info suisse Spring 2016
Law
May 2016

The Myth of Ownership

(James Breiding)
Less than a generation ago, Swiss multinational companies were the predators on the global theater rather than the hunted. Times have changed. Within the last 12 months, a substantial portion of the Swiss industrial treasure - HolcimSikaKuoni, and now Syngenta - have, or will soon experience new ownership. To many it is not clear whether any of these maneuverers represent progress or regress. Do they result in more competitive companies; more attractive employers; higher tax revenues; or superior credit ratings?

What does ownership mean and how has it evolved over time? Are these isolated exceptions, or a growing trend of foreign conquest of the Swiss industrial base, upon whose viability we all depend?

Ownership has long been considered the DNA of capitalism; the driving force of innovation; the incentive for undertaking entrepreneurial risk; and the reason scientists prove themselves wrong time and time again until their chance discovery leads to a commercial breakthrough. Given that Swiss AG seems increasingly ‘up for sale’, it occurred to me that it was a good time to reflect on who owns Switzerland most important companies. What can the owners expect and what is expected of them?

Shareholders of Sika, Syngenta and Holcim do not have the right of possession or right of use. Nor is ownership at the exclusion of others, but shared. If shareholders go to the company premises, they will more likely than not be turned away. They have no more right than other customers to the services of the business they “own”. The company’s actions are not their responsibility, and corporate assets cannot be used to satisfy their debts. Nor do shareholders have the right to manage the company in which they hold an interest, and even their right to appoint the people who do is more theoretical than real. They are entitled only to such part of the income as the directors declare as dividends.

In practice there is a stronger case for asserting that a company, if not ‘owned’, is at least ‘controlled’ by its directors and management than there is for its shareholders. To call shareholders ‘owners’ of Swiss companies is thus a misnomer; and to assume that they will, or indeed can, act in a responsible manner in the long-term interests of the company may be misleading and dangerous. In most instances, one name is recorded on a share register; someone else makes a decision to buy or sell; someone else decides how the shares are to be voted; and someone else benefits from the returns from the company’s activities. It is not only possible today, but usual, for all these rights to be exercised by different people.

The average holding period of an investor in large Swiss companies is less than one year, so all of these so called ‘owners’ are likely to be replaced in a sort of ‘musical chairs’ before the company’s next annual general meeting. The vast majority of shareholders do not even attend the general meeting and if they do, they will unlikely be there for the next one. With the increasing popularity of so called ‘passive asset management’ where funds are invested indiscriminately to companies based only on their existence and weighting in an index, this trend towards unintentional, transient, and complacent ownership is already decisive and programmed to increase. Blackrock, the world’s largest manager of ETF’s (exchange traded funds) is already the most important owner of Swiss listed companies. As a result, the Anglo-saxon driven capital market system has evolved to confer ownership to those least willing or able to act in a responsible manner.

Increasing Unintentional Ownership (ETF’s)

In Exit, Voice, and Loyalty (1970), the influential German economist from Harvard, Albert Hirschman, proposed that we have essentially two possible responses when we perceive that relationships are deteriorating: we can exit (withdraw from the relationship); or voice (attempt to repair or improve by proposing for change). Think of the last time you had a disagreement with your spouse, your son, a neighbor or a business partner. The Anglo Saxon model of ownership is biased towards ‘exit’ – while the Swiss model for ownership has historically been, similar to our political system, based on ‘voice’. The problem with ‘exit’ as Hirschman points out is that it only provides the warning sign of decline, but not the reasons. He also argues that the greater the availability of exit, the less likely voice will be used. 

When shareholders are more absent, transient, anonymous and complacent the companies they own are more vulnerable to “agency disease”. Exchange traded funds, mutual funds and big pension funds are not known for confronting boards. Often shrouded in layers of committees, consultants and compliance departments, more likely to obfuscate than encourage shareholders to act as responsible owners, their modus operandi is ‘vote with your feet’ – or ‘exit’ not ‘voice’.

For Switzerland’s largest companies like Nestlé and Novartis, they have become so valuable that the only owners with the weight to have their say are in reality the least likely to do so. It is precisely at the intersection of lumbering size and complacent ownership that the greatest abuses have occurred. Just think of ABB, UBS, Swiss Re or Zurich Insurance.

Professor Peter Katzenstein of Cornell points out in his famous study Small States in World Markets that since small countries are vulnerable, they must take extra precautions to preserve their industrial treasures. Sweden, for example, has Investor AG as an industrial gatekeeper to long-term interests of the company may be misleading and dangerous. In most instances, one name is recorded on a share register; someone else makes a decision to buy or sell; someone else decides how the shares are to be voted; and someone else benefits from the returns from the company’s activities. It is not only possible today, but usual, for all these rights to be exercised by different people. The average holding period of an investor in large Swiss companies is less than one year, so all of these so called ‘owners’ are likely to be replaced in a sort of ‘musical chairs’ before the company’s next annual general meeting. The vast majority of shareholders do not even attend the general meeting and if they do, they will unlikely be there for the next one. With the increasing popularity of so called ‘passive asset management’ where funds are invested indiscriminately to companies based only on their existence and weighting in an index, this trend towards unintentional, transient, and complacent ownership is already decisive and programmed to increase. Blackrock, the world’s largest manager of ETF’s (exchange traded funds) is already the most important owner of Swiss listed companies. As a result, the Anglo-saxon driven capital market system has evolved to confer ownership to those least willing or able to act in a responsible manner. Increasing Unintentional Ownership (ETF’s) In Exit, Voice, and Loyalty (1970), the influential German economist from Harvard, Albert Hirschman, proposed that we have essentially two possible responses when we perceive that relationships are deteriorating: we can exit (withdraw from the relationship); or voice (attempt to repair or improve by proposing for change). Think of the last time you had a disagreement with your spouse, your son, a neighbor or a business partner. The Anglo Saxon model of ownership is biased towards ‘exit’ – while the Swiss model for ownership has historically been, similar to our political system, based on ‘voice’. The problem with ‘exit’ as Hirschman points out is that it only provides the warning sign of decline, but not the reasons. He also argues that the greater the availability of exit, the less likely voice will be used. When shareholders are more absent, transient, anonymous and complacent the companies they own are more vulnerable to “agency disease”. Exchange traded funds, mutual funds and big pension funds are not known for confronting boards. Often shrouded in layers of committees, consultants and compliance departments, more likely to obfuscate than encourage shareholders to act as responsible owners, their modus operandi is ‘vote with your feet’ – or ‘exit’ not ‘voice’. For Switzerland’s largest companies like Nestlé and Novartis, they have become so valuable that the only owners with the weight to have their say are in reality the least likely to do so. It is precisely at the intersection of lumbering size and complacent ownership that the greatest abuses have occurred. Just think of ABB, UBS, Swiss Re or Zurich Insurance. Professor Peter Katzenstein of Cornell points out in his famous study Small States in World Markets that since small countries are vulnerable, they must take extra precautions to preserve their industrial treasures. Sweden, for example, has Investor AG as an industrial gatekeeper to ensure that the right people are installed at the Chairman and CEO roles. Denmark’s most important industrial companies like Novo Nordisk, Moeller Maersk and Carlsberg are owned by foundations. GIC and Temasek are the fortresses that look after Singapore’s industrial interes

Switzerland has been a staunch advocate of free markets and in any free market system, companies prosper, and parish, replaced by more viable competitors. There are mergers, there are bankruptcies, and it’s often painful. This is what the great Austrian economist Josef Schumpeter had in mind with his notion of ‘creative destruction’. But the Swiss way of managing has been historically better at preserving rather than destroying. The average age of a company listed on the main Swiss stock exchange is 125 years, compared with 20 years for the S&P 500. Switzerland has had its own idiosyncratic version of protection through a variety of mechanisms: shares with disproportional power in favor of owner operators; registered shares to secure Swiss identity of ownership; shares held by the large banks as fiduciaries holding power of attorney to vote; hidden reserves as a buffer to see through difficult times; cross board memberships between industry and banks; a long tradition of owner operators with names like Hoffmann, Sandoz, Schmidheiny, and Schindler who viewed ownership as more permanent than temporary; etc.

These particular aspects of the Swiss ecosystem of ownership provided a sort of ‘immune system’ that prolonged the lives and viability of its industrial base because it tended to fix rather than discard. Nestle nearly went bankrupt in 1923; Roche was on the verge of bankruptcy twice; the Swiss watch industry went bankrupt in the 1970’s; ABB was bankrupt for two days in 2002; The Swiss government was forced to rescue UBS during the financial crisis; and Swiss Re was rescued by Warren Buffet. These companies survived and reinvented themselves because there was a preference for ‘voice’ over ‘exit’.

Holcim, Sika, Syngenta and Kuoni instruct us that the measures Katzenstein has in mind, once effective, are either fading or, indeed gone. 15 years ago, no heir to an owner operator would have shopped around their stake to the highest bidder without the board’s knowledge, or consideration of other ‘owners’ as we have recently experienced with SIKA. Holcim Lafarge is worth considerably less, has inferior credit ratings, and has suffered a considerable exodus of its best people – but who raised a ‘voice’? The board of Kuoni, hired as professionals, conceded that the company could be managed better by other professionals at a private equity firm. Syngenta will be controlled by the communist Chinese state where political considerations will necessarily win out over economic ones, which is why politically dominated firms have never thrived over long periods.

In strategic terms, Switzerland has what is termed ‘Klumpen risiko’. The fact is the extraordinary success means that 25% of Swiss GDP comes from a small number of companies that lead their respective fields globally.

Switzerland only claims 0.1% of the world’s population, but boasts 2.4% of the firms in Fortune Magazine’s ‘Global 200’ ranking of the most valuable largest multinationals. No country comes close in the per capita density of large multinationals. A good reason for this is that the Swiss have historically treated ownership transitions with greater care than most places, and, as a small country, it is more dependent on its industrial legacy, and vulnerable to losing it. The issues that dominate public debate include immigration, and relations with the EU. The most important impact on Switzerland’s future prosperity may, however not come from relations with the outside, but from relations within. It may be about whether ‘ownership’ in Switzerland continues to be effective in fulfilling its ultimate responsibility as the driving force for our ‘Wohlstand’ by ensuring that ownership changes improve rather than detract from competitiveness. Is there a way that ‘Swissness’ can still assert itself and prevail as it has for so long and so successfully ? Is Katzenstein right to assert that small countries are fundamentally more vulnerable and therefore must guard their industrial treasures more carefully? Does our economic system, like our political system, benefit in Hirschman’s way of thinking, from more ‘voice’ and less ‘exit’.

With the alarming rise of foreign acquisition of leading Swiss companies, this may be a good moment to reflect on and debate these important questions.
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