Was Philipp Hildebrand frank about the Swiss Franc?

Currency plays a key role in the world economy and can affect the profits of organisations, particularly larger companies with a worldwide reputation. Currency can affect companies in different ways, either in a favourable or an adverse manner. The three main types of exposure that can affect a currency are:

• Transaction exposure – A company receives income or makes payments in a different currency to what they use within their own home country. The risk is that the domestic currency can be lower than expected or the cash payments made may be higher.


• Translation exposure – Companies report their financial position of foreign subsidiaries back to the currency of their parent company; affecting the company’s balance sheet and profit and loss account. The exposure does not reflect an actual cash loss unless dividends are being declared.

• Economic exposure – The trading position of the business is at risk due to adverse affects on the short and long term movements of exchange rates.

(Arnold, 2008)

Economic exposure can be classified into two separate definitions.

1. Direct Economic Exposure - Expected future income and payments are in foreign currency and have not yet been made.


2. Indirect economic exposure - Long term risks from adverse developments in the company’s home country can result in foreign competitors benefitting from exchange rate movements.
(Arnold, 2008)

The Swiss National Bank (SNB) conducts the country’s monetary policy as an independent central bank; the bank is there to act in the best interests of the country (SNB, 2012). Philipp Hildebrand, the chairman of the SNB, resigned with immediate effect on 09 January 2012 (BBC News, 2012). Philipp Hildebrand had come under scrutiny in recent months after some of his recent personal transactions have been questioned. Kashya Hildebrand, Philipp’s wife, exchanged Swiss Francs and bought $504,000 (£323,024) in August 2011, three weeks before the bank intervened to reduce the value of the Swiss Franc. She later sold these dollars to buy a property (BBC News 2012).Mr Hildebrand denied that he had any knowledge of these antics. People are now questioning whether Mr Hildebrand was aware of this. Was he actually fully aware of this situation and was he only considering his own benefits rather than Switzerland’s?

Graph 1

(Trading Economics, 2012)

Graph 2

(x-rates, 2012)

Graph 1 shows the sudden drop in the Swiss Franc in early August 2011. The affect of the currency dropping dramatically so suddenly will have affected lots of businesses worldwide. Every form of currency exposure will have occurred under different circumstances as a result of this event. Graph 2 shows the increase in US Dollars in comparison to Swiss Francs. It is clear that in August 2011 the value of the US Dollar increased immensely. The reason for the increase is from a direct result of the decrease in the Swiss Franc, as shown in graph 1.

Kashya Hildebrand, Philipp’s wife, was able to benefit from exchanging Swiss Francs for US Dollars before the Swiss Franc decreased in value. As a result of this, Kashya was able to receive more US Dollars in this exchange than she would have weeks later. A property was bought with these US Dollars, meaning that the property cost her less. As graph 2 shows, the Swiss Franc increased back to a similar price to July 2011.

One of the SNB’s primary objectives is to be aware of the country’s economic developments and declines (SNB, 2012). The idea is that if the bank is run correctly then economic growth will eventually occur. If Mr Hildebrand had followed these objectives thoroughly then it is possible that this situation would never have occurred. The Swiss Franc is ranked fifth in the global foreign exchange market turnover; behind the US Dollar, the Euro, The English Pound and the Japanese Yen (Retail FX, 2012).

I believe that Philipp Hildebrand was correct to resign from his current role at the SNB. There was a lot of attention brought to this story, following recent scrutinised events at national banks such as RBS and Barclays. Although Mr Hildebrand denies knowledge of his wife’s actions, many believe that he would have been aware of this. Others believe that he would have been the reason as to why his wife was able to attain these profits as he would have been aware of the upcoming effect on the Swiss Franc. Passing on this information to his wife would enable her to take advantage of the situation, like she did. I believe that Mr Hildebrand’s resignation speaks volumes and suggests that he may have been feeling the pressures from his own guilt. If a manager or director is more concerned about their own personal well being over the benefits of the company, then it is not possible for them to remain in their role.

Sources used: Arnold, BBC News, Retail FX, SNB, Trading Economics, x-rates

Could Greene King make investors blue?

Greene King is one of the UK’s leading pub retailers and brewers. It operates over 2,400 pubs and restaurants and runs two breweries. The company was established in 1799 and has been very successful in recent times.

Companies like this usually need some finance in order to be successful. There are two ways that are most common to companies to raise finance.  Money can be raised through equity or capital of the company. Money can also be raised through debt finance. Equity finance has been a popular option for companies for many years, whereas debt finance has only really come to fruition within the last 30 years.

Greene King has raised finance through their equity. The company has significantly high net debt and has done for many years. In 2008 the net debt was as high as £1,605m (Greene King, 2011). The majority of this net debt is made up of securitised debt. These are loans given to companies which are secured with their assets. Although these figures seem alarming, Greene King has taken this approach for years. The company no longer has any short term debt outstanding and some borrowings are not fully due until 2036 (Greene King, 2011).

Some people believe that companies should not be run in this manner but this approach is not uncommon within this particular industry. Greene King has high equity because of all the properties that have been acquired over the years. The company’s gearing ratio has been above 100% for a long time. This states that the company is highly geared; relying on borrowing for the majority of its capital.

Weighted average cost of capital (WACC) – is calculated by “weighting the cost of debt and equity in proportion to their contributions to the total capital of the firm” (Arnold, 2008). Companies use this figure to see how much interest is being paid on the money that it is financing. Realistic cash flows can be developed from this calculation; allowing the company to interpret whether acquisitions or mergers can be made. Greene King invests heavily in new acquisitions so it is important that these calculations are correct. The company would not want to place itself in a vulnerable position.

 Rooney Anand – Greene King Chief Executive

Greene King recently suggested that its half-yearly profits were higher than past years but the Chief Executive of the company, Rooney Anand, was quick to suggest that 2012 would be a tough year of trading for Greene King (BBC News, 2011). If this is the case, should Greene King continue to receive the majority of their borrowings in the way they do currently?

I believe that the answer is simply yes. Before the financial crisis it was simple for people in well established countries to borrow money to expand their businesses. Before the crisis, in the US, more than half of the country’s borrowings to companies were financed through asset-backed securities (Financial Times, 2011). Although the UK and the US are struggling more than in the past, it is still possible to have a business that is consistently successful and profitable. However, some companies can not necessarily be as successful without the funding. A company in this situation may not be able to progress or may even begin to struggle. Greene King does raise internal finance and therefore does not rely solely on external finance. It is very likely that the company would not be as successful as it is currently is without the borrowings that it receives.

Greene King maximise their shareholder value by “maintaining a strong credit rating and a core level of debt which optimises the weighted average cost of capital (WACC) and shareholder value” (Greene King, 2011).  This statement shows that the company are aware of the potential implications from their current net debt. It also shows that they take WACC into account in order to be as successful as they are. The debt is actually maintained to a level that benefits the WACC.

Greene King has operated in this manner for a long time. The company has been successful under this business plan and has not shown any ill effects from recent obstacles such as the smoking ban and declining property prices. The company is seen as being volatile due to the level of net debt and high gearing. However, the securitised debt is currently under control and is not affecting the progression of the company. Greene King is also classed as being a stable company through their annual credit score and rating (FAME, 2012).

Businesses such as Peacocks have been recently unsuccessful but this does not mean that all companies will follow in their footsteps. It is unfair for all companies to be tarred with the same brush but it is inevitable that the general public become concerned when well known companies begin to fail. Greene King has not had too much public attention in comparison as their business model has been successful.  I believe that if larger companies were given time and co-operation from their lenders then it may be possible for them to replicate these successful results.

 

Sources used – G Arnold, BBC News, FAME, Financial Times

Will Apple Inc. remain this successful?

The New York Stock Exchange (NYSE) contends with billions of dollars of turnover on a regular basis. It is the biggest in terms of domestic share exchanges. The main reason behind this is because the domestic companies they deal with are huge.

One of these companies is Apple Inc. The graph below shows just how big Apple is, as their share price reached a new high of $497.50 on 10/02/2012.

(Yahoo Finance, 2012)

The graph shows the share price of the company for as early as 1985; when an individual share could be purchased for less than $4. Share price remained at this level until the millennium, which is when the iMac became a familiar product. After a small dip in share price, Apple recovered sensationally. By 2005, share price had increased to over $70 per share (Yahoo Finance, 2012). The success of the iPod played a big role in this, along with Apple stores opening worldwide.

Technological companies are paramount to the success of such stock markets. In the NYSE they represent 20% of the market (Financial Times, 2012). Apple is now the largest US company by market capitalisation (FactSet, 2012). This shows how successful Apple is in relation to Market Efficiency.

It is argued by many that the success of the company would not have been so vast without the leadership skills of Steve Jobs (above). Mr Jobs lead the company with imagination and creativity, along with business nous. On 05/10/2011 Mr Jobs passed away, leaving other individuals to keep Apple at the top. Initially, the share price fell after this news was broke. However, the share price did not fall dramatically and did recover quickly. This shows that investors have faith in the company in itself, rather than just one person who was leading the operations.

Since December 2008 the company share price has been on a meteoritic rise, but will this bubble burst? Competitors such as Lenovo, the 2^nd largest makers of pcs, have produced a 54% increase in profits (BBC News, 2012). Will Apple see this as a threat?  Well if Lenovo follow in the footsteps of HTC then no. HTC had produced an increase in profits BUT announced that recent sales have been poor due to their competitors success, such as Apple (BBC News, 2012)

John Browett was appointed by Apple in February 2012, as Senior Vice President of Retail (The Guardian, 2012). It is reported that his wages have increased significantly. Is this an action that will help Apple remain top of the market and as powerful as they currently are? There is the potential that Mr Browett may be motivated by this new challenge. However, there is also the concern that he is there solely on the basis of money and that this alone will not help Apple. There is a lot of pressure at management level; with the possibility of people such as Chief Executive Tim Cook coming under scrutiny if the business begins to crumble. If results do not remain high then senior figures such as this will surely be blamed. If the company does begin to dip, will these individuals act in a “rational” or “normal” manner; will they act in the way of a utilitarian or would another approach be taken (Statman, 1999). I am sure that they hope this scenario never occurs.

Does share price remain high due to their reputation?

When I think of Apple, the initial words that spring to my mind are ‘innovation’ and ‘reputation’. This is what the company has been built upon, particularly in the last twenty years. RIM (Blackberry) were known as the ‘innovators’ of the smart phone market within recent history. However, technology quickly changed and RIM struggled to cope with that demand.

Apple currently benefit from an anticipatory price movement in share price when new products are announced. This is because the demand for all those products is so high; so investors become optimistic that the share price will increase further because of these past trends. It will be interesting to see how Apple now cope without jobs steering the ship and whether that optimism remains with potential investors.

Sources used: BBC News, FactSet, Financial Times, The Guardian , Yahoo Finance

Will Hester's actions have an impact on the shareholders?

Mr Stephen Hester, the current Chief Executive at Royal Bank of Scotland (RBS) recently turned down an annual bonus of 3.6 million shares. These shares were valued at almost £1,000,000, putting the value of the shares into perspective. (The Wall Street Journal, 2012). Hester was arguably forced into this position as a result of public demand. It has to be questioned as to whether this was the correct decision and whether shareholders will benefit from this.

Hester became Chief Executive at RBS in November 2008, replacing Fred Goodwin. He was brought in to restructure the bank after it suffered severely from the economic crisis and from bad management. The bank was eventually bailed out by the Government, who purchased 83% of the company’s shares (BBC News, 2011). Fred Goodwin was referred to as ‘Sir’ Fred until this month. He had his knighthood taken away from him as a result of his actions when at the helm of RBS. Martin Dickson (2012) believes that Goodwin did make bad decisions but "he was hardly alone in causing the credit crunch".

Chief Executives are heavily scrutinised, particularly in the UK and the US. It can be argued that they are easy targets and that if a company’s share price falls, it is due to a collective performance rather than just one individual.

Hester is paid an annual salary of £1.2million, which most would argue is enough in itself. However Hester’s bonus is decided by a board of directors rather than by himself. So he can not necessarily be blamed for the size of this bonus. It also has to be mentioned that Hester was in a good job before accepting his current role. It is generally agreed that he has performed well at RBS under the circumstances; this should be commended. There were rumours of Hester and his staff quitting their roles over this debacle, but this never came to fruition. It should be noted that these were only rumours and that Hester never suggested that this could happen.

In Heston’s tenure he has delivered good results and arguably over achieved. To receive his bonus, he is evaluated on five categories:

1. Strategic direction
2. Financial performance
3. Stakeholders and lending
4. Risk and control
5. Capability and development

(Financial Times, 2012)

If Hester did well on these targets then why should he not be rewarded? £1 million as a ratio of RBS’s profit is relatively insignificant and maybe this should be taken into account rather than just taking the actual figure into consideration.

Some would argue that the Prime Minister David Cameron is to blame for this bonus. He agreed to the bonus as it was under £1million; this decision was heavily criticized by his opposite number, Ed Miliband (Financial Times, 2012).

Hester received £6.5m in bonuses in 2010 (Daily Mail, 2011). This alone would suggest that that the £1 million bonus offered this year was not needed. Excess and greed is not appreciated by the general public. The public are technically majority shareholders of this company so their voice should be heard, and in this case, it has been. In comparison to Bob Diamond, CEO of Barclays, his bonuses seem very small. However Barclays are in a much more stable position as a company than RBS currently are. Therefore they would argue that they are in a position to offer higher bonuses.

RBS Share price has been below the FTSE 100 since the end of 2009 (Thomson Reuters Datastream). This suggests that shareholder value has not been achieved since this time onwards. Once the circumstances of the company are taken into account then it becomes clear why.

Some suggest that there should be a closer link between the performance of a company’s share price and its chief executive’s bonus. Under these circumstances, if shareholder wealth maximisation was being achieved then the person who enabled this achievement could be rewarded for their efforts appropriately. It should be remembered that shareholder wealth maximisation is different to profit maximisation and that it is also seen as the better option to judge a company’s overall performance.

Jensen (2010) suggests that an ‘enlightened approach’ to value maximisation is something that should be considered by organisations. This is when the need to acknowledge stakeholders is appreciated but to not feel indebted to them at all times. If RBS were more transparent then they would probably gain more trust and confidence from the public.

Value management suggests that the following five methods are used to increase company value:

Increase returns on existing capital

1. Increase returns on existing capitals
2. Raise investment in positive spread business units
3. Divesting from assets
4. Extending the planning horizon
5. Lower the required rate of return

RBS can use these techniques to stabilise the company in the short term and to re-establish the company in the long term. The directors of RBS would argue that management value was taken into account when Hester's bonus categories were set.

In conclusion, I believe that Hester’s performance should be evaluated on the performance of RBS rather than a potential bonus. His job is one of the toughest jobs in the world which many would not be able to cope with. I believe that this is not truly taken into account and that Hester is an easy target. There is the belief that Hester could drop his standards as a result of not receiving his bonus. If this is the case then RBS could seriously suffer as a result. If RBS were to suffer then the UK’s economy would also suffer. It has to be remembered that 83% of the company's shares are owned by the Government and therefore it is paramount that the company recovers and that the share price increases in order for the country to benefit.

Annual bonuses should not necessarily be scrapped. However, they should be re-evaluated by most companies. If shareholder wealth maximisation is being achieved then reasonable bonuses could be offered.