FINANCIAL TIMES
July 21, 2022
Hello and welcome to our weekly intelligence briefing for boards, where we help directors keep up to speed on the macro trends affecting businesses across the world, and corporate governance news.

This is the last newsletter before we take a summer break. We will be back on Thursday 18 August.

We hope you enjoy it and, as always, you can find the latest stories and resources on FT.com/Board.
 
A look ahead with the FT leader writers
Each day FT Leader writers on the Editorial Board meet to discuss the topics to be considered for Leader columns. Here are the issues that dominated this week:

 It has been a busy time in politics and business. We welcomed the decision by the judge in Twitter's litigation with Elon Musk to expedite the hearing of the case, even if a strict legal judgement may not be in the interest of most concerned.

An out-of-court settlement that sidesteps the flawed specifics of their acquisition contract could be optimal, we suggested. "The parties could either negotiate a lower purchase price, or a higher termination fee. Twitter and its advisers ought to push for the latter.”

We have also bemoaned the ongoing self-harm being done to the Chinese - and global - economy by China's zero-Covid policies.

“Covid should still be taken seriously. But not through ultra-strict lockdowns,” we wrote. That in turn would facilitate an economic rebound. Our conclusion: “A resumption of Chinese growth would do much to benefit global economic health.”

In the next day or two, we will opine on the relative merits of Rishi Sunak and Liz Truss as Britain's next prime minister; and on the ECB's double-bind, as it confronts spiralling inflation on the one hand and Italian political tumult and widening bond spreads on the other.

 
My pick of the week’s stories
Rishi Sunka will face Liz Truss in the battle to become the next UK prime minister. Following MPs’ final vote yesterday,150,000 Conservative party members will be balloted over the summer before votes are counted on September 5. It is expected to be a bitter fight.

Sunak is chiefly focused on tackling inflation. But the more obviously rightwing Truss has pledged sweeping tax cuts and deregulation. She is the favourite to win based on her popularity with party members: according to Ladbrokes, the odds of her being the next leader are 4/7, while Sunak is at 111/8.

As Stephen Bush points out , pretty much every poll of the party membership suggests Sunak will be defeated. He faces a long and painful summer of being attacked for his tax-raising budgets while chancellor of the exchequer under Boris Johnson’s leadership, and the government’s economic record. Johnson’s allies in parliament see him as disloyal and are out to get him.

“I had hoped this would be a contest of virtues,” says the former Tory leader David Davis. Not much chance of that.

Our political team has set out the candidates’ lines of attack here. Keep up with Sunak and Truss’s progress with the FT’s Conservative leadership tracker.

Regardless of who the next Tory leader will be, they are going to have to contend with reality. Brexit is failing to live up to its billing as a way to revitalise capital markets.

A post-Brexit bonanza still eludes both the City of London and Germany, as Helen Thomas points out in her column this week , despite efforts by both to tinker with regulations to make accessing capital easier for businesses.

As one commentator says, it is hard to see the UK’s efforts as a Brexit dividend “if the EU can copy-paste” them. And progress for both so far has been slow.

Meanwhile, central banks are preparing for big rises in interest rates to bolster currencies and fight inflation.

The European economy is in an “impossible situation” - ECB president Christine Lagarde is preparing to raise interest rates today, just as war and energy prices threaten to tip the eurozone into recession. Fears of a repeat of 2011’s market panic that followed the last time the ECB raised rates will be front of mind.

In the US, fund managers have reached a “dire level” of pessimism over the economic outlook, with investors cutting equity allocations to the lowest level since the collapse of Lehman Brothers, according to a study by Bank of America. A third said inflation was their biggest concern.

UK inflation is already running at 9.4 per cent , which makes the Bank of England’s decision to ditch the affordability test for prospective mortgage customers at the end of this month a bizarre one, as I argue in my column this week . The bank says it is an attempt at doing away with “unnecessary” regulation. But in an era of fast-rising inflation, it is hard to imagine a worse time to kill off the test. It has ensured home buyers could cope with the shock of a 3 percentage point rise in rates.

Keep up with inflation where you are with the FT’s global inflation tracker.

Rampant energy prices in the wake of Russia’s invasion of Ukraine are behind inflation. In the UK, an influential House of Lords committee urged the government to urgently strike a deal with the EU on emergency energy supplies. This week, the EU asked its member states to slash gas use by 15 per cent and set out emergency plans for winter, as Russia warns of reduced supplies to the continent.

The EU’s voluntary target, which amounts to about six weeks’ consumption “is necessary to protect [member states],” according to commission president Ursula von der Leyen. It could become compulsory if events change. Nord Stream 1, a crucial Russian-controlled pipeline to Europe, has been shut for annual maintenance for just under two weeks. It is due to come back on stream today - and there is uncertainty over whether it will.

The IMF warned this week of a sharp European economic hit from a Russian gas embargo. Bill Perkins, an American and one of the hedge fund industry’s most successful energy traders, has opened a London office seeking opportunities in Europe, describing the gas market as “ crazy ”.

There is little prospect of an end in sight. Moscow plans to step up its war beyond the eastern Donbas region. We have mapped the invasion with the latest updates.

In business news, mid-tier accounting firms BDO and Mazars have been criticised by the UK regulator for the “unacceptable” quality of their audits . They received the worst scores in industry inspections for the second year running.

The big firms did not perform particularly well, either: across the seven, 25 per cent of audits inspected were deemed to need improvement.

At KPMG, the firm is to rerun the election for its chief executive in the UAE , after incumbent Nader Haffar was accused of exploiting weak governance to extend his tenure, despite complaints about his conduct.

Haffar won a five-year extension to his term as CEO after a hastily arranged partner vote in December, the arrangements for which one former board member said “completely violated” KPMG’s normal practices. This week, staff were told the vote would rerun and the firm will hire an eternal law firm to review governance.

Meanwhile the Twitter board this week pushed for - and won - a “warp-speed” courtroom showdown with Elon Musk to force him to complete the $44bn deal to buy the social media platform. Musk wanted court proceedings to start in February at the earliest, but this week, a Delaware judge ordered him to stand trial in October.

Musk claims he is backing out of the deal over the proportion of spam accounts on the network, but Twitter believes he is more concerned with the rout in tech stocks that has hurt its value. Musk is already Twitter’s second-largest shareholder.

The Due Diligence team introduces the lawyer that Twitter has chosen in its effort to defeat Musk.

Sujeet Indap points out that the Tesla chief must now seriously consider the risk of harm . Twitter is seeking to close the buyout and force Musk’s lending banks to come up with $13bn of debt financing they have committed to - along with the $33bn Musk himself is on the hook for.

A final thought before the summer break. Performance management at work is big business: the global market for feedback software alone was worth $1.37bn in 2020.

How effective it is varies. But what if there was a science of criticism that actually works? This week’s FT Weekend Magazine cover story argues that it really is possible to get better at giving - and receiving - criticism.
 
Resources to bookmark
•
ESG
•
Strategy
Data rich: the numbers behind corporate news (data visualisation series by FT)
UK IPOs slow to a trickle (analysis by KPMG)
•
Audit and risk
Using tech to enhance audit (insight from ICAEW)
•
People and workforce
 
From Agenda
Chief executive succession plans: what boards should do next

This article is brought to you by FT Specialist’s Agenda, a publication that focuses on corporate boards.
 
Upcoming events
How will the risk of recession affect M&A trends? How prepared are dealmakers for global economic volatility? Join senior industry leaders and the FT’s Ortenca Aliaj, the FT’s M&A correspondent, for insights in this webinar from FT Live on Tuesday 26 July at 2pm BST. Learn more here.
 
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