Category: Risk Management

Basic Income: A Bold Solution to a Big Problem

Published by

Peet van Biljon

While most corporate directors in the United States are focusing on the social and business impact of recent tax reform, some of them have another economic matter on their minds: the concept of universal basic income (UBI). This is our future, says a recent article quoting Silicon Valley’s Ray Kurzweil, Google’s director of engineering. Kurzweil is not alone. Other tech luminaries such as Marc Zuckerberg and Elon Musk have expressed support for it. Meanwhile, public sector leaders from Canada to Kenya are already looking at implementing this economic model.

So, what is UBI? One way to define it is to see what it is not. It was reported recently that Finland has discontinued its year-old UBI pilot. The Finnish government’s discomfort with handing out money with no strings attached got the upper hand. (However, Finland retains its generous unemployment, free college, and universal healthcare benefits.) While Finland is abandoning unconditional income guarantees, it will be lumping all government benefits together in a single monthly sum, a universal social credit. The UK government is following a similar lump-sum approach, the so-called universal credit. But neither is a basic income.

A true UBI is both universal (i.e. paid to every citizen), and unconditional, ( i.e. recipients do not have to meet any obligations to maintain their eligibility). The tax treatment of a UBI is intended to avoid any distortions normally associated with the transition point between social benefits and wage income. This distortion can be a disincentive for benefit recipients to start working. On the other hand, UBI is tax free; only additional income from other sources like wages, called the market income, is taxed. Even as market income goes up, UBI is not taxed. Tax brackets are designed so that a gross income (UBI + market) above a certain level makes an individual a net contributor, meaning what someone pays in taxes will exceed his UBI receipts. For example, with a 33.33 percent flat income tax rate, the recipient of an annual UBI of $12,000 will reach the breakeven point when her taxable market income is $36,000, on which she will be paying $12,000 in taxes balancing out the UBI. Every dollar of market income after that makes her a net contributor of taxes. The system is startling in its simplicity.

The modern idea of a basic guaranteed income has been around since Bertrand Russell made the case for it 100 years ago, but Thomas Paine proposed a form of basic income as far back as 1797. A close variant of UBI is the negative income tax, which entails payments only to those who would be net recipients under the basic income system, like those earning less than $36,000 in the example above.

So, why are so many leaders of institutions (from government and non-governmental organizations to corporations) looking at UBI right now? It is because of the ongoing unemployment trends in recent decades. In countries such as the United States, these trends are better reflected in a 20-year low workforce participation rate and precarious employment than in unemployment claims, which are currently low. There is widespread fear that the elimination of low- and medium-skilled manufacturing and administrative jobs will accelerate as new automation technologies such as artificial intelligence (AI)  spread like brushfire through the economy.

The predictions on the worker dislocation by AI and other automation technologies are piling up: In 2013 Oxford University researchers estimated that 47 percent of U.S. jobs had a high probability of being automated by 2033. This started off a range of estimates and predictions by consultancies, think tanks, and governments. For example, late last year McKinsey estimated that by 2030 between 400 to 800 million jobs worldwide may be lost due to automation, including 73 million lost jobs in the United States. PwC in 2017 estimated that up to 38 percent U.S. jobs are vulnerable to automation by 2030. On the low end is the Organisation for Economic Cooperation and Development’s 2016 measure, which estimated that 9 percent of jobs are highly automatable and another 32 percent have a significant risk of automation. There are also optimistic estimates of millions of new jobs being created by this technology—but most such predictions only offset the job loss. They do not erase the net loss that will surely result.

Both job losses and job creation have indeed been part of previous industrial revolutions, but that does not mean serious disruption can be avoided in the transition. We could have one or more lost generations of workers before the system rights itself. Just this past month, Brookings researchers provided a grim warning that with job dislocation around 38 percent (a forecast mean), “Western democracies likely could resort to authoritarianism as happened in some countries during the Great Depression of the 1930s in order to keep their restive populations in check. If that happened, wealthy elites would require armed guards, security details, and gated communities to protect themselves, as is the case in poor countries today with high income inequality. The United States would look like Syria or Iraq, with armed bands of young men with few employment prospects other than war, violence, or theft.”

This is a bleak future we all want to avoid. What’s needed is a policy response equal in size to the disruption. UBI may be a big part of the answer, but the concept is too often met by skepticism or outright hostility from business leaders who have a distaste for anything that smells like socialism.

Concerns for personal responsibility immediately come up when UBI is discussed: Won’t it take away the incentive for people to work? Won’t some people abuse it? Perhaps no one better addressed these concerns than that paragon of free market capitalism, Milton Friedman, in a famous 1968 article titled “The Case for a Negative Income Tax: A View from the Right.” Friedman pointed out that onerous conditions for social assistance interfere with personal freedom and dignity when large numbers of government bureaucrats have to screen and police recipients to make sure they do not violate eligibility requirements. It is also highly inefficient. Friedman argued that replacing the multitude of existing welfare measures with one unconditional payment would be much more efficient, increase the incentive to work, and reduce the number of permanent poor living off government programs.

More practically, if the UBI is set at a low-enough amount, and recipients keep their after-tax income from employment, ample incentives remain for people to find work to improve their status in life. For example, the Ontario pilot UBI for individuals is set at only $13,000 US per year per individual, and $19,000 US per couple. This is hardly enough to live a life of luxury on the dole.

For the same reason, companies need not worry that a modest UBI will drive up wages for low-wage workers, because the UBI might depress the labor supply.  It may do the opposite, that is enable more people to take low-wage jobs similar to the current situation where many low-wage workers in the United States are supported by the Supplemental Nutrition Assistance Program (SNAP, previously known as food stamps) program. It is estimated that U.S. taxpayers already provide working families  with over $150 billion in annual public support through the current patchwork of state and federal programs like SNAP, Temporary Assistance for Needy Families, Medicaid, and the Children’s Health Insurance Program. By design, UBI eliminates the so-called poverty trap in which people are discouraged to take work because they may earn less from wages than from the sum of these benefits. And since everyone from the CEO to janitor will get a monthly UBI directly from the government, there is no regulatory or administrative burden for companies. Furthermore, the UBI becomes a permanent safety net for laid-off employees who have exhausted their termination and unemployment insurance benefits.

Will UBI give struggling people the opportunity to lift themselves up or will it create a permanent underclass? Preliminary anecdotal feedback from the Ontario pilot is that participants are eating healthier, retiring debt, and feeling less stressed, enabling them to focus on economic advancement. This is consistent with the so-called Maslow argument for UBI. Longitudinal data is needed to properly assess the societal welfare effects of UBI and these are scarce, which is precisely why properly designed UBI pilots should be supported. One of the only UBI-like programs to have existed for years is the payment funded by casino royalties (currently about $12,000 annually) to every member of the Eastern Band of Cherokee Indians in North Carolina. The program has been extensively studied by social scientists who found compelling benefits: a 40 percent decrease in behavioral problems among poor children to a level equal to non-poor children, and a 22 percent decrease in minor crimes which means fewer kids in jail, and higher high school graduation rates.

The last big concern is the cost burden of UBI for a country. A full-scale UBI implementation could be partially funded by absorbing many existing programs into the single universal payment. Significant savings will also come from collapsing the large government bureaucracies currently employed in administrating those programs. A tiny new bureaucracy can send every citizen a monthly check or bank transfer, and the existing tax bureaucracy (e.g., the Internal Revenue Service) will process any taxable income and payments as usual. But some incremental public spending will likely be needed, and new revenue sources found for it.

Earlier this month, Canada’s Parliamentary Budget Office estimated the cost of extending the Ontario pilot to every Canadian citizen at the current rates, net of expected savings in existing spending, to be in the order of $23 billion (Canadian). To scale this to other economies like the United States, this is roughly one per cent of gross domestic product, and could be paid for with about three additional points on the federal Canadian general sales tax (GST).

UBI is a bold new mechanism for social support. But so was unemployment insurance and Social Security in their time. There are details to be worked out, and hypotheses to be tested, before rolling out such massive programs nationwide. The best way to do that is to proceed with, and copy, controlled experiments like the current pilot in three cities in the Province of Ontario. Board members and other business leaders would do well to monitor these developments and to keep an open mind on UBI. It may just save our society from the social havoc that could be wreaked by artificial intelligence.

Peet van Biljon is founder and CEO of BMNP Strategies LLC. He advises clients on strategy, innovation, and new business building. He focuses on Industry 4.0 and transformative technologies such as artificial intelligence, digitization, fintech, and the Internet of Things. He previously managed McKinsey’s global innovation practice from 2010 to 2015. Peet is an adjunct professor at Georgetown University, where he teaches a graduate course on innovation. He co-chairs the General Principles Committee of the IEEE Global Initiative on Ethics of Autonomous and Intelligent Systems (A/IS). Peet authored a book on business ethics, Profit with a Higher Purpose, and has developed Ethics-driven Innovation, an innovation process to help clients meet the highest ethical standards. He is an electrical engineer, licensed as a professional engineer in Ontario, and also has degrees in accounting and economics. All thoughts expressed here are his own and do not necessarily reflect those of NACD.

The Future-Ready Workforce: Lead the March

Published by

Brian Baker

Some claim that seven million jobs will be lost, and more than half of jobs will be replaced. Others claim that 2.3 million jobs will be created, exceeding the 1.8 million that it will removed. These are just some of the forecasts pundits are making about the impact artificial intelligence (AI), automation, robotics, and more will have on jobs and the changing nature of work in the United States.

When taken together with many other forecasts, there is really only one conclusion. We really don’t know what the impact will be. What we do know is this: change is happening and it’s happening fast. And beware, we humans tend to underestimate the amount of change that will happen in the next 5 years. Don’t get caught. One of the single biggest questions the board needs to be asking of their CEOs is, “Is our workforce strategy built for the future of work?”

Despite all of the rhetoric about advanced and emerging technologies creating massive job losses, our economy will continue to function as the “human operating system” that will power organizations of all sizes. The most adept leaders will recognize advanced technologies as opportunities to unlock the full potential of humans rather than considering those technologies as simply a way to replace jobs and reduce costs. Our capacity for curiosity, customer devotion, empathy, problem-solving, relationship building, and more will be difficult to replace.

Technology, automation, robotics, AI, side-by-side with the human operating system, is the new currency in a workforce prepared for the future of work. Importantly, 62 percent of organizations rate themselves as ineffective at this type of workforce planning.

Board members in companies of all sizes should be asking, therefore, the following questions of the C-Suite.

What should our workforce look like in five and 10 years, and what is our plan to achieve that end state? So far, only one in five human resources leaders have begun implementing strategies to develop their workforce for tomorrow. While this figure is surprisingly low given the urgency with which company leaders need to act, it’s these leaders who are positioning their companies ahead of the curve and widening their competitive moat against those who choose to delay or take no action at all.

What are the external trends defining the future of work that we are harnessing for success? Which ones could prevent us from delivering on our goals? Mercer’s 2018 Global Talent Trends report is a good starting point to learn more.

Is the leadership team and workforce ready for the speed of change required to win? Only 18 percent of C-Suite leaders describe their organization as agile enough today to succeed through change.

Should we be measuring the long-term health of our company differently than just earnings or stock price given the changing nature of work? What are we doing to develop and retain talent? Does our mission statement reflect the need for customer devotion and a purpose-driven culture? How are we measuring whether or not we are delivering on our mission?

What are we doing to upskill and reskill our workforce to improve their digital literacy? Only 15 percent of company leaders consider themselves leaders a digital organization, with 53 percent reporting they have not yet begun their journey or have a long way to go. That makes it even more surprising that only 15 percent of C-Suite leaders believe that upskilling and reskilling employees for new and changed roles, driven by digital and technology, will make a sizable difference to business performance.

Today’s board members and leaders can’t afford to wait any longer. The technology innovation curve is a hockey stick and many believe we are about to hit the elbow as AI and other technology capabilities begin to approach and surpass human intelligence. Those leaders who embrace the pace with urgency will set themselves up for accelerating growth while those who don’t will find that the notion of being able to catch up has vanished.

No business is immune, and how the workforce will morph and adjust needs to be at the center of gravity in all board room discussions. Think about these facts from the World Economic Forum:

  • 35 percent of the core skills of today could change by 2020
  • 65 percent of the jobs our own children in elementary school will be doing in the future do not yet exist

These are just a couple of data points that capture the significant change ahead. Are you ready? If you believe your C-Suite is behind in developing a workforce strategy to compete in the digital age, now is the time to leap forward. If you believe they are ahead, it’s time to invest in accelerating their march.

Brian Baker is a Partner in Mercer’s New York office and the US Digital Workforce Leader. He is focused on helping business leaders determine and build their Workforce for the Future strategy and execution plans.

Talk to Your Auditors About Cybersecurity

Published by

Cindy Fornelli

If you’ve ever seen a television ad for a prescription drug, chances are you heard a soothing voice urging you to “talk to your doctor” about the treatment in question.

Now, I may not have a silky voice fit for TV, but I do have a similar message for the distinguished readers of the NACD Board Leaders’ Blog: Talk to your auditors about cybersecurity.

The Importance of Communicating About Cybersecurity

Unlike a blockbuster pharmaceutical, there is no magic pill that can solve the big, complex, and evolving issue of cybersecurity. In recent years, however, the key elements of a sound approach to cybersecurity have become clearer, and one of those elements is communication.

Regulators certainly recognize the importance of communication from businesses to investors. In September 2017, Securities and Exchange Commission (SEC) Chair Jay Clayton stated, “I recognize that even the most diligent cybersecurity efforts will not address all cyber risks that enterprises face. That stark reality makes adequate disclosure no less important.”

Accordingly, the SEC remains strongly focused on ensuring the adequacy of public company disclosures of cybersecurity risks and how those risks are managed. Likewise, investor groups, such as the Council of Institutional Investors, have also asked company boards to strive for transparency in reporting efforts around cyber threats.

At companies, communication is no less critical between and among boards of directors, company management, external auditors, and internal auditors. Each group has a role to play, and each must have a grasp of the others’ roles. Ongoing dialogue fosters this understanding.

CPA Firms and Cybersecurity: Bringing Expertise and Values

Before jumping into a dialogue with external auditors, a board member might wonder, “Why talk to an accounting firm about cybersecurity?” It’s a fair question, with two simple answers.

  • Deep expertise. Not only do certified public accounting (CPA) firms provide independent assurance services in both the financial statement audit and a variety of other subject matters, they have played a role in assisting companies with information security for decades. In fact, four of the leading 13 information security and cybersecurity consultants are public accounting firms.
  • Strong values: CPAs bring to bear strong values that have defined and guided the profession for over a century. Foremost among these values are independence, objectivity, and skepticism.

Key Topics to Discuss with Your Auditor

So, having established that a conversation with a CPA firm about cybersecurity is a good idea, what is there to talk about with your auditors? The Center for Audit Quality (CAQ) has recently released a cybersecurity tool for board members to guide these conversations. The tool, which leverages resources from NACD and others, covers areas including the following important topics.

How the Financial Statement Auditor Considers Cybersecurity Risk

An essential starting point in the dialogue is to get clarity on the current roles and responsibilities of the financial statement auditor when it comes to cybersecurity. This conversation may include, if applicable, the audit of the effectiveness of a company’s internal control over financial reporting (ICFR).

A talk with the external auditor might involve the following questions.

  1. How does the financial statement auditor’s approach include the consideration of cybersecurity risks when identifying and assessing risks of material misstatement for the financial statement and ICFR audits?
  2. If, as part of understanding how the company uses information technology in the context of its financial statements and ICFR, the financial statement auditor identifies a cybersecurity risk, how does that risk get addressed in the audit process?
  3. Why don’t the financial statement auditor’s procedures on an ICFR audit address all of the company’s enterprise-wide cybersecurity risks and controls?
  4. What impact does a cybersecurity breach have on the financial statement auditor’s assessment of ICFR?
  5. In the event of a cybersecurity breach that results in a potential need for a contingent liability that could be material, what is the audit response of the financial statement auditor?

How CPA Firms Can Assist Boards in Cyber-Risk Oversight

Although cybersecurity risk management practices are typically beyond the scope of a typical financial statement audit, the CPA profession’s commitment to continuous improvement, public service, and increased investor confidence has resulted in a greater focus on this area.

One example is the cybersecurity risk management reporting framework developed by the American Institute of CPAs (AICPA). The voluntary framework, known as SOC for Cybersecurity, enables CPAs to examine and report on management-prepared cybersecurity information, thereby boosting the confidence that stakeholders place on a company’s initiatives.

Here are seven questions to ask CPA firms about these initiatives.

  1. How can the AICPA framework be used as a self-assessment tool to help management or the auditor (via a readiness engagement) identify opportunities for improvement in the company’s cybersecurity risk management program?
  2. How is the AICPA’s cybersecurity risk reporting framework used by auditors as part of an attestation service to evaluate management’s description of its cybersecurity risk management program? How does it determine whether controls within the program were effective at achieving the company’s cybersecurity objectives?
  3. What technical expertise do CPA firms possess that qualify them to perform a readiness engagement or an examination to validate effectiveness of controls specific to a company’s cybersecurity risk management program?
  4. The SOC for Cybersecurity examination cannot prevent or detect a cybersecurity threat or breach. Accordingly, what is the goal of the cybersecurity examination?
  5. What factors should be considered by the company and the CPA firm prior to engaging its financial statement auditors to perform the readiness assessment or examination for entities subject to SEC independence rules?
  6. What is the audit profession doing to help address cybersecurity risks from third party vendors or service providers?
  7. What other types of engagements are available to help board members with cybersecurity risk oversight?

These questions, of course, are just a starting point. I urge you to read the CAQ tool for more ideas on how you can—and here I switch to my smoothest TV-announcer voice—talk to your auditors about cybersecurity.

Cindy Fornelli is a securities lawyer and has served as the Executive Director of the Center for Audit Quality since its establishment in 2007.