Georgetown-ESADE Global Executive MBA Graduation
H.S.H. Prince Philipp of Liechtenstein addressed the graduates of the Georgetown-ESADE Global Executive MBA Program on Saturday, August 29, at 6 p.m. This is the inaugural class of the program, which is a joint effort among Georgetown University's McDonough School of Business and Walsh School of Foreign Service, and the ESADE Business School in Spain.
Remarks by H.S.H. Prince Philipp of Liechtenstein
Dear Deans, Professors, Mrs. Ambassador Fritsche, Ladies and Gentlemen. I have been asked by the Dean and Professor Czinkota to speak to you on this occasion. I am indeed honored to have been invited to do so, and I will try in a few minutes to reflect on some issues and personal experiences in my professional life hoping this might be of interest to you.
My background being in private banking and wealth management working in a privately owned institution does certainly influence my thinking. Also, coming from a country that is very small – approximately 60 square miles and 35,000 inhabitants – and which has been sometimes criticized in a manner which seems to leave fairness and the principle of a level playing field aside, will explain some remarks to come.
As all of us have already heard and read so much about the economic and financial crisis we live in, I will only mention it as far as it has and may influence my professional life and my responsibility as a citizen in the future.
Let me begin by explaining what defines me as a citizen of Liechtenstein. Very similar to Switzerland, Liechtenstein’s constitution makes and thereby defines the citizen as sovereign. Direct democracy means that with a little more than a thousand signatures, a referendum can be triggered or that the government on its own initiative may ask for a referendum. Any question or proposal can be put forward, for instance a vote of confidence concerning the ruling prince or a change of constitution, also rejecting laws or regulations already voted by the parliament. We are, you could say, not ready to delegate all decisions and tasks to third parties – be they elected ones – or to an oligarchy should one exist. The sovereign citizen has the right to impose his final decision.
This certainly does create a specific political culture, greater transparency being one of its strengths; also less pretension of knowledge – to paraphrase Friedrich August von Hayek – of what a so-called public opinion wishes and what so-called social justice is. Maybe certain slowness in decision-making will sometimes result from this. Let me close this paragraph by saying that as a sovereign citizen, I have not to define what my freedom is and no organization has the right to define it for me. Also, may I add, without privacy, no freedom in the long term.
As a country, we have been over the last 12 months frequently mentioned as an offshore center. Before entering this subject, may I be allowed just to mention that Liechtenstein is much more than a so-called offshore center. It is one of the most industrialized countries of Europe; its GDP derives 40 percent of its value from industry and goods production, 30 percent from financial services.
Instead of a tax haven, I would call us a safe haven. Tax competition should be the general rule. The exchange of information concerning tax issues of non-domiciled bank account holders in cases of well-documented demands is already the rule as far as the U.S. is concerned as of this year. A Tax Information Exchange Treaty signed last year has now been followed by an agreement with the U.K. Clients who do not conform to their tax obligations will not be welcomed. Discussions with other countries are taking place.
Very strict laws defining “know your customer” rules and “know your customer” processes make Liechtenstein by IMF ratings one of the best-regulated and controlled financial places. It is definitively a very unattractive location to try to set up money laundering operations or other financial crime schemes.
We certainly agree that over time offshore banking, which is not tax conforming, will shrink worldwide. What will instead become more important in attracting clients is the political and legal stability – here I am thinking first of all of fiscal legislation. Some countries, like Germany, have made their fiscal law so complex that they have to amend it continuously in a merry-go-round. Obviously a conditio sine qua non will be for everybody the ability to deliver best professional services.
Not only will one demand portfolios with a well-diversified asset allocation, but in the future we might see a growing number of clients also asking for a well thought through diversification of jurisdictions as far as booking centers are concerned. And we’ve already seen that. The background to this may well be the fast-growing debts of nations and the speculation that in certain cases this may lead to punitive and populist fiscal policies. Implicit national debts, rarely explained to the public in detail, have reached in many countries a multiple of the publicized explicit debts. I am happy to be able to report here that our government has over the years taken care and achieved consistently budget surpluses; 2009 may certainly be one of the very rare years where that will not be the case.
Today we all feel the global crisis. The bubble, which preceded the crash, was a classic. Bubbles are never about reasoning, but more about greed and fear to miss the party and the fun. Compensation schemes of doubtful long-term value certainly accelerated this process. Looking back in history, we have to realize that bubbles were and will always be with us. 1630 the Dutch Tulip Mania, the South Sea Bubble of 1710, the Mississippi Bubble of 1718-19 touching mostly the French Ancient Regime, the British Railway Bubble of 1840, .com, and so on and so on.
Bubbles – one should not forget – are the result of human behavior in working out and discovering values and prices. The Nobel Prize Laureates Vernon Smith and Daniel Kahnemann observed and studied these processes leading to economic decisions. One is tempted to say the so-called homo economicus does not exist, lemmings certainly do!
How did we as a medium-sized financial institution navigate through this storm without enduring any major damages, and what could we possibly learn from it?
May I say that the cornerstones of a solid operation are alignment of interest between shareholder or owner and management; the simple rule: clients come first; discipline; and last but not least, transparency.
Let me start with an example of alignment of interest. Our private banking and wealth management institution, as you have heard, called LGT Group, has as its ultimate owner and beneficiary the ruling Prince of Liechtenstein. As head of state, neither he nor his predecessors have received or are receiving any public money; all expenses related to this function have been and are being paid out of their own pockets. We at LGT mange his portfolio, which is as far as strategic asset allocation is concerned, very similar to the endowment funds of U.S. universities. He is also the largest client of the bank.
Some 10 years ago, we opened this fund for co-investments to all clients who wish to do so, the rule being very simple: everyone is treated the same, no preselection and particular attribution to a chosen few. Also, very important is that part of our remuneration scheme – a large part of it – is the long-term participation of all management and key persons in a long-term incentive system, which is calculated by the Economic Value Added over a longer period of time.
Asymmetric risk-taking and risk distribution between shareholders or owners and management is a recipe for disaster.
Next, what is simpler than the rule “clients come first” analogue to the old Roman saying In Dubio Pro Re! Conflicts of interest will occur when the revenues generated by the distribution of financial products takes precedence over the rules to give best advice to clients. Many institutions are now reconsidering their compensation schemes pushed by their governments. Better would be to inform shareholders thoroughly of compensation packages, let them have a say, and the markets will take care. Maybe a wish to be addressed to Santa Claus rather than to some European politicians.
On discipline, we have founded more than 15 years ago an institution which is called LGT-Academy. Here, management and key people go through fairly intensive courses lasting up to seven weeks distributed over two and a half years, the aim being get to know oneself better, discover new abilities, and learn to lead oneself before leading others. Professors from universities and teachers from different institutions will present subjects and make the participants work hard on issues as different as questions concerning social and natural science, arts, philosophy, sport, and last but not least, intensive teachings in the art of meditation. Typically, private banking institutions.
Everyone is invited to go through these courses in classes of about 24 participants, which have the additional advantage of creating personal networks within institutions independent of hierarchy, functions, or geography. It also enforces the natural cohesion within the enterprise. Be it the chairman or the CEO participating in the class, he will be treated exactly the same way as all other classmates. The atmosphere is competitive, sporty, and intellectual.
From my own experience, I can tell you that nothing is healthier and strengthens your position as chairman and CEO more than to be in competition with junior colleagues and for instance, ending flat on your back in an Aikido session or being trashed in a chess competition.
A few remarks pertaining to transparency: In discussions with clients, we have experienced ever more often their wish to understand not only a given portfolio structure but also to get a strong feeling and a grasp about what makes the organization tick. They may question, for instance, if there could be some inbuilt and maybe even hidden conflicts of interest between him as the client and the organization. I am convinced that an organization clearly focused on private banking and wealth management will have an interesting future after the experienced mishaps of very large organizations and financial conglomerates.
As a conclusion: Bubbles are part of our economic discovery and the innovation process. Overregulation will not prevent them, only stifle innovation and further endanger our individual freedom.
Freedom isn’t free as somebody said. It will stay with us if we have learned to lead and discipline ourselves. Nowhere truer than in the financial service industry.
The abilities, capabilities, and responsibilities wealth brings to a person should create a certain culture. Financial institutions providing the best advice to their clients, as we are supposed to do, have an interest to help develop this culture of wealth. Our own experience tells us that clients are more and more inclined to discuss issues related to this. The interest in philanthropy and social enterprises, even in today’s environment of crisis even in Europe, is growing. An institute and a chair, which we finance, at the Private Viennese University Sigmund Freud, is studying and researching the different aspects of this culture of wealth. It should lead to some very interesting insights and help us provide better services.
Coming to the end of my presentation, I want again to say to those who have invited me, I hope I haven’t put my feet in too many plates, and I would like to thank you for your very kind attention.