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"Houston, We Have a Problem"
The intensity of the public outcry is justified. Credit Suisse is not just any company and the magnitude and duration of misbehavior by Swiss standards has been unprecedented.
In the first instance its behavior has adverse consequences for its 50,000 employees, 100,000 shareholders and 1.6 million clients. But impact goes well beyond this.
CS is a significant intermediary between Swiss savers and mortgage holders and provides payment services. It is thus of systemic relevance; a kind of cardiovascular system for the Swiss economy.
CS is also of considerable historical significance. What William Tell means to Swiss political history, as Alfred Escher, CS’s founder, means to Swiss economic history. He also founded the ETH as well as being a kind of spiritus rector of Swiss entrepreneurship.
CS initiated and provided funding for the Gotthard tunnel, Swiss railroads, electricity to households, the establishment of the ETH
Credit comes from "credere" meaning "trust" so wherever it goes in the world, CS advertises itself as "Trust Switzerland". Given its importance, it is surprising that CS’s misbehavior has been tolerated for so long.
Credit Suisse share price is lower today than 25 years ago. It has amassed fines and penalties equivalent to 30% and paid out management salaries and bonuses in excess of 2x its market capitalization.
During this extended period of value destruction and extraction, no chairman, board member resigned in opposition or was pressured by large shareholders to leave. Urs Rohner, the chairman, has been the only senior person of a leading global bank beleaguered by the GFC to remain in office.
So what has led to CS’s downfall?
There are few compounds more toxic than money to excite greed and Credit Suisse has relied almost entirely on money as motivator for its senior management.
Having money as the prime motivator tends to encourage self-interest and creates a moral hazard with a "heads I win, but tails the bank loses" payoff.
Since bonuses are calculated annually and earnings quarterly, excessive short termism permeates behavior. Beneath the barrage ad hominem press criticism, greed is the root cause of Achegos, Greensill, toxic mortgages, money laundering, spying and all the other irregularities which have characterized CS downfall over the past twenty years.
It is difficult to imagine how long-term success can be achieved when greed and short-term gain is the modus operandi and there is so little bond between a company and its employees and clients.
How did this come about? My thesis is leadership in the Swiss economy began to bifurcate starting in the 1990’s with the onset of "Davos Man".
Harvard’s Samuel Huntington’s classical neologism refered to the global elite whose members view themselves as completely "international".
Integral to the Davos Man mantra is the supremacy of shareholder value over other stakeholders, community or national considerations.
Since this schism, Switzerland has become a kind of laboratory of co-existence and tension between two competing factions; "Davos Man" vs "Homo Helveticus", the traditional form of Swiss industrial leadership.
There are plenty of companies still adhering to the "Homo Helveticus" taxonomy such as Firmenich, Partners Group, Nestle, Roche or Schindler.
Take Pictet for instance. Ivan Pictet once told me that he is driven by a "certain sense of duty". A duty towards employees, their families, the city of Geneva and Switzerland.
But he mentioned he also feels a duty to win the approval of his ancestors. This means to protect, build and pass on in a better condition what one has inherited. "Being at Pictet is the chance to benefit from a lot of things that others have done before you," he said.
Pictet is probably worth 10 times more today than when Ivan Pictet became a partner in 1982. During this period, I don’t recall one scandal or incident which blemished its reputation.
The bank is considered a preferred employer and their people feel well paid. They are motivated by values not greed.
Partners Group, a leading advisor in private equity investments is another example of "Homo Helveticus" leadership. Established only in 1996 by Marcel Erni, Alfred Gantner and Urs Wietlisbach (The Partners), it is now worth more than CS and has been scandal free.
Pictet and Partners Group explode the notion that value extraction rather than creation is endemic to the financial services sector.
When Credit Suisse acquired the control of First Boston in 1990 it began emulating the "eat what you kill" remuneration practices prevalent to Wall Street.
Ironically the Swiss Multinational corporations (MNCs) which have maintained the "Homo Helveticus" approach have achieved vastly greater shareholder value such as Nestlé, Roche and Schindler, than those who have pursued the "Davos Man" strategy so this may provide a valuable lesson and source of optimism.
When one studies the heroes, who generated the greatest value for Swiss industry such as Fritz Gerber, Nicholas Hayek, Sergio Marchionne, Helmut Maucher, Christoph Blocher, Nicky Schindler, Ivan Pictet - all have been from the "Homo Helveticus" mold.
They took original, often bold paths and had a long-term orientation.
Jorge Paulo Lemann pointed out to me that no one among large MNCs adhering to the "shareholder supremacy" camp has done anything bold, or distinguished themselves, over the past 20 years.
Their formula tends to be similar. An external CEO, usually with McKinsey experience, coming from a different sector which happened to do well under different circumstances; five years of cost cutting; sale of a non-profitable division; and share buybacks.
Little is invested in R + D or new product development as benefits would only accrue beyond their normal tenure.
It reminds me of the French philosopher Rene Gerard’s concept of "mimetic desire" where people seem to desire something because others desire it, leading to copying or mimetic behavior. And since more people do it, it becomes less valuable and more competitive.
CS provides a case study of how management cleverly engineered a system to neutralize traditional lines of good corporate governance. This neutralization has occurred on three levels.
The first: the board.
CS relies on appointed fiduciaries as board members as its highest organ accountable to shareholders. To allay the potential of agency risk, chairman and board members have historically constituted a kind of Swiss knighthood.
Recruited from captains of industry, academics and government - each with impeccable reputations. It was considered an honor to be a board member and with honor came the risk of shame.
People of high stature place considerable value on their reputations and go to considerable length to protect them. I remember Helmut Maucher once told me “the board members usually agreed with me but knew if I made a questionable proposal, board members such at Rainer Gut, Fritz Gerber and Jean Pierre Roth would be the first to object, so I was very careful in what I proposed ".
Since CS adopted its "shareholder supremacy" approach, its board has gradually morphed from knighthood to a constellation of members proposed by the chairman for their tameness.
Most are retired, living on other continents, not familiar with Switzerland so reputational risk is muted. None have the stature of Gerber or Gut with the kind of reputations to lose wagered on every important decision.
Annual board fees of up to 1,000,000 Swiss Francs are rents worth preserving especially for someone in retirement or a professor earning less for their day job. Expecting them to challenge the chairman may be wishful thinking.
Second level: the shareholder.
The ultimate culprits for CS mishaps are its shareholders. Of course, they carry the direct financial consequences, but that is not enough: as the ultimate power holder they have ultimate responsibility.
If management is permitted parasite like feeding off the host of ownership which has characterized Credit Suisse’s demise, it is only rational for them to do so.
Management carefully cultivated relationships built on privilege with CS’s most influential shareholders during his reign; the Olayan Group and Qatar Holding.
The Olayan relationship dates back to CS’s acquisition of First Boston where it was an important shareholder. The bank has had extensive dealings over the years with the group in the middle east.
Qatar has a joint venture with CS in the middle east. During the Grand Financial Crisis both shareholders became the most important investors in CS capital structure.
In addition to being among the largest shareholders, they provided capital in the form of convertible loans (COCOs) earning up to 9.5% yields, remarkably high for fixed income investments in Swiss Francs.
"COCOs" could be considered very high risk as the investor may be forced to convert their debt into shares at depressed share prices should their be an event which brought CS Tier 1 capital to below 7%, the minimum level required by regulators.
In reality, each time the minimum level threshold was threatened, CS issued more capital, diluting normal shareholders. CS did this in 2015 and repeated it again in 2017, avoiding such conversions. Neither Olayan or Qatar participated in the capital raisings but they continued receiving their outsized interest payments.
Normal shareholders were not offered to participate in these convertible bond offerings, so at a minimum, shareholders were not treated equally.
Whether these and other privileged dealings helped protect Rohner's position is a matter of speculation, but the fact remains that the most influential shareholders have been acquiescent during CS’s demise.
Third level: "Feedback Loops".
The final line of defense which has been engineered away is what I call "feedback loops".
In the Chiasso affair in 1977 CS suffered a loss of CHF 1.4 billion from a rogue lending incident. The NZZ wrote May 5, 1977 "this is not about the individual interest of the chairman but the interest of the entire Swiss bank community and the image of our country throughout the world".
The next day Heinz Wuffli, CEO of CS, who knew nothing about nor had anything to do with the incident, resigned stating "subjectively I feel I am not guilty but objectively I feel responsible; submitting my resignation would be a service to CS ".
Rainer Gut commented contemporaneously "the pressure from the media and public was immense".
To put this in perspective the Chiasso loss was a small fraction of CS recent loss from Archegos of CHF 4.4 billion; and only one incident.
Mistakes will be made in a world subject to intense competition. A key to success as we have all experienced in our own lives is being subject and responsive to criticism.
The Germans have the best automobiles because German customers are the most critical. Swiss are also critical by nature which has historically been an effective quality control against the sort of behavior experienced at CS.
How many CS board members read Le Temps or the NZZ, or care about their critique? Which board members still have reputations more valuable to protect even if this means foregoing board fees?
How sensitive are shareholders to criticism if they have been passified through privileges or others such as Blackrock, among CS largest shareholders, are ETFs designed to be "non owners"?
One begins to understand what constitutes CS’s immunity from criticism and the absence of feedback loops. Still, some are saying it's unfair to blame chairman Rohner in particular as the whole board has failed.
Well, it's a matter of responsibility rather than blame.
Credit Suisse shares have lost more than 70% of their value under Rohner, and the number of irregularities which have befallen the bank have been too numerous and consistent to excuse.
The main task of a chairman is to make sure the right CEO and strategy is in place. By Rohner’s own admission, his appointment of Thiam was a mistake.
In crisis situations like these the critical pathway is to regain trust as soon as possible and to cast a realistic, forward looking and positive narrative. Once trust is lost, banks can suffer a rapid exodus of its most valuable clients and employees.
It's also important to draw a line from the past and move on towards a more promising future.
Credit Suisse would benefit if the entire board were to step down and be replaced by members capable of restoring trust among clients, shareholders, employees, regulators and the community.
Now: Will the incoming chairman be able to change the course?
Antonio Horta-Osorio certainly has a strong reputation and deserves the opportunity to evaluate the situation and assemble what he considers as an optimal management team.
It's much easier to change management than cultures but people need to have confidence that greed is no longer the DNA determining motivation.
The quickest cure of CS "culture" would be some very high-profile firings and prosecutions with lengthy jail sentences. This would be far faster and effective than any number of reorganizations and PR campaigns.
Thus far it has only been the shareholders who have paid for the extensive fines, penalties, write-offs and share price destruction.
And then there’s the question of CS as a target of an acquisition? Anytime a company sells so cheap relative to its book value it attracts suitors. Banking is highly regulated so any possible combination would be closely scrutinized in various jurisdictions.
On the surface a merger with UBS may seem appealing. There are considerable cost synergies, both are Swiss etc. At a higher level this may have drawbacks: fewer choices mean less competition and more concentration of risk.
The reality is that both UBS and CS have become less competitive on the global stage over the past generation so it's not clear to me that combining weakness will result in strength.
Neither have been innovative. They were both predestined to enter the payments business where companies such as Adyen and Square are now worth multiples in value.
They could have competed with Blackrock or Lyxor in the ETF sector but chose to sit on their hands. They could have expanded more aggressively in Asia where the Swiss brand counts for a lot.
Each have followed the same, unimaginative strategy: shrink the investment bank and continuously cut costs.
Management and the Board felt this is what analysts wanted to hear and it would reflect in higher share prices but both UBS and CS are selling at a fraction of their book value suggesting investors still feel their businesses are more valuable liquidated than managed.
Protracted cost cutting creates its own risks. Switzerland’s advantage historically has been its ability compete on quality. But it's hard to compete on quality or innovate if you're constantly cutting costs.
People look over their shoulder, thinking they may be the next to go. There is a natural temptation to cut corners when we’re forever forced to do more with less.
Company morale also suffers, knowing that cost savings at the working level are funding massive bonuses at the very top, rather than investing in new business initiatives. And it's hard to attract top talent if a bank is permanently in a cost cutting mode.
So has Credit Suisse turned into a risk for Switzerland?
Switzerland, as elsewhere, has become fascinated and engaged with sustainability. There are ESG funds, ESG reporting requirements, UN SDG standards, endless webinars. But Credit Suisse reminds us how little discussion there has been about the sustainability of Swiss Inc.
MNCs like CS are the crown jewel of Swiss prosperity so any risk to them must be taken seriously. With over twenty leading global companies, Switzerland has the highest density of MNCs in the world - 4 times the number per capita compared to the US, Germany or Japan.
They account for more than one third of the Swiss GDP and nearly half of Switzerland’s federal corporate tax revenues. In addition, MNCs tend to create the highest paying jobs and generate the majority of exports.
Success has created a dilemma. The MNCs have become so valuable that the only investors with the weight to have their say are the least likely to do so.
Exchange traded funds, mutual funds and big pension funds are not known for confronting boards. They are often shrouded in layers of consultants more likely to obfuscate than encourage shareholders to act as responsible owners.
It is precisely at the intersection of lumbering size and complacent ownership as we have experienced with CS that the greatest abuses are seen. It is no surprise the groups like CS who pay the biggest salaries, by and large, have had the biggest problems.
I have a chapter in my recent book "Too Small to Fail" about successful small nations called "Towards Responsible Ownership". Studies show companies are most competitive when they have large, engaged, and vigilant shareholders (Thompson et al).
The most prosperous countries such as Switzerland are those with the highest levels of exports. Because their prosperity is dependent on their MNC exporting machines, each of them have adopted special provisions to ensure they have long term and engaged owners; each in their idiosyncratic way:
Singapore has its sovereign wealth funds GIC and Temasek, the most valuable Danish companies such as Novo Nordisk and Moeller Maersk are owned by Danish foundations; Swedish companies such as Ericsson and Enskilda are controlled by the Wallenberg’s via Investor AB, the Dutch have foundations for specific companies such as Philips which control the voting rights.
Each are outward looking, liberal economies like Switzerland, but realize their prosperity is vulnerable to the potential demise of their MNCs.
"We want to ensure the right people are put in the right place" Marcus Wallenberg says. Investor AB recently oversaw the replacement of ABB’s CEO due to dissatisfaction with the performance of his predecessor.
Rather than having a "multi-culti" collection of board members and management unified singularly by money their boards and management are skewed towards the best the country has to offer in the way of talent and sense of duty.
There is still plenty of attraction for multinational talent but anyone who works for Novo Nordisk feels it is a Danish company or ASML is a Dutch company.
So the feedback loops between the company and the community function. Chairman and Chief executive appointment carry a burden of duty and are deserved rather than merely paid for.
Switzerland has to devise its own solution but CS is a kind of "Houston, We Have a Problem" wake up call. Anyone who attended one of CS annual shareholder meetings can vouch that it was a farce.
And with passive investing rising rapidly in popularity it seems a matter of time that Swiss MNC will be owned by few who really care to act as responsible owners.
Andrew Carnegie famously wrote that "a company owned by many shareholders in not owned by anyone". There is no precedent for nationless companies as Samuel Huntington warned in 1997.
Credit Suisse instructs us that the combination of ownership-less and nationless companies may be the worst of all possible outcomes. Ironically, the companies which matter most to Swiss prosperity are the most at risk on both fronts.
The socio-economic order is also at risk. Switzerland has a unique architecture with a weak central government and strong industry. This government lite, bottom-up architecture has been a key to its historical success but it requires trust between society and industry to function.
With each Rohner like incident this trust breaks down and there are more calls for regulation and increasingly top down modus operandi.
Switzerland’s future will be very different from the past. During the next twenty years industry will be significantly transformed. The internet remains in its infancy with respect to the range and extent of its applications.
Every industrial process will be affected by drastic measures to reduce Co2 emissions. Every line of a company’s profit and loss statement will be impacted by both.
These developments will place greater tension on social cohesion, not less - so trust between society and industry will take on increasing importance.
This is no time for leadership with unimaginative strategies focused on the short term. It is a good time to remind ourselves of what has made, and continues to make, Switzerland successful, and different to others.
And Credit Suisse’s future: What will it be like?
Credit Suisse still has considerable potential but needs to make the right choices. There are two phases: CS needs to push the "reset" button, and initiate a "new start" to reestablish trust. This includes altering the bank’s behavioral DNA which is much easier said than done.
The second phase is to cast an aspirational narrative drawn from a competitive edge, fed by a sustainable ability to attract top talent. Without these two features, any plan is sterile.
Credit Suisse has never been, and in my view, will never be competitive on Wall Street unless it is able to attract the best people. Graduates from the top universities such of Harvard, Yale, Stanford interested to work in investment banking want to work for Goldman Sachs, Morgan Stanley, and JP Morgan.
So, CS’s investment bank de facto draws from a pool of inferior talent. Employees nevertheless have similar expectations concerning remuneration and clients sense they are hungrier for business. They need to stretch to win the business from say Goldman, so the business often carries greater risk from the outset.
The employees don’t have any skin in the game so greater harm is done to the bank than to them as a result of misjudgments. This has been, by and large, the story of CS in investment banking over the past generation.
Looking forward, CS’s management should ask themselves self critically two fundamental questions: where is their long-term growth? And where do we have a competitive edge?
CS has a strong domestic banking franchise with outstanding people and healthy profitability and modest growth. It should preserve this.
Its wealth management for high-net worth individuals is globally among the largest. Most wealth management companies are domestically focused and people underestimate the value of Swiss banks ‘ability to deal in multiple currencies and across the full range of investment opportunities.
The Swiss brand is strongest in places where growth in wealth is most attractive - Asia; so its center of gravity should shift away from the US.
A complementary and supportive investment bank makes sense as Asian wealth is largely patrimonial rather than institutional so it is important to offer services at the owner and company level since they often have the same beneficiary.
Wealth is transmissible to ancestors so relationships should be long term rather than transactional. Again, a feature that may favors the traditional Swiss vs Anglo saxon approach.
Asians also like to work with Swiss banks compared to colonial banks ("chip on their shoulder") or those of American origins (arrogant) so CS would be intrinsically more competitive than in the US or the UK.
This would also make them a more attractive employer and talent is the sine qua non in banking wherever one competes.
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