’s easy to assume that start-ups are bound to be successful if they are based on a good idea. The truth, however, is start-up failures are far more common than you might assume. Research conducted by Harvard Business School says three out of four start-ups will fail1, never to return any cash to investors. Although, if you were to define failure as not delivering on the projected ROI, then 95% of VC- backed start-ups are, in fact, failures1.

his is not a sign of healthy start-up ecosystem. Rather this inefficiency is the symptom of a model that is broken to its very core. It is time we question the very fundamentals of how our industry operates. Modern capital circulates the globe rewarding consumption over creation, quick exits over sustainable growth, and shareholder profit over shared wealth. It seeks “unicorn” companies fixed on disrupting the market, rather than supporting businesses that build, nurture and connect. Not every

company needs to be a unicorn to be successful. They do, however, need effective ways to raise capital. The post-Bretton woods world driven by profits is not a particularly inclusive or equitable one. Assets globally are governed by accountants while GDP remains the global benchmark for national performance, despite it reflecting an unsustainable and inequitable economic model. It all seems like a very myopic way of looking at the world. Valuing people and the planet seem to be no-brainers, and yet they are not baked into the global economic system. Based on the analysis of 101 startup post-mortems2, the top 3 reasons given for failure were not serving market needs, lack of money, and partnering with the wrong team members. In the current VC model, founders can spend as much as 60% of their time searching and raising capital. This is an important process, but many of these problems could be resolved if founders could spend more time focused on the strategic growth of their company, and less time on fundraising.

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Venture Capital

The VC industry wouldn’t exist without entrepreneurs, yet entrepreneurs often feel as if they’re in the backseat when it comes to dealing with VCs. The key challenge the investment industry faces is to realign the interests of those founders, investors and the experts crucial to turning ideas into companies. These Interests are too often in conflict in the current system. VCs need to return three times their fund in order to be profitable for their investors. This is neither a realistic nor a sustainable goal. Yet it remains the benchmark by which all new companies are judged. Regardless of the social benefits they may be able to deliver. These targets have driven investors towards FinTech products, where profits are more easily and quickly accrued. Investment into the UK FinTech sector doubled in 2019 to £2.15 billion. Research from the Economic Innovation Group’s discovered that despite all this talk of ground-breaking change, the most striking feature of modern business is its complete lack of dynamism and innovation. One figure that stands out in its Dynamism in Retreat report was that the number of businesses created in the US between 2010 and 2014 was less than a quarter of the number created between 1983 and 1987. This issue is accompanied by a widespread dissatisfaction amongst those are setting up start-ups who face a lengthy and consuming process of finding and securing VC investment. As well as the unwanted “strings attached” once it has been secured. Which brings us to the key weakness in the VC model, that the interests and agendas of start-ups, investors and experts are not aligned. Start-ups, for example, seek high valuations. This results in an information asymmetry between founder and investor which incentivises start-ups to hide their pain points while problems escalate behind closed doors. Med-tech company Theranos, who collapsed last

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year was an excellent example of this. They had raised a jaw dropping $700 million in investment, its paper valuation exceeded $9 billion and the founder, Elizabeth Holmes, was worth over $4.7 billion. There was one little issue. The cutting-edge technology it promised would revolutionise blood testing, didn’t work. One employee described the tech as no more sophisticated than a school science project. How was it possible for a student straight out of college to fool some of the most respected investors in the world to be fooled to tune of hundreds of millions of dollars? That debate will no doubt be the focus of business school classes for years to come, but what is clear is both investor and founder were not incentivised to work towards the same outcome. Investors are instead on the hunt for lower valuations and an opaque relationship. They seek a company that can quickly accrue profits and begin to repay their initial investment. For the start-ups, these profits are often lost at a crucial time for growth. Not only does this stifle the development of companies at an early stage in their development, but it also minimises the chances of longterm success for both parties. For the experts, those who the initial capital is often spent on and whose experience is so key to the success of start-ups, in the

December - January 2020

case of a successful business they will see most of the returns offered to shareholders. This set up leaves everyone frustrated. Businesses need time and a reliable network that can help them grow. Capital is certainly essential; but so often it is what inhibits that growth. As an entrepreneur, your job is to do what is right for your customers, money and valuation are the end-product of that endeavour. Now more than ever we must establish the right environment and incentives for innovators. We need to create an ecosystem where industries can work together with start-ups, universities, corporates, governments and investors to solve societal problems effectively. The centralization of capital is killing innovation and slowing down economic growth. We must be able to deploy capital accurately at speed and at scale - which only decentralization combined with knowledge transfer can reach. Innovation is happening outside of universities – in co-working spaces, garages, accelerators and start-up collaboratives. Some of today’s most innovative ideas are coming from these groups. We need to embrace, engage and propagate these communities. When raising capital becomes an almost impossible process, it hurts innovation. To be clear, innovators are

The key challenge the investment industry faces is to realign the interests of those founders, investors and the experts crucial to turning ideas into companies. These Interests are too often in conflict in the current system. not those incrementally reshaping products; but those offering fundamentally new and superior ones. On occasion, they make the quantum leap and create an entirely new market. We have not been fostering an innovation ecosystem that encourages this, but one where investment piles into the incumbents, rather than the insurgents. To concentrate their market share, these companies then continue to snap up much of the talent, only to then smother originality. Its left innovators and entrepreneurs not effectively addressing the major social challenges we face of health, education, food, water, jobs, security and environment. Our innovation culture is therefore being stifled. Many of our brightest, high potential innovators with tech start-ups are struggling to survive. We need a new model that offers direct access to knowledge and expertise, without the stress of repeated funding rounds. We must establish an enabling environment that support the growing number of start-ups and budding entrepreneurs by providing resources, access to advisory and capital services for greater chances of success. These reasons are why I launched Consilience Ventures, an investment platform that is unlike any other traditional fund. It’s goal is to support every stage of the start-up lifecycle with capital, resources and mentorship from high-profile industry leaders. It offers a one-stop-shop ecosystem with a community of carefully selected investors and experts that are incentivised to help grow each company. By doing so we believe we can drive more sustainable and ultimately profitable growth. By pooling invested capital across an ecosystem of companies, experts and investors, the risks of investing are shared across the community. It means pain points are openly discussed and resolved through the mentoring programme to assist their growth towards an exit event. When the company in the eco-system is bought or IPOs, the proceeds are shared by everyone in the community, according to how many tokens

they own. We are using a blockchain supported platform to track the ownership of these tokens, which can be exchanged in the community for expertise and knowledge. These tokens operate like digital shares in that they pay you a dividend, but they are also unique because they can also be used as a currency. This creates the opportunity for liquidity between the hundreds of investors and start-ups in the eco-system. Crucially, it also realigns the interests of the founders, investors and experts. The community is not under the same pressure from investors to grow at all costs and by delaying the returns to the exit event, it doesn’t eat into the early profits that start-ups need to grow. New technologies mean these models can help us tackle the faults with the VC model but most importantly, give start-ups a fair chance of sustainable growth. Start-ups are the engine of national economic growth. SMEs provide over 15 million jobs in the UK, they create new markets and boost the production of goods and services. If the UK is to reap the benefits of entrepreneurship – job creation, economic and social prosperity – we must be prepared to nurture a strong entrepreneurial culture that is supported by an investment model that sees beyond the short-term and provides sustainable development and growth. That’s how we can fix this broken investment model.

Kevin Monserrat is the CEO of Consilience Ventures, a disruptive new collaborative community connecting capital, growth companies and business expertise. References: 1. https://www.inc.com/john-mcdermott/report-3-out-of-4-venturebacked-start-ups-fail.html 2. https://www.cbinsights.com/research/startup-failure-reasons-top/

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Data Security

Security vs. Convenience: Delivering seamless, secure service experiences BY JOHN WATKINS

ustomer identity is a precious asset and a highly prized commodity. As the financial services industry has become more digitised down the years, customers’ digital identity decides what they can do and what online services they have access to. This has been revolutionary for the customer experience. So long as the service provider is happy that customers are who they claim to be, they can access their account, make a transaction or take out a loan anywhere and at any

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time they want. Indeed, the speed and ease of this process has become a point of competition, with organisations vying to provide the most seamless and frictionless online experience possible. However, in the rush for greater convenience, the industry can’t afford to forget about proper identity verification. The threats from identity theft and cyberfraud are growing more sophisticated and pernicious. Organisations must guard against this, but in a way that doesn’t penalise the innocent customer.

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A global identity crisis Digital identity is a convenient means of authentication, but the lines are starting to blur. The industry has woken up to the fact that online identities are malleable and spoofable. Impersonating customers online to commit fraud and Image source: gain access to their financial assets has Blog.sas.com become big business for cybercriminals. In 2017, identity fraud peaked in the UK with 174,523 cases reported by Cifas, with eight out of 10 fraudulent applications made online. What’s more, these hackers are constantly innovating and adopting new technologies to stay ahead of security measures. Even popular, tried and tested measures like two-factor authentication have been compromised.

Impersonating customers online to commit fraud and gain access to their financial assets has become big business for cybercriminals.

Cybercrime is fundamentally adversarial. A lone wolf or criminal outfit will probe every weakness in your verification system and will stop at nothing to breach your defences. You need to cover all your bases and ensure they have no place to hide. At the same time, however, you mustn’t go too far in the other direction. You have a duty to protect your customers, but also to provide them with the best experiences – something an endless loop of authentication methods can never deliver. The 5 senses of security When you meet someone for the first time, you make use of all your senses to get a first impression of them. The same principle should be applied to online interactions with customers. Why wouldn’t you use all the information channels available to you to find out if the user is being honest? The problem is that credit, fraud and risk managers and their staff too often make the call based on incomplete insight. This is because they only collect and analyse some of the data that’s on offer. If you don’t consider every possibility, you’re only leaving blind spots to be exploited. For example, an authentication system may approve a request from cybercriminals simply based on the device they’re using. Yet if the system had checked the device’s location and the customer’s behaviour, the hacker would likely have been exposed. The main data points to consider are: 1. Experiential information: The organisation’s previous interactions with and knowledge of the user based on an existing profile. Has this user been denied access before, and why? 2. Channel information: The channel or device the entity is using. Has the user accessed your services with a certain device before? 3. User behaviour: The behaviour of

users while they’re interfacing with your services. Are they hesitating too long when asked to make decisions? Does their cursor move robotically? 4. Public record: Publicly available information on the customer. Are they accessing their services from their registered address? Does their given age match what’s on their driver’s license? 5. Group and risk analysis: Wider data from analysis of the market and threat landscape. Is the email address the entity is using part of a known fraud cluster? Organisations don’t have to implement every data type into their verification process. Yet every new segment they do adopt vastly increases their chances of detecting and stopping fraud in progress. Time waits for no one However, data alone won’t protect you or your customers. Once you have the data and a process in place for discovery, you have to do something with it. While models do an outstanding job predicting fraud, rules stop it. At the same time, you need to act quickly. Customers won’t wait around if you spend more than 10 seconds weighing up their credentials. The process has to be seamless and instantaneous. Yet the industry’s approach to authentication has sadly become segmented. There are thousands of point solutions that cover only one part of the verification process. They are rarely joined up and only waste customers’ time and patience. It’s critical that the process begins and ends with the customer experience in mind. Turning insight into authentication To turn insight into an authentication decision, organisations should consider an end-to-end solution. When

When the process for verification is unified and data-driven, passive authentication becomes a reality. a customer tries to sign-in or access a service, an orchestration platform should be set up to collect all the desired data points before sending them to a decision engine. The solution can then analyse the data and evaluate if entities are the customers they claim to be. When the process for verification is unified and data-driven, passive authentication becomes a reality. The customer enjoys a real-time, seamless experience – no password required – while the decision engine rapidly confirms identity in the background. This is security and customer satisfaction all in one. There is no silver bullet that will protect your organisation from cyberfraud in every event. However, when you have access to the right data and the capability to interpret and act on it in real time, you achieve the best of both worlds.

John Watkins is an Industry Consultant for SAS Institute who partners with financial services companies to drive analytical and operational solutions to prevent losses, reduce compliance risk and minimise customer impact. John’s 20+ years of financial services experience fuels a passion for combining operational data and processes with cutting edge analytics to identify and mitigate emerging fraud and risk trends.

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Risk Management

Managing Risk in a Modular Economy activities, however there is one aspect of outsourcing and automation which requires special attention, i.e. third party risk management. It is becoming an ever increasing problem for Chief Risk Officers of global organisations operating in a modular economy, in which the majority of business processes are executed beyond organisational boundaries.

threats, this approach becomes even more important as many firms rely on shared cloud resources, such as Amazon Web Services or Microsoft Azure. These services are often used to outsource even the most critical business processes. The associated concentration risk is hard to identify and manage if you don’t look beyond your own organisation. In the age of modular economy, financial services and manufacturing firms are buying more and more new technologies than ever before. By doing so, they can offer enhanced services to their clients without having to develop them in-house (and later on maintain the costly IT infrastructure). However, the reliance on external service providers bears supplier risks that include facilities in geographical locations prone

How to assess and mitigate third party risk? In my previous article1, I have introduced the concept of economic supply chain risk capital (ESCRC) which is a useful tool that helps managers to quantify and mitigate (or transfer) their third party risk exposure. In the wake of cyber

The associated concentration risk is hard to identify and manage if you don’t look beyond your own organisation.

BY KAMIL J. MIZGIER

he business world is constantly changing, at a pace which humans are not able to catch up with. The premise of machines taking over the most tedious, low value-adding business processes is very attractive from a budget and cost cutting perspective, which is so prevalent in the current low interest rate environment. From Boston Dynamics’ robots replacing humans in physical activities to medical nanobots correcting human bodies through to financial bots taking care of human’s investment decisions – automation and artificial intelligence are taking the world of commerce by storm and it is unstoppable. One of the earliest adopted trends – robotic process automation – allows firms to reduce the cost of outsourced

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Risk Management

Supplier development is an important business practice that can help to bring your suppliers to the next level, however, it is costly and time consuming. to disruptions, incompatible cultures, activities being further outsourced to unidentified suppliers, wrong business practices or even costly law breaches in countries that have very different local labour laws. Supplier development is an important business practice that can help to bring your suppliers to the next level, however, it is costly and time consuming. In that new reality, ESCRC is a tool that can help you to make the decision on which suppliers to develop and which business relationships to wind down. A practical example of using ESCRC As an example, think of an SME managing a global complex supply chain for high-tech manufacturing with its factories and supplier base exposed to disruptions in Thailand and Japan. For this manufacturer and auto supplier, business continuity and loss of profit must be managed as top priority. The firm had only limited information about its first tier suppliers, not to mention sub-suppliers further in the supply chain. But even with this partial information, the company’s management did not have to waste resources on mapping the entire supply chain. The company selected their most critical products and began to collect data on products, suppliers and trajectory. In the second step, the firm polled its staff about historical occurrences of disruptions, likelihood and times to recovery. Based on this data, ESCRC was computed, revealing aggregated information about expected losses and profit at risk in the next year’s time horizon. Furthermore, several strategies to minimise impact of systemic risk could be tested (such as the relocation of the factory, supplier switching or reallocation

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of purchasing volume). A focus on their most critical business case was enough to assess the company’s third party risk profile and help to decide what it can afford to lose in the most conservative worst case scenario (and hence helped to define the firm’s risk appetite). The study revealed several surprising and important insights: 1. Procurement managers normally focus on stock keeping units with the highest spend, but a low-volume component actually had the biggest impact on profit-at-risk. 2. Alternative or backup suppliers do not guarantee business continuity. Normally companies do not look at all the different risk types and their differentiated impacts. Only the statistical modelling of ESCRC revealed the impact of these very real effects. 3. Further testing revealed tradeoffs and identified which suppliers were worth keeping based on their individual reliability. A forward looking approach to third party risk management As the above case study shows, third party risk can be understood, measured, owned and mitigated in a forward looking fashion if statistical risk measurement techniques like ESCRC are carefully applied with enough high quality data. Future development of this methodology includes macroeconomic variables and scenario consistent simulation of future states of the world, in which value added activities are becoming more and more fragmented and performed in locations where they can be done most efficiently. From this even more sophisticated third party

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risk management strategies can be evaluated by the digital risk manager of the future. Machine learning is another potential avenue to be explored for even more comprehensive model formulation that predicts future supply chain disruptions based on similar events happening elsewhere in the business ecosystems. For this to happen, both vast amounts of internal and external data and computing power is already available and ready to be applied to assess third party risk in complex supply chain network that your organisation is inevitably part of.

Kamil J. Mizgier works as Group Manager, Model Development in the area of Enterprise Risk Analytics in the financial services industry. Until 2016, he was a Senior Researcher in Supply Chain Management at ETH Zurich. Prior to this role, he gained professional experience in risk modeling at Credit Suisse, UBS and Aduno Group in Zurich. He has published several academic and practitioner articles on supply chain and operational risk management, supply chain networks and economic risk capital. He obtained a Master's degree in Applied Physics from the Warsaw University of Technology and a PhD from the Department of Management, Technology and Economics at ETH Zurich. References 1. Mizgier, Kamil J. (2018): On Economic Supply Chain Risk Capital, The European Financial Review, August/September 2018.

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Risk Management

The Challenge of the ‘Shifting Sands of Model Risk Management’ for Banks BY TONY BETHELL

Model risk management (MRM) sits at the heart of the Bank of England’s Operational Resilience (OpRes) initiative. OpRes raises yet further the expectations around risk management at financial institutions. Driven by regulatory expectations and scrutiny, MRM and governance are fast finding their place as the top agenda items in banks today.

t was perhaps around 2000 when the first regulatory demands – OCC 2000-16 from the US Office of the Comptroller of the Currency (OCC) – were introduced for financial institutions, covering Model Validation. Developed jointly with the Federal Reserve System, this regulation provided guidance for effective risk management when using quantitative models for decision making. Fast forward to 2018 – and the scale and tone of MRM regulation has changed significantly globally. In the US, SR 11 7 has updated previous regulations, and is now in serious adoption. In the UK, the Prudential Regulatory Authority’s (PRA) standard for MRM for Stress Testing (SS 3/18) – with its broader remit than just Model Validation – encompasses everything from model definition through to evidencable governance, risk management, as well as validation and review.

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The significance of MRM has grown in recent years as the reliance on models – and the knowledge and insight they provide – has grown.

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MRM at the heart of Operational Resilience In 2019, the Bank of England has considerably picked up the pace on its Operational Resilience (OpRes) initiative. While still not a regulation, nonetheless regulators are expecting their regulated firms to demonstrate enhanced resilience across every aspect of the business. In essence, regulators are insisting that banks’ business processes are resilient to any event that has the potential to cause disruption or have a profound impact on the business over an extended period of time – it could be anything from a power outage, a fire, the failure of a key business counterparty, or an economic shock. The significance of MRM has grown in recent years as the reliance on models – and the knowledge and insight they provide – has grown. Whereas models were used in certain niche areas – foreign exchange, derivatives, and other core functions in the trading book, now they are used more broadly in the banking book and broader business management – even budget management. This pushes MRM to the heart of OpRes. Nicholas Edge, Principal, Prudential Policy at UK Finance, recently reiterated this view too, “As OpRes becomes a central theme of the regulators, disciplines like MRM too will become a core tenet of ensuring a good operational resilience outcome.” Internationally also, there is a vast number of regulations that emphasise the need for effective MRM – Basel III, MAS 637 in Singapore, BAIT,

TRIM and MAIT in Germany, CECL in the US, and the list goes on. MRM challenges With most regulations now including MRM as a key requirement, the scrutiny is increasingly getting intense – especially as models are becoming more complex, the regulations continue to evolve, and newer ones routinely being introduced. With so many and different types of models in play for day-to-day business operation, gaining full oversight and control of the model landscape is proving difficult. Often there isn’t transparency of how models are developed and used across the business. The shifting sands of MRM means that model governance must be at the core of financial institutions’ business operations. However, different institutions are at different stages in their journey of model governance. Nicholas Edge added, “As regulators are becoming more interested in, and demanding of, the MRM discipline, the end journey for institutions is at a different place today than it was a few years ago. The standards for model risk and governance are constantly being pushed, which is further challenging organisations in terms of how they must manage their models.” The pressure on model risk teams is enormous and has spread from some specialist models teams, to now include most of the senior managers of the Operational, Financial and Regulatory Risk groups. Short on staff and resources, they need to defend every rationale they use for the models, evidence all actions and provide visibility of every change they make in the models to satisfy internal and external auditors,

their Board and the regulators. While continuing to deliver business as usual. Senior executives aren’t off the hook either. The Senior Managers & Certification Regime (SM&CR) demands model oversight – executives need to be aware of the assumptions made in the material models. Not everyone fully grasps that the SM&CR is a catch-all regulation – a bank’s non-compliance with another regulation can lead to breach of the SM&CR. This regulation aims to hold senior executives and the C-suite accountable individually and means business. A practical framework for MRM and governance is the way forward MRM efforts have increased exponentially in institutions, driven by the expectations of the regulators of course, but also by business challenges that lie ahead. Many are appointing Heads of Model Risk, and there is a push to centralise the model inventory for visibility of the landscape. The focus is also on model testing and validation – i.e. ensuring the models assumptions are accurate, the model is stress tested and overall, works as expected. However, things like data quality and change management and model lifecycle management are severely lacking. With the intricate interconnection of models across the environment, potentially one inaccurate change and the entire business model could be in disarray. Financial institutions will do well to establish a core foundation and structure for MRM so that this function is implemented systematically in the business. With so many new regulations being regularly launched, and their numerous

iterations published, often unless the executives dig deeper into the legislation, they wouldn’t even notice the relevance for MRM. The Bank of England’s Stress Testing and Basel III’s Fundamental Review of the Trading Book (FRTB) are perfect examples. To then meet new regulatory requirements, additional models are routinely required. An automated, management framework approach will help replace a siloed, model validation-only approach in favour of one that is holistic, robust and governance-led. This will deliver model oversight – complete with a full inventory that includes all enterprise models, Shadow IT and end user computing tools (that can be models in their own right), all categorised and tier-based on their criticality and materiality. This will provide the ability to identify risks associated with methodology, data, implementation and model usage by individuals. At a more advanced level, the framework will enable model risk assessment with the ability to even quantify its impact on P&L, capital and similar parameters. Last, but not least, the organisation will be able to institute standardised reporting with controls built-in to mitigate risks. Breaking this approach down, as financial institutions consider an MRM framework, these are some key components to consider: Policy – This will help determine which business entities fall within scope, which models within these entities should adhere to the policy, definition of model risk, the difference between a model and a tool, criteria for model tiering, processes for risk reporting and crucially, which models fall under policy exceptions and escalations procedures.

The shifting sands of MRM means that model governance must be at the core of financial institutions’ business operations. However, different institutions are at different stages in their journey of model governance. europeanfinancialreview.com

Risk Management

Model inventory – This underpins the quality of an MRM framework. Many institutions are challenged by the lack of visibility of the model landscape. At an insurance company, 5000 files were being added every quarter, making visibility and control difficult. Determining the model inventory components (e.g. name and owner, risk classification, complexity) helps alongside categorisation based on things like purpose of the model, and risk and criticality tiering. This is especially important so that where needed appropriate governance can be applied to specific models, per the requirements of individual regulations. This will go a long way in enabling the bank to easily defend the model inventory and models themselves, should it be challenged by external bodies. Generally, most institutions put their model inventories together manually utilising standard Microsoft Office tools such as Word, Excel and SharePoint or GRC systems. Due to the size of the model inventory, the number of users, and complexity of the model estates, automation will deliver material benefits in terms of efficiency, accuracy and overall management capability for workflow, validation, attestation, testing and policy adherence. Roles and responsibilities – Especially with the SM&CR, the clear definition of team structures, roles and responsibilities is key to ensuring ownership and compliance. There is an emergence of Chief Model Risk Officers in financial institutions (especially in the US) to oversee MRM reporting,

which is a step in the right direction. Care should be taken to clearly define and differentiate between the responsibilities of model owners, developers and users. And it is best practice for the Board of Directors to be involved not just approving the MRM framework, but also reviewing and challenging the highest risk tier of models in the business. Reporting – Processes for reporting should be commensurate with the financial institution’s model risk appetite. Some commonly used metrics by financial institutions are number of models used in exception, un-remediated models, high risk models as a percentage of total model landscape, models yet to be validated and so on. Here again, automation can facilitate dynamic reporting and should be a consideration. More broadly too, underpinning MRM with automation can provide institutions with a single, real-time view of the function, based on the type of models in the business, policies, processes, priorities, usage, geography, activity status, data flows and interdependencies and risk appetite. Anecdotal evidence shows that financial institutions are including Model Risk on Board Risk Committee agendas on a quarterly basis. Some even mention the specific high-risk models and new models that are under development. This indicates that MRM is making its way up to be among the top items of institutions’ operational agenda. Yes, MRM requires an investment, but in the current regulatory, financial and socio-economic environment, it is essential to mitigating business risk and ensuring operational resilience.

Tony Bethell is VP of Strategic Alliances at CLusterSeven with global responsibility for developing and driving the partner channel. He is focused on identifying new partnerships and enabling existing partners to build successful propositions and creating new routes to market for ClusterSeven. He brings to ClusterSeven an extensive skill set having been responsible for managing Sales, Channel, Product Management and Professional Services organisations.

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China and the World

From Follower to Leader: China’s Development of Special Economic Zones and Its Global Impact and Lessons BY XIANGMING CHEN

A Preamble I published my first article “China and Latin America” in The European Financial Review in 2012 to launch this magazine’s “China & the World Series”. Since its official inauguration in 2013, the Belt and Road Initiative (BRI) has turned “China and the World” into a globally significant topic of public attention, academic research and policy debate. The topic has stayed constantly and prominently in the headlines, only magnified by the US-China trade war over the past year and a half, and generated a large

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and growing body of published scholarship and media commentary. Through 13 articles published in this series thus far with a variety of co-authors, including a number of undergraduate students at Trinity College in Connecticut, I have taken the reader to see China’s presence and influence in all regions of the world. More importantly, I have attempted to shed light on “China and the World” by drawing meaningful connections between local and regional development and transformation deep inside China and their echoes and

December - January 2020

extensions across varied places and boundaries around the world. The article below takes the trans-local dimension of “China and the World” further by tracing how China has evolved from a follower to a leader in building special economic zones (SEZs) within its boundaries earlier on and extending this experience and expertise to other developing countries more recently.

pecial economic zones (SEZs) have been used as an important national development instrument around the world for the past several decades. China stands out not only in having created the largest number and variety of SEZs but also in building some SEZs in other developing countries. In this article, I first trace the evolution of SEZs into both distinctive and overlapped types over the past four decades, showing how SEZs have changed and continued in their own existence and in roles in fostering development. Second, I focus on China’s transition from a national follower to a global leader in creating the world’s largest number of SEZs, diversifying its SEZs domestically and extending them internationally. Finally, I draw critical lessons from China’s development experience with SEZs for developing countries.

Pedestrians walk under red lanterns which were installed as Chinese New Year decorations, at Pudong Financial Area in Shanghai, January 24, 2014. REUTERS/Aly Song

An Age-old Story Through the 21st Century The Economist (4 April 2015) dated the first free trade zone (FTZ) to ancient Phoenicia about 3,000 years ago. Keller Easterling (2012) traced it to the Roman port of Delos in the Aegean Sea, which flourished in the first century B.C. From the FTZ-like Hanseatic League during the 13th to 17th centuries, we could fast-forward to find the first modern zone, created at Shannon airport in Ireland in 1959. This was followed by South Korea and Taiwan using export processing zones (EPZs) in the 1960s and early 1970s to jump-start their export-oriented industrialization. China raised the SEZ approach to development to a new level in 1980 when it established four SEZs (Shenzhen, Zhuhai, Shantou, Xiamen) along its southeast coast which were much larger than the earlier EPZs and sited in or near existing cities. From an estimated 500 in 1995, the number of SEZs has risen to 5,400 zones operating in 147 countries (UNCTAD, 2019). Given the large numbers and varied types of SEZs, their success varies widely. China is a global leader in SEZ development having operated the largest number and most varied types of SEZs with overall success. By comparison, SEZs in India and Africa have generally not done as well, for various reasons such as weak infrastructure connections, excessive bureaucracy, and resistance to land acquisition (ADB, 2015; UNDP, 2015). Timing of establishment and governance structure loom among other determining or facilitating factors that shape the differential performance of SEZs. I update my early typology of SEZs (Chen, 1995) to a dynamic view on the new SEZ landscape today. Table 1 shows four types of SEZs over three broad stages. Free manufacturing zones (FMZs) mark

industrial upgrading from the takeoff of labour-intensive and export-oriented manufacturing to knowledge-intensive innovative manufacturing. Since hosting much earlier services such as warehousing for duty-free goods in FTZs, free service zones (FSZs) have diversified over time into broader coverage of more modern and high-end services such as logistics. While overlapping somewhat with FSZs, sector-specific zones (SSZs) have a shorter history and feature more specialized economic functions and activities that increasingly herald the future. Cross-border

and extra-territorial SEZs are the newest type, of the largest geographical scope, and truly border-intensive and transnational in function. This table aims to remap SEZs as subnational units of economic development with varied roles onto the development ladder of climbing or sliding national economies based on shifting comparative advantages. China’s Experience with SEZs China’s experience with SEZs has largely tracked the global trend over the last four decades, with Shenzhen being

Table 1: The Evolution and Diﬀerentiation of SEZs: A Typological Framework Zone Type by Stage and Time

Stage I 1980s

1. Free Manufacturing Zones (FMZs) • Masan EPZ (S. Korea) • Kaohsiung EPZ (Taiwan) 2. Free Service Zones (FSZs)

3. Sector Specific Zones (SSZs)

4. Transnational (cross-border) and Extraterritorial (enclave) Zones (ETZs)

Stage II 1990s-2000s

Stage III 2010s

Take oﬀ

Upgrading

Innovating

• Enclave-like • Labor-intensive • Export-oriented • Incentive-heavy • Experimental and catalytic • Narrower focus

• Extra-zone spillover • Capital-intensive • Balanced exportimport • Broader incentives • Spread eﬀect • Diversification

• Within-zone refocus • Knowledge-intensive • Domestic-oriented • Upgraded incentives • Clustering eﬀect • Integration

Limited

Expanding

Dominant

• Trade • Warehousing • Shipping

Rare ᵒ Trade ᵒ Shipping

Beginning > Maquiladoras (US-Mexico border)

• Finance • Back oﬀice • Real estate

Growing ᵒ High-tech

industry

ᵒ Call center

Growing > Growth triangles (ASEAN) > China-Kazakh border coopera tion center

• Finance • Logistics • Other professional services like engineering design Emerging and Future-Oriented ᵒ R&D labs ᵒ Digital media ᵒ Tourism

Multiplying > Forest City (Chinabuilt in Malaysia) > SEZs in Africa and Middle East (Chi na-built) >Boten SEZ in Laos (China-built)

Source: Author

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China

Table 2: Types of China’s SEZs by Time Periods Type of zone by Time period

1980s

1990s

• Shenzhen • Zhuhai • Shantou • Xiamen • Hainan (province)

Industrial upgrading began

14 coastal cities including • Shanghai • Ningbo • Nantong • Others

Began industrial upgrading

Transition and diversification to high-tech manufacturing and service

Fully institutionalized and stable

3. High and New Technology Zones (HNTZs); Border SEZs

Special zones spread to coastal, central and western border regions • Ruili • Mohan (Yunnan)

Growing and spreading nationally

Uneven success

4. New Free Trade Zones (FTZs) and Overseas Economic and Commrcial Cooperation Zones (OECCZs)

Growing gap between coastal and inland/ border regions

“Go West” and “Go Global” policies began

Belt & Road Initiative (BRI) launched • Shanghai Free Trade Zone • Forest City, Johor, Malaysia • China-Laos (Mohan-Boten) Economic Cooperation Zone (ECZ)

1. Special Economic Zones (SEZs)

2. Economic & Technological Development Zones (ETDZs)

2000s Uneven success in upgrading

2010s Uneven success in upgrading • Kashgar • Horgos

• China-built SEZs in Africa

Source: Author

the most successful and well-known case. As Table 2 shows, the first two types of zones started in the 1980s, a few years apart from each other, with the economic and technological development zones (ETDZs) launched in 1984. All the early ETDZs built by the 14 established coastal industrial cities were sited some distance away from the central cities as greenfield development projects. They were similar to Shenzhen in that the new location and construction would keep the zones less connected and thus influenced by the old system. While both the SEZs and ETDZs experienced their transitions through industrial upgrading, China unleashed a wave of high- and new-technology zones (HNTZs) across much of the national economic space starting around 2000, although an earlier variation

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called high-tech industrial development zone started in the 1990s. The fourth type, heralding a new phase of China’s SEZ development that reflects its more open economy, appeared with the official unveiling of the Belt and Road Initiative (BRI) in 2013. While starting out as a SEZ for low-end and labor-intensive manufacturing SEZ around 1980, Shenzhen in the early 1990s entered a new stage of development characterized increasingly by more capital- and technology-intensive manufacturing in response to rising land and labour costs and worsening environmental degradation. The focus during this stage was on Shenzhen to become a center for high- and new-tech manufacturing, finance services and logistics. In 2003, a cultural industry focus was added. In 2009, Shenzhen added a new focus on becoming an international innovation center. The successful Shenzhen model has recently been extended to China’s far western cities of Kashgar and Horgos in Xinjiang (Chen, 2018). Focused more on industrial innovation a few years ago, Shenzhen designed a set of very generous financial incentives for attracting R&D labs of national, provincial and municipal grades ranked by a sliding scale of importance and prestige, as well as labs set up by multinational corporations. National- and provincial-level labs, especially those certified as “excellent”, would each receive financial support of up to RMB10 million ($1.5 million), while each municipal level lab would be granted 5 million RMB ($750,000). Shenzhen would also provide 5 million RMB for offsetting the cost of constructing each of these labs. In addition, Shenzhen has built new R&D lab spaces that are available to new-tech firms without rent for the first two years and at a discount of half of the rent for the next three years. These new incentives have fuelled the dense emergence and rapid expansion of high- and new-tech firms that have placed Shenzhen at the forefront of global technological innovation today (Chen and Ogan, 2017). Except for Shenzhen’s singular success, China’s experience with SEZs varies broadly. Despite their shorter histories than the SEZs and ETDZs, the HNTZs have since around 2000 become quite productive, in parallel with China’s overall effort to move to higher valued-added manufacturing and knowledge industries (Table 2). By 2009, China had approved 54 HNTZs occupying a total area of 962

sq kms. Although this is only 1/10,000 of China’s total territory, it produced 10.4% of China’s total industrial output that year. Of these HNTZs, 16 produced over 20% of their cities’ total output, up from eight that did so in the previous year (Yu, 2011). Productive as they are, some HNTZs have run into the land bottleneck and acquired some surrounding areas without administrative approval by the higher authorities. In some cases, the areas around the originally approved HNTZs have been developed into residential and commercial zones, which has pushed up land prices. This has restricted and diluted the original purpose and focus of building high- and new-tech industries. This process also reflects another critical factor in China’s SEZ success – local leadership. Most of the zones of various types are led by a vice mayor or Party secretary of the cities where the zones are located. These leaders tend to do quite well early on because they can leverage and utilize the autonomy granted to the zones and their new momentum, with some institutional separation from their municipal administrative anchor. Some of the leaders were innovative and led the HNTZs to varied levels of success. However, as these zones have become more integrated with their host cities through mixed-use development and inertia, some of their leaders have become more conservative and content with the status quo. The leadership factor exposes a fundamental dilemma facing China’s SEZs. Since they are not special political zones and ultimately governed indirectly by the larger system, they carry a strong built-in limit for sustaining their vitality. Pushing SEZs Overseas Partly pressured by its domestic overcapacity in cement and steel, as well as the overall saturation of the construction market, China has begun to

build a variety of SEZs abroad as part of the infrastructure-led development strategy under the BRI. In 2014, a Chinese company started constructing Forest City, a private, gated, luxury mega-development for 700,000 people on four reclaimed islands in Malaysia’s Johor state near Singapore. But this project has been halted since the second election of Prime Minister Mahathir, who is more critical and cautious about China’s heavy investment in Malaysia. In the meantime, Alibaba has helped Malaysia launch the DutyDigital Free Trade Zone (DFTZ), a warehousing facility close to Kuala Lumpur’s international airport. The DFTZ is designed to serve as a regional logistics hub to help small and medium-sized businesses better connect to global commerce. These cases mark the most recent phase of China’s SEZ development featuring a “go global” strategy (see the lower right corner of Table 2). It is a logical extension of China’s cumulative strength and experience in building SEZs at home and provides new opportunities for countries that are relatively late in coming to SEZs. These countries can learn useful lessons from China’s uneven success with SEZs that may or may not transfer easily and successfully to other contexts. I present two sets of cases in Laos and Ethiopia respectively below.

By 2009, China had approved 54 HNTZs occupying a total area of 962 sq kms. Although this is only 1/10,000 of China’s total territory, it produced 10.4% of China’s total industrial output that year.

A China-Laos economic cooperation zone China’s extension of SEZ development to Laos has taken place between the Chinese border city of Mohan in Yunnan Province and the Lao border town of Boten. In 2015, the governments of China and the Laos signed the Agreement for Joint Construction of the China–Laos (MohanBoten) Economic Cooperation Zone (ECZ) as the BRI gained momentum into Southeast Asia. While this bilateral plan was predated by the establishment of the Boten SEZ in 2009 directed by the Lao government, little had

Partly pressured by its domestic overcapacity in cement and steel, as well as the overall saturation of the construction market, China has begun to build a variety of SEZs abroad as part of the infrastructure-led development strategy under the BRI. europeanfinancialreview.com

China

happened through 2015. The ECZ became China’s way to jump-start and scale up the Boten SEZ by building a new and much larger city where the Boten zone is located, on the Lao side of the border. The construction has been undertaken by Haicheng, a private real estate development company based in Kunming. The signing of another joint development master plan for the ECZ in 2016 accelerated the construction, with the vision and goal of turning the zone into a comprehensive and integrated city for 300,000 people characterized by four functions: international commerce and finance; duty-free logistics; culture, education and health care; and tourism and vacation. It recalls Shenzhen’s functional expansion into a real city from its early years of industrial dominance. Figure 1: The China-Laos (Mohan-Boten) Special Economic Cooperation Zone in Larger Regional Contexts

Source: The sales oﬀice of Haicheng Corporation (the Chinese builder of the Boten SEZ), Boten, Laos.

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The Boten ECZ offers a set of familiar financial incentives accorded to the Boten SEZ and other SEZs. These include: 1) the exemption of import duties for all goods and materials used, sold and served in the zone; 2) tax reduction or exemption for 2-10 years for factories in the zone; and 3) tariff-free exports to third countries and qualification for most-favoured-nation status relative to advanced economies. The ECZ also benefits from being located at the crucial cross-border point of the China-Laos Railway and at the connecting hub for both rail and road lines linking China, Laos and Thailand that will eventually extend to Malaysia and Singapore. It also serves as the distribution and connective hub for cross-border trade and tourism. Moreover, the ECZ, in the heart of four concentric circles with travel radiuses of one to seven hours, allows easy and quick access and travel to a number of major cities and their hinterlands that span the connected adjacent border regions of China, Myanmar, Laos, Thailand and Vietnam (see Map 1). The ECZ’s ultimate success is most likely to depend on the completion and operation of the China-Laos Railway that runs by the Mohan-Boten border zone. Although the idea for the China-Laos Railway project germinated in 2010, the official agreement was not signed until November 2015 and ground for construction broken in Vientiane in December 2015. The line starts in Kunming and travels southward to Jinghong and Mohan until it enters the Laos through the Lao border city of Boten. It will then move past Luang Prabang and Vang Vieng before arriving in the Lao capital of Vientiane. Designed to carry both passengers and cargo, the railway will run at an average speed of 160 kms per hour, which qualifies it as a high- to medium-speed train, and 60% of the line will be bridges and tunnels.1 The Lao government expects roughly 4 million Lao passengers a year to use the railway’s 420-km route through the country at first, with the figure growing to 6.1 million passengers in the midterm and 8.1 million passengers in the long run.2 This is a rather optimistic scenario. The China-Laos case reflects the dominance of Chinese state capital and a narrower focus on cross-border transport infrastructure in the ChinaLaos Railway, although the new China-Laos ECZ in Boten is being built up rapidly as a hub for

anchoring cross-border regional development. It is also too early to gauge the prospect of manufacturing-oriented SEZs being built and planned near some stations of the China-Laos Railway such as the China-Laos cooperative Saysettha Development Zone (SDZ) located only 1.5 km from the railway’s terminal station of Vientiane. Laos’ SEZs are expected to host labour-intensive industries, some of which have left China for Southeast Asia due to its more expensive labour and land and upgrading to high-tech manufacturing in new zones. Being built by Yunnan Construction and Investment Holding Group Co., a large SOE specialized in constructio n from Yunnan, to host more than manufacturing to include logistics, commerce and other associated functions of a new city, the SDZ is larger version of the Mohan-Boten ECZ and also stands to benefit from being on the outskirts of Laos’ capital of Vientiane (see Map 1).

China’s has recently further strengthened its role in building industrial parks for Ethiopia by agreeing to start building a new, $300 million industrial park before the end of 2019.

Building industrial parks in Ethiopia Powered by the same internal push of high production costs, Chinese companies, both state- and privately-owned, have brought SEZs to Africa, Ethiopia in particular. The establishment of an SEZ in Ethiopia was reportedly linked to Chinese economist Lin Yifu, a former chief economist for the World Bank, who had convinced former Ethiopian Prime Minister Meles Zenawi of the value in SEZs (Pairault, 2019). The then Prime Minister called for Zhang Huarong, Founder and CEO of Huajian Group, a huge shoemaker based in the southern Photo 1: Ethiopian Workers at Huajian Shoe Factory in the Eastern Industrial Park

Source: CNN; accessed from https://edition.cnn.com/interactive/2018/08/world/china-africa-ethiopiamanufacturing-jobs-intl/.

Chinese city of Dongguan and a major global shoemaking center, to open a factory in Ethiopia. Three months later, in 2011, Huajian entered the Eastern Industrial Park (EIP) and began producing footwear for giants such as Nine West, Guess and, later, Ivanka Trump’s fashion line (before it closed later).3 Located 35 kms southeast of Addis Ababa in the town of Dukem, EIP is Ethiopia’s first industrial park and has helped spearhead the country’s export-oriented industrialization since 2011 when it was built with Chinese investment and is currently owned by the Jiangsu Qiyuan Group, a private Chinese investor (Zhang et al, 2018). Dukem is located on the Addis Ababa-Djibouti highway and the Addis Ababa-Djibouti Port railway, which was built by China with a loan of $3 billion from the Export-Import Bank of China and started operation on January 1, 2018. This rationale is similar to building SEZs along the China-Laos Railway discussed earlier. Like land-locked Laos, 95% of Ethiopia’s trade passes through Djibouti and accounts for 70% of the activity at the Port of Djibouti. Now shoes made by Huajian’s factory in EIP can be easily shipped by rail for export to the US and European markets. After opening a second factory in 2016 in an industrial park of its own near Addis Ababa, Huajian now employs over 7,000 local workers (see Photo 1) and churns out 5 million pairs of shoes for export every year, earning $31 million in foreign exchange earnings for Ethiopia in 2017 alone.4 In 2019, Huajian stepped up further in cooperating with Ethiopia on manufacturing by acquiring the right to operate Ethiopia’s Jimma Industrial Park (JIP) for 40 years. Located in Oromia Regional State in western Ethiopia and 350 kms from Addis Ababa, JIP was constructed by China Communications Construction Company (CCCC) with an investment of $61 million. Stretched on 75 hectares of land with 35 hectares already

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developed, JIP aims to attract clothing and shoe factories. Huajian has already taken the lead in leasing 9 factory buildings covering 39,000 sq meters and committed to invest $100 million to build more shoemaking facilities. This production plan is expected to create 12,000-15,000 jobs. Huajian also plans to develop the other 40 hectares in JIP to build a coffee-processing plant taking advantage of being in Ethiopia’s coffee-growing region and add other agricultural production activities that may create additional jobs through larger and more varied exports.5 China has recently further strengthened its role in building industrial parks for Ethiopia by agreeing to start building a new, $300 million industrial park before the end of 2019. Located in Adama city, 99 kms southeast of Addis Ababa in central Ethiopia, this industrial park, which will focus on equipment manufacturing, is funded at 85% through Chinese government concessional loans while the remaining 15% will come from the Ethiopian government. This park follows from the first Adama industrial park, which was built by China Civil Engineering Construction Corporation (CCECC) at a cost of $146 million and inaugurated by Ethiopian Prime Minister Abiy Ahmed in October 2018. The two parks combined can create around 25,000 jobs as an important part of Ethiopia’s grand plan to transform its largely agrarian economy into an industrialized one by 2025.6

China’s Impact and Lessons Global SEZ development over the past four decades (Table 1) has been accompanied and reflected by China’s own SEZ development for a comparable period of time (Table 2). Around 1980, China adopted the main elements of the early generation of EPZs through its experimental version of SEZs, crystalized in Shenzhen. China then expanded the “learned” SEZs geographically to scale up export-oriented manufacturing based on its low-cost labour and land advantages by building physical and transport infrastructure for all forms of SEZs. As China upgraded its low-cost manufacturing, heavily concentrated in industrial zones in the coastal region, towards the end of the 1990s, it created more SEZs in its inland and border regions and began to “export” SEZ development, notably to Laos and Ethiopia. Starting out as a follower or learner of SEZs with its adaptations, China has recently become a global leader in developing SEZs. Regarding China’s own SEZs, two main policy lessons can be drawn. The first lesson, of a positive nature, has to do with a national government commitment to using SEZs of various kinds and locations to achieve multiple goals: driving industrialization, creating jobs, promoting exports, inducing technology transfer and innovation, and stimulating broader regional development to reduce spatial inequality.

The second lesson, with an undesirable twist, pertains to many local governments competing to build identical SEZs and ending up with wasteful investment, unfair competition and partial failure. The combination of these two lessons points to the critical importance of vertical and horizontal policy coordination and operational sensitivity in creating truly needed SEZs for clear and achievable development goals from and beyond most favourable locations. The Chin-Laos (Mohan-Boten) SEZ, being built by a regional private Chinese company under a bilateral agreement at the national level, offers two quick lessons, one likely positive and one potentially negative. First, taking the form of an integrated city in a border region like Shenzhen with a large scale and diverse activities, this SEZ is capable of stimulating broad regional development in northern Laos where development has lagged. The potential downside of heavy Chinese involvement poses a risk that this zonal development will produce exclusive spaces only for Chinese investors, workers, and residents while marginalizing Laotian citizens. This scenario is likely since the Chinese private development company is also heavily involved in local governance. In this kind of large-scale development driven by a powerful outsider, local “others” can be excluded and lead to the erosion of political and

territorial sovereignty and governance of Laos or other countries hosting China-built SEZs. China’s venture to build SEZs in Africa invokes two other policy lessons that harken back to its domestic experience. The first lesson reinforces the two-sided trend that SEZs can continue facilitating economic development and that the successful aspect of China’s SEZs can be transferred to other developing countries with necessary adjustments. The growing number of special manufacturing zones in Ethiopia built by China have shown expected results in inward investment, job creation and exports. This contradicts earlier studies that had showed the China-sponsored SEZs in Africa to be largely unsuccessful (UNDP, 2015). Secondly, with multiple actors including the state and private firms involved, China-built SEZs in Ethiopia point to the challenges such as ensuring high-level political commitment and support for effective inter-ministerial collaboration and integrating SEZ programs into national development strategies and plans. These features not only define China’s more successful SEZs but also reflect Ethiopia’s commitment to using them to accelerate industrialization. At this critical time for evaluating China’s growing role in the global economy, we are only beginning to understand China’s leadership in global SEZ development. In spite of China’s success with SEZs at home, often inflated by the singular prominence and reputation of Shenzhen, we should be cautiously optimistic that certain elements and practices of China’s SEZs may be adapted to some developing countries, either intercountry policy mobility or China-foreign cooperation zones. As this potential grows from the further implementation of the BRI, it alerts us to fully assess the policy lessons of China’s SEZs that can inform and foster sustainable economic development through South-South cooperation. This article was adapted from the author's recently published much longer paper “Change and Continuity in Special Economic Zones: A Reassessment and Lessons from China,” Transnational Corporations 26 (2): 49-74 (2019).

Xiangming Chen served as the founding Dean and Director of the Center for Urban and Global Studies at Trinity College in Connecticut from 2007 to 2019. He has been Paul E. Raether Distinguished Professor of Global Urban Studies and Sociology at Trinity College and a distinguished guest

professor at Fudan University, Shanghai. He has published extensively on urbanization and globalization with a focus on China and Asia and conducted policy research for the World Bank, the Asian Development Bank, UNCTAD and OECD. Endnotes 1. “China, Laos sign railway deal”, Zhao Lei, The China Daily, 14 November 2015; http://www.chinadaily.com.cn/business /201511/14/content_22456633.htm. 2. “Laos and China come to terms on loan interest rate for railway project”, Radio Free Asia, 4 January 2016; http://www.rfa.org/english/ news/laos/laos-china-come-to-terms-on-loan-interest-rate-for-railway-project-01042016163552.html. 3. “Employed by China,” Jenni Marsh, CNN, August, 2018; accessed from https://edition.cnn.com/interactive/2018/08/world-china-africa-ethiopia -manufacturing-jobs-intl/. 4. “Chinese firm signs agreement to manage Ethiopian industrial park,” Xinhua, May 31, 2019; accessed from http://www.xinhuanet.com/ english/2019-05/31/c_138103636.htm. 5. “Huajian takes over management of Ethiopia’s state-owned Jimma Industrial Park and plans to build shoemaking and coffee-processing plants,” Sina.com, June 5, 2019; accessed from http://www.timedg. com/2019-06/05/20836228.shtml. 6. “Ethiopia, China to partner to build new 300 million USD industrial park,” Xinhua, August 13, 2019; accessed from http://www.xinhuanet. com/english/2019-08/13/c_138304130.htm. References • ADB (Asian Development Bank). 2015. Asian Economic Integration Report 2015: How Can Special Economic Zones Catalyze Economic Development? Manila: Asian Development Bank. • Chen, Xiangming. 1995. “The Evolution of Free Economic Zones and the Recent Development of Cross-National Growth Zones.” International Journal of Urban and Regional Research 19 (4): 593-621. • Chen, Xiangming. 2018. “Globalization Redux: Can China’s Inside-Out Strategy Catalyze Economic Development Across Its Asian Borderlands and Beyond.” Cambridge Journal of Regions, Economy and Society 11(1): 35-58. • Chen, Xiangming, and Taylor Lynch Ogan. 2017. “China’s Emerging Silicon Valley: How and Why Has Shenzhen Become a Global Innovation Center.” The European Financial Review (December/ January): 55-62. • Easterling, Keller. 2012. “Zone: The Spatial Softwares of Extrastatecraft.” Places Journal, June. Accessed 25 May 2019. https:// doi.org/10.22269/120610. • Pairault, Thierry. 2019. “China in Africa: Phoenix Nests versus Special Economic Zones”, Working Papers hal-01968812, HAL. • UNCTAD. 2019. World Investment Report 2019: Special Economic Zones. New York and Geneva: United Nations. UNDP (United Nations Development Programme). 2015. Comparative Study on Special Economic Zones in Africa and China. Working Paper No. 6, jointly with the International Poverty Reduction Center in China. • Yu, Liang. 2011. “Land Constraints on the Development of High and New Technological Development Zones.” Science and Technology Forum 206 (3): 49-53. • Zhang, Xiaodi, Dejene Tezera, Ciyong Zou, Ciyong Zou, Jie Zhao, Eneyew Abera Gebremenfas, and Jaidev Dhavle. 2018. Industrial Park Development in Ethiopia Case Study Report. Inclusive and Sustainable Industrial Development Working Paper Series WP 21. United Nations Industrial Development Organization. New York: United Nations.

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Executive Compensation

Why Do So Many People Think That CEOs Earn Too Much? BY RAINER ZITELMANN

n the public debate on executive compensation, it is repeatedly claimed that it is impossible for a manager to work 100 or 300 times longer or harder than a regular employee, and therefore such high salaries are unjustifiable. In an Ipsos MORI survey in 2018, 39% of American respondents said it was inappropriate for managers to earn 100 times more than regular employees because they don’t work 100 times longer or harder. In Germany, as many as 63% of respondents expressed the same opinion, even though German CEOs earn far less than their American equivalents. C-suite managers with Germany’s 30 largest companies (listed on the DAX stock market) earn an average of just €7.5 million per year. The fact that more Germans than do Americans believe that top-tier managers’ salaries are far too high, despite the fact that German executives earn significantly less than their U.S. counterparts, proves that the level of remuneration alone cannot be the reason for the criticism.

measured primarily based on the number of hours someone works or how much effort they put into their job. In their opinion, salaries are a form of direct compensation for time spent on the job or a “blood, sweat and tears premium.” And because a top-tier manager doesn’t sweat 100 times more or work 100 times longer, adherents of the “employee mindset” naturally conclude it is “unfair” for CEOs to earn so much. Employees are thus projecting their own performance and remuneration benchmarks onto top managers and believe that there must be a close relationship between how hard or how many hours someone works and their remuneration – and they do not see this type of direct correlation when they read stories about top managers pay packages. That’s why regular workers think that managers’ salaries are excessive, because no manager works 100 times longer or harder than an average employee. On the other hand, the fact that manager salaries are determined by supply and demand

The Harder You Work, the More You Should Earn? People who claim that executive salaries are too high because there is no way CEOs work so much longer or harder than average employees are demonstrating what I refer to as an “employee mindset.” They believe that salaries should be determined or

The richest people in the world are those who have the best ideas and invent or market products and services that satisfy the needs of hundreds of millions or even billions of consumers.

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on the market for top executives is not at all widely understood. Only 23% of the Ipsos MORI survey’s United States respondents agreed that companies could only get the best managers by paying very high salaries, because otherwise top-tier talent would move to other companies that do pay more or set up their own businesses. Although time input and qualifications typically play a major role in salary considerations in other occupations, they are not particularly relevant in determining the remuneration of top-tier managers. Rather, CEOs negotiate their salaries within the very narrow market for top executives. C-suite remuneration is determined by supply and demand, just like the pay of elite athletes. The basketballer Stephen Curry earns more than $40 million a year – and the reason is not that he sweats a hundred times more during a game or that he trains a hundred times harder than a less talented basketball player. He earns so much because he has a rare ability. The analogy between an elite athlete and an elite executive can be taken even further. When a company or basketball franchise signs a top manager or top athlete, they base their remuneration on their new hire’s past performance. Their forecasts could prove to be right, but they could also be wrong.

But this world, where rare skills and good ideas are rewarded, is out of the reach of most workers and employees, who, based on their experience, believe that someone with better qualifications deserves to earn more. And anyone who works 50 hours deserves to earn more than someone who works 40 hours. This “employee mindset” is largely alien to top managers and entrepreneurs, who know that nobody pays them by the hour or based on the volume of sweat they produce. A large proportion of a CEO’s salary is linked to the performance of their company’s share price. It is not the number of hours they work that earns them their very high salaries. It is how much value they add to their companies.

Dr. Rainer Zitelmann is a historian and sociologist. He is also a world-renowned author, successful businessman and real estate investor. His most recent book, The Power of Capitalism (http://the-power-of-capitalism.com/), was released in 2019.

It is not the number of hours they work that earns them their very high salaries. It is how much value they add to their companies.

Image source: designsrock.org

Ideas are the True Source of Incredible Wealth For entrepreneurs, who usually earn far more than top-tier managers, high earnings are usually a reward for particularly good ideas. The richest people in the world are those who have the best ideas and invent or market products and services that satisfy the needs of hundreds of millions or even billions of consumers. Just think of Larry Page and Sergey Brin, who invented Google, Amazon founder Jeff Bezos or Bill Gates of Microsoft. Of course, Jeff Bezos hasn’t worked a million times longer or harder than the average employee, but he has had great ideas that have been especially beneficial to hundreds of millions of people. Ideas that others didn’t have or couldn’t implement.

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Family Business

Portrait of Darius Forbes BY DENISE KENYON-ROUVINEZ

A portrait of a special man Writers and dramatists have a saying: ‘Show, don’t tell.’ It means to convey a thought or emotion through dialogue or action, rather than telling the audience directly. The same principle applies to the most impressive leaders, especially those with strong values and philanthropic achievements. I first met Darius Forbes, founder of the Indian family firm Forbes Marshall, in 2017. The occasion was a conference speech by his son Farhad, a successful engineer and business leader in his own right. The speech was about to start, and the auditorium was getting dark, when my eyes were drawn to the arrival of an old, pale man, very slim and elegant, who took his seat in the front row, near the stage. A few people were helping him. There was a lot of deferral and respect around him. You could immediately understand he was someone of importance, and I was intrigued; there was something special about him. His presence conveyed a certain aura, that I have learned to associate with an individual who combines high achievement with humility: a rare and extraordinary combination that has the power to enrich many lives. I later learned that it was Darius Forbes and decided to approach him at the break. The initial impression was deepened in a conversation we had in the conference hall lobby. This straight-backed, elegant, refined gentleman declined to accept an offer of a seat. Another individual joined us in the conversation and, after Mr Forbes had left us, informed me that he was 91 years old. His eyes shone; there was so much life – a spark, so much energy. He

was very eager about life and polite enough to answer my questions in a humble and yet precise manner. I was curious to learn more about the life journey of this man who had co-founded a trading company more than seven decades earlier, that had evolved to become a world-class company specializing in instrumentation, steam technology and energy efficiency, as well as a wide range of community initiatives and other philanthropic activities. Darius Forbes was born in 1926 to an Indian Parsi family. The Parsi religion is Persian in origin, and little known. It is shaped by the principles Good Thoughts, Good Words, Good Deeds. Mr Forbes lives these principles, without preaching them. When he was just 19, he was invited by his uncle to work at the trading company JN Marshall. They soon developed the business, forming partnerships with British companies to import their goods, principally in steam technology. They formed successful partnerships; in one case so successful that the firm in question, Spirax, suggested that they start manufacturing their own. This led to the foundation of the first factory, in the city of Pune, western India. Development of a manufacturing firm in post-colonial India presented challenges. Governments were following protectionist, nationalist policies with

From left to right: Naushad, Darius, and Farhad Forbes

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Family Business

very high tariffs and many bureaucratic restrictions. Yet, with his intelligence, pragmatism and spiritual calmness, Mr Forbes rose above these challenges, even turning them into advantages. The difficulty in importing components encouraged him and his team to display ingenuity in developing their own. And bureaucratic restrictions on forming joint ventures with foreign companies meant that he forged many partnerships based on honesty and trust without formal contracts; a high-risk approach, but one with high rewards. On one occasion, Mr Forbes was no longer able to import a crucial component required for the manufacture of a pH measuring instrument. After much research, Mr Forbes identified a Swiss company run by Dr. Werner Ingold, inventor of the relevant technology, and the two of them worked out a plan to produce in India, after importing the technology. According to the Indian government, they could not do this, because the technology was already developed by a Calcuttabased organization. When Mr Forbes contacted this agency, they confessed that they did not possess the expertise, but did not want to acknowledge this, as they would lose their funding. Dr. Ingold devised a generous and ingenious solution: He provided the proprietary technology for free, and Forbes Marshall technicians learned how to produce it themselves, after being trained in Switzerland. Mr Forbes married Maharookh Forbes, a long and happy marriage, which has given them two sons, Farhad and Naushad. Both their sons are brilliant engineers and businessmen, trained at Stanford University in California, and present-day leaders of Forbes Marshall.

In the 1980s, when they took over leadership, they saw how high-technology products were changing, and becoming so sophisticated that development in one country was becoming more and more difficult. They began a program involving closer work with overseas partners, bringing the technology up to world-class standards. Their modernization initiatives were helped enormously by the liberalization of the Indian economy that began with Prime Minister Rajiv Ghandi’s reforms in the late 1980s, followed by bolder reforms in 1991 introduced by Manmohan Singh, Finance Minister and later Prime Minister. The 1990s saw the elevation of Forbes Marshall to an enterprising, innovative international business at world class standards. Yet this came with challenges: with the opening up of the Indian economy to international trade, competition intensified. The company rose to the challenges, learning to play to its strengths, increasingly specializing in steam technology for industrial units and process control and instrumentation. For Mr Forbes and his sons, social responsibility is part of the way of life for the company; as integral as the manufacturing and trading business itself. One major development began decades ago, after Mr Forbes was shocked that people injured in a road accident had to wait for the police to arrive before being cleared to be taken to a public hospital. He intervened himself to make sure the people received medical attention. He adds: “When I left them afterwards, I was thinking that … if I have some [accident] in my own factory, what will happen? I said to myself: ‘I can’t depend on the hospital here.’ I decided that we would

start our own little medical facility and our own hospital. That’s how we first got the idea of starting our hospital.” The hospital continues to this day, and serves the local area, not just employees. The charitable foundation, currently run by Rati, Farhad’s wife and Mr Forbes’ daughter in law, prioritizes education; but their social initiatives have also included ensuring clean water, sanitation and electricity for local homes. Forbes Marshall set up a Provident Fund for employees, even before Tata, the much larger philanthropic corporation, did so. The ethos of the company has always been egalitarian, long before the ‘flat’ hierarchy and informality became fashionable in the workplace. Mr Forbes rejected the colonial ‘master and servant’ culture. “I always propagated [the notion] that whoever we employ, we will not employ them as an employee,” he says. “They’ll be members of the company. I used to keep on insisting that we never called person an employee … I feel that, that made a big difference in people’s relationship with us.” He encouraged individual and team autonomy, and flexible job descriptions – again, long before it was a business trend. Suitably qualified members have the freedom to take an ingenious approach to a technical or sales-based issue, without going through a time-consuming approval process. He adds: “I think the main reason of success is that nothing was impossible to make or, do. It was always that if we applied our minds we could get around whatever problems we faced. I would always encourage people, never to worry about a problem and to feel that the problem is something which gives us a challenge.

For Mr Forbes and his sons, social responsibility is part of the way of life for the company; as integral as the manufacturing and trading business itself. 72

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“My way of working [was that] if I saw a product, which I thought would be very useful to us, I would always encourage people to make it. They always felt that, this is so difficult, we don’t have the drawings, we don't have this, we don’t have that. I would always encourage them to see that they use their own resources, their own ideas, their own thoughts to develop. Whatever modifications we had to make, we would make it, but make certain that we succeeded with it.” Honest mistakes are not punished, even if they are expensive. But an individual will be disciplined, and potentially dismissed, for conduct that is unethical and contrary to the company’s values, such as theft. All these values and ways of working have been continued by Farhad and Naushad, and into the third generation, who are starting to make their way in the working world. The company has frequently reached a high placing in the Great Place to Work rankings in India, reaching the number one place in the manufacturing category. The ethos extends to the customer; the Forbes Marshall way is to empathize, and try to see the problem from their point of view, and then work back to the solution. It can be a time-consuming exercise in the short-term, but leads to high levels of satisfaction, loyalty and repeat business. Mr Forbes has maintained his aura of calmness and sense of fairness through the most testing times, such as the wave of trade union militancy that swept through India in the late 1970s. Throughout the most significant dispute, a politically motivated strike of over 100 days, he declined to respond to extreme provocation, and even still permitted strikers to use company resources. The only point he held firm on was not paying for days not worked. One of the strikers later recalled: “I feel ashamed to remember that during that entire period we came to the factory in the bus that the company was paying for … [and] the canteen was giving us meals at company expense. I know that Mr Forbes always really cared for our well-being and did his best for us.” That individual later became an advocate for the company. Ashok Desai, a former member of the Supervisory Board at Forbes Marshall, describes Mr Forbes’ presence: “He seldom says much but when he does say something, it is worth listening to. He often reminisces in meetings; he reminds us of a certain way of doing business … If you ask me to define it, it is unbending commitment to goodness,

to doing business correctly, honorably, honestly and sticking to one’s knitting, deciding what you’re good at and specializing in it.” During a later period of unrest, activists held demonstrations outside many Pune workplaces; but Forbes Marshall was spared the indignity. Curious, the Forbes Marshall HR Director Bobby Kuriakose made inquiries, and learned that a planned protest was called off when one of the leading protestors, a local mother, declared that they could not demonstrate outside the Marshall Forbes campus because it was at their hospital that her baby had been born. The family togetherness is also striking. The event at which I first met Mr Forbes was held in Hyderabad, several hundreds of miles from the family home in Pune. He had travelled by air, at the age of 91, to hear his son talk for 30 minutes. Similarly, when his son Naushad was President of the Confederation of Indian Industry for the year 2016-17, the whole family travelled to Delhi for his final address as President. It is easy to forget that history is shaped by the good guys, as well as the bad. All that is creative, innovative and socially valuable is the product of the efforts of enlightened people, who combine strong values with hard work. When you have been in the presence of Darius Forbes, and his amazing family, you feel a little better about humanity, and its prospects.

An individual will be disciplined, and potentially dismissed, for conduct that is unethical and contrary to the company’s values, such as theft.

Prof. Denise H. Kenyon-Rouvinez is the former Wild Group Professor and Director of the IMD Global Family Business Center at IMD. For more than 25 years she has worked extensively with very large family businesses in Europe, Asia, the Middle East, North and South America and is used to deal with complex governance and wealth situations. Denise is also author and co-author of many books, including Governance in Family Enterprises: Maximizing Economic & Emotional Success, (Palgrave Macmillan, 2014). Her work in collaboration with the World Economic Forum over the past three years has culminated in the publication of a white paper in June 2019: Responsible Ownership: Reshaping Business as a Force for Good.

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If Transformational Leadership Comes First, Knowledge Management and Financial Performance Will Follow BY MOSTAFA SAYYADI departments, but most importantly, through manipulating organizational factors. Also, transformational leaders contribute to financial performance through improving knowledge management performance that will increase the rate of responses to environmental changes. Transformational leaders know that financial aspects of firm performance include return on assets, return on sales, earnings per share, and stock price performance. Armed with these tools, transformational leaders can effectively increase financial performance for companies.

A prominent scholar that is well known in the Academy of Management, one of the largest leadership and management organizations in the world by the name of Peter Senge says that successful organizations enhance their competitiveness and financial performance by focusing on knowledge management. This article indicates the indirect impact of transformational leadership on knowledge management as an important component of financial performance. Introduction The key function of knowledge management is to help executives use it for goals achievement. Knowledge management has been, therefore, a focal point of executive span of control but has not been associated with transformational leadership enough to make it an integral part of business success. One tool for executives to use when considering on lessening the gaps between success and possible failure, is to adopt transformational leadership and become a transformational leader. Transformational leaders can positively impact knowledge management through enhancing the dynamic relationships among employees and

Corporate structure can be reshaped by transformational leaders when they develop knowledge sharing and inspire employees to create new ideas for a better environment.

Structural Change That Sticks Corporate structure has been defined as a pattern by which companies can divide their activities and tasks as well as control them to achieve higher degrees of coordination.1 Corporate structure, therefore, refers to the bureaucratic division of labor accompanied by control and coordination between different tasks in order to develop communication within companies. Corporate structure can be reshaped by transformational leaders when they develop knowledge sharing and inspire employees to create new ideas for a better environment among business-units and departments.2 An informal structure could facilitate new idea generation to build a more innovative climate within companies.3 Transformational

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leaders can implement organizational changes that develop better collaboration among subordinates and managers. Centralized versus decentralized decision making is a topic that transformational leaders must deal with. More emphasis on formalized and mechanistic structures can negatively impact the transformational leaderâ&#x20AC;&#x2122;s ability to exert such changes. On the contrary, a more decentralized and flexible structure may improve departmental and managerial interactions. The mechanical or centralization at the commanding level of leadership impairs the opportunity to develop relationships among managers, business units, and departments. Transformational leaders inspire followers to generate new solutions and a better environment. A highly centralized structure has a negative impact on transformational leadership practices, while decentralization positively contributes to transformational leaders in developing a more innovative climate. This is enhanced by the crucial role of decentralized structures in facilitating the exchange of ideas and the implementation of more innovative solutions based on stipulating the power of decision-making at all levels of the company. Furthermore, highly formalized structures are more bureaucratic, and this negatively contributes to the effectiveness of transformational leadership in changing the existing situations and creating a better environment. Thus, transformational leaders reshape corporate structure to be more effective when the command center of companies can disseminate information in a decentralized and organic way as opposed to the mechanical and centralized command center. Transformational leaders that implement structural changes may improve knowledge management. For example, decentralized structures shift the power of decision-making to the lower levels and subsequently inspire organizational members to create new ideas and even implement them while centralized structures may negatively impact interdepartmental communications and inhibit knowledge exchange.4&5&6&7 Recent research affirms that the there is a negative impact of centralization on various

knowledge management processes such as knowledge acquiring, creating, and sharing among both managers and departmental units.8 On the contrary, a more decentralized and flexible structure may enable companies to identify best opportunities that can potentially lead to improve knowledge utilization process. Ergo, transformational leaders can positively contribute to organizational knowledge management through building more decentralized structures within companies. And if corporate structure is not completely in favor of supporting knowledge management, companies cannot effectively implement knowledge management projects to improve financial performance and they may become obsolete or taken over. Strengthening Corporate Culture Corporate culture is a â&#x20AC;&#x153;pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to perceive, think, and feel in relation to those problemsâ&#x20AC;?.9 Corporate culture is, therefore, reflected in shared assumptions, symbols, beliefs, values and norms that specify how employees understand problems and appropriately react to them. Scholars have proven that transformational leaders can build a strong corporate culture to improve customer satisfaction through acquiring additional knowledge from customers, developing better relationships with them, and providing a higher quality of service for them.10&11 Executives, today, are focusing on corporate culture. Corporate culture is to gather, evaluate, and disseminate information throughout the companies. Transformational leaders can build an effective culture to acquire knowledge from various sources such as suppliers, customers, business partners, and competitors.12 Corporate culture includes three dimensions of collaboration, trust and learning.13 A collaborative culture enhances communications in companies. And this cultural aspect can be critical for transformational leadership practices, which are strongly

Corporate culture is to gather, evaluate, and disseminate information throughout the companies. Transformational leaders can build an effective culture to acquire knowledge from various sources such as suppliers, customers, business partners, and competitors. 76

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based on developing relationships with subordinates. Moreover, a transformational leader’s ability to build a more innovative environment is highly dependent on the extent to which their subordinates trust them. Therefore, a culture that instills trust in subordinates enables transformational leadership practices through mobilizing their support toward the transformational leadership vision for changing current situations, whereas, distrust will impair the effectiveness of transformational leaders leadership.14 Thus, transformational leaders can manifest themselves as change agents who manipulate corporate culture with the aim of improving knowledge management and financial performance. Transformational leaders can facilitate collaboration by developing relationships in companies. These leaders can contribute to the cultural aspect of trust, through considering both employee’s individual interests and company’s essential needs.15&16 Also, transformational leaders identify individual needs of their employees and develop a learning culture by intellectually stimulating them to generate new knowledge and share it with others. Transformational leaders, therefore, manipulate a company’s culture to conform to the needs and expectations of strategic goals and objectives. Executives have found that corporate culture impacts knowledge management.17&18&19&20&21 Particularly, the three cultural aspects of collaboration, trust and learning play a critical role

in enhancing the effectiveness of knowledge management practices. For example, collaboration provides a shared understanding about the current issues and problems among employees, which helps to generate new ideas within companies.22&23&24 Trust towards their leader’s decisions is a necessary precursor to create new knowledge.25&26&27 Moreover, the amount of time spent learning is positively related with the amount of knowledge gained, shared, and implemented. Therefore, transformational leaders reshape, and in some cases, manipulate corporate culture to facilitate knowledge management practices within departmental and business units of companies. Executives today realize that knowledge is the one of most strategic factors for financial performance.28&29 For example, knowledge is shared and synthesized with an aim to providing higher quality services. This can improve financial performance in various metrics such as the customer focus, the quality of services, and the organizational revenue. Shared knowledge can also contribute to the development of a learning organization in which people continuously grow and develop. It enables companies to actively respond to environmental changes through developing interactions and awareness from the external environment, which can in turn improve financial performance. Ergo, corporate culture indirectly improves financial performance through disseminating

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Leadership

Financial success can be achieved by the implementation of knowledge management and facilitated by a transformational leader acting as a change agent. and managing organizational knowledge that can play a crucial role in enhancing various metrics such as the quality of services and the organizational revenue. Therefore, executives act in a supportive role as transformational leaders but academicians point out that if transformational leaders do not adequately support knowledge dissemination and creation through various mechanisms such as corporate culture, knowledge management cannot be successful. In Conclusion Executives can now see how culture and structure constitute the foundation of a supportive workplace to share and synthesize organizational knowledge and subsequently improve financial performance. In fact, financial success can be achieved by the implementation of knowledge management and facilitated by a transformational leader acting as a change agent. My primary focus is on culture and structure but there are many more important components of the managerial function that can be enhanced when transformational leadership is embraced. The key here is that there are significant effects of culture and structure on knowledge management. Without a grasp on these two tenets executives are bound to fail. Scholars can take these ideas and continue to conduct research using executives as the

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focal point so that academic scholarship can meet the needs of managerial implications at the higher echelons of organizations worldwide.

Mostafa Sayyadi, CAHRI, AFAIM, CPMgr, works with senior business leaders to effectively develop innovation in companies, and helps companies – from start-ups to the Fortune 100 – succeed by improving the effectiveness of their leaders. He is a business book author and a long-time contributor to HR.com and Consulting Magazine and his work has been featured in these top-flight business publications. References 1. Bowditch, J.L., & Buono, A.F. (2000). A primer on organizational behavior, New York: John Wiley & Sons. 2. Tafvelin, S. (2013). The transformational leadership process, Retrieved from http://umu.diva -portal.org/ smash/get/diva2:640843/FULLTEXT01.pdf. 3. Jarvenpaa, S.L., & Staples, D.S. (2000). The use of collaborative electronic media for information sharing: An exploratory study of determinants. Strategic Information Systems, 9(2), 129-154. 4. Damanpour, F. (1991). Organizational innovation: A meta-analysis of effects of determinants and moderators. Academy of Management Journal, 34(3), 555–590. 5. Woodman, R.W., Sawyer, J.E., & Griffin, R.W. (1993). Toward a theory of organizational creativity. Academy of Management Review, 18(2), 293-321. 6. Sivadas, E., & Dwyer, F.R. (2000). An examination of organizational factors influencing new product success in internal and alliance based processes. Journal of Marketing, 64(1), 31–50. 7. Kasper, H., Muehlbacher, J., & Mueller B. (2006). The Effects of the Degree of Decentralization and Networks on Knowledge Sharing in MNCs Based on 6 Empirical Cases, Retrieved from http://www2.warwick.ac.uk/fac/soc/wbs/ conf/olkc/archive/olkc1/papers/ 335_mueller.pdf. 8. Zheng, W., Yang, B., & Mclean, G.N. (2010). Linking organizational culture, structure, strategy, and organizational effectiveness: Mediating role of knowledge management. Journal of Business Research, 63(7), 763-771. 9 Schein, E., (1984). Coming to a new awareness of organizational culture, Sloan Management Review, 25(2), 37-50. 10. Darling, S.K. (1990). A study to identify and analyze the relationship between (1) transformational leadership and collaboration, and (2) transactional leadership and collaboration in selected Minnesota elementary schools

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(Unpublished doctoral dissertation). University of Minnesota, USA. 11. Vera, D., & Crossan, M. (2004). Strategic leadership and organizational learning. Academy of Management Review, 29(2), 222–240. 12. Dix C.R. (2013). Leadership and learning: the impact of transformational leadership on learning culture within global ministry non-profits (Unpublished doctoral dissertation). Indiana Wesleyan University, USA. 13. Lee, H., & Choi B. (2003). Knowledge management enablers, processes, and organizational performance: an integrative view and empirical examination. Journal of Management Information Systems, 20(1), 179-228. 14. Lines, R., Selart, M., Espedal, B., & Johansen, S.T. (2005). The production of trust during organizational change. Journal of Change Management, 5(2), 221–245. 15. Podsakoff, P.M., Mackenzie, S.B., Moorman, R.H., & Fetter, R. (1990). Transformational leader behaviors and their effects on followers’ trust in leader, satisfaction, and organizational citizenship behaviors. Leadership Quarterly. 1(2), 107-142. 16. Klinsontom, S. (2005). The influence of leadership styles on organizational commitment and employees performance (Unpublished doctoral dissertation). Nova Southeastern University, USA. 17. Ruggles, R. (1998). The state of the notion: Knowledge management in practice. California Management Review, 40(3), 80–89. 18. O'Dell, C., & Grayson C.J. (1999). Knowledge transfer: Discover your value proposition. Strategy & Leadership, 27(2), 10-15. 19. Gold, A.H., Malhotra, A., & Segars, A.H. (2001). Knowledge management: An organizational capabilities perspective. Journal of Management Information Systems, 18(1), 185-214. 20. Cameron, P.D. (2002). Managing knowledge assets: The cure for an ailing structure. CMA Management, 76(3), 20–23. 21. Sveiby, K.E., & Simons, R. (2002). Collaborative climate and effectiveness of knowledge work—An empirical study. Journal of Knowledge Management, 6(5), 420–433. 22. Leonard, D. (1995). Wellsprings of knowledge: Building and sustaining the source of innovation. Boston, MA: Harvard Business School Press. 23. Fahey, L., & Prusak, L. (1998). The eleven deadliest sins of knowledge management. California Management Review, 40(3), 265-276. 24. Leonard, D., & Sensiper, S. (1998). The role of tacit knowledge in group innovation. California Management Review, 40(3), 112–132. 25. Nahapiet, J., & Ghoshal, S. (1998). Social Capital, Intellectual Capital, and the Organizational Advantage. The Academy of Management Review, 23(2), 242-266. 26. Rowley, J. (2002). Eight questions for customer knowledge management in e-business. Journal of Knowledge Management, 6(5), 500–511. 27. Wagner, B.A. (2003). Learning and knowledge transfer in partnering: An empirical case study. Journal of Knowledge Management, 7(2), 97–113. 28. Pathirage, C.P., Amaratunga, D.G., & Haigh, R.P. (2007). Tacit knowledge and organisational performance: construction industry perspective. Journal of Knowledge Management, 11(1), 115 – 126. 29. Mills, A.M., & Smith, T.A. (2011). Knowledge management and organizational performance: a decomposed view. Journal of Knowledge Management, 15(1), 156 – 171.

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