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issue six | april 2011
focus on Performance
Subramanian Rangan
The new era of sustainable performance p4
Ludo Van der Heyden and Theo Vermaelen
Control, performance and shareholder value p9
Rolland-Yves and Thierry Mauvernay
The biopharmaceuticals entrepreneurs p15
Dominique Jacquet
Without profit, there is no future p18
Didier Drogba
Sustaining performance at the highest level p22
George G.Farha
The service entrepreneur p25
Gianpiero Petriglieri
Leadership for the next generation p29
Tricia Guild
The design and lifestyle entrepreneur p35
Yves Bonzon
Managing risk to achieve performance p39
Foreword
The events of the last few years have provided a salutary
reminder of the importance of performance in business and
investment. As the global economy recovers from the financial
crisis, it is clear that short-term performance in both fields
is no longer enough. The challenge is to create sustainable
performance in a world where the definition of exactly what
that means is broadening all the time.
In this issue of Pictet Report, we look at what
performance is, how it can be measured and how it can be
improved sustainably. We asked experts at INSEAD, the
leading international business school, to outline what
long-term performance, risk and control mean for different
business models. We invited the entrepreneurs behind three
successful companies to tell us what performance meant to
them and how they had sustained it over the years. And for
a different perspective, we asked one of the world’s most
famous sportsmen how he achieved and maintained his
remarkable record on the football pitch.
Finally, the Chief Investment Officer of Pictet’s Wealth
Management sets out his thoughts on sustainable investment
performance. Helping our clients in the art of managing their
wealth over the longer term has been Pictet’s single-minded
mission for over 200 years. We hope you will find this report
stimulating and valuable in thinking about the performance
challenges you face.
Philippe Bertherat
Partner, Pictet & Cie
April 2011
Pictet & Cie editorial team–Ninja Struye de Swielande, Stephen Barber and Olivier Capt
Design & editorial consultancy–Winkreative | Rapporteur–John Willman
Photography–Antoine Doyen, Andres Gonzalez, Rama Knight and Børje Müller
contents
insead on performance
p4
Subramanian Rangan
The new era of sustainable
performance in business
p9
Ludo Van der Heyden
and Theo Vermaelen
Control, performance
and shareholder value
p18
Dominique Jacquet
Without profit, there is
no future
p29
Gianpiero Petriglieri
Leadership for the next
generation
Entrepreneurs on performance
p15
Rolland-Yves and
Thierry Mauvernay
The biopharmaceuticals
entrepreneurs
p25
George G. Farha
The service entrepreneur
p35
Tricia Guild
The design and lifestyle entrepreneur
Pictet on performance
A different perspective
p39
Yves Bonzon
Managing risk to achieve performance
p22
Didier Drogba
Sustaining performance at the highest level
pictet report | april 2011
focus on performance
3
INSEAD on
performance
The 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.
Risk, Reputation,
Resilience, Respect
and Recognition–the
broadening definition
of performance
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. 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.
Resilience: stuff happens–an oil spill,
a product recall, a safety accident that •Re-architecting the system to leave
the firm in a vastly different condileads to injury or death. The question
tion, rather than just optimising it
is how rapidly the organisation can
bounce back. Has it built in resilience, to deliver slightly better results. For
or is it a fragile tall structure that has example, this could involve bringing
become way out of proportion to in new technology, or leveraging technology in a different way.
its foundations?
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5
•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.
Very creative ideas and product or service introductions create a lot of buzz
and can be fabulous, but they are not
durable because eventually the novelty
fades. Leaders who make contributions
with new capabilities, systems, technologies, methods and aspirations can
help create sustainable performance in
an organisation. These are characteristics that we associate with companies
like IBM, with firms like McKinsey–a
certain culture, a certain ethos, a way
of working.
So performance, which was already
a broad concept, is being broadened: on
the enterprise level to sustainable profitable growth; at the leadership level, by
contributions beyond results. But why
has this happened? Are we just tired of
the way we measure and conceive performance? Or are there some developments
that are causing us to reconceptualise
the notion of performance? I would like
to propose four developments that have
prompted this re-examination.
One is the dispersal of power, which
used to be highly concentrated–first
with landowners and more recently
with owners of capital. Physical and
financial capital used to be where the
power was, but today that power is also
with customers, regulators, society,
academics, non-governmental organi-
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sations. Power has been dispersed in of other actors–including enterprises.
multiple ways to new actors, so our
Another development is in the
definition of performance has to reflect sphere of ideas, in particular the
where that power is going.
growth in importance of the notion of
fairness over the last 50 years. Issues
such as gender disparity, inclusiveness,
meeting the needs of the bottom of the
In the sphere of ideas,
pyramid, the identification of different
the notion of fairness has
stakeholders, ethical treatment–their
grown in importance
core idea is fairness.
Urbanisation in cities such as
Mumbai or São Paulo as well as in
If you do not understand power, it developed centres such as Amsterdam,
is very difficult to understand what Los Angeles or Berlin concentrates
performance is and to deliver it. People humanity so that people are much
or entities that have power want to more able to see what unfair or inequisee their interests reflected in the table life outcomes people experience.
definition of desirable outcomes. If A book called The Spirit Level suggests
China has more power, it would like that equality is a major driver of socito see the G20 economic performance etal well-being–how we feel, what
or societal targets incorporate what kind of health outcomes we have. The
China considers important. Any entity idea of fairness is at the root of so many
defines its own interests and as its developments, including the broadpower increases, it wants to see those ening of performance–and it is only
interests reflected in the performance the beginning.
Technology is a third factor in the
changing definitions of performance.
Technology firstly means competition:
if I am sitting in Hong Kong, I can
start competing in capital markets, I
can be a trader. Through outsourcing,
I can compete in labour markets such
as healthcare or information processing in other countries and continents.
Technology is changing how power is
concentrated, and diffusing it.
Technology also means much more
transparency, and not only through
WikiLeaks. People now have access to
information on a wholly different scale:
we can understand what is happening in Saudi Arabia, or in Switzerland, or at BP. They can see animal
welfare procedures–how slaughterhouses work and where food comes
from. They ask how governments make
decisions, and how commercial deals
are reached. The spotlight on performance is much broader and somebody
is always looking at it critically.
Global trends influencing the definition of performance
•The dispersal of power–bringing new interests into play.
•The rise of new ideas, especially the notion of fairness.
•Technological changes–increasing competition and transparency.
•The erosion of trust–spreading to affect all institutions.
There has been an erosion
of trust in government,
business, the media,
churches and science
Finally, there has been an erosion of
trust as people see behind the scenes
and think about ideas of fairness and
the distribution of power. It started
first with distrust in politics and
government in the 1970s, then spread
to enterprises and business leaders and
eventually became mistrust in leadership. People see events and anomalies
that prompt the idea that the system
is not necessarily fair. They feel that
they can’t trust the media. They don’t
even trust the churches after so many
scandals, while controversy over issues
such as global warming has undermined trust in science.
Trust ultimately is not only about
whether reported results reflect actual
performance. After so many restatements of performance from enterprises,
the question is: if I believe you, how
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could you achieve that? Goldman Sachs,
for example, has faced questions about
how the firm works and whether it
exploits conflicts of interest. BP is being
challenged about whether it achieves oil
production at high and consistent levels
safely. When we see reported results that
are so consistently above and beyond
what we might expect, people now ask
how it is achieved.
A couple of years ago, I wrote an
article entitled Globalisation the JEDI
Way, alluding to the Star Wars character. The E in JEDI stands for Efficiency,
which remains very important and will
always be an element in performance.
But I identified other elements–the J,
the D and the I.
The J stands for Justice, and I
suggested that when we make our
reckoning of the 21st century, justice
will have a prerogative over efficiency.
Enterprises must start to incorporate
considerations of justice when making
decisions, whether on outsourcing,
pricing, the kind of products or the
methods that they use.
D is for Diversity, essential in
thinking about risk and resilience.
Enterprises tend to go for one currency
(dollars), one computer operat-
ing system, one search engine, one
language (English)–one single everything because it’s the best today. But
diversity is very important, because
we cannot know what the future
brings. Part of sustainability must be
to maintain diversity even though it
may not appear to be the most efficient
outcome. We need to think much more
deliberately about diversity, whether it
is gender, age, ethnic, linguistic, intellectual, etc., diversity.
A meaningful life is one
that is externally oriented,
not just internally focused
The I stands for Integrity, which brings
us back to trust and especially intentions. You cannot have trust just based
on efficiency. China might become the
most efficient economy, but people
still have a lot of doubts about whether
they can trust China. Do I trust Russia,
do I trust India, do I trust America?
We have lived for a long time in a
compliance culture which avoids errors
of commission, but the best companies
now worry about errors of omission.
They think about gender disparity, and
what they can do about it. They think
about ecology and how they use water
in agriculture, and what they can do
about this without damaging the workers or farmers. They think about the
tragedy of suicide rates among indebted
farmers in developing countries. They
think about youth unemployment and
at how to mobilise on the issue.
Most of the business leaders that I
meet are becoming much more aware
of this paradigm shift, and most want
to learn and to invest their cultures
with the proper practices. Young
people certainly want to: the number
of MBAs who are now attuned to the
notion of contribution rather than
just results has grown enormously
compared with when I started teaching. There are many more people in
their 20s and 30s who want to make a
contribution, who understand that a
meaningful life is one that is externally
oriented, not just internally focused.
We can see the symptoms of this in
the Giving Pledge that Bill Gates and
Warren Buffett are propounding, and
the number of people who have signed
up to it all over the world.
JEDI, as a principle, broadens the
assessment of performance to become
more robust, more multifaceted, both
temporally and in terms of these other
dimensions. And I am optimistic when
I look at how the best enterprises are
performing in response to the new pressures. I have never met a perfect company,
but I have met companies that look at the
evidence from multiple sources and seek
the views of a diverse group of people.
They are quite admirable.
Subramanian Rangan is Professor of Strategy and
Management at INSEAD, where he holds the Abu
Dhabi Crown Prince’s Diwan Endowed Chair
in Societal Progress. His research and teaching
revolve around the strategy and management
challenges facing multinational firms. He is
working currently on the theme of reconciling
business performance with societal progress.
Professor Rangan is vice-chair of the World
Economic Forum’s global agenda council on
emerging multinationals.
8
INSEAD on
performance
Control,
performance
and
shareholder
value
Two leading business
school professors compare
the strengths and weaknesses
of family-run companies
versus public companies
LUDO VAN DER HEYDEN
PROFESSOR OF TECHNOLOGY
AND OPERATIONS MANAGEMENT
INSEAD
THEO VERMAELEN
PROFESSOR OF FINANCE
INSEAD
or not about short-term stock price variation, and for most investors this is irrelevant because you can’t control it, you
can’t manage it, you have to react very
quickly. Eventually the share price will
reflect long-term value creation–and if
you see opportunities where the share
Is there a tension between the popular concept price today is much lower than you
of short-term shareholder value as measured think it should be in terms of economic
by a company’s share price and long-term fundamentals, then invest aggressively
performance in a family-run business?
and conservatively and wait until the
market catches up.
Theo Vermaelen: Absolutely not–there
is no such thing as short-term share- Theo: There are opportunities in the
holder value measured by the stock short term, however–especially when a
price. The value of a company is the net company buys back its shares. Because
present value of all future cash flows it misses its short-term targets for earnfrom now to infinity. The share price is ings per share, analysts downgrade
not the same as shareholder value.
it and the share price falls. When the
management announces a buyback,
Ludo Van der Heyden: There is no disa- the market ignores it completely and
greement on that. As an investor, you people who buy that company’s shares
have to decide whether you’re worried can make a lot of money if they hold
Short-term shareholder
value vs. long-term
performance
9
on to them long-term. The people that
sell because of short-term considerations often sell too cheaply. Every year
I give my list of such companies and it
has proved to be the best investment
strategy today.
‘Managerial talent is
not an inherited quality’
Theo Vermaelen
So if the market is wrong about your
company, you should see it as an opportunity and take advantage of it. Of
course, some people will be concerned
about short-term share prices–if your
company is too cheap, someone may bid
for it and buy you out below fair value.
That can be a concern if your company
is not tightly controlled by a family:
it’s subject to hostile bids that are not
driven by sound, fundamental reasons.
An argument could be made that a
family-controlled business which is
immune to hostile bids is better for the
long-term shareholders because they
cannot be bought out at the price below
fair value.
Ludo: There seems to be a premium
for stocks in companies that have some
type of dominant shareholder such as
a family–so long as they do not have
a majority holding. The premium
becomes negative if there is a majority shareholder because then the other
shareholders will have no voice, whatever happens in the short run. The
market likes a reference shareholder
such as a family which behaves with
the mindset of a conservative investor.
They’re not going to sell out because
they’re going to pass the company on
to the children.
Even the market recognises that
you can’t leave the market to the market
when it comes to long-term value creation. If you just have shareholders without a relatively strong minority, then
some value can be lost because management can do whatever it wants, there
is no supervision. That was what led
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to the adoption of the remuneration
approach of Stern Stewart in the 1990s
which aimed to tie management incentives to economic value added. But it
linked EVA to the share price which is
exactly what you don’t want for longterm value creation, because it encourages shorter-term animal spirits to do
things that force up the share price.
So there are two very different
games: to play the market in the short
run and play it in the long run. I have
visited companies where the CEO
would welcome me in the lobby and
check the share price, and then check
it again after a one-hour meeting.
If you’re interested in long-term
value creation, it’s a waste of time to
look at short-term share valuations.
The new manager of a big
company has no impact for at least
three years. I spent ten years visiting
factories and it takes two years minimum to turn round performance if
you do everything right–and typically
you lose a year because you don’t have
the right management. And if it takes
three years just to improve a factory, it
takes much longer to really change the
business–to open a new product line,
for example. Long-term value creation
can take many years.
Ownership for
value creation
The two professors then turned to the factors
that can undermine long-term performance
in a family-run company.
Theo: If the family intends having
their children running the company
forever, that limits the pool of potential managers and I do not see how that
could be optimal for value-creation.
Managerial talent is not an inherited
quality–if I’m a good manager, my
children will not necessarily be good
managers too. You can maybe pass on
the colour of your eyes and your hair
but not managerial talent. I know of
companies where the founding father
was a great guy with a great idea, but
when he passed the company on to his
sons, it brought down the company
because they were useless managers.
This is the danger if you start limiting
your pool of potential managers.
Ludo: It’s all about management
incentives, understanding how you
need to incentivise the managers to
create long-term value. And most studies say that family firms which were
thought to be inefficient are on average doing that better. Why? Because
on average they’re more committed
to long-term value creation than nonfamily firms.
‘It is easier to train an
owner than a CEO’
Ludo Van der Heyden
Theo: You have to incentivise managers, but how do you incentivise them?
That’s the question. If you keep the
company in the hands of the family
and they care about the long run, that’s
fine. But holding on to a business for
the long run is not necessarily value
creation–sometimes someone else is a
better manager than you are and can see
better opportunities. In such cases, you
should sell your business and this is my
main problem with family businesses
that don’t want to sell their company.
Ludo: I advised a big family company,
run by the father who was a genius. My
advice was to sell the firm: I told him
he was half of the value of the firm,
and if he sold the firm now he would
cash in on its value. But he was in his
eighties and wanted to pass it on to
his children–and the problem is that
the children of geniuses are typically
not geniuses. But families don’t sell up
often because members of the family
say they have been waiting for their
chance to run the company.
As a family, you always have to ask
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whether we are the best owners. If we
are controlling shareholders, are we the
right controlling shareholders for the
business? Given our interest as family
shareholders, is investing in this business still what we want to do? The best
way to remain a family firm for 300
years is to keep creating value for the
next 20 years: if we as owners provide
control and stability that creates value,
let’s continue it.
It’s easier to train an owner than
it is to train a CEO. You can’t train a
CEO who needs animal spirits which is
an intangible characteristic, but I can
train a good shareholder. So a family
should certainly not take the view that
a family member should be CEO.
The family company
as incubator
The discussion explored the reasons for the
premium commanded by family-controlled
companies, and what can undermine it.
Ludo: One of the benefits of family
firms is they can have a culture of longterm value creation. That doesn’t mean
they will never sell the business but
that they do not overreact to negative
developments. It’s continuity, it’s the
fact that families care and they care
about who represents them. But their
focus must be to make sure that the money and are concerned about how
family members who are on the board much the family cares about making
know what they’re doing.
money. As an investor, I want controlling shareholders who are really
obsessed with making money–I don’t
want people who care about family
‘As an investor,
values and other issues. If the company
I want controlling
is controlled by family whose goal is
shareholders obsessed
not to maximise returns but to make
with making money’
family members happy or do good for
the environment or whatever, it should
Theo Vermaelen
say that in advance to investors so that
everybody knows it. Then people like
Theo: If the family firm is a public me can avoid such companies and
company, it has to raise money from other people who like those goals can
other people who really care about invest in them.
12
Top: Theo Vermaelen
Above: Ludo Van der Heyden
Ludo: I think the source of the
premium commanded by family firms
is not that they’re going to maximise
family happiness, but that they’re more
credible when they make a commitment to long-term value creation. Why
are they more credible? Because it’s
part of their culture. In a good family
firm, the first school is the family.
There is no question that if you
are born a Rothschild, you’re going to
learn about finance from day one. By
the age of 15, the chances are you’re
already a trader, and you’re doing it
with cousins and people you trust.
And you trust them because you know
what they’re good at and that people–
including your mother and your aunt–
will stop you from doing things if they
are not good.
So the premium that family
firms command is often that there is
more credibility when they make an
announcement to the markets because
it’s not going to change. And they are
more credible because they’re more
careful about training the people who
actually manage the commitment to
this announcement.
pact. That is what the Belgium families behind Interbrew did when they
created a long-term pact to merge the
business with AmBev of Brazil. They
lost sole control of the business, but
with the Brazilians they’re in control of
the biggest beer company in the world.
‘Companies are not
about happiness–they’re
about doing things’
Ludo Van der Heyden
Theo: But the family mission has to
be about value creation and there’s no
way to guarantee that. There’s no way
that limiting control to a specific group
of people is optimal, and there is no
theory can justify this. After all, some
family members will probably sell their
shares. You have to have competition in
the jobs market to guarantee that the
best people are running the company. I
understand there’s a desire for commitment to the long run, but you can easily
encourage that commitment by paying
people with stocks they have to hold
for long periods of time.
Does control matter?
Theo: Obsession with control can be
dangerous. If people are obsessed with
power and refuse to issue stock, they
might then have to borrow money and
leverage up too much. If you end up
with debt in a very risky business, you
can go bankrupt.
Ludo: The issue of control is about the
psychology of an entrepreneur. Entrepreneurs don’t do it for value creation,
they do it because of their drive–it’s
their identity, it’s their project. It has
nothing to do with value creation, it’s
psychology, it’s an obsession. But it’s
also good in the sense that our fundamental driver is ourselves. There are
people who say they do it for others, but
the more they say that the less I believe
them–I think they do it for themselves.
manager, someone that really wants
to make money. These are the people
I trust–the others have got too rich to
care about cash flows.
Ludo: I agree. Companies are social
instruments but the overall logic is an
economic one. We need others, but we
do it for ourselves. Value creation is a
very tedious thing and happiness is a
very personal thing. Companies are
not about happiness, they’re about
projects, they’re about doing things,
they’re about changing the world.
When you have changed the world
then you can sit back and do something different.
Ludo Van der Heyden is Professor of Technology
and Operations Management and the Mubadala
Chaired Professor of Corporate Governance and
Strategy at INSEAD. He was also the first holder
of the Wendel Chair in the Large Family Firm at
INSEAD, which led to the creation of the Wendel
International Centre for Family Enterprise.
Before joining INSEAD, he was on the faculty of
the School of Organisation and Management
at Yale University and of the John F. Kennedy
School of Government at Harvard University.
Theo Vermaelen is Professor of Finance at INSEAD
and Schroders Chaired Professor of International
Finance and Asset Management. He has taught
at the University of British Columbia, the
Catholic University of Leuven, London Business
School, UCLA and the University of Chicago. He
is also a consultant to various corporations and
government agencies, and Programme Director of
the Amsterdam Institute of Finance. His research
areas are corporate finance, share repurchase,
death spirals, IPOs and Call Option Reverse
Convertibles (COERCs).
Finally, the professors discussed the desire among Theo: That’s why I think a hungry
many families to retain control of their busi- manager leveraged up is my ideal
nesses, and the implications for performance.
Ludo: Families are obsessed with
control–but if you don’t have a project,
control is worthless. It’s not control
that should be the obsession, but the
project–and whenever I talk to families
about control, my question is control
for what? Control by itself has no value
unless you use it to execute a long-term
project–that’s the premium.
For example, if somebody says: let’s
merge–you’re going to lose control but
it’s going to create a lot of value. Then
the family could say, let’s go ahead and
exercise control together through a
13
14
the biopharmaceuticals entrepreneurs
The biopharmaceuticals entrepreneurs
Rolland-Yves and
Thierry Mauvernay
The founder of a Swiss biopharmaceuticals company created
a unique business model for bringing innovative drugs to
market. His son’s involvement promises the continuity needed
for long-term performance in developing new cures.
Dr Rolland-Yves Mauvernay has a deceptively simple mission for his
biopharmaceuticals business: think of tomorrow and the day after
tomorrow. The secret of success in his industry, where it can take
many years to develop and commercialise a drug, is to think longterm. So Dr Mauvernay says he is delighted that his son Thierry–a
successful entrepreneur in his own right–has become Executive VicePresident of the company. It will, he believes, ensure that the business model he created will continue into the future.
“I am very happy to have Thierry with me,” he says, his eyes
twinkling. “It is very important to me to ensure continuity
tomorrow and the day after tomorrow–it is my goal.”
The company is Debiopharm, headquartered at Lausanne in Switzerland in a sleek modern building overlooking Lake Geneva. It was founded 32 years ago by
Dr Mauvernay, who adopted an innovative approach to
discovering new molecules to treat serious medical conditions. Today the company has well over 300 employees from
18 countries and around 400 external consultants, and an
enviable record for developing new drugs, particularly for
the treatment of cancer.
Thierry Mauvernay says that he had long resisted
becoming involved. “When I finished my studies at 23, I
told my father that I would never work with him. He has a
very strong personality and I thought it would be difficult
to work with him.”
Instead, he started a cosmetics company in France, which
he ran for 23 years before selling it. After a two-year handover, his plan was to buy a vineyard, but his father
persuaded him to work one day a week to see if it would
work. “I found it was not so difficult,” he says with a smile.
That was nine years ago, and now Thierry Mauvernay is
responsible for the administration, finance and strategy of
the company. He worried that unlike his father, he had no
scientific training–he studied administration and market-
ing. But his father says there are many scientists, but not so
many people with such good business skills.
Dr Mauvernay completed his medical studies at the
University of Strasbourg in France, where he also later
obtained a PhD in biology, bacteriology and pharmacy. In
1953, he created RIOM Laboratories in France, purchasing
several pharmaceutical companies and various rare molecules. After selling RIOM, he founded Debiopharm: “My
motivation was a feeling that I could use my past experience
to develop new drugs addressing unmet medical needs. My
multiple scientific background helped me think laterally,
but the key principle is to know what you don’t know–and
then find those who can provide the knowledge and expertise that you need.”
The business model he developed is described by the
letters NRDO: No Research, Development Only. Large
conventional pharma companies employ many thousands
of people to carry out research, develop drugs and then
commercialise them to treat diseases. Debiopharm specialises in one key stage of this production chain: developing products through to approval by regulators. It leaves
research to biotechnology, pharmaceutical and academic
organisations, licensing in promising molecules they
discover. And it licences out products to partners who
manufacture and commercialise the treatments, paying
royalties to Debiopharm and, through Debiopharm, to the
researchers who made the original discoveries.
“Debiopharm is a bridge between discovery and the
market,” says Dr Mauvernay. “We focus on identifying
therapeutically interesting molecules, developing them for
tomorrow’s world and licensing them out to the right partners. And we have been successful because as a relatively
small company, we have a good spirit–creative, pioneering,
passionate and open. It is hard to cultivate the same spirit
in the big listed pharmaceutical companies.”
15
The two most successful molecules developed by the
company have been triptorelin, licensed in from Tulane
University in New Orleans in 1982, and oxaliplatin, licensed
in from Nagoya City University in Japan in 1989. The latter
is used to treat colorectal cancer, while the former has been
developed into three drugs for the treatment of prostate
cancer and other conditions, and more recently a product
for the treatment of sexual deviations.
‘Our industry must reach
out to the 6 billion people not
in developed markets’
The three prostate cancer products are formulations of the
same drug with doses that last for different periods of time–
one, three and six months. This is another Debiopharm
innovation, designed to make treatment more convenient
for patients. A 12-month formulation is now being created,
which Dr Mauvernay believes will be particularly valuable
in emerging markets.
“In countries like India, you cannot visit a doctor when
you want. With 20 times fewer doctors than Switzerland,
patients can only visit a doctor infrequently. Our industry
will not be sustainable in the long term if it only treats 20
per cent of the world’s population–it must reach out to the
6 billion people outside the developed markets.”
More than a dozen other products are in the company’s
pipeline, mostly for cancer treatments. But Thierry Mauvernay, wearing his administration hat, says the length of time it
takes to bring a drug to market raises issues in recruiting and
retaining the excellent scientists that Debiopharm needs.
“It used to take five or six years to develop a compound,
and staff used to stay with a company for 15–20 years. It
can now take 15 years to develop a compound and people
stay with an employer for only six or seven years. We have
created a programme called Debio2025 to find ways to
keep our people by showing that they can learn more and
improve their careers even if they stay with us. We need
strong commitments.”
defines performance as developing efficacious drugs in a
timely manner to address genuine medical needs–using
the company’s financial resources in a sustainable fashion. “Every year, we analyse around 1,000 new compounds.
Only six are taken forward and just two or three will make
it in the end. Large companies measure their performance
by setting targets such as discovering ten or 15 products a
year. But it is better to do nothing than to waste time on a
compound that will not succeed. Performance is not about
value, but about finding products that bring value–and
success in this will bring income.
“When we found our colonic cancer treatment, it was
by chance–not because of a target. There are lots of failures
before a success.”
This aspect makes the biopharmaceuticals industry one
of the riskiest businesses in the world, says Thierry Mauvernay. “For every 10,000 compounds, only one will make it
to the market. The hardest aspect sometimes is to stop a
project when it is not making progress. Each project is the
work of a team, but the team needs to be objective about it.
The big challenge is to stop at the right time.”
Looking ahead, Thierry Mauvernay sees new challenges
for the pharmaceutical industry. In addition to producing
‘Performance is not about value, but about
drugs for emerging markets, companies must recognise that
finding products that bring value’
the environment in developed markets is changing. “The
thinking has tended to be that care doesn’t have a price,
but it certainly has a cost. The debts of developed countries
Relationships with partners must also be lengthy, he mean that price will become much more important, and
adds. On top of 15 years to develop a compound, it will be the industry needs to be much more efficient. Add to this
commercialised for a period of up to 15 years. This means a the ageing populations, and the aim will be to care for more
partnership of 25 to 30 years.
people with less money. Our business model is focused on
Dr Mauvernay says that a company such as Debio- that, because it reduces the cost of developing drugs and
pharm must have a constant focus on performance. He small units can be more efficient than large ones.”
16
Personalised treatment is another challenge, and under
Thierry Mauvernay’s leadership, Debiopharm has invested
in six diagnostic companies. One is Diagnoplex, which has
devised a blood test that can detect colon cancer at an early
stage. Instead of waiting until a colonoscopy can detect it,
treatment can begin much earlier in the development of
the cancer. Just as important, tests can probably also help in
monitoring the efficacy of the treatment–most drugs either
fail with a large proportion of patients or have side effects
in many others.
“Personalised analysis is the future for everybody,” says
Dr Mauvernay.
Both father and son are very proud of the group’s philanthropic activities. In addition to supporting various associations, it is involved in three projects: Pinceaux Magiques,
which gives hope to children in hospital; the adventurer
Sarah Marquis who walks the planet; and the Kantuta Association which works with street children in Bolivia, whose
colourful paintings cover the walls on the headquarters
meeting rooms.
Now well beyond the age when most people have
retired, Dr Mauvernay is still very much at the helm of
Debiopharm, which he describes as his hobby. Still energetic, he takes a close interest in his employees and their
families, continuing to keep all the staff committed to the
culture he created. The company has no debt and finances
its work from its own resources, and he vehemently rejects
the idea of listing Debiopharm on a stock exchange or
selling it to a larger buyer. “I would say a big ‘No’–and
I would say ‘Never if possible’–and it is certainly possible to
continue as a family business for the next 20 years.”
Rolland-Yves Mauvernay’s five tips on performance
•Think about the future–sustainable performance depends
on a vision for tomorrow and the day after tomorrow.
•It is important to know what you don’t know–to be humble and
search for the knowledge you require.
•Be ready to take the decisions necessary to sustain performance,
in particular when a project should be terminated.
•Accept that you must take risks to achieve performance
–risk-takers should be commended, not criticised.
•Go for it!
‘One of the key strengths
of Debiopharm is that it is
not a public company’
The short-term horizons of shareholders would undermine
the business model, he says. “One of the key strengths of
Debiopharm is that it is not a public company, which allows
us to think long-term–essential in an industry where developing a new product takes up to 15 years.”
That is why he was so delighted that he managed to
persuade his son to come back to the business, because the
intention is that it will remain a family-controlled company.
The family manages the company as if it was listed, in terms
of accounting standards and a board structure that has an
audit committee and a strategy committee. Debiopharm
thus faces the sort of pressures that shareholders bring
to bear on listed companies, but it has its own additional
source of inspiration, says Thierry Mauvernay.
“My father provides the pressure. He tells us when we have
not done enough and always pushes us to go further.”
17
INSEAD on
performance
Without
profit, there
is no future
Financial performance
is crucial for the survival of
all businesses–including
those owned by families
DOMINIQUE JACQUET
Visiting Scholar
INSEAD
Social Innovation Centre
The generation of adequate financial
performance is critical for any business–
large or small, listed or unlisted. This is
because the most important decision to take
in a company is to invest, but it is essential to finance the investment. To mobilise
the necessary financial resources, a promise
is made to the investors that the return on
capital will exceed its cost. If this promise is
not fulfilled, it will be the last investment
the investors will finance with the company.
So profitability is key to business
survival–it must be at the centre of
the picture. If a company is performing well, it can finance investment in
improving its competitive advantage
and its productivity. If a company is
not profitable, it cannot survive tomorrow and the day after. This is true for
every type of business–including those
owned by entrepreneurs and families.
There are complications when dealing with entrepreneurs and families,
especially after the first generation
when there will be a variety of perspectives among the owners. Some may be
working in the company, some may be
not working in the company but still
feel part of it, and some may not work in
18
the company and do not care about it at
all. But financial performance is still key
for all of them: if they want to receive a
larger dividend tomorrow and the day
after, the company has to invest. And if
it wants to invest, it has to finance the
investment–and to finance the investment it has to be profitable.
If a company is not
profitable, it cannot survive
There is a debate over the degree to
which stakeholders should share in
the value created by a company, versus
maximising shareholder returns. This
is dangerous, however, because the
day you say profitability is no longer
important and we have to provide
funds to anybody and give money
and resources away, you lose the ability to finance investment. Then the
company, the people working for it,
its customers, its suppliers and all its
stakeholders will be in a difficult situation because the company is not going
to be productive enough to survive.
This is why whatever the utility function of members of the family, whatever their perspective in looking at
the company and interacting with it,
financial performance is absolutely
critical. Performance for a company is
the ability of the company to invest in
its future. It is about its sustainability,
its survival. It is about being able to
hire more people and treat your people
well. It is also about being able to have
enough resources not to generate negative externalities–to protect the environment, for example. But you can do
that only if you are profitable.
come from Burgundy, close to L’Abbaye
de Cluny which had only two abbots
during the eleventh century. This gave
it long-term stability over 115 years
when there were 33 different Popes.
There is a danger with long-term
stability: if noone can sell their shares,
the owners are protected against a
hostile takeover–and they might take
bad decisions. For example, they might
decide to introduce an unsuitable
family member into the business–the
son-in-law, say, to please a daughter.
But the antidote to this management
misperformance is to make financial
performance the rule. Profitability is
a discipline: profit in order to invest,
invest in order to make more profit–
Value is created by
and be sustainable in the long run.
making a good investment
Emotion plays a role in a family
–the rest will follow
business, which is only human, and
it can make governance a bit more
complicated sometimes. But we are all
All companies are a set of conflicts, human beings and emotions can be
like any organisation or institution. seen in all walks of professional life,
A listed company with a diversified including public companies. The hardshareholder base is just the same as a nosed CEO will sometimes take decifamily company: the market is made
up of individuals with different utility functions and risk aversions. The
difference is that with a listed company
they are anonymous, but with a family
company they are sitting around the
table–you can put a name and a face on
each and every utility function. But the
owners need to look to the future even
if they have a higher preference for
today rather than tomorrow, because
preparing the company for the future
maximises their own wealth.
Managing these conflicts may be
easier if the business is put into a holding company, especially when there
are many family members and different families involved. Some financial,
legal and tax engineering can protect
the company from attempts to play
some shareholders off against others by
making it harder for them to sell out.
This approach has created the long-term
stability which has allowed many familycontrolled companies to be so successful.
L’Oreal, for example, has had just five
chief executives in 102 years.
There is nothing new in this. I
sions which please the stock market in
the short run, but undermine the longterm sustainability of the company.
Large listed companies are often led
by charismatic figures whose success
in the past means they will not be
challenged when they make decisions
based on their emotions.
The key to success in all companies
is always investment. Value is created
by making good investments: select
a good investment, and the rest will
follow. But to make the investment,
you have to raise financial resources
and that will depend on the credibility of the promise you make to your
investors about profitability. And that
is why performance is crucial to the
survival of any company.
Dominique Jacquet is a Visiting Scholar at INSEAD.
He has held, amongst others, positions as Treasurer
of Rank Xerox, France and Administrative and
Financial Director of Ferinel Industries. His areas
of interest are corporate financial policy and the
evaluation and control of high-tech projects and
corporations. Parallel to his teaching activities he
is also a consultant to various companies.
19
20
21
A different perspective
Sustaining performance at the highest level
Chelsea soccer star Didier Drogba, who attributes his success
in sport to hard work and mental strength, has an unparalleled
record of achievement on and off the football pitch
Ask Didier Drogba what it takes to become a world-class football player,
and the Chelsea star reels off five qualities that would be instantly
familiar to successful entrepreneurs around the world. Performance in
the game of soccer, he says, comes from his passion for the game, hard
work, mental attitude, leadership skills and, of course, talent.
His family were not well-off, and as a child he practised
his football in a city car park. But Drogba denies that his
sporting career has been driven by a desire to escape his
poor background. “My family was loving and caring–I was
a happy child. It was my passion for the sport that gave me
the desire to perform, not poverty.”
Nor is it money that drives him, playing with the same
A late developer by the standards of his sport, Drogba
played for minor French sides until the age of 25 when he motivation in European stadiums or on African pitches
joined Olympique de Marseille, one of France’s top teams, for Côte d’Ivoire, his national team. “Performance is not
in 2003. A year later, he moved to Chelsea, the English linked to earnings, but to my desire to maintain my success.
Premier League team owned by Russian oil magnate Roman Whether it’s a friendly game, a World Cup match or a Champion’s League final, I want to perform at all times.”
Abramovich, for a fee of £24 million.
22
a different perspective
It was only when Drogba joined a professional club at the age of 19 that he began
daily football training and his first two
years as a professional were marred
by injuries. His then manager later
remarked that it took him four years
to be capable of training every day and
playing every week. Drogba now says
that he learnt that hard work in training
is essential–talent is not enough.
‘The team picks the leader
because they know what the
leader will bring’
“To perform I need to be at the top
in terms of physical ability, but most
importantly on top mentally. I need
to be ‘fresh’ mentally to completely
control my body, to push it to its limits,”
and also to sustain his performance.
“It’s easy to perform once, but it’s much
more important to consistently repeat a
high-level performance.”
His scoring record in the game
shows remarkably consistent results
over the years, especially when under
pressure in high-stakes matches. In
his first season at Chelsea, his 16 goals
included the winning goal in the
2004 League Cup final against Liverpool. A year later, Drogba helped the
club win its first ever Premier League
title, and has since become the only
player to have scored in six English
Cup finals.
He attributes this consistency to
his mental preparations for important
matches. “I visualise the game and all
the potential situations beforehand,
I visualise the opponent, I project
myself scoring. This feeds back to me
when I play.
“I do a lot of video analysis, too:
I dissect the other team, its defence,
each player, his style, body movements
and reactions in very specific situations. I study the goalkeeper’s strength
and most importantly weaknesses.”
Drogba works hard around the
year to maintain his performance. “My
holidays are always ten days shorter
than those of other players–I start
preparing for the new season well in
advance,” he says.
“We play a very high number of
games and the games intensity is ever
increasing. I have my own medical and
physical staff in addition to the staff
from the club, inspired by US basketball players. I talked recently to Kobe
Bryant, and he has a significant staff
around him to stay on top too.
“At the end of the day the most
important sacrifice is the time I spend
away from my family. All the rest is part of
the game–it’s my work and my passion.”
Drogba says the pressure to outperform comes from fear of failing. “When
you play a Champion’s League final
you simply don’t want to lose. The
importance of the event creates a lot of
stress. To control this stress and turn it
into an asset I position myself as a team
leader. Being a team leader means I am
not allowed fail. It forces me to always
think one step ahead of the game.
“Self-confidence is also important.
I know I can make the difference in the
game. Often my team-mates tell me
‘If you’re good, we’re good’. This trust
helps me overcome the pressure–it is a
self-feeding mechanism.”
Widely credited as a natural leader
who has brought cohesion and ambition to the Ivorian team, Drogba
believes that it is the team that makes
the leader. “The team picks the leader,
because they know what the leader will
bring–not the other way round. Leadership is key on and off the pitch, especially in big competitions when you
live together for a month. It takes a lot
of communication and requires great
listening skills.
“Leadership comes through direction, followed by actions which in turn
produce credibility. It also requires
structure–I rely on a few lieutenants
who completely buy into my leadership,
and can relay my ambition and views to
the whole team.
“In addition, the leader must set an
example to the younger players. Some
have more talent than I have, but if they
want to succeed they need to improve
their mental strength.”
Drogba’s achievements have reached
beyond the football pitch, in the role
he played in 2006 in bringing to an end
the civil war that had divided his country for five years. After Côte d’Ivoire
qualified for the 2006 World Cup, he
issued a plea to the combatants to lay
down their arms, which led to a ceasefire. He later helped move an African
Cup of Nations qualifying match to
Bouake, the former rebels’ stronghold,
where both sides united to support
their team.
His critical involvement in peacemaking led Time magazine to name
him one of the world’s most influential people in 2010. But does he feel
like getting involved again, with Côte
d’Ivoire again divided after an election?
“We sent a letter in the name of the
national team. We achieved something
unique in 2006, but the conflict is now
way too complex. We can speak and
inspire, but it’s the role of the country’s
leaders to act.”
‘It’s easy to perform
once, but it’s much more
important to consistently
repeat a high-level
performance’
In 2007, Drogba was appointed a Goodwill Ambassador by the United Nations
Development Programme (UNDP)
because of his charity work. He has
since created the Didier Drogba Foundation, donating the £3 million fee he
received for endorsing Pepsi-Cola to
build a hospital in his home town of
Abidjan, the Ivorian capital.
Now 33, what does he hope to do
once his football career is over? “When
my uncle stopped playing as a professional player he had a hard time managing his career change. I witnessed that as
a child and I will not go down the same
route. I will find other activities where
I can use my passion and follow new
dreams. I like challenges. Challenges and
passion are my two main drivers.”
a different perspective
23
24
the service entrepreneur
The service entrepreneur
George G. Farha
The founder of a catering and laundry business in Dubai
has built up an impressive client list through a focus on
performance. Now he has partnered with Qatar’s leading
investment bank to expand elsewhere in the Gulf.
Destined for a career in chemical engineering, George G. Farha–
known universally to his colleagues as GGF–had a rude awakening
when he graduated from University College London. The first job
he was offered in the UK was on an oil-rig in the North Sea east of
Scotland, at £9,000 a year. He decided to head home to the Gulf to
join his Lebanese-born father whose business interests were mostly
in Dubai.
“At the time, there was one large supplier, with a near-monopoly,” he says. “Their margins were healthy enough to sustain
a new competitor, which was why we entered the business. I
saw that if I could take just 5 per cent of the market, I would
be a very happy entrepreneur. Today, we have around 40 per
cent of the market, and a lot more competition.”
Three years after the launch of Intercat, his business
partner decided to sell his stake, and GGF bought him out.
“I said that chemical engineering was not going to pay my His brother Dany, who was working for Lehman Brothbills–this was not the business for me. I told my Dad that ers in London, returned to help run the growing business.
I didn’t want to work in his business, however: I wanted to Another partner was brought in at a later date when his
brother-in-law Wael Hourani joined the company in 2003.
do something on my own.”
His plans came to fruition during a conversation with “We then became a 100 per cent family-owned business.”
His Highness Sheikh Saeed Al Maktoum (brother-in-law
of the Ruler of Dubai). When the Sheikh questioned him
about what he was doing with his life, GGF said he was
‘We prepare meals in
thinking of going into catering. Asked why, he replied that
22 cuisines to feed hospitality
food was his passion. “Then let’s start a catering company,”
staff three times a day’
the Sheikh suggested.
That was the origin of Intercat, now one of Dubai’s largest catering businesses. The company was created in 1992,
and won its first contract with the Dubai Ports Authority A key milestone for the growing business came in 1999 when
the following year, when GGF was just 23. Starting with Intercat won a contract to supply Dubai Police, the first time
just six employees in an office, Intercat now employs 1,300 that a Dubai government institution had outsourced caterstaff, producing 60,000 meals a day which it delivers to 120 ing. “It took two years to convince them that it would be
hotels, education institutions and government bodies with cheaper to provide meals for their staff, the police stations
and the correction establishments, rather than procure the
a fleet of more than 80 vans and trucks.
25
ingredients, hire the cooks and handle the logistics themselves. My brother and I personally served food at the counter to convince the senior officers that outsourcing was the
way forward.”
A year later, the company signed up to feed the staff
working for the Burj Al Arab, the world’s first seven-star
luxury hotel. Other hospitality contracts have followed,
with hotels and resorts groups such as Hilton Group,
Rotana and Mövenpick. And in 2008, Intercat landed the
contract to provide 4,000 meals three times a day for the
enormous Atlantis Hotel at the tip of Palm Jumeirah, the
artificial archipelago of islands shaped like a palm tree.
“It’s quite a feat to feed the many nationalities working
here in Dubai–we prepare meals for 22 different cuisines.
And we feed hospitality staff three meals a day, since they are
mostly expats who live in accommodation provided at work.”
More recently, Intercat has expanded into the restaurant
business, initially with Mashawi, a high end Lebanese food
chain. The first Mashawi opened in 2005, followed by several
more–and even ones in Bahrain and Qatar. Other brands
include Toast cafes and the upmarket Burger House restaurant whose signature dish is the Don GGF Corleone Burger.
George Farha’s five tips on performance
•Be well-capitalised–growth will be much faster if you have
enough capital. Without it, there will be delays and performance
will suffer.
ire an outstanding CFO who can keep the finances under
•H
control and spot warning signs of underperformance.
Finance is everything–it is easy to squander capital.
ormulate a strategy–too many entrepreneurs shoot from the hip.
•F
Decide where you want to be and how you want to get there.
tudy your competitors’ performance–and then work out how you
•S
can beat them. Only by outperforming can you win market share
from them.
ecome the chief mentor for your managers, so they can help your
•B
business perform and then take responsibility for it so you can
look at new opportunities.
‘The beauty of the laundry
business is that it complements
the catering operation’
Not content with running only a catering business, GGF
created a second company in 1997: Butlers Dry Cleaners
& Launderers. This time, the inspiration came from Ali
Albwardy, owner of the Spinneys supermarket chain, who
suggested that GGF should go into dry cleaning, with
collection points in his Spinneys supermarkets.
“I knew nothing about dry cleaning, but after studying
the laundry and dry cleaning business we went into business. Two years later, he decided it was too small for him,
so again I bought him out and ended up owning 100 per
cent of the company. The beauty of this business is that it
complements the catering operation because most of our
clients are interested in both support services.”
Hospitality companies are the largest clients for Butlers,
but it also provides services for some industrial companies,
schools and universities, as well as airlines and luxury golf
clubs. It also has retail outlets in several of Dubai’s famous
shopping malls. As the business took off, GGF anticipated
further expansion by building the largest and most sophisticated laundry and dry cleaning facility in the Gulf whose
400 staff can handle 350,000 pieces of laundry a day.
The key to business success is a laser-like focus on
performance, GGF says. “We measure, measure, measure
everything we do, and monitor key metrics to make sure we
are on course for our targets. In the catering business, for
26
From left: Dany G.Farha, Wael A.Hourani and George G.Farha
example, we measure our yield, our wastage and the productivity of the bakers, butchers and drivers. Then we check that
we are achieving our targets for sales and profitability.
“In the laundry and dry cleaning business, it’s a science.
My brother has spent a lot of time recently doing diagnostics on the cost of cleaning towels and bed-sheets, their
weight and the time it takes to process them. Consultants
from abroad have analysed the flow through the processing
units to see that it is optimal, whether it’s washing, drying,
pressing or folding. Benchmarking our performance has
shown us to be extremely efficient.”
His brother-in-law Wael, who is a Partner, says the 90
per cent customer retention rate is also a good measure of
performance. “Our point of difference is that we’re based
here in Dubai as owners and we’re on top of the business. Our
response to any problem is pretty much instant compared to
competitors’ more bureaucratic-style approach.
“We see ourselves as partners of the hotels. When the
crisis hit Dubai and occupation levels fell, we were prepared
to review our menu structure and prices temporarily to help
them through.”
Recruiting suitable staff is always a problem in the Gulf,
with the need to bring people in from abroad and train
them. “We end up being our own little internal university,”
says brother Dany, founder and also chief operating officer
of the Middle East’s largest online recruitment website
Bayt.com. “We bring in people with the right attitude and
some of the skills we need, and they learn on the job.”
Attracting skilled specialists to Dubai is harder as a local
regional player, he adds, because big international competitors can bring staff in with promises of repatriation deals.
“We have to make sure our staff will be happy here–and
that their families will be happy as well.”
‘If you don’t have the right
partner, going into other markets
can be very tough’
As a successful entrepreneur, GGF has helped foster entrepreneurship in the Gulf. He was a board member of the UAE
Chapter of Young Arab Leaders, heading its Entrepreneurship Initiative. He was also a founder member of the first
Young Entrepreneurs Organisation in the UAE, becoming
its President.
“UAE nationals have only very recently started to become
entrepreneurs–often after working for family businesses
and deciding to create their own company. It is hard to raise
27
finance in the region without the support of a family business, and there’s also a lot of bureaucracy and legislation to
deal with when establishing a business. I can be an example
of success for those thinking of starting something here.”
In April 2010, GGF decided that the time had come to
expand outside Dubai, and sold a 40.8 per cent stake in
the two businesses to QInvest, Qatar’s leading investment
bank. “If you don’t have the right partner, going into other
markets can be a very tough battle. QInvest was the right
partner, because the logical next step was to move into
Doha. We’re excited about Doha, because it is developing
fast and the FIFA World Cup is coming to Qatar in 2022.”
Intercat will open its catering processing unit in Doha in
the summer of 2011, and follow it up with two more–in Abu
Dhabi and the Saudi city of Dammam. The plan is to build
the business for either an IPO or a trade sale to a corporate
facilities management services company that wants to add
catering and laundry to its offering.
“We have grown the business to a point where we could
pass it on to an owner who will take it to the next level. So
right now, we’re busy building it up for an exit.”
Both companies are now run by managing directors from
outside the family, with GGF as chairman. But he still regards
them as a family business, and pays tribute to the support he
has received from family members such as Dany and Wael.
28
“When my brother joined me in 1995, he left a USD100,000 a
year job at Lehmans in the City to earn USD1,800 a month–a
huge pay cut in the heyday of his career. He left his life in
London just to come and run a kitchen in Dubai with me.”
His wife Suha has also been a huge emotional support,
he says–the ‘best partner’ that any busy entrepreneur could
ever dream of, who can often see things differently.
‘My father was my brand
ambassador, accompanying me
to meet potential customers’
“My father, Ghaleb Farha, had his own business, but he
supported me–in every way at the start (financially, experience and ambition). He was also essential from a PR
standpoint: I was new from London–23 years old, young
and single. He gave the business legitimacy. He was my
brand ambassador, accompanying me to meetings with
potential customers.
“We both knew that it would never work if I worked
for his business. But he has taken a personal interest in our
success, and I have been very lucky to have such support.”
insead on
performance
Leadership
for the next
generation
The performance of good
leaders reflects their ability
to learn deep lessons from
their experiences in life,
embody the values
and purpose of their
organisations and encourage
leadership in others
GIANPIERO PETRIGLIERI
AFFILIATE PROFESSOR OF
ORGANISATIONAL BEHAVIOUR
INSEAD
When people talk about leadership, they tend
to associate it with individuals such as chief
executives, general managers or well-known
politicians. It is a very appealing way of
looking at the subject which I call the propaganda of leadership. It is as exciting as it is
reassuring, because it takes us back to when
we were little and we looked up to individuals who appeared–for good or bad–larger
than life.
Think of our everyday language. When
discussing business, the media often
say that under a particular CEO’s leadership, the company achieved a 15 per
cent return on investment, or lost 30
per cent market share. Why under CEO
X? Why not alongside, regardless of, or
even despite?
The propaganda of leadership is
not just appealing to the press: it is
also influential on researchers. A literature review by some colleagues found
that over 80 per cent of the published
academic studies on leadership essentially equate ‘leadership’ with the
activities of the person in a position
of authority. As a result, most studies
of leadership boil down to looking at
what this person does–studying their
behaviour and then drawing correlations with some performance measure
to see which behaviours produce the
best results under certain conditions.
Organisations need
much more leadership
than that provided by
the few at the top
Both the popular and academic press, in
short, often assume a direct causal link
between what people in senior management positions do and the current
performance of the organisation. This
29
raises two questions. First, whether
there is such a link–researchers have
found it in some studies but not in
others. Second, whether leadership in
corporations is exercised only in senior
management offices.
great performance in an organisation. The challenges we face today are
so complex and broad that there is no
individual with the cognitive capacity
or the emotional resilience to deal with
them all and to inspire everyone else to
do what they think is right. Organisations need much more leadership than
that provided by the few at the top.
All leaders have one
Just because there may not be as
thing in common: their
direct a link as we imagine between
power comes only from
senior managers’ behaviour and their
their followers
organisations’ returns, however, does
not mean–as some would have it–
that leaders don’t matter. Leaders are
Only recently academics, and corporate extremely consequential. Their conseboards, have started to recognise how quence is not just in creating perfordangerous it is to assume that a leader mance, but in shaping the environment
is a very special individual who fosters within which performance is pursued.
30
I look at leaders as central links in the
relationship between organisations’
members’ activities and a broader
purpose. And increasingly we recognise that what makes a good leader is
the extent to which they enable leadership to emerge at different levels
of the organisation. The more people
think and act as leaders, the better the
company will perform, whether performance is measured in terms of shortterm results or longer-term factors such
as innovation, ability to retain talent, or
pride in the organisation’s values.
Leadership can take many forms,
but the key characteristic is that it is
an intrinsic property of a group. In
any culture, sector or society, wherever there is a group of people pursu-
ing a task there will be leadership. It
can be provided by an individual who
is regarded as superhuman, by a group
of people elected democratically or in
other ways. But there is no group where
there is no leadership, because it fulfils
two essential functions: it helps get
things done and it represents the group.
All leaders have one thing in
common: much as they may like to
think their power comes from God,
exceptional skills, luck, a great idea
or hard work, their power comes
from one place only, and that is their
followers. People like to talk about
charismatic leaders who draw people
to them through a mixture of magic
and authority. But charisma accrues to
those who are able to embody authen-
tically a cause their followers aspire to
be part of.
In other words, a leader is a symbol,
a story, an embodiment of what people
hold dear. The moment that a leader no
longer embodies something the followers hold dear, that leader loses his or
her appeal, or is sidelined–often very
dramatically. You can see that in financial services, where some of the CEOs
who were most venerated as exceptional
shepherds of incredible organisational
performance before the financial crisis
then came to be reviled as the people
who had landed us all in trouble.
Learning for leadership, therefore,
takes more than learning to act in a
certain way. When I design and direct
leadership development programmes,
I always centre them around the three
key ingredients of genuine leaders’
development: experience, identity and
emotions.
Research that has analysed what
very different leaders have in common
is beginning to find that they are able
to draw deep lessons from their life
experiences. These lessons shape their
sense of purpose and the way they
operate. Some of that experience may
have been tough, involving failure
and trauma, but successful leaders are
people who have been able to learn
lessons from those ordeals that shaped
their values, their life purpose and
their hopes for the future.
We process and learn from experience through the filters of our own
history and through the filters of the
people around us. To learn the lessons
of experience, therefore, you need to
understand your identity–the people
who shaped you, your education, the
companies you worked for. Where you
come from historically and where you
spend your life (and with whom) are
the two big influences on the way you
look at reality and act in the world.
The other thing you need to learn for
leadership is how emotions affect your
views, and your relationship with those
whom you ask to follow: how do you
manage your own emotions and how
do you manage others’ emotions? Can
you still ask difficult questions when
everyone around you is pressing you to
provide them with reassuring answers?
If you want to learn leadership, it
is of course helpful to understand how
the theory of leadership has evolved. It
is also helpful to develop skills in interpersonal influence–how to manage
a team, and to create and sustain a
network. And there are skills in selfmanagement–how to avoid kneejerk
reactions, how to delegate, how to bite
your tongue and let someone do tasks
that you may well do faster and better.
You have to understand
and navigate the forces that
make or break leaders
But the knowledge and the skills are
just the entry ticket to leadership:
you have to understand and navigate
the forces that make or break leaders.
That means learning about how your
inner world affects the way you look
at the world out there, and how the
world out there affects you. Unless you
understand that, you can have all the
skills in the world but you will not be
able to lead.
In my research, I say that this
understanding of the interaction
between the inner world and the social
world is learnt in identity workspaces,
and there are three ingredients for
making a good identity workspace:
•A combination of knowledge and
skills that allows you to understand
your environment and to act competently in it.
•A community that sustains your development. Sometimes this means reassuring you, telling you that it is going
to be all right; sometimes this means
pushing you, saying come on, just get
out there.
•A rite of passage–the provision of
a space where you can enter, experiment and then go out with a
broader, wiser, more capable, more
resolute perspective.
31
Thirty years ago, identity workspaces
were provided for most people through
a close relationship with their employer.
Employees gave their commitment
and loyalty and in return employers
gave them opportunities to strengthen
and develop their sense of self, career
ladders to climb and broader opportunities to increase their status. That was
the traditional contract.
With careers today, the most
talented people expect to work in
different organisations, changing
functions and countries–so places of
work no longer function as identity
workspaces. This is why people go on
leadership development courses to
find a place where they can develop the
skills, abilities and identities that are
necessary to lead and to be regarded as
leaders in the contemporary world.
One of the key performance metrics
today for any CEO is the extent to which
they are able to attract and retain talent.
But you cannot do that just by showering them with rewards and opportunities; you do it by offering them
identity workspaces which allow them
to develop the skills and identities that
will serve them in the future.
Three ingredients for making a good identity workspace
•A combination of knowledge and skills–to understand your environment and act
competently in it.
•A community–to sustain your development.
•A rite of passage–a space where you can experiment and emerge more capable.
Some companies
are very good at
developing leadership
skills and identities
Some companies are very good at that.
They say that whether you stay with us
for all of your career or go elsewhere, we
will help you develop ways that help you
to operate in the contemporary business environment. Those companies
are regarded as leadership factories–
GE, McKinsey and Goldman Sachs have
been very good at making sure that even
if people leave, they feel the company
has helped their development.
Doing something similar is often
part of the covert agenda of much leadership development, so it is important
to understand what sort of identities
it is developing. In an identity work-
32
space, you can develop completely selfish leaders or you can develop people
with an incredible regard for the
welfare of the environment in which
their organisations operate.
So is your organisation like an
airport where people come and go–and
while they are there, they give and take
what they can? Or does your organisation remain within people even when
they are no longer working for it? And if
it is the latter, the second question is, in
what way are you shaping them? What
are you teaching them? How are you,
either subtly or overtly, helping them
answer the questions, what does it mean
to lead? What is my duty as a leader?
Boards in publicly traded
companies are becoming
weary of celebrity CEOs
This is where the leadership of senior
executives matters–a lot. Because,
more or less consciously, members of
the organisation look at them as role
models for how leaders think, what
leaders believe, and how they operate.
Leadership issues often arise in
family firms where the question is
see at Google where you have the two
founders still leading the company.
In family businesses, you often see
families destroyed by the choice of the
successor: if there are two siblings, the
lingering question from very early on
is which will be the chosen one. Yet
who is the one at Google?
Families become even more
stressed when there are three or four
possible candidates in the next generation. Instead of rejoicing, they find
themselves emotionally torn–an enormously painful situation. And if they
choose one from the four people who
could become the next CEO, they risk
giving up three potential futures of
the enterprise by choosing the candidate who will make the enterprise look
like their vision.
An alternative sacrifice would be
to abandon looking at leadership as
which member of the family will be the preserve of one individual at the
the next CEO. But the more impor- expense of others. Instead of picking
tant question is how to make sure the one person in the next generation to
family continues to exercise leadership groom as the leader, you can develop
in the next generation, and what we the leadership of the business so it
want that leadership to look, feel and can be shared in ways which involve
act like. Often much potential leader- taking different formal roles, and let
ship talent is squandered by select- the future emerge from an ongoing
ing a candidate who is identical to the vigorous debate rather than a single,
present CEO.
momentous choice. After all, the future
Interestingly, in publicly traded keeps flowing and cannot be predicted,
companies, many boards do not want despite our best efforts to assure it once
that. They are becoming weary of and for all.
celebrity CEOs. They prefer a strong
management team where leadership is Gianpiero Petriglieri is Affiliate Professor of
Organisational Behaviour at INSEAD, where he
distributed. For example, when John directs customised leadership development
Mackey, the co-founder of Whole Foods, programmes for executives from a variety
appointed a co-CEO, he said that five of industries. He also consults to a range of
international organisations on the design
people could have the title because the and implementation of programmes for
senior team takes decisions by consen- developing high potentials into effective and
sus. If you have a team that is diverse responsible leaders. A psychiatrist and former
psychotherapist, his research explores–among
enough, you will have leaders who other subjects–the influence of unconscious
represent the different cultures, values factors in leadership and the emotional dilemmas
and identities of today’s diverse work- of high potential managers.
force. They will have the perspectives
that allow the enterprise to stay committed and moving in a coherent direction.
I believe we will increasingly see
much less of an obsession in public
companies about who is the leader,
and much more about the leadership
team and how leadership is exercised.
There will be more shared titles, as we
33
34
the design and lifestyle entrepreneur
The design and lifestyle entrepreneur
Tricia Guild
The founder of a design business has revolutionised the
way people think about their living space, giving them
access to contemporary lifestyles. Together with her
brother, she has created a business that spans the globe
and is constantly introducing new collections.
Soon after Tricia Guild started her design business in 1970, she
opened a shop at the unfashionable end of London’s King’s Road with
the aim of helping people create a contemporary lifestyle. Today,
Designers Guild turns over more than £50 million a year, operates
in 40 markets worldwide and employs more than 280 people. And
the original shop—greatly enlarged and with a much wider range of
merchandise—is still central to her mission of making a difference for
customers by offering them beautiful designs to fit any pocket.
languages, because people all over the world are very interested in what we do.”
She has also worked with hospitals and hospices in helping create designs that make a difference to the patients.
“My experience is that when people love their surroundings,
they feel energised. It helps them feel more healthy.”
Headquartered in a purpose-built head office, the
company has a large distribution centre in West London,
as well as offices in Munich and Paris. Its fully comput“We have grown from three to nearly 300 staff, but the erised customer service operation handles over 1,000 orders
concept hasn’t changed,” says the striking and vivacious Ms and enquiries daily, processes more than 2 million metres of
Guild. “I wanted to create beautiful fabrics that you could fabric and wallpaper annually and despatches orders around
buy in a retail environment and see how to use those fabrics the globe through a network of couriers within 24 hours.
to create a lifestyle. I always had the view that that would be
the way I wanted to work, to show what I was doing.”
Designers Guild’s first collection was made up of Indian
‘One important lesson is that
hand-blocked printed textiles that Tricia Guild had reyou have to be disciplined and
coloured. When the shop opened, it also sold ceramics and
selective about what you do’
furniture—already providing an environment to demonstrate her design concepts. More than 40 years later, the
company designs and wholesales nearly 9,000 furnishing
fabrics, 2,000 wall coverings, upholstery and bed and bath It is a remarkable achievement for a woman who has had no
collections throughout Europe and further afield.
formal training in design—apart from working with an inteIn addition, Ms Guild has written 15 books on design, rior designer. But Ms Guild’s home environment had been
lavishly illustrated with the company’s products in real quite contemporary, and she always knew that she wanted
settings to demonstrate how they can be used to create to be involved in design.
contemporary lifestyles. “They are published in seven
“The fact that I had no formal training has always
35
bugged me, because three years at college teaches you a
large amount that you can use in this business. It also gives
you the freedom to experiment, so that you can make your
mistakes before you start a business.”
Nevertheless, she quickly learnt valuable lessons that
contributed to the success of Designers Guild today. One was
that the retail organisation she had created could wholesale
the products she sold in the shop, which expanded the business. Another was the realisation that it was not limited to
the UK: the first real exhibition was in France in 1974, when
the tiny staff headed for Paris.
“We loaded up a van and set up the tiniest little exhibition beside some very famous designers, who were very kind
to us and introduced us to other people. It was very exciting, and when we signed up our first distributor in France,
I realised there was a place for this in Europe. Two years
later, we started selling in America—all from this very small
shop in the King’s Road.”
Ms Guild also had to learn fast on the business side of
the company. “Business can’t be separate, but when I started
up I had no financial plan. One important lesson is that you
have to be disciplined and selective about what you do: you
can’t expect things to happen just because they are good.
“Going to a bank in my twenties with no financial training was so difficult. I didn’t have the language, and at times
they were very difficult. But I had a new business model, and
I was determined to make a success of it and be independent.
36
“Creative people are often seen as a bit ditsy, but if you’re
running a business, that can’t happen. You have to be disciplined with a decent work ethic and be able to multi-task—
which women are quite good at.”
A critical milestone in the growth of Designers Guild
came in 1986, when Ms Guild was joined in the business by
her younger brother Simon Jeffreys who became chief executive. A chartered accountant with a business degree, he
was working for the accountancy firm Coopers & Lybrand
in Hong Kong.
“I had taken the company to a certain size with turnover
of nearly £4 million a year,” says Ms Guild. “But I needed
his brilliant skills to move it on to become what I thought
it could be.”
‘I’m very hands-on, but
I also love delegating to really
good people I trust’
Mr Jeffreys says that he had always wanted to run his own
business and was not interested in being just part of a large
company. “I could see that Designers Guild had great potential, and the idea of joining her evolved in discussions over
a year and a half.
“In some ways it was quite a scary decision—moving from a
professional career to an entrepreneurial role. But in the end
it was a very easy decision to make and since we have always
been very close it has been very easy to work together.”
His first move was to bring new management skills in
to what was still operating as a start-up company run by
creative people with little business experience. And with no
formal financial planning, budgeting and monitoring, he
established a management information system that allowed
the company to measure its performance.
Ms Guild says that her brother’s arrival preserved
Designers Guild as a family business, and that she remains
very involved in the business side. But she is now freer to
focus on the company’s design performance, which she says
is all about quality at every level—creativity, innovation and
the service offered to customers.
“I’m very hands-on, but I also love delegating to really
good people that I trust. The only way we can measure our
performance is in sales, so we pay a lot of attention to those
figures. But while sales figures can give you guidelines when
designing the next collection, they can’t design it.
“Every new collection is a risk—you can never know what
the response will be. But you can know that you have to be
absolutely committed to it. Unlike with fashion, we commit
before we show our collections to the outside world. It can
take a year to prepare a collection, and we will present it
to the board three or four times before launching it. If it is
successful, it will be around for five years, perhaps ten.”
Constant innovation is part of Designers Guild’s success.
From the start Ms Guild worked with artists such as Kaffe
Fassett and Lilian Delavoryas, and more recently has added
William Yeoward and Jasper Conran fabrics and wallpaper
to the company’s distribution.
Tricia Guild’s five tips on performance
•Focus on quality in all its forms—it is not enough for things to
look beautiful, they must perform as they are meant to perform.
•Be careful about your business partners—be really fussy on
upholding quality and be prepared to change partners who
do not meet your standards.
•Service is vital—if you promise three-day turn-around, that is what
you must deliver.
•Be bold—push as far as you can within the resources at your disposal.
•Be selective—when designing a product, explore all the options,
but then choose the best that you can afford within your budget.
‘I want to see something
innovative in every collection... I like
feeling being nearer the edge’
Earlier this year, she launched the first collection for the
iconic international luxury brand Christian Lacroix under
licence, and the company exclusively distributes Ralph
Lauren fabrics and wallcoverings in Europe. And in 2006,
she created the Royal Collection of Fabrics and Wallpapers
in 2008 on behalf of the Royal Household, inspired by the
interiors of royal residences such as Buckingham Palace and
Windsor Castle.
“I want to see something innovative in every collection,” she says, “though not everything works. I like this—I
like feeling being nearer the edge.”
Brother Simon sees continuing innovation as essential
to the growth of the business, particularly after the financial crisis. “Turnover didn’t drop, but our 15 per cent annual
37
growth plateaued for a couple of years. We’re growing
again, with turnover up 8 per cent this year to £53 million—
but I want to get back to 15 per cent.”
He sees opportunities to expand sales worldwide
by distributing brands such as the Royal Collection and
Christian Lacroix through new outlets. There is also great
potential, he believes, in the Essentials range of plain and
semi-plain fabrics that are relatively inexpensive, the Kids
collections for children of all ages and the edgy Unlimited
products for the young and the young at heart.
‘I work because I love what
I do, and I love the fact that
people enjoy what I do’
“We also have a growing e-commerce business for the Bed
and Bath range in the UK and USA which we want to extend
to Europe. And there is growing interest in the emerging markets such as China where we are seen as a luxury
brand in home furnishing. Our Chinese distributor is now
producing bed linen under licence for us.”
The two owners both describe Designers Guild as a
family business. Noone from the next generation is working for the company, but they both extend the definition to
the team working for the company.
“People stay here a long time,” says Ms Guild. “We have
celebrated careers here of 20, 25 and even 30 years, and we
38
make it a warm place to work. We expect our staff to be
disciplined and hard-working, and it can be all-embracing—
but a lot of my team come back after having children.”
One of brother Simon’s innovation on joining the
company was to make the business side much more inclusive. “Like many start-ups, it was a bit too secretive about the
financial side. We now talk to staff about all aspects of the
business—they get daily sales data at their desks. I like to be
open and transparent, even when things are not going well.
The recent recession was just such a time, but Designers
Guild managed to avoid lay-offs and even found money for
a small pay rise. Staff also participate in the success of the
company through share option schemes and profit-sharing
for managers and those above.
Both say they want the company to remain a family business and carry on its unique approach. “We get approaches
all the time,” says Ms Guild. “If an approach was right and
we both felt it was exciting, we’d probably look at it—not to
do so might be closing off a fantastic opportunity.
“It’s good to be open-minded, but we would not want to
make compromises.”
Simon adds that it is important to have the right people
in the business. “We want it to carry on—some of the directors could do my job.”
Ms Guild has revolutionised the way that people think
about their living space, but she is not about to step back
from the front line. “I work because I love what I do, and
I love the fact that people enjoy what I do.
“Noone would ask a painter when he plans to retire.
I absolutely love what I am doing right now.”
Pictet on
performance
Managing
risk to achieve
performance
Private investors have
significant advantages over
institutions when it comes
to portfolio management,
so long as they understand
that mathematical modelling
must be augmented by
judgment and experience
YVES BONZON
CHIEF INVESTMENT OFFICER
PICTET WEALTH MANAGEMENT
Finding the right balance between performance
and risk requires judgment, experience and an
understanding that today’s opportunities are
often very different from those of yesterday.
Investment philosophy
How we manage the trade-offs between
risk and return reflects Pictet’s investment philosophy and beliefs. Creating
sustainable investment performance
and solid risk management are the
twin pillars of our philosophy; in
pursuit of those aims, we draw on
high-quality advice to select the right
investments for the needs of clients.
As for our beliefs, we like applied
mathematics–our approach uses quite
a lot of quantitative modelling. But
this research work is supported by
two other very important principles.
First, we believe there is always a role
for judgment: we do not apply mathematics in a vacuum, but try to under-
stand what is happening in the real
world. Second, we believe in making
our recommendations with a forwardlooking perspective.
On the role of judgment, it is
essential not to cede control to models,
particularly when assessing risk.
Models can seriously underestimate
the risks of particular types of asset, as
we saw in the sub-prime crisis, especially when the approach relies on past
correlations. Financial institutions
that relied on value-at-risk models
found they were overtaken by risks
thought to be well outside the probability of occurrence–the so-called black
swans. The mathematical tools are
helpful, but it is all about interpreting
the results and understanding what
can go wrong.
A forward-looking approach is
also essential, yet too many investment
institutions rely on past performance,
pictet on performance
39
rather than a static one. When new asset
classes such as private equity or Asian
real estate investment trusts emerge,
those who buy into them early usually
benefit most from their initial performance. International portfolio diversification was very successful when
there were barriers to capital flows, but
since those barriers fell, the returns in
a globalised world have become correlated in different markets.
Another example is provided by
stock
selection, where performance can
Too many investment
fluctuate tremendously when market
institutions rely on past
drivers change. In the early 1990s, I
performance, regardless of was seen as a stock-picker because my
current valuations
economics background told me that
concepts such as the return on capital
invested and weighted return on capiRelying on the past also ignores the tal were important. At the time, most
evolution of the investment land- institutional investors did not pay
scape. New regulations, changes in attention to these factors and this led
investment classes, improvements in to stocks being neglected as overpriced,
investor knowledge and other devel- when in fact they were deploying their
opments require a dynamic approach, capital at returns much higher than its
regardless of current valuations.
Modern portfolio theory relies on
underlying hypotheses which are such
a simplification of a complex world
that they are often scarcely credible.
I have been shocked at the extent to
which institutional investors may rely
on extrapolations of return data from
the past, without considering whether
the assets are cheap or expensive.
cost. When investors came to understand the importance of the cost of
capital in long-term performance, the
anomaly disappeared–and with it my
stock-picking edge.
Markets change
Markets do change dramatically. When
the dominant pools of capital in the
1990s were long-only funds, stock
valuations and prices did not move in
the same way as they have done in the
last decade when hedge fund managers have dominated the market. The
market drivers are constantly changing and investment processes cannot
therefore be static. Good investors
have to change their approach to be
effective in the new environment.
The example of Warren Buffett is
instructive: people believe his success
as an investor has been to apply the
lessons of Benjamin Graham. But the
markets he operates in are very different
to those when Graham wrote his guide.
If Buffett had applied the investment
principles of Graham, he wouldn’t have
generated great returns. He was smart
enough to adapt those principles to
deploy capital very profitably for Berkshire Hathaway shareholders.
Our central belief is
that we should use
mathematical models
with caution
Structural breaks such as these are much
harder to model and their impact is felt
over longer time periods–in an industry where time horizons and incentives are much too short. So our central
investment belief is that we should use
mathematical modelling with caution,
thinking about the future and movements in the investment environment.
And we are pragmatic about how we
invest, because even if over the longer
term economic fundamentals on the
pricing of assets prevail, there are shortterm factors that influence markets
which are hard to predict.
40
An edge for private investors
In a fast-evolving world, private investors do have some advantages in terms
of both performance and risk when
compared with investment institutions. Perhaps the most important is
that they are not constrained by rules
and regulations. The financial crisis
in 2008 was made possible because of
regulatory actions that allowed banks
to hold triple-A senior structured
credit with very little capital, and
forced institutional investors searching for yield to invest in instruments
that appeared to meet rules about
ratings. These ratings turned out to
be based on fake mathematical models
that blew up.
Private investors
often underestimate
the strength of their
own balance sheets
Private investors have a significant
advantage, because they are not forced
by securities regulations to make
sub-optimal investment decisions.
This allows them to make significant
hedges against such investment trends
if they can handle the apparently difficult short-term results. With appropriate support from advisers such as
Pictet, they also have the advantage of
a relatively concentrated investment
process, where a limited number of
individuals on an investment committee can take decisions that may be difficult to live with for a period.
Another advantage for private
investors is they often underestimate
the strength of their own balance
sheets. In a leveraged world, it is easier
for them to be counter-cyclical: when
the world is blowing up and there are
a host of forced sellers who are scared
to death, a private investor with no
debt does not need to follow the herd
and sell. There is an opportunity to be
in the unique position of holding positions, looking beyond the valley to the
rebound and taking advantage of it–a
luxury not always available to regulated institutions.
One important role that we play
at Pictet is to guide clients in making
these decisions, by helping them to
understand the risk issues and their
impact on performance. The growing body of knowledge in behavioural
finance has shown the emotional
biases that influence investment decisions. For example, it can be very hard
to take decisions that fly in the face of
market sentiment, such as the belief in
the merits of sub-prime credits in the
run-up to the crisis. Solid long-term
performance may involve periods of
short-term underperformance that
tempt investors to sell before recovery. Sometimes our mental accounting
processes put more emphasis on cost
than on future return prospects.
Risk overlay strategy
One very important part of any portfolio, we believe, is the risk overlay
strategy to hedge against risks in asset
allocation and currencies while maintaining performance. Clients often ask
whether the cost of this is justified,
because often those risks do not materialise for many years and it appears to
be a needless expense. But just as drivers only realise the benefits of their car
insurance when they have a crash after
years with no accidents, the risk overlay
proves its value when it is most needed.
Our job is to hold the hands of
clients to help them to understand
these emotional biases. It is a significant component of the wealth manager’s services to be able to do this
when discussing portfolios and market
developments. There can be significant
gains in both risk and returns from
having a more structured view of how
human emotions work in finance,
so that they do not negatively influence investment decisions. The clear
understanding of the influence of risk
on decision-making that Pictet brings
to every private client is an essential
contributor to maximising sustainable
long-term performance.
Pictet’s investment beliefs
•Mathematical models are useful tools
in producing sustainable investment
performance, but they are not enough:
judgment and experience are essential,
especially in assessing risk.
•A forward-looking approach is also essential
in creating investment portfolios. Too many
investors rely on extrapolations of past
performance, ignoring fundamentals such
as valuations.
•The investment landscape is constantly
evolving, with dramatic changes that
mean that today’s opportunities may be
very different to yesterday’s. A dynamic
approach to investment is required.
•Investment performance is easier to
achieve for investors who are not bound
by regulations. Such regulations force
institutions to make sub-optimal decisions,
running with the herd when holding
positions may produce higher returns.
•Maximising sustainable long-term
performance is easier if investors
understand the emotional biases that can
distort decision-making–for example, the
temptation to sell when going through
periods of short-term underperformance.
41
ACKNOWLEDGEMENTS
We are grateful to Dominique Jacquet, Gianpiero Petriglieri,
Subramanian Rangan, Ludo Van der Heyden and Theo
Vermaelen of INSEAD for their insights on performance. We
should also like to thank the entrepreneurs who generously
shared their experiences with us: George G. Farha, his brother
Dany and brother-in-law Wael Hourani; Tricia Guild and her
brother Simon Jeffreys; and Dr Rolland-Yves Mauvernay and
his son Thierry. Last but not least, we are indebted to Didier
Drogba for giving us a different perspective on performance.
Pictet & Cie
42
acknowledgements
Pictet & Cie
Founded in 1805 in Geneva, Pictet & Cie is
today one of Switzerland’s largest private
banks, and the leading independent
asset management specialist in Europe,
with CHF372 billion (EUR297 billion) in
assets under management and custody at
31 December 2010.
Pictet & Cie is a partnership owned
and managed by eight general partners
with unlimited liability for the bank’s
commitments.
The Pictet Group, which is based
in Geneva, employs more than 3,000
staff. The Group has offices in Barcelona, Basel, Dubai, Florence, Frankfurt,
Geneva, Hong Kong, Lausanne, London,
Luxembourg, Madrid, Milan, Montreal,
Nassau, Paris, Rome, Singapore, Turin,
Tokyo and Zurich.
Disclaimer
This publication is issued and distributed by Pictet &
Cie based in Geneva, Switzerland. It is not aimed at or
intended for distribution to or use by retail clients, or
any person or entity who is a citizen or resident of, or
located in, any locality, state, country or other jurisdiction
where such distribution, publication, availability or use
would be contrary to law or regulation. The information
and material presented in this publication are provided
for information purposes only and are not to be used
or considered as an offer or invitation to buy, sell or
subscribe to any securities or other financial instruments.
Furthermore, the information expressed herein reflects
a judgement as at the original date of publication and is
subject to change without notice.
This publication and its contents may be quoted provided
that the source is indicated, but it may not be reproduced
or distributed, either in part or in full, without prior
authorisation from Pictet & Cie.
All rights reserved. Copyright © 2011 Pictet & Cie.
www.pictet.com

English - Perspectives Pictet

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