Investors are struggling more than ever to find investments with optimal or even adequate risk/return profiles in the current post financial crisis era. Due to a low interest rate environment (caused by central banks’ quantitative easing), a particularly depressed performance of emerging markets equities, the recent crisis of gold and stagnant price of other commodities, is today a true challenge when aiming to achieve appropriate diversification with consistent positive returns over the medium and long term.
In this context, real estate is quickly recovering its central role in investor portfolios due to the main benefits of it being hedged against inflation, stable and positive yields, a low correlation to other asset classes and real asset status. In particular, among the most attractive investments in European real estate are Berlin’s commercial and residential property markets.
It was the end of 2006 when I happened to be in Berlin and I discovered its unconventional real estate market with exceptional returns and an attractive outlook, and the opportunities it offered. In almost 20 years of investment origination, I had never found an investment opportunity offering similar yields, strong upside potential and limited downside risk. I decided to create Optimum Asset Management as I saw the great opportunity international investors could benefit from with a company that could deliver an excellent level of service, comparable to the one offered by well-established asset managers and banks, but with the benefit of flexibility and the customised solutions of a small and client oriented firm.
[A]mong the most attractive investments in European real estate are Berlin’s commercial and residential property markets
Since then, Berlin’s real estate market prices increased by 60 percent and Optimum was able to successfully invest more than €500m spread over two funds. We are now in the process of launching our third fund. The reasons leading to the current exceptional situation in the Berlin real estate market are both historical and structural.
Unification brings change
From 1990 to 2005, Berlin faced the problematic issue of reunification – in the context of a stagnating economy – with a 20 percent unemployment rate and GDP growth close to zero. Public deficits combined with an enormous stock of property inherited from the German Democratic Republic of East Berlin resulted in a constant inflow of properties into the market through the government and public housing corporation auctions.
By that time, oversupply matched by weak demand – as a result of the poor economy – put enormous pressure on property prices, bringing them down to a level without comparison in the whole of Europe and other developed countries. Furthermore, before 1990 Berlin was managed by a vast amount of state subsidies that included the residential rental market, creating a legacy of low rental costs. This encouraged people to rent as opposed to buy, and led to one of the lowest homeownership rates in the whole EU area.
But Berlin is the capital of Germany, the largest economy in Europe and the fifth in the world by GDP, and important reforms conducted by the German government led to the development of fast-growing sectors such as tourism, life sciences, mobility and services with information and communication technologies. Indeed, since 2005, the situation has been significantly improving, and Berlin’s economic data has been constantly positive.
The city’s economy has grown continuously above the German average in the period from 2005 to 2013 and in the last year, its unemployment rate fell to 11.2 percent with a GDP growth rate of 3.8 percent, more than 0.4 percent in Germany and 0.1 percent in the EU28 countries. Moreover, Berlin is benefiting more than other German cities from the economic recovery because of the low cost of living, an excellent educational system, as well as its strategic position in the country and its technological prowess – it is the leading German city in terms of network infrastructure.
Structurally, the extremely low prices of Berlin properties have created a one of a kind situation in its real estate market. The prices for existing properties are, in fact, still below the cost of new construction and, therefore, poor new residential building activity has taken place over the past 10 years. This situation, coupled with a continuously growing population (currently, around 3.4 million people live in the city and in 2013 only, the population increased by roughly 50,000 inhabitants) led to over-demand for real estate.
As a consequence, the vacancy rate sharply decreased, standing now below two percent for residential properties. With a significant difference between institutional (whole buildings) and retail (single units) property prices – and due to constantly rising rents – yields for institutional investors are pretty stable at an average of 6.5 percent, with peaks reaching eight percent.
Berlin’s purchasing power
Even after growing for almost a decade, Berlin’s prices are still substantially cheaper than other comparable German cities, including Munich and Frankfurt, and other major metropolises in Europe, including London, Rome, Paris, Madrid, and even Athens. Moreover, new key developments are changing the city’s property market. Experts expect the homeownership rate to increase (currently around 15.6 percent against a German average of 45.7 percent), also thanks to a misbalance in the purchasing power of Berlin residents who, compared with other German residents, have a salary-to-property price ratio significantly higher (see Fig. 1) and can benefit from the positive incentive of low rate mortgages coupled with increasing property value.
Source: Optimum Research. Notes: Figures are from 2012
This is leading to the establishment and strengthening of a high-potential retail market, providing an exceptional exit strategy to institutional investors like Optimum who can buy entire buildings and then split them to be sold on a single unit basis at the much higher retail prices.
The profitable situation of the Berlin real estate market is already clear to both national and international investors. According to the latest data released by Jones Lang LaSalle, in 2013 the city’s market registered the highest liquidity within Germany, showing a continuously growing trend, and the number of traded properties was four times higher than 2012. In a growing, competitive and unique environment like the Berlin market, investment in real estate can follow two opposite approaches.
There are large traded portfolios, usually made by more than 3,000 units, built over many years and cyclically transferred among significant institutional investors. These portfolios can be bought at significant discount by different ways (for instance, through direct acquisition or takeover of the owning entity), and their significant size can provide relevant diversification and large-scale benefit in day-to-day management. However, I believe this approach might be considered as the equivalent of index investments in equity markets – their return is often mostly linked to the overall relevant market sentiment.
The opposite approach is to build a portfolio from the very beginning, which Optimum does, through a careful selection of properties deemed to be undervalued and, therefore, with a significant upside. I believe this approach represents the best way to exploit the potential of a still growing and non-homogenous market like Berlin, where specific and notable opportunities can be found.
On the other hand, it requires a specific structure and expertise to reduce due diligence and execution time to the lowest possible, because the best properties often stay on the market for as little as one or two weeks. Furthermore, besides a deep knowledge of the market and acquisition expertise, an active approach during the optimisation phase is needed when, through property management and careful investments in renovation of the properties, the upside of the portfolio can be fully realised.
Either way, for the next few years Berlin’s real estate market will continue to attract a growing number of investors, both retail and institutional, looking to benefit from its dynamic and unparalleled opportunities. As of today, the market still has a lot of potential, but the catching up process with its German and European counterparts has begun.
Forced to contend with regulatory changes and an increasingly competitive environment, the wealth management industry has had to take notice and emerge more cost-effective and responsible. Having been dealt the difficult task of streamlining a traditional operating model – while at the same time improving client engagement and personal service – wealth management has been subject to innumerable changes. It is this delicate balancing act that has seen technology take centre stage and firms satisfy changing client behaviour.
Even the onward march of the digital age and the unerring spotlight of regulatory scrutiny has failed to topple an industry that has been caught in a financial storm. Last year wealth management in the retail sector posted its sixth consecutive annual increase in assets under management and productivity, with assets up 11 percent and revenues up six percent on the year last, according to PriceMetrix’s State of Retail Wealth Management report. Dating back to 2009, the upward trend is proof of the industry’s ability to negotiate sometimes-challenging market conditions, marking the beginning of a new era for global wealth management.
Less had been more
Previously the industry has been buoyed by fundamentals, the most notable being strong economic growth in emerging markets, booming equity markets and, crucially, a rise in HNWI ahead of GDP. It would appear, however, that as a result of increased regulatory and pricing pressures, firms are more selective about who they bring on board, choosing to serve fewer and, on average, more valuable clients.
Previously the number of clients per advisor in 2012 came to 159 – falling in 2013 to 156. Nonetheless, average household assets throughout the same period increased to $562,000 from $490,000, mirroring the same pattern in household revenue, which was up to $3,670 from $3,300. The number of HNWI with $2m or more in investable assets also increased by 19 percent in 2013 to 7.7 percent, an increase of 6.5 percent on the year previously and 5.7 percent in 2012. The findings illustrate where the focus lies for managers today, as they look to HNWI to compensate for heavy losses inflicted by way of regulation, increased IT spending and sky-high client expectations.
Whereas assets under management are back to their pre-crisis highs, and, in the case of most emerging markets, far and above what they were previously, the pressures on revenue and profits are far greater. Revenue growth and profitability – when put alongside equity market returns – is seriously short, and highlights the importance of transforming operating models if firms are to remain competitive.
The circumstances have seen technology emerge as the go-to solution for many of the prevailing issues, and without it, many firms would likely struggle to keep pace with new and established market players – not to mention rising client expectations and regulatory pressures. As a result, firms are upping IT spending and integrating data, channels, people and processes as they do so. One joint report co-authored by Wealth Briefing, Weatherill and Advent Software entitled Technology and Operations Trends in the Wealth Management Industry shows the extent by which firms are beginning to see technology as a pillar of effective wealth management. The report shows that 60 percent of respondents have or will invest up to $5m on technology a year over 2012, 2013 and 2014, around 10 percent will then be investing between 10 and $20m annually, and another 10 percent will invest over $10m.
Those asked in the survey also said that the biggest technology-related challenge they faced was compliance with present and future regulatory requirements, with transparency at a distant second. Meeting regulatory challenges, therefore, accounts for the biggest share of spending, above even cost cutting and security. “Client expectations with regards to technology are fundamentally changing – not only driven by how digitised the banking industry is, but also their experiences in other industries,” says Sid Azad, Partner and Financial Services expert at Strategy&’s London office.
Adapting to the unknown
One area in which technology has emerged as an important differentiator is in reporting. Customisation and autonomy in particular are key areas of focus, as clients increasingly demand that they have anytime anywhere access to their assets. Here digital channels are crucial in building integrated wealth management platforms, capable of withstanding the changes – regulatory or otherwise – that come the industry’s way.
The focus on digital strategy and the development of new wealth analytics tools has also given rise to new market entrants, whose understanding of the digital space sets them apart from established competitors. “The new players are significantly more configured for the digital age than the traditional players are,” says Azad. By automating various back-end processes, these technologically savvy newcomers can eliminate hefty back office costs and still deliver a comprehensive and always connected service to their clients.
“The new players are also better at putting clients in control of their portfolios and helping clients co-create their propositions rather than being offered the standard two or three propositions. These new players are often able to offer better price points due to a more nimble and technology enabled operating model,” he adds. As such, a digital strategy for those in wealth management is no longer a choice but a necessity if they are to satisfy clients, streamline operations, cut costs and increase compliance across the board.
Much like the rest of the financial services sector, wealth management has come up against a host of regulatory hurdles of late. One Strategy& report, entitled Global Wealth Management Outlook 2014-2015: New Strategies For A Changing Industry, shows that in Europe, regulations have driven up costs by five to 10 percent for wealth management firms, becoming the single most expensive operational consideration on the books. Although the new regulations have been introduced to protect against corruption and mismanagement, no other factor has troubled firms to such an extent.
“Greater transparency on fee and performance is resulting in a fairly fundamental shift in client expectations, and therefore their wealth managers,” says Daniel Diemers, Partner at Strategy&’s Financial Services practice in Europe and the Middle East. “Historically, clients have often not been fully informed and appreciative of the various charges built into their underlying investments, and therefore how they could influence management fees by changing their portfolios.”
Firms must now make public their tax arrangements, forcing many into rethinking their offshore strategies, and making improvements to client disclosure in order to protect against mis-selling. What’s more, new pricing laws should serve to significantly lower costs for clients in the near future, narrowing already slim profit margins further still. “Regulatory changes and lack of clarity on future regulatory pressures is one of the biggest concerns of wealth managers,” says Diemers. “We believe that regulatory compliance has already added at least 10-15bps onto on-going costs-to-do-business due to a significant need for remediation and the constant flow of work to adhere to new regulations.”
Clients, whose appetite for transparency has increased most notably since the financial crisis took hold, have also fuelled the regulatory changes. As opposed to previous years, clients are demanding full disclosure across the board and the option to make informed executive decisions on how their assets are managed. “While regulations are contributing to a more transparent and competitive private wealth management landscape to a certain extent, an even bigger driver of transparency is the emergence of nimble, fully transparent wealth and asset management technology platforms,” says Azad. “These platforms are setting new standards for transparency which traditional players are being forced to match. We expect this trend will continue and traditional players will need to fundamentally change their operating models to achieve a significantly lower cost structure so that they can compete in a more transparent environment.”
Regardless of consistent annual growth in assets under management, traditional wealth management firms are only now beginning to adjust to a transformed industry. By putting client- centricity ahead of profitability and focusing on solutions ahead of mere services, industry leaders are redefining the foundations and bringing an increasingly sustainable and responsible shape to wealth management.
To mark this transformation, World Finance recognises those leading the way and making clear changes in the wealth management space.
When newly appointed Indian Prime Minister Narendra Modi tweeted “India has won, good days are here again,” you would think that his message was a reflection of universal jubilation across the country. However, while his landslide victory was more convincing than any in the country’s recent history, the joy felt by his supporters was met with equally vociferous dismay from his many opponents.
Upon his election in May, Modi was hailed as the saviour of India’s economy and the man who would kickstart the country into taking a dominant role in global affairs. Despite the welcoming tone from those fed up with the corruption and dynastic feel to Indian politics for much of the last few decades, there were also many that were dismayed by Modi’s victory. In particular, the country’s minority – yet considerable – Muslim community will have greeted his election with grave concerns that the government would not be acting with their interests at heart.
This sentiment stems from his role in the terrible riots seen in 2002 in his home state of Gujarat. During those riots, hundreds of Muslims were murdered by Hindu mobs, and Modi – a Hindu nationalist – failed to condemn them. It has meant that many of India’s Muslim community have immense ill feeling towards him, presenting a considerable hurdle for him to overcome.
During those riots, hundreds of Muslims were murdered by Hindu mobs, and Modi – a Hindu nationalist – failed to condemn them
Missed opportunity
The manner in which Modi’s Bharatiya Janata Party (BJP) swept to power surprised many observers, especially after the Congress Party dominated for so many years. However, the result shows that Indians had become fed up with Manmohan Singh’s government, and much of this resentment stems from the perception that India has wasted a decade when it should have been powering ahead economically.
The Congress Party had governed India for a staggering 55 out of the 67 years since independence. The defeat to the BJP was the worst performance in history, with just 44 seats secured in the lower parliamentary house – the Lok Sabha. This means Congress is not even the main opposition party anymore.
Upon his inauguration as Prime Minister in 2004, Singh was expected to oversee a period of rapid transformation. Singh had enjoyed acclaim for his economic acumen and previous experience running the country’s finances, as well as not being linked to the corruption scandals that had beset many within the Congress party. Many expected Singh to harness the country’s vast potential by shredding much of the country’s labyrinthine bureaucracy, therefore helping to create a more democratic economic powerhouse in Asia rival to China.
However, in the run-up to May’s election, many of the same calls for reform that were made 10 years ago were being heard once again. The lacklustre pace at which India’s economy has grown has led to Singh being dubbed a disappointing leader that has struggled to implement any meaningful change. Another crucial reason why Congress suffered such a heavy defeat was the long list of corruption scandals to hit the government over the last decade.
Notes: Post-2013 figures are IMF estimates. Source: International Monetary Fund
Corruption has become endemic throughout all levels of Indian society, but Congress suffered a multitude of scandals during its time in office. These include the 122 telecommunications licences awarded since 2008 under former minister Andimuthu Raja, which then had to be cancelled in 2012 after accusations of mis-selling. It’s thought that the licences cost India around $40bn and the scandal has been described as the country’s biggest to date. There was also a bribery scandal which hit the army in 2012, with a defence industry lobbyist offering an army chief $2.7m for ‘sub-standard’ vehicles. And there were a series of ‘cash-for-votes’ allegations to emerge from Wikileaks in 2011. These wrongdoings have done great damage to the reputation of the establishment in India, and it is Modi’s positioning of himself as a corruption-free outsider that has appealed to the majority.
Modi’s new dawn
Many observers want to know whether Modi will be able to return the country to the promising signs of growth shown a decade ago. Deepak Lalwani, Director for India at London-based consultancy firm Lalcap – which specialises in Indian investments – told World Finance that he had high hopes for Modi’s government, stating the appointment will hopefully bring, “a revival of the economy and a return to the higher economic growth trajectory seen in the last decade.”
In order to stimulate growth, Lalwani believes Modi needs to look at a number of areas that are holding back the economy. He says Modi must reduce the country’s spiralling inflation, while also accelerating the economic reforms that have long been promised by his party and their predecessors. He also calls for the government to “contain fiscal and current account deficits”, two important aspects that have got out of control in recent years. Immediately after the election result, however, Modi was provided with some good news on this front, with the current account deficit dropping to its lowest point in four years during the first quarter of 2014 (see Fig. 1). This represented a shortfall of just $1.2bn, compared to $4.2bn the previous quarter, and is thought to be as a result of higher tariffs that had slowed gold imports.
According to Lalwani, Modi’s vision of India is of a country with a strong economy and robust defence, carrying significant influence on the world stage. He believes that the government should be stripped back, with his mantra being “less government, more governance”. Modi’s performance as Chief Minister of Gujarat since 2001 – where he raised economic growth rates, improved infrastructure, eradicated corruption and cut down regulations – has led to the country’s millions hoping he can do the same on a national scale.
Lalwani added in a note, shortly after the election, that getting the economy started would not be easy, and that there was no ‘magic wand’ that could speed up growth. However, he said that such a large parliamentary majority for Modi would allow him to be a ‘decisive doer’; giving the country its best chance of passing some serious and meaningful reforms. Modi won’t get it all his own way, however. While he has secured a massive majority in the Lower House of India’s parliament, he doesn’t enjoy similar sway in the Upper House. “A key challenge for Modi will be to push legislation through the Upper House where BJP lacks strength. And successfully navigate through India’s complex federal structure, where state Chief Ministers play regional politics,” says Lalwani.
According to recent estimates by the World Bank, India’s economy will grow at around 5.5 percent during this year, a downward revision from January’s 6.2 percent forecast. While this is an improvement on recent years, it is not the soaring rate that many had hoped India would be achieving. However, the World Bank does expect growth to accelerate to 6.3 percent next year, and to 6.6 percent the year after. In order for Modi’s government to achieve yet further growth, there will need to be a solution to its soaring inflation, as well as a winding down of its famously prohibitive bureaucracy. While Singh made some decent steps towards deregulation by agreeing to the Indian Financial Code, thereby simplifying financial law, much greater strides need to be taken by Modi to ensure that businesses find it easier to operate, without having to tick a never-ending list of bureaucratic boxes.
Infrastructure and manufacturing
Perhaps the main criticism is that India should have invested in is its woefully inadequate infrastructure. For a country that has population of over 1.2 billion, there should be a vast network of infrastructure in place. Instead, the country’s road network is underdeveloped, its energy provision is severely unreliable, and its telecoms service is infrequent. While the rail network is certainly extensive, it still doesn’t serve many of the country’s poorer communities.
Notes: Figures from June 2013 to May 2014. Source: Trading Economics
For years there has been talk of building grand infrastructure schemes that would bring the country up to speed with the rest of the world and transform the lives of India’s many poverty-stricken citizens. However, for all the talk, little has actually been built. A total of 36 major infrastructure projects had stalled last year, and so Modi has a number of large schemes that need to be revitalised to help spur growth. Projects that need to be started or completed include many small airports, the Diamond Quadrilateral of high-speed trains, and the ‘Sagar Mala’ project that will better connect India’s ports.
Another thing that needs to happen is a boost to the manufacturing industry, and the subsequent job creation that will come from it. With millions of unemployed young people and a population growing at an alarming rate, India is seriously in need of stimulating its manufacturing base so that there are enough jobs to go around.
Many of India’s industries have been closed off to foreign investment for many decades, with protectionist policies being favoured over encouraging globalised competition. Regulations that limit the amount of overseas investment have led to a number of industries becoming stagnant. Modi is thought to be ready to loosen these rules, with arms manufacturing and defence industries seeing the limits on FDI removed (see Fig. 2), a drastic change to the current 26 percent restriction.
While Singh had long talked about reforming India’s FDI rules, getting anything implemented proved far more difficult, especially as he had to govern as part of a coalition. Modi has not got the same problem, and Lalwani thinks he will kickstart many of these relaxations to regulations. “Stalled reforms are expected to be revived quickly. Foreign investors will be welcomed and sectors opened to them if it is in India’s interests – for job and assets creation, for improved infrastructure and specialist technology.”
Building bridges
Inviting newly elected Pakistani President Nawaz Sharif to his inauguration was seen as a hugely symbolic step towards building bridges with India’s neighbour. However, it was also widely condemned by Indians that still blame the country for its supposed role in a wave of terrorist attacks in 2008 and 2009. A subsequent exchange of letters showed that Modi and Sharif were planning to “chart a new course in bilateral relations.” However, Modi is still yet to make reference to the massacres of Muslims in Gujarat under his watch. Until he addresses this issue, a large and influential part of Indian society will continue to distrust him.
Even though Modi is despised by a considerable number of Indians, a line needs to be drawn under the past. While he certainly should make some sort of gesture towards the Muslim community – an apology or a show of contrition – the fact is that Modi is going to be in charge of the country for the next five years. Lalwani feels that his divisiveness will be ignored if he is able to get India’s unemployment figures down. “The country needs economic growth, development and jobs. If he delivers on these in reasonable time he will win even more support.”
Getting stalled infrastructure projects off the ground should form the centrepiece of Modi’s economic policy. This can be done through a number of measures, including removing red tape and welcoming investment from overseas. But it will also require the government to be bold and underwrite the projects to get them off the ground. The announcement in June of an initial investment of around $5bn into an infrastructure fund is certainly a good start, but this must be kept up in the future. The news that Japanese and South Korean investors are interested is also a good sign that the country is adjusting itself to welcome more overseas cash to help spur economic growth.
While 5.5 percent GDP growth is certainly not a small amount compared with the expectations many have for India’s economy, it is somewhat lacklustre. The years squandered by Manmohan Singh’s Congress-led government mean that India has lost serious ground to China in its quest to become Asia’s economic powerhouse. Overcoming the many obstacles that India’s economy faces should be Modi’s primary concern, and getting the country to realise the vast potential it actually has will take a great deal of work.
However, achieving this must be done with the full support of parliament and the country’s business community, so that instead of India forever being talked of as merely a sleeping economic giant, it will actually rise up and challenge China for dominance of the Asian economy.
As newly anointed Prime Minister Narendra Modi sets about the business of building a modern, thriving Indian economy, he is seeking the help of foreign investors in funding the massive overhaul of infrastructure that the country needs.
“I believe Prime Minister Modi’s spectacular win will be seen as a ‘game changer’ for India”
Modi has said it is seeking as much as $1trn to spend on transforming its road, rail, and cities, by 2017, so that the country is able to cater for its vast population and harness it’s huge economic potential. He has been looking towards foreign investment to help with the funding of these many projects, something that many previous Indian governments have been reticent to do before.
Since Modi was elected in May, governments have lined up to praise his pro-business stance and focus on the economy. While the French are the first to send a senior minister to the country, it is expected that they will be followed by a number of other governments offering investments and strategic partnerships over the coming years.
Announcing the deal, Fabius said that the investment would help the two countries develop new technologies and ideas. “If you don’t have the share of technology and the share of finance, you can develop brilliant ideas, maybe brilliant, but [you will have] nothing concrete.”
Until recently, India’s biggest foreign investment partner has been Japan, which has invested considerable amounts into the colossal Delhi-Mumbai Industrial Corridor that will dramatically expand the regions transport, energy and manufacturing infrastructure.
Deepak Lalwani, Director-India at Lalcap, a London-based consultancy specialising in India investments, told World Finance that Modi’s election victory had heartened foreign investors. “I believe Prime Minister Modi’s spectacular win will be seen as a ‘game changer’ for India. Great expectations of foreign investors have been raised now of a reversal of policies by Prime Minister Modi. Slow approvals, excessive bureaucracy, sectors not being opened enough and contradictory policies caused “investor fatigue” in India in the last few years.”
He added that many other countries will certainly look to invest in India in the future, but it depended on concrete policy changes rather than rhetoric. “Other countries will follow France, no doubt. But a lot more money will flow in once foreign investors’ need for “show me, don’t just tell me” occurs in the hoped for positive change in policies. Time will tell.”
Fast food workers earlier this year tore themselves away from their tills and chip pans, choosing instead to take to the streets and protest against the gross margins of inequality that exist between them and their employers in the $200bn industry.
In among the ranks of disillusioned workers and union activists stood a low-ranking KFC employee, whose ambition it was to have her hourly pay raised to $15. The worker’s demands, however, were promptly dismissed, despite the fact that her superior, Yum Brands Chief Executive David Novak, enjoyed an annual compensation, according to Forbes, of $37.42m in the previous year.
Worst of all is that the ratio of executive-to-worker pay is not exclusive to the fast food industry, where it stands at over 1,000-to-one, and inequality is seen as a natural consequence of the capitalist system.
CEO pay increase:
875% (approx.)
1978-2012
Average worker pay increase:
5.4% (approx.)
1978-2012
Relative to the remaining 99.9 percent of earners, executive compensation has risen by an extraordinary rate in the past three decades, near enough doubling the income share of the top 0.1 percent of households through 1979 to 2007, according to the Economic Policy Institute (EPI). What’s more, research undertaken by the left-leaning think tank shows that CEO compensation through 1978 to 2012 increased 875 percent – double that of the stock market’s growth and far beyond the 5.4 percent equivalent rate for typical workers over the same period.
Granted, the chasm between executive and worker pay has existed for decades, but it is only in the previous 30 years or so that the distance between the two has reached such extremes. Whereas 50 years ago CEOs, on average, earned close to 20 times more than their typical employees, the reality today is pushing on 270.
Competition for executives has stiffened, purse strings have loosened, and as a result companies are attempting to lure executive candidates with increasingly excessive pay packages; some argue to the detriment of the economy.
Worst of all is that the increase in some instances has continued on its upward curve irrespective of productivity and profitability fluctuations, resulting in an increasingly disconnected labour market and a catalogue of consequences for those at the bottom of the ladder.
“Much of the increase in CEO pay has come from performance pay i.e. bonuses and share plans,” says Deborah Hargreaves, Director of the High Pay Centre. “However, there has been little link with company performance. These elements are increasingly taken for granted as part of overall pay instead of being a reward for exceptional performance.”
Discontent and disclosure
Fortunately, a surge in shareholder activism and a crackdown on corporate governance is today going some way to keeping a lid on executive pay. On September 18 last year, the US Securities and Exchange Commission (SEC) voted 3-2 in favour of a new rule requiring all publicly listed companies to disclose their ratio of CEO-to-worker compensation – though stopped short of enforcing a specific methodology. “This proposal would provide companies significant flexibility in complying with the disclosure requirement while still fulfilling the statutory mandate,” said the SEC Chair Mary Jo White.
The SEC ruling, however, is far from the only regulatory obstacle on the way to astronomical executive pay, and governments across the globe, in particular in the past decade, have instigated various say-on-pay initiatives to grant shareholders greater powers when deciding upon the issue of executive remuneration.
Across the pond in Europe, EU Internal Market and Services Commissioner Michel Barnier has unveiled fresh measures to cut short the widening margins of pay inequality that exist between workers and executives. Under the new EC measures, European companies must first seek shareholder approval for the gap before they’re allowed to push forward with their remuneration policy. And while there is no binding cap for the amount, companies must disclose clear, comparable and comprehensive information on the reasons why they have arrived upon their pay and employment terms.
“The last years have shown time and time again how short-termism damages European companies and the economy,” said Barnier when the proposal was first announced. “Sound corporate governance can help to change that. Today’s proposals will encourage shareholders to engage more with the companies they invest in, and to take a longer-term perspective of their investment.”
The central idea is that making pay disparity public should disincentivise companies from awarding bloated pay packages to executives, and transparency should reverse the upward spiral of executive pay, bringing oversized offerings to a standstill. And while it’s true that increased disclosure is an effective means of centring the spotlight on pay disparity, some suspect that the approach could actually have the opposite effect in terms of reducing executive compensation.
Peer benchmarking is a method utilised by many boards to arrive at an appropriate pay package for their executives, but releasing the executive-to-worker-pay ratio to the public could be seen by some as a green light for awarding similarly obscene salaries and bonuses.
Shareholder activism
It’s important that increased disclosure is coupled with appropriate action. Major shareholders were quick to oppose Martin Sorrell’s pay this April, after WPP announced that the CEO’s pay had risen by more than two-thirds in 2013 to reach £29.8m. Critics claimed that the raise did not in any way align with the interests of shareholders, and that such a sizeable package would raise costs and lower dividends as a consequence. Similarly, AstraZeneca’s most recent remuneration report prompted outrage among investors, many of whom were opposed to the measures. In total, 40 percent of shareholders attending the company’s annual general meeting refused to back the report, which would have increased Chief Executive Pascal Soriot’s base pay by three percent for the year and awarded him a further £4.35m in bonuses.
These instances illustrate that it isn’t just financial industry executives in the firing line, as has been the case historically, but also those in other sectors that have until very recently been considered relatively free of activism.
50 years ago CEOs, on average, earned close to 20 times more than their typical employees, the reality today is pushing
on 270
The most significant revolts began with the so-called ‘shareholder spring’ of 2012, which saw those at various companies – in particular those in financial services – rebel against overly excessive pay packets, and even depose certain individuals from the position of CEO. And although popular shareholder opposition failed to turn a positive result in every instance, the period served as an indication of how remuneration policies from thereon would be subject to sharpened shareholder scrutiny.
The wave of shareholder scrutiny that came crashing down on the likes of Aviva and Trinity Mirror left them with little option but to get rid of their executives. The circumstances at firms such as Citigroup, UBS and Barclays have resulted in an air of tension between boards and shareholders that to this day has not quite died down. Gone are the days when annual meetings were seen as little more than routine hearings, and in place has come an opportunity for disillusioned shareholders to have their concerns heard.
It’s clear, considering the rate at which equality-related policies are gathering support, along with the success of texts such as Piketty’sCapital in the Twenty-First Century, that there is a mounting interest in matters of inequality. And while executive compensation constitutes an ever-so-slight part of the wider issue, this is not to say that finding a resolution to spiralling CEO compensation is any less crucial.
Finding the right path
Executive pay looks to be entering into a new era in which pay, detached from performance, will be held to account. As shareholders gain more say on the specifics of executive pay, appeasing shareholders first time around at annual meetings will be seen as essential for boards looking to win their approval.
In decades gone by, shareholders have watched executive compensation reach stratospheric levels, regardless of the fact that margins have shrunk and productivity has fallen short of what it was. What’s clear now is that, increasingly, shareholders are opposed to oversized pay packets for executives, although are still unconvinced as to the best course of action to take.
“Some shareholders have become more vocal about excessive pay and they now have a binding vote on pay policy over the next three years,” says Hargreaves. “But many of them are short-term or not engaged enough, so it is hard to muster a majority vote against. That’s why we have always said they can’t hold companies to account on their own. We need more say for the workforce on pay with employees voted on to remuneration committees or boards.”
Despite greater powers for shareholders, executive pay continued on its upward curve in 2013. Analysis conducted by USA Today, using Standard & Poor’s 500 companies as a sample, showed that median CEO pay last year rose 13 percent to reach $10.5m, far above the three percent rise for the typical American worker.
Installing the mechanisms to vote down excessive executive pay and actually doing so are two very separate parts of a much larger issue.
Since the global financial crisis in 2008-09, the sustained suppression of interest rates by global central banks has contributed to broad-based inflation in asset prices, rewarding investors that have participated indiscriminately in the prevailing yield chase in global bond markets.
Short-term interest rates continue to yield close to 0 percent, resulting in investors suffering negative real rates of return after adjusting for inflation for short maturity holdings. With the Bloomberg European High Yield Index offering investors a yield-to-worst figure of merely 3.4 percent at the time of writing, high yield no longer represents high yield, and investors are being forced to stretch for yield at the expense of duration, credit quality and liquidity.
With 2013 representing a true annus horribilis for bonds – with investment grade bonds suffering their worst year since 1994, registering their first annual loss since 1999 (only the third time in 34 years the asset class finished the year in the red) and long duration bonds suffering heavy losses in 2013, with the Barclays US Treasury Index 20+ Years maturities returning negative -13.88 percent – investors are being forced to reassess risk exposures in fixed income portfolios as the 30-year-plus bull market in bonds seemingly draws to a close.
From May 2 to June 25, 2013, the yield on 10-year US Treasuries went from 1.63 percent to 2.59 percent, causing sharp losses in fixed income portfolios, as investors priced in stronger US economic growth and the withdrawal of Fed stimulus. With consensus forecasts suggesting that the yield on the US 10-year Treasuries will rise to 3.5 percent by the end of 2014, more challenges lie on the horizon for bond investors, as they remain overexposed to interest rate risk. It is against this backdrop that Byron Capital Partners is aiming to provide innovative solutions in the area of absolute return fixed income and relative value credit, with a focus on producing strong risk-adjusted returns while offering investors a liquid alternative to traditional long-only fixed income investing.
Byron Fixed Income Alpha Fund return
3.47%
2013
The search for yield
Greece, after announcing the world’s largest sovereign debt restructuring in history in 2012, returned to the markets in April 2014 issuing €3bn of a euro-denominated five-year bond. An order book of €20bn drove yields down to a remarkable 4.95 percent, despite Greece’s credit rating (Caa3 from Moody’s and B- from S&P). Spain, rated Baa2 by Moody’s and with net foreign liabilities of 114 percent of GDP, in April 2014 issued a 10-year USD-denominated bond at a record low (since 2004) yield of 3.059 percent.
Not only have peripheral European countries profited from investors’ search for yield, but Pakistan is rated Caa1 by Moody’s and issued its first USD bonds since 2007 in April this year at a yield of 7.25 percent for the five-year maturity and at a yield of 8.25 percent for the 10-year bonds. Weaker creditors continue to come to the market to take advantage of low yields and strong buying from investors, who are desperate for yield. This demand has led to continual over-subscription of new debt issues, resulting in reductions in coupons and protections and less transparency provided to investors (issuers have even refused access to historical financials in some cases). Going further down the credit spectrum in search of return remains challenging, as even distressed names are in short supply. Taking the definition of a ‘distressed credit’ as a name trading in excess of 1,000 basis points over US Treasuries, only four percent of the US High Yield Index trades with spreads in excess of 1,000 basis points over US Treasuries.
Faced with corporate credit yields continuing to touch new lows and credit supply offering inadequate compensation for fundamental credit risks, traditional bond investors have been forced to turn to equities, but their volatility can be problematic. For example, since 1972 the S&P 500 has fallen more than seven percent on 27 occasions. Furthermore, incoming legislation such as Solvency II, which will regulate the €7trn European insurance industry, focuses on ‘asset risk’, forcing insurers to evaluate the assets they invest in from a cost and risk budgeting perspective. Under Solvency II, a capital charge of 39 percent will apply for global equities but debt-related instruments are scheduled to be cheaper at 15 percent, forcing insurers to look to debt assets. However, with yields low and investors being forced to take more duration and credit risk, investors are now being forced to look at absolute return fixed income and relative value credit as alternatives to traditional long-only fixed income investing.
Byron Capital Partners launched the Byron Fixed Income Alpha Fund in November 2010, which focuses on absolute return fixed income and relative value credit. Furthermore, the fund operates in a UCITS-compliant (undertakings for collective investment in transferable securities derivatives) structure, domiciled in Ireland. The strategy works well in a UCITS structure, although leverage in UCITS is limited to 10 percent of net asset value so the quality of the asset management is truly tested. In addition, exposure to loans that tend to outperform in a rising interest rate environment are not permissible in UCITS funds.
During and following the 2008 financial crisis, the comparative advantages of UCITS funds manifested themselves and the structure addresses prominent investor concerns such as liquidity, regulation, custody of assets, transparency and risk management. UCITS IV provided the flexibility for absolute return strategies to be run effectively in a UCITS structure with the scope to offer hedge fund-like risk-return profiles in a regulated, liquid and transparent product offering. Both in and outside of Europe, the UCITS directive has evolved into one of the most widely recognised regulatory frameworks of investment funds, allowing investors to access absolute return strategies through UCITS-compliant onshore structures while obtaining increased transparency and liquidity. One of the most effective measures taken by the UCITS directive to provide investor protection is the requirement for UCITS funds to hire independent service providers such as trustees, auditors, administrators and custodians. In addition, UCITS funds explicitly lie outside of the AIFMD scope and already possess a European passport allowing distribution across Europe.
Low risk, low volatility
Now approaching its four-year anniversary in November, the Byron Fixed Income Alpha Fund has won performance awards for 2012 and 2013 from leading industry publications in very different market conditions for fixed income investing. The fund returned 7.43 percent in 2012 and 3.47 percent in 2013 and has run an average credit rating of BBB since inception, thereby not taking excessive credit risk. For the year-to-date through May 15, the fund has returned 2.69 percent.
Duration risk continues to be tightly managed, with the fund running duration at 1.95 at the time of writing. Furthermore, volatility is low at approximately 2.3 percent since inception and a premium is placed on risk management, with monthly value-at-risk at a 99 percent level of confidence currently totalling 1.39 percent. Hit ratios of individual trades (i.e. each trade is monitored for profitability) are monitored and stored for analysis and correspondence with the risk team. A strong emphasis is placed on matching the liquid profile of the investments with investor capital, in line with the UCITS directive. On account of offering investors weekly liquidity, the fund maintains a liquid portfolio of investments in order to ensure there are no mismatches between investor capital and the underlying asset base of the fund.
Importantly for investors looking to mitigate interest risk and diversify their fixed income portfolios, the fund maintains a low correlation against traditional bond indices, with a correlation of less than 20 percent versus the Barclays US Aggregate Bond Index. The selection of securities held is bottom-up driven, with the goal of identifying fundamentally mispriced idiosyncratic risk. Generation and implementation of short side exposure is more top down, macro-driven with the focus on identifying asset class, sub-asset class, sector or sub-sector shorts either to hedge out exposures in the long side of the book or express a negative view on a particular segment of the market. Themes on the short side that worked well in 2013 included but were not limited to shorts in US Treasuries that helped mitigate interest risk. The fund has historically been run with a net long exposure but has the ability to take a net short exposure that should serve it well in a secularly negative environment for fixed income and credit. In terms of current opportunity sets, the investment management team is focusing on selective areas of emerging markets following the re-pricing of emerging market risk in 2013.
With short-term interest rates in the developed world likely to remain low for the foreseeable future, a premium will be put on the ability to generate positive real returns without exposing investors to excessive duration and credit risk, as well as illiquidity. With the 30-year-plus bull market in bonds reaching a denouement and investors under increasing pressure to produce positive real returns from fixed income investments, the prospects for absolute return fixed income, particularly in a regulated structure, look favourable and offer a compelling alternative to a rotation into equities that arguably remain expensive on both a cyclically-adjusted and historical basis.
The biggest financial services firm in the Netherlands, ING Group, has raised €1.54bn from the sale of shares in its insurer NN Group NV. The IPO is the largest European listing in over three years, with ING selling 77 million shares at a starting price of €21 above the estimated sales price. The move has raised significant capital for ING which is looking to regain its footing following a bailout in 2008.
The move has raised significant capital for ING which is looking to regain its footing following a bailout in 2008
Including a conversion of €450m in mandatory exchangeable notes under an agreement with three Asian investors, gross proceeds from the listing amounted to about €2bn.
The sale of a 28.6 percent stake in NN Group brings ING closer to the end of a restructuring programme imposed by EU regulators and the proceeds will be used to pay debt and further unwind the firm into more of a stable bank.
Having raised a significant amount of money but still keeping a majority ownership in NN, ING shares rose 0.4 percent, giving the company a market value of €40.5bn.
ING had initially said that it would only offer 70m shares, but chose to increase the offering shortly before the IPO in order to meet ‘significant investor demand,’ a statement said. The company must sell at least 50 percent of NN by 2015 and be rid of the arm entirely by 2016, as part of the demands from the Dutch government, which gave ING a €10bn capital injection after it saw serious losses to assets backed by US mortgages during the financial crisis.
NN is currently considered the biggest life insurer in the Netherlands, based on gross written premiums, and is also the largest provider of mandatory pensions in Poland and Romania. With the offer price, the insurer is now valued at more than €7bn and its sale could finally bring ING’s finances back to solid ground.
ING, which will continue as a Europe-focused bank after the restructuring, also said that it had recently sold a remaining 10 percent stake in Brazil’s Sul America SA through a block trade for about €170m.
Like it or not, the duties of a CEO aren’t limited to what goes on in the boardroom. Taking that top job means entering into a committed relationship with a company’s bottom line, and it means always putting the welfare of that business above all else. A CEO drives the heart and soul of a company; thus, they become representative of that entity as a brand name. As long-established firms begin to crumble under the weight of dime-a-dozen start-ups, it’s become more important than ever for CEOs to take the helm and navigate towards unknown waters in order to assert their companies as strong, consolidated brands with unique selling points. That work undeniably requires a platform – and while many greying CEOs still harbour a phobia of all things social media, there’s no longer anywhere else to turn.
Social media isn’t just a passing fad. A quarter of the earth’s population claims membership to at least one social media site – and by next year, those numbers are forecasted to swell to over two billion. Global leader Facebook already commands an inbuilt audience of 1.28 billion. Meanwhile, niche sites like professional network LinkedIn are catching on like wildfire, growing at a rate of some 100 million followers per year. Those are figures that companies simply cannot afford to ignore. Customers, investors and the media all live, work and shop online. The sites they frequent harbour new and much-needed opportunities for growth. With companies already living or dying based upon their abilities to maintain strong online profiles, the time has never been better for company leaders to jump into the deep end and widen the scope of their public profile – and the quickest place to consolidate those strengths is via Twitter.
500m
Tweets sent every day
Be a good listener
At half a billion active users, Twitter is by no means the globe’s largest social media outlet; however, its audience is without doubt the web’s most active. Every day, 255 million people trawl through the site’s 140-character micro-blogs on the hunt for fresh news, entertainment and general insight. Around 500 million tweets are sent out on a daily basis, and the better the content, the more clout users gain. As a result, the site is naturally populated by scores of highly motivated PR units that help companies spew out official lines on new products and services. Yet while that facility is invaluable, it doesn’t capture the authoritative punch of words from a company’s leading man or woman. If CEOs wish to enhance their company as a brand, they can’t simply leave it to the drones in marketing; they need to be delivering insightful output on Twitter, too. At present, less than a third of top CEOs have profiles on the site; however, one survey by BRANDFog estimates that over 80 percent of corporate employees believe Twitter is now one of the most important communications channels in existence.
The day billionaire investor Warren Buffett joined Twitter, he gained over 1,000 followers per hour. Today, he has 843,000 – and while Buffett is now able to transmit his sporadic, innermost thoughts to that extraordinarily high volume of users at will, he’s also been given a direct line for feedback from hundreds of thousands clients, employees and members of the general public. That’s invaluable to a vast majority of customers who would have never been able to access the CEOs’ impenetrable waiting room. But it should be equally valued by bosses. Jacqueline Gold, the CEO of lingerie retailer Ann Summers, has learned that lesson only too well. Like nearly a quarter of all CEOs, Gold was initially concerned about joining the social media network because of the inherent risk of saying the wrong thing and causing some sort of backlash. But she flourished on the site. “I just think you can not underestimate the engagement value of Twitter – and also not to forget Twitter is the new garden fence so it is better to be in control of that and have your say,” she has said.
Now, Gold has over 43,000 followers, and gains more every day by seeking to engage with users in fresh ways. Examples include her weekly Women on Wednesday (#WOW) campaign, in which fledgling female business owners are invited to tweet any and all business questions at the £500m CEO. In answering those questions and building links, Gold has helped redefine public perceptions of the lingerie outlet as a thoughtful and hugely successful enterprise. Similarly, Virgin CEO Richard Branson has utilised Twitter as a forum for building ties with other aspiring innovators. With the help of his irresistibly cavalier take on business, the self-made billionaire has been able to rack up 4.2 million followers on the site. Yet he doesn’t clog his personal profile with one-way posts pushing Virgin’s latest products; instead, he engages with would-be businessmen from across the globe. Branson talks back. And more importantly, he gives advice.
Mark Bertolini, CEO of insurance giant Aetna, inadvertently chalked up similar victories using the platform. Upon joining Twitter three years ago, Bertolini was stormed with abuse from unhappy customers. Where such complaints would have likely fallen on the deaf ears of a corporate PR department, however, Bertolini actually listened. Last summer, he was the subject of abuse from hundreds of users after a colon-cancer patient vented on the site about hitting the cost ceiling of his health insurance plan with Aetna. Against all odds, the CEO actually reached right back to the patient via Twitter. Bertolini pulled some strings, and Aetna ended up covering the full extent of the man’s bills. 20 years ago, that result would have been inconceivable.
Digital wildfires
With the help of Twitter’s immense user base, the positive business impacts of online engagements are limitless. In fact, there are hardly any drawbacks for CEOs, save one: bosses had better know what they’re talking about. The site is littered with cautionary tales of routine business posts gone awry; therefore, it’s worth noting some general guidelines to follow when posting. First and foremost: keep it relevant. Fashion CEO Kenneth Cole caused public backlash by attempting to shove inappropriate plugs for his clothes label into posts about trending topics. Cole’s first foray into unsubtle branding came in February 2011, when Egypt found itself gripped in the bloody coils of the Arab Spring. As millions of users across the globe looked to Twitter for insight on the conflict, they were instead greeted (and appalled) by Cole’s two cents: “Millions are in uproar in #Cairo. Rumour is they heard our new spring collection is now available online”. After torrents of abuse, Cole’s company issued an apology on his behalf.
There’s also such a thing as being too relevant. Take the online misadventures of Carnival CEO Micky Arison, for example. In 1988, Arison decided to purchase the NBA’s Miami Heat for a cool $32.5m. Today, the team is worth almost half a billion. That’s largely because it boasts some of basketball’s best (and most expensive) talent. So, when its star players LeBron James and Dwayne Wade decided to walk out of offseason training as part of a league-wide players’ strike, Arison reacted poorly. The angry owner decided to vent his union negotiation woes on Twitter. Little did he know that was a strict violation of NBA league policy – and he ended up being fined a whopping $500,000 just for a brief, 140-character view on his stable of ego-driven athletes.
That’s not to say sharing important company information is always a bad thing, though. In July 2012, Netflix CEO Reed Hastings turned heads when he announced on his personal page that the video-distribution company had reached the milestone of users having streamed over one billion hours’ worth of films using the service. By the end of the day, the company’s stock posted a five percent gain. The Securities and Exchange Commission (SEC) was less than impressed. The regulatory body initially warned Hastings he may be liable for violating laws designed to ensure that all company investors have full access to any company information of notable material value. The SEC argued the announcement was unfair, as the general public wouldn’t have been able to see the information without Netflix having submitted an 8-K filing with the SEC. Hastings scoffed, arguing that sharing the information with Netflix’s 200,000 social media followers surely would have alerted more people about the company milestone than a regulatory filing. In a true sign of the viable impacts social media is forcing upon business, Netflix actually won the argument.
Bosses can’t afford to ignore social media anymore. In the UK, a recent PwC survey indicated that 91 percent of CEOs are currently seeking to strengthen their social media engagement strategies. Last year, there was a 55 percent increase in the number of Fortune 500 CEOs who had signed up for the social media site.
Sites like Twitter offer a formidable set of benefits. Would-be users must tread carefully, of course. Each company and its CEO should play to their strengths; for example, those who have never been called ‘funny’ may do well to avoid attempts at humour. Likewise, bosses must know their audience. Unloading a set of sincere personal views may allow the boss of a major corporation to appear more human – but there’s no point in doing so if those views end up outing them as a bigot.
But the benefits of social media engagement outweigh the risks. Sites like Twitter allow instant access to hundreds of millions of potential customers, clients and journalists, but they also offer leaders a chance to enhance public perceptions organically. Sometimes, all it takes to win over a customer is proof that someone is listening.
Marissa Mayer is a rock star. At just 39, the $300m CEO has already conquered a dynamic and growing industry. Mayer earned her stripes at industry behemoth Google. She signed on in 1999 as its first female engineer, and went on to take charge of the look and feel of its most important products. She was a significant presence at the company, and ensured her staff churned out product after product to keep Google ahead of the competition. She also implemented many of the corporate governance methods that established the search engine as a global business leader.
With a CV like that, it’s little wonder struggling rival Yahoo so desperately sought out Mayer’s help in 2012, when it lured her away from Google with one of the largest pay packages in Silicon Valley’s history. Ever since the dotcom bubble burst, former industry leader Yahoo has struggled to negotiate the various identities and roles of an online portal. Yahoo wasn’t quite sure what kind of company it wanted to be, and while its executives spent the better part of a decade trying to decide strategy, the $34bn firm’s best and brightest moved on to greener pastures. Google, Facebook and Apple all surpassed Yahoo by ploughing billions into R&D, acqui-hires and major startup deals. With that in mind, Mayer’s unenviable task has not only been to help Yahoo regain pole position in the tech world, but also to repair its broken corporate culture.
Marissa Mayer CV
Born
May 30, 1975
(Wissau, Wisconsin)
Education
BS in Symbolic Systems
(Stanford University, 1999)
MS in Computer Science
(Stanford University, 1999)
Honorary Doctorate
(Illinois Institute of Technology, 2009)
Experience
1999: Google (Engineer, Designer, Product Manager and VP)
2012: Yahoo (CEO)
A smart bet
The product of an idyllic, small-town American upbringing, it’s fair to say Marissa Mayer never expected to be tasked with rescuing one of the globe’s biggest tech giants. Throughout her youth, Mayer was dismissed as shy and antisocial. Yet the small-town Wisconsin girl wasn’t afraid to showcase her deep affinity for maths and science. After making her way to Stanford, Mayer excelled at philosophy, and decided to devote much of her time to the study of symbolic systems – which has since become a mandatory course for any aspiring Silicon Valley technician. She went on to earn a Masters in Computer Science, with a specialisation in artificial intelligence, interning along the way for UBS’ research lab in Zurich and landing no less than 14 job offers fresh out of grad school. The majority of those offers came from well-established and respected R&D firms. Instead, Mayer decided to bet on a scruffy start-up called Google.
When Larry Page and Sergey Brin convinced Mayer to join Google, the fledgling company had just 19 employees. She was interviewed across a ping-pong table the firm used for conferences, and agreed to sign on to lead its user interface and web server teams. She was Google’s first female engineer. Yet Mayer was confident she was surrounding herself with the best and brightest, and that Google had the ability to really take off – but only if the firm’s tiny team was willing to put in the work.
During her first two years at Google, Mayer regularly worked 100-hour weeks overseeing the site’s aesthetics. She found a niche as the guardian of Google’s characteristically crisp and clean user format. She obsessed over pixels and colour shades, and placed the consumer experience above all else. Her name ended up on the patents for some of Google’s most important products – and by 2005, her work had seen company’s search numbers skyrocket from a few hundred thousand per day to over a billion. Mayer was promoted and handed full control over the look and feel of Google’s heart and soul: its search engine.
Yahoo by numbers
1995
Founded
12,200
Full-time employees
84%
Rise in income, Q1 2014
$4.67bn
Annual revenue (2013)
$3.33bn
Gross annual profit (2013)
$35.7bn
Market capitalisation
Perhaps more significant than Mayer’s product contributions, however, were the corporate policies she implemented to help develop the culture at Google. Mayer turned heads and broke corporate precedent by negating middle managers and working directly with the lowly Googlers who were actually pushing the buttons. She also singlehandedly drafted a mentoring programme that’s since become a gold standard among tech firms: the APM scheme. Each year, Mayer handpicked a number of junior employees for the programme, which would see them take on a number of extracurricular assignments and intensive evening classes. The scheme helped Google cultivate its own in-house talent, and has since assisted over 300 engineers advance into leadership roles across the company. Meanwhile, to ensure her new managers possessed a true understanding of the company’s target audience, Mayer decided to recreate the technological circumstances of Google users throughout the office. Mayer refused to install broadband until the majority of American homes had done so, for example, and carried an iPhone because that was the globe’s most popular. She religiously charted every interaction between users and their Google products, and used that data to aggressively redesign seemingly minute aspects of the site and its thousands of apps. Her fierce attention to detail would go on to drive countless designers into the ground; however, Google’s rising popularity justified every strenuous peculiarity.
After Google went public, Mayer and her colleagues became rich overnight – and the media started taking an extreme interest in the tech firm’s leading lady. She was a different kind of tech boss. She wasn’t ashamed of flashing her cash, and was a bright, young female face in a sea of stereotypically unassuming men. Newsweek named her one of the ‘10 Tech Leaders of the Future’. Business 2.0 put her on its ‘Silicon Valley Dream Team’, and Red Herring called her one of ‘15 Women to Watch’. She clawed her way up every single list at Forbes, and by the end of the decade, Mayer had even nailed the cover of Vogue. Yet as Mayer’s public profile blossomed, she was about to suffer a lateral career move at Google that would go on to set the stage for her departure.
Searching for a hero
As the head of Google Product Search, Mayer was in charge of the company’s flagship product. Yet due to a convoluted set of circumstances (both personal and professional), in 2010 she was moved by then-CEO Eric Schmidt to head the firm’s local and geographical products instead. From the outside looking in, it certainly appeared to be a demotion. She was no longer reporting directly to the CEO’s inner circle, nor was she in charge of Google’s single-largest product. Yet Mayer has retrospectively described the perceived slight as a vital “learning experience”.
In her old post, she had supervised 250 product managers; now, she had over 1,100, and oversaw 20 percent of Google’s total headcount. Her teams were responsible for rolling out immensely popular products like Google Earth, Google Maps and Street View.
She also learned how to handle acquisitions. In 2011, she secured Google’s 10th-largest ever deal when she purchased survey site Zagat for $125m. What’s more, the acquisition inadvertently changed Google’s modus operandi, in that the portal no longer merely wanted to curate information – Google wanted to own it.
Major acquisitions since Mayer’s appointment
$10m
Snip.it (Social Network), Jan 2013
$30m
Summly (News), March 2013
$1.1bn
Tumblr (Blogging), May 2013
$50m
Qwiki (Video production), July 2013
$40m
Xobni (CRM), July 2013
Yet while Google was beginning to solidify its position as the globe’s leading tech firm, former ironclad Yahoo was taking on water faster than ever. At the end of the 1990s, Yahoo was the globe’s leading point of entry onto the web. Shares peaked at $118.75, and the giant scooped up every start-up it could get its hands on. Then, the dotcom bubble went splat. Suddenly, investors couldn’t stomach the idea of a company that did little more than curate a catalogue of risky ventures – and by the end of 2001, shares in Yahoo had plummeted to a worth of just over $8. As investment disappeared, so did the innovation. Board members failed to resolve the company’s various conflicting identities as a web tool and media source, and by 2011, a decade of reactionary management had all but doomed Yahoo to extinction. Yet for all the company’s faults, one particular investor still saw a glimmer of hope.
Third Point’s Daniel Loeb has always been an infamously active investor; therefore, when the fund manager decided to swim against the tide by purchasing a five percent stake in Yahoo in 2011, everyone knew he must be up to something. Most analysts struggled to work out just what it was Loeb saw in the criminally mismanaged company. Yet Loeb reckoned there were two massive advantages Yahoo was still clinging hold of: a 700 million-strong user base, and a blossoming investment in Asian e-commerce giant Alibaba. With a 24 percent stake in the firm (worth an estimated $10bn), Loeb seemed to think there was something in Yahoo worth saving. He went on to engage in an aggressive letter-writing campaign that saw him and fellow fund managers added onto the board, while convincing them to fire their fourth CEO in as many years. Loeb said he wanted to find a chief that would place more emphasis upon the cutting-edge products users so-craved. That’s exactly what he found.
A new hope
After some aggressive courting, Marissa Mayer was named Yahoo’s new CEO in July 2012. Shockwaves echoed throughout the valley, and analysts mockingly tallied up the laundry list of problems she’d have to address.
As Mayer strode into Yahoo’s world headquarters for her first day of work, she was brutally frank with her new colleagues. She told them Yahoo was going to shut its doors for good within just a few years if it didn’t turn around soon. It wasn’t just a lack of innovation Mayer was battling, but also a broken culture. Things had gotten lax at the firm’s offices. Car parks didn’t fill up until after 10am, and they were empty again by 4pm. She started by conducting top-to-bottom meetings with all of the company’s leaders. She scrutinised everything and everyone, and axed all of the deals former board members had pursued. She began hiring new faces – including former Google colleague Henrique De Castro as her new COO, and a private equity investor named Jacqueline Reses as her new HR head. Start-up exec Kathy Savitt was brought on as CMO, and the old guard were slowly pushed out. Mayer had her team in place; now, she had to get results.
Fortune 10 most powerful women in business, 2013
1 Ginni Rometty – Chairman, President and CEO, IBM
2 Indra Nooyi – Chairman and CEO, PepsiCo
3 Ellen Kullman – Chairman and CEO, DuPont
4 Marillyn Hewson – CEO and President, Lockheed Martin
5 Sheryl Sandberg – COO, Facebook
6 Irene Rosenfield – Chairman and CEO, Mondelez
7 Pat Woertz – Chairman, President and CEO, Archer Daniels Midland
8 Marissa Mayer – President and CEO, Yahoo
9 Meg Whitman – CEO, HP
10 Abigail Johnson – President, Fidelity Investments
Mayer’s change in direction started with the sale of some $7.6bn worth of stock in Alibaba. With cash in hand, the straight-talking CEO then turned to acquisitions. In her first 12 months, Mayer’s team spent over $100m on 21 companies. Later, in a particularly bold move, Mayer would go on to snatch popular blog site Tumblr for a whopping $1.1bn. Analysts hailed the move as a shift in industrial strategy, illustrating a newly placed emphasis on the prospect of user-powered ad revenues rather than an acquisition’s turnarounds.
In the midst of all that, Mayer also gave birth to a baby boy. But even the joys of motherhood couldn’t distract the CEO from the job she’d been hired to do. Mayer knocked down a wall in her office, had a nursery built and was back on the job within a fortnight. By the end of 2013, the firm was reporting a steady rise in profits. Yahoo share prices more than doubled, and the site is now racking up more web traffic than upstart Google for the first time in years. Engineers have adorned Yahoo offices with Obama-like posters that feature Mayer’s face above the word “hope”, and car parks are filled to the brim from 6am to 6pm. It appears the dying firm has found its salvation.
In April, a victorious Mayer announced that Yahoo had seen a remarkable 84 percent rise in income since 2013. “The company had finally returned to growth,” she said. Yet critics are still split over whether her long-term strategy will ultimately guide Yahoo out of the dark ages. After all, two years after taking the helm, it would be extremely naïve to assert Mayer’s performance at Yahoo has been flawless. She may be a woman of power, but she’s been heavily criticised for her lack of support in helping other women break through the glass ceiling of her industry’s heavily male-dominated hierarchy. Meanwhile, her cold, calculated style has continued to chase some of Yahoo’s most talented engineers into the arms of rivals like Google and Facebook.
Start-ups and the boom-and-bust nature of the web still pose enigmatic problems for Mayer’s company, and investors are still unsure whether Yahoo will be worth the sum of all its parts after Alibaba goes ahead with its impending IPO. Yet for all of the trials and tribulations Yahoo will undeniably face in the years to come, one simple fact cannot be denied: without Mayer, there probably wouldn’t be a Yahoo anymore. She was tasked with the impossible job of resurrecting the Titanic; but if she keeps playing smart, she might actually do it.
French banking giant BNP Paribas has pleaded guilty to criminal charges and accepted a $8.9bn settlement deal after years of investigations and hushed up meetings with US authorities. The banking group received its final judgement in a US federal court yesterday; after prosecutors proved that the bank and several key persons had breached US sanctions between 2002-2012.
According to the FT, the BNP board met over the weekend in order to give final approval to the settlement, after US investigations suggested that the bank concealed about $30bn of transactions for clients in Sudan, Iran and Cuba at a time when all three countries were under economic sanctions issued by Washington.
[T]he bank concealed about $30bn of transactions for clients in Sudan, Iran and Cuba at a time when all three countries were under economic sanctions
“This conspiracy was known and condoned at the highest levels of BNP,” Edward Starishevsky, an assistant district attorney in Manhattan, said in court when the bank pleaded guilty to one count of falsifying business records and one count of conspiracy. The investigation suggested that BNP had stripped identifying information from wire transfers so they could pass through the US financial system unnoticed for years and that this has been approved by some of BNP’s top bankers.
The criminal charges are a first in the banking industry and will set a precedent for coming cases in future months, US authorities said, as no other bank has faced criminal charges before. Aside from the record fine, BNP also faces a yearlong suspension on its ability to clear US dollar transactions, which is crucial for its international wholesale banking activity.
However, BNP and New York’s Superintendent of Financial Services, Benjamin M. Lawsky, said the bank had negotiated a concession with US authorities, delaying the start of the suspension period for about six months, giving the bank until January 2015 to make alternative arrangements for its clients to maintain their access to US dollar financing, TheNew York Times said.
The suspension will apply to the businesses deemed directly responsible for the alleged sanctions violations, including its oil and gas financing units in Paris and its offices in Rome, Milan, Geneva and Singapore, as well as clearing for other banks. BNP has been in talks with rival banks about its clients using their dollar clearing services to avert a complete loss of business in the areas affected.
Fine could prove detrimental On Friday, BNP’s Chief Executive Jean-Laurent Bonnafé wrote to staff preparing them for the punishment ahead.
“I want to say it clearly: we will be fined heavily,” Bonnafé said, adding that the “difficulties that we are experiencing must not alter our course,” according to Reuters.
The $8.9bn fine is sizeable in that it’s more than four times the record $1.9bn paid by HSBC two years ago and stands in stark contrast to RBS’ $100m and Standard Chartered’s $667m penalties paid in 2013 and 2012 respectively. The sheer magnitude of the BNP fine has triggered speculation about whether the French bank will need to raise capital to strengthen its balance sheet.
So far, BNP Paribas has put $1.1bn aside for penalties stemming from the US sanctions probes, but the bank has also sought help from the French government, saying it was the victim of ardent US authorities trying to use the case as an example for countering accusations that the Obama administration has been too soft on banks following the 2008 financial crisis.
In a letter to President Barack Obama, French President François Hollande said earlier this year that he respected the independence of the US judicial system but wished the case would proceed ‘on a reasonable basis’. Obama said earlier this month that he doesn’t meddle in US prosecutions, despite French officials issuing concern that a disproportionate punishment on BNP Paribas could destabilise Europe’s banking industry.
Heads will roll As part of the settlement, BNP will also part with more than a dozen employees, several of whom have already left the bank.
“BNPP employees – with the knowledge of multiple senior executives – engaged in a long-standing scheme that illegally funnelled money to countries involved in terrorism and genocide. As a civil regulator, we are taking action today not only to penalize the bank, but also expose and sanction individual BNPP employees for wrongdoing. In order to deter future offenses, it is important to remember that banks do not commit misconduct – bankers do,” Lawsky said in a statement.
Several newspapers have reported that Chief Operating Officer Georges Chodron de Courcel, was featured prominently on a list of executives who US authorities wanted removed. But the bank has since said Chodron de Courcel will step down at the end of June, at his request.
Consequently, Bonnafé did not hide the serious implications of the US investigation.
“We deeply regret the past misconduct that led to this settlement. The failures that have come to light in the course of this investigation run contrary to the principles on which BNP Paribas has always sought to operate. We have announced today a comprehensive plan to strengthen our internal controls and processes, in on-going close coordination with the US authorities and our home regulator to ensure that we do not fall below the high standards of responsible conduct we expect from everyone associated with BNP Paribas,” said Bonnafé in a statement.
Once paid, the billion-dollar fine will be shared between the Manhattan’s district attorney, the New York State Department of Financial Services, the Department of Justice and the Office of Foreign Assets Control, which all conducted probes into BNP Paribas’ misconduct.
World Finance: Now the move towards greater regulatory harmonisation has been shared by most, but do you think this is even a feasible plan?
Nick Jeffrey: Ideally we would like to see regulation harmonised across the world. Ideally. But that’s a little bit of a nirvana that we’re never really going to get. There’s too many barriers in the way of that. You’re never going to get international rules across the board.
We would like to see regulators continue to talk with each other, exchanging their views on the problems that they’re facing, that investors want them to address, and to have consistency as far as possible across the world.
But that’s a little bit of a nirvana that we’re never really going to get
World Finance:Marian?
Marian Williams: I would completely agree with Nick: utopia isn’t achievable, at least in our lifetime. I think what we do at the Financial Reporting Council, we work alongside the PRA, the FCA, obviously our counterparts both in the European Union and across the world, in terms of getting a better regulation.
As the regulator responsible for reporting and auditing in the UK, clearly our remit is quite wide. And also at the same time we set the codes and standards for our reporting in the UK. So trying to get cross-working, across all of those areas, is challenging. But it’s something we seek to do.
World Finance: Okay. Raj?
Raj Thamotheram: With the best will in the world, regulators and indeed all of us, are a little bit like the generals fighting the last war. Back in the 70s something like 80 percent of a company’s assets were due to the finances and the physical assets. Today that’s probably down to 20 percent. The stuff that matters are the non-financial assets, and that’s the key game in town. It’s the human capital, it’s the corporate culture, it’s the governance, it’s the behavioural governance, it’s the R&D, it’s the innovation.
The really big challenge today is how to get harmonisation of that kind of reporting. Because that’s how we can look forward.
World Finance: Now looking at harmonisation, first let’s talk about what needs to be disclosed in financial reports.
Let’s consider the repatriation of funds. Do you think that information needs to be included in financial reports, when it’s involving European companies? Marian.
Marian Williams: So essentially, in our Strategic Report – which was introduced at the beginning of this year – you would expect such challenges, or such information, to be part of what a company should disclose to its investors. Because clearly that is a part of what will help investors decide if they want to invest, or if they want to take their money from that company.
So I think if something is clearly material, then that should be disclosed in the financial statements.
World Finance:Okay, now let’s talk about The Takeover Panel. For instance, you are tasked with looking out for the public’s interest. Do you think that if there is a multinational takeover bid, that your organisation in any way should be involved in that process? Perhaps your remit might be too narrow in focus right now.
Marian Williams: At the moment the FRC does not have a role in takeovers as such, but we are responsible for the issuance of the Stewardship Code, which was issued two years ago, and we review it every two years. And that was really about promotion of the long-term interests of companies via the investors.
And so in a takeover situation, you’ve got a very delicate balance between who’s investing for the long term, and who’s investing for the short-term. And that’s quite a challenge to understand how the Stewardship Codeshould apply.
World Finance: Nick, what do you think of the Stewardship Code?
Nick Jeffrey: I think the Stewardship Code came around as a reflection that companies and their owners were not talking together. In some ways they were talking past each other.
That in itself was a reflection that periodically a company would produce five or six hundred pages, as you were referring to. There’d be this whole raft of information appear, and investors were saying, ‘What am I supposed to do with this?’
The Strategic Report that Marian was referring to, I’m a strong supporter of that. What that’s intended to do is to kind of stratify the information, to give everybody the same amount of information if they want it, but to direct different users of financial reports and annual reports as Raj was referring to, to a different degree of granularity. Depending on what they want and what they need.
World Finance: In its current form then, do you think it’s taking in all of those financial and non-financial factors that you’ve written about extensively, Raj?
Raj Thamotheram: The intent is absolutely right, and the encouragement from the FRC and government to greater stewardship is absolutely the way to go, but I think there’s a little bit more box-ticking than substance at the moment, today. So if you look just at the issue of mergers and acquisitions, what we see is very low transparency on the part of investors on the reporting of how they actually deal with it.
I looked at four investors who are at the top of the field, and actually to get the data of how they were voting took my researcher the better part of one whole day to be able to compare just those four investors.
What we found was that actually, the vote against mergers and acquisitions went from 0.5 percent to 50 percent. There is some reason for this huge difference. And I think that actually part of it is that the system isn’t working in terms of shining light on the key factors that investors should consider.
World Finance: Marian, will the system work better now that we have the ISB as well as the FASB working towards convergence in standards?
Marian Williams: The recent revenue recognition and standard that was issued by FASB and IASB was around getting one standard that could be implemented globally, which looks at reporting of how revenue should be reported.
I think that’s a very positive move, and we feel there’s something that we’ve worked closely with the IASB on all their projects, this one included.
So getting a standard that can allow consistency, comparability across the world, is very positive. However this has only really just been introduced, so you know, it’s probably too early to tell whether we can raise the flag of success, if you like.
World Finance: But the sheer fact that we have these convergent standards demonstrates that at the international level there is coordination that’s happening. Do we even need the government to be involved in financial regulation?
Nick Jeffrey: We definitely need the likes of the FRC! We definitely need audit regulators. And that was brought around at a time in the history of financial and corporate reporting when investor confidence had taken a knock.
Since the FRC and others have been cooperating at the international level, that has reinforced investor confidence in financial information. We’re very close, in the next maybe five years, to approaching the point of diminishing returns.
The point that Raj is making about wider information about a business is not just the numbers, but wider information about intangibles. Think about Grant Thornton’s business: our two main assets are our brand and our people.
World Finance:Raj? Do you think that we can trust companies to self-regulate?
Raj Thamotheram: You know, the thing is you can trust most people to do the right thing, but you can’t trust the people who can’t be trusted! And that’s where the role of the regulator is important, to make sure that there is a policing mechanism.
I think that Ronald Reagan said “Trust but verify”. We need that backstop in order for the voluntary system to work well. The bit that it’s not working well on – and this is the challenge looking forward – is that the things that are really important to assess a company going forward – the Capex, the return on invested capital, the human capital, the staff engagement – these things are currently very badly reported. This is why we need government intervention, to just turn up the dial and make sure that we start to deliver on what we need to be delivering.
World Finance: Okay, speaking – oh, did you want to add a point?
Marian Williams: Yes, if I can just disagree on that point. I agree on the point about giving more information where it’s relevant. I think the word relevance is really important to emphasise.
Human capital for instance, at the Financial Reporting Council, really wouldn’t make very interesting reading, but it may do at another organisation. So I think it’s really for… in my view and our view, it would be very difficult to police non-financial reporting.
However, I think what companies should be doing is liaising with their investors as to what is relevant. If it’s British Airways and its carbon emissions, or hotels and its occupancy, then that’s probably – it will stick more if investors really want it.
World Finance: Nick.
Nick Jeffrey: The Strategic Report. What that does really well, what the UK government’s done really well, is it’s given a framework or high level, minimum requirements, that allow companies that want or need to do this sort of reporting, in reacting to what their stakeholders want.
I think you’ve got to be very careful when you’re talking about governments stepping in to start setting reporting requirements in the non-financial area. Because I think what we really need here is innovation. And to my mind, we haven’t heard enough from investors and other stakeholders about why human capital is so important to them.
Marian Williams: Well we liaise with NGOs on what is important to them. And I think we have listened to them, and the value us listening to them. But I agree with Nick in terms of, it needs to be relevant. It should sit possibly in the Strategic Report, but if companies want to give more information because their investors want it, it should probably sit on their website.
What I think is really exciting is the Sustainable Stock Exchange Initiative, which potentially allows many stock exchanges to move in the right direction
So there is opportunity for companies to give more, but it may not sit on the annual report.
World Finance: I had a chance to speak with a small firm that was fined for falling under national accounting standards. Here’s what they had to say about the current state of financial regulation in the UK.
“The number of high profile cases coming to light is not resulting in the level of sanction that the public might expect. This is partly because big firms have deep pockets, and audit work requires judgement to be exercised by human beings.”
FRC, let me first pose a question to you. How do you expect these various groups to be able to keep up with the ever-changing nature of financial regulation?
Marian Williams: I think it is more challenging clearly for the smaller firms to keep up with financial regulation. But if you’re in the business of giving accounting, or being an audit firm, there are some requirements that you must comply with in order to meet those standards. And the FRC’s role is to make sure that they are behaving appropriately.
Just in terms of the cases, and I suppose specifically the larger firms, at the moment we’re looking at about 20 investigations. Of those 20, about half of them are in reference to larger firms. You’ve probably heard most recently of the Rover case, which, although it’s subject to appeal, the tribunal came up with the figure of £14m against Deloitte.
So the land has probably changed here. I think we’re looking through our processes to make them more efficient, post-reform.
World Finance:Nick.
Nick Jeffrey: I think the complexity issue, I’m afraid I’m not terribly impressed by that argument. If that’s the field we’re playing in, you’ve got to deal with that issue. And you’ve got to be prepared, if you want to work for large corporates, you’ve got to be prepared to deal with it.
World Finance:Now there are other means of policing of course. The European Parliament voted to force companies to hire new auditors at 10-24 year intervals to reduce the excessive familiarity between statutory auditors. What do you make of that, Nick? Do you think that is actually going to be achieved through this rotation process?
Nick Jeffrey: I think the environment that we’re now living in, audit is no longer a job for life. And by the same token you don’t give loads of other services to a big company’s auditor.
The idea of changing your auditor every two or three years would be harmful to quality. But changing them periodically, I think really as a market we ought to be able to cope with that. And I think it’s a good development. The package of measures that’s come out of Europe is well balanced. It’s not focused on one particular issue. And it reflects the investor sentiment that’s been happening in the market.
They don’t like lots of non-audit services going to the auditor. They don’t like audit being a job for life. They want periodic challenge.
World Finance: Okay, Raj?
Raj Thamotheram: The connection which Nick made I think is terribly important. The purpose of the audit is primarily for the investors. It is a mechanism to reassure the investors that the financial accounts and the other statements are true and fair. A due process of renewal of that contract allows for the prevention of capture of interest by personal relationships and other factors. And so it’s the connection with the trust that we spoke about.
We know we need to reestablish why that’s so important today, I think.
World Finance: What does that do to the monopoly that maybe the big four currently have in the industry? Nick, what does that do when you have audit rotation? Does this level out the playing field?
Nick Jeffrey: There are things that the FRC and other audit regulators can do to make sure that there is a level playing field. They can make sure that where appropriate they’re comparing audit firms that do similar sorts of work: they’re not comparing apples with oranges.
They can publish named reports on individual firms, which the FRC has done for a while now, and that’s extremely helpful for investor confidence.
When they publish those reports they can publish them at the same time. So we’re not comparing one firm’s recent report with another firm’s old report.
There’s a bit that the regulators can do. I have to say that the FRC is probably one of the better in the world at doing these sorts of things. I think the FRC can still be better though.
Marian Williams: So just on that point, I think Nick’s point is fair around… we publish the audit quality reports for each of the big four on an annual basis. In fact it was released last week. And on Grant Thornton’s BDO we publish those every two years. Now we’d look to publish that annually. So I think the point is well made.
World Finance: Raj, do you think that’s enough?
Raj Thamotheram: The ecosystem of players is I think the critical issue. And I think it’s not just auditors who can keep companies on the true path. It’s also investors.
This is where the regulatory bodies, not just the FRC, could perhaps step up. For example, let’s go back to the mergers and acquisitions example again. We know that all the data suggest that something like only 13 percent or 17 percent of mergers and acquisitions deliver the value that they’re stated to deliver.
Today there is no requirement for investors to report on why they voted in the way they did. Now the FRC could in fact ask investors to explain how they’re tracking that reporting, what they’re learning from it. This wouldn’t be micro-managing, it would just be asking another aspect of the value-adding function.
Now that then creates space for the auditors to do their job better. Because there’s another player in the game, having some insight. It’s very hard for auditors to challenge their sort of fee-paying client on some very sensitive issues. So I think it’s an ecosystem.
World Finance: Do you think that we have seen a maturation of the financial reporting community in terms of… I mean even if we look back to the 1970s where we had the Nestle babymilk scandal, which everyone is aware of. In the aftermath of that scandal, we saw many indices that came to birth, including the FTSE4Good Index, reporting on what people wanted to know in terms of those investors who were looking for that additional information as you mentioned. But how does an organisation such as the FSC, or another one, then say, ‘let’s look at this index versus another’? How do you measure the merits? Raj?
Raj Thamotheram: I fully agree that regulators can’t micro-manage companies and tell companies what to report. But I think there are some areas where the gaps have been so consistent and so long-lasting. I can go back to human capital, for example.
Say for example we’re invested in two retail companies, and a retail company changes its management and starts to lose the engagement of its staff, and starts to have a staff turnover. We know that that’s a lead indicator of risk. But currently there’s no requirement to report on that.
So unless investors have consistent reporting on some standards, the system won’t take it into account. It’s not possible for passive investors to take a little bit of data here, but if there’s no data here, kind of compare it.
So I think there’s a levelling that regulators need to do around material issues. And it’s happening, but it’s happening a little bit too slowly.
World Finance: Nick, you have an intimate understanding of course, being on the front lines of auditing accounting standards, and where your clients are willing to apply them. Corporate governance: how important really is it to them?
Nick Jeffrey: It’s part of the mosaic that helps to bring the whole thing together. Just to go back on something that Raj was saying, I think we’re arguing about shades of grey. I think Raj seems to be towards the end of the spectrum where he wants more impetus, because companies aren’t doing what investors need now. I’m slightly the other way; I would say that it’s for investors to drive their informational needs, and not to rely on governments too much.
For me, it’s for investors to be more vocal about what they want to know about sales per square metre, or staff turnover. It’s for them to be more vocal about the things that drive their investment decisions.
World Finance: What do you make of this criticism? Do you think that the FRC and other regulatory bodies have shouldered enough of a burden, and taken action as a result?
Marian Williams: I think the Strategic Report is a good example where companies have to give details of their principle risks, and therefore in this situation companies should be providing the information that is important for shareholders, that is relevant.
We just need to watch the amount of information. A project that launched this morning actually was our Clear and Concise project, where we’re looking at what is relevant to stakeholders and investors.
I think we’re all saying the same thing, I think really, is what is really relevant to investors? And two retailers, for instance, clearly if one starts giving profit per square foot, then that might make the other provide that information too. So I think if you see some leadership in that particular topic, or in that area, then you might find others follow. But I don’t think really it is for the regulator in this instance, for non-financial reporting, because as I said it’s a very deep ocean. I think we’d be drowning.
World Finance: I think you would get a faster reaction if you leave regulation to one side and let the market innovate. And if you let the market react to what investors are asking, or to what competitors are giving.
The challenge there is we’re going to fall back again into that FASB, IASB divergence. And then we’re going to have to knit this thing together.
So the trick I think is to do the learning from the last experience ahead of time, and try and create a convergence standard.
What I think is really exciting is the Sustainable Stock Exchange Initiative, which potentially allows many stock exchanges to move in the right direction.
We are definitely arguing about gradations, but for me it’s not an either/or situation. Everyone needs to be in the game.
World Finance: In terms of financial reporting, where would you say you would add more information relating to how to enhance investor relationships, or pull back?
Marian Williams: I suppose I would look at the characteristics really. So I think materiality, clearly. If it’s material to a user of a financial statement, that must be in. It must be relevant. But at the same time it must be concise. So you’re trying to balance the two, which is really challenging.
World Finance: But when we’re looking at 400, 500 pages of reporting, while the intention might be right. Do you think that the European shareholder is going to sit and read through every single page of that report? Or only focus on what’s key? And should the rules and regulations as to what’s being reported in the basic report, should that be changed faster?
Marian Williams: You know, your challenge is fair. And I think there’s probably something to think about in innovation that Nick mentioned earlier, around how can companies get smarter with where they put their information. There may be something to think about there.
For instance we’re looking at a new project on reporting in a digital world. So maybe there’s something there, around how companies – not what their report is, but where they report it and how they report it.
Raj Thamotheram: I think that’s where the potential of, kind of, collaborative action between regulators and investors could be really potent.
Because the great thing about investors is, by consensus, they can define a set of standards and criteria with companies on what’s most material. And that being not regulated can evolve every two or three years as understanding evolves. And I think there’s a real potential here, between what regulators can do, and what investors can do.
I just want to challenge this though. We keep… we used your phrase, ‘non-financial’. But you know, when you look at Lehman’s, or BP, or Rentokill, or Parmalat, or Avendi, or WorldCom. To call these things non-financial misses the strategic importance of them. And I think that’s what we’re continuing to do sometimes, to miss the strategic importance of these superfinancial, or extrafinancial – whatever we call these things!
Because the great thing about investors is, by consensus, they can define a set of standards and criteria with companies on what’s most material
Now how to capture that I think is the challenge for both regulators and investors, supported by auditors. So I think you’ve framed the discussion extremely well.
World Finance: But I think what we also need to consider is that there are people, companies rather, that are doing this well. You work with some of them. Can you tell me who is doing this well, who is incorporating this kind of information, if you want to use a term other than non-financial?
Raj Thamotheram: You know, a company like Unilever is well experienced – and not just for PR reasons, but over a long period of time – at integrating into all aspects of its strategic planning and its remuneration design, long-term incentives to take into account these sustainability factors.
So the current CEO came in with a desire to double his financial targets and halve his carbon footprint.
Not a trade-off either, a win-win.
That’s not yet the norm, and I think that’s our challenge. Because that’s what society needs us to do, we need to rapidly move to greater resources efficiency, better organisational governance, behavioural governance cultures, and a more empowered and engaged workforce.
Now that examples exist, we need to move it into the norm of practice.
World Finance: Grant Thornton must work with some big names out there; is there an appetite for change similar to what Raj has been discussing?
Nick Jeffrey: We react to the pressures that are in that environment. And I think we as a profession could be smarter and stronger in advising the companies that we work with, and the investors that we work for, to help them understand what is really material to the users of their information, if I can put it like that: the information that goes out there.
Not to just put everything out there in reaction to what they think a regulator might react to. We’ve got to be stronger in saying to the companies that we audit, ‘You don’t need that bit of information, it’s not material to users.’ And we need to be stronger in saying to regulators when they come in and rightly challenge us on that, ‘It’s not material’.
World Finance: Well it sounds like the innovations really have to take place at various levels, not just at the regulatory level, but even in the way that companies perceive their role in this world and their long-term interests.
Well Nick, Marian, Raj, thank you so much for joining us today, now, have financial regulators and governments done enough in policing this industry? Tweet us your thoughts @worldfinance and remember to include #FinancialReporting.
Brazil’s new Clean Companies Act came into effect in January of this year. Under the new law companies can be fined up to 20 percent of their gross annual revenue, if found liable of corrupt activities. World Finance speaks to respected lawyer Antonio Giacomini, Partner at Andrioli, Giacomini, Porto e Cortez Advogados to find out about the global implications of the act.
World Finance:Antonio: what does the Clean Companies Act do?
Antonio Giacomini: Well the Clean Companies Act, also known as the Anti-Corruption Law, provides for certain penalties when a company or its officers are found guilty of acts of corruption.
One of the most important features of this legislation is the high penalty: you know, they can be fined up to 20 percent of their annual income. Mergers and acquisitions will also be affected, in the sense that acquiring companies may be found responsible for penalties that were imposed on acquired companies, up to the assets that were transferred.
World Finance: And just like anti-corruption laws in the US and the UK, it will apply to companies’ activities anywhere in the world, provided they have presence in Brazil? Is that right?
Antonio Giacomini: Indeed; much like in the UK and the US, a foreign company that has a relevant investment in a Brazilian company will be affected, as much as multinational Brazilian companies. So companies should be aware of the changes of this new legislation, and should also understand what the implications are when doing business in Brazil and with Brazilian companies.
[A] foreign company that has a relevant investment in a Brazilian company will be affected
World Finance: The law has been criticised for having so many levels of enforcement; what are the concerns?
Antonio Giacomini: Well there are basically two issues, there are two levels in this new legislation. One is the administrative level; the other one is the judicial level.
At the administrative level, the government, or the legislation, is looking more to imposing penalties on the companies and the officers. While on the judicial level, the focus is to cease assets and to close down businesses that have been practising corruption. Which is something that the government – and of course, a lot of Brazilian companies – are worried about, and want to prevent or terminate those practices.
World Finance:So do you expect it to do more good, or more harm?
Antonio Giacomini: In truth, it’s quite difficult to foresee if it will do more good or more harm. In my opinion, in the long-term, it will surely do more good. But in the short term, we do have some things to sort out.
The government has several levels of administration – you know, the municipal, the state, and the federal. And the Brazilian constitution would allow the state and the municipal bodies to issue regulations with respect to this particular legislation. So one of the concerns would be that there might be conflicting dispositions in these regulations.
Another concern is that before this new legislation, we already had criminal laws in place, that to a certain extent would cover those criminal acts.
You know, the concern is that there might be cumulative penalties, depending on the new regulations that are to come. But of course, we understand and we believe that the regulators will be attentive to that under this new statute.
World Finance: Another interesting legal development in Brazil is your internet anti-spying bill. What’s the latest?
Antonio Giacomini: Well first if I may; it’s not an anti-spying legislation, properly speaking. The thing is, the government wanted to take the opportunity of an internet regulatory framework bill of law that was in Congress to include certain articles that would deal with anti-spying provisions.
The government was truly concerned in rumours, or some… I don’t know if I can say this, but the Snowden situation? It was mentioned that the government was being spied on, and some Brazilian companies were being spied on. So the government decided to include that in the bill.
[O]ne of the concerns would be that there might be conflicting dispositions in these regulations
But fortunately the government decided to withdraw its proposal in order to approve the bill in time for an internet forum that took place in Brazil last month.
So the government decided to take this away, and approve the law as it should have been. As a Marco Civil, as we call it, which is a law or legislation that deals with internet service providers. And of course, users of the internet.
World Finance: And what other legal changes have been affecting your clients recently?
Antonio Giacomini: Well quite a few; but one in particular that’s been quite interesting – a change that the government did by approving last year’s budget. The government did veto a couple of articles. One of them in particular had to deal with indexes that adjust the government’s contracts with private companies, or companies that enter into public biddings.
That has been the first time in several years. I believe the government will issue a decree in the near future to deal with the situation. Some people understand this to be a good move, in the sense that it does not prevent the government from being flexible with the entities as far as adjusting the contracts. And some people are somewhat reluctant to accept that this is a good change.
But of course with the new legislation in place – especially the anti-corruption legislation – we tend to see this as a good move, and give more flexibility to the government and to the entities that do business with the government.
World Finance: And finally, the last time we met, you were simply Andrioli e Giacomini, and now you have Porto and Cortez. So what do these new partners bring to the table?
Antonio Giacomini: They bring a lot, we are very happy to have them. Luciana Porto is developing our consumer practices groups, and also the civil litigation practice group. And Cris Cortez is developing our intellectual property practices group.
We’ve always thought of ourselves as a small-to-medium law firm, and we’re rethinking that. We’re growing, of course with the help of everyone who is in the firm. And with the new businesses that they both brought to the table and to us. So we’re very excited and happy.
Some challenging new times ahead of us, I would say.
Japan’s consumer prices in May rose to an annual rate of 3.4 percent, marking the fastest rise since April 1982 and a knee jerk reaction to the country’s April tax hike. Data released by the internal affairs ministry on June 27 showed that consumer prices had experienced a slight uptick on the 3.2 percent equivalent rate a month previous and that deflationary pressure has eased somewhat for the time being.
[H]ousehold spending in the year through to May plummeted eight percent, representing a poorer performance than most analysts predicted
Japan’s sales tax was bumped up from five percent to eight in April, as policy makers sought to ease the country’s spiralling public debt, which, as of this moment, stands at approximately 230 percent of national GDP, and represents the highest rate in the developed world. Excluding the effects of the tax hike, however, Japan’s core consumer inflation eased slightly on the month previous, again encouraging the otherwise bullish BOJ to maintain its monetary stimulus efforts for the immediate term.
Ignoring the effects of the tax hike, consumer inflation in May came to an annualised rate of 1.4 percent, slightly less than April’s 1.5 percent equivalent. More shocking is that household spending in the year through to May plummeted eight percent, representing a poorer performance than most analysts predicted. The increase in May, however positive, is some way short of the BOJ’s target of two percent, though the institution remains optimistic that emboldened labour market conditions will soon translate into increased spending.
Japan’s unemployment rate hit a 16-year low in May of 3.5 percent, and 370,000 jobs were added in the last year, leading the BOJ to hope that firms will look to increase wages and, thus, boost inflation. The rate, says the BOJ, is close to full employment and should serve to boost consumer confidence in the typically volatile economy.
Although the country’s core inflationary rate is short of what it was, the results fall in line with analyst predictions, which say that the rate will slow, before gaining pace again towards the latter stages of the year. “The rebound in retail sales and the renewed decline in the unemployment rate in May confirm that the slump following the consumption tax hike was short-lived,” according to Marcel Thieliant, Japan Economist at Capital Economics. “The recovery in the “willingness to buy durable goods” component of consumer confidence suggests that household spending should continue to improve in coming months.”
