InBusiness Issue 15

It's a dog-eatdog world

Why life is tough for start-up companies

From locker room to board room Lessons to be learnt from coaching sport

Accentuate to legislate

Do law firms discriminate by class?

Issue 15

The

psychology of trading

Does the fate of the markets rest on the emotions of traders?

Performance.

It’s about exceeding expectations.

Lisa Peters, Chief Human Resources Officer, BNY Mellon

Understand the possibilities. You bring skills, know-how and strong ethics to the workplace. We strive to consistently exceed the expectations of our clients, employees, communities and shareholders alike.

That’s why we foster an environment where collaboration, innovation and discourse are truly encouraged.

The possibilities? They’re yours to experience.

bnymellon.com/careers We are an equal opportunity/affirmative action employer.

©2011 The Bank of New York Mellon Corporation.

InBusiness Issue 15 Summer 2011

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06

Fund managers are only human

How mind games affect the markets.

Contents

IMAGE BY GETTY IMAGES COVER ILLUSTRATION BY CHRIS PRICE

04

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A host of financial world leaders chose Cass as the venue to air their views on current affairs.

Research into London law firms shows that talking the talk is more important than walking the walk.

Snapshots

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It's a dog-eat-dog world

Why start-up businesses face stiff competition from rivals with wealthy backers.

Cass Business School In 2002, City University’s Business School was renamed Sir John Cass Business School following a generous donation towards the development of its new building in Bunhill Row. The School’s name is usually abbreviated to Cass Business School.

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It's new, it's cool, it's a... flop Marketing new technology to the masses is harder than it looks.

Sir John Cass’s Foundation Sir John Cass’s Foundation has supported education in London since the 18th century and takes its name from its founder, Sir John Cass, who established a school in Aldgate in 1710. Born in the City of London in 1661, Sir John served as an MP for the City and was knighted in 1713.

Printed on fully recyclable, Forest Stewardship Council (FSC) accredited paper stock.

InBusiness is produced by Cass Business School's Corporate Marketing and Communications team. If you have any feedback, email cass-marketing@city.ac.uk

Verified Environmental Management — produced at an EMAS registered mill.

Designed by FP Creative www.fpcreative.com

This paper is chlorine-free, printed using vegetable-oil-based inks with chemical-free platemaking. This paper is made using Elemental Chlorine-Free processes.

Produced at a mill and printed at a plant both holding ISO:14001 certification.

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From coach to CEO

How business can learn from those who turn their sporting skills into management pearls.

20

Protecting the punters

Does the online gambling industry have a duty to protect its customers from themselves?

Talk your way to the top

28

Corporate profile

RSA's emerging markets Chief Executive, Paul Whittaker, explains how he made it to the top.

32

Building business relationships Advertising guru Sir Martin Sorrell on the challenges facing businesses in a global marketplace.

33

Opinion piece

Julie Verity on women's leadership skills in the workplace.

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Development highlights

The latest fundraising and campaign news from across Cass Business School.

InBusiness | Issue 15

04 | Events Sharing the debate

Snapshots Cass Business School regularly organises and hosts fora to share new ideas, expert knowledge and vision – and to stimulate informed and challenging debate. Here is a brief glimpse of what business, political and academic leaders are thinking and saying.

February 2011

Top US economist delivers annual Henry Thornton lecture Charles Calomiris, Professor of Financial Institutions at the Columbia University Graduate School of Business, has warned that US inflation could soar unless the Federal Reserve learns lessons from the Great Depression.

During the 1930s Fed officials wrongly believed high bank reserves were indicative of easy credit and consequently failed to loosen monetary policy, resulting in the collapse of money and credit.

Speaking on the theme 'Monetary Policy and the Behaviour of Banks: Lessons from the 1930s for the 2010s' at Cass in February, Professor Calomiris said in the annual Henry Thornton lecture that the experience was a warning from history as the economy emerges from recession and US banks prepare to shed almost $1 trillion (£618 billion) of reserves. www.cass.city.ac.uk/ thorntonlecture2011 InBusiness | Issue 15

The QR codes on the right will link you to the websites via a smartphone. Download one of the widely available barcode reader apps to scan the code with your phone.

Cass Talks Hear our experts’ views at www.cass.city.ac.uk/casstalks

March 2011

We’re not hard enough on banks, warns Lord Turner The required capital ratios for banks of 7%, outlined in the Basel III accord on capital adequacy and liquidity, should be more than doubled to 15-20%, Lord Turner, Chairman of the Financial Services Authority (FSA), said in his annual address at Cass in March.

As part of the Dean’s Lecture Series, Lord Turner, a Visiting Professor at Cass, told academics, students and senior City practitioners: “The adverse costs of even very rare banking crises are so great as to outweigh any marginal growth penalty resulting from higher equity ratios.”

Adair Turner was appointed FSA Chairman in September 2008. He has combined careers in business, public policy and academia. www.cass.city.ac.uk/ lectureseries2011

Lord Turner warned on banking liquidity

Delegates at the Editorial Intelligence (ei) Comment Conference

April 2011

Cass hosts ei Comment Conference Cass hosted Editorial Intelligence’s third Comment Conference – with enterprise as its theme – in May, with contributions from David Willetts, the Minister for Universities and Science, Professor Steven Haberman, Director and Deputy Dean of Cass, Luke Johnson, the Financial Times columnist who runs Risk Capital Partners and from leaders in finance and business. David Willetts, in his keynote address, suggested that business schools placed too much emphasis on peer-reviewed research rather than studies relevant to industry; a claim refuted by Professor Haberman.

Cass was the academic sponsor of the event which was also supported by BAE Systems, the Financial Times, Lloyds Banking Group and Smithfield, the financial and corporate communications consultancy.

May 2011

NHS needs right kind of competition Dr David Bennett, Chairman of Monitor, the independent regulator of NHS foundation trusts, argued in favour of choice – but not necessarily competition – within the NHS at the fourth Currie Lecture in May. He said: “We should not support competition for its own sake, but as a way to drive innovation, quality and efficiency. Only where it is appropriate, only where it is more likely to deliver benefits for patients and the public than other routes, should it be used.”

The Currie Lectures began in 2008 in honour of Lord Currie of Marylebone, Dean of Cass until 2007. www.cass.city.ac.uk/ currielecture2011

www.cass.city.ac.uk/eiconference

Charles Calomiris spoke on US inflation

Dr David Bennett, Chairman of Monitor

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Cass events Register for forthcoming events at www.cass.city.ac.uk/events

Cass in the news Keep updated with news from Cass at www.twitter.com/cassinthenews

Cass connection Stay connected with Cass at www.facebook.com/cassofficial

May 2011

European Commission Vice-President speaks at Cass In a keynote speech at Cass, Joaquín Almunia, Vice-President of the European Commission with responsibility for competition policy, delivered a warning to financial institutions that the Commission intends to combine increasingly robust regulation with closer scrutiny of anti-competitive behaviour.

Speaking to academics, business leaders and students, Mr Almunia, a Spanish politician who in 2000 stood as the socialist candidate against Prime Minister José María Aznar, said that the opaque nature of financial markets was unacceptable as it provided an unfair advantage to some of the biggest players.

However, he dismissed the idea

European Commission VP Joaquín Almunia

that a proliferation of clearing platforms posed a danger to markets.

He said: “In particular, we should prevent that any one entity or group controls essential infrastructure – be it a trading platform, a clearing platform or a pre-trading service – to the benefit of the restricted few.”

Mark Hoban, the Financial Secretary to the Treasury, echoed Mr Almunia’s theme, saying: “What we are looking for is open access to information so that counterparties are not locked into any particular clearing choice.”

The second half of the breakfast event was chaired by John Fingleton, Chief Executive of the Office of Fair Trading and included a panel comprising Donald Donahue, Chairman and Chief Executive of the Depository Trust & Clearing Corporation; Richard Gnodde, Co-Chief Executive of Goldman Sachs International; Xavier Rolet, Chief Executive of the London Stock Exchange and Devin Wenig, Chief Executive of the markets division of Thomson Reuters. www.cass.city.ac.uk/alumnia

Graduates of the Cass Executive MBA programme in Dubai

May 2011

Dubai EMBA graduation The second cohort of students graduated from Cass’s Executive MBA programme in Dubai in a ceremony at the Dubai International Financial Centre (DIFC) in May. They received their certificates from Sheikh Ahmed bin Saeed Al Maktoum, Chief Executive and Chairman of the Emirates Group, the travel and tourism conglomerate, and Chairman of the state-owned investment company Dubai World.

The part-time course is aimed at managers in the Gulf region who want to accelerate their career development while remaining in full-time employment. The course forms part of the Cass Executive MBA offering, which ranks amongst the

“The Cass Business School EMBA is ranked amongst the best in the world.”

The conference heard Vice-President Almunia warn of the dangers of opaque markets

Professor Paul Curran, Vice-Chancellor, City University London

world's elite. In 2010, the Financial Times ranked Cass's Executive MBA second in the UK, fourth in Europe and tenth in the world. Graduates from this year's Dubai EMBA programme included executives from across the Gulf region working in energy, engineering, commerce, manufacturing, finance, the law and government.

As the first EMBA programme in the world to offer a specialisation in Islamic Finance, the Cass Dubai EMBA is regionally relevant. It offers electives in Global Real Estate Markets, Entrepreneurship and Family Business. Student admissions in Dubai have grown by 90% in the past four years.

Professor Paul Curran, ViceChancellor of City University London, said: “The Cass Business School EMBA is consistently ranked amongst the best in the world and is taught by experts who advise leading companies, the authors of important business texts and pioneering researchers, and I have no doubt that these graduates’ professional lives will be enriched as a result.” www.cass.city.ac.uk/ dubaigraduation InBusiness | Issue 15

06 | Feature The psychology of trading

ILLUSTRATIONS BY CHRIS PRICE

InBusiness | Issue 15

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Optimism and greed are ingrained in the City psyche – but they can be refocused, says Cass’s champion of behavioural finance. Nick Mathiason examines a discipline that is finally attracting a serious following.

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or much of her career, Gulnur Muradoglu, Professor of Finance at Cass, has been at odds with the mainstream of intellectual finance and economics. But not any more. In fact, the Turkish-born academic is today acknowledged as one of the world’s leading experts in behavioural finance – a theory that, post-crash, has come of age.

Behavioural finance is about understanding markets through a human lens. This relatively new school of thought rigorously analyses the nature and quality of financial judgments and choices made by individuals to assess whether investment strategies are misguided.

Professor Muradoglu says one key question she asks is: “Do fund managers have any systematic biases when they make investment decisions?”

Where once she and a small collection of academics ploughed a lonely furrow, now blue-chip investors increasingly commission Professor Muradoglu and her team at Cass to help them unpick how their fund managers and clients make decisions.

Academic backwater

It marks a significant sea change as, until very recently, behavioural finance was regarded as something of an academic backwater. In

January 2008 Professor Muradoglu established the Behavioural Finance Working Group which she leads and Cass hosts. It was a well-timed move.

This school of thought now appears to be challenging and perhaps has even usurped the efficientmarket hypothesis which once held unquestioned sway.

In 1978 Michael Jensen, an American economist who is now emeritus Professor of Business Administration at Harvard Business School, declared: “There is no other proposition in economics which has more solid empirical evidence supporting it than the efficientmarket hypothesis.”

The hypothesis underpinned market fundamentalism, a position that largely attributed market instability to governments rather than those who worked the trading floors.

Unbridled faith

The efficient-market theory dates from the beginning of the 20th century but it came into its own in the early seventies. Eugene Fama, Professor of Finance at The University of Chicago Booth School of Business, defined its essence: that the price of a financial asset reflects all available information that is relevant to its value.

As the 1944 Bretton Woods Accord on rule-based financial regimes gave

way to neo-liberal deregulation, an unbridled faith that markets were the ultimate judge of value emerged.

It took the most catastrophic banking failure the world has ever seen to realise that this faith was misguided.

Professor Muradoglu identifies four triggers that caused global financial meltdown. First there was globalisation, which allowed cancerous US sub-prime problems to infect the rest of the world. Second, high leverage, not just in housing but across the corporate sector. Third, inadequate and opaque accounting systems that amplified volatility and created false, not fair, value. And, finally, “the underestimation of risks, not only in newly issued assets but also in corporate sector leverage ratios” – in short, the behavioural trigger.

Better regulation

“Part of the process that led to the crisis was over-optimism,” Professor Muradoglu says. “Look at the television programmes that dominated the schedules: Location, Location, Location; A Place in the Sun; house makeover shows. The whole assumption was that you couldn’t lose in the property market and that reinforced the bubble. Part of this was due to optimism. The lesson of the crisis is that we need better regulation and that regulation has to take into account human behaviour.”

InBusiness | Issue 15

08 | Feature The psychology of trading William N. Goetzmann, Professor of Finance and Management Studies at Yale School of Management, argues that analysis of housing prices systematically generated forecasts for long-term price growth and underestimated the possibility of extreme price decline.

“Such optimism is fuelled by the extrapolation of past trends into the future,” wrote Professor Muradoglu in her paper published last year, The Banking and Financial Crisis in the UK: What Is Real and What Is Behavioural?

“Why were the fundamentals not recognised? Optimism is in human nature and cannot be avoided.

Greed is in human nature and cannot be avoided.”

Cultural assumptions

Fusing psychology, finance and economics, Professor Muradoglu places the decision-making process at the heart of assessing whether investment decisions are made on optimistic, over-confident criteria or based on cultural assumptions that in reality are flawed or unnecessarily narrow.

She said: “Fund managers all have benchmarks and trading strategies but if there’s an element of a systematic bias within that, you have to acknowledge it. These people are well trained. If they recognise something, they change it immediately. That’s the fun part of working with finance professionals.”

During the nineties, Professor Muradoglu experimented with stock market professionals’ trading strategies to reveal whether they exhibited over-confidence and optimistic tendencies. Experiments continue to provide the basis for asserting that markets have an inherent weakness built into them.

The questions posed to professional investors and casual traders are simple and boil down to predictions about specific stock prices. Professor Muradoglu and her team gather traders’ projections at various intervals and assess the basis on which predictions are made.

Patchwork theory

After the dotcom crash and Enron collapse, a paper by Professor Muradoglu, Portfolio Managers’ and Novices’ Forecasts of Risk and Return: InBusiness | Issue 15

Are There Predictable Forecast Errors?, concluded that professional traders tended to predict share prices more accurately in the short term but non-experts’ medium-term predictions proved the better performers. “Experts are, in general, more optimistic than novices,” she wrote. “However, they hedge their optimism better.”

Critics of behavioural finance suggest it is not a coherent theory but rather a patchwork of various strands. Perhaps, says Professor Muradoglu, this says more about the reductive, simplistic need by critics to come up with one over-arching principle to explain the way markets work.

“I think you can come up with more than one theory. We have a pragmatic realistic approach. The idea is to examine how people behave. If you don’t know the virus, how can you cure it? If you are a banker and if you acknowledge you are optimistic or over confident, then you have a chance to address this. If you are a regulator then you have a chance to make markets better.”

Andrew Lo, Professor of Finance at the Sloan School of Management at the Massachusetts Institute of Technology, sees merit in both the rational and behavioural views. He has tried to reconcile them in the “adaptive markets hypothesis”.

The Economist recently characterised his thinking as assuming that “humans are neither fully rational nor psychologically unhinged.

Instead, they work by making best guesses and by trial and error. If one investment strategy fails, they try another. If it works, they stick with it.”

Nuanced viewpoint

Professor Muradoglu agrees. “There is no harm in using the efficientmarket hypothesis as a benchmark,” she says. “It is one representation of reality. But the danger is having faith in efficient markets.”

Such a pragmatic, nuanced viewpoint has brought Professor Muradoglu to the attention of a number of financial institutions.

“I received a lot of invitations during and after the crisis. Most of them were related to the difficulties people had understanding what had happened. If the efficient-market

hypothesis was true, then markets weren’t supposed to overshoot.”

She suggests that global finance requires a profound regulatory overhaul. She argues that the system has its roots in the 1934 Securities Exchange Act which was a reaction to the Crash of 1929.

Then, 90% of securities were held by individuals. Today, 70% are traded by institutions.

“The financial markets are not sterile,” Professor Muradoglu says.

“They are places in which people

openly communicate and we can’t think about markets without thinking about people. There are ways of understanding people through behavioural psychology.

My focus is on how people behave.”

Human interaction

It seems that her philosophy, while perhaps not an explanation for the way markets operate, gets us close to the truth. After all, markets are made up of humans interacting.

“I’m Turkish. When you see

How traders strike a balance between optimism and rational thinking can play a major factor in the success rate of their decisions

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Opinion

The key to successful trading Dr Nick Motson, former proprietary trader and Cass Lecturer in Finance.

IMAGE BY GETTY IMAGES

volatility you think this might be because of national institutional markets related to issues in an emerging market. But then you observe them in mature markets.

When I first read papers on behavioural finance as a PhD, I was thrilled: volatility has to be because of human beings. We assume people are rational but they’re not.

We assume they’re rational in the financial domain but they’re not.”

The rule applies throughout myriad asset classes, extending even to foreign direct investment. What else explains why funds managers or businesses from one country invest only in specific jurisdictions outside their borders?

Behavioural finance is still in its infancy and remains a work in progress. But the financial crisis has undermined old certainties. The past 30 years have produced a procession of financial crises encompassing the US savings and loans collapse, the internet stock “pump and dump” scandal and the destruction of the global banking system requiring trillions of dollars of publicly funded bailouts affecting billions of people worldwide.

Brash optimism

Professor Muradoglu is convinced that an element of brash optimism and over-confidence lurks behind every stock market crash, from

17th-century Tulip Mania and the 18th-century South Sea Bubble to the Wall Street Crash and the present malaise. The task of behavioural finance is to isolate and then identify the intellectual frameworks such attitudes are built on so they are acknowledged and remedied.

Professor Muradoglu wrote with three other academics in 2009: “It is clear that if academics are to succeed in understanding financial institutions and actors, and if the agents themselves, as well as policymakers, want to make wise decisions, they must take into account the true nature of people, that is to say their imperfections and bounded rationality.”

There is an obvious need for a shift in the theoretical framework of finance. To carry on as if nothing happened is not tolerable.

Behavioural finance must be part of that shift.

Nick Mathiason is Business Correspondent at the Bureau of Investigative Journalism, a not-for-profit news organisation based at City University London.

He can be contacted at nickmathiason@tbij.com For more information on the research, contact g.muradoglu@city.ac.uk

During 13 years of trading and managing traders in the City, I observed two behavioural traits that distinguished the most successful traders from their peers.

First, the best traders didn’t become married to a position.

In other words, they would be disciplined about stop losses — selling when a stock falls to a pre-determined level — and willing to cut losing positions if their initial assumptions proved to be invalid.

Less successful traders would focus on their entry point and, in many cases, be unwilling to take a loss, waiting instead for the market to return to their entry point to allow them to scratch the trade. They would often end up taking much larger losses when the pain became too much to bear.

In behavioural finance terms, this mistake is known as anchoring – a cognitive bias that occurs when investors link their decisions to irrelevant factors, such as a number.

For example: “I’ll sell when the FTSE 100 gets to 5,000.”

Second, the most successful traders would cut losses and let winners run. This means they were willing to admit when they were wrong and use stop losses. However, when they were right they wouldn’t be in too much of a hurry to take a small profit. Instead, they would keep the winning positions longer, often resulting in very large profits.

Less successful traders would often take much larger losses and be more prone to lock in small profits when things went their way.

Behavioural finance calls this the disposition effect. It describes the tendency of investors to sell assets whose price has increased while keeping assets that have dropped in price because they are less willing to recognise losses but more willing to recognise gains.

InBusiness | Issue 15

10 | Feature Start-up finance

Start-up firms face an uphill struggle when challenging established businesses with a well-financed parent company, says Cass lecturer Dr Giacinta Cestone – ­­ a factor that could hamper Britain’s recovery.

Richard Tyler reports.

It's a dog-eatdog world

IMAGE BY GETTY IMAGES

InBusiness | Issue 15

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“James Dyson seemingly blanked out the possibility that Hoover's parent company could blow him out of the water.”

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hen James Dyson began work on his bagless vacuum cleaner in 1978, the last thing on his mind was how Hoover would react to his muscling in on their market. Five years and 5,127 prototypes later, the Dyson G-Force Dual Cyclone arrived and revolutionised the vacuum cleaner market.

Hoover, once the dominant US brand, had become complacent and failed to innovate. Dyson – now Sir James Dyson – could see a gap in the market for a top-of-therange product that went about its job in a completely different and, arguably, more effective way.

His gamble paid off handsomely.

He established his product in Japan, then in Europe and by 2007 Dyson was the market leader by revenue in the US – Hoover’s own backyard.

But it was a gamble.

Dyson seemingly blanked out the possibility that Hoover could use the financial muscle of its parent group, Whirlpool, to blow him out

of the water. It wasn’t until 1999 that Hoover made its move. It tried to imitate a Dyson and Sir James went to court to protect his invention.

He won.

Challenging the odds

A year earlier Whirlpool had sold the Hoover brand to the Hong Kongbased manufacturer and trader Techtronic. The Chinese company could see the value remaining in the Hoover brand if only its processes and products could be overhauled. And so the creative/ destructive cycle of free market enterprise goes on.

An entrepreneurial ambivalence to the potential threat from those companies already operating in established markets is common to budding entrepreneurs. Every day people venture into industries and markets where the odds are stacked against them.

Doug Richard, the American serial entrepreneur who has been a panellist on the BBC’s Dragons’ Den show, has taught the basics

to hundreds of business novices through his School for Startups, an enterprise focused on teaching entrepreneurship in partnership with UK universities, the Royal Institution and the British Library.

He says: “Innovation is blind.”

In 1979 Michael Porter, a Professor at Harvard Business School who specialises in competition issues, identified the threat of new entrants to a market as one of the five forces acting on it that determine its competitive intensity and therefore profitability.

The other four were the threat of substitute products, the bargaining power of buyers and of suppliers and rivalry among existing players.

Know the opposition

A new study by a team from institutions across Europe, led by Cass, takes this analysis further. Its findings prove that entrepreneurs really should be aware of exactly who they are taking on before they set out to challenge incumbent companies.

InBusiness | Issue 15

12 | Feature Start-up finance The study examined 70,000 French manufacturing firms operating between 1995 and 2004, isolating the ones that were legal entities in their own right and financially autonomous from their parent group. Typically, incumbents are majority-owned by a parent group but each may also have outside shareholders. The Fiat Group in Italy, for instance, operates in this way.

The parent has the ability to provide finance and reshuffle assets and people as it sees fit. It may be that a parent group receives a special dividend from one of the companies it controls and passes that cash on in the form of a subsidised loan to a second company that faces a competitive threat from a new market entrant.

What the team found was that if an incumbent company had the ability to access finance from within a cash-rich parent group, the success of new entrants in gaining meaningful market share fell.

There was a significant correlation between the two.

The team also examined job creation by new entrants in the first year – taking it as a measure of ambition and confidence – and found a similar pattern: the presence of an existing market player with access to group finance acted as a brake on employment by new entrants.

Rational decision

Dr Giacinta Cestone, a Senior Lecturer in Finance at Cass and study co-author, says: “If we had observed larger entry rates in terms of sales it would have suggested there were more entrants.” In fact the team observed the opposite, which could indicate that entrepreneurs are making the rational decision not to launch in industries dominated by such groups.

What is certain is that new entrants do not achieve the same levels of sales success or employ as many people as they would if the incumbents did not have access to intra-group finance.

“What matters is not that the firm in a sector is cash rich – it’s enough that the group is cash rich,” says Dr Cestone.

InBusiness | Issue 15

The effect is meaningful: “An increase of 10% in group cash entails a reduction of slightly more than 0.4% in entry rates,” she says.

The team’s original research suggested that the rate of reduction could even be higher, but the lower rate stood when they factored in the potential impact of an incumbent company’s operating efficiency.

Deterrent effect

“We are sure now that financial muscle has truly a deterrent effect, and is not just capturing something else, for instance efficiency,” says Dr Cestone.

Competition authorities have until now not taken into account the effects of intra-group finance when vetting the impact on markets of mergers and takeovers. Dr Cestone says they should now do so.

Foreign-owned diversified groups are also more active in the UK and US after a period when industrial conglomerates fell out of favour with investors and were broken up.

Now Indian, Chinese and Russian groups all own stakes in companies across a range of sectors in the UK and can use the financial strength of one company to support another.

In the aftermath of the financial crisis, while some carmakers turned to governments for bailouts, Tata Motors, India’s largest carmaker, used its financial strength to secure loans for its cash-strapped Jaguar Land Rover business in the UK. The State Bank of India, Bank of India and Bank of Baroda joined foreign banks in guaranteeing a £340 million loan from the European Investment Bank.

Intellectual capital

The study also found that the negative effect on competition was most apparent in industries that require a high level of product or service innovation – those selling their intellectual capital.

This raises questions about the ability of R&D intensive firms – the ones that secure an above-average number of European patents – to bring products to market that could benefit society and the economy in the face of a belligerent, cash-rich group keen to protect its market

“Microsoft in the US in the early nineties had a chilling effect on adjoining markets. You would get noticed and slapped down.”

Doug Richard, School for Startups

position. Dr Cestone cites biotech industries that require large sums of cash in their early years of development.

The same patterns are true for industries with low levels of tangible assets – plant and machinery and other things of value – that can be used as collateral to secure bank finance.

The team looked at book and periodical publishing and found that access to internal group finance was “a more important source of competitive strength… than in the iron and steel manufacturing industry, where 96% of assets are tangible and can thus be pledged as collateral to raise capital externally”.

Anti-competitive practices

Perhaps most worryingly for competition authorities, the researchers found that new entrants struggled most when an incumbent’s holdings included a financial subsidiary such as a bank.

This suggests that belonging to a group including a bank improves a company’s ability to respond to competition from new entrants.

Dr Cestone says the researchers did not have data to explore whether groups were adopting anti-competitive practices, such as cross-subsidising to sell below cost and drive out rivals.

It would seem the readily available finance is just as likely to be used to develop new products and services to take on the new entrants and maintain market share.

There is also no evidence that banks within groups provide fellow group companies with finance at rates that are not available to their rivals.

But Dr Cestone says there are lessons for competition authorities around the world. “When you look at a sector that is dominated by cash-rich groups, that sector must be handled with care,” she says. “We have no evidence that this is what scares rivals but it’s a possibility that when you enter such a market you are going to be at a financial disadvantage.”

Doug Richard recognises the findings from his experience of running software firms in the

US in the late eighties and nineties.

“Microsoft in the US in the early nineties was evidence of it. It had a chilling effect on adjoining markets.

Nobody would bother to enter a market adjoining Microsoft where you would get noticed and slapped down.”

Changing the landscape

He says the dynamics of industry sectors can also alter quickly as cashrich groups acquire incumbents and change the competitive landscape.

He cites in his case an investment in the Bristol-based cloud software company Bright Pearl. “My assessment was that Sage (the business software provider) was old and slow. But now there are rumours that Sage might be acquired, perhaps by Oracle, and that’s the worst-case scenario, Sage being part of Oracle. I am living through a variation of this (research) theme.”

Richard also suggests that some entrepreneurs will intentionally target industries where there are two or more dominant players, where one has a track record and the resources to acquire technology, services or products to bolster their position. With a nod to the marketaltering “force” of industry rivalry identified by Michael Porter, he says setting out to be acquired by an aggressive, cash-rich incumbent is not a bad strategy.

What the Cass research does indicate is that those newcomers planning to build significant market share quickly are impeded by the presence of incumbents with access to finance from cashrich groups.

Dr Cestone says that at a time of tight credit the impact is potentially more severe. “When finance is scarce, cash-rich groups are going to have the highest financial advantage.” Competition authorities should take note.

Richard Tyler is Enterprise Editor at the Daily Telegraph and Sunday Telegraph. He can be contacted at richard.tyler@telegraph.co.uk For more information on the research, contact giacinta.cestone.1@city.ac.uk

| 13

Opinion

A small start-up with a big passion One man's innovative spirit opened a gap in the digital games market.

Most people who start businesses do it because they feel driven to achieve something or change something for the better – or because they feel they have no choice. They’re prepared to make sacrifices and take risks.

Take the specialist digital consultancy Matmi. When Chief Executive Jeff Coghlan began the company in Macclesfield in 2001, he saw the opportunity for the internet to deliver much more than text. The company’s first game was the selfpromoting Monster Poolside Sumo.

It quickly went viral. Matmi saw the potential for games to engage buyers with brands – advergames – and quickly established itself as a leader in branded gamification (using game-play mechanics for non-game applications).

Coghlan, who participated in Cass’s Better Business Programme in January 2011, says: “Even though there are only 20 of us, we innovate and set trends by experimenting with own-brand releases first. We don’t have the resources of a big agency, but we don’t have to have an R&D budget signed off in triplicate either.

It helps that everyone at Matmi lives and breathes what we do.”

So for smaller companies to be able to compete with corporate ventures they need to: • Be clear about what makes their offering distinctive • Be resourceful and innovate so they can punch above their weight • Be passionate about what they do and infect their clients with that passion.

Gerard Burke is the Founder and MD of Your Business Your Future, a specialist provider of development programmes for owner managers.

The Better Business Programme and Foundations for Growth are run in partnership with the Peter Cullum Centre for Entrepreneurship at Cass. www.yourbusinessyourfuture.co.uk

IMAGE BY STEVESTILLS.COM

InBusiness | Issue 15

14 | Feature How to market innovation

new, it’s cool, It’s

it’s a... flop

Up to 90% of technological innovations fail – and it’s usually because their manufacturers don’t put across the message of what they are for, Cass research shows. Caroline Scotter Mainprize reports.

IMAGE BY GETTY IMAGES

InBusiness | Issue 15

F

ans queued overnight. The police were on hand to keep the crowds in check. There were cheers every time one was seen. “It’s fantastic. It’s so worth the wait,” said one enthusiast. “I just came down for the atmosphere,” said another.

A new boy band? The opening of the final Harry Potter film? No: this was the UK launch of the Apple iPad tablet computer in May 2010. Similar scenes had been enacted in the US and were repeated throughout Europe, Japan and Australia. Our love affair with technology had reached its apogee.

Yet not all technological innovations are so successful. The vast majority (between 40 and 90%) of really new products – those that create entirely new product categories and allow consumers to do things that they have not been able to do before – fail. And highly innovative products fail at an even greater rate than less innovative ones. According to Dr Stephanie Feiereisen, a Lecturer in Marketing at Cass, this is often because consumers simply don’t understand how the new products are going to work for them.

Additional costs

“With existing products, such as a laptop, consumers know what to look for when they are evaluating it,” she says. “They already know how they are going to use it, so the decision becomes one about how fast it is, how light it is, or how much

memory it contains. But with an unfamiliar product they have to get their heads around how it will work for them, as well as wondering if there are additional costs that they don’t yet know about.”

For example, the digital camera was once a really new product.

No longer would consumers have to remove the film from the back of the camera (taking care not to expose it to sunlight) and carry it to Boots for processing and printing; instead, they would just plug the camera into a computer, or directly into a digital photograph printer, upload and print.

We barely think about it now, but at the time there was real consumer anxiety, not only about doing things differently but also about the unknown costs associated with dedicated printers and special paper, and who knew what else.

But once people could see the need for digital images in the fastdeveloping world of the internet and social media, the digital camera not only became accepted but swiftly overtook the film camera.

The story of the digital camera also illustrates the potential for really new products to transform entire industries and create enormous upheaval in the spread of market share. Kodak, for example, had been a market leader in film cameras. However, despite being involved in the early development of digital cameras, it missed the boat when it came to marketing the concept to consumers.

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Failure rate

“Companies need to introduce really new products,” said Dr Feiereisen, “and they need to keep up with the market. But the high failure rate, caused by the difficulties of explaining the benefits of these products to consumers, makes it a process fraught with uncertainty.

It is increasingly evident that really new products demand new ways of thinking about marketing communications.”

Dr Feiereisen is researching how learning strategies can help consumers to understand the benefits of really new products. A recent study set out to determine which learning strategy and which style of presentation – words or pictures – was most effective.

A traditional method of explaining really new products is by using analogies. The personal digital assistant (or palmtop) was introduced by comparing it with a secretary.

More recently, Nike teamed up with Apple to market the Nike + iPod Sport Kit, a pedometer system designed to give runners feedback on their workout. The system was compared with a coach and a personal trainer. This analogy encourages consumers to draw upon their knowledge of what a coach does to understand what the Kit will offer them. For instance, as a coach gives feedback on an athlete’s progress from one training session to another, one may infer that the Kit possesses a similar progress-tracking function.

InBusiness | Issue 15

16 | Feature How to market innovation “If the new product is about pleasure then visual stimulation is likely to lead to a high degree of product comprehension.”

Key feature

But, says Dr Feiereisen, this approach can have its weaknesses.

Using an analogy to simplify a complex concept may result in over-simplification and the risk of misinforming consumers. In the case of the Nike + iPod Kit, a consumer may incorrectly infer that the product has a feature to keep him or her motivated, as a coach would do.

On the other hand, he or she may miss that the Kit has a feature that can measure the number of calories burned as you run, as one would expect a coach to measure only times and distances. And as no coach in history has been known to personalise playlists and shuffle songs during a training session, a key feature of the Kit is entirely lost in the analogy.

A different strategy is mental simulation, in which consumers are encouraged to imagine themselves using the product. This can be done either through pictures or words, and Dr Feiereisen’s research showed that the effectiveness of these two formats hinges on the type of really new product being advertised.

“We found that if the really new product is hedonic – about entertainment or pleasure – then a visual mental simulation is likely to lead to a high degree of product comprehension,” she says.

When mp3 players were introduced, for example, advertisements showed people how to use them: people accustomed to loading vinyl records or CDs into a player and moving sequentially through a list of tracks would not have understood instinctively how an mp3 player worked. The first iPod advertisement showed a man dragging music from his iBook to his iPod, then closing the laptop and dancing out of the room with the iPod in his pocket.

Focus on function

“Showing people, step-by-step, what is going to happen is a way of making the unfamiliar more familiar,” said Dr Feiereisen. “They can see themselves in the picture and imagine how it would feel to have the product in their lives.”

However, this approach is less likely to work with a more utilitarian product such as wireless charger InBusiness | Issue 15

Initial resistance

Celebration time...

A happy iPad customer joins the Apple clan

mats, which recharge devices that are left resting on them. “With a product such as this the communication is not about the experience but about the function it serves. People are more convinced by an explicit, and therefore apparently more objective, verbal simulation when evaluating a product that is highly functional.”

The failure to understand the importance of showing consumers exactly how they should use a product and where it fits into their lives is behind the disappointing response to a very high-profile really new product, the Segway.

This two-wheeled, self-balancing electric vehicle devised by the American inventor Dean Kamen, was introduced to great fanfare in 2001. People found it intriguing but could not work out whether it was a leisure vehicle or suitable for the daily commute. This confusion was probably shared by legislative authorities, who have largely placed

IMAGE BY GETTY IMAGES

restrictions on its use. As a result, the Segway is a niche product used, for example, by police in some Portuguese cities, by security staff patrolling shopping centres such as Gunwharf Quays in Portsmouth and for guided tours around some European cities, but it has not fulfilled its market potential.

Against a background such as this, the successful launch of the iPad was perhaps surprising.

“The iPad was a really new product and was introduced with all the uncertainty that accompanies new product launches,” says Dr Feiereisen. “But they had prepared the ground carefully in marketing communications terms. The first adverts showed the iPad being used by a real person – rather than the usual Apple silhouette – swiping and opening a range of applications. Apple used a visual mental simulation which was highly appropriate for this hedonic product.”

Meanwhile, the iPad’s perceived rivals, the Kindle and other e-readers, have also grown in popularity, despite initial resistance to the idea of them replacing printed books. However, the manufacturers are aware of the need to keep educating consumers in a still relatively new market. Omar Gurnah, the Reader Marketing Manager for Sony, recently told Marketing Week: “There is still a lot of education to do as most customers haven’t seen or touched an e-reader yet. Getting that across wherever we can is far more important than shouting about reading e-books on mobile phones or driving prices through the floor.”

Dr Feiereisen says: “Like digital cameras, the Kindle’s uses will become even more apparent as the market develops around it, and as Amazon introduces different selling strategies that allow people to buy a single chapter, or children’s books.”

What has emerged is that the more innovative the product, the more straightforward and focused on the consumer the initial marketing and advertising has to be. Who cares how groovy a product is if consumers cannot see how they would use it?

“When introducing really new products, companies should think carefully about how they expect the products to be used and how they communicate this to consumers,” Dr Feiereisen concluded. “As our research shows, different strategies need to be employed depending on whether the product is more hedonic or utilitarian.”

Caroline Scotter Mainprize is a writer on management issues.

She can be contacted at caroline@ csm-communications.co.uk For research information, contact stephanie.feiereisen.1@city.ac.uk

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18 | Feature Management credentials

The best players make the best leaders, a research project suggests – whether it’s on the basketball court or in the City. Joe Boyle reports.

coach to CEO From

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InBusiness | Issue 15

A

ny organisation recruiting a new head should take a look at the NBA, America’s elite basketball league.

Examine, for example, the case of Glen Anton “Doc” Rivers, a defender during a 13-year playing career and now Head Coach of the Boston Celtics. In 2008 he led the team to its first NBA title in more than 20 years.

The lessons to be learnt extend far beyond the sports arena. The implications for recruitment policy in many of our leading public and private institutions could be farreaching.

Dr Amanda Goodall, a Visiting Fellow at Cass, argues that the best leaders in expert-knowledge environments are likely to be those who possess expert knowledge. In Why Do Leaders Matter? A Study of Expert Knowledge in a Superstar Setting, a paper co-authored with economists Lawrence Kahn at Cornell University and Andrew Oswald at IZA and The University of Warwick, and published this year in the Journal of Economic Behavior & Organization, she analyses the success of coaches in the NBA. Success as an elite player, the paper concludes, is a reliable predictor of subsequent success as an elite coach.

In her 2009 book Socrates in the Boardroom: Why Research Universities Should Be Led by Top Scholars, she demonstrates that the best university leaders are those with an outstanding research pedigree, equipping them with a deep understanding of their institution’s core business. The findings from basketball add another level of evidence to the argument.

Domain expertise

“I would like organisations to consider the amount of domain knowledge their leaders hold,” she says. “You need to understand the

"I'm trying to move away from this idea that leaders are hand-picked by God."

core business of your organisation.

More recently we’ve assumed that because you’re a great manager you can chop and change the industry you’re in. The NBA research highlights that top basketball coaches were domain experts.”

What can happen when nondomain experts find themselves in charge is demonstrated by the case of Andy Hornby, the Chief Executive of HBOS when the bank failed in 2008. Hornby, a retailer by background, told a Parliamentary Select Committee: “I do not have any formal banking qualifications. I have an MBA from Harvard.”

The cultural perception now is that managerialism exerts too strong a grip, especially on public institutions. “Under New Labour,” says Dr Goodall, “the number of managers in schools, universities and hospitals increased. There has been a backlash.”

A business leader with a demonstrable record of success in a similar discipline can also make an impact in a new sector. Richard Gillingwater CBE, Dean of Cass, came from a professional services background which, Dr Goodall says, “has a similarity of culture with an academic setting”.

Core need MBAs

The challenge is to provide knowledge experts with the skills needed to become managerial experts. Dr Goodall says she is encouraged that management modules are making their way into degree courses for doctors, lawyers and architects and argues that business schools also need to deliver MBAs that are designed around core needs.

As well as her role at Cass, she is a Senior Research Associate at IZA Institute for the Study of Labour in Bonn. Her fascination with leadership stems from a decade ago

| 19 The Boston Celtics' "Doc" Rivers led the team as a player and then title-winning coach

IMAGE BY GETTY IMAGES

when she worked at the London School of Economics in the senior management team with Anthony Giddens, the Director from 1997 to 2003. She arrived there having completed her first degree when she was in her mid-30s. She had left school aged 16, after which she modelled for a few years before travelling to India, where she worked on a small rural development, witnessing an aid project in operation. This was followed by time working with a number of charitable and campaigning organisations.

How have these experiences shaped her views on leadership? “I’m trying to move away from this idea that (business) leaders are hand-picked

by God,” she says.

Her ambition now is to explore what she calls the “transfer processes”. The NBA research suggested that former elite players had greater credibility, could see the game better and had an increased likelihood of controlling highly paid egos. “We need to understand more empirically about what these leaders actually do,” she says.

Football managers

She has already started her research with a sport closer to British hearts: football. Research in conjunction with the School of Industrial and Labour Relations at Cornell and Warwick Business School considered the characteristics of those managers who could best handle elite players.

Matthew Amos, Member Services Executive at the League Managers Association (the representative body

for football managers in England), said: “There is no relationship between the level at which they played and the performance of managers at the top level. Experience is the main relationship.”

In fact, the NBA link between an elite playing career and coaching success has an echo in English football as well: 52% of Premier League managers at the time the paper was written in 2009 had played international and top-flight football.

Ideally, leaders will have both domain knowledge and experience.

It is a combination that possibly finds its highest level in Sir Alex Ferguson, the Manchester United Manager, who played for his country and has been a successful manager for 37 years.

Unearthing a leader with the qualities of Ferguson is the Holy Grail of recruitment. And here, too, Dr Goodall has a recommendation.

“There is some evidence,” she says, “that if a hiring panel is a group of outstanding individuals, they’re more likely to appoint someone of equal calibre to themselves.”

In other words, excellence attracts excellence – surely a blueprint for universities and banks as well as basketball teams.

Joe Boyle is a freelance writer whose work and contact details can be found at www.wordandtext.co.uk For more information on the research, contact amanda.goodall.1@city.ac.uk InBusiness | Issue 15

20 | Feature Online gambling

D£BT D£BT D£BT

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InBusiness | Issue 15

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Protecting the punters

Online betting companies must do more to identify and help problem gamblers or face oppressive regulation, Cass research suggests. Sean Farrell reports.

T

he online gambling industry faces a choice: take the lead on protecting vulnerable customers from themselves, or take a big gamble with its own future.

On offer via the internet are lotteries, poker, casino games, sports betting, bingo and, increasingly, in-play betting in which gamblers bet on details of sporting events as they take place. Online still has a small share of the UK gambling market, increasing from 6% in 2007 to 7% in 2010. In 2009-10 the total wagered online, excluding betting exchanges, was almost £12 billion, up from about £10 billion the year before, according to the Gambling Commission.

In 2010 there were 366 licensed remote operators in the UK. However, players may also access nonregulated operators too. It is difficult to estimate how many of these there are. Most online operations, including those of the high-street bookmakers Ladbrokes and William Hill, are in offshore centres such as Gibraltar or the Isle of Man for tax reasons but the Government has plans to require all online gambling companies operating in the UK to hold a domestic licence.

Spotting problems

Cass alumnus Simo Dragicevic is the Founder and Chief Executive of Bet Buddy (bet-buddy.com), which helps operators spot potential problems among their clientele. Dragicevic and Dr George Tsogas, Senior Lecturer in Management at Cass, have coauthored a report, Can the Online Gambling Industry Continue to Grow Profits whilst Protecting Players?

They argue that if companies prevaricate over investing in protecting customers they risk paying a higher price in the future in the form of reputational damage and oppressive reactive regulation.

Tsogas says: “It is always cheaper to get the ethics right at the beginning, rather than to have to repair a damaged reputation later.

Nothing could be more costly for an online gambling company than to be exposed in the media if, say, a teenager evaded identity checks and racked up a huge debt on a family credit card, or worse.”

Dragicevic interviewed several senior figures in the industry, including Roger Steare, Visiting Professor of Organisational Ethics at Cass; Alex Blaszczynski, Professor of Psychology at the University of Sydney and author of Overcoming

Compulsive Gambling; Andy McLellan, Chief Executive of the industry-funded charity GamCare and a former Head of Gambling at the Department for Culture, Media and Sport; Christel Schaldemose, a member of the European Parliament’s Committee on the Internal Market and Consumer Protection; Clive Hawkswood, Chief Executive of the Remote Gambling Association and a Director of the Responsibility in Gambling Trust; Jean Moreau Jorgensen, Executive Director of the World Lotteries Association; and John Carr, Secretary of the UK Children's Charities’ Coalition on Internet Safety.

Vulnerable customers

The findings suggest that the sector will have to take the lead in protecting its vulnerable customers and its reputation.

In 2010 the helpline at GamCare took 50,788 calls. According to the UK Gambling Commission’s two most recent prevalence surveys, there are 250,000 to 285,000 problem gamblers in Great Britain. The commission’s 2010 survey showed a 50% rise in problem gambling from 0.6% to 0.9% of the UK population in 2007.

InBusiness | Issue 15

22 | Feature Online gambling Although the rise is at the margins of statistical significance, the emotional and financial impact on sufferers and those close to them can be profound. Callers to GamCare report high levels of anxiety, stress and relationship problems and 39% of callers said they were experiencing financial difficulties.

Gambling online in the UK is illegal for anyone under the age of 18. For lotteries and football pools the legal age is 16. Companies verify a customer’s age with software that checks the electoral roll, credit agencies and other data. Players can also limit their gambling through self-exclusion. John Carr said: “The online gambling industry is now viewed as a model (on age verification) for other relevant industries with online channels.”

Blocking software

However, these measures were forced on the industry by the 2005 Gambling Act, which also set up the Gambling Commission. Before that, a study of UK online operators found 97% had no self-exclusion service, 77% had no reference to controlled gambling and 37% had no age verification at registration.

Dragicevic says that the technology at companies’ disposal – especially the ability to share information on self-excluded players – has surpassed the obligations imposed by the 2005 Act. However, there is no legal or regulatory requirement for industry-wide self-exclusion that would prevent problem gamblers from skipping from site to site.

He adds: “PC blocking software is available to prevent vulnerable gamblers accessing internet sites.

However, not only are there different PC standards but also betting is

"The industry needs to keep innovating... to avoid onerous, heavy-handed regulation."

InBusiness | Issue 15

In brief

£714 million

The gross gambling yield for remote gambling in 2009/10

£288 million

The amount held in gambling accounts in the UK

17 million increasingly taking place via texting, smartphones, tablets and interactive TV and the software is swiftly becoming ineffective.”

In America, online gambling is illegal. In the European Union, attempts to co-ordinate monitoring and standards have failed to overcome national self-interest. Tim Phillips, who until May this year was Director of European Public Affairs at Betfair, the world’s largest internet betting exchange, said that with little co-operation between nations it was in the sector’s interests to go “on the front foot” to drive improvements.

Staying in control

Dragicevic says that regulators have less information than the industry and “the industry needs to keep innovating (on player protection) because in doing so it stays in control of the agenda and avoids onerous regulation. The online industry has always made this point – that it is ahead of the curve – but it hasn’t done anything really innovative since the 2005 Act. “While there are examples of innovation in player protection, such as some lotteries using behavioural analytics technologies to identify problem gamblers, these remain the exception rather than the rule”.

Christel Schaldemose said: “The majority of the established and serious online gambling operators are aware of what they

need to do from a (corporate social responsibility) perspective.”

The second part of the research

by Dragicevic and Tsogas builds on pioneering work at Harvard Medical School on problem and internet gambling. Bet Buddy, in partnership with GTECH, a gambling software seller and lottery manager, analysed online gambling data to detect risky gambling patterns among casino and poker players.

Jean Moreau Jorgensen said: “Offering value-added services, such as informing players of spend and any changes to their playing patterns, could… enhance an operator’s brand.”

Tsogas says these should be regarded as immediate and essential goals. He concludes: “Too many companies have learned the hard way that ethics and social responsibilities, when violated, can tarnish their image and reputation irrevocably. Active engagement and prevention, rather than reliance on market forces, offer the best prospects for achieving both profits and sustainability.”

Sean Farrell is a freelance journalist and Acting Financial Correspondent at The Independent. He can be contacted at seanfarrell68@yahoo.co.uk For more information on the research, contact g.tsogas@city.ac.uk

The number of online gambling accounts in the UK

400,000 The number of people who visited gamcare. co.uk in 2009/10

285,000 The estimated number of people in the UK with a gambling problem

8,287

People employed by the remote gambling sector Source: GamCare annual report 2009/10 and the Gambling Commission’s official report 2009/10.

The best people in business are always learning For over 20 years, Cass Executive Education has worked in partnership with its clients to create and deliver bespoke education and training programmes that deliver real benefits.

The team draws on Cass’s world-class faculty and research, City of London location and network of business practitioners to develop and deliver programmes that have a measurable impact on their clients’ businesses. Why not get in touch to see how Cass Executive Education could help your organisation?

To find out more call the Cass Executive Education team on +44 (0)20 7040 8710, email cassexec@city.ac.uk or go to www.cass.city.ac.uk/executive

www.cass.city.ac.uk/executive

24 | Feature Law firm discrimination

Research by Louise Ashley suggests it's not what you say but how you say it that’s likely to land you a job with Britain's leading law firms. Ed Fennel reports.

Can you talk yourself into a City law firm?

T

he singer Cheryl Cole was dropped from the US version of the television talent show The X Factor because, according to some reports, Americans could not understand her Geordie accent. It prompted a debate in Britain about whether the way someone speaks still matters when it comes to getting a job.

Dr Louise Ashley, a Research Fellow at Cass, concluded in her paper Making a Difference? The Use (and Abuse) of Diversity Management at the UK’s Elite Law Firms that accent and social manners remain absolutely crucial in securing a traineeship with a City law firm.

One anecdote from the report sums up the difficulty of reconciling social class, professional expectations and diversity. A partner at one of the elite London law firms said: “There was one guy who came to interviews who was a real Essex barrow boy. He had a very good CV (and) was a clever chap, but we just felt that there’s no way we could employ him. I just thought, putting him in front of a client... you just couldn’t do it.”

This was despite the fact that the firm, at least notionally, was InBusiness | Issue 15

committed to diversity.

The partner added: “If you’re really pursuing a diversity policy you shouldn’t see him as rough round the edges. You should just see him as different.”

But difference of this kind can create unbridgeable chasms. It is 95 years since George Bernard Shaw wrote in an introduction to his play Pygmalion: “It is impossible for an Englishman to open his mouth without making some other Englishman hate or despise him,” but the basic rule still applies.

How this plays out in the legal profession always attracts attention, perhaps because the law is the stereotypical middle-class career and, historically, has offered an opportunity for those with social and economic aspirations.

In January 2010 Alan Milburn, a former Labour Cabinet minister and Chairman of the Panel on Fair Access to the Professions, wrote in the introduction to the panel’s final report, Unleashing Aspiration: “Many professions are still unrepresentative of the modern society they serve.

And most alarmingly of all there is strong evidence… that the UK’s professions have become more, not

less, socially exclusive over time.”

Pat McFadden, the Minister for Business, Innovation and Skills at the time, said in response to the report: “Although effectively the legal profession employs more than 250,000 people it is, in some ways, less socially mobile than it used to be.”

The Milburn Report prompted well-intended initiatives by government and professional bodies including the Law Society, which drew up a Diversity and Inclusion Charter that has now been signed by hundreds of firms, including all the big names in the City of London.

But what do these firms do about social inclusion? And, in particular, what progress is being made in relation to social class? That was the question that Dr Ashley wanted to address.

“The intention of this research was to assess the value of diversity strategies as a means to widen access to the corporate legal profession,” she says. “As such, it had two core objectives. The first involved an analysis of diversity policy adopted by leading corporate law firms, in order to understand how diversity and equality are written about

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ILLUSTRATION BY MATT TARRANT/FP CREATIVE

InBusiness | Issue 15

26 | Feature Law firm discrimination and the type of strategy the sector deems important in order to secure key goals. The second involved an analysis of how these policies are experienced and understood in the organisational setting.”

Dr Ashley found that firms had moved on significantly in the past two decades. All-male, all-white cohorts have been transformed into mixed groups with equal numbers of males and females and, in most cases, a significant proportion of non-white faces and a number of non-British entrants.

However, while their physical attributes may be different, these bright young recruits will almost invariably dress, speak and act according to the same middle-class code. Dr Ashley concluded: “The strong consensus in this and other research was that middle-class ethnic minority candidates with the right education – and the right accent – would not necessarily experience discrimination. Their upbringing, background and education had almost certainly already equipped them with the same set of cultural practices as their white (middle-class) peers.”

But what about those graduates who have come from council estates and bog-standard comprehensive schools and have the accents and social mannerisms that might be associated with that background?

Overwhelmingly they meet discrimination, despite the fact that, in public, the firms concerned espouse a commitment to diversity and are even involved in diversity programmes with local schools and communities. In short there is a disconnect between the rhetoric and the reality.

According to Dr Ashley’s research, diversity issues and outreach activities in law firms are usually hived off to a self-contained department that has little impact or bearing on the way the firm conducts its recruitment. The result, says her report, is that “diversity strategies are implemented alongside a range of competing policies that seem perfectly designed to perpetuate existing forms of discrimination against non-traditional and less privileged candidates”.

She reports: “A specific example of the contradiction between good InBusiness | Issue 15

other words, those who “fit in” and become “one of us” – cannot be reconciled to their claims to be committed to diversity.

So what can be done?

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intentions and actual practice can be found at Firm D. This firm was closely involved with Global Graduates (an independent organisation that helps students from under-represented communities to attend university and enter professional careers in the City) and provided mini-internships for students. It had also established its own programme to sponsor a small group of less privileged students at school, helping them to develop the skills required for a career in an elite law firm. However, while the firm had recognised the difficulties faced by non-traditional (law) students it was simultaneously engaged in an active strategy to recruit more of its new graduates from elite universities, particularly Oxbridge.”

Elite firms, it seems, do not want to take the risk of stepping outside the comfort zone of their established – and seemingly successful – recruitment criteria (or maybe their gut instinct). An explanation

frequently voiced in the City is that a high level of legal knowledge is a given; but gaps in education, knowledge, savoir faire and social rapport with clients could be fatal.

When these firms do step outside the norm it can have an unwelcome impact on their success. Dr Ashley reports: “Firm E is an established City firm which had experienced a dip in both its reputation and profits during the previous ten years. These problems were related to several issues but, again, the quality of its staff was regarded as one factor.

A subsequent policy to recruit graduates almost exclusively from Oxbridge had been highly successful.

As one partner said, ‘We did suffer in terms of recruitment... and we were losing out to rival firms. We changed our strategy and that’s helped with quality. We’re just a much smarter firm now’.”

Dr Ashley concludes that recruiting only those with middleclass manners and mores – in

"Elite firms, it seems, do not want to take the risk of stepping outside the comfort zone of their established – and seemingly successful – recruitment criteria."

Dr Ashley posits that maybe surgery to the education system might be the only true solution.

“A radical approach to diversity might only originate in a holistic agenda which tackles not only the barriers to equality which exist within the legal sector, but also the far deeper structural issues which lie at the heart of the UK’s economy and society,” she says. “This radical approach would include a more active focus on differential access to educational advantage from an early age, a factor which continues to limit the life chances of less privileged people just as effectively as the value judgements made by managers within elite organisations, if not more so.”

Meanwhile, however, she recommends the approach adopted by the Sutton Trust and the College of Law in their Pathways to Law programme – a £1.5 million project founded in 2007 and delivered by the universities of Leeds, Manchester, Southampton and Warwick and the London School of Economics.

Its aim is to inspire and support academically able students from non-privileged backgrounds who are interested in a career in law. It focuses explicitly on group-based disadvantage. “Critically, it is a strategy based on social class that may not have gained ground without the development of a diversity discourse within the legal sector,” Dr Ashley says.

Development of two-year and part-time degrees and a significant investment in apprenticeships might start to open up the legal profession to a wider social demographic.

How long it will be before this has any impact on the elite law firms described by Dr Ashley remains to be seen.

Edward Fennell is a columnist for The Times LAW. He can be contacted at edward.fennell@yahoo.co.uk For more information on the research, contact louise.ashley.1@city.ac.uk

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28 | Corporate profile

Putting the

human touch back into insurance

Stefan Stern meets Paul Whittaker, a Chief Executive at RSA who, as a Human Resources Director, learnt the value of putting people first.

H

uman resources professionals have had to develop a pretty thick skin over the years. Labelled the human remains department, dismissed as being mere tea and sympathy merchants, or the abominable no-men (and women), HR managers have been the butt of endless jibes.

What the profession lacks, perhaps, are some role models a few big-hitting characters to raise HR’s profile and self-esteem.

The reputation-builders could do a lot worse than head down IMAGES BY NEIL BRIDGE

InBusiness | Issue 15

Fenchurch Street in the City of London to the headquarters of the general insurer RSA, where Paul Whittaker, Chief Executive of the company’s emerging markets business, is based.

What could the head of a division of RSA do for HR’s reputation?

Nitty-gritty

Until he was appointed four years ago, Whittaker had been an HR professional for most of his career.

A ten-year stint in HR at General Electric (GE), followed by three years at AXA, the French insurer, and

| 29

InBusiness | Issue 15

30 | Corporate profile another three years as HR Director of RSA, formed the preamble to his current job. So was the step up to Chief Executive daunting?

“I like numbers and the commercial aspects of business,” he says. “I never saw HR as being something separate from the financial nitty-gritty of the company. At GE you had to focus on performance and numbers and be a real part of the business.”

Whittaker and RSA’s Group Chief Executive, Andy Haste, have been on a challenging journey together these past eight years. They joined the company at the same time in 2003 and helped to overcome a legacy of difficulties from the merger of Royal Insurance and Sun Alliance in 1996.

Headcount was reduced sharply and the business rationalised.

By the time the company needed a new chief executive for its emerging markets division in 2006, the mood had changed to something far more positive. “The feeling was, ‘we’ve fixed it, now let’s grow it’,” Whittaker says.

Haste turned to him to build the emerging markets business. The pair knew each other well after working together at GE and when Haste took over at AXA he took Whittaker with him as HR Director. In 2003, when Haste was handed the task of leading RSA back to financial health, he again called on his old colleague to lead the HR team.

Upside potential

So were there any raised eyebrows at the company when Whittaker was handed the emerging markets role? “You would understand if there

“I knew that half the battle was going to be getting the people side of this business right. You don't really want to run businesses like these with expats.”

InBusiness | Issue 15

Paul Whittaker talks to Stefan Stern, Visiting Professor at Cass

were,” he says. But in fact, “Andy was completely open about it. He would say to anyone who asked, ‘Oh yeah, it could be a bit of a risk. I’ll sack him if he’s no good’.”

Happily, Whittaker has had a successful few years making that rare move from HR to business leadership. His emerging markets group comprises 21 countries and growth is healthy. Insurance is in its infancy in some of these countries, so the “upside potential” is huge.

And his HR experience is invaluable. “I knew that half the battle was going to be getting the people side of this business right,” he says. “You don’t really want to run businesses like these with expats.

So we have a Brazilian running our Brazilian business, a Chilean running our Chilean business, a Colombian running our Colombian business and an Indian running our Indian business. There’s a correlation between good leadership

and good results: get the people right and the rest can follow.”

Cass is trying to help RSA “get the people right”. The School is an important feeder of technically skilled people to the industry.

Writing insurance risk is a highly specialised function. RSA has a constant need to refresh its talent base with new people and Cass has provided many from its actuarial and insurance courses. The company also sponsors a Technical Academy prize for the most technically proficient graduate, who must also display “innovation and engagement with the School and their student community”.

Risky business

In addition, RSA has been a Founding Corporate Partner of Cass for the past three years. The company co-hosted the oversubscribed Solvency II event at Cass for alumni and students and

provided two keynote speakers — David Innes, Head of Economic Capital, and Nathan Williams, UK Pricing Director, who talked about the implications and challenges of Solvency II, the updated set of regulatory requirements for insurance firms that operate in the European Union.

Risk is a risky business, especially, perhaps, in some emerging markets. RSA has a cool head in charge of this important division — one who not only has a taste for growing the business, but who understands that it is his people who are going to deliver those results.

HR managers of the world rejoice!

Stefan Stern is Director of Strategy at Edelman and also Visiting Professor of Management Practice at Cass.

He can be contacted at stefan.stern@edelman.com

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32 | Cass forum Sir Martin Sorrell speaks at the Cass Building Business Relationships forum

Building business relationships A day of lessons and opportunities in networking at Cass.

S

ir Martin Sorrell, Chief Executive of the global media company WPP, identified the ten most significant factors influencing business today in his opening speech at Cass’s Building Business Relationships forum.

The day-long event on 29 June brought together Cass alumni, corporate partners, students, friends and staff.

Sir Martin’s list comprised: • The shift of balance of power from West to East InBusiness | Issue 15

• Overcapacity in the manufacturing sector coupled with a shortage of “human capital” in a time of ageing populations and falling birth rates • The internet. It has “broken the tyranny of distance and geography” • Tension between manufacturers and retailers as Walmart, Tesco and Carrefour exercise ever greater leverage • Internal communications, particularly in large corporations which, like WPP, have grown by acquisition rather than organically • Global versus local: as companies became more global they centralise, squeezing regional working • Too much power in the hands of procurement. There's a limit to what you can do to cut costs • Healthcare: if the UK wants to compete with China, retirement at 50 is not an option • Government interference won't stop. Governments put $12 trillion into the world's economies and businesses need to think of

the government as both investor and client • Corporate social responsibility (CSR). He said that ten to 15 years ago this was “greenwash”. Today, to companies in business for the long term, CSR makes sense.

Later the iOpener Institute for People and Performance led masterclasses on Happiness at Work: How and Why It Matters, and The Secrets of Successful Networking. Your Business Your Future, which runs business development programmes, led on The Seven Pillars of a Better Business while Alain Portmann, Founding Partner of the strategic digital marketing consultancy Web Liquid, spoke on Turning Social Media into a Competitive Advantage.

Closing the day, Cass Visiting Professors Bob Garratt and John Pool joined Charles BadenFuller, the Centenary Professor of Strategy at Cass, in a debate on business models and corporate governance.

Opinion piece

| 33 IMAGE BY GETTY IMAGES

Ladies first?

It’s time we were

Women’s evolved strengths – collaboration and sharing – are more important than male leadership skills, argues Dr Julie Verity.

I

n business today, women continue to be underrepresented in leadership roles. In the past, this has been easily explained by social inequality excluding women from the opportunities but, with the massive changes in society and the advance of equality, that no longer holds true. The opportunities are there but women, at least in sufficient numbers, are not. So are women simply not capable of competing with men for leadership roles or is something else going on?

Many women who succeed do so by exhibiting typically male characteristics of singlemindedness, self-interest and competitiveness. An obvious example is Margaret Thatcher, complete with handbag as a weapon. It would be logical to assume that her success would have changed things for women but if we look at the political parties today, almost all the senior roles are still held by men.

So why has Lady Thatcher not proved to be a role model for other women? The answer is that she did not represent the inherent skills and strengths of women as co-operative and collegiate individuals. A more exemplary role model would be someone like Anita Roddick who, rather than competing in a male hierarchy, created an organisation that matched her values.

Change the rules

In the musical My Fair Lady Rex Harrison’s character, Professor Henry Higgins, asks, “Why can’t a woman be more like a man?” To which the answer is: Why should she? If women have to behave as men in order to be viewed as leadership material then that is to deny the inherently different skills women possess.

As evolutionary psychologists remind us, we are evolved animals with evolved mechanisms and motivational drives that have been fashioned by our different roles in the past when our brains developed to ensure our survival. Men were the hunters, risking life and limb to track down prey. Here the skills of game-playing, risk-taking and single-mindedness evolved. Women gathered food and minded children, roles that could be accomplished more successfully through collaboration and sharing.

It would be wrong, however, to assume that leadership is a male role, although our idea of leadership is most certainly male-orientated.

Because most organisations have been created by men they are, predictably though not necessarily consciously, designed for men and leadership in these organisations is about status, game-playing, hierarchy and risk-taking, all predominantly male traits. For women to gain leadership roles they

have to some extent to play the male game – unless the rules of the game can be changed.

Some argue that, post financial crisis, the organisational model must change to avoid walking blindly back into the same mess. In other words, we need a model based on inclusiveness, co-operation and merit, a model that plays to the strengths of women.

The old ideas of command and control will not suffice in a world needing creative ideas. Women are good at relationships and teamwork, concepts that are based on a collegiate approach, offering the opportunity to tap into all the nodes of intelligence everywhere in an organisation and let the talent rather than the hierarchy lead.

Changing male-biased notions of leadership is not going to be easy, not least because one wonders whether men can convert their subconscious notions of heroism into an overt courage to embrace real change, but the challenges ahead might just make it a very real necessity.

Julie Verity is Visiting Lecturer in the Faculty of Management at Cass.

She can be contacted at julie.verity.1@city.ac.uk For more commentary and analysis

by Cass experts, go to www.cassknowledge.com InBusiness | Issue 15

34 | Development highlights Cass Business School is a place where students, academics, industry experts, business leaders and policymakers enrich each other’s thinking.

Our dialogue with business shapes the structure and content of all our education, training, research and consultancy. Since 2005, the Development Office at Cass has worked with alumni and organisations to create opportunities to sponsor Cass’s research and it provides vital scholarships and facilitates mutually beneficial partnerships.

Highlight

Corporate partnerships Cass hosted a presentation on the EU’s Solvency II directive by the insurer RSA in May. The updated set of regulatory requirements for insurance firms that operate in the European Union is scheduled to come into effect on 1 January 2013.

David Innes, Head of Economic Capital for RSA who is responsible for the implementation of Solvency II, and Nathan Williams, UK Pricing Director, spoke about its implications and the challenges faced by insurers and regulators. RSA, a Cass Founding Corporate Partner, is also running a Technical Academy Prize for Actuarial Science & Insurance and Risk Management students.

Senior Corporate Partner Threadneedle, the global asset manager, began its MSc Investment Management award this year.

Students from Europe, the Middle East, Africa and the Asia Pacific region are invited to write an essay addressing an economic question relevant to their region and to identify opportunities for the investment management industry.

The winner will have tuition fees paid for the one-year MSc course and will be offered an internship.

Czarnikow, which provides a

InBusiness | Issue 15

facility where Cass alumni and students can seek advice by email from our volunteers about careers and a range of other subjects.

This year we rolled out the Masterclass Series in collaboration with the MBA and MSc programmes.

This is a series of events in the UK and around the world for alumni and prospective students. The format is a masterclass given by a Cass academic followed by a networking reception for alumni, prospective students and Cass staff. In 2010-11 we held 15 events in total, five in the UK and ten in Europe, Asia and North America.

Muhtar Kent (fourth from left), Cass alumnus, Chairman and CEO of Coca-Cola toured Cass in May

range of market services in the sugar industry, has renewed its corporate partnership for a second year. They are also offering a prize to the student who gains the highest marks for exam and course work in the MSc Shipping, Trade & Finance course for the academic year 2010-11.

Senior Corporate Partner BNY Mellon is collaborating on a white paper with Andrew Clare, Cass Professor of Asset Management, and Douglas Wright, Cass Senior Lecturer in Actuarial Science and Course Director for the MSc in Actuarial Management.

Highlight

Alumni fundraising When the economist Shelagh Heffernan, Professor of Banking and Finance at Cass, died on 14 December 2010, her family and colleagues established the Shelagh Heffernan Scholarship to be awarded to a final-year undergraduate student studying Banking & International Finance. Zaheed Nizar, a student from her class of 1999, wrote: “Shelagh really was ahead of her time in respect of her knowledge of banking and finance. Her work will continue to impact on the lives of all who were tutored by her, and this scholarship will ensure the significance of her devotion to banking and finance students will live on for generations to come.”

With the help of her classes from 1998 and 1999, the scholarship fund has raised £6,090. Please consider making a donation via the Cass website: www.cass.city.ac.uk/development Highlight

Alumni news Cass alumnus Muhtar Kent, the Chairman and Chief Executive of The Coca-Cola Company who gained an Administrative Sciences MBA from Cass (then City University Business School) in 1977, visited Cass in May. During the tour of the School he met fellow Cass alumnus Peter Cullum, Founder and Non-Executive Deputy Chairman of Towergate, the specialist insurance provider; Sir Malcom Williamson, Chairman of National Australia Group Europe and of the Strategy & Development Board at Cass and senior executives from the business school.

In the MBA suite, Kent spoke to students attending a lecture on digital marketing by Henry Stokes, Visiting Professor and Head of Online Display at Mindshare, the WPP-owned media agency.

Highlight

Campaigns The Haberman Campaign for Actuarial Science was launched in the summer of 2010 to pay tribute to Professor Steven Haberman and the contribution he has made to Cass and to the teaching of actuarial science over the last 35 years. So far the campaign has raised funding for scholarships for students from Brazil, Greece, Iran and the UK as well as donations from a number of alumni. The campaign’s target is to raise £1 million.

Highlight

Governance The recently established advisory boards have now met at least twice since they were set up in 2010. They bring together alumni and industry experts to discuss course content and the skills sought by employers.

They focus on MBAs, Finance MScs, MSc in Management, Actuarial Science, Undergraduate Business and Management, Undergraduate Finance and the Centre for Asset Management Research.

Alumni Relations

For information on supporting Cass's students or to find out about corporate sponsorship, visit www.cass.city.ac.uk/development

Ask Alumni (formerly Careers Network Online) was re-launched in March. It is an online mentoring

For more information on alumni services and benefits, visit www.cass.city.ac.uk/alumni

Highlight

Knowledge is power Cassknowledge.com is an online resource designed to support practitioners and academics worldwide by empowering them to solve real issues and drive new thinking through access to the extensive expertise and research from world-class academics at Cass.

It’s a simple website which puts the latest and best business thinking at your fingertips. And what’s more, it’s totally free.

To see how Cass Knowledge can help you, contact: Christina Makris at christina.makris.1@city.ac.uk or visit www.cassknowledge.com

www.cassknowledge.com

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