17 years after the release of the Cadbury Report, the accepted wisdom in most English-speaking countries is that, except in unusual circumstances, the same person should not hold the roles of CEO and chairman* of the board at the same time.  European countries have increasingly adopted the same practice. The USA stands notably apart, having a very high prevalence of combined CEO/chairman appointments. However, do the results justify the change?  5 years ago, professors from the Wharton Business School said that, as shown by analysis of the financial performance of US corporations, there was no evidence to support separation. Now Harvard professor Bob Pozen reports similar findings from British and European studies. Given this lack of evidence, Pozen comes out against any mandatory requirement for a separation of duties in publicly listed companies.

However, Pozen notes:

… most US firms already have an independent person performing the key functions that you would want from an independent chair. That person is the lead director, an independent board member who helps set board agendas and conveys the concerns of independent directors to the CEO. The lead director is also needed to preside over periodic executive sessions — attended only by independent directors — which are now mandated by listing standards at US stock exchanges. Choosing a lead director is a less dramatic way of fulfilling this listing standard than appointing an independent board chair.

In other words, there is a degree of separation and oversight in many USA listed companies, albeit the CEO is still the dominant player. However, notwithstanding the lack of empirical evidence one way or the other, I suspect most boards who have separated the roles of chairman and CEO, especially outside the USA, will be extremely reluctant to go back to the old model.  Boards want CEOs to perform, to get things done,  to drive the business forward, but they like the positional advantage a chairman has over a CEO on the odd occasion they need to rein the CEO in. It’s easier for a board to steer via the chair, than from the side.

Finally, Pozen adds:

… there is only one arrangement with generally negative results for a company: having a former CEO becoming the board chair of the same company. This can undermine the power of the new CEO. Unfortunately, as mentioned above, over 15 percent of US companies have this arrangement. Clearly that practice needs to change.

PS:

• I am a member of the Wellington branch committee of the Institute of Directors in New Zealand, whose recommended best practice is generally separation of duties.
• I use the chairman* title in a non-gender specific way, taking my cue from some notable female company chairmen who vehemently eschewed the “chair” title prevalent in more PC circles.

I’m back. Don’t worry; I won’t bore you with my travels and pictures (not even the trout I caught fly-fishing in the Yorkshire Dales).  I didn’t write anything here after the first few days away. Not that there wasn’t anything to read or write about, but I found the break too relaxing to want to break the mood.  After the first week when I did some business stuff, I made and received very few phone calls. I hardly touched the internet, apart from online booking sites and Google Maps.  I did check emails daily (via my phone), deleting most of them, filing some for attention later, and responding to a tiny few.  I only looked at my Google Reader news feed once or twice to keep up with people I knew, but ignored everything else.  It’s very liberating to delete thousands of items unread!  All in all, it was a pleasant reminder that being “always on”  isn’t a necessity.

OK - maybe just one picture.

Sitting in the lobby of my hotel (with free wifi, NZ hoteliers please note) in Plan de Campagne, Provence, appropriately the first thing that comes up on my newsfeed is a BBC report from France. President Sarkozy will impose a carbon tax (at 17 Euros per tonne) across all industries and households, except industries already designated to be part of the European cap & trade system (heavy industry, power generation, etc).

This is a novel approach, and it will be interesting to see how it works out.  At first glance, it looks promising. I’ve long been an advocate of simple carbon tax, but the momentum behind cap & trade has proved unstoppable so far. Maybe this mixed-mode approach could combine the best of both systems. I’llawait more expert analysis with interest.

Right, time for un café espresso et un pain au chocolat.

You’ll have already guessed from my current  limited posting that I’m too busy with other stuff to do much blogging.  This is likely to continue for a while, but I’ll try to post something if I get a) a connection, b) have the time and c) have something to write.  Likewise comment moderation.

Next order of business: Tuscany; for in-depth research into the Italian regional economy, of course!

KPMG has published  a comparison of effective tax rates for people on US$100k a year in 86 countries (click here for the pdf file).  US$100k is the entry-point for internationally-mobile managers and mid-level professionals.  (KPMG also compares tax at US$300k for those further up the income ladder). The comparison excludes local government taxes and consumption taxes, and ignores what government provides in return (eg. healthcare). However, the figures are for a childless married income earner, not usually a big user of government services at this income level.

Once again, The Economist publishes an edited highlights graph.  For my English-speaking readers elsewhere:

• New Zealand income tax 32%, social security 1%, total 33%
• Australia income tax 29%, social security 1.5%, total 30.5%
• Ireland income tax 21%, social security 7.3%, total 28.3%
• Singapore income tax 9.3%, social security 10%, total 19.3%
• Hong Kong income tax 10.5%, social security 0%, total 10.5% (but just to make you really turn green, tax waivers can return some of that to you!)

I’m off to Europe on 2 September for 5 weeks.  It’s a busy schedule, a mixture of business and leisure (London, Provence, Tuscany, Bristol, Giggleswick, London), but if anyone wants to catch up in London, let me know.  At 41p to the NZ$, I might let the moths out of my wallet.

In January, financial commentators were praising Porsche management for a “darkly brilliant” plan which saw the company ending up with over 50% of Volkswagen and possibly €6-12 billion from hedge funds, in what became known as “the Porsche Squeeze”.  At the time, I wasn’t so sure it was a brilliant plan; more likely Porsche’s management were just riding a lucky break. Six months later, it turns out that luck was bad luck.  The Porsche family have just fired their CEO and CFO, and agreed to a plan which will see a radical change in the German automobile industry. VW will gradually take over Porsche (over several years), with the Qatar Emirate buying Porsche’s VW share options (equivalent to 17% of VW), the funds being used to reduce the €10 billion debt Porsche is carrying after its gambit.

Another factor in all this seems to have been been a feud within the family. The chairman of Volkswagen is a grandson of Ferdinand Porsche. The now re-united family, albeit losing control of the family business, ends up as the largest shareholder in a much bigger business.  Management lost their jobs (but were paid heaps to go).

Maybe someone will make a television drama series out of all this.  It certainly sounds like the plot of one.

Most currency relative value tools look at some mix of goods in each country (purchase power parity). The Economist cuts through the complexity by looking at just one ubiquitous product sold by a single organisation - the McDonalds Big Mac.  Although the Big Mac index is really just a bit of fun, it has proved surprisingly effective over many years alerting people to significant disparities in currency fair values.

As with all international currency matters, the US dollar sets the base point.   In effect, this implies that the US dollar price of a good is fair value.  Clearly that’s not always so. The Europeans and, more recently, the Chinese have argued for an alternative, but there’s no sign of any real contender to be the new reserve currency.  With that caveat,  right now a Big Mac costs the Anglos and Japanese about the right price, the West Euros way too much, and most of the rest of the world way too little.  Sounds fairly accurate to me!

Struggling to get your head around current thinking on what governments are doing or should be doing to deal with the global economic crisis?  The New York Review of Books recently hosted a symposium with leading economics pundits Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, and Robin Wells.  Reading the summarised text of their discussion will give you a reasonably straightforward understanding of the various camps’ viewpoints.  Although the participants do look at the bigger world picture, inevitably their discussion is somewhat US-centric.  However, the USA’s situation and policy responses will affect us all, and similar debates are happening in every country and in international forums. The NYRB article is well worth the time to read.  Just don’t expect a consensus conclusion: the debate still rages.

Thanks to SPD for the link.

The OECD has just issued its annual survey of tax on wages using 2007/8 data.  Some readers may be surprised at where their country of domicile ranks. However, these simple averages are misleading:

• GST, VAT, sales tax and local government taxes, etc. are not included.
• What about the higher earners, say 65 or 75th percentiles? For example, NZ’s higher tax rates rate kick in at very low $ levels, by comparison with other countries.
• And let’s not even mention the differences between countries regarding real wages, local purchasing power, and tax or tax breaks on interest, dividends and imputation, mortgage interest, pension contributions, capital gains, inheritance, house purchase stamp duty, fuel tax, road tax, etc, etc, etc.

It’s a bit like comparing airline fare deals.

The President of the European Central Bank, Jean-Claude Trichet, commenting on the economic situation, said “As far as growth is concerned, we’re around the inflection point in the cycle, that’s the sentiment,…” Many took this to mean that the recession had reached a turning point, that it was bottoming out.  WRONG!  This is how economist and Financial Times blogger Willem Buiter vented his spleen over the mathematical illiteracy of most commentators:

… Trichet did not say that the recession was bottoming out.  He said that it had reached an ‘inflection point’…  Unlike the gormless arts students, limp-minded lawyers and woolly social scientists that dominate British and American economic policy making, President Trichet actually knows and understands mathematics.  An inflection point is not a turning point.

An inflection point is where the shape of a curve (in a graph) changes from concave to convex, or vice versa.  Let me put what Trichet said another way.  The economy is like an aircraft falling in a terrible dive that’s been getting steeper and steeper. However, the nose has just started to come back up.  We’re still in a dive, but from here on, the dive will get shallower and shallower.

That point where the nose started to come back up was an inflection point. Trichet thought he was addressing a technically-literate audience who’d understand his use of the word.  Clearly, that was a wrong assumption, and one we probably all make from time to time. A useful reminder, as well a nice line in grumpiness from Professor Buiter.

The Dominion Post reports that the founders of HELL Pizza have bought back their NZ master franchise 29 months after selling it to TPF, the owners of Burger King in New Zealand.

Callum Davies, Stu McMullin and Warren Powell opened the first Hell Pizza in Kelburn, in Wellington in 1996. With a menu and branding themed on the seven deadly sins and a penchant for provocative marketing campaigns, which included giving away condoms to promote its lust pizza, the chain had expanded to 66 stores by the time it was sold for about $15 million in December 2006.

The founders would not say how much they bought it back for but it is understood they paid less than they sold it for.

HELL’s founders sold their NZ operation to generate cash to expand internationally, establishing HELL in Britain, Australia, Ireland and Canada.  Under TPF, HELL NZ seemed to lose its way. Those who bemoan the sale of businesses will no doubt use the HELL buyback to push their barrow about the evils of companies being sold to “corporate” or “overseas” owners, who then “destroy” a good business. What’s not mentioned are the far greater numbers of business that prosper under new ownership, or the productive use of the sale money to reinvest in other ventures, new or existing.  And founders can destroy businesses just as easily as subsequent buyers.

However, it’s not unusual to see founders buy back businesses that they’ve sold, especially if they’re still involved somehow, and often for a much lower price than they received when they sold it in the first place.  I can think of several examples where I know the principals personally.  The extra capital they can apply (gained from the original sale and from their other ventures), combined with their renewed passion for the business, often takes the business on to new heights.

HELL built its brand on up-market pizzas and cheeky promotions.  Here’s the message to entice you to open an online account:

Your soul doesn’t do much. You can’t feel it. You can’t see it. It sucks at making coffee, and when you’re buggered after a hard day, it’ll never have dinner on the table. So give it to us. Then you can begin your descent into HELL. The deeper you go, the more retribution you’ll receive for your measly soul. The retribution could be anything from free morsels of food to exclusive access to random stuff. That all depends on how good you are at being bad. And if you make it right into the darkest depths of HELL, then you’ll receive free pizza for life. So sell your soul to us.

On his excellent financial news website, Bernard Hickey makes a prediction on the future makeup of Big Auto:

Fiat is looking to take over Germany’s Opel from out of the General Motors stable of dead and dying brands and add it to the remnants of Chrysler it is taking out of Chrysler’s bankruptcy. The hard-charging boss of Fiat, Sergio Marchionne, (sounds like the guy who made the spaghetti westerns with Clint Eastwood) reckons he can build Europe’s second largest car maker, the WSJ reports. He’s dreamin’. Big cross-border car company almost never work. Just ask BMW, which bought Rover in the 1990s and lost billions of euros, and Daimler Benz, which bought Chrysler and lost tens of billions. I predict this will all drag Fiat into bankruptcy too. The big 3 car companies in 10 years time will be Toyota, Ford (if it’s lucky) and Renault-Nissan.

If Fiat picks up Chrysler and Opel (essentially GM Europe), Hickey may well be right about Fiat’s potentially fatal indigestion and the new Big 3 (although VW, BMW and Mercedes have ambitions too).  I thought that Fiat’s bid for Chrysler was brilliant strategic opportunism, but GM Europe is “a bridge too far” for the Italian automaker.  The other thing I don’t get is why GM would divest its main European operations to Fiat:

• They’re in less of a mess than the rest of GM.
• They have the vehicles and designers GM needs both now and in future (retrofitting eco-friendly engines when practical).
• They give GM true global scale, which everyone seems to agree is essential for success in automobile production.
• GM is desperate for funds, but the Fiat deal won’t give them any, and there are almost certainly other buyers who might stump up hard cash.

Brazilian President Luiz Inácio Lula Da Silva proclaimed last month that the global financial crisis had been created by “white-skinned people with blue eyes.”  Now Walter Russel Read, writing recently in Newsweek, has gone a step further and blamed it all on the Dutch:

The modern financial system grows out of a series of innovations in 17th-century Netherlands, and the Dutch were, on the whole, as Lula describes them.

Read’s brief history of modern finance looks like a review of Microsoft Windows:

This financial and political system is the operating system on which the world runs; the Dutch introduced version 1.0 in about 1620; the British introduced 2.0 in about 1700; the Americans upgraded to version 3.0 in 1945, and as an operating system, it works pretty well - most of the time… But the system has bugs - among them, a tendency to crash.

I’m kidding about the blame; Read’s article is titled “In Defence of Paleface Capitalism.”

The 300 years of liberal, global capitalism have seen an extraordinary explosion in knowledge and human affluence. Not everybody shares in these benefits, and there are environmental and social costs to the rapid progress. Still, not many of us would like to turn the clock back to 1610.

… Lula … understands that for all its shortcomings, the market isn’t the enemy of the poor. Brazil’s task, Lula believes, isn’t to make war on the market, à la Venezuela’s Hugo Chávez, but to harness its vast potential for the sake of the poor. This is new. Thirty years ago, Brazil, like most of Latin America, was polarized between a radical, antiliberal left and a radical, antiliberal right. Today Brazilian politics are different; both the left and the right are more committed to free politics and free markets than they used to be.

Brazil is better off for the change. Although the current crisis is beginning to bite, Brazil has overcome the stagnation and corruption that halted growth after the first oil shocks and the Third World debt crisis, and is now one of a handful of countries with the power to shape the new century. And this hasn’t just been the story in Brazil; more and more “developing” countries are turning into the pacesetters of liberal global capitalism. So Lula is right: the global crisis emerged from a system built, with all its many flaws, by blue-eyed palefaces. But if countries like Brazil can stick with their own versions of Dutch finance, the future of the system will increasingly be shaped by people who look more like Lula - and the palefaces are going to have to run hard to keep up.

I think Read includes China, India, etc.; but it’s still moot what capitalism will look like as they reach their full potential.

Courtesy of Capital Chronicle, here’s Global Finance magazine’s list of the world’s safest 50 banks.  I’m glad to see that the list includes all the ones in which I have an interest, directly or indirectly.  The list shows great variety in size and ownership. As Capital Chronicle observes, “public ownership or a cooperative structure certainly do not guarantee prudence.” In that light, NZ readers will note one notable absentee from the list - the so-called “people’s bank”, government-owned KiwiBank.

Today’s Vista Group lunch followed its usual pattern as we jumped from one idea to another in bewildering rapidity:

• Will kerning save the world? Every technical elite has its own jargon and in-jokes. Kerning is a graphic-designer term for adjusting the white space between letters.  Apparently, the question is a good one to have printed on a T-shirt to wear when talking to art directors at ad agencies.
• Didn’t they read what I wrote? We all had recent examples of how some people misread even the shortest communications only taking in words to support their pre-conceived prejudices and assumptions about the writer.  Of course, the use of deliberately-provocative headlines can increase that risk.
• How does Jack Yan get to be a judge in both the Miss New Zealand AND Miss Sweden beauty pageants?  Being a fashion magazine publisher didn’t seem to explain it to the other gentlemen present.
• How does Chanel manage to retain its cachet of luxury and exclusiveness, while Pierre Cardin, Yves St Laurent, Gucci et al have cheapened theirs?  “Expensive” does not mean “exclusive.”
• Does your market offer determine your target market, or does your target market determine your market offer?  This is a chicken and egg question.  You can go either way.
• Does branding only work on cattle? No, was our unanimous conclusion to the idea behind Jonathan Salem Baskin’s book. But we would say that, wouldn’t we?

You’ll have to take my word for it that the transitions were seamless and logical.