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.

This weekend, I finally got round to reading Michael Hill’s book “Toughen Up.”  For those who don’t know him (US and UK, I’d guess), Michael Hill is the founder of Michael Hill International,  the publicly-listed mid-market jewellery retailer which grew from a single store in small-town Whangarei to a multinational chain spanning New Zealand, Australia, Canada and (recently) the USA. Hill’s story is an inspiration to those who think they’ve left it too late to strike out on their own.  Hill didn’t do well at school, and he wasn’t talented enough to pursue a career in music or architecture, his early passions. When he was 17, his parents arranged a job in his uncle’s jewellery store where, learning from his salesman father who also worked there, Hill discovered he was good at selling jewellery.  For 23 years, he drifted along, eventually running the store despite his uncle’s disdain and repeated refusals to let Hill buy into the business. Everything changed when Hill’s house burned down.  Watching the flames, he had an epiphany, resolving to buy his uncle’s business. When Uncle Arthur again refused Hill’s very generous price, Hill announced he would set up in competition; he was ordered to clear out there and then.  The rest, as they say, is history.

Michael Hill’s book (co-written with Claire Harvey and already in its third print) is a deceptively simple read.  With a light, self-deprecating and chatty manner, he expounds his business insights through his personal and company history. I found myself nodding vigorously at several points, particularly learning not to fight on too many fronts at the same time, keeping things simple, keeping focused on big goals, and being prepared to make mistakes. Several chapters feel like something I might have written myself when explaining business ideas to staff.

Hill’s narrative is interspersed with adoring short notes from some of his staff; some readers may find that it feels too much like a company indoctrination manual.  Even so, persevere. There are some golden nuggets of business wisdom in there. And the title?  It goes back to Hill’s house fire epiphany at age 40.  Times may be tough now, but there is no better time to start something new.

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!)

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!

General Motors has announced its withdrawal from NUMMI, its joint venture with Toyota.  NUMMI was an incredibly generous initiative by Toyota to educate its global rival about modern management and production techniques, while giving Toyota insight into operating in the US.   Although the NUMMI plant was generally seen as a (qualified) success, and GM learnt about efficient plant layout and just-in-time inventory, it (GM) never really absorbed the “lean business” mindset that infuses every aspect of Toyota.

The NUMMI plant is now 25 years old, and probably long overdue for a major overhaul/replacement.  Toyota doesn’t need it, with low demand and its own plants elsewhere in North America making similar models. Politically, Toyota might wait a while to close the only unionised shop in its portfolio, but GM’s reputation is so low, now is probably the least reputation-damaging time for Toyota to do so.

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 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.

Some Swedish researchers [.pdf] have apparently shown that American women were significantly influenced by price when judging the quality of red wine in comparative tastings, whereas American men were not.  Economics writer Chris Dillow has bravely extrapolated this to suggest it may explain why women buy cosmetics at outrageous prices. Mind you, I’ve heard the ladies make similar comments about blokes and cars, which of course is quite ridiculous, isn’t it, chaps?

I’d always understood it to be accepted folklore in the wine industry (makers and sellers), at least here in NZ, that price is a key influence on perceived quality.  I hadn’t seen the gender slant with wine before, but I don’t really believe that men are much more objective.  My gut feel is that more extensive study would show that men also can be significantly influenced by price vis-a-vis value in wine. I volunteer to be a guinea pig.

Those seeking angel or venture capital need to learn what’s in a term sheet - an agreement between investor and investee which spells out the key element of a funding deal. Guy Kawasaki has pointed me to leading Silicon Valley law firm Wilson, Sonsini, Goodrich, and Rosati, who offer a free online term sheet generator.  It’s designed for USA venture investments, but it’s still useful for other countries, since it captures many of the key elements. Have a go - you’ll see some terms you don’t understand, but that’s good.  Find out what they mean.  Understanding this stuff is important, so you know what you’re signing up to and why.

Update: Here are some handy NZ guides.

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.