The magazine for decision makers. September 2009 Foresight ... · forum1. optimism/realism Susanne...

ceo*The magazine for decision makers. September 2009

Foresight. Thomas Schmidheiny on the joy of long-term investing. Responsibility. Professor Ernst Fehr on the ground rules for fair play. Strategy. Martin Senn on the challenge and value of discipline.

Publisher: PricewaterhouseCoopers AG ceo magazine, Birchstrasse 160, CH-8050 Zurich, Switzerland

Editors-in-chief: Alexander Fleischer, [email protected], Franziska Zydek, [email protected]

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Concept, editing and design: purpur ag, publishing and communication, zurich, [email protected]

Copyright: ceo magazine PricewaterhouseCoopers.

The opinions and views expressed by the authors do not necessarily reflect those of the publisher.

ceo magazine appears three times a year in English, German and French. Circulation: 26,000

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Lithography/Printing: ud-print AG, Lucerne. Paper: Magno Satin FSC, wood-free, two side coated, silk, bright white

ceo/editorial 03

The crisis is rearing its ugly head. Althoughfor a long time the nervousness in the finan-cial markets and economy was an abstrac-tion for the majority of Swiss people, thedownturn is now becoming painfully real.Companies are restructuring or having todeclare themselves bankrupt, staff are losingtheir jobs, and salary cuts for senior staff arethe norm. People are reacting with fear,concern and anger. Hitherto concealedemotions are coming to the surface.Business cannot disregard emotions either.Nor should it. For it is undoubtedly right toarticulate feelings and communicate clearly,particularly when such important decisionsas restructuring, job cuts and lay-offs are atstake. At a higher level too, the importanceof emotions is becoming increasingly betterrecognised and accepted in business. Oneindication of this is the calling into questionof the idea of Homo Economicus – the pure-ly rationally thinking and acting, benefits-oriented person – as exemplified by theresearch of economics professor Ernst Fehrat the University of Zurich.

The world is ruled by emotionsCurrent developments have shifted thefocus of business thought and practice backto people, their emotions, motives, incen-tives and ethical principles. The financialcrisis has shown us that purely rational ormathematical models have their limits forcomplex contexts such as finance. We havealso learned that incentive models aimedsolely at personal profit do not ensuresustainable economic activity. But what dowe conclude from all this? Instead ofrepressing or rationalising individual percep-tion and emotions, it is better to includethem in the equation. Indeed, “soft” factorscoupled with “hard” key figures supply amore reliable basis for implement-atingcorporate strategy and controlling perform-ance delivery than figures alone. In an articlein our Spectrum, Thomas Scheiwiller showshow PwC is forging new paths with the small yet expert ISG Institute in St Gallen inexamining the emotional basis of humanmotivation. Emotions are a powerful force. Fortunately,that applies especially to positive emotions.Several articles in this issue of ceo* maga-zine bear witness to how they can beharnessed to achieve great things. Theentrepreneur Thomas Schmidheiny explainswhy he had no reservations about investingCHF 160 million in the future of the high-

Current developments have shifted the focus of businessthought and practice back to people, theiremotions, motives, incentives and ethical principles. Business cannot disregard emotions either.

Dr Markus R. Neuhaus CEO PricewaterhouseCoopers Switzerland

class hotel industry in the Sargans region.The CEO of the Grand Resort Bad Ragaz,Peter P. Tschirky, tells us why you can’tmanage a company as big and international-ly oriented as his without trusting your feel-ings.Whether positive or negative emotions getthe upper hand frequently depends simplyon perspective. We all know the famousglass that can be perceived either as halffullor halfempty. How we approach the glassoften plays an important part in that percep-tion. Four accomplished professionals givetheir views on this subject at the beginningof this issue of the magazine. They explainhow they manage to achieve a balancebetween optimism and pessimism.

I wish you a stimulating read.

Markus R. Neuhaus

04 ceo/contents

ceo2/09. contents

Professor Dr Susanne Suter, President of the Swiss Science and Technology Council,writes in ceo* Forum: “In Switzerland,education policy requires a sense of realityas well as of optimism.”

06

Jean-Marc Bolinger, Managing Director Eden Springs Switzerland, writes in ceo*Forum: “Companies need to be deliveringservices based on substance instead of onmarketing blah-blah.”

08

Maja Storch, owner of the Institute for Self-Management and Motivation Zurich, writesin ceo* Forum: “Managers are entitled tofeel uncomfortable in difficult situations andshould be able to express it.”

10

Andy Schmid, professional handball player,writes in ceo* Forum: “I keep my feet on the ground. I trust my own strengths andbelieve that things will turn out OK. That’snot optimistic; it’s realistic.”

12

pwc expertise

Swiss tax system: Switzerland must usetax policy as a strategic tool for boostingthe country’s competitiveness while at the same time ensuring that the system iscompatible internationally. .15Non-financial assets: A new web-basedapproach to identifying people’s individualpreferences helps businesses to betterimplement corporate strategy and manageservice delivery. .18Sustainable compliance: Compliance ismore than just risk management. It canalso be seen as opportunity management,a chance for a company to establish aculture of integrity..20Management: The financial crisis provided the opportunity to cast a criticaleye on management practices in the banking industry. Lessons learned? Threerules of thumb for good decision making:stay close to the market, foster an opencorporate culture, and question data andassumptions.

23Service: Events, publications and analyses.Subscriptions and contacts.

25

Cover: Cédric Widmer

“Ulysses”, a leadership-development programme of PwC. An agricultural school in 50 countries.

50

Professor Ernst Mohr, President of theUniversity of St Gallen, on the impact of theeconomic crisis on his institute and themeaning of social responsibility.

47ceo/contents 05

dossier values

Adrian Pfenniger, CEO Trisa AG, Triengen,on the importance of values such as empathy, fairness, decency and respect,particularly in times of crisis.

40

Martin Senn, Group Chief Investment Officer (and designated Chief ExecutiveOfficer) of Zurich Financial Services, on thechallenge and value of discipline.

44

Professor Ernst Fehr, Director of the Insti-tute for Empirical Research in Economics, University of Zurich, on fairness, altruismand the role of emotions.

36

Peter P. Tschirky, CEO Grand Resort BadRagaz AG, on true luxury and the art ofcreating a company culture centred on thethings money can’t buy.

32

Thomas Schmidheiny, Entrepreneur,on his personal commitment to the GrandResort Bad Ragaz, worthwhile long-terminvestments and preserving values.

28

Current developments have highlighted the importance of permanent values. Swiss business leaders answer questions such as: What really matters? What will last?

26

forum1. optimism/realism

Susanne Suter: Education policy requires a sense of reality as well as optimism. What’s possible and enforceable ends upbeing a compromise between the two.

Professor Dr Susanne Suter was ChiefPhysician at the University of Geneva Chil-dren’s Hospital between 1994 and 2008.Since the beginning of 2004, she has beenPresident of the Swiss Science and Technology Council (SSTC), advising theFederal Council primarily on research butalso on education issues.

You have to have an optimistic attitude tohave a career and family, bring up threechildren and gain recognition in a male-dominated society. I am clearly an optimist.Sometimes, other women ask me: “How didyou do it?” My reply: “I don’t want to knowanymore.” Now, the pressure has gone; Iretired from my position as Chief Physicianat the Geneva Children’s Hospital a yearago. Would I do it all again the same way? Yes,without a doubt. Working with children alsomakes you optimistic: getting to know bothhealthy and sick children, encouraging themand helping them to capitalise on their posi-tive characteristics is a fulfilling task. Withadults too, I tend to want to identify thepositive aspects of their personality first.Everyone should be able to make the bestof themselves. Paediatrics – a subjectchosen primarily by women – is ideally

06 ceo/forum

suited to promoting women. In Geneva, theproportion of female professors in paedi-atrics has risen sharply.My position as President of the SSTCenables me to be active at the interfacebetween the academic and political worlds,across all sectors of research. The council isindependent and does not represent anyspecial interest groups. Nor does it distrib-ute any funding.With the federalist system in Switzerland,education policy requires a sense of realityas well as optimism. What’s possible andenforceable ends up being a compromisebetween the two. The new higher-educationact is currently being heard in parliament.Opinions are split on what the universitylandscape should look like. Nevertheless, Ihope that the guiding idea behind this law,namely maximum autonomy for universities,is accepted. The level of education and research inSwitzerland is of a high quality, but moreneeds to be done quantitatively. Switzerlandmust not rest on its laurels; other countriesare catching up. It is an undisputed fact thatthe demand for academics is on the rise,and it is conspicuously clear how muchSwitzerland depends on highly qualifiedforeign labour in certain areas, for instanceas top managers in companies, teachingstaff at colleges and universities, anddoctors in our hospitals. I support the exchange of knowledgebetween countries, and the free movementof knowledge and brainpower internation-ally. Switzerland is ambivalent here: on the

one hand, certain political groups still advo-cate adhering to “the special case ofSwitzerland”; on the other hand, Switzer-land has opened its borders to highly quali-fied personnel – and could do so evenmore.If I could make three wishes, the first wouldbe to hope that we succeed in Switzerlandin giving every individual the same educa-tional opportunities. Second, I would wishthat the importance of the first three or fouryears of a person’s life to their futurebecomes better recognised. Up until themiddle of the 20th century, science shame-fully neglected research on young children.Today, however, we have a wealth of know-ledge from such research. This leads me tomy third wish: public discussion regardingthe education and training of young childrenshould be based on the results of moderndevelopmental research; we can no longercling to old clichés, nor should we believewe will be able to increase the number offuture Nobel Prize winners in this way. Whatwe can do, however, is improve the educa-tional opportunities open to children with apoor educational background. In thisrespect, our educational system is still defi-cient. //

Photo: Bertrand Cottet

08 ceo/forum


Jean-Marc Bolinger: Take a little pragmaticoptimism, add companies with substancebehind their services instead of marketingblah-blah, and the opportunities are huge.

Jean-Marc Bolinger has been ManagingDirector of Eden Springs Switzerland since2006. Eden Springs supplies drinking watersystems to companies and private individ-uals and employs 2,650 staff throughoutEurope, generating some EUR 300 million inturnover.

If you want to be successful in our busi-ness, you need optimism and realism. In themineral water industry, prices have beenhalved in the space of 10 years, while trans-port and material costs have risen sharply.We are primarily selling a service, whichmeans we bring water right to where peopleneed it. In Switzerland, with its normallyimpeccable-quality tap water, that is quite achallenge. Our product is not an essentialitem; what we offer is convenience and effi-ciency for our customers.How does our business model work? Weprovide companies with our waterdispensers – normally 19-litre tanks, filledwith mineral water from our springs in Valais– at the office or at home, collect the emptytanks again and carry out the maintenance.Our customers get everything from onesource. We mostly do not deliver ondemand but rather at defined intervals. Itworks like the milkman used to do in thepast, which makes it possible for us toensure efficient logistics and reduce thenumber of kilometres travelled. The systemis ecologically worthwhile and vital for oureconomic survival. Our water travels amaximum of 300 kilometres, for every extra

kilometre reduces profitability. In addition,we distribute fresh water dispensers thatare directly connected to a water pipe. Thepurified drinking water can also be enrichedwith carbonic acid. With 25,000 waterdispensers in 12,000 companies and privatehouseholds, we are the market leader inSwitzerland. In terms of turnover, we are not yet feelingthe pinch, but we are not immune. Ifcompanies and individuals save on theadditional services they order, this will affectus. But if we continue to do our work well, Iwill still be optimistic about our chances.Some companies are reducing their budgets and converting from bottledmineral water to water tanks or fresh waterdispensers; these are potential newcustomers for us. The alternative to the“Age of Less” is not the “Age of Nothing”.This is not the end of the world; we aren’tgoing to see the worst-case scenario withmass termination of our contracts. For our customers what’s at stake are smallbudgets; for their employees, however, theissue is huge. If companies turn off theirpeople’s water, so to speak, the reverber-ations could go on for weeks. Companiessometimes underestimate the signal thisputs out. Drinking water at the workplace isan extremely emotional issue, just like thecoffee machine or the company car park.However, we are noticing shifts in priorities.Up to half a year ago, ecology was rankedat the very top. In collaboration with a spin-off from the Swiss Federal Institute of Tech-nology (ETH) in Lausanne and partnercompanies, we developed software tomeasure the ecological balance of acompany in real time. We assumed CO2

emissions would be a key indicator. But

now customers in the water segment are nolonger asking for the most ecological prod-uct; instead, they want the most economicalone. Ecology remains a selling point onlywhen the price is right. Even with just 3 percent higher costs, purchasing managerswave their hands dismissively. Personally, Iregret that, but from a business perspective,it’s reality. We cannot put ecology ahead ofeconomic factors. Nevertheless, I amconvinced that companies that are able tocombine ecology and economics under oneumbrella will win in the long run. What’s needed is pragmatic optimism andcompanies with substantial services, notmarketing blah-blah. The current crisis wascaused primarily by people who sold toomuch hot air and had lost sight of the realeconomy. You only recognise chances andopportunities if you are right in the thick ofbusiness operations and know what needsto be improved tomorrow and the day aftertomorrow. Crises usually precipitate restruc-turing – and also lead people to ask ques-tions that haven’t been asked before. Managers should put their cards faceup onthe table for their staff. Employees oftenfigure out for themselves that restructuringis necessary. If you are too optimistic andput a gloss on everything, you will losecredibility. If everything negative is blockedout, errors occur that put the company atrisk. Based on our experience, even whenbottled mineral water becomes too costly,not all customers opt for tap water. Theopportunities for us lie somewhere inbetween. //

Photo: Andri Pol

10 ceo/forum


Maja Storch: Managers are entitled to feel uncomfortable in difficult situations like these and should also be able to express that.

Graduate Psychologist Maja Storch, Ownerof the Institute for Self-Management andMotivation Zurich ISMZ, has developed the“Zurich resource model” in collaborationwith Frank Krause. It aims to help peopleact as they really want to more often.

There are two types of optimism. One is therose-tinted-glasses type which is removedfrom reality and in no way purposeful. Youcan’t manage a company with unrealisticoptimism – and even less so in situations ofcrisis. When bosses attempt it nevertheless,employees instinctively see through it andjustifiably perceive it as “putting a gloss onthings”. The second type is healthy, functional opti-mism. The people who possess it are real-ists through and through. The human brainprocesses positive and negative feelings viatwo separate systems. You could say this ispart of our fundamental biological make-up.People with a healthy, functional optimismcan switch positive feelings up higher, aswith a thermostat, and turn down negativefeelings. So how can this ability specifically help amanager who has to stand up in front of hisor her staff and announce some unwelcomenews? It makes him or her authentic!Honesty is particularly important here: manycompany managers believe that they arenot allowed to show their concern openly.Yet nobody expects the boss to announcethat everything will be all right if sales havecollapsed by 30 per cent. Managers areentitled to feel uncomfortable in difficultsituations like these and should also be ableto express that.

Not providing information in a transparentand prompt manner is always a mistake. Itleads to rumours and fuels uncertainties.Because many managers are afraid ofopenly communicating tough decisions, lay-offs, for instance, are often done in a veryupsetting manner for those affected. Theright way would be to disclose openly andin a timely manner why lay-offs havebecome necessary and to communicate theindividual decisions with the greatestrespect for each person’s dignity. In the selection process for managementpositions, the people who frequently comeout on top are those whom I would assignto the category “Rhino”, to put it bluntly.They are thick-skinned by nature, resistantto stress and particularly able to suppressnegative feelings. Frequently, people likethat tend to overestimate themselves; theylack the capacity for self-discomposure.Like someone who stands in the snowwearing a pair of swimming trunks anddoesn’t feel the cold. However, those who have a healthy, func-tional optimism do have this capacity forself-discomposure: negative feelings are aninner alarm system that tells them to switchon their common sense and find out whypeople are so concerned. We really needboth: self-discomposure and self-compo-sure. Discomposure results in a hormonal switchin the body. But we are not made for copingwith this state on a long-term basis! Oneconsequence, for instance, can be burnout.Regulating negative feelings requires the artof self-management, something we conveyin our Zurich resource model in courses andcoaching sessions. Self-management isessential to reach goals and deal with a

constantly changing environment in the bestpossible way.I regularly hear in our courses that todaythere is often no time for well-consideredapproaches and interaction betweencommon sense and gut feeling. Managershave to make quick decisions. I see it differ-ently: if someone knows the “right” solutionto complex issues today straight away, thenhe or she is lying. With complex issues, wecan only make decisions by drawing on allour competences. And for that, time andoften several feedback loops are required.We should therefore think twice aboutwhether everything really has to be done soquickly. Crises always offer opportunities. But in thisarea, too, it is the manager’s responsibilityto put forward his or her optimism in a cred-ible manner. A positive underlying tenor canonly be generated at the attitude levelbecause the limbic system – the functionalunit in the brain that regulates mood andmotivation – is reached via this level. Let’stake Barack Obama and his “Yes, we can”as an example. As far as “specifics” go, thisis a statement completely devoid ofcontent; but from the vantage of “attitude” itstrengthens people’s belief in themselves.This attitude can make a great deal pos-sible. Or to quote Antoine de Saint-Exupéry:“If you want to build a boat, do not drum uppeople to collect wood or assign them tasksor work, but rather teach them to long forthe endless immensity of the sea.” //

Photo: Helmut Wachter

12 ceo/forum


Andy Schmid: I trust my own strengths and believe that things will turn out OK. That’snot optimistic; it’s realistic.

Andy Schmid is a professional handballplayer who had a lot to do with ZMC Amici-tia Zurich winning the Swiss championshipin the last two years. Beginning thissummer, he has been playing for the topDanish club, Bjerringbro-Silkeborg.

I am a realist. For self-protection, amongother things. If expectations are too opti-mistic, they are bound to end in disappoint-ment. Many people say that they are opti-mists. But are they really? Can someonereally be a total optimist? I sometimes thinkthat people like that live in an illusory world.They convince themselves that everythingthey decide to do will turn out all right andare then flabbergasted when that’s not thecase. That’s why I prefer to keep my feet onthe ground. In top-class sports, good preparation isessential for success. If I haven’t trained inthe fitness room three times a week, I don’tfeel strong enough on the day of the match.Mental preparation is of course hugelyimportant too. Before a game, we analysethe task at hand, the opponents. I gothrough individual situations in the game inmy head, the coach and the captain think

about what tactic to choose when, forinstance, it’s all square with five minutes togo before the final whistle. With properpreparation, I can approach a game calmly.I know that a team will have to be prettygood to beat us. I trust my own strengthsand believe that things will turn out OK.That’s not optimistic; it’s realistic. Handball is a team sport. We win or losetogether. When we feel strong and ready asa team, it generates a very special aura thatmakes us almost invincible. The trainer hasa definite influence here. Individual doubterson the team become stronger if the atmos-phere is optimistic. You need that to comeout on top in international competitions too.In the last two years in Switzerland, therewas only one club that could match us. Butcertain clubs, for instance from Spain orGermany, would have probably beaten usnine games out of ten. To prevail againstopponents like that, you need to forgo toorealistic a view of things for once. An opti-mistic illusory world can actually be helpfulin situations like that. For example, itworked fine in the semi-final of the Euro-pean Cup against the top Spanish club,Valladolid. Amicitia won by four goals. Butthen we were probably too optimistic for thereturn game. From a realistic perspective,Valladolid had simply had a very bad day inthe first match – and still only lost by anarrow margin. Before the return match inSpain, we were caught up in the optimismof others: “You’ll do it,” said the fans – and

the press were already talking about thefinal. We lost the return match by six goalsand missed out on the final. That was thereality.At the moment, I tend to set myself short- tomedium-term goals. I would like to play fora top team in Germany at some time – arealistic goal. A few mid-table clubs fromthe handball Bundesliga have already mademe some offers, but first I want to developmy game further. That is why I am moving toDenmark for the time being, to the third-best league in Europe. I like the mentality ofthe Scandinavians, and the style andmanner in which they play handball: fastand technically demanding. If I can estab-lish myself in Silkeborg – and I can – I’ll beable to move to a top German club. Therequirement for this is of course that I stayhealthy. In this regard, I am neither opti-mistic nor realistic; I’m a fatalist. //

Photo: Markus Bärtschi

ceo2/09. pwc expertise

Swiss tax policy: Striking the balance between attractiveness and international acceptance. Page 15

Non-financial assets: How businesses can boost their performance by capturing and respecting people’s individual preferences. Page 18

Sustainable compliance: The first step towards business integrity management. Page 20

Management: Lessons from the financial crisis. Page 23

Service: Events, publications and analyses. Page 25

14 ceo/pwc expertise

Swiss tax policy: Striking the balance betweenattractiveness and international acceptance.As the Swiss tax system becomes the target of criticism on the internationalstage, one thing is clear: Switzerland must use tax policy as a strategic instrument for retaining and boosting this country’s competitiveness. At the sametime, we should avoid a situation where our tax system gives grounds for exclu-sionary or retaliatory measures. Our system must be compatible internationally.

[email protected]

Pressure on Switzerland from variousgovernments and international organisa-tions has intensified. Banking secrecy hasalways been a bone of contention for bothethical and fiscal reasons. But with budgetdeficits threatening to skyrocket in the wakeof the financial and economic crisis, andfinance ministers pressured to mobilise allthe forces at their disposal to generate taxrevenues to finance corporate andeconomic aid packages, economic reasonshave now taken precedence – even thoughthese economic interests often masqueradeas arguments of fiscal justice. This has alsoresulted in more intense international taxcompetition.These are the facts of the matter. Switzer-land must come up with a strategy to adaptits tax system to this new state of affairs.But in doing so it faces a dilemma: it mustensure that it remains competitive as anattractive economic location, while at thesame time reviewing any policies that givegrounds for exclusionary or retaliatorymeasures. In other words, Switzerland muststrike a balance between internationalcompetitiveness and compliance with inter-nationally recognised principles and tax

regimes. This will require an active, effect-ively communicated policy geared to clearstrategic goals.

Sharing information is okay; automatic-ally sharing information is notIn its communiqué of early April, the G-20left no room for doubt: “The era of bankingsecrecy is over.” In the run-up to the G-20summit, Switzerland had said that it wouldretain banking secrecy but was prepared toaccept Article 26 of the OECD Model TaxConvention on avoiding double taxation.The aim was to keep itself off an OECDblacklist and prevent any ensuing damageto the country’s image. The Model TaxConvention contains guidelines and stand-ards on cross-border taxation that applyworldwide as the basis for double taxationagreements (DTAs) between nations. Article26 governs the exchange of informationbetween the tax authorities of OECDmember states. In concrete terms, theSwiss Federal Council’s resolution of 13March of this year means that in futureSwitzerland will be willing to generally give

official assistance in matters related to tax,if there is a specific and justified request ineach individual instance. In practice thismeans that quite a few DTAs will have to berenegotiated to take account of the newexchange of information arrangements.These negotiations are now well under way.Revised DTAs have already been initialled,and more will follow soon.Switzerland is thus signalling that it is infavour of greater transparency on taxmatters and will exchange information onthe basis of the OECD principles. WithEuropean counterparts Austria and Luxem-bourg also going along with these arrange-ments, this is the right signal to be giving atthe present time. Switzerland is not puttingitself at any disadvantage. On the otherhand, this country should draw the line atthe automatic exchange of information(which the model convention does notrequire). So-called fishing expeditions,where a country makes general enquiriesabout accounts held by its citizens, shouldnot be allowed, as they constitute a breachof the right to privacy – something on whichthere is broad consensus in Switzerland. So Switzerland’s standpoint should be asfollows: unreserved compliance with theOECD rules, but an equally unreserved noto the automatic exchange of information. Itis interesting to note that it is only inconnection with individual persons thatinformation sharing leads to controversy.Because of the rules on transfer pricingdocumentation, corporations are in anycase subject to more stringent disclosure

SwitzerlandTaxesReputation

Andreas Staubli, Leader Tax and Legal

ceo/pwc expertise 15

requirements, and have had to live with thefull exchange of information in tax proceed-ings for some time already. Even so, thedebate on information sharing has strainedSwitzerland’s reputation in tax terms. Ratherdifferent in nature is the long-standing taxsquabble between Switzerland and the EU.The EU accuses Switzerland of having a taxregime that grants unjustified tax relief tocertain forms of corporation, which the EUsays is tantamount to anticompetitive subsi-dies and thus in violation of the 1972 freetrade agreement. What is meant specificallyis the taxation of holding companies, domi-ciliary companies and so-called mixedcompanies.

Ensuring equal treatmentSwitzerland firmly rejects this interpretation,arguing that the free trade agreement is notsufficient basis for an indictment of Swisscorporate taxation. Given that Switzerland’sstance was explicitly known to all signator-ies back in 1972, it cannot be called intoquestion now. Even if the EU’s arguments are artificial,however, the matter of variations in thetaxation of different taxpayers remains. It isprecisely here that the crux lies: in the pref-erential treatment of particular categories oftaxpayers over others. Any tax regime thatfails to apply consistent standards is prob-lematic. If a management company withrevenues from foreign sources pays less taxthan a company with revenues from domes-tic sources, there have to be differentiatedreasons for this.As part of the proposed Corporate TaxReform III, the Swiss Federal Council isconsidering how these tax regimes could beamended or even replaced by regimesdesigned along different lines entirely.Possible measures under discussioninclude a general ban on the business activ-ities of holding companies (both in andoutside Switzerland), certain taxation of theadditional income of holding companies,changes in the taxation of mixed companiesby means of a minimum rate of taxationand the abolition of domiciliary companystatus. This would go some way to meetingthe demands of the EU. On the other hand,Switzerland cannot afford to ignore the factthat tax competition is intensifying. OtherEuropean countries are already attempting

to attract mobile corporate functions bymeans of special tax arrangements.Switzerland has to find forms of taxationthat are competitive but at the same timejustifiable from an equitable taxation pointof view. New models will be required to survive andflourish in a competitive internationalmarketplace – models that make Switzer-land more attractive while not giving othercountries grounds for complaint. Such astrategy will have to include the abolition ofcertain taxes and duties. Take stamp duty,for instance: levying a duty on the issue ofsecurities makes it harder to invest riskcapital in the creation of new businesses.Now that Luxembourg has abolished stamp

duty (at the beginning of this year), Switzer-land is one of the last countries to have alevy of this sort. Switzerland also has toeliminate business-unfriendly taxation –rules on withholding tax and stamp duty –affecting corporate finance, which is alsodenting this country’s locational attractive-ness. Whatever happens, any moves to introducethis type of corporate tax reform must havebroad political support. Breaks for corpor-ations and high-net-worth individuals,however, are not necessarily going to gainpolitical acceptance in the present climate,even though they are all the more necessary


Country

Belgium

Ireland

Luxembourg

Netherlands

Portugal

Spain

Measure

Excess profits

Tax deduction of 80% on patentincome

Notional interest deduction

Non-trading branch

Tax deduction of 80% on patentincome

Goodwill write-downs

Taxation of interest

Excess profits

CV/BV structures

Madeira

Goodwill write-downs

now from everyone’s point of view becausethey make Switzerland more attractive as aneconomic location. The solution lies incombining this type of break with other taxrelief in areas such as family taxation, andthen communicating the policy convin-cingly. There is nothing abstract about loca-tional attractiveness: it is something thatreally does promote economic valuecreation in Switzerland. This country needsa regulatory and business framework thatallows companies based here to continueproducing goods and services and makingprofits in Switzerland, and that attracts newbusiness. The incentives to shift productionto low-wage countries will not be any lesstempting in future. There is fierce competi-tion between different locations. And with

no other country holding back, choosingnot to engage in this competition wouldbring only disadvantages for Switzerland. So what should be the strategy behindSwiss tax policy going forward? Policyshould centre on two principles: makingSwitzerland attractive as an economic loca-tion, and avoiding exclusionary or retaliatorymeasures. Rather than yielding unilaterallyto international pressure, Switzerlandshould actively counter this pressure. And itshould act quickly, because global pres-sure, combined with calls for greater taxtransparency and consistently higher taxes,will go on creating new challenges.

SUMMARYPublic debate on the Swiss taxsystem has damaged Switzer-land’s reputation as an economiclocation. To restore this reputation,this country must come up withcompelling responses, developnew approaches and market themeffectively. Switzerland must intensify communication both withthe public and with other nations.This means acting with convictionand confidence, but also under-standing the new realities andputting in place any measures thatare necessary and possible.


Short description

Under certain circumstances the Belgian tax authorities will grant a tax exemption for profits that an entity has been able to generate onlybecause of its position within a corporate group. These are not arm’s length profits, and could not have been generated by a stand-aloneentity. Since they do not stand up to an arm’s length comparison, they are not taxed.

80% of patent income qualifies for the deduction provided that this income is measured at arm’s length. This results in an effective taxrate of 6.8% on this type of income.

A deduction can be made for notional interest on net equity.

Financing activities within a branch may remain untaxed as long as they not exceed a certain low profile (e.g. the branch in question hasonly one loan on its books).

80% of patent income can be deducted. This results in an effective tax rate of 5.7% on this type of income.

Principal structures: on migration to Luxembourg, goodwill can be claimed and amortised for tax purposes (market value is determinedby a ruling; not recognised in statutory accounts). This may lead to an effective tax rate of 2% to 8%.

The Netherlands is endeavouring to introduce exemptions or substantial relief on intra-group interest payments. However, these plans stillhave to be approved by the European Commission.

Similar to arrangement in Belgium.

Corporations that are basically not subject to tax themselves are nevertheless treated as companies subject to tax for the purposes of the DBA with the United States if they pursue real business activities in the Netherlands. This arrangement is attractive for holdingcompanies.

Companies that are registered in the International Business Centre of Madeira and create jobs pay reduced corporate tax on earnings oncross-border transactions.

Following acquisitions, goodwill can be amortised for tax purposes over a 20-year period. This regime still has to be approved by theEuropean Commission.

Competition between economic locations: tax incentives in other European countries.*

* This list is not exhaustive, but is designed to provide examples giving a rough overview of the advantageous tax regimes that exist.

Soft factorsHard factorsControlling

Thomas Scheiwiller, Global Sustainability Leader

Non-financial assets: How businesses can boost their performance by capturing andrespecting people’s individual preferences.Individualisation is a long-term business trend. Now there is a new method available for reliably identifying and recording individual perceptions and emotions. Used in conjunction with “hard” financial data, “soft” factors like these provide a dependable basis for implementing corporate strategy andmanaging service delivery.

[email protected]

“Our organisation revolves around people.”Pick up just about any item of corporatecommunications, and you will find this orsimilar statements. But these days it’s muchmore than a buzzword. Many companieshave recognised that the true drivers ofvalue are people – customers, employeesand other stakeholders – and that financialperformance is merely the product of thevalue these people generate. Evencontrollers are now realising that businessperformance depends primarily on theemotional relationships people have to acompany and within an organisation. “Emotions are key indicators that help usassess the future development of a busi-ness, including its financial performance,”explains Roman Kurmann, CFO of Zurichprivate bank Clariden Leu. “This means thatawareness of what clients want and needbeyond mere products, and the ability tomanage emotional drivers, are of strategicimportance in our increasingly service-oriented economy.”

Image of people in economics is changingParallel to these insights in the practicalworld of business, there are also signs thateconomists’ image of human beings isundergoing a radical change. Modernempirical economics, spearheaded byProfessor Ernst Fehr, head of the Institutefor Empirical Research in Economics at theUniversity of Zurich (see interview on pageXX), is based on real people whose deci-sions are driven by feelings as well asrational considerations. The title of a bookby Uwe Jean Heuser – “Humanomics: Die Entdeckung des Menschen in derWirtschaft” (“Humanomics: the discovery of people in the economy”) – is indicative ofthis trend.There is no doubt that there are non-physical factors in every business that willinfluence its future performance. Of these

intangible assets, the most important areemployee knowledge, customer loyalty, and a smoothly functioning operationalorganisation.Employees: People who work for acompany are motivated by different things.One of them is the desire to earn as muchmoney as possible. Other important factorsthat influence an employee’s loyalty, enthu-siasm and motivation include the content ofthe work itself, training, the feeling of beingpart of a team, and career opportunities. Ifan organisation knows these individual pref-erences, it can create targeted incentives.The result will be greater employee motiva-tion, better business performance andimproved chances of success in a competi-tive marketplace.Customers: Customers can be guided byprice or quality. They may favour a particu-lar brand or a personal relationship withtheir customer adviser. Cost-drivencustomers are unlikely to be impressed byinnovative solutions, while those who focuson quality are not going to be made moreloyal by price reductions. Particularly in thebusiness-to-customer market, it’s importantto remember that consumers do not havethe same preferences in all productsegments. Independent research hasshown how important context is in terms ofbuyer behaviour. Many consumers areextremely cost-conscious when doing their


day-to-day shopping, but rarely take priceinto consideration when it comes to prod-ucts with high emotional or social prestige.

Consistently measuring individualperceptionsCompanies wanting to boost their perform-ance for the long term must recognise andmanage intangible assets. The problem isthat managing these assets means captur-ing them first. Intangible assets require non-financial units of measurement. The indica-tors that have been developed to do this areall geared to target groups, and they alwaysoutput aggregate or average figures. So farthere has been no methodology for system-atically breaking down performance indica-tors at the level of individual people ratherthan target groups.But now the ISG Institute (ISG), a socialresearch and business intelligence special-ist in St. Gallen, has developed a powerfulmethodology for capturing and measuringindividual perceptions. The new methodol-ogy is based on the ISG’s own empiricalresearch that shows that people’s behaviouris to a large extent guided by complexfactors such as values and ideals, motiva-tions and attitudes that are tied up withmotivational psychology.The ISG has joined forces with Pricewater-houseCoopers to adapt this robust meas-urement methodology to business-specificchallenges and implement it in organisa-tions. The new approach allows individualperceptions to be captured consistently andreliably. Three aspects are key:– The method is robust because it system-atically uses web-based technologies.– It measures subjective perceptionsregardless of whether they are objectivelycorrect.– Rather than averages, which in mostcases do not even exist in reality, themethodology yields figures for individuals.Thanks to web-based technologies themethodology is user-friendly and allows

organisations and the people they aresurveying flexibility to time the question-naire as they desire. For example thecompany can schedule its research inpreparation for a customer meeting, and the customer can complete the online questionnaire whenever and wherever it isconvenient for them. This results in betterreturn rates.The method goes to the very source ofvalue creation by capturing the individualperceptions of customers, employees orother stakeholders. It looks at two dimen-sions: showing where preferences lie, andrevealing the extent to which the organisa-tion takes account of these preferenceswithin its value management.

Congruence between employee andcustomer typesAwareness of individual preferences opensup new perspectives in terms of managingthe business and its value drivers, as theISG methodology allows different types ofemployee and customer preferences to beseen in relation to each other. This way it ispossible to create congruence betweenspecific employee and customer types. Thisis particularly useful as a way of boostingcustomer and staff loyalty in industriesinvolving a great deal of consulting andadvice. Information on individual prefer-ences is visualised in a KPI cockpit andcombined with financial performance indi-cators. This provides the strategic control-ling function and line management with apractical tool for comprehensively monitor-ing value drivers.The ISG methodology can also be used todo research into other stakeholders such asbusiness partners and suppliers. It alsoserves as a tool enabling investor relationsdepartments to capture and classify theaims and goals of shareholders. This under-standing of the interests of business ownerscan then be used in the formulation ofstrategic targets such as ROE or dividendpolicy.The new approach enables companies tomanage causes rather than merely observeeffects. They will now know where salesoriginate, what motivates the individualcustomer to buy, and how to managemargins and costs. And they will under-stand what incentives will best motivateindividual employees – all knowledge thatcreates a decisive competitive advantage.

SUMMARYThanks to new web-based tech-nologies for measuring intangibleassets, it is now possible to con-sistently capture informationon individual perceptions rather than just averages. Performancemanagement can now be geared to individual people. Thisapproach is supported by the realisation underlying modernempirical economics: peopledecide emotionally as well asrationally.



[email protected]

These days the greatest strategic risks areconnected with breaches of rules and regu-lations or internal guidelines. Some well-known international companies havealready made the headlines because ofunfair business practices in the acquisitionof orders or violation of data protectionrules. Surveys of executives put compliancewith the rules first in the list of businessrisks. And rightly so, for conflicts with lawsand regulations are often subject to heavysanctions, and can destroy an organisa-tion’s reputation from one day to the next. For this reason, awareness of compliance isgrowing in many companies. But the issueis as complex as the word “compliance”itself. There is no universal definition: aGoogle search for a definition of complianceyields millions of results. In its circular of 27September 2006, the Swiss Federal Bank-ing Commission (SFBC) defines it asfollows: “Compliance is deemed to be theadherence to legal, regulatory and internalprovisions, as well as the observance of thecustomary standards and rules of profes-sional conduct within the market.” However,

this definition is worded in very generalterms, with the term “customary standards”in particular leaving plenty of room for inter-pretation.Compliance can be viewed from a numberof different perspectives. In most cases, asin the SFBC definition, it is seen through thelens of risk management. From this point ofview, compliance issues include things likeanti-corruption legislation, antitrust law and,increasingly, environmental, health andsafety issues.

Violations incur heavy penaltiesThe European Union and the United States– especially the latter – have laid down standards in terms of anti-corruption legis-lation: The Foreign Corrupt Practices Act(FCPA), which entered into force as longago as 1977, prohibits bribery in any coun-try in which it is a punishable offence, andrequires complete and detailed documenta-

tion of all transactions and a functioningsystem of controls. In extreme cases thepenalties imposed, which take account ofany preventive measures and the serious-ness of the breach, can run into hundreds ofmillions of dollars, quite apart from thethreat of imprisonment for executives.Antitrust fines imposed by the EU generallycome to between EUR 500 million and onebillion. In May 2009, the European Commis-sion handed out the heaviest single antitrustpenalty yet, imposing a fine of EUR 1.06billion on chip manufacturer Intel for abuseof its dominant market position. But it isMicrosoft that was at the end of the heavi-est overall financial penalty for violation ofthe antitrust rules. In March 2004, a fine ofEUR 497 million was imposed on the UScompany, and in February 2008 the Euro-pean Commission handed down a furtherfine of EUR 899 million because Microsofthad not kept to the terms of the 2004 ruling.Swiss companies have always been keen tocomply with the European antitrust rules,not least because of the drastic penalties.But in recent years, many have paid lessattention to the anti-corruption legislation.This is due on the one hand to the fact thatfines have been comparatively mild in thepast. But it is also because most companieshave felt safe from the US authorities,because they are not listed on a USexchange and do not believe the judicialauthorities have the necessary scope to

Sustainable compliance: The first step towardsbusiness integrity management.Compliance is usually seen from the risk management perspective. But in reality it is much more than this. Compliance can also be viewed as a componentof opportunity management: a chance for an organisation to differentiate itself in the market by establishing a culture of integrity.

RulesRiskReputation

Jürg Wyser, Leader Compliance


intervene. But these arguments do not reallyhold up to scrutiny. Corruption is a criminaloffence, which means that it cannot beinsured, and does not depend on whethershares are traded or what exchange theyare traded on. Proceedings for corruptioncan be initiated any time, any place. Addedto this, there are growing signs that USauthorities are clamping down more heavilyon breaches of the law and imposing more

serious penalties. In early February of thisyear, for example, Halliburton was given afine of USD 560 million.It is also a mistake to assume that onlyinternational companies face heavy fines.For instance the amount Intel had to paycorresponds to only around 4 per cent ofthe company’s sales (the EU can imposefines of up to 10 per cent of sales). Finescould be even more painful for smallercompanies. There are examples of medium-sized enterprises where the total costs –fines for corruption plus the damage tooperations – have run into nine figures.Not being “compliant” can cost a business

dearly. The damage is not limited to fines.There is also the loss of reputation toconsider. Added to this are other threats,including licence losses as the company isexcluded from certain markets and criminalsentences for the officers responsible. Thevery fact that a company is involved in liti-gation can hit its market performance hard,as customers and suppliers keep theirdistance. The authorities are also entitled to

Motivation

• Remediation of issues• Reactive management of severe risks• Reaction on failures or violations

Motivation

• Prevention • Comprehensive management of

compliance risks• Individual’s protection

Motivation

• Impact on company’s reputation• Differentiation strategy• Public expectation

Organisations that merely address compliance issues as part of risk management are always reactive. Comprehensive business integrity management, on the other hand, is an opportunity for companies to differentiate themselves in the marketplace. The first step is to make sure that compliance is firmly anchoredin corporate culture.

From risk management to business integrity management.

Driver

• Compliance risks • Clients, suppliers etc.

Driver

• Peer pressure• Public expectation

Driver

• Opportunities• Clients, products

RISK MANAGEMENT

OPPORTUNITY MANAGEMENT

Compliance Sustainable compliance

Sustainability


force the company to draw up a complianceplan and make sure it is properly andpermanently implemented (meaning that the programme will be reviewed by theauthorities responsible).These days no organisation can afford notto make compliance an integral part ofenterprise risk management. The signifi-cance of compliance risks has less to dowith the type of business the organisation isengaged in, and more with the degree ofinternationalisation of its value chain. It is noaccident that the Swiss State Secretariat forEconomic Affairs (SECO) has geared abrochure titled “Preventing corruption:Information for Swiss businesses operatingabroad” to companies with heavy foreignexposure.

Internal codes of conduct countBut compliance is not only significant in riskmanagement terms. Compliance does notjust entail formal adherence to rules andregulations, but is also relevant in terms ofopportunity management. From this point ofview, compliance is a matter of attitude,authenticity and corporate culture. Onlywhen compliance is given a sustainablecomponent and evolves into businessintegrity management can it not onlyprevent damage, but create lasting value aswell.The key is to view compliance, corporateculture and sustainability as an integralwhole. Almost all companies, in their corporate governance and branding policy,set down values which they intend to beembodied in their corporate culture. These

values are translated into a code of conductcontaining rules of behaviour for differentareas of the business. In most cases, codesof conduct cover a broad spectrum, dealingwith issues ranging from bribery and childlabour to the environment. These guidelinesserve as the basis for managementprocesses and control and corrective mech-anisms designed to ensure compliance withthe rules of behaviour the company has laiddown. But whether people within the organ-isation actually internalise these values andcodes of conduct is quite a different matter.The provisions contained in the Sarbanes-Oxley Act on codes of conduct have notnecessarily helped in terms of internalcompliance with the rules. Forcing seniorstaff to sign written declarations that theyhave understood the code and informedand trained their staff correspondinglyquickly makes this into a mere formality thatis not automatically put into practice.Sustainable compliance not only in terms ofexternal laws and regulations, but also interms of internal rules of conduct, is the keystep on the path to business integritymanagement.Some companies are already favouring theterm “integrity” over “compliance”. But ithas to involve more than just changing theterms used. Business integrity managementmeans putting corporate values into prac-tice authentically, and acting with integrity.Here again the tone at the top – the example set by management – is decisive.Businesses that are already caught up in litigation, or who have been in the past, canoften only put business integrity manage-ment into practice if they pursue the conse-quences single-mindedly. In extreme casesthis means taking uncompromising actionagainst decision makers who are guilty ofmisconduct.Rigorous business integrity managementcan enable an organisation to differentiateitself strategically, meet the expectations ofits shareholders, and thus influence itsreputation for the better. A corporate culturelike this reduces compliance risks at asystemic level. In any case, it turns out thatit rarely pays to gain market share throughunfair practices: in PwC’s experience, at theend of the day most transactions involvingbribery fail to generate any financial advan-tage.

SUMMARY Compliance entails many risks, butopportunities as well. Breaches of anti-corruption, antitrust andenvironmental rules in particularcan result in drastic penalties.Damage resulting from violatinglaws and regulations is hard torepair for companies and theirdirectors. Organisations that wantto be properly equipped to meetthese challenges are advised tomake compliance an establishedpart of a corporate culture gearedto integrity, and put values intopractice authentically. Those thatdo so will create a key differen-tiating factor in the marketplace.

GovernanceCultureProfit

Matthias Memminger, Advisory, Financial Services


[email protected]

The causes of the financial crisis arecomplex. The stage was set by systemicfactors such as inadequate regulation andthe easy money policy of central banks. Butbesides these systemic factors, manybanks got into difficulties for reasonsspecific to the institutions themselves: deci-sions made on the basis of false assump-tions, or deficient risk management. It isprecisely here that banks can draw usefullessons because unlike systemic factors,these internal inadequacies can be influ-enced directly. A closer look at what reallywent wrong reveals three classic pitfalls:hubris (overestimating oneself), groupthink,and blind faith in the quality of informationand assumptions.

Hubris: the Icarus effectIt is striking that some of the companiesthat suffered the most precipitous fall wereamong the most successful and well-regarded in their business. Royal Bank ofScotland, UBS and AIG spring to mind.Dizzy with success, these companies setmore and more ambitious growth targets

that inevitably had to be reached in areasoutside their core business. Many organisa-tions were soon no longer able to realistic-ally gauge the risks in these new fields ofbusiness, and like the arrogant Icarus, fellfar having tried to fly too close to the sun.Managers who remain successful over thelong term know how to avoid this Icaruseffect, and are at deliberate pains to avoidthe trap of hubris. When making decisionsthey call on a group of confidants – peoplewho are as independent as possible – togive direct and open feedback and helpmake sure the decision does not lose sightof the reality of the market. In addition tothis, successful banks apply a great deal ofbusiness sense and carefully weigh up therisks. A good example is Jamie Dimon, theCEO of J.P. Morgan. Dimon and his teammake decisions on the basis of thoroughmanagement reports covering all areas ofthe business. The rule of thumb is that if the

data show a particular business to be riskierthan the margins justify, get out! When thecosts of credit default swaps (an instrumentused to insure against default invented,ironically, by J.P. Morgan) rocketed at theend of 2006, the data indicated that busi-ness with low-grade collateralised debtobligations (CDOs) should be dropped.Dimon gave the order to sell, even thoughhis competitors ridiculed him for doing soand a number of his star investmentbankers left J.P. Morgan in disbelief.

Groupthink: the danger of conformityAfter the disastrous decision to invade theBay of Pigs, US president John F. Kennedycommissioned psychologist Irving Janis toinvestigate this error of judgement. Janiscame to the conclusion that because ofKennedy’s dominant personality, none of hishighly qualified advisers (the best and thebrightest) dared voice criticism while thedecision was being made. Janis called thisphenomenon “groupthink”, the conformityof thought that can emerge in organisations.Back then, the remedy suggested by Janisincluded appointing a devil’s advocate (theVatican had come up with the concept of“advocatus diaboli” centuries before) todisrupt conformity in the decision-makingprocess.

Management: Lessons from the financial crisis.The financial crisis was an opportunity to take a close and critical look at management practices in the banking industry. Three basic rules of thumb forgood decisions emerge: stay close to the market, foster an open and criticalcorporate culture, and question the quality of data and assumptions.


very complex and expensive solutions forimproving data quality. They also calibratedecisions to compensate for the low qualityof data.It’s a similar story when it comes toassumptions. Most banks that fared badlyin the crisis had only one risk model, valueat risk (VaR). This resulted in two weakpoints. Firstly, a VaR model does not coverpositions that are hedged or insured. Sinceup to two thirds of positions were hedged,and most of these hedges failed when crisishit, the banks affected only ever saw the tipof an iceberg of risks.Secondly, VaR requires time series of atleast 20 or 30 years to ensure that themodel’s extrapolations take sufficientaccount of upswings and downturns. Butfor subprime instruments there were onlytime series of 4 to 6 years, and these seriescovered only one upswing and no downturnat all. This meant that the model was muchtoo optimistic in its forecasts. Some banksrecognised this weakness in their assump-tions and took measures to counter it byusing additional models that analysed allpositions (including hedged positions), aswell as using stress tests to simulate down-turns. These examples are relevant to allmanagement decisions, whether or not theyare part of risk management. Managershave to understand and question the qualityof information and assumptions. And as arule they should draw on different sourcesand compare the results rather than rely ona single source of information.A model can only be as good as its dataand the assumptions underlying it. If thedata and assumptions are inadequate, sotoo will be the output of the model; or, toborrow an apt term from IT: garbage in,garbage out.The studies cited, as well as PwC’s dealingswith directors and executives at banks,show that financial institutions can takestructural and cultural measures to helpthem tackle future crises successfully. Thebasis for successful management is maturemanagement information systems, riskmodels that match the reality of themarkets, and balanced governance struc-tures – plus a corporate culture that leavesroom for debating the divergent opinions ofpeople within the organisation and special-ists outside the company.

SUMMARYLearning the lessons of the pastyear’s turmoil means taking a lookat successful – and less success-ful – business practices. A numberof essential points emerge: cor-porate culture is moulded bygovernance and the people wholead businesses. Relevant, good-quality data, combined with flowsof information from the entireorganisation, facilitate decisionmaking and help foster a culture ofconstructive argument and debate.

Jamie Dimon again provides a good ex-ample of how to actively minimise group-think: J.P. Morgan’s CEO relies on thesupport of a management team of fellowexecutives, long-standing employees of thebank, and newly hired experts. He encour-ages managers to speak up against him,and forces them to come up with convinc-ing arguments. At meetings, Dimon is notafraid to engage in debate and discussdiverging views. Goldman Sachs, on theother hand, is renowned as a place wherenews of problems spreads through theorganisation like lightning, right up tomanagement. This rapid flow of informationis possible because the bank has a culturewhere rather than being sanctioned foridentifying problems, employees are morelikely to get into trouble for deliberatelykeeping problems to themselves.

Quality of data and assumptions:garbage in, garbage outThe Senior Advisory Group, consisting ofrepresentatives of various regulatorybodies, has published a report on pre-crisisrisk management at 11 of the world’s lead-ing banks. One of the findings of thisresearch is that the quality of data andassumptions underlying the banks’ riskmodels do not always correspond to thereality of the market. It also found that theflow of information was a crucial factor inthe proper functioning of risk management.Not all the institutions investigated hadbeen able to ensure that the right informa-tion got to management when it wasneeded.All banks have to struggle with the quality ofdata, information and assumptions. Butwell-managed banks recognise that thereare weaknesses in these data. Theyrespond by seeking creative and sometimes

Retail & Consumer Worlds.

“Retail & Consumer Worlds” is an interna-tional electronic newsletter published byPwC Switzerland that gives a twice-yearlyupdate on developments and current issuesin the retail and consumer goods industry.Besides global issues, the newsletter alsolooks at country-specific concerns,addressing the interests of decision makersat national and international organisations inthe industry. You will find more informationat www.pwc.ch/r&cworlds, where you canalso subscribe to the newsletter.


Events, publications and analyses.

Events

PwC Energieforum 2009PwC’s annual energy forum will present and discuss the hot issues and challenges facing the Swiss energy industry. This year’s themes include grid- and incentive-basedregulation, and the findings of PwC’s latest research on the Swiss energy business.Zurich Oerlikon, Wednesday, 23 September 2009For information and registration: [email protected], tel. 058 792 18 30

Total tax contribution: how much do large companies contribute to financing Switzerland?At this free evening-before event, the results of a joint survey on TTC (total tax contribu-tion) conducted at the largest Swiss companies by economiesuisse and PwC will bepresented. TTC goes beyond corporate taxes to encompass all taxes paid by an entity.This is the first survey in Switzerland conducted on the basis of total tax contribution.Zurich, Tuesday, 27 October 2009For information and registration: [email protected], tel. 058 792 44 96

Managing Through the DownturnA survey of how Swiss companies are facing the current crisis

www.pwc.ch/confidence

Brazil’s retail and consumer sector well set to ride out the economic crisis

Reader service:The authors of the topics covered in thepwc expertise section of this issue of ceo magazine can be contacted directly at the e-mail addresses given in theirarticle. For a comprehensive overview of PricewaterhouseCoopers publications,please visit www.pwc.ch. You can orderPwC publications and place subscriptionsby e-mailing [email protected] orfaxing 058 792 20 52.

Subscriptions:ceo, the magazine for decision makers, is published by PricewaterhouseCoopers.The magazine appears three times a year inEnglish, German and French. To order a free subscription, please [email protected] specifying yourdesired language.Address: PricewaterhouseCoopers, ceoMagazin, Birchstrasse 160, 8050 Zurich,Switzerland.

Economic crisis.

Swiss companies are preparing for reces-sion. Their efforts include enforcing costmanagement in human resources by meansof early retirement or redundancies, reduc-ing fixed costs, and developing and imple-menting alternative strategies. Smallercompanies are not feeling growing pressurefrom the banks as much as larger ones, butall companies are seeing a deterioration inpayment practice. These are the key find-ings of “Impact of the Economic Crisis onSwiss Companies/Managing through theDownturn”, a report published by PwC onthe basis of responses from 91 Swisscompanies. www.pwc.ch/en/press_room

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Financial reporting and the audit.

PricewaterhouseCoopers’ regular publica-tion “Disclose” looks into key aspects offinancial reporting and auditing in clear andunderstandable language. The magazine isdesigned to help managers retain anoverview in a very dynamic environment.The current issue focuses on topics such asthe financial crisis and its implications forboards of directors, pension funds andfinancial reporting. You will find the maga-zine at www.pwc.ch/disclose, or you can order hard copies [email protected].

dossier + + + + + + + + + + + values

26 ceo/dossier values

It’s permanencethat counts.Current developments have highlightedthe need for enduring values. The focusis increasingly returning to questionssuch as: What really matters? What willlast? As a result, many companies andinstitutions are changing course –others, however, feel confirmed in theirapproach up to now.

Thomas Schmidheiny invested CHF 160 million in the Grand ResortBad Ragaz and consistently opted forthe crème de la crème in the process.He is convinced that “the key factor ispreserving values”.

Martin Senn, Group Chief InvestmentOfficer (and designated CEO) of ZurichFinancial Services, has internalisedvalues such as discipline, a clearphilosophy and systematic procedures– to positive effect.

For Adrian Pfenniger, CEO of theTriengen-based brush manufacturerTrisa, encouraging values such asempathy, fairness, decency and respectis what gives a company the internalstability it requires, particularly in timesof crisis.

Ernst Fehr, Director Institute forEmpirical Research in Economics at theUniversity of Zurich, investigates therole of emotions in making decisionsthat involve money.

And for Ernst Mohr, President of the University of St Gallen, socialresponsibility is a pivotal aspect.

Text: Corinne Amacher, René Bortolani, Samuel Dubno, IrisKuhn-Spogat, Franziska Zydek


dossier + + + + + + + + + + + future thinking

ceo/ 00

Simply “Wow!” The entrepreneur Thomas Schmidheiny on his personal commitment to the GrandResort Bad Ragaz, worthwhile long-terminvestments and preserving values.Photos: Cédric Widmer


Mr Schmidheiny, one of the things yourfather left you were the Grand Hotels BadRagaz. You were 46 when he died in1991. How did it feel to inherit one of themost renowned hotel companies inSwitzerland?I had been part of the scene in Bad Ragazmuch earlier – to be more precise, since Iwas 28. The hotel’s board of directors wasmy first experience of having my fatherdelegate to me. That was 1973; I had justcome back from Central America, where Ihad earned my spurs at Apasco, the Mex-ican subsidiary of Holcim.

Were the hotels in Bad Ragaz of particu-lar importance to your family?Yes, they were. In the mid-1950s, a group ofeastern Swiss entrepreneurial familiespooled their resources to reopen the ther-mal baths in Bad Ragaz. The town’s mainhotel was the Quellenhof, part of which hadburned down. These families wanted to dosomething for the canton and the region. At

the time, there was almost a depression inthe Sargans region. Many companies hadmoved away or had been forced to closedown. Our commitment was based on thedesire to contribute something to theregion’s recovery. There was a great affinityright from the start. However, it would ofcourse have been impossible to offeranything that wasn’t in tune with customers’wishes and market conditions.

Was your trump card the springs?Not our only one. Obviously, you needsomething special if you want to competewith the big resorts. And that something isthe water in our town. The springs of BadRagaz belong to the canton, and we are theusers. There is a contract, which I think runsout in 2067. But the entire region, the Bünd-ner Herrschaft with its vineyards, rounds outthe picture. It is not urban, but attractive forwhat we offer there: a place to wind down,enjoy treatments, rehabilitation. Only, backthen, some of the hotels were hopelesslyoutdated and there was no way that thethermal bath could compete with a modernspa facility.

You had to invest to improve the qualityof the services offered.Some 15 years ago, we renovated the mainparts in three phases: the Hotel Hof Ragaz,the Wellness Center and the public thermalbaths. Originally, we had also planned torenovate the Quellenhof. Like the HofRagaz, however, around a third of the hotelwas under heritage protection. After morethan 100 years, the building was in a dilapi-dated state. The ravages of time had lefttheir mark on the structures, resulting in thedecision to demolish the hotel and rebuild itfrom scratch.

How was the construction financed?We proposed a capital increase to ourshareholders, yet only a few of them wentalong with it. Our financial commitmentmeant that our stake grew to around 50 per

cent. The Quellenhof was then constructedin record time: demolition in 1995 andreopening on 31 October 1996 after aconstruction time of just 22 months! A tourde force!

You rebuilt the hotel in its original style –why?There were ideas to implement somethingentirely new, for instance a glass building.Nevertheless, in restoring the building wedecided to keep a classical look, primarilyfor landmark protection reasons. The resultproved us right: the quality, the interiordesign, the infrastructure – everything wasperfect. Our guests were delighted, givingrise to our vision of becoming one of theleading resorts in Europe.

This step was completed in the last twoyears with the extension of the GrandHotels Bad Ragaz to form the GrandResort Bad Ragaz.We first applied for and received a licencefor a “B” casino. It’s worth noting that BadRagaz had one of the first casinos inSwitzerland. The casino became an unlikelysuccess! The revenues from the gamingbusiness today will contribute to financingfurther expansion...

“Heart and commitmentare also part of thoseassets. And for a strategyto be successful in thelong term, heart andcommitment need to besupplemented by effi-ciency, stability and repu-tation. These are valuesthat I want to pass on tomy children too.”


ceo/dossier values 31

… which has been estimated at CHF 160million. A major investment in the future.What’s the strategy behind this step?We asked ourselves how the resort couldgrow further and came to the conclusionthat although the Quellenhof has a lot oftraffic and catering areas, there was aninsufficient number of really spaciousrooms. This led to the decision to build atower 36 metres high, with suites only.

The Tamina thermal bath was alsocompletely rebuilt.As we were posting fewer and fewer admis-sions to the baths as time went on, we hadno choice. We had a look at around 20competing facilities in Europe – andcompletely rebuilt our thermal baths. Withtoday’s solution, I think we are back amongthe very best. I believe the architecture thatwe have chosen will make history.

How great was your personal commit-ment during the reconstruction?I was on site once or twice a month. Thatwas and is time well spent. There’s some-thing fascinating about the construction of ahotel; you can see how it grows, how roomsare structured, and you are always person-ally involved – by the end, you even findyourself thinking about the colour of thecurtains.

And your financial commitment?Grand Resort Bad Ragaz AG now has some700 shareholders. Our stake as the majorityshareholder is around 75 per cent.

What is your motivation behind thisinvestment? I am a bit of a homebody, really; the cantonof St Gallen is my home canton, and as Ialready said, we decided as a family topromote Bad Ragaz. We feel obligated andbound to the valley in which we grew up. Ihave also restructured the family’s ownvineyards in Heerbrugg, where we are nowproducing recognised fine wines.

The Grand Resort Bad Ragaz wasopened in June in economically difficulttimes. Does that make you nervous?It takes a bit more than that to make menervous! But I’m confident for two reasons:first, our management team and all the staffdo a superb job; second, we are broadlypositioned with regard to the services weoffer and the profile of our target groups. 40 to 50 per cent of our guests come fromSwitzerland; around 30 per cent areGerman; the rest come from other coun-tries. We have a relatively strong clientelefrom the golfing segment – and the MedicalHealth Center offers outstanding services inthe therapeutic area. We thus benefit fromthe needs and requirements of an ageingsociety – with the Swiss Olympic MedicalCenter and also from the megatrend insport and fitness. The economic crisis willundoubtedly have an impact on us. Ultimately, however, we are launching a product on the market that is simply“Wow!”. That gives us a major competitiveadvantage.

You own hotels, grow wine, collect art.You appear to have a taste for the finethings in life. Is that right?Yes and no. It is of course nice to own art. I enjoy this privilege. The fascinating thingabout wine, however, and also the hotelindustry, is that here – more than anywhereelse – a product is associated with personalcommitment. But in everything that I do,there needs to be a balance between theidealistic and the commercial. The interest-ing aspect is the preservation of value. For us, Grand Resort Bad Ragaz AG is abusiness unit that is managed according tobusiness rules.

What does money mean to you?In principle, for me it is a measure ofperformance. I was lucky in that I inheritedthe family’s stake in Holcim from my fatherand was able to oversee the company’ssuccessful expansion for more than 20years. Most of the family’s assets are stillinvested in Holcim. Heart and commitmentare also part of those assets. And for astrategy to be successful in the long term,heart and commitment need to be supple-mented by efficiency, stability and reputa-tion. These are values that I want to pass onto my children too. //

“In everything that I do, there needs to be a balance between the idealistic and thecommercial. The interesting aspect is the preservation of value. Grand Resort Bad Ragazis a business unit that is managed according tobusiness rules.”


Luxury as a commodityversus true luxury.The conversion and extension to the Grand Resort Bad Ragaz cost CHF 160 million– an ambitious investment in the future. Butmoney alone does not guarantee success, says CEO Peter P. Tschirky.

Photos: Cédric Widmer

The Penthouse Floor in the newlyconstructed suite tower of the Grand ResortBad Ragaz stretches over 560 squaremetres, almost the size of a ballroom. It isfurnished in exquisite taste – everything isof the best, finest and most expensivematerial: the floors made of nut-wood; thehuge bed, satin bed linen and ultra-exclu-sive feather pillows; the light in the bath-room reflected by Swarovski crystals, the whirlpool and the Finnish sauna; and the flat-screen TV hidden in the ceilingabove the bed. Without a doubt, and at CHF 12,000 a night, guests are gettingluxury here. That luxury is tranquillity. It envelopes youlike a veil of cashmere as soon as you enterthe resort grounds. Lying in the park under ahundred-year-old tree and listening to thesound of… nothing! is balsam for the soul.The location of the wellness oasis at thefoot of the Bündner Herrschaft region, with


years abroad, the manager returned homenear the Weisstannental in the region ofSargans, “where all Tschirkys come from”,where he grew up as the son of a mountainfarmer. At the beginning of the 1980s,Tschirky was working as a hotel managerfor the Sheraton Group in the Kingdom ofBahrain, the island state on the PersianGulf. He managed to win the trust of theemir at the time, Sheikh Isa, who thencommissioned the Swiss national to reno-vate his palace facilities. Tschirky thusbecame a construction expert too.It was precisely this blend of building andgastronomic expertise that was required inBad Ragaz when the extension and conver-sion of the Grand Hotel was being planned(see also the interview with the majorityshareholder Thomas Schmidheiny). CHF160 million has since been invested inconstructing the tower with its 56 spasuites, converting and renovating the twohotels Quellenhof and Hof Ragaz, and

developing the new medical centre and theTamina thermal spa. The new MedicalHealth Center, which is affiliated with theSwiss Olympic Medical Center, offers rehabilitation and preventive care of thehighest order. It is also available to patientswho are not staying at the resort; theyaccount for half of turnover. Around 30 percent of the hotel guests come to Ragaz fortherapeutic and medical reasons. The average age of the guests is 59.6; attractinga younger clientele is also envisioned.Tschirky’s attitude in this regard is prag-matic: “Demographics offers huge growthrates with this target group – there is also aconstant supply of new old people.”

Travelling into the futureEven before construction began, Tschirkywas already planning the “internal” conver-

a view of the Alps, is therapeutic in the bestsense of the word – far removed from thenoise of the towns and cities and yet soaccessible: an hour’s car journey fromZurich, two-and-a-half hours from Munich,three from Milan. “Luxury,” as Peter P.Tschirky points out, “is where I feel good.And when applied to a hotel – it’s whereguests find what they are looking for.” Tschirky, 57, has been CEO of Grand ResortBad Ragaz AG since June 2006. After 30

“The glossiest brochure is worth nothing if theatmosphere’s all wrong.For a hotel of our positioning, the best form of advertising isword of mouth.”



sion of the Grand Hotel Bad Ragaz into theGrand Resort Bad Ragaz as a “trip into thefuture” with his management team of 62staff. In seminars lasting entire days, theyexplored the elements crucial for turning theresort into the best of its kind in Europe. “Itwas about developing an all-embracingculture,” says Tschirky, “where the key wordis love.” By that, he means a love of detail –and the ability to put yourself in otherpeople’s shoes. “We want to ensure that ouremployees’ actions are determined by inter-est, care and respect, and not by indiffer-ence and egoism.”

Every member of the management crew isresponsible for conveying the results of the“trip into the future” developed in the semi-nars to his or her staff. The “BusinessExcellence” department analyses the feed-back from the guests and checks, usingvarious other measures, whether the effortsto achieve a special culture are bearing fruit.“Your hotel has a soul,” wrote one guest.Another noted: “My wife and I travel a lot.We know no other 5-star hotel where thestaff are so friendly and ready to help.”These statements prove to Tschirky that heand his team are on the right track. In addition to the “trip into the future”,because the resort would be bigger and asanother step towards excellence, Tschirkyintroduced an ISO-certified managementsystem. “We knew that we would not be the

same company after the conversion,” saysTschirky. “Now you can say every day thatyou ‘will do it differently in future’. But thereis a risk that ultimately everything will staythe same because it’s easier to keep thingsas they are.” In the course of the switch toISO standards, no stone was left unturned –change had irrevocably taken place. “Thisstep required will, courage and humility,”says the CEO, looking back. “It brought usa lot, but at the same time, the process wasnerve-wracking.”

A quantum leapToday, the resort offers facilities for up to550 guests. Their needs are attended to by682 employees. From an operationalperspective, the company is led by theResort Management, which comprises

“We want to ensure that our employees’actions are determined by interest, care and respect, and not by indifferenceand egoism.”


Tschirky as the CEO and the four businessheads of the sectors “Grand Hotels”, “To B.Wellbeing & Medical Health”, “Business &Events” and “Golf” as well as the CFO, thedirector of marketing and sales and thehead of infrastructure. The Resort Management meets once amonth, and Tschirky has regular weekly orbiweekly meetings with the business headson fixed days. The board of directors,chaired by industry manager Willy Kisslingand with Thomas Schmidheiny as its vice-chairman, is responsible for strategy. “We have implemented our vision andachieved the quantum leap to become theleading well-being and medical health resortin Europe,” said BOD chair Kissling, at theopening ceremony. Nevertheless, thecurrent crisis is also affecting Bad Ragaz –more in the restaurants than in room occu-

pancy. “Guests are consuming less,” saysTschirky. “With turnover per seat, we areposting a decline of 18 per cent.” This trendwas evident as early as 2008 before thefinancial crisis had begun to touch every-one. The company is trying, for examplethrough adaptations to the menu and winelists, to stimulate turnover again. This deli-cate task is based largely on psychology,says Tschirky. Indeed, the management of a resort of thissize and exclusivity has a lot to do with intu-ition as well as management expertise.“Observe carefully, and that will tell youwhat you have to change,” says Tschirky.On his endless tours through the resort, theboss follows his feelings. Uneasiness inresponse to this or that situation is a suresign that something needs to be done. And,of course, feelings are ultimately whatbrings guests to Bad Ragaz in the firstplace: “The glossiest brochure is worthnothing if the atmosphere’s all wrong. For a

hotel of our positioning, the best form ofadvertising is word of mouth,” saysTschirky, “when people tell their friends andacquaintances that they felt thoroughly athome in our hotel.”The CEO has set himself three goals: “First,I want to be able to get back that CHF 160million in return on investment. Second, Iwant to be the best hotel in the world forour customers. And third, in Bad Ragaz Iwant my name to stand for good andsuccessful management.” The time-framefor reaching these goals: 2011. //


Only the best: CHF 160 million was invested in rebuilding and renovating thehotels Quellenhof and Hof Ragaz, a tower with spa suites, the new MedicalHealth Center and the new Tamina thermal spa.

“People have a deeply entrenched need to ascribe good or bad intentions

to others,”

says Professor Ernst Fehr, Director of the Institute for Empirical Research in Economics at the University of Zurich and the first economist to be awarded the renowned Marcel Benoist Prize.

Professor Fehr, to put it briefly: what do you study?We deal with a wide range of issues: how labour markets work,how to create ideal incentives for employees and managers, howhierarchies are generated in companies, what role reputation playsin how markets function. In addition to these economic issues, wealso look at the question of the influence of non-economic factorssuch as fairness and social norms on economic life and its players.Are these factors biological or cultural? And if the latter, whatexactly about the culture? Our research programme has becomevery successful. Today, the University of Zurich is one of theworld’s leading centres in experimental economic research andneuroeconomics.

What grabs your interest at the moment?We want to understand the biological basis of economic activity.We are carrying out genetics studies and investigating which brainprocesses underpin altruistic and egoistic behaviour.

How do you do that?The participants in an experiment are networked in our computerlaboratory interactively and given economic situations to tackle.They have to make decisions within clearly defined parameters.These can be very simple experiments, such as the ultimatumgame, and also complicated market experiments with complextrading rules.

What is the ultimatum game?In the ultimatum game, a participant, let us call him Participant A, isgiven a sum of money and can decide how much of this he or shewants to offer B. A makes an offer and B can only accept or rejectthe offer. The two do not negotiate. If B accepts the offer, then bothof them get their money; if B rejects it, neither of them getsanything.

What results do you see?Many offer 50 per cent of the sum because they consider an offerlike that to be fair and expect it to be accepted. Players who aremore willing to take a risk try to come off better with a moreaggressive, i.e. a lower offer. The more one-sided the offer from A is, however, the greater the probability that B will reject it. B’swillingness to reject unfair divisions, even though he or she willthen not receive anything, punishes A and helps to ensure thatfairer proposals are made. Experience shows that B subjects tendto accept lower amounts if the distribution of roles has beendecided not by the toss of a coin, but rather based on a perform-ance test. Or if a random generator specifies the amount that A hasto offer to B.

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So the game shows that subjects do not behave like the model Homo Economicus would?That’s right. The assumption of Homo Economicus (economic man)is refuted because B is prepared to forego sums of money topunish A for a low offer. This is neither rational nor self-serving.Homo Economicus would not act in this way. Economists weresurprised by the result of this experiment. But they were probablythe only ones. It is clear to anyone with an ounce of social intuitionand a healthy dose of common sense that a player will not acceptany old amount if this would mean that another player received adisproportionately higher amount.

In your opinion, what model should replace Homo Economicus?One based on a more complex, multifaceted type of person – aperson who has a high degree of rationality but is also guided byemotions that are not always ideally suited to decision processes.He or she is a person who also demonstrates irrational behaviour.Someone who is willing, under certain circumstances, to behave ina fair way and to cooperate, even if cooperation costs somethingand is not in his/her own material interest. I am not saying that aperson who always behaves in an altruistic manner is a saint. Quitethe opposite, in fact. Self-benefit remains an important motive, butnot the only one.

When are people – economically speaking or in professionaleveryday life – fair or altruistic, or selfish?We can view the attainment of fairness goals or altruistic goals ascommodities. A person for whom fairness is very important “buys”himself or herself fairness, with fair behaviour and, at times, forego-ing material prosperity. If the costs for fair behaviour are too high,then nobody will “buy” this commodity anymore. However, thisdoes not alter the fact that there is a preference for fair behaviour. Ifchocolate becomes more expensive, people will buy less of it notbecause they don’t feel like eating chocolate anymore, but ratherbecause the chocolate is more expensive. Incidentally, the differen-tiation is not always easy. If an entrepreneur voluntarily gives his orher managing director a participation in profits, this can be out ofan altruistic motive or for his/her own self-interest because theentrepreneur believes that he/she is thus motivating the managingdirector for the future.

In your opinion, are incentive systems really needed to motivate people?With incentive systems, the question is always what they areintended to incentivise. Frequently, that turns out to be the wrongthing. People are also prepared to do something without receivingspecial remuneration in return. Material incentives can destroyvoluntary cooperation. A job normally consists of many tasks. Ifgoal attainment can be measured and incentivised for only a fewtasks, it may be better to do without incentives. If a company setsincentives for tasks, the fulfilment of which can be measured, the employees primarily concentrate on these tasks and neglectothers. That is the well-known problem of multitasking. One example of this is the payment of management according toabsolute share prices. I consider this to be a poor incentive system.

Why?The absolute level of the share price is a poor indicator of perform-ance. It is determined by factors that a manager cannot influence.Why should the management participate in an increase in thecompany’s value that occurs because the economy is doing well?That is not down to the manager. The same applies the other wayaround: why should a manager be punished because the economyis in the doldrums? That doesn’t make sense. A more suitablemetric would be share price relative to a benchmark index. Theincentive system should be designed in such a way that thecomponents which the manager does not have any influence overare not relevant for his/her remuneration.

What role does responsibility play in the economy in thisrespect?The term “responsibility” is closely linked with moral judgment. It isinteresting that the term does not exist in the business sciences.You will not find it in any textbook either. In an ideal market econ-omy, however, responsibility has a pivotal role. In the ultimatum

“If a company sets incentives for tasks,the fulfilment of which can be meas-ured, the employees primarily concen-trate on these tasks and neglect others.That is the well-known problem ofmultitasking.”


game, for instance, either player A suggests how the money shouldbe divided up, or the decision is made by a random generator. Thereactions from player B vary. If player A makes an unfair sugges-tion, it is rejected more frequently than when the same unfairsuggestion comes from a random generator. This shows thatpeople have a deeply entrenched need to ascribe good or badintentions to others, and to make them responsible for these inten-tions, although this inclination seems to be less widespread amongthe uneducated in society than among the highly qualified.

In the laboratory, a subject knows whether the distribution isdone by a person or the “system”. Isn’t this distinction muchmore difficult in reality?Yes, in practice it is frequently blurred. If a manager wants toprevent an increase in salary, he says: “I have no choice; thecompany results do not justify it.” The statement “I have no choice”means that I am not responsible for my decisions. If I had a choice,I would be responsible. There is a difference between whether aperson does something or the market does it. If a business partnerdoes not pay his or her invoices, the responsibility can be clearlyassigned. If the price of a share falls, the other capital marketparticipants cannot simply be made responsible for it. This oftenmakes it difficult in reality to examine psychological processes in ascientific manner.

Can lost trust ever be restored again under these circum-stances – and if so, how?Markets and market players can generate trust themselves. This isthe case wherever trust in individuals is involved. I know whether acontractual partner is reliable or not. The market largely regulatesthis itself. Individual players generate trust by assuming responsi-bility and repaying a part of their remuneration. But when the issueis about trust in the system, the market does not regulate that auto-matically. This is where political action is required. State interven-tion to assist UBS was very important for the Swiss financialsystem. If we look at the recent movement of the share price,investors seem to have regained some of their confidence.

Doesn’t classical theory teach that the good of the communityis maximised when markets are free and that everyone tries tomaximise his or her personal benefit?That is the ideology on which classical teachings are based.However, it does not correspond with the facts or with prevailingtextbook knowledge. Economics provides very clear conditions

under which markets are or are not efficient. When external effectscome into play as happens, for instance, with many public goodssuch as clean air and lakes, then decentralised free markets are nolonger efficient. If my production activities pollute river water or theair, the market does not reflect the real costs of those activities.Environmental legislation in Switzerland is one example of how thestate intervenes to compensate for markets that are not efficient.Traditional economics has a very scientific and completely non-ideological approach to this problem. There are circumstanceswhere the market is the better system, and there are circumstancesin which regulation is necessary.

For instance…?A good example of this are the financial markets, which harbourenormous information asymmetries. One side of the market is oftenmore familiar with the subject than the other. In situations likethese, with imbalances of information, there is the risk of individualplayers being at an advantage. It is therefore necessary and worth-while for the state to provide instruments wherever there aremarked information asymmetries. But state intervention begins atthe level of contractual enforcement! I can sue in court to have anagreement implemented. This is an elementary legal prerequisitefor the functioning of markets.

You mean legal safeguards as a form of regulation?If private players are better able to enforce agreements that theyenter into of their own volition, this is a positive form of regulation.It makes it possible for private individuals to get more out ofexchange deals. The idea that markets function efficiently withoutany regulation whatsoever was never right. //

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“You can only be a top performer if you feel good,”

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says Adrian Pfenniger, boss of the Triengen-based brush manufacturer Trisa. He is convinced that preserving values such as empathy, fairness, decency andrespect gives the company the internal stability it needs, particularly in times of crisis. Photo: Tom Haller

Every year, after the general meeting, Trisaboss Adrian Pfenniger makes a special tourthrough his company. Together with thecompany management, he goes throughfactory halls and office rooms and distrib-utes envelopes with precious contents. Theenvelopes contain money – cash, countedout exactly – which the boss hands over tothe employees in person. It is their share ofthe profits for the previous financial year. In2008, it amounted to 6.5 per cent of thebasic wage, from the machine worker to themembers of the board of directors. Pfen-niger also adheres to this ritual in the age ofelectronic payment transactions. Thehandover gives him the opportunity to saythank you to the staff and to gauge themood “on the ground”.He conscientiously avoids the term“bonus”, for Trisa introduced financialincentives long before they were in fashionand then fell out of favour. Since 1964, thebrush manufacturer has enabled its staff toparticipate in the company’s profits.Whereas back then they were scorned as“communists”, today Pfenniger lectures atuniversities on his participative manage-ment model, which he refers to as the “most

significant success factor” of his company.Each month, employees are given anaccountability report on the business andthe profit sharing associated with theperformance. “It is a good managementinstrument,” says Pfenniger, “Everyone cansee whether we are on course.”

Encouraging successThe method was developed out of neces-sity. At the beginning of the 1960s, Adrian’sfather, Ernst Pfenniger, experimented withnew management models to save the thenstricken company from collapse. Thecompany boss invested in new factory hallsand developed a system to spur the teamon to outstanding performance. For thispurpose, he not only introduced profit shar-ing but also made the employees share-holders and thus entrepreneurs. Thirty percent of Trisa’s shares have since been heldby its employees; 70 per cent are in thehands of the Pfenniger family. Those whojoin the company receive the gift of a Trisashare after one year of service, whichaccording to Pfenniger is “not intended asan investment vehicle, but rather as a ticketto participate in the shareholders’ meetingand on the board of directors”. Those wholeave the company have their sharepurchased back at its taxable value. There is thus a greater throng of people atthe shareholders’ meeting of the brushmanufacturer than at the annual meeting ofmany a corporation listed on the stock

exchange. After a phase of strong expan-sion, the group today has more than 1,000employees, 750 of whom work at thecompany’s headquarters in Triengen. Irre-spective of the growth, the values that havebeen lived ever since the company wasestablished still apply – with one difference.Now they are recorded in writing too. AdrianPfenniger, who joined the company in 1989and has been responsible for operationssince 2005, wanted to ensure that thecorporate culture grew with the company. He did not prescribe a business charter excathedra. Instead, together with the boardof directors and the company’s hundredmanagers, he defined the central manage-ment principles in the project “Trisa Spirit”,which all the employees signed in person.At Trisa, business dealings are to be char-acterised by empathy, fairness, decencyand respect without in any way diminishingthe importance of motivation or ability towork under pressure. “You can only be atop achiever in the long run if you feelgood,” says Pfenniger with conviction.Everywhere in the company one seesplaques with mantras such as “We treat


each other with esteem”, “Innovation is ourgoal” and “We deliver top performance”. Inthis way, long-standing employees are notthe only ones who are able to regularly callthe values to mind; new employees alsoquickly become members of the Trisa“family”. Seminars on the topics of “praiseand recognition”, “achieving better qualityof life” and “teamwork” help to consolidatethe spirit of cooperation in day-to-day work.

Investments of about CHF 100 millionWhat neo-liberal pioneering thinkers mightlaugh off as social romanticism, Pfennigersees as a “clear strategic benefit”. The

strong culture is the reason it still makessense for the company to produce at thehigh-cost site of Triengen. Trisa is compet-ing particularly in young markets such asChina and India where suppliers factor inconsiderably lowerwage costs. Pfenniger,however, is sticking by the Triengen site andhas even strengthened it over the last fewyears with investments of more than CHF100 million in new production systems.Outsourcing to low-wage countries is out ofthe question.

For Pfenniger, there is only one way tosurvive in global competition: innovate.Prime importance is attached to ideasmanagement in Triengen; the share ofturnover accounted for by products thathave been on the market for less than threeyears has grown from 5 to 35 per cent overthe last ten years. Several innovation circlesof employees from various divisions andexternal experts meet up regularly in a so-called idea house to develop new products.Ideas and knowledge about patents andtechnologies are systematically managed ina database. All Trisa employees also havean ideas pass in which each ideacontributed is recorded and subsequentlyalso rewarded. “Trisa champions” arechosen at the end of the year. This washow, for instance, the sonic toothbrushSonicpower came to be launched on themarket. A team spent four years working on

All Trisa employees also have an ideaspass in which each idea contributed is recorded and subsequently also rewarded. “Trisa champions” arechosen at the end of the year.


Facts and figuresTrisa was established in 1887 and today isone of the five largest brush manufacturersin the world. Last year, the company gener-ated a turnover of CHF 236 million and a netprofit of CHF 16.5 million with around 1,000employees. Every day, one million or sotoothbrushes leave the plant; 97 per cent ofthese are destined for export in more than80 countries. Other business segments arehaircare and commercial cleaning. Thirtyper cent of Trisa AG is held by its employ-ees; 70 per cent belongs to the Pfennigerfamily.

a solution to fitting a motor into the narrowneck of a toothbrush.

No fair-weather programmeThe economic crisis is becoming anendurance test for Trisa too. Pfennigerwants to show that social entrepreneurshipis not a fair-weather programme but rathercan guide the company safely throughtimes of recession. Trisa, which exports 97per cent of its toothbrushes, was hit byfalling currencies last year. High prices forcommodities drove up costs. In the first fewmonths of the current year, orders declined.Knee-jerk cost-saving exercises, however,would be counter to the company’s ethos;instead, cost reduction is an ongoingprocess at Trisa. “Ideas management

affects not only the creation of new prod-ucts but also the entire manufacturingprocess, logistics and administration,” saysPfenniger. “The internal procedures arecontinually optimised and rationalised at ourcompany, not only in times of crisis.”Currently, order handling is being examined.The Trisa CEO is preparing for a stagnationlasting two to three years and a slow recov-ery. The goal of increasing employee profitsharing to 10 per cent has accordingly beenpushed back a bit, but Pfenniger thinks it isunlikely that no bonus will be paid out, aswas the case in the economic crisis of the1970s. He is convinced that retaining valuesgives the company the internal stability itneeds, particularly in times of crisis: “Our values are an anchor in a fast-moving environment,” says Pfenniger. “Thanks tothem, a quantum of luck and God’s blessing, we will also come through thisdifficult time.” //

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Trisa introduced financial incentives long before they came into fashion andsubsequently fell out of favour. Since 1964, the brush manufacturer’s employeeshave shared in the annual profits.


Discipline: the greatest challenge.

Mr Senn, as the chief investment officer of a global insurancecorporation, you hold a key position. What is your task?The Investment Management division of the Zurich Group has themandate to generate superior, risk-adjusted return on its capitalinvestments in relation to its liabilities. In other words, my team andI strive to create long-term added value with our revenues from theinsurance business both for our policy holders and our sharehold-ers.

You are aiming for an above-average return. What is yourbenchmark?We are continually comparing ourselves with our 30 biggestcompetitors in the world. In the last three years, we have beenamong the top five on each occasion, both with regard to theabsolute performance and the “relative performance”, i.e. profit inrelation to our liabilities. This is a nice affirmation of our work.

What kind of sums do you manage?Our core business, the management of insurance funds, involvessome USD 174 billion. The management of these funds is supple-mented by diverse consulting activities within the Group – foranother approximately USD 100 billion. We also act as consultants

to our pension funds; across the Group, there are around 40pension plans with a volume of USD 11 billion. And, what’s more,we are also experts in the area of owner-occupied real estate.Here, we have great expertise as real estate is an important part ofour portfolio and we have the corresponding specialists in ourteam.

How many staff do you employ in your division?We have a very lean organisation; worldwide, around 300 Zurichstaff are entrusted with investment management. They are supple-mented by a network of external institutional asset managers withwhom we collaborate on a mandate basis. This task sharing has avariety of benefits, one of which, for instance, is that we can recruitthe best asset managers in their class anywhere in the world andcan also part company with them at any time if they do not meetour expectations.

How much latitude do you have?On the one hand, a considerable amount because we have accessto very substantial funds and thus the corresponding influence. Onthe other hand, our radius of activity is limited by our liabilities, byour capital and by regulatory requirements in the various countrieswhere we are active. The biggest restrictions are our capital andour liabilities. They form the perimeter boundaries for our invest-ment strategy. As an insurer, we need to guarantee that thecompany’s liabilities are covered in such a way that we never haveto draw on the Group’s capital even in a poor financial market environment. The most recent crisis has provided many examplesof what happens when an insurer does not take this into account.Some of our competitors were in such difficulties that they had to

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For Martin Senn, Group Chief Investment Officer (and designated Chief ExecutiveOfficer) of Zurich Financial Services, clearly structured investment procedures anda well-defined investment strategy are vital for success. His motto: do everythingby the letter at all times. Photo: Tom Haller

Martin Senn, designated CEO of Zurich FinancialServices, starting January 1, 2010, has been ChiefInvestment Officer and member of the Group ExecutiveCommittee since 2006. His career has taken in variousmanagement positions at the former Swiss BankCorporation and at the Credit Suisse Group. Between2003 and 2006, he was Chief Investment Officer at theSwiss Life Group.


increase their capital or were even dependent on assistance fromthe state.

What has your experience been with the current crisis? It is not the first crisis that I have experienced. The global financialcrisis has once again highlighted in no uncertain terms the import-ance of a clear investment philosophy and a correspondinglysystematic and structured investment process. We have identifiedthat our investment strategy is solid and robust. However, we toowere surprised by the extent of the crisis, we were forced to acceptchanges in value, some of which were greater than we hadexpected. Now we are of course asking ourselves what lessons weshould learn from that for the future.

Can you be more specific? I can’t be all that specific as a lot is still in flux. Nothing fundamen-tal, however, will change at our company; at our core we have noneed for action. Our philosophy will continue to be: We want togenerate superior risk-adjusted returns in good times and a min-imum loss in bad times – and we will not risk the company’s exis-tence in the process. Our overriding goal is very clearly to keep thebalance sheet of the Zurich Group strong.

What is the greatest challenge here?Discipline. We have a clearly defined investment strategy andclearly structured investment procedures, and the aim is to ensurethat everyone adheres to these guidelines, irrespective of whattemptations the market offers. The temptations in the market arehuge – and there is a risk of succumbing to them, for people, notmachines, are at work here. The most recent past shows that itrepeatedly pays off for us to do everything strictly by the book.Without our exacting regime, we would be much more stronglyexposed to the market. We might, like others, have been driven bygreed on the way up and by panic on the way down. Thanks to ourdiscipline, we had a positive investment return of just over 1 percent at the end of 2008 – a significant success and clear affirmationthat we are doing a lot right.

In your field, what is know-how and performance, and what isluck and intuition? At our company, the expertise and, as I said, the discipline of theemployees are the be all and end all. It is therefore absolutelypivotal to ensure that we have the best people in each position.Diversity too is a factor. Here, at the Group’s headquarters, weemploy 53 staff from 25 countries in investment management. That

is not only part of our philosophy; it is also decisive for success.When we want to conclude a transaction in China, we need anexperienced Chinese employee who has internalised the cultureand customs of his/her country as well as the values of ourcompany. I am very proud of the professionalism and the commit-ment of my staff. And on the topic of luck: that shouldn’t of coursebe a factor at our company! After all, we’re not playing the lottery.Our success is based on solid market research, empirical modelsand clearly defined procedures. Gut feelings and intuition can alsoplay a role up to a certain extent – but are certainly not drivers. Farmore important than intuition are insights based on broad internaland external research.

The market for investment opportunities is very agile andinventive. How do you invest? Here we have a clear guiding principle. We only invest in risks thatwe understand. By that, I do not mean from a technical perspec-tive, for we easily understand the structure of products. It’s muchmore about understanding the importance and influence of variousproducts on our balance sheet, in particular in the event of a crisis.Certain products are too complex for them to justify in sum theeffort required to analyse them properly, to model them and thendepict them in the risk systems. It is our experience that highlycomplex products only marginally prove themselves in an insur-ance environment. The most recent past proves us right.

When are you anticipating a recovery in the economic situation? We are already seeing the first signs of a recovery, albeit at a verylow level. I think unemployment will continue to grow in manycountries, and consumer trust will be dented for a long time tocome. Consequently, the glimmer of hope on the horizon does notyet signify a reversal of the trend. We will have to wait a while yetfor that to emerge.

What is your own attitude towards risk? Risk is the driver of return. I always take this link into consideration,both in my job and in my private life. I consider the relationshipbetween return and risk before every decision. //

dossier + + + + + + + + + + + preserving values

“Our philosophy will continue to be: Wewant to generate superior risk-adjustedreturns in good times and a minimumloss in bad times.”


dossier + + + + + + + + + + + education

Building a mound to view thebig picture.

Professor Ernst Mohr on the impact of the economic crisis on the University of St Gallen,

human weakness and social responsibility.Photo: Tom Haller

Professor Mohr, the HSG is often seen asa foundry for Swiss business executives.Does that please you?I like the term “executive” more than theterm “foundry”. Foundry suggests ironwhich can be shaped and processed as youwant it. That image does not fit with auniversity. What is correct is that the HSGproduces executives.

Executives who are intended to serve theinterests of business?Not only. The HSG is not purely a businessschool; rather, it offers a broad range ofservices. I see the HSG as a social sciencesuniversity with a strong focus in the area ofbusiness studies and, more specifically, inthe area of management. We also offer onecourse in law and two in economics as wellas “Law and Economics” and “InternationalAffairs”. This distinguishes the profile of theHSG. Only around half of our graduateshave studied business administration in itsnarrowest sense.

One of the guiding principles of the HSGis: “We want students who can use theirtalents and their motivation not only fortheir personal success but also in asocially responsible way.” The financialand economic crisis has shown thatmany managers in executive positionswere primarily seeking personal success.Were they badly educated?It takes around 15 to 20 years betweengraduation and gaining a top position. HSGgraduates who are now in managementpositions studied at an institution that wasvery different from today’s. I am not beingjudgemental in saying this; I am merelysaying that the university conveys mindsetsto students that always take effect with acertain time lag. That is why the HSG isalways in a permanent state of flux. Thefinancial world has also undergone radicalchange over the last 20 years. A techno-logical revolution has taken place that hasfacilitated concepts and approaches tovaluation that now appear to have got out of control. The financial crisis developed outof a combination of technical errors andhuman weaknesses.

How do you explain the “human errors”?They have different causes. One is to befound in specialisation, which is not bad initself but harbours certain risks. It cannarrow horizons and restrict the view of theoverall picture. The specialist has atendency to say: “I’ll keep my area in order,and if the other specialists do the same,things will generally be OK.” As the crisisshows, this is a misguided view.

Human weaknesses can also be down to character. Can a university train character?Pedagogical studies prove that early child-hood, parents, surroundings and friendshave a far greater impact than do schooland university. Nevertheless, it would be adamning indictment of a university if it

claimed: “We offer a scientific education –we’re not interested in the rest.” Our oppor-tunities to influence the development of ourstudents’ character are restricted, just asthey are in a company, for instance. Yet wehave to make use of these opportunities.

Has character training become a topic atyour university against the backdrop ofthe financial and economic crisis?The discussion about the consequences tobe drawn from the crisis is under way withinthe HSG. I am often asked what we aredoing now, what we are changing. It is tooearly to give any answers. One of the topicsthat we are discussing is the relationshipbetween contextual and core subject study.Here, we are dealing in particular with therisks of specialising.

In “contextual studies”, students attendcourses that are not directly linked to thesubject of their degree and which areintended to broaden their horizons, forinstance from a cultural perspective.Yes, and here the question of how to inte-grate disciplines arises. Science is becom-ing ever more specialised; this is the natureof science. On the one hand, it is our task tooffer a scientific education; on the otherhand, we have to encourage linking ofelements, for instance through contextualstudies. This is an important point that wehave been examining, and not only since

dossier + + + + + + + + + + + education

“I see the HSG as a socialsciences university with a strong focus in the areaof business studies and,more specifically, in thearea of management.”


the financial and economic crisis. The crisishas confirmed that no single discipline canpromise a solution to the problems. Theyneed to be tackled on a broad front.

Is the discussion about the future ofuniversities being carried out at the inter-national level?Over the course of the crisis, the HSG hasbecome a focus of special attention – like allbusiness universities. We are a member of the Community of European Manage-ment Schools and are noticing that all ourpartner universities are facing the samechallenge: how do we react to the questionsand demands from society? We are betterplaced than purely business schools.Because we offer a broad portfolio,students are given an environment in whichthey can also exchange ideas and informa-tion with students and lecturers from othersubjects. This gives us a certain advantageover other universities. This does not mean,however, that everything is OK. We, too,have to review the courses we offer, inparticular vis-à-vis the interaction Imentioned between contextual and special-ist subjects.

You expect social responsibility fromyour students. What do you mean bythat?Social responsibility implies an interest inthe community. This consists of differentpeople with different backgrounds anddifferent interests, perceptions and require-ments. A lot is already achieved here ifstudents are receptive to this subject.Through active membership in studentorganisations, students can generate bene-fits for all their peers.

You yourself are a lecturer of macroeco-nomics with “special consideration of the context of business and ecology”. Entrepreneurial activities that take theenvironment into consideration alsoinvolve social responsibility. Primarily, it is about determining the basisfor people’s prosperity. The environmentplays a major role here – and you first haveto ask yourself: “Is it worthwhile choosing along-term perspective over a short-termone?” Of course, you should not lose sightof future generations; however, a companyalso has to take commercial aspects intoconsideration; the challenge is to combinethe two.

Politics and business are still dominatedby men. Is the HSG doing enough toencourage women? The number of female students isconstantly on the rise, but is still belowaverage due to the specific subjects that weoffer. Female students now account foraround 38 per cent of students; ten yearsago, that figure was only 28 per cent. Butwe still have the potential to increase thatnumber further – compared to other univer-sities that have a quota of women in excessof 50 per cent and also with regard to adifferent spectrum of subjects. We take thepromotion of women seriously. Since 2008,we have offered the further training course“Women Back to Business” for women whoare planning to rejoin the labour force.

Is it conceivable that the HSG will have afemale president one day?Yes, of course.

As the president of the University of St Gallen, what lessons do you draw fromthe last twelve months?University teaching is researchbased; that’swhat sets it apart. Research is becomingever more specialised; that’s in its nature.The challenge is to ensure that increasinglyspecialised researchers not only dig downdeep for their research but also build them-selves a mound from which they can seethe whole picture.

As you have said, the HSG is the focus of attention. Has the economic crisisharmed its reputation?No. It spurs us on to find ways of doingbetter in future. I don’t set much store byapportioning blame. More interesting is thatthe dimensions, the rich facets and theeffects of the financial and economic crisisoffer a huge potential in terms of lessonslearned and the chance to review andconfirm old concepts or to replace themwith improved ones. We have to seize thisopportunity, for the cards are being reshuf-fled at universities too. //

“I don’t set much store byapportioning blame. More interesting is thatthe dimensions, the richfacets and the effectsof the financial andeconomic crisis offer ahuge potential in terms of lessons learned.”


50 ceo/ulysses

“Ulysses”: An agricultural school in 50 countries.

It was exactly one year ago that PhilipposSoseilos, Business Advisory Leader andHead of the People & Change Team at PwCin Cyprus, was in South America as part ofthe “Ulysses” responsible leadershipprogramme. Together with two other partnercolleagues (one from Canada and one fromMalaysia), he took on an agricultural educa-tion project in Paraguay, working with thelocal NGO Fundación Paraguaya. Theschool’s model promotes entrepreneurshipand provides young people in underprivil-eged, rural area with the opportunity tolearn how to be self-sufficient using themeans accessible to them. “Our task was todesign a replication model so that theschool’s system can be transferred to 50other countries,” explains Philippos. “It wasan amazing learning experience which gotus out of our comfort zones and helped usform a wider and more realistic perspectiveof the world.”

The three-month programme incorporatedintense personal reflection and coaching.Philippos acknowledges that this experi-ence allowed him to go through a number ofpersonal shifts. “I observed myself throughthe eyes of others. I got to thinking aboutmy values, strengths and the source of myenergy. I identified my personal blocks(judgements and fears). I very muchreflected on the evolution of societies, onthe global issues of sustainability, the role ofbusiness in the community and of the globalleadership challenges.” Philippos began to see his perspective onthings change: “The trips that we madeduring the project brought us into contact

with great poverty but also with actuallyvery happy people. It was a humblingconfirmation that possessions do not bringhappiness. As one of them said: You havethe watches, we have the time.”Through “Ulysses”, Philippos’ ability tolisten has greatly improved. “Today, I ammuch more attentive in both my profes-sional and my private life. I try to betterunderstand people and create space forothers. I focus less on my own agenda. Iinvest more on building trust-based rela-tionships, and I have absolute conviction inthe power of collaboration and the spiritualconnectivity between people.”“Learning and changing is a lifelong journey.This experience has made me more confi-dent to be myself in an authentic way. I havelearned that leadership is about who youare and not what you do.” //

“Ulysses” is a leadership development programmeof PricewaterhouseCoopers. The participating PwCpartners demonstrate potential for a career inmanagement and are nominated by their countryorganisations. In multicultural teams (comprisingthree to four persons), they spend two months inThird World countries, working together with socialentrepreneurs, NGOs and international organisa-tions. The selected projects constitute a challengeand offer a chance for participants to put theirprofessional expertise to good use in a totally differ-ent environment.

Formative experiences: PwC’s Philippos Soseilos in Paraguay.

© 2009 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Corporate success is all about sustainable profitability. Achieving it requires candour and credibility. Open, communicative management is a hallmark of modern corporate governance, and essential if your aim is to build trust. PricewaterhouseCoopers can help you strengthen your company’s position in the capital markets and in the public eye – and at the same time secure your success. So what’s your question?

Does there always have to be a secret to success?Sandra Böhm, PricewaterhouseCoopers Zurich

www.pwc.ch

ceo* optimism/realism

Andy Schmid:“I prefer to keep my feeton the ground.”

12

Dr Maja Storch: “Managers are entitled tofeel uncomfortable in diffi-cult situations and shouldbe able to express it.”

10

Prof. Dr Susanne Suter:“A compromise of pos-sible and enforceable.”

06

Jean-Marc Bolinger:“We need substance, notmarketing blah-blah.”

08

*connectedthinking CO

RP

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