 And so with that, I would like to now formally introduce our speaker for today. It is Dr. Kate Sika Vitsa from the University of Zurich, and she will be talking about a very important topic, which is who owns Swiss firms and why does it matter. She relates to corporate governance, and she is truly an expert in corporate governance. She is an academic with a strong background in this area. And in terms of her formal education, she holds a master in communication science from the University of Zurich, and a PhD in international management from the Hochschule St. Gallen, and is a recipient of the Swiss National Science Foundation and the European Union's Marine Curry IEF fellowships. Kate received a part of her training and conductive investigations at the Kellogg School of Management, the W.P. Kerry School of Business, and the Wharton School of the University of Pennsylvania. She has almost 10 years of research experience in the areas of ownership, structure, shareholder activism, and firm valuation. And so with that, I would like to now hand it over to Kate. Thank you very much. Well, thanks for having me. It's an interesting group. First, it's done a lot of talks in front of different audiences, but I've never talked in front of financial analysts. I have to tell you, I don't do this type of research, but you are a very important category in our research. So we oftentimes, we have a lot of models where we look at how do analysts actually impact what happens in companies. So I see this really as an interactive endeavor. I invite you really to challenge me to make remarks, to ask questions. As you have heard, I am an academic, so I can't spare you of a little bit of theory. It's just in my nature I would not be myself talking about theory. I think when it comes to say and pay and ownership, particularly on compensation, it's important because nowadays compensation structures have become so crazy, none of the same mind, except an academic, would come up with something like that. So I really think we actually invented say and pay when that did the compensation. In terms of, I was going to mention maybe a couple of words of corporate governance, how, you know, what I've been doing, what kind of research I've been doing in this area. I was, we were the first, when I started my PhD, well even before that, there was no, Switzerland had no code of corporate governance. So back then there was no, there was no data. And as researchers we don't line data, what we want you're going to see, we always want to have, you know, some kind of numbers to crunch and some kind of, you know, variables to put in our progression models. And some 10 years ago, in 2002, Switzerland was introduced, it has introduced the first code of corporate governance. And that was the starting point that we, as researchers, could actually, you know, get, you know, get data on compensation, to some extent, compensation. You know, patchy, however it was, but, you know, more data, more compensation with also emission structure. And that was 10 years ago, that's when we started collecting data and I still have that same data set. So basically my data set is, I started doing it for my dissertation. It's really, you know, they think right before it's sitting, you know, kind of really looking at any reports and kind of why we're doing this hand collect is because of all the viable. You don't go and kind of pull it out of the papers because, you know, some journals require it. So I see corporate governance as a vast topic, including ownership, compensation and boards. And I've specialized in ownership and what I'm looking at is basically, you know, how are companies, how is the ownership structure of companies composed? How, why do shareholds behave the way they behave? How they impact governance and the strategy of companies? When do they engage in activism? How do they pick their trades? And today I'm going to talk a little bit about who owns Swiss firms. This is about, you know, sizes of shareholdings and why does it matter. And then going to use a case in point. So in order to understand how ownership impacts corporations, we need an example. And since we just voted on the anti-rip off initiative, it's supposed to come out as a law in November and we're now about to vote on 1 to 12. I thought it's a good example to say a couple of words of why ownership matters. I'm going to provide you with a set of descriptive statistics. We did run models, but I'm not presenting there. I thought it's probably a little too crazy still. A number of words about data that's in our due diligence. That's what we have to do as researchers. It's a good conductive hand-collected ownership data of 135 logistic companies that market capitalists on the Swiss stuff exchange. The data source is really annual reports. So whatever you see comes out of the annual report. It has to be this way because when we, you know, when we do research and submit to journals, they want to know where the data comes from. They have to have the same source for all the data. And it's basically, we have looked at significant shareholders. So that's the numbers that we picked out. And those are usually the ones, or those are the ones, our requirement to have more than 3% shareholdings. Very important, we collected data on voting rights. Voting rights, non-cashable rights. These are two different things in Swiss context. It's a bear in mind, whatever you see, it's control rights. It's not shares. It's really, you know, the number of words that you have. And the time period is 2006 and 2011. I'm going to present to you the three key insights. One concerns incentives of shareholders to capture their voting rights, to vote their shares. Another insight concerns the heterogeneity. That's what we call heterogeneity. It's really about shareholder interests, different types of shareholders, and how they diverge in terms of interests. And the third insight is about expropriation. It's what we call it, completion. It's the problems and difficulties that minority shareholders might incur, depending on their own should be given ownership structure. It's going to provide you with two conclusions. One concerns what can we expect from a binding say. From a binding say of pay in Switzerland, from the upper top of the interior. And the second conclusion is, that's all I've experienced for me. I thought you might be interested in that as analysts. So what is a well-owned company, not well-governed, what is a well-owned company? Please feel free to jump in and make remarks, questions, whatever. I really prefer an interaction. It's more interesting. So say of pay, fear and hope. What is this about? Case in point, I think that's the, it's a credit to the economist. That's for fair economic purposes, because you steal everything out of me. What's the point? So I call it say of pay. It's something that came over to our context of the UK in 2000 and we did two, I think, was the first say of pay event where, you know, idea came up in UK. And general idea is that we need to empower shareholders through more rights and more bounded binding rights. So we need to give them more rights. And we need to make these fines, these rights binding. And the underlying belief is that share holders are actually a watch-off. They have a disciplined, we call it a disciplined effect on excessive salaries. So that's the basic idea. Power shareholders, why? Because they have an interest to watch over executive compensation and make sure we're going to talk about why that these salaries are not excessive. Now, given this, knowing more on who owns shares in Switzerland and how much means actually knowing who will have a say on paying in Switzerland. So that was our basic idea to look at these issues. And again, I have three different topics that I'm going to touch upon. One is concentration and incentives. The other is heterogeneic and 30-section creation. And if we step in concentration and incentives, I'm going to provide you with the inside number one right away. And if you don't believe me, please say so anyway. Well, I claims that shareholders have enough incentives to engage in saving money. Why are incentives important? What are incentives? Well, you know, the idea is you can give people rights to do whatever you want, but you have to have so kind of motivation when it comes to share holders through the financial motivation to actually use these rights. Now, the idea is, and that's a little academic, using property rights or, you know, monitoring is a public good, which means the costs are lowered by one shareholder the benefits accrue to the entire shareholder base. So the point here is if you're a small shareholder, if your dominant strategy is exit, why would you go on and vote, you know? And now, please, you know, think about how much we've been talking about this up-to-date in CUL and how important it is that shareholders vote their share. Well, look, if you're a small shareholder, why would you vote if you're dissatisfied with the company? Send your shares, you know, you don't have any problems anymore. So what we call this the dominant strategies exit instead of voice. It follows from this that on the large shareholders, those that have significant block of shares in one company have an incentive to vote. And this is even more so because they cannot easily sell. If they sell, this is going to depress the share price and thus their own wealth. You know, we can talk about thresholds, but that's not that important. The important thing is if you're a small, they're going to sell. But, you know, in order to actually force shareholders or kind of expect of shareholders to vote their shares, you have to, you know, you have to look at large shareholders. Well, if I didn't control it right up, there's just a mention that many, many, many shareholders, particularly institutional investors, they don't want control. They keep their shareholdings below five percent. A low three percent so it has to be able, you know, not half to this close has to be able to sell off. What I'm trying to say, you know, whenever someone tells you, say, hey, in ownership structure, bear in mind you need incentives. Right? So if you go to the US or UK context, they will have, they have a different ownership structure. The ownership structure tends to be way more dispersed. And then they would tell you, well, shareholdings lack incentives if they have, you know, a very diverse portfolio so they can hedge risk. Here, you know, you would, this is why I say, incentives work in Switzerland because as we're going to see, we have a high ownership concentration. This means ownership concentration and dispersion, the level of ownership concentration is going to provide information on how likely it is that shareholders are going to use limits. Okay? So let's have a look. Now that we know this, let's have a look how shareholdings look in the Swiss context. So bear in mind 135 lodges over a period, 2006 to 2011. What we see here, that's the average number of voting rights. Right? So in Switzerland, on average, this is the largest shareholder of the second lodges, the third lodges. On average, the largest shareholder holds about 30% of voting rights. I mean, that's huge. And that's giant. But I have to tell you, it's way less than the Anglo-Saxon context. It's more than in the Anglo-Saxon context, but it's less than Germany, less than Austria, less than... I have numbers, Chris asked me to provide numbers. I have numbers, the problem is everybody does this for his or her own research purpose so they're not exactly comparable. Some use different thresholds. But I can tell you, Germany, we can speak of 40%. Italy, Austria. So this is, you know, big. But, you know, it's not even the largest level of concentration. So it's one shareholder? So this would be the largest shareholder. This would be the second largest shareholder. This would be the third largest shareholder. On average. On average. Over the limit of 35. And you take this market cap whether it's an average of each individual company. Each individual company. If you look at the SMI, yes. As an example. And it takes, it takes the, when you take the big companies to, you know, they're always trying to accept the company that makes all of this money. It's the same average. So this is, it's a good question. Thank you. This is the 135. It's an average. We all know, averages are kind of, not with median, it's an average. Excuse me. SMI companies, pretty much the same. SMI companies, we have La Varnes, we have Nestle, with almost 0% of shareholdings. But bear in mind, SMI, it's rush. It's entirely public hand. It's out of code. It's, I mean, beside Nestle and La Varnes, I don't know, all the 20 SMIs. UBS, UBS has the Southern Fund. You know, the Bayland, Southern Singapore Fund. Credit Suisse, I think has a stake. I mean, you know, it's below 5%. So all these companies, I don't know, beside the two, have one block holder. It's probably not 30%. But I mean, Russia's, you know, family is good for 1%. The second perception. Excuse me? The second perception. Yeah. We're getting, that's a creation issue. But, I mean, You deal with the free float. How do you deal with the free float? I mean, there's a lot of shares that are not traded or... I'm not sure if I can answer this question. So, this is the significant shareholders. This is, it's the voting rights. It's the voting rights in the hand of the largest shareholder on average. You know, you might have many, many questions. You know, this is why I mentioned data at the beginning. You know, I can only tell you what the annual reports tell you. And you might have a lot of detailed questions that I can't ask because I'm trying, you know, I'm trying to have all the companies. So, the annual reports, it's the disclosure requirement is this close every shareholder above. And, you can collect shareholdings with voting rights without voting rights. So, does that, does that answer your question? You also have data in terms of which companies that have these large shareholders are also actively involved in management. Because it's one thing to have a big shareholder. And it's another thing to have a big shareholder is also part of the management. We have a note to show in this slide on board involvement. So, in a category that's called shareholders on board. The management category, that's a matter of the management, they appear to the extent that they're individual shareholders. But you know, this is really, these are really about 3% as managers takes really a lot of shares via compensation to accumulate this large amount. So, the levels of entrenchment by executives is not that high in Switzerland. You know, in some, it's in US context over, you know, I don't know, 20 years of variable compensation or long-term incentive plans, CEOs tend to have accumulated large, large stock in Switzerland that's not the case. I mean, they don't appear more than 3%. But board members do. Exactly. As you rightly pointed out, it's different in Anglo-Saxon countries like Bill Gates, Steve Jobs, entrepreneurs who are, who were the largest shareholders sitting in their firms and entrepreneurs, but they're interested in closely aligning with those shareholders because they were running the company. Right, right. They were the largest shareholder. Yeah, right. Or even, you know, non-founders which is accumulated large level of shareholdings over time via long-term incentives. I mean, there's context in that case. And where you've become, so, to make you to tell a little vignette, I conducted a research project in Germany where we had to interview top executives and board members. I was one board member and it was, you know, a very prominent person in the German context and I found it interesting. It tells me, you know, we're not activist shareholders because, you know, sharehold, just about 20 years ago, you wouldn't do that. No one would speak up. But now it's kind of, you know, it's cool to do that. So this, this guy tells me, there's a really, really high profile individual tells me, you know, sometimes I have small activists, people who own 10 shares. And then he shows up at the German German meeting and tells me, I'm an owner and I said, you know how much I own for years and years and years of exit compensation? You know, that exists. So, you know, so they, the executives can become an important shareholder but, you know, we're going to see it's what Sunday. They're not the most meaningful categories. I think the numbers are pretty high. Again, it's lower than in Germany and in Austria and so on and so forth. But it's, they're in the Anglo-Saxon context. It's lower than in, but it's way higher than in India. So, you know, it's not the most meaningful and the hard part. Yes. It's not hard. It is. Well, I have two categories. I have institutional investor and I have bank. And they said it was Sunday increase the bank. Yes. So, whenever, whenever this closed, whenever this closed, the who owns how much? Okay. I mean, another important question here is, let's move on. Some of the questions are going to be, in terms of who owns what, what is the limit. Let me maybe quickly, because incentives are important. So, bear in mind, incentives is really how to, to what extent will you be willing? Will you have an interest to actually vote? Look, if you hold 30% of a company, because if you sell, everybody else is going to sell. So, you're going to want to have a stamp. Right? So, that means we have a fairly high level of ownership concentration in Switzerland. As I just said, S&Y companies are not significantly different. These are some numbers for the rest. So, we have even these cases. Right? That's totally unknown again in the middle. It's really Switzerland is usually situated in the middle. So, you would have the Anglo-Saxon context here, and you would have the relational, the Ryanish system here in Switzerland somewhere in the middle. And that's pretty much merely the ownership structure. Yeah, what's noteworthy, I have a nice graph here, but I decided that it's only the majority of the American companies. Then you can see that 38% of these 135 companies hold a majority vote. I mean, that's kind of funny, right? I mean, tell this to your American colleagues in Switzerland, a coalition of free Candice on everything in 38% of the largest stunning. Coming to types, I'm going to talk a little bit about types, heterogeneity and preferences. Second topic, that matters. What I mean provided was that with an insight, institutional investor monitoring, and we are very much influenced by the Anglo-Saxon industry here, where institutional investors, particularly also pension funds, I think everybody knows the market descriptive statistics, is that institutional investor monitoring is relatively modest, suggestive of a weaker paper performance relationship than in other contexts. Let me explain this a little bit. So in order to understand that, so many, you know, when it comes to same-paying, when it comes to up-to-op institute, for example, anti-red-bought initiatives, what often goes regarding this discussion, when it comes to say-on-pay, say-on-pay by shareholders, this is not so much about the level of pay, the absolute level of paper performance, it's the link between compensation and performance. And in my discussion with, you know, people around me, this kind of got a little lost. So when you ask people, so what are you going to vote, you know, anti-red-bought initiatives, I want to lower, I'm against excessive salaries, I'm going to vote yes. But then you go, but you know, it's not capping excessive salaries, it's really about the link between pay and performance, right? So this is what we want to achieve, this is, you know, what say-on-pay what, you know, share all the say-on-pay wants to achieve. Assuming that shareholders share the best stock price or other performance, it can't be proposed equally. Off-executive compensation means of allowing the interest of executives with the interest of shareholders. So what we are interested in, it's what we call preference, what we call sensitivity between pay and performance. For every dollar right of $1,000 value increase in share hold of wealth, you would expect company, excessive compensation to go up by one study minus 32%. But you would expect the opposite. So when performance goes down, that's what we wish or hope for when it comes to say-on-pay. However, and that's what I mean by heterogeneity, we know from management research it's not that much financial doctrine it's really management research that shareholders have heterogeneous preferences. Right? So the standard model would assume every shareholder cares about stock price performance and stuff. That's it. We know that's exactly the case. All shareholders care about company performance, yes. But the different investment horizons they differ in this position towards risk and they differ in their attachment in their proximity or proximity or binding with the company and that impacts a lot of what kind of pay structure they prefer. That impacts also how tolerant they are for shareholder performance declines. Now when it comes to this for example attachment take a family how low does the performance have to fall before they're going to sell off and get rid of the company. It takes a long time. Right? Take a government owner. Right? It's a giant investment horizon. So if you have a long investment horizons and for a hedge fund long as six years for a government owner but the state is involved with 40, 50 years that impacts the structure of your pay you're going to have more L tips. Right? You're going to you're going to try to kind of provide your executives with incentives that are tolerant with your interests. Right? The same holds true. I mean there is there is a bunch of research on that. The same holds true for disposition towards risk. You know if you are risk averse as a shareholder then you're going to structure the compensation such that executives have less incentives to you know invest in risky students. Some shareholders for example don't want executives to invest in R&D too much because it doesn't pay out you know immediately. So they're trying to say you know to kind of take out from this is really very much shareholders have had Virginia's preferences. Now when we award shareholders to say on pay well not first he needs an incentive right? But then we have to know what is his interest? How much does he care about performance? What is his investment horizon? How attached is he to the company? That makes him our objective if he is. What's his disposition position towards risk? This is going to impact the pay structure. Not so much to a little level of the pay structure. Now if you look at the distribution of shareholder types with this heterogeneous preferences we can't say something about how you know how how is rewarded what is rewarded and how. And this probably I hope is maybe going to answer some of your questions I don't know. So I looked at 2011 and I don't want to overload you with graphs it's pretty much the same in 2006 it hasn't changed so I even have a graph somewhere here. So if you look at the 2011 distribution of large shareholder types this is it. This is an institutional investor as the largest category. Family owners government owners large individual investors that would be someone like Victor Rexelbeck and then large shareholders with a seat on the board. So these can be you know individuals who got a seat on the board but can also be a member who actually you know typically if you're involved in the company for a long time you're sitting on the board. This is an interesting category for you know they this is they tend to get trenched they have way more access to information and they don't necessarily need you know the kind of foreign say and pay mechanisms because you know they're sitting on the board and this is a fairly large you know it's you know it's a fairly large category. Now bear in mind that's the largest shareholder this is the distribution just the distribution of types of large shareholders if you look at the second largest and you can go down to the third and I have to take this until from fifth what happens what you see here is that the institutional investor category is rising so yes we do have a lot of institutional investors and if you look at this fifth largest shareholder they're all institutions you know white rock fidelity you name it you know however they don't share they don't hold hold that many shareholders and that's an important insight if you believe in a disciplining type of institutions so that's what we know from the Anglo-Saxon context where you know 60% of you know all shares is important to somehow help by institutions you have no other walkholders you have no large families but in Switzerland even though they are a frequently occurring type on average they're not the largest walkholder this is the largest investor and the largest investor is and it's often in the state a shareholder and least frequently institutional investors so even if you hold 5% but you have a family that holds 30% or you're in a company with 3 largest hold 50% it's kind of difficult for you to you know to enforce something when you say at a company it relates to cross shareholders yeah and vertical horizontal integration in Switzerland I don't know in Germany in Switzerland and here yeah sorry in the shareholder will you see them can you explain again what is living in their last large individual investor does not see them avoid them this is it's a little bit of an artificial category I could have looked at this one but I didn't want to because again this is a shareholder that appears as a significant shareholder that has a significant avoid you know this is the large individual company report and it says holds about 30% and then you look you have a name because it's an individual and then we would go back and look and this is it on the board many many many shareholders many large shareholders particularly foreigners foreign shareholders they want to see it on the board Octavian was a very prominent example you know where a fund or investment fund jumped in wanted to see it on the board so usually large investors large institutions they or they want to see that both of them together it should be the largest but it's still not an institution that was my point you know that's that's fair enough I mean that's that's the victor vexel docks of these of this world you know the call icons or icons institutions that's what everybody is talking about that's what the animal sex and context is talking about the disappointing effect of institutions why I mean family you know in Switzerland the expectation was sensitivity between performance and see your internal work it's kind of ridiculous if your son sits on your son is the CEO you're never going to second that doesn't happen you know so the disappointing effect for example if you look at the likelihood that a CEO is going to get dismissed for performance this only happens when you have a large institutional investor I mean the sensitivities always in degrees the likelihood rises if you have a disappointing effect by an institution and this interesting enough in the Swiss context in 2011 but it wasn't very different to second it wasn't very different in 2000 you know institutions don't hold that many shares well you know they are a frequent occurrence but they are very seldom a large shareholder I'm very surprised but the first line are the companies companies vertical integration horizontal integration being being being involved do you need an example by the some of the current companies the Russian the Russian the Russian the Russian that's a family company but you would have for example who owns which bank owns Bunker corp for example that's like I don't know Bunker for example that's something because it's not and fun but it's not an asset management it's really a bank being involved and you have that but that means that I'm not sure to understand the calculation in Switzerland if I took all the companies I mean the majority of them are held by other companies am I correct? no it's if you look at the largest shareholder okay so you have to if you think of an excel sheet you know it's a little complicated so that's that's the research thing if you think of an excel sheet and you have to code then you would have you know largest shareholder second largest shareholder third largest shareholder that's how the database is built and then you look in the annual report you know significant shareholder and you have number one holding 50% and the name that will be the largest shareholder and then number two would hold 12% number two would hold and that's what we collected so we took the largest shareholder in each company looked who he is so coded is it a company is it an owner again it can be Swisscom something like that and then we would average it which is a little nasty it's an average so let me get it it's an average okay so that's how these numbers come about and it's the largest when you say it's the decision investor what exactly you put how you put in follow those two steps ahead of them thank you follow those follow those yeah good question thank you so so who are institutional investors and again we're looking at if this is important you know two facts for questions it's very one it's the largest shareholder the one that holds I mean we can break it down for every shareholder it doesn't you know have it it's not so exciting I mean I have all the graphs but excuse me could you make a weighted average of those numbers for example determine if you you see that another company owns so much of a given company and then you multiply what you take you take the capitalization of each company and then you multiply the percentage by the capitalization and then you would sum that and divide by the total capitalization I guess you could do that the question is just you know what do you want to show well the percentage of shares which is owned by companies and price you know for one thing these are voting rights you know that's two different things you know so you can in Switzerland one share one vote is not exactly a okay right you know so weighting you could weight it because why have the bare numbers it's really because I was interested in say on pay so say on pay frankly you know where is say on pay important where do we have excessive salaries it's the SMI companies well it's not it's the big ones you know so you want to have the one of the 35 watches that's you need to watch a number I mean it comes excessive compensation you could actually look at the only SMI companies basically what I'm interested in is the percentage of voting rights you know how many voting rights do they hold but I guess yes I think why we didn't weighted it because we you know we did the aim is a regression analysis you know regress ownership structure performance which companies perform better depending on the on the on the ocean I guess I have no other you know answer to that we didn't weight we could this this may be something you're going to talk about later but one issue you have or a country like Switzerland is you tend to have people who sit on multiple courts and so you don't have the same let's say diversity of board membership that you have let's say in other countries and to use the classic example of Swiss air it was a very cozy and so you didn't really have perhaps the best oversight of the management during the crisis for Swiss air do you have data in terms of like the number of board members who sit on multiple boards the board interlocks exactly because that that creates perhaps a very cozy atmosphere that's less conducive or strong for the governments right I have data from 2000 to 2006 and now we are torturing little students to collect part of the data set so that could be the next talk yeah I mean boards or this is really ownership structure we are about now to collect data from 260 to 11 on the structure of corporate boards in terms of interlocking directorships um that has decreased a lot from 2000 to 2006 I didn't know by heart but I would expect that the problem is not that serious so it's become less less of an issue you know I was thinking when Akamon resigned from Siemens and from Zurich I was thinking maybe this interlocking stuff we should look at the Dach state not just in one context because to me it seems that you can but I it's definitely become less of an less of an issue than it was definitely and then you have this you know kind of diversity discussion so I mean I think there are still a number of interlocked directors but way less than in 2000 but we're about to collect that topic for another presentation topic for another presentation and by the way much of the critics say on page well you know we should have a pair of shareholders we have boards you know stop ignoring boards boards are the ones who are push it you know to the mod function boards are intelligent shareholders and when it comes to this then obviously you don't want boards that are interlocked that do you know that do each other's favors and so on what extent do you insert differences in time these numbers I haven't changed drastically I mean I I can finish this slide I have a nice slide which is just here what I wanted to show you would you say that pension fund have really a low impact that's a reminder has almost missed his target yes because forcing them to vote it's good for talk but not so much for you probably will yes so this is what I was coming back on the three two six and two eleven I have a slide going to show it but maybe to finish this one this is what I was going to say it's exactly what you point out I'm writing this article Chris knows this for you know and there I was going to talk about this topic so all of a sudden look at the data and I think well you know what it's kind of weird so we have really really somewhere I think here you know it's not many it's all it's thirty-seven institutions and a lot of shareholders in the one hundred thirty-five and ten point eight percent of pension funds you know so I call up Claudia Custer from the Uptalker Institute because I'm writing a newspaper I'm a researcher it has to be you know watershed you have to have evidence so I'm calling up and I say you know how is it with this you know and he goes why I said but you know it's not really fancy it doesn't there's so so few pension funds and you are imposing imposing on all pension funds it's a giant cost you know it's really it's a huge issue right they are aware of that so you might know that someone who has you know they have abandoned that all but it's sort of the final law the final law should not have you should not I mean that's that's maybe someone who knows more about this no they don't know more but I have another question do you know how much of the pension for those investment funds are exercising the voting rights we don't have to there is no disclosure on that I don't have to know that what I have I don't have the graph here but it was it was fun they published recommendation they published a percentage of votes in favor of pay in the last of FMI companies in the last few years this year you might know we had two companies that got rejected that's how to know and it was and the yeah to know exactly and what you can't see from there again I didn't want to overload you but what you can't see is that the the yes votes are declining so we see but it's still an overwhelming majority of yes for any compensation package so most companies vote yes that you know the number of no votes are rising from say 90% to maybe 85, 82% so that's the picture right now you know there is research in the Anglo-Saxon context that looks at stock market responses you know abnormal returns we can't do that we have two companies where it's been rejected in general if you're interested they find a positive abnormal return for a yes and a vice versa but we can't study this in Switzerland first off you know kind of calculating the compensation is it's insufficient we can't really you know sum it up I mean you can but you know you do the supply chain stuff and you know we don't have the numbers really to be 100% sure what the final numbers are and we don't have variance in this variable so we have two companies that got rejected we have many companies that don't vote at all you know that's that's what the interest was because also from initiatives like the principles for responsible investment that enforce also as a manager is to vote right does it make sense in Switzerland or not it's I'd say no I mean it does it's also a cost at the end it's the same and you have a very very entrenched ownership structure in Switzerland how much can you I mean what can you achieve right as a pension if you have you know many companies where three shareholders decide everything or many companies with really a very dominant major shareholder so you should be an active shareholder if you don't agree yourself yes no you know you should not well that's my personal stake and now where it gets a little political and when I know I would not want to have it in post on either pension funds or any other constituency because I think it's it's useless in Switzerland so we want to have you know more say and pay we should look at the dual class restrictions so that's the first thing the fact that a lot of pension funds can be in the 64.9% to be a lot of pension and holdings could be in the 64.9% basically because they're investing through investment funds yeah but they're not the largest shareholder so this is the largest shareholder but you say on the other side pension funds are not large enough but as a general amounts I don't mind the number it says how much of that voting right represents pension funds because maybe they are very fractured but in not in largest shareholder but in total shareholder and then you know because we only disclose about three or five something you know I never I know what you mean you're trying to say in the market in the entire market yes you know I I don't really understand this I mean I have a lot of people saying this yes in the entire market they hold a large amount of shares like a fraction but in each every company you know you're analyzing unit you're the size of when it comes to say a overview of largest how it drops the second largest and you know you know when you know what happens when they are the largest who is the largest shareholder and if you look at two six just a gap it doesn't change dramatically my question was on the identity of the institutional investors um you mean I mean when this graph I mean what are these shares between two thousand six I know I guess I didn't I didn't look at it because the distribution was small right and then I was I was interested you know to what extent do they have a discipline if I see one it's just 10.8% it's it's very but I could if you're interested I could look I could look it up I could look it up in the latest but I haven't constructed I you've talked initially about how attached investors are to the company or what time horizon they are have you compared who the largest is and how long he has been in that position because I guess investment funds probably don't have such a long time horizon as what it depends companies or families or well could you just clarify the question because I didn't hear the question how long have these largest investors been in that position I don't have numbers for how long they have been it's just more of a general wisdom as a family you know you're a founder and then you your son takes over maybe third generation then you have a foundation family owners that controls it so that's the standard so that the answer is never if your company is profitable you know if you can get a giant dividend why would you do that? how about investing types? institutions so there is no years in my data set so that's not something I can tell you but I've talked to private equity people because I'm interested in ownership and I've talked to particularly that was in Crosines at night and the guy says oh we have a large investment horizon so I go so how long is how long is long he says six years you know it's very industry dependent as well you know depending on a project so for example utilities you know anything that needs a lot of money you know there you tend to have shareholders kind of giant large investment horizons you know I don't have so I can't really answer the question I don't have the years but you know if you look at the general wisdom is pension funds have a large investment horizon furniture a long investment horizon private equity hedge funds are on the shorter time frame shorter kind of on this other continuum and I mean you know six years when they say six years that means they have a lot of time at the end so usually it's probably shorter state owners that's a matter of privatization oftentimes they stay early on when it comes to say okay the results are only there's a lot of research on compensation family firms and you have two camps of researchers one saying well these are you know stewards of the company they preserve company wealth and they're gonna pay less because you know they part of their motivation or part of their kind of interest in the company is what they call emotional wealth you know they kind of they they want to be in control so that's the reward that they have it's an emotional attachment so therefore you can kind of be compensated by this emotional attachment I know it's very academic apologies for that but you know and therefore this camp finds lower average compensation you know in family firms you have another camp and I'm not a family business person you have another camp that says we have giant principal it's been a giant agency problems in family firms why? their point of spring they're not qualified they're not the best talented people they tend to you know enjoy perks they tend to kind of save enough wealth to themselves they create giant agency you know problems and they pay a lot within you know they tend to have higher pay and lower pay performance sensitivity within this camp you will find and I think that's probably the most kind of argument is that it changes a lot of where you have the founder first generation second generation there's something called the bulletin brooks effect that says the founder preserves and in the further you know down the line you go the more they dissipate right it's closed family business it's a question but I'm not a family business person so yeah I'm trying to be you know usual so many family business people are very ardent about that and after the study comparing firm value in terms of Toby Q. and ownership structures and we find in the Swiss context on Swiss data that the best combination is you have family ownership and professional management and relative to dispersed general looms where we claim management and control so no disciplinary effect full family control so family control family management or institutional investor so we claim relative of the family to kind of preserve firm value but you have professional management that kind of brings in knowledge and we find this is the best arrangement in the Swiss context best in terms of shared performance yes in terms of Toby Q. so when you relative to the others it's kind of it's a multinomial model to compare relative to the other category and this one is the best family professional management yeah I mean I have a paper on that if you wanted it's nestily academic it's been published a couple of months ago shall we sure we can let me wrap up this shortly so institutional investors are frequently frequent occurrence they don't hold they don't they're not frequently large sharehold and they'll hold as many voting rights the large sharehold is held by other companies family shareholders the smallest they can actually answer institutional investors pension funds that's what we were talking about is not a big amount of occurrence or it's seldom for large shareholders and then please bear in mind this whole thing is about pay performance sensitivity it's not about total compensation it's about pay performance we want to have a sensitivity ideally when performance goes down not just compensation well the institutional investors that have been claimed have been ascribed a very, very strong disciplinary effect probably have this disciplinary effect in an Anglo-Saxon context I guess less powerful in Switzerland according to expropriation private benefits of control inside this is a short line in terms of the tensions so this is inside number three state and family always use instruments to bless your spare power creating room for entrenchment and the pursuit of private benefits of control so what is private benefits of control what do we need like this well that's when you have your cost years you're disproportionately invested you have less investments than control rights cash but you have more of a say that's what we call a batch between cash and control rights and this creates incentives and that's a finance term so don't blame me I'm a manager because I'm a strategy person and the central claim is it creates an incentive to engage what's called private benefits of control to kind of if you want to to do stuff like related to transaction and tunneling themselves or to related parties or to other companies so why because you have this proportion of incentive you have you don't hold as many you're not invested in as much capital as you actually control so that's what's meant with a batch between cash and control rights the idea is that if you have such a situation then this creates disadvantages to already shareholders in general such firms are the financial markets in terms of Tobin's Q for example and this disadvantages for minority investors and that's oftentimes there's a lot of research and this is called expropriation of minority investors and usually when people compare government's context and they look at so what's the incidence of dual-cloud shares voting restrictions and the like and from this they infer what is the quality of minority share or protection rights and Switzerland has always been there are very important things that isn't starting in the 90s it's always been on the bottom level of the continuum because you know very very frequent use of dual-cloud shares and voting restrictions and if you look at this this is a 2006 and this situation has gotten better and you see it presents you companies with dual-cloud shares and voting restrictions and then you see that all about 35% have voting restrictions and about this is a 15 I apologize we don't see it here about well yeah 40% 15% have dual-cloud shares so Anglo-Saxon context typically zero Korean Japanese context they have cross-strait all these okay that's something like so that's another story that's if you went Switzerland along with Sweden by the way is one of the countries that have this and you know if you want to complain about the Swiss context that's I mean that's what you know Anglo-Saxon investors usually complain that there is a lot of you know but in order to share all the rights I'm not as well protected how does it compare to Germany or Australia I don't know I I would have to guess I know I have read a paper in Italy and Italy is you know totally you know cross-shareholding stuff so Italy is really kind of like Korea and Germany has changed a lot I think because after the you know Germany I gave they have a large large you know kind of influx of money capital so then I would expect that these guys have abolished you know the way to do cash was good I don't know if I'm right I would have to look back but I know that you know there is the first time someone has really there are four guys that have made a career of this they're usually referred to by an acronym LLSB I know someone knows this LePort Salinas Brittany four guys and they have actually they have investigated context by context you know European countries Asian countries the Anglo-Saxon context and when it comes to this type of frustration so that was in the 90s way before 2006 Switzerland was like wow you know this is bad Switzerland, Sweden so I guess Germany is better in terms of dual class shares and voting plans not when you know not you know or it's composition stuff that's not an issue but here and I think that's it's gotten better now for sensitive companies with dual class shares where the large shares so if you look at so who is actually the one who wants this dual class shares who is kind of entrenching themselves then you see in terms of dual class shares as family companies so when the large shareholder is a family you're going to have in 27.3% of cases you're going to have dual class shares and this is pretty natural so institutional investors don't care about this that's a reaction when it comes to voting restrictions then state owners are very prominent and here the prominent examples are Cantal banks many people maybe don't know that but you know Cantal banks usually no one has the right to vote beside the Cantan so that's a very and we have a lot of you know a lot of Cantal banks among the 135 colleges so you know Swisscom the state has voting restrictions well really you can't vote more than a certain level of shares that's a pretty standard procedure it also happens in family firms interestingly voting restrictions are also here for institutional investors that sounds good but less if we do the class shares finding summary the distribution of dual class shares among Swiss companies has remained rather than stable the use of voting rights has slightly decreased as I just said frequent occurrence where a shareholder is a family voting restrictions with state companies this leaves a lot of this leaves a lot this leaves some room for a pursuit of private benefits of control it's not as advantageous it's not as advantageous in terms of a minority shareholder protection but maybe more important it creates a very very stable situations where things cannot easily be changed so you have large pool of clothing dominant owners and these owners entrenched themselves by voting restrictions in dual class shares and you have a very low number of institutions well you know pension funds are meaningless as large as shareholders so this and it's been stable for the last 5 years for the last 10 years I've talked to a person to a compensation consultant from Hakape Austria Department and I asked him so are they embracing themselves and we have to say okay are they getting nervous are they hiring compensation consultants proxies always suggesting he says no and the reason is this my guess conclusion what to expect I think it legitimizes shareholder involvement if you ask Dominique Pietermann from ETHOS is going to say it's become more fancy more acceptable to say no you know so 10, 15 years ago no shareholder or holder in the Swiss context would go to an AGM and you know cry I don't like you now it's become fancy and people follow ETHOS issues recommendations people read this ETHOS in terms of capital is not a giant but everybody knows these guys and everybody knows their recommendations so they have become it's become legitimate to say no this green leaves room for activists or investors you know from the Anglo-Saxon context who are used of having a say who are used to getting involved and they may take you know advantage of these empowered of these kind of increased shareholder rights electronic AGMs for example they might use that because they have the culture it has actually spurred a dialogue so speaking of you know I think there was a vote here so we see that you know the yes votes have decreased so what happens you know as a company you don't necessarily need a no for your compensation it surfaces that you see all the support is going down so what happens is you're going to reach out to them you know you're going to talk to them you're going to try to you know you're going to talk to ethos you're going to talk to rating agencies to give you a better rate you're going to manage expectations whatever that means you're going to manage your pressure you're going to try you're going to hire compensation consultants you're going to hire process listeners so I think there's going to be more activity you don't need to have your compensation rejected but you don't want to be in the press saying oh they have received it does have an effect it's just not you know and the effect that people people thought it's going to cap compensation it won't I think the level will likely remain the same and that's probably okay high pay high performance high pay our high pay pay performance sensitivity you know the lower pay the lower performance the lower pay this should might become a little better with increased discipline in effect the share holders how I was symbolic it may be radical changes excuse me are maybe are going to be really an exception rather than a movie Daniel Vasella you know is an example with his anti-competition calls where you know it wasn't public pressure so this I think it's really kind of started off legitimacy issues just becoming okay to you know that compensation and that's why in some cases you might have a giant effect but this is going to be an exception so what do you want to look for and look at a company so what is a well owned company you know you want to look you know look at who is the largest shareholder because we know it's been talking about Swiss context we know that the largest holds about 30% how large is the stake and then think of practice think of interest saturation which you said think of it's family what the families want you know this is going to impact the compensation structure and compensation structure is going to impact the strategy right so if you're a family you're going to want to have an LTIP you're going to have different decisions who are the other blockholders who is number two number three are the blockholders and how stable is this coalition are they able to reach an agreement imagine a situation where you have a large foreign investor coming in you know who is going to side with whom you know think Schmaltz and Bickenbach you know who is going to side with Vexelberg who not I mean I think coalitions this is going to be a prominent thing in the Swiss context and then have a look at whether large more power better access to information which may be you know good because they know the situation better they are there but they also might entrench themselves right they might kind of kind of fend off anybody intruders and what means to shareholders have the disposing to protect their interests or entrench themselves that means how prevalent the deal clause shares how prevalent so that's what you have to look for one you want to know if you have a well-owned company in your portfolio thank you very much very good thank you very much Kate we have time for a couple of questions yes I was wondering if there's a theory on why there's such difference in ownership structure between Anglo-Saxon countries in Europe is it cultural is it because I don't know pension funds have less prominence in Europe less weight is it market depth is it culture in the sense that big investors in Anglo-Saxon countries prefer to have the diverse fiber holdings whereas in Europe they prefer to go all in for a long time in one company hold a lot of power how are there any theories on that I'm just thinking I mean there is there is a lot of theory about why investors have been largely passive in the Anglo-Saxon world so it's been traditionally dispersed with a lot of passive investors you know we're talking 20 years ago before this whole corporate government started off you know why are ownership structures such as they are well you know I think it's really historic I mean if you look at some of the really old companies that are still you know on the offensive stock exchange so many of these are mergers of some even older companies it's probably been historic that you have you know this lot I mean what drives ownership concentration it's mainly family business right so that's that's family business and state you know you know before deregulation that's what drives it and that's an historic issue in Europe are the theories I would answer it historically but I don't know you know what what the historic driver was because you could say that for example those families it's a big risk to have all of their wealth in one company maybe in Anglo-Saxon countries they prefer to die that's like what we're doing right now we're using Microsoft slowly and slowly every year we're trying to diversify it whereas maybe that's not something that you and your family have come to or want to you know I just I just wanted to to what extent is it about the popularity of the stock market as an instrument to raise capital you know I mean you know the kind of the overwhelming power of financial markets that we know them now I know you're a financial analyst but that wasn't 50, 60, 100 years ago you know we're only now become a financing society you know I was wondering perhaps I can offer another kind of explanation if you look at the sample that you're looking at 138 firms so basically the size effect will play a role here there will be a lot of many many small firms in there whereas in the US you have a huge concentration of really huge firms so I think that that size effect might also play a role and as a large firm you have more needs to raise capital where you raise capital on the stock market you know I think the interesting question also is why they have been so passive that's because the law forbade it you know the American context they didn't want shareholders to you know kind of concert and engage in collective action they wanted them to you know that's really the explanation why there was no shareholder engagement and then people would say well it's not because they are not interested because you know they are they are you know the efficient model holds it it's the most efficient way to organize a company shareholder risk bearers managers managers and the board is something in between and then there is a whole bunch of people from political science you know I was going to say well now law separated ownership and control not efficiency because they were not allowed to get involved or to talk to each other to concert with them to be engaged in collective action and so on this has changed lessons class have shown that then this whole kind of shareholder rights movement has taken on which probably in Europe is a different thing because we have higher levels of concentration we have time for one final question if somebody wants to raise it but yes please yeah this is not a question it's just a comment it's a common knowledge and then you are an academy an academy so maybe you can perform it now but that I mean managers performance and companies performance at the end it's 60% of I mean economy environment 40% of executives management and so on so linking executives it seems very obvious but at the end I mean I've been in any other criteria that be relevant to I mean to match to this study I guess we're moving a little bit away from the ownership structure right it's one of the exactly I think that's you know that's silly because you know executive compensation like another topic online not have touched on some very important issues I agree when it comes to executive compensation I was going to show you ownership data when it comes to what you are saying and this is you know economically that means what percentage of variance is explained by executive effort and what by other variables you know I guess you know a lot of a lot I mean you know how I mean that it's a debatable question you know how large is their impact how much you know how much is random right particularly comes you know to stop performance how much or exogenous shocks certainly a lot but that said you know the idea it's not entirely wrong to think that if you want executives to focus on long term investments to invest in innovation to invest in research and development that does not pay off to link part of their incentive structure to some measure of long term performance it does not have to be a stock price you know it can be a different another measure an accounting based measure or some other benchmark but you know the near idea that you want to you want to like his reward or if you want punishment you decide to strategic goals at the corporate level I think it has its merits and we do find these relationships you know on average for example if you look at compensation R&D compensation structure long term short term fixed variable and innovation charity contributions all this stuff that's pretty neat a relationship when you find that you know if you're compensated by stock options no one's going to invest in R&D I mean it's a truth high upside potential low downside risk you know if stock options lose their incentive once they go beyond you know below a certain threshold so and then you have to think who is going to favor stock options as a compensation mechanism and then you think ownership structure and preference heterogeneity so the answer is yes and Chris knows me like I'm a very much in favor of executives I like them you know I'm not a manager realist I think you're going to do a good job because but there is merits to say look I know I give you stock in my company if you do if you you know if you make sure you do a long term story that that's that we might take that I don't want to answer your question very good so we can now close the formal part of the presentation I'd like to thank Kate again very much very we see a very timely topic and based on the number of excellent questions clearly that was interesting for you so now with that I would like to thank you for attending and we can now go next door for the buffet luncheon so thank you very much thanks for coming