Wuffli on corporate governance

Peter Wuffli is categorical that cross-mandates - where an executive in one company sits on the board of another - are not consistent with good corporate governance.

UBS has escaped the criticisms levelled at many firms in the wake of the Enron collapse, unlike several other Swiss companies, such as ABB and the collapsed Swissair.

Senior executives who have fallen from grace include Rolf Hüppi at Zurich Financial Services, financier Martin Ebner and ABB chief Jörgen Centermann.

In April, the Swiss Stock Exchange (SWX) introduced new regulations aimed at improving corporate governance and making companies more accountable.

The SWX decision came after a code of good practice was issued by the Swiss Business Federation (economiesuisse), targeted at all companies.

swissinfo: Many managers have fallen from grace over the past years. To what extent are you still proud to be a manager?

Wüffli: I am proud of what I do and I am proud if we have successes. Obviously times have become much more challenging and I think what’s particularly so is the tendency to personalise corporate developments and corporate events. I think that is a bad development. It’s not only inappropriate to kind of scandalise and emotionalise and personalise corporate stories, whether success or failure, but it also goes against the practical reality of how big corporations work. They are not run by a single person. They are run by teams. In our case, I would say by 70 to 80 very senior managers. The group operates according to very strong partnership principles. That is a more appropriate governance than the kind of focus on individual personalities.

How seriously do you take corporate governance at UBS?

We made it a point after the merger between UBS and the Swiss Bank Corporation to be at the forefront here in terms of best practice. One of our vice chairmen, Professor Peter Böckli, is the father of the Swiss Code of Best Practice in corporate governance and we adhere to almost all the standards that are being advocated. We have a very clear separation between the board of directors and the group executive board. We have separate roles between the chairman of the board of directors and the president of the group executive board. The majority of our directors are independent, according to internationally accepted standards. We have an audit committee which is completely composed of independent directors so we are not concerned about any comparison with any large corporation around the world in terms of corporate governance.

To what extent do you think the greed of the 1990s has damaged the moral fibre of society?

That is a very fair question. We do have an erosion of confidence and I think if you go back in history every bubble has basically led to abuses, to fraud, to unethical behaviour and we’re seeing the same. It’s obvious that the combination of the very heavy material losses that many people have incurred increases the frustration levels and damages the confidence in business leaders. One should not forget though that we’re still talking about a very small minority of companies and individuals and that a much larger part of corporate leadership is professional, has adhered to highest ethical standards and therefore it would be wrong now to penalise a whole group of people as opposed to focus on those cases where abuses have been made.

But isn’t there a problem that there seems to be a tendency, or there has been, of short-term profit taking rather than looking at the long-term picture?

Capital markets have changed fundamentally over the past decades and the measurement and the transparency of success and failure have changed with them. Managers and senior leaders have in many cases turned into entrepreneurs. Despite that, there may have been a temptation to sometimes focus on short-term profit, particularly in those cases where incentive schemes have favoured that. We at UBS very firmly believe in long-term incentive plans, where the majority of compensation is delivered in the form of restricted stock over many years. This basically aligns the management’s interests optimally with the shareholders’ interests and thereby focuses on long-term success as opposed to short-term success.

The public, as you are well aware, has made a lot of noise about high wages in the upper echelons of companies. What’s your idea of a reasonable salary for a manager of a top Swiss bank?

The question is: whom do you compare a manager with? Traditionally a manager is compared with a fixed wage employee. That was the case 15 to 20 years ago. The world has changed. There is today no difference between a manager and an entrepreneur because most managers – senior managers in corporations – have gotten a lot of their compensation in the form of restricted stock so they suffer the same or they benefit the same as entrepreneurs if the company is successful or fails. I think that’s the perspective we should look at. We should look at managers and compare them much more with entrepreneurs than with fixed-wage salaries.

If we look at managers as a whole in Switzerland, to what extent do cross mandates – that means when a manager of one company sits on the board of another – constitute a danger?

It certainly does and it is one of the issues that we very much hope the recommendations of the Swiss Code of Best Practice will cure. We have had at UBS for many years a very clear policy that we do not accept board mandates at executive level. We all have firmly adhered to that policy and it has avoided conflicts for us. We feel that usually a board mandate for an executive at a big bank not only leads to conflicts but also leads to dilution of attention. People should focus on their job. Now, having said that, there is an issue in Switzerland that our law asks for the majority of board directors to be Swiss. Switzerland is a tiny country and there is a shortage of highly qualified, independent directors, so it is not an easy challenge to solve.

Why wasn’t this a problem ten years ago? Was life too comfortable then? Were companies making enough money that it wasn’t considered a problem?

Well, ten years ago a lot of what today is transparent was not. Ten years ago in Switzerland, we still had a kind of period one could call almost like a club capitalism. It was a period where many large corporations were still controlled by private families, where a lot of corporate accounting was not transparent and was not at fair values. There were hidden reserves. Reserves could be built in a hidden way but they could also be used to cover up for failures in a hidden way so the level of transparency on success and failure was simply not at the level that it is today.

To what extent did the fall from grace of Swiss financier Martin Ebner damage the reputation of Switzerland as a financial centre?

Martin Ebner obviously has a fascinating development story over his whole career. Overall, I think it is a symptom rather than a cause of anything. Clearly, particularly initially, he gave very important initiatives and triggered a rethinking of corporate Switzerland in terms of its accountability versus shareholders and in terms of the way that the capital market works.

In brief

Peter Wuffli believes in a clear separation between board and upper management roles to avoid conflicts of interest.

He acknowledges that the economic bubble of the 1990s led to abuse, which has shaken confidence in corporations. At the same time, Wüffli says most corporate leaders are honest and do a good job.

Wuffli favours long-term incentive plans for managers because they align management’s interests with the interests of shareholders.

Cross mandates – when a manager of one company sits on the board of another – is a danger because it leads to conflict of interests, he says.

Ten years ago corporate accounting was not nearly as transparent as it is today. Wuffli says that the Swiss financier Martin Ebner triggered a rethinking of corporate accountability in Switzerland.