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    The UN takes on corporate greenwashing

    Readers looking for thrills rarely turn to official reports written by groups of worthies. At first glance, one from a body soporifically named the UN High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities might be expected to cure insomnia. The team of experts, led by Catherine McKenna, a former Canadian minister, has spent the past seven months poring over the proliferating climate commitments of banks and big businesses, as well as cities and regions. Listen to this story. Enjoy more audio and podcasts on More

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    Can American liquefied natural gas rescue Europe?

    “ONE CARGO of LNG heats 1m people in Europe for a month,” beams an employee of Cheniere, America’s biggest exporter of liquefied natural gas, pointing to a specialised vessel docked at its huge export terminal in Corpus Christi, Texas. The firm has poured $17bn into the facility and in October held a groundbreaking ceremony to mark an additional $8bn expansion. More lng sets sail from Cheniere’s even bigger plant in Louisiana.Listen to this story. Enjoy more audio and podcasts on More

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    The sportswear giants are running into hurdles

    Following a series of anti-Semitic outbursts in October, Kanye West, a rapper and fashion entrepreneur (who insists on being called Ye), bragged that Adidas would never get rid of him. Within days, the German sportswear giant proved him wrong, ending a lucrative seven-year relship. Mr West’s line of Yeezy sneakers added €1.5bn ($1.5bn) to Adidas’s revenues in 2021, or 12% of its entire shoe business. After the announcement, the company’s share price fell to lows unseen since 2016. On November 9th Adidas cut its profit forecast for the fourth time this year. The previous day it had named a new chief executive, Bjorn Gulden, to clean up the mess.Listen to this story. Enjoy more audio and podcasts on More

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    As tech lay-offs spread, Meta sacks 11,000 workers

    On November 9th Meta said it would fire 11,000 people, or 13% of its workforce. It is not the only tech firm to give its workers the boot, as the sector goes through a harsh downturn. A week earlier Stripe, a fintech firm, announced it would cut 14% of its staff; Twitter’s new owner, Elon Musk, fired half its personnel. According to Crunchbase, a data provider, more than 60,000 American techies have been shown the door this year.To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

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    Even with political gridlock, America Inc should still fear the bossy state

    In 1922 Vladimir Lenin, criticised by Communist militants for tolerating a minuscule role for the private sector in Bolshevik Russia, insisted that it was a reasonable trade-off because the state would still control “the commanding heights” of the economy. For much of the rest of the 20th century that phrase came to stand for state meddling—not a complete clampdown on private markets, but preference for a dominant economic role played by the mandarins of the public sector. In the 1980s that changed. For most of the period since then it was market forces, rather than the state, that have been in the ascendancy across the West, even when centre-left governments have been in power. But Daniel Yergin, who co-authored a book called “Commanding Heights” in 2002, argues that the concept is back. President Joe Biden’s spending bills on infrastructure, semiconductors and the climate seek to use industrial policy to strengthen investment in America and counter geopolitical competition from China. His government has a left-wing regulatory zeal not seen in generations. “The hand of the regulatory state has become stronger,” asserts Mr Yergin, who is also vice-chairman of S&P Global, a research firm.For such reasons, the prospect of gridlock after Republicans appear on track to narrowly regain the House of Representatives in midterm elections on November 8th will probably be salutary for business, even if the Grand Old Party fails to make the sweeping gains in the Senate that some had predicted. If nothing else, it will prevent yet more big-spending “Bidenomics”, potentially reducing upward pressure on inflation and interest rates.Yet the election results are not an unalloyed win for America Inc. Although political paralysis in Washington may constrain the more progressive wing of the Democratic Party and the globophobe populists among the Republicans, there is little that centrists can do in the short run to stem the regulatory tide. Moreover, results in state races portray a country split into conflicting ideological camps. Whether in red states like Florida and Texas or blue ones like California, governments are increasingly keen to boss businesses about. Corporations struggle to straddle the chasm. Even before the final vote counts roll in, the post-electoral picture for corporate America is already clearest on taxes. Republican control of the house would take two immediate concerns off the table. The first is the White House’s ambition to push through corporate-tax increases, windfall taxes on oil firms, or both. The second allayed concern is that of a new fiscal splurge. Granted, many consumer-facing firms benefited from the fillip to households that came from Mr Biden’s $1.9trn American Rescue Plan in March 2021. Others, such as construction-equipment firms, logistics operators, chipmakers and clean-energy companies, are likely to benefit from the $1.7trn trio of spending bills pushed through by the Biden administration in the past year. With annual inflation running at 8%, however, further spending, if debt-financed, would be dangerous. It would push up wages and other costs.Matters are blurrier when it comes to the regulatory state. Even if the right wins control of both chambers, Mr Biden would veto any attempts to arrest his sharp shift to the left on matters like competition policy; the Federal Trade Commission is gearing up for some high-profile cases, including an antitrust trial against Meta, Facebook’s corporate parent, expected to begin in December 2023. With control of at least one chamber, the Republicans can make mischief, summoning regulators to Capitol Hill, or turning down agencies’ requests for more money. They are cross about some issues that many big businesses also seethe about, such as the attempts by the Securities and Exchange Commission, the market regulator, to demand finicky emissions disclosures.In other important ways, though, the party that used to treat corporate America as a bedfellow has started to disown it. Like Democrats, though for different reasons, Republicans want to cut big tech down to size. Just as Donald Trump courted blue-collar voters, some of his most notable acolytes have espoused causes that are anathema to big business, such as higher wages and workers’ councils, while turning against laissez-faire favourites like globalisation and immigration. In the end it may be the courts, not the Republicans, that prove to be the last bulwark against overweening regulators.Business may have the most difficulty keeping interventionism at bay in the states. With Washington gridlocked, states are turning into strongholds of ideological unity and taking matters into their own hands. In the run-up to the elections, only 12 of the 50 states had divided governments, notes Neil Bradley of the US Chamber of Commerce, America Inc’s main lobby group. That emboldens them to interfere in what used to be considered internal corporate affairs, from the “wokery” of CEOs to investments, lending policies and the size of share buy-backs. That leaves companies in the tricky position of trying to appease both deep-red and deep-blue states at the same time. As Mr Bradley puts it, companies are seeing “Texas telling them they have to do one thing and California telling them they have to do the opposite”. Taking the Mickey One way for businesses to cope with this is to keep their heads down and their noses out of politics. The consequences of misreading local political moods can be severe. Just ask Disney, whose run-in with Ron DeSantis, Florida’s governor, may be all the costlier after his thumping re-election win puts him in pole position to challenge Mr Trump for the Republican nomination in the 2024 presidential race. Alternatively, companies could also lobby the federal government for a single set of rules in areas such as greenery or data privacy, even if these are not all to businesses’ liking. That would help clear the state-by-state minefield. It is also fanciful in an era of gridlock. From the commanding heights of Bolshevik heaven, Lenin must be laughing. ■ More

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    A sleuth’s guide to the coming wave of corporate fraud

    The bad news just keeps coming. Ten months after America’s stockmarket peaked, its big technology companies have suffered another rout. Hopes that the Federal Reserve might change course have been dashed; interest rates are set to rise by more than previously thought. The bond market is screaming recession. Could things get any worse? The answer is yes. Stockmarket booms of the sort that crested in January tend to engender fraud. Bad times like those that lie ahead reveal it. “There is an inverse relationship between interest rates and dishonesty,” says Carson Block, a short-seller. Quite so. A decade of ultra-low borrowing costs has encouraged companies to load up on cheap debt. And debt can hide a lot of misdeeds. They are uncovered when credit dries up. The global financial crisis of 2007-09 exposed fraud and negligence in mortgage lending. The stockmarket bust of the early 2000s unmasked the deceptions of the dotcom bonanza and the book-cooking at Enron, WorldCom and Global Crossing. Those with longer memories in Britain will recall the Polly Peck and Maxwell scandals at the end of the go-go 1980s. The next downturn seems likely to uncover a similar wave of corporate fraud. Where, exactly, is hard to know in advance, fraud-busters concede. Everyone has a favourite hunch. The rush to comply with the demands of environmental, social and governance (ESG) investing seems ripe for more imbroglios; in May German police raided the offices of dws, an asset manager, over claims of greenwashing. The various government schemes to shore up businesses in the pandemic are another candidate. They were designed to be tapped quickly, so checks were by necessity lax. Evidence of fraud is already emerging. The archetypal sin revealed by recession is accounting fraud. The big scandals play out like tragic dramas: when the plot twist arrives, it seems both surprising and inevitable. No simple formula exists to sort the number-fiddlers from the rest. But the field can be narrowed by searching within the “fraud triangle” of financial pressure, opportunity and rationalisation.Start with pressure. Sometimes this is self-imposed. If you make the cover of “Business Genius Monthly”, in Mr Block’s words, “the guy on the cover becomes your identity, the ceo of a high-flying firm.” Fessing up that the firm is not flying high becomes unthinkable. Often it is the result of external expectations, says Andi McNeal of the Association of Certified Fraud Examiners, a 90,000-strong professional body based in Texas. The expectations to be met—or gamed—can be regulatory: think of how bankers pulled the wool over the eyes of their watchdogs before the financial crisis; or how Volkswagen deceived environmental agencies about the pollution from its cars in the “diesel-gate” scandal that blew up in 2015. For bosses of listed firms, the external eyes to please are often those of portfolio managers, analysts and traders—and the thing doing the pleasing are accounting earnings. The stockmarket uses profits as a rough-and-ready guide to how well a company is doing and at what price its shares should change hands. Earnings “misses” can be punished brutally. The shares of Meta, owner of Facebook, lost 25% of their value after disappointing quarterly earnings last month. A lot of ceo pay is tied to share prices, which creates the incentive to meet earnings forecasts. That bosses feel pressure to deliver predictable earnings is well documented. Almost all of the 400 managers surveyed in the mid-2000s by John Graham, Campbell Harvey and Shiva Rajgopal, a trio of academics, said they had a strong preference for smooth earnings. Most admitted they would delay big spending line items to meet a quarterly earnings target. More than a third said they would book revenues this quarter rather than the next, or incentivise customers to buy more earlier. If anything, the rewards for smoothing earnings have grown. Investors attach rich valuations to the shares of dependable earners, or so-called “quality stocks”. Those that suddenly look unreliable have a long way to fall (see chart). Some bosses will resort to fraud to avoid that fate. Motive is not enough to lead people to commit fraud. The circumstances have to be right (or rather, wrong). Opportunity will vary by jurisdiction. In places where the rule of law is weak, scope to falsify accounts with impunity is wider. You should expect to find more book-cooking in emerging markets than in rich ones. Some short-sellers, such as Mr Block, have trained their attentions on Chinese firms listed abroad, whose accounts are hard for foreigners to verify. They landed a big target in 2020, when Luckin Coffee agreed to pay $180m to settle accounting-fraud charges in America. India is another font of scandal. Its tycoons are often afforded a reverence that is at odds with their probity. In rich countries, opportunity is afforded by the latitude of accounting practices. Earnings are a slippery concept. In a simple business, like a lemonade stand, profit is the difference between the cash coming in from lemonade sales and cash going out to buy lemons. More complex businesses have to account for non-cash items, or “accruals”, such as sales that have been booked but not yet paid for. Accruals also include costs that will eventually be a drain on cash, but aren’t yet: wear and tear (depreciation) of assets, pension payments, bad debts and so on. Accruals always rely on a forecast or best guess of how things will turn out. “Accountancy is full of such estimates,” notes Steve Cooper, a former board member of the International Accounting Standards Board, who now writes the Footnotes Analyst, a blog. Accruals estimates can change for defensible reasons. Amazon Web Services, the e-emporium’s cloud-computing division, said in February that it would extend the working life of its servers by a year, thus lowering its depreciation costs. This is perfectly legitimate. No one knows for sure the useful life of fixed assets, such as servers (or aircraft or office buildings). Some less scrupulous firms, however, can time accruals changes to give earnings a bump, by bringing forward revenue to the present or deferring costs to the future. Eventually, earnings must tally with cashflow. Firms that do not generate a lot of cash tend to pile on debt to disguise the fact. Corporate sleuths know this, which is one reason fraudsters go to great lengths to conceal their true debt burden. Another reason, powerful during recessions, is to avoid a downgrade from rating agencies, which would raise borrowing costs. The side that completes the fraud triangle is rationalisation. Though some fraudsters are, as Mr Block points out, sociopaths who don’t feel the need to justify themselves to anyone, fraud is likelier to occur if company bosses feel they can justify it to themselves. “Everybody does it” is something you might hear from the earnings-smoothers at the white-lie end of the accounts-fiddling spectrum. Some fraudsters fall back on altruistic reasoning, telling themselves they are doing it to save jobs or investors. “This is just temporary” is another common rationalisation, says Ms McNeal. Book-cooking can feel acceptable in a recession, in cases where the bosses sincerely believe that the business has good long-term prospects. This is what happened at one particular company. It was a classic story, says the executive who was brought in to clean up the mess. Business was good. The management believed they had found a recipe for success. They repeated this formula until long after it had stopped working. The pressure increased after recession struck. Costs were slashed in an effort to sustain profits. The cuts served only to hurt the business. Somehow reality had to be kept at bay. So the company began to fiddle its accounts.How many such cases are thrown up by the next recession depends in part on its severity. It is easier to keep a fraudulent show on the road in a short downturn. In a prolonged one, a few sorts of corporate sinners are likely to come to be unmasked. The least guilty category is firms that were run with a view to meeting accounting goals but to the long-term detriment of the business. This group includes firms so obsessed with managing earnings that they skimped on investment in capacity, new products or brands, and firms that were so intent on managing costs that they destroyed valuable relationships with suppliers or employees. A firm that pays too much attention to accounting measures of success is not committing fraud. But such a focus may act as a gateway to actual book-cooking. Some firms that were flying high only to suddenly lose altitude may decide to fiddle the numbers in the hope that the good times would quickly return. A loss of revenue is the likeliest trigger for fraud of this kind. The peculiar circumstances of the post-pandemic economy have now given rise to other possible triggers, such as excess inventories or problems with suppliers going bust. The share prices of Walmart and Target fell sharply in May, after the two retailers revealed they had misjudged demand for some goods and been left with large stocks of unsold items. It is easy to imagine less honest firms seeking to cover up mistakes of this kind rather than fess up to them.Then there are firms with no real business or not much of one. Wirecard, a much-feted Germany “fintech” firm that imploded in 2020, fits this category. So does Nikola, a startup with plans to make battery-powered lorries, whose founder, Trevor Milton, was found guilty last month by a federal court in New York of defrauding investors. By the cold light of recession, similar such examples will come to light. A lot of venture capital (vc), much of it undiscerning, poured into untested enterprises in recent years. The valuations they were assigned in the boom years already look like fantasy; many of their business models will prove similarly fanciful. Their venture-capitalist backers may try to conceal such souring bets. Their fees are based on the value of their portfolio companies, whose equity is not frequently traded. That gives the vc fund managers wide discretion on the value (or “marks”) they place on them. The same is true of private equity. Both vc firms and private-equity firms, which focus on mature businesses, are notoriously slow in writing down these values in bad times. When a fund matures, its sponsor must usually sell companies, at which point the market value ought to be clear. But these days a lot of private-asset “exits” are sales to other private funds, including some run by the same asset manager. Clubby arrangements of this kind invite abuse. The slow-growth, low-rate 2010s were a favourable climate for fraud to breed in all these areas. There were no doubt instances where financial pressure, opportunity and rationalisation became aligned. Everybody does it? Perhaps. But even the “smoothing” that seems acceptable in a boom will be judged harshly in a bust. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

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    Elon Musk’s challenge to management thinking

    Elon musk’s takeover of Twitter raises questions of policy: is it right for the world’s richest man to own such an important forum for public debate? It raises issues of law: is his decision to get rid of so many workers within days of completing the acquisition above board? And it raises questions of strategy: can Twitter make money by moving from a business model based on advertising to one based on subscription? But it is also an extremely public test of a particular style of management. In the way he thinks about work, decision-making and the role of the CEO, Mr Musk is swimming against the tide. His attitude to employees is an obvious example of his counter-cultural approach. For a futurist, Mr Musk is a very old-fashioned boss. He doesn’t like remote work: earlier this year he sent an email to employees at Tesla demanding that they come to the office for at least 40 hours a week. Anyone who thought this was antiquated could “pretend to work somewhere else”, he tweeted. Whatever the legality of his decision to fire so many Twitter workers, his methods are brutal: people locked out of corporate IT accounts, careers ended with an impersonal email, half the workforce gone at a stroke. It’s as if Thanos had decided to try his hand at business. For those who remain, hard graft is the expectation; insiders say that one of Mr Musk’s first acts at the firm was to cancel monthly firm-wide “days of rest”. The template for the modern manager tends to be a low-ego, compassionate boss who gives people autonomy. Someone didn’t get the memo. His critics have to accept that the my-way-or-the-highway approach has worked before. At his other firms, like Tesla and SpaceX, Mr Musk may not have offered empathy but has provided a planet-sized sense of purpose, from popularising electric vehicles to colonising Mars. Whether this can work for him at Twitter is less clear. His vision for the product as a “digital town square” where free speech flourishes is a typically grand one. This time, however, he is not taking on lumbering incumbents, but fixing an existing business where judgment and politics matter as much as engineering. The way that Mr Musk takes decisions also cuts across consensus. Comparatively little research has been done on how CEOs make their choices, but a Harvard Business School working paper published in 2020 had a bash by asking 262 of the school’s own alumni how they went about making strategy. The authors of the paper did discover a wide range of approaches, with some managers going on gut instinct and others using very formalised processes. But the researchers found that bosses who use more structured processes tend to lead bigger and faster-growing firms (which way causality runs is not clear). They also tend to make decisions more slowly. Mr Musk and his acolytes are in a different camp: fast, informal and aggressive. Reports are already surfacing of fired Twitter workers being asked to come back.He is unorthodox in another way, too. Peter Drucker, a doyen among management thinkers, described the CEO as being the person in the organisation who bridges the outside world and the inner workings of the company. No one else in the firm is in a position to combine these perspectives, Mr Drucker wrote. Mr Musk is not so much bridging this gap as making the distinction between the inside and outside of the company irrelevant. His personal brand and wealth are inextricably linked with the other firms he runs. At Twitter he is going even further, tossing out product ideas on his own Twitter feed, polling the audience for their views and offering real-time commentary on how things are going. And Twitter itself is a platform on which everyone—users, ex-employees, the people who founded the firm, policymakers and pundits—weighs in publicly to say how things are going. There is not much of an inside to talk of. You might object that Mr Musk is a one-off, and so is this deal. When he first made his offer to buy Twitter, he explicitly said that it was not because of an economic rationale. He later tried to wriggle out of the transaction entirely. The story of a billionaire owner of a social-media platform has little in common with the challenges that preoccupy the salaried executives of most public firms. Maybe so, but if Mr Musk makes another success of his latest venture by being brutal to his workforce, skipping the PowerPoint sessions and managing through memes, the MBA will still need a bit of an update. ■Read more from Bartleby, our columnist on management and work:How to think about gamification (Nov 3rd)The archaeology of the office (Oct 27th)When bosses walk in employees’ shoes (Oct 20th)To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

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    What big tech and buy-out barons have in common with GE

    Conglomerates could hardly be less fashionable. The diversified industrial empires of old are taught as case-studies in underperformance, misaligned management incentives and poor capital allocation. Bosses fear that a “conglomerate discount”—the difference between the market value of a firm and the hypothetical value of its constituent parts—will invite activist investors to agitate for divestments. Focus is now the idée fixe of industrial organisation.Listen to this story. Enjoy more audio and podcasts on More