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CEO Daily: Tuesday, 26th July

Good morning,

I’m in Philadelphia this morning, but rather than dwell on the Democratic convention, I want to focus on what it symbolizes. We live in a time of unprecedented prosperity – the last two decades have seen more people around the globe lifted out of poverty than at any time in human history. Yet, we also live in a time of growing uncertainty, especially in developed countries – as the Brexit revolt in the U.K. and the rise of the Sanders and Trump in the U.S. indicate. Support for the twin drivers of post-World War II prosperity – globalization and digitization – is eroding.

How should global business respond? Rich Lesser and Martin Reeves of BCG have an interesting piece out this morning that calls on business leaders to adopt a new “corporate leadership manifesto.” It “won’t be easy,” they say; but failing to adopt it may mean companies lose their “freedom to operate.”

You can read the full piece here later today, or read my summary of their “seven imperatives” for business below:

1) Use technology to rethink globalization. In the future it must be less about global supply chains and low-cost offshoring, and more about serving the needs of individual markets.

2) Create business platforms and ecosystems that allow more people to participate. That’s not just for tech businesses, but also for things like energy, with decentralized grids, or manufacturing, with decentralized supply chains.

3) Deploy technology from front to back. Business often adopts technology with a view toward increasing efficiency and eliminating jobs. Lesser and Reeves says they should start with serving the needs of customers, and work back from there.

4) Invest in human capital. The rapid pace of change requires people to constantly be acquiring news skills to survive. Companies should facilitate that re-skilling.

5) Apply a social business mindset. Business must think about the effects of their operations on communities and underserved populations. The Milton Friedman construct – that the social responsibility of business is to make a profit – is no longer sufficient.

6) Rethink compensation. Workers need a living wage, and exorbitant pay for corporate leaders, particularly when not linked to performance, undermines support for business.

7) Own the narrative. Business leaders need to do a better job explaining to the world how capitalism solves problems and creates prosperity.

Simple enough? Let me know your thoughts.

More news below.


Alan Murray

Top News

Fed and Friends

The Federal Reserve’s policy-making Federal Open Market Committee starts a regular two-day meeting, against a backdrop of a market rebound in the wake of the U.K.’s Brexit vote that has wrong-footed many participants. The markets’ “surprising resilience”, as ECB President Mario Draghi described it last week, has again revived talk of the Fed raising rates, with the market now again implying nearly an even chance of a hike this year. Another important central bank meeting starts today in Japan (it will wind up on Friday), where Haruhiko Kuroda is under pressure to stop the yen rising further against the dollar. It rose over 1% in Asia after details of a new government stimulus program fell short of expectations. In the U.K., meanwhile, fresh stimulus from the Bank of England in August looks inevitable after one of its policy hawks threw his weight behind the idea in response to some shocking survey data on Friday.  Fortune

A Flood of Earnings

Earnings season marches onwards with Apple topping the bill of companies reporting Tuesday. Skepticism about the company’s long-term outlook has increased over the last three months, owing to saturation of the smartphone market, ongoing problems with the migration of the music industry from downloads (iTunes) to streaming, and the lack of an obvious driver for the next leg of growth. BCG Financial issued a “sell” recommendation on the stock yesterday, arguing that it had peaked. While that may not be the mainstream view, it’s now no longer the unspeakable heresy it was a year ago. Analysts expect earnings per share to have fallen by a quarter from a year earlier to $1.39. The company has guided for a gross margin of between 37.5%-38%. Other companies to report today include Caterpillar, Verizon, McDonald’s, Under Armour, United Technologies and 3M, which will make for a pretty broad cross-section of the economy for the Fed to consider. Fortune

AB InBev Throws SABMiller a Bone

AB Inbev improved its offer for SABMiller, after pressure from activist investors. However, it did so in a manner that left one wondering why they bothered at all. The instigator of the deal creating the world’s largest brewer raised its offer for its rival by one pound, or 2.2%, to 45 pounds a share. By contrast, sterling has fallen nearly 10% against the dollar since the U.K.’s vote to leave the EU, so the increase does nothing to change the fact that the terms of the deal have moved sharply in favor of AB InBev shareholders. At the same time, it increased the cash portion of a hybrid cash-and-shares offer to SABMiller’s two biggest shareholders by 23%, from 3.78 pounds to 4.66 pounds. Fortune

Europe in Torment

The spate of violent attacks on random and largely indefensible targets in Europe shows no sign of abating. This morning, a priest has been killed in an attack by two armed men while celebrating mass at his church near Rouen in northern France. The attackers, whose motive is as yet unclear, have been shot dead by police. Germany is still reeling from four attacks in as many days, three of them including asylum-seekers—a development that has re-inflamed debate over Angela Merkel’s refugee policy. The range of targets, and the motivation and profile of the perpetrators, is so wide as to defy easy characterization. First impressions suggest that mental illness, as much as affiliation to terrorist groups, is the common thread in the German attacks: a Syrian man who blew himself up at a music festival on Sunday claimed allegiance to Islamic State, but had a previous record of less apocalyptic suicide attempts.  NYT

Around the Water Cooler

Sprint Signals the End of Mobile Price Wars

Sprint’s shares soared over 20% after CRO Marcelo Claure told a conference call that it may lift prices “in the not so distant future.” The announcement appears to call the end of a price war between the big four mobile providers, after Verizon and AT&T already scaled back their promotional offers in recent weeks. Sprint appears to be calling time on its cut-price deals after regaining the scale that it needs to survive: it added 173,000 net customers in the three months to June, its fourth straight quarter of additions and the biggest increase in a second quarter in nine years. Fortune

BP Reports Another Shocker

BP reported a third straight quarterly loss after taking another $5.2 billion charge related to the catastrophic Deepwater Horizon blowout in 2010, raising its estimate for that spill to $61.6 billion. Underlying earnings also disappointed, falling by nearly half from a year earlier as average crude prices fell from $62 a barrel to $46. Refining margins, which normally pad earnings in times of low prices, fell to a six-year low. The company has said it needs a long-term price of $60 a barrel to fund its investment budget and its dividend—a price level that looks as far away as ever after crude slipped below $43 a barrel for the first time in three months overnight. BP cut its capex forecast again to less than $17 billion for 2016 (down by one-third from its original forecast). ExxonMobil and Chevron are due to report their quarterly earnings on Friday. WSJ, subscription required

Banks in Search of a Band Aid

The problems with the Eurozone’s banks are obviously not limited to Italy. Commerzbank, Germany’s second-largest bank and a pillar of lending to its medium-sized businesses, opened down 5.5% after rushing out a statement ahead of its scheduled earnings release to say its tier 1 capital ratio had fallen to 11.5% from 12% at the end of June, mainly because it had had to apply higher risk weightings to a broad range of assets. Net income also fell short of expectations, underlining the difficulty of generating profits in a negative interest rate environment. Back in the emergency ward, meanwhile, Italy’s biggest pension funds have agreed to fund a second rescue vehicle for the country’s banks under pressure from Rome. The European Banking Authority is due to publish its annual stress test results on nearly 60 banks Friday, and those with the weakest balance sheets need to have contingency plans in place as soon as possible. Reuters

Solar Impulse Completes Its World Trip

Solar Impulse 2 completed the first round-the-world flight by a solar-powered aircraft Tuesday, touching down in Abu Dhabi 16 months and 25,0000 air miles after it took off from the same spot. Despite 16 stops, numerous delays and technical problems, the aircraft’s two pilots Bertrand Piccard and Andre Borschberg have managed to cross both the Atlantic and Pacific Oceans without using any fossil fuel at all, using only by the 17,000 solar cells on the aircraft’s wings and four lithium polymer batteries. It’s no commercial model, to be sure. But as an illustration of the capabilities of solar energy, it’s more than impressive. The Guardian