Neil Rimer: “We look for someone with a passion for solving a big problem”

Posted on Wednesday May 16, 2012 at 17:02 by Perspectives Pictet

To celebrate the release of the 10th edition of Pictet Report, we are republishing a selection of articles taken from our archives dating back to 2009. Today, we meet the co-founder of a leading venture capital that focuses on investments in start-up technology companies. A member of twelve boards, Neil Rimer partners with other entrepreneurs to expand their businesses, taking them through to sale or a stock-market debut.


Neil Rimer
Co-founder and Partner
Index Ventures

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When Neil Rimer co-founded Index Ventures in 1996, his ambition was to create one of the best venture capital firms in the world. Sixteen years on, it has a portfolio of more than 100 companies—many with well-known names. They include Skype, now part of Microsoft, Lovefilm, bought by Amazon in 2011, Net-a-Porter, the luxury fashion website now owned by Richemont, and MySQL, the world’s most popular open source database which was sold to Sun Microsystems in 2008. Many others are quoted on stock markets around the world, with the online gambling group Betfair and the internet clothing retailer ASOS listed in London and several companies on the US Nasdaq.

Today, Index Ventures manages more than €2 billion of funds and is ranked first decile in its category. With around 50 staff, it is just raising its sixth venture fund and last year raised a €500 million growth fund to finance later-stage activity which often requires larger sums of expansion capital to reach the next stage of growth. IndexVenture just announced a EUR 150 million life science fund in partnership with Glaxo Smithkline and Johnson & Johnson.

“We’ve had successes like Skype and MySQL and hopefully over time we’ll become associated with more and more companies like them”

‘Doom for a business like ours would be to believe that we have arrived — we’ll never arrive,’ says Neil Rimer. ‘But we’re making progress on a path towards a distant objective. We’ve had successes like Skype and MySQL and are associated with companies such as Dropbox, Etsy and Criteo. Hopefully over time we’ll become associated with more and more companies like them, so that entrepreneurs will recognise a pattern and come to us with their businesses.’ Born in Montreal, Neil was educated in Switzerland when his father moved his bond-trading business to Geneva. After school, he went to Stanford University in California, at first studying biology and physics in preparation to be a doctor. But with the technology boom just beginning on Stanford’s doorstep in Silicon Valley, he decided he was more interested in technology and its use to solve problems. He switched to history and economics, and on graduation spent four years with Montgomery Securities in San Francisco, one of the ‘four horsemen’ in technology investment banking.

After a year obtaining an MBA from Harvard Business School, he decided to move back to Geneva with the intention of raising venture capital finance in Europe, a nascent market for the sector. He joined his father’s bond-trading business — called Index Securities — but after two years his father sold it and the two of them started Index Ventures in its wake. ‘At the beginning, we had no fund, so we raised money for each investment from institutional investors. We made two crucial decisions: that we would always rely on funding from institutional investors; and that we would specialise in technology and the life sciences.

“We look for someone with a passion for solving a big problem with a solution that lots of people will be prepared to pay for”

‘For the first four years, we would identify an opportunity, structure the investment, raise the finance for it and then help build the company — either by sitting on the board or as an observer. We were and still are minority investors: our aim is to help entrepreneurs build their businesses.’ His younger brother David joined after a year, with the role of helping the firm to raise funds. David still manages all non-investment aspects of the firm. He had worked at Capital International, a big money management firm where he had been through the management training programme.

In 1996, the first non-family partner joined: Giuseppe Zocco, also a Stanford graduate who had worked for McKinsey with another of the Rimer brothers. ‘Very early on, we decided we didn’t want to be a family firm. We wanted to be the best venture capital firm in the world and the way to achieve that was to recruit the best people — and they wouldn’t all be Rimers. So we made Giuseppe an equal partner with a right of veto so that the family couldn’t gang up on him.’ In the same year, Index Ventures raised its first fund from a group of investors, including a Dutch pension fund. ‘We had $17 million to invest which we could deploy using our judgment without having to raise finance for each project. ‘Our first big success was Virata, a Cambridge University spin-off which made the chips needed for ADSL modems. These had yet to become the standard for internet connections, but Virata bet the company on the adoption of ADSL — which was exactly what happened. The company went public and was then acquired, making it a very successful investment for us.’

To read the entire interview, download the corresponding Pictet Report or use the online viewer below:

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United States: encouraging start for retail sales in the second quarter

Posted on Wednesday May 16, 2012 at 10:19 by Bernard Lambert

With soft nominal retail sales headline figures, but slightly better than expected core numbers, yesterday’s set of data should be considered as modestly encouraging for consumption growth in Q2. Following a surprisingly strong figure in Q1 (+2.9% q-o-q annualised), less buoyant growth in consumer spending has to be expected in Q2. However, we bet on a still healthy consumption growth rate of around 2½%.

Nominal retail sales rose by 0.1% m-o-m in April, in line with consensus expectations. The figure for March was revised down from +0.8% to +0.7%. Although growth in retail sales was weaker m-o-m in April, between November and January and February-April, it reached a strong 8.2% annualised, following a 7.1% rise over the preceding three months.

The weak m-o-m increase in global retail sales in April was mainly linked to a weather-related downward correction in sales of building materials (-1.8%, following +2.7% m-o-m in March) and a fall in nominal sales at gasoline stations (-0.3% m-o-m), the latter merely reflecting lower gasoline prices. Meanwhile, auto sales increased by 0.3% m-o-m in April (+0.4% in March), in line with what already published unit car sales were suggesting.

Control sales, i.e. sales excluding autos, gasoline and building material stores (the portion of retail sales that goes directly into personal consumption calculations), increased by a healthy 0.4% m-o-m, above consensus expectations of a 0.3% rise. Moreover, the figure for March was revised up from +0.4% to +0.5%. The result was that between November and January and February and April, core retail sales grew by a solid 6.9% annualised, following a 4.6% rise over the preceding three months.

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The biggest source of alpha

Posted on Tuesday May 15, 2012 at 09:30 by Yves Bonzon

The May 2012 issue of Perspectives is now available for reading and downloading. We start previewing the articles of this edition with the opening column by Chief Investment Officer Yves Bonzon.


Yves Bonzon
Chief Investment Officer

Alpha can be defined as the extra return generated from actively managing an asset class compared to the return secured by straightforward passive-management exposure to an asset class. As, by their very definition, aggregated returns obtained by all investors collectively must be equal to the return on the market overall, alpha is tantamount to a zero-sum game. Put simply, for every extra franc or dollar earned by an investor from beating the market, there will be another investor who has underperformed and fallen short by the same amount in francs or dollars. This helps to explain why alpha measured as a percentage does not really provide much instructive information about how good an investment manager is whereas alpha measured in terms of hard dollars is much more revealing. This is what makes looking to generate that extra return by outperforming public and open financial markets such a ferociously competitive exercise. However, many will strive, but very few tend to succeed.

Several research studies have revealed that those investment managers who have delivered the best returns over ten years will still fall foul of quite significant spells of underperforming over very short-term periods. To beat the market average, investors must be able to do something that is quite different from what is being done by the overwhelming majority of other market players, a skill, talent or capability that, self-evidently, not everyone can possess.

To start with, human beings do not like to stand out from the crowd that much, preferring to go along with the herd and stick close to the dominant lines of thinking at the time. Often they will derive greater satisfaction from being wrong along with everyone else than being proved right alone and at odds with the rest. Admittedly, the borderline between firm belief and stubbornness can be wafer-thin when it comes to asset management.

Secondly, even though investment managers might possess the know-how and talent to achieve differentiation from the consensus by venturing off-piste, they will have to cope skilfully with the tolerance and patience thresholds of investors who have entrusted their wealth to them and who might pull their money out before the consensus-contrarian bets put in place have delivered their expected rewards. Between 2005 and 2007, several investment managers who had been predicting the debacle ahead and had shorted us sub-prime mortgage securities were obliged to backtrack because their own clients, who were losing a little every month, had lost heart and belief, and asked to cash in their investments.

Asset managers have to manage their own business risk and, especially, the risk to career or reputation as they might well lose their jobs before the tide turns in the marketplace to vindicate their convictions and investment plays. The fact that markets have a tendency to cause financial assets to overshoot both upwards and downwards stems from this cruelly pragmatic reality of risks and opportunities involved in the asset manager’s business because the vast majority of market players behave according to herd instinct, which induces them to act more or less like everyone else rather than run the risk of underperforming embarrassingly and being shown the exit door.

Disparities between price and value that emerge as a result of this perfectly rational pro-cyclical pattern of behaviour, commonly referred to as ‘career risk’, are probably the prime sources of that extra return or alpha, in what will always remain a zero-sum game. Through our ‘momentum’ strategy and with our allocations in defensive shares, whose features I outlined in my March Editorial Outlook article, we are endeavouring to generate outperformance by seizing on opportunities thrown up by career risk being minimised by those involved in the asset-management business. Paradoxically, as the proportion of funds being managed by professional investors has climbed over the last forty years from 20% to over 75% in the US market, presumably this particular source of alpha is not about to dry up. On the reverse side of this coin, the price to be paid for this alpha will be a cool head and readiness to accept that, inevitably, there will be brief spells when investments will underperform.

For more views and insights, read or download the May 2012 issue of Perspectives, and remember you can subscribe to Perspectives to receive each issue directly in your inbox on the day of its release.

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Perspectives 27: “Ugly divergence in Europe vs. the Great Deleveraging in the US”

Posted on Monday May 14, 2012 at 14:53 by Perspectives Pictet

The May 2012 edition of Perspectives – titled “Ugly divergence in Europe vs. the Great Deleveraging in the US” – is now available.

In this edition:
• Editorial outlook: the biggest source of alpha
• Macroeconomics: Europe a drag on the world economy
• Strategy: US bonds, risks mounting
• Headline news from around the world: surprise moves to ease monetary policy
• Asset classes and currencies: financial markets caught between two fronts
• Topic of the month: the atlantic divide, divergence between US and European equities
• Key figures: US bonds under the microscope

Download Perspectives in your language (English, French, German, Spanish) or use our online reader below.

Published in four languages on a monthly basis, Perspectives presents our views on strategic trends, macro-economics, and asset classes. In addition we address a topical issue related to the concerns of the moment. You can subscribe to Perspectives to receive each issue directly in your inbox on the day of its release.

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INSEAD’s Filipe Santos: “Social entrepreneurs will play a greater role in this new age of fiscal austerity”

Posted on Monday May 14, 2012 at 08:01 by Perspectives Pictet

Filipe Santos
Associate Professor of Entrepreneurship
INSEAD

To celebrate the release of the 10th edition of Pictet Report, we are republishing a selection of articles taken from our archives dating back to 2009. Today we discuss social entrepreneurship with Filipe Santos, Associate Professor of Entrepreneurship at INSEAD. For more than two centuries, entrepreneurs have created wealth for society by pursuing their own financial self-interest. Now a new generation of business leaders is taking a more direct approach to solving social problems.

Inspired by role models such as Microsoft’s Bill Gates, social entrepreneurs are using their commercial skills and market-based incentives to tackle poverty, disease and environmental degradation. With government cutbacks touching every aspect of life, these socially-driven business leaders are set to play an increasingly important role.

Characteristics of today’s social entrepreneur

The common view of a social entrepreneur is a mix of Sir Richard Branson and Mother Teresa – commercial entrepreneurship combined with charity. The truth is more complex. At its best, social entrepreneurship is an organising process distinct from those in the business and social sectors. While social activists use political pressure to stop the negative impact of government and business, social entrepreneurs approach it from a different angle. They ask why people behave in a negative way, then look for market and/or community based incentives to encourage positive behaviour. On one level, their actions are no different to any commercial entrepreneur – pursuing opportunities for value creation through new business initiatives. The distinction is in their motivation. Whereas the main driver for commercial entrepreneurs is profit, their socially-minded counterparts want to improve society.

Creating a sustainable venture

What both types of entrepreneur have in common is the need to make ventures financially sustainable. Give money to a poor man and he can eat the next day – but what happens when the money is gone? Human beings cannot live off goodwill. Hence the concept of sustainable ‘microfinance lending’ pioneered by Muhammad Yunus in Bangladesh.

Lenders loan money to poor individuals so that they can create a small business. When that enterprise takes off, it generates returns to repay the loan and support the owner’s family and community in the long-term. Not only do the first of wave of beneficiaries improve their own lives, the money they give back to the lender is used to fund further loans. Creating a sustainable solution to a problem in society has become a hallmark of today’s social entrepreneurs.

Managing a growing enterprise

“Profit is not the main driver for a social entrepreneur”

In the past, identifying problems and designing innovative solutions on a small scale was the typical approach of social enterprises. In the wake of the global fiscal crisis, the difficulty many entrepreneurs face is how to expand their operation to address the growth in numbers needing their help.

Over the past 200 years, management theories and powerful business tools in the areas of marketing, strategy and competitive advantage have helped entrepreneurs expand their commercial ventures. Growth within the social enterprise sector remains comparatively unknown territory. As the aftershocks of the economic turmoil continue to be felt around the world, rethinking management theory for social entrepreneurs is critical. Developing a set of powerful tools is necessary to enable the social enterprise sector to reach its full potential when society needs it most. It is for this reason that ISEAD’s Social Entrepreneurship Programme, launched in 2005, is promoting the leadership, organisation and business skills entrepreneurs require to manage a growing social enterprise.

To read the entire interview, download the corresponding Pictet Report or use the online viewer below:

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Simon Jablon & Tracy Sedino: “We had to do everything and learn by trial and error”

Posted on Friday May 11, 2012 at 17:03 by Perspectives Pictet

To celebrate the release of the 10th edition of Pictet Report, we are republishing a selection of articles taken from our archives dating back to 2009. Today, we meet the son of legendary eyewear designer Linda Farrow, who relaunched her iconic brand with his wife almost two decades after it was put into storage. Nine years later, it is again making waves in the fashion world, its designs worn by global stars such as Lady Gaga and Madonna.


Simon Jablon
Owner & Creative Director
Linda Farrow

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Tracy Sedino
Marketing Director
Linda Farrow

When Simon Jablon went to clear out a North London warehouse owned by his father in 2003, he discovered a treasure trove of the vintage eyewear designed by his mother Linda Farrow. Her iconic designs had helped shape the fashion world of the 1960s and 1970s, but in the mid-1980s, she had put the company into storage to focus on her family. With retro styles back in demand, Simon and his then girlfriend Tracy Sedino decided to revive the brand and build a global eyewear business in partnership with many of the world’s leading designers.

“I was 24 and Tracy was 22 and we were opening up box after box of amazing creations,” says Simon. “I always knew the vintage archive existed, but I hadn’t grasped the level of creativity and the value of my mother’s work—it was just mum’s stuff. But we were able to start our company simply on the back of what we had.”

His mother had designed innovative eyewear in the swinging sixties for fashion houses such as Balenciaga, Emilio Pucci and Yves St Laurent. She launched the Linda Farrow brand in 1970, pioneering designs still popular today such as the avant-garde wraparounds that were Yoko Ono’s signature 1970s look. Meanwhile, his father had his own business which distributed eyewear for many of the major brands and manufactured own-label products for UK high street retailers.

“Linda Farrow revolutionised eyewear design which had previously been very functional — dictated by men and doctors. She was the first designer to bring a feminine approach to eyewear that was influenced by fashion. Bigger brands then worked with her on their designs, and the company was very successful. She put it into storage in the 1980s, when my father’s company was doing sufficiently well to allow her to focus on the family.”

“I hadn’t grasped the level of creativity and the value of my mother’s work—it was just mum’s stuff”

When he made his exciting discovery nine years ago, Simon was working for his father, whose business included a small property portfolio. The warehouse which housed the stock was about to be redeveloped for residential purposes, but turned out to contain more than 2,000 eyewear styles, with up to 10 or 20 pairs of each — and hundreds of pairs of some. With seven months to go before London Fashion Week, the two entrepreneurs worked up to 18-20 hours a day to catalogue and document the stock for their first show.

“There was an amazing response when we launched Linda Farrow Vintage. We took some 50 orders in four days, with a value of around £200,000 — which was effectively profit, because we hadn’t had to produce anything. We could have made a pretty penny by just selling off the stock year after year, but every year we invested in the new Linda Farrow Luxe brand as we learnt more about the industry.”

The two entrepreneurs soon realised that exclusivity deals restricted their sales growth. When Simon went to Hong Kong where they were selling through Joyce, he realised there were many more great stores that could be outlets for them. So they decided to work with other designers to create more eyewear brands, starting with Eley Kishimoto, the London design house whose work was displayed on the catwalks of Louis Vuitton, Marc Jacobs and Alexander McQueen. Today, Linda Farrow partners with the likes of Alexander Wang, Dries Van Noten and Agent Provocateur, developing concepts and helping them to realise their designs. The company also cultivates new talent by working with emerging designers such as Jeremy Scott, Peter Pilotto and House of Holland.

“We’ve been profitable from the start and this year have grown by more than 100 per cent—not bad in a depression!”

The strategy has been highly successful. “We’ve been profitable from the start and this year have grown by more than 100 per cent — not bad in a depression! Our product is a high-end one: we’re selling sunglasses for up to £1,000 apiece to the pockets of wealth that exist all over the world — in Eastern Europe, the Middle East and Asia, as well as Western Europe, the UK and America. We even managed to increase sales 30 per cent in 2008, in the depths of the recession. People stopped travelling, but many spent their money in a more discerning way — on “outer skin” accessories such as eyewear, watches, handbags and shoes.”

Linda Farrow designs have become very popular with celebrities, including Lady Gaga, Madonna and Lenny Kravitz from the music world and film stars such as Sienna Miller and Maggie Gyllenhaal. “It’s not forced,” says Simon Jablon, “we don’t pay for coverage. If you create it, they will come. We work on the pull mentality: if we make a beautiful product that’s different, people will desire our brands.”

Neither of the two entrepreneurs was conventionally prepared to run such a fast-growing, cutting-edge business. Simon had dropped out a business studies course at University College London, partly because he felt he was being groomed to work for a big company. He had wanted to be an entrepreneur or a sportsman from the age of nine, a combination that led him to start his first company at 14.

To read the entire interview, download the corresponding Pictet Report or use the online viewer below:

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Tyler Brulé: “Newspapers have survived because they are best suited to people’s downtime”

Posted on Thursday May 10, 2012 at 17:01 by Perspectives Pictet

To celebrate the release of the 10th edition of Pictet Report, we are republishing a selection of articles taken from our archives dating back to 2009. Today, we are diving in the world of media with Typer Brulé, founder of two iconic publications: Wallpaper* and Monocle.


Tyler Brûlé
Serial Entrepreneur

For Tyler Brûlé, the visionary behind two global publishing brands and an intelligence-driven design enterprise, being shot by a sniper while reporting in Afghanistan during the war in 1994 only served to fuel his devotion to journalism, the commercial value of intelligent editorial and his inherent business drive.

Tyler Brûlé decided to launch his own magazine–a smart title covering design, travel and lifestyle–that would soon become part of the contemporary vernacular. Wallpaper*, supported initially by a £136,000 uk government-backed business loan, was launched from his own home to critical acclaim in 1996. Brûlé says its success was due to a clear vision of where the publication fitted within a crowded marketplace–combined with a focused belief in quality.

Decision to sell and recreate

Two years after it first hit the newsstand, Brûlé sold Wallpaper* to Time Warner, retaining the post of editorial director and gaining what he calls ‘an mba at Time Warner.’ This decision sets Brûlé apart from many entrepreneurs who find it particularly hard to give up control. But this option was driven by pure business logic. While the launch had been hugely successful, Tyler saw the opportunity to grow the business with the distribution and marketing expertise of a major media company as his partner.

“My passion for the final product gives me an energy that I can pass onto others; clients, colleagues and investors alike”

Then, in 1998, Brûlé set up Winkreative, a branding, design, and content agency whose blue chip clients include British Airways, American Express and blackberry. The launch was a natural response to clients’ demands for more bespoke, editorial-based commercial solutions to their branding requirements.

Apart from relishing the challenge of starting a business, Brûlé says an important part of his entrepreneurial drive is the desire to perfect a product–whether it be a magazine or aircraft interior. That could explain his decision in 2007 to launch another ground-breaking magazine, Monocle. Billing itself as a ‘briefing on global affairs, business, culture and design’, Monocle is read by an affluent group of well-travelled, well-connected readers, and is already distributed in 65 countries internationally. Today, almost 15 years after founding Wallpaper*, Brûlé runs a cosmopolitan enterprise with over 100 employees, and an international network of offices connecting London, New York, Tokyo, Zürich and Hong Kong.

To read the entire interview, download the corresponding Pictet Report or use the online viewer below:

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Markus Boesch: “We know most of the families that own a Boesch boat”

Posted on Wednesday May 09, 2012 at 17:01 by Perspectives Pictet

To celebrate the release of the 10th edition of Pictet Report, we are republishing a selection of articles taken from our archives dating back to 2009. Today, we meet the fourth-generation member of the family which owns a Swiss boat-builder famous for its high-tech mahogany speedboats. After leaving the company to pursue other interests, Markus Boesch returned to become its chief executive.


Markus Boesch
CEO
Boesch Motorboats

When Markus Boesch was growing up, he always assumed that he would join the speedboat business founded 91 years ago by his great-grandfather Jakob. As a young boy, he had played in its boatyard on the shores of Lake Zurich, and later worked there during his summer holidays. But after failing to complete a degree in mechanical engineering, he decided on a change of career and left the family business — forever, he thought. Ten years ago, however, he returned to Boesch Motorboats and is soon to take the helm as chief executive.

‘My first reaction to the disappointment in my studies was to decide to do something totally different — which is typical of people in their mid-20s who see things in black and white! So I went to business school and also trained as a swimming coach at Switzerland’s sports university. At high school I had been a keen swimmer and I became coach of the junior national team. And when I had completed my business degree, I went into it, working for a small chain of shops that specialised in mobile computing. ‘I found the it industry fascinating, but it was moving so fast that the company’s strategy and career plans changed every few months. I realised I’d be happier in a smaller, more familiar environment where I could be involved in building a business over the longer term. So I talked to my father and my uncle about returning to the company and how I might move up to an executive role over the medium term. And in 2000, I joined Boesch, with my first role being to modernise the company’s it system.’

He is the first generation where not all the family members are working for the company, Markus adds. His younger brother is pursuing a career in psychology in which he has a doctorate, while his cousin moved on after working for Boesch for a time. ‘In previous generations, the children were expected to follow their parents. My father and uncle had no choice, because my grandparents

“I am the first generation where not all family members are working in the company”

Sent them to Germany for their technical education so they could join the business.’ There has been a boatyard on the site of the Boesch headquarters in Kilchberg, a lakeside village which is now effectively a suburb of Zurich, for more than 140 years. Jakob Boesch, a carpenter who retrained as a boat-builder after realising that he had no head for heights, came to work at it around 1900. When it went bankrupt after the First World War, he bought it in 1920 with financial backing from some directors from Lindt & Sprüngli, the famous chocolate-maker whose headquarters is across the road.

The business then was building, servicing and repairing sailing boats, motorboats and rowing boats. But Jakob’s son Walter, who started his apprenticeship with the company in 1925, was fascinated by the first half-glider speedboats whose design allowed them to achieve faster speeds more efficiently. Under his leadership from 1938, the company developed the ‘horizon gliding’ designs which mean that Boesch boats climb up on their bow waves and overtake them nearly horizontally. The resulting stable stern waves, speed and agility quickly made them a favourite for waterskiers, used in European Championships between 1960 and 1976, and in World Championships from 1960 to 1991.

When petrol rationing halted motorboat production during the Second World War, Walter switched to making sailing boats. But once the war was over, the demand for motorboats soared—and with it sales of Boesch boats which were relatively cheap because of the low exchange rate of the Swiss franc against the dollar. Walter visited the US to study mass production of boats in Detroit, and in 1953 Boesch was the first company to apply such techniques to boat-building.

“The boating industry has changed a lot in the last 15 years, with small manufacturers facing increasing competition from large, vertically integrated companies”

The company continued to be innovative, switching from plank construction to the use of laminates after yet another trip by Walter to the US in 1964. Today, the boats are built with up to eleven layers of mahogany from West Africa, which is stained and coated with several layers of epoxy resin and varnished with further layers of polyurethane which cumulatively bring out the natural beauty of the wood. The result is a skin that is solid, rigid and stronger than the fibre-glass which is now the commonest material for speedboats. A larger production plant capable of making up to 150 boats a year was opened at Sihlbrugg in the neighbouring canton of Zug.

In the 1970s, the family’s third generation came on board, when Marcus’s father Klaus, a newly graduated naval architect, and his uncle Urs, a mechanical engineer, joined the company. But the business quickly faced tough new challenges with the oil shock and the devaluation of the dollar against the franc. Boesch moved from mass production to a niche business model, designing bigger boats with more features to order and using new products and technologies. Today, they make 25-30 motorboats a year, which take around six months to complete and sell for between SFr150,000 and SFr750,000

To read the entire interview, download the corresponding Pictet Report or use the online viewer below:

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Subramanian Rangan: “The new era of sustainable performance in business”

Posted on Tuesday May 08, 2012 at 17:01 by Perspectives Pictet

To celebrate the release of the 10th edition of Pictet Report, we are republishing a selection of articles taken from our archives dating back to 2009. Today, INSEAD professor of strategy and management Subramanian Rangan explains that, in a new era of sustainable performance in business, companies must embody considerations of justice, diversity and integrity, as well as efficiency.


Subramanian Rangan
Professor of strategy and management
INSEAD

Business performance can be analysed on two levels – the enterprise level and the leadership or management level. At both levels, what we mean by performance has changed over the last decade and a half, reflecting changes in the global environment. This requires us to re-examine and reconceptualise performance in these new circumstances.

At the enterprise level there has been a shift from the broad view that performance means profitable growth, the mantra of the 1980s and 1990s, to a broader definition of sustainable profitable growth. Sustainability is very hard to nail down, but it reflects a sense that we really care about the future. Five “Rs” come to mind in trying to define it.

Risk: profitable growth does not quite get at how the balance sheet looks. Past performance is not a predictor of future performance, because the actions that seem to deliver current performance may engender risk for the future. This is analogous to the farmer who is eating his seeds until he has no more left for replanting.

Reputation: intuitively, my sense is that reputational capital is important, as it is when countries or companies try to sell bonds. The premium they have to pay over prevailing rates gives us a sense of both risk and reputation – a speculation or forecast about the future. Reputation is an asset that gives an organisation credibility and means it can be trusted.

Resilience: stuff happens – an oil spill, a product recall, a safety accident that leads to injury or death. The question is how rapidly the organisation can bounce back. Has it built in resilience, or is it a fragile tall structure that has become way out of proportion to its foundations?

Respect: there is fear and there is respect, and respect is a higher order sentiment, something that others endow you with. The Dalai Lama is respected; some other religious leaders might be feared. Certain enterprises perform in such a way that they elicit the respect of society – in India, Tata is one such enterprise. Because respect is a cumulative type of sentiment, it is not based on just a single outcome but on a durable record.

Recognition: when people acknowledge and attribute certain deeply valued characteristics to the enterprise. It may have started the quality movement or be recognised for its professionalism. Apple is recognised for having led a renaissance of design.

These are the five Rs I think about when defining the substance of sustainability.

“In the sphere of ideas, the notion of fairness has grown in importance”

There is much more, of course, including traditional factors such as profit, people and planet. But Risk, Reputation, Resilience, Respect and Recognition are terms that signify the broadening definition of performance – factors that organisations are now grappling with in many sectors. Thus profitable growth has been broadened for enterprises to sustainable profitable growth. For management, the evolution has been slower, but it is also happening: a high-performing executive used to be someone who delivered the results, but is now increasingly seen as someone who makes a contribution beyond the current results. What are the contributions that leaders are making that eventually feed into the resilience, recognition, respect and so on of the enterprise? Here are some examples:

• Endowing the enterprise with new capabilities that allow it to make innovations and to deliver performance.

• Re-architecting the system to leave the firm in a vastly different condition, rather than just optimising it to deliver slightly better results. For example, this could involve bringing in new technology, or leveraging technology in a different way.

• Creating a method, rather than just making superficial changes. That again can lead to recognition, resilience and a reduction of risk, because without methods you do not create scalability, you will not have a future.

• Transforming the team – bringing in new human capital to strengthen the team and put it on a completely different trajectory.

• Raising the enterprise’s aspirations by setting out ambitions that had not previously been contemplated by the resource allocators.

• Transforming the culture. When you upgrade the culture, you make a durable contribution, because culture embodies the memory of the organisation.

To read the entire interview, download the corresponding Pictet Report or use the online viewer below:

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United States: weak monthly employment report

Posted on Monday May 07, 2012 at 18:05 by Bernard Lambert

Last Friday’s employment report was clearly weak and market-unfriendly. However, weakness in March and April followed weather-influenced very robust figures between December and February. We continue to believe that the recent deterioration in the economic dataflow is not the beginning of a downturn like the one last year.

Non-farm payroll employment increased by a weak 115,000 m-o-m in April 2012, below consensus expectations of an increase of 160,000. However, March’s figure was revised up (from +120,000 to +154,000), as  was the number for February (from +240,000 to +259,000). Net revisions thus cumulated to +53,000, meaning that April’s level of employment was in line with expectations.

As this series on job creation is often very volatile and 100,000 jobs represent less than 0.1% of total  employment, we should not read too much into data for one or two months. Job creation has averaged a still relatively robust 176,000 per month over the past 3 months, against 218,000 over the previous 3 months. Nevertheless, there was a clear slowdown over the last couple of months, but probably for a significant part a payback following the positive impact of unusually warm weather during the winter months.

 

Once again the unemployment rate inched down m-o-m: from 8.2% in March to 8.1% in April. Consensus estimates were heading for an unchanged rate. Employment in the household survey (a very volatile series) actually fell by a substantial 169,000 m-o-m in April. However, the labour force fell by a high 342,000 (as the participation rate moved down from 63.8% in March to 63.6% in April). As usual in this set of statistics, the number of unemployed was calculated to match the difference between the change in the labour force and the change in employment (-342,000 minus -169,000), so despite a heavy fall in employment, unemployment dropped by 173,000. 

The average workweek remained unchanged at 34.5 hours in April. As a result, aggregate private hours worked (which combines the workweek with employment) were up by a meagre 0.1% m-o-m in April, following a decline of 0.1% in March (the average workweek dropped by 0.1 hour between February and March). Aggregate hours therefore grew by only 1.8% annualised between December-February and March-April, compared to a very strong rise of 3.9% q-o-q in Q1.

Moreover, average hourly earnings were flat m-o-m in April, below expectations (+0.2%). As a consequence, the index of “aggregate weekly payrolls” (calculated as a product of aggregate hours worked and average hourly earnings) increased by a modest 0.2% m-o-m in April. This indicator was thus up by a weak 3.5% annualised between December-February and March-April, a much lower rate than the one seen q-o-q in Q1 (up 5.4%). As this index is a good proxy for household income coming in the form of private wages and salaries, it suggests that, following a sharp pick-up in December, January and February, income growth from this source slowed significantly over the past two months (see chart below).

 

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