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Wednesday, 18 October 2017

Today's great Swiss idea could be seen as angry demagoguery tomorrow

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Those on the right accuse me of being too left-wing. Those on the left accuse me of being too right-wing. Those in the centre think of me as being quite fair and reasonably balanced. I, for myself, sometimes think that I simply can’t make up my mind. That is how I feel about life this morning.

Anthony Peters, SwissInvest Strategist

This weekend, the Swiss turned out to vote on a referendum capping executive pay, especially compensation for failure. The vote against excess was carried by a popular majority of 67.9% – the third-highest approval vote for a popular referendum in the country’s history and of those there have been hundreds over the years – and sets a new standard in reining in some of the near criminal compensation nonsense which has befallen our companies and our economies.

The referendum was enforced by a popular initiative which traces its roots back to 2006, well before the onset of the current crisis. It was formally titled the Abzocker-Initiative which translates fairly literally as “Anti-Rip Off Initiative”.

The fact that it played straight into the financial crisis is as much by default as it is by design and yet it did bring about the withdrawal of a golden parachute offered to Daniel Vasella, the outgoing chairman of Novartis, said to have been worth SFr 74,000,000.00 and which was supposedly the cost of an anti-compete clause in his exit agreement. This has even me dusting off that copy of Das Kapital which I haven’t taken off the shelf since my late teens.

The proposed legislation supposedly places power back in the hands of shareholders which is, a priori, a wonderful idea. However, as we City folks know, we don’t buy and hold stocks in companies we have an interest in, but in ones we think are undervalued and which will do well for us – not the companies, the stocks. My stockbroker never sends me a list of talented directors and their utterances with respect to the future of their business. He sends me a chart of the stock price overlaid with the performance of the peer group index and an arrow pointing north.

Since the crisis hit, especially in the banking sector, I have often asked what would have happened had the chairman of a bank stood up at the AGM and declared that his bank had made a 10% lower ROE than the peer group because he did not believe in the peer group lending practices. What chance he would still have been there the following year to present the results again?

Not too high in my estimation. And why? Those level-headed shareholders in whom the Swiss initiative places such high responsibility would have had him hounded out. “We want our dividends!” The concept of shareholders having a longer-term perspective on the world than the management are largely rubbish. There is – a sweeping statement, I know – quite clearly as much if not more short termism in the shareholdership as there is on the management floor.

I know Switzerland too well and it sports a system where the legislative wheels turn much slower than in other countries; thus, I have no doubt that the implementation of the proposed legislation will take many years and what comes out of the process might well be something very different than had been intended by the voters.

This is not always bad, for today’s great idea might look like misguided demagoguery in years to come. A significant part in the country’s economic success is built on its inability to respond to populist knee-jerk reactions and a legislative process which weeds out the super-enhanced varieties, leaving a core of legislation with a strong DNA. It might be frustrating but it works.

It would be a huge mistake for other countries (or single unions which shall remain nameless) to try to immediately copy the Swiss model for the final outcome of yesterday’s constitutional referendum might prove to look very different by the time the corresponding detailed legislation is promulgated.

Taking the mickey

The populus is angry but the populus can also be angry when there is too much snow in a winter and equally when there isn’t enough. It is evident that senior executive compensation has gone off the scale and that golden hellos, golden goodbyes and golden hand-cuffs are out of control.

Nevertheless, government has no more right to spy on those in the boardroom than it has on those in the bedroom. Compensation committees should now spend more time reflecting and less time justifying their past actions. I doubt the competence and the motivation of shareholders as much as I do that of lawmakers. You must agree, SFr 74m really was taking the mickey for someone who did nothing more than the job he had been employed to do.

Meanwhile, on the subject of competence, the US President has signed the sequestration legislation and, although not mentioned in anything I have read, the US has in fact now fallen off that much discussed Fiscal Cliff. I know not why, but in the past, when financial disaster has faced Washington, the White House and the Hill have sat down together for as many days as it takes to thrash out a solution. Not this time.

If in doubt, sell bonds, buy equities and increase your exposure to commercial real estate. Why? Events, my dear boy, events

President O’Bama didn’t call in the opposition until Friday morning. This smacks of him having held the gun to his own head and then having asked John Boehner to pull the trigger for him. Alas, the Dow closed up 35 points. I did say that I thought the sequestration issue was being overcooked – it looks as though markets agree with me.

Measures in Beijing

Finally, Chinese indices closed sharply down – the Shanghai by 3.65%, the Shenzhen by 3.54% and the CSI 300 by 4.61%. Within these, the property sector got flattened to the tune of 9%–10% as the government introduces sharp capital gains tax legislation – I think it’s around 20% – on real estate. This is aimed at bursting the property bubble which many had argued doesn’t really exist.

Construction might be a key driver of Chinese growth but if it is out of control, as the authorities seem to believe, then these measure come not a minute too soon. It might well lead to a slowing of growth but if that was predicated on a bubble formation, then Beijing must be congratulated on its decision not to follow the Spanish growth model. Chapeau!

So much going on and I can’t make up my mind. Nevertheless, if in doubt, sell bonds, buy equities and increase your exposure to commercial real estate. Why? Events, my dear boy, events.

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