Thursday, September 28, 2006


The Great Transformation of Corporate Finance and its Impact on the Economy

I just came across a very interesting special report on corporate finance in yesterday’s Financial Times. In the leader, Gillian Tett shows that a variety of new instruments for debt financing has emerged in recent years. This evolution changes profoundly corporate finance and constitutes one of the most important driving forces behind the current changes in European corporate governance. In several earlier postings on this blog I touched on this subject, but I never actually discussed it more in depth.

So, how does the increasing resourcefulness of financial institutions affect the functioning of corporate governance? Well, in many ways as I will show. But let’s start with the cause of this evolution: the increasing variety of financial instruments, that is.

People that are familiar with the Swiss economy might remember the uproar that was created by Martin Ebner, when he first introduced a new equity instrument in Switzerland, which he got to know during is stay in the US. The so called Stillhalteroptionen allowed Ebner to issue options on shares of Swiss companies in his possession, which he blocked in a depot. The advantage was that these very expensive shares could be split into smaller parts, which were affordable for the small saver. This was a first step in Ebner’s quest to transform the Swiss into a people of shareholders…but that is another story.

What is important for the question of corporate governance, is the fact that the introduction of this instrument had an important impact on the evolution of the financial markets in Switzerland and that this kind of innovation of financial instruments seems more and more to reach not only equity but also debt markets. In fact, the functioning of Stillhalteroptionen resembles what is usually called securitisation of loans. This latter development means that banks grant loans to corporations and issue, then, themselves bonds on this loan portfolio. This allows them – among other things – to transfer the risk of the loans to the purchasers of the bonds. The same can be done with bonds, or in general with any kind of debt. This kind of securitisised loans are usually called Collateral Debt Obligations (CDO).

A multiplicity of very complex instruments and ways of financing debt has been created recently. What is important for my purpose is that the issuing of this kind of debt instruments is less and less the exclusive hunting ground of commercial (or universal) banks. In fact hedge funds, who are often ready to take considerable risks, have become important actors on this market.

This evolution has, according to Gillian Tett, lead to an increased accessibility of finance notably for companies that are in financial trouble. One remembers the negotiations between ‘financially challenged’ companies and banks for new loans (e.g. Swissair). This situation has, according to Tett, considerably changed in recent years: “[W]hereas these companies would have once been forced to turn to commercial banks [in order to obtain new loans], there is now a growing tendency for troubled companies to use hedge funds or other sources of capital […] (FT September 27, 2006).

Now, what does this mean for the functioning of corporate governance? One important consequence is of course that the role of banks changes in important ways. Banks used to play a central role in the functioning of the economy especially in countries with strong universal banks – i.e. banks that are active both as commercial banks (loans) and investment banks (equity issuing etc.) - such as Switzerland and Germany. Universal banks grant loans to corporations, they issue equity for corporations, advise them in merger and acquisition activities and controlled, moreover, important portions of voting rights during the Annual General Meeting of these companies through a proxy voting system that allows them to vote for bank clients that did not wish to attend the AGM. This is why Continental European Corporate Governance Systems are usually called ‘bank-centred’ systems.

The central role of banks and their multiple channels of influence on industrial companies gave periodically rise to criticism of the power of banks and their damaging influence on industrial development. The most extreme theories postulated that banks consciously accepted the bankruptcy of a company that was under their controlled in order to get the maximum out of the company’s assets.

In Switzerland, the Anti-Trust Commission was mandated in the 1970s to elaborate a report on the power of banks (Oddly enough, the report of 1977 concludes that – despite the multiple channels of influence that are shown by the report – the banks actual influence on industrial companies is very limited).

Be that as it may, the recent evolution of corporate finance led to a situation where industrial companies do not seem to rely so much on banks anymore, but they take out loans from other financial institutions or rise capital directly on equity markets (in the latter case, one speaks of disintermediarisation). Consequently, industrial companies are more and more independent from banks.

Yet, banks are not just the victim of this evolution, but they reorient themselves voluntarily their activities towards more profitable activities than loans. This becomes apparent when we consider that small- and medium-sized enterprises, who cannot raise funds on capital markets as easily as large companies, complain about the “credit crunch” that results from banks reluctance to grant loans. A glance at the composition of the balance sheet of Swiss banks illustrates the decreasing importance of loans for bank income (see graph below): If in 1955 more than 70% of the income of Swiss banks came from interests (i.e. from loans granted to corporations and individuals), by 2003 this proportion had fallen to about 40%. At the same time commission and fee income, from M&A advising and issuing activities for industrial corporations, has increased to reach about 40%, the rest stemming from trading activities.

Source: Swiss National Bank, Annual reports, various years

One important consequence of the disintermediarisation and the strategic reorientation of banks away from the loan business, which goes together with the increasing independence of industrial companies, is the anonymisation of relations between banks and industrial companies. In fact, credit activities are usually considered to be relationship-based activities, implying close personal ties between borrower and lender and an active monitoring by lenders of their loans. This was a central feature of Continental European corporate governance systems and limited the strength of market forces. Corporate finance through investment in equity, on the other hand, is market-based and does not necessitate any particularly close relationship between investor and issuer. This brings us to the downside of the increased independence of industrial companies from banks. By using more and more securitised finance instruments – as well for debt as for equity – companies become more dependent on financial markets. And this is precisely why we find so much change in corporate strategies in countries like Switzerland.

In fact, many of the recent evolutions in corporate governance in Switzerland and other European countries can be explained by this increasing dependence on financial markets. Thus, the abolition of discriminating voting right distortions (giving more voting rights for the same capital investment to traditional blockholders than to minority shareholders), the increasing transparency of annual accounts (use of international accounting standards) and more generally a better communication and protection of minority shareholders are all expression of this evolution. Maximising the value of the firm – i.e. the price of its shares – and its profitability are more fundamental trends that can be – in part – explained by the change in corporate finance.

‘So what?’ could one say, ‘why is this important?’ In fact, as technical and far away from everyday life these evolutions of the corporate governance system might seem at first glance, they can have a very concrete meaning to many people…as is shown, for instance, by PSA Peugeot Citroën’s announcement of a plan to layoff 10’000 in order to increase the company’s profitability (NZZ, September 27, 2006).

Friday, September 22, 2006


Boards of directors in the UK: structure, behaviour and competence. Or the limits of rules

Yesterday evening I was at a Round Table on Corporate Governance organised by the Centre for Research in Corporate Governance of the Cass Business School, London. Professor Terry McNulty gave a talk about a very interesting research he carried out with Andrew Pettigrew during the second half of the 1990s. The study consisted in a survey of board members of the 500 largest UK FTSE companies. The idea was to find out how the structure of the board influences the behaviour of board members and, more precisely, the relation between the Chairman and the CEO.

McNulty and Pettigrew show that after the Cadbury and Greenbury reports on corporate governance (and subsequent reports), boards of UK companies underwent considerable changes in structure. Already the Cadbury and Greenbury reports, but also the governance codes of 1998 (the Combined code elaborated by Hampel) and the revised version based on the Higgs report of January 2003, all ask that the chair of the board and the CEO be two different persons. They also claim that a certain number of board members should be non-executive directors (NEDs). Consequently, the most important evolution in board structure was the separation of the function of chairman of the board and CEO. This evolution led during the 1990s to the emergence of five types of board structures:

1. The traditional system of cumulation between the positions of chairman and CEO (only 8.7% of the firms in their sample still had this board structure in 1997. Since then, this ratio has further decreased and is today probably about 2%)

2. A board with a full-time, executive chair who has formerly been CEO of the firm (20.6%)

3. A full-time, executive chair who has not been CEO of the firm (6.2%)

4. A part-time, non-executive chair who was formerly CEO of the company (10.6%)

5. A part-time non-executive chair who has never been CEO of the firm (53.7%)

The figures show that compliance with the governance codes is high since approximately 64% of the UK companies have non executive chairs.

Yet, McNulty argued convincingly that this compliance with the structure does not necessarily imply compliance with substance. In fact, the separation of the role of the Chair and the CEO aims at creating an independent board, which is supposedly able to effectively monitor the company’s management. However, McNulty and Pettigrew show that some of these models weaken, rather than strengthen, the position of the chairman and of the other NEDs on the board. Thus, their survey shows that only in models 1 through 3 the chair sets the agenda for the board meeting, whereas in models 4 and 5, i.e. the models that notably the Higgs report preaches, the CEO sets himself the agenda. The most likely explanation is that since the chair is a non-executive, he has not enough information about what is going on in the company in order to set the agenda.

The agenda setting is but one out of 34 issues of McNulty and Pettigrew’s research for which the respective power of the CEO and the chairman was analysed. All the results tend to show that board structures with non-executive chairmen reduce rather than increase the power of the chairman.

This result is actually confirmed by structural analyses of organisations. In fact, the claim that a large portion of board members should be NEDs may lead to an organisational structure, where the CEO is the only person to bridge the “structural hole” between the board and the operative management of the company. This of course gives him considerable brokerage power concerning the control of information flows between the board and the company as such. Whereas if other executive directors are on the board there is at least a theoretical possibility that the information the CEO gives to the board is verified by these executives. Hence, the complete independence of the board – i.e. 100% of NEDs – does not maximise the boards influence over management’s decisions.

This result makes intuitively sense. However, the corporate governance reality does not pay much attention to this issue. In fact, corporate governance policy-makers put very much importance on the question of board independence from management, which should be achieved through rules concerning board structure and composition. As McNulty shows, these rules can be counterproductive. What misses in these reform efforts is a deeper understanding of how boards work in actual fact and the insight that at the end of the day boards are composed of people.

Related to this, one issue that was brought up yesterday during the discussion, was the question of competence. In fact, the competence of board members is probably the most important factor, which can guarantee that a chairman, or any other NED, is able to effectively control the management’s decisions. Competence however can not be guaranteed with rules concerning the composition or the structure of the board but only with recruitment procedures for board members; and such procedures are difficult to define. How can one make sure that the shareholder meeting elects the “most able” candidate on the board? In most countries board composition is ruled by other criteria than competence. Thus in some countries legal rules prescribe board representation for certain constituencies of the firm (such as employees’ representation in Germany). This limits of course the choice of people available for that job, which may further limit competence.

The link between competence of board members and effective control is an issue, which is virtually never addressed in discussions on good governance and does not appear as such in corporate governance codes or company laws. Of course finding a solution to this issue would greatly increase the quality of control mechanisms within the firm. However, as prof. McNulty pointed out last night, sometimes we can create as many new rules as we want, the outcome will always depend on how actors apply these rules and how they behave within the regulatory framework. This is a fundamental limitation to all efforts aiming at regulating the economy and making sure that things like Enron, Parmalat or Swissair do not happen again.

Friday, September 08, 2006


Princess Saurer, the Evil Hedge Fund, and the (Foreign) White Knight. Of how a Company Resists all Attacks…but Gets Eaten anyway.

Textile machinery and transmission system maker Saurer is used to fight – more or less successful – battles against potentially hostile investors. But the last one was particularly nasty! Since Laxey Partners, a UK hedge-fund, announced in July 2005 that it held a considerable position in the tradition Swiss company Saurer, a fierce battle between the investor and the Saurer management set in. This episode shows in an extremely clear way how two different economic principles clash: the Anglo-Saxon shareholder-oriented way of managing a company, and the European industrialist’s way. This struggle has started in Europe somewhere during the 1980s but especially during the 1990s when more and more investors started to adhere to the idea of shareholder value, which was at that time mainly propagandized by American pundits such as Alfred Rappaport. Due to the liberalisation of capital and product markets during the 1980s and 1990s and the increasing competition between companies all around the world, many observers predicted the fast decline of the European way of doing business. In fact, the Anglo-Saxon approach, based on the supremacy of the owners (i.e. shareholders) was considered to be the most efficient way of managing a company. Hence, less efficient approaches would soon disappear. The fundamental difference between the Anglo-Saxon approach and the European approach is the respective position of the shareholder and other stakeholders: in Anglo-Saxon countries, managers are considered to be trustees who administer “other people’s money”, the company being nothing more than a way for owners to increase their wealth. The mission of the management is hence to maximise shareholders returns on investment, i.e. creating shareholder value through the maximisation of the company’s market value. In Europe, on the other hand, the company is traditionally seen as being more than the sum of its parts. The company is a quasi-public entity with multiple interests and responsibilities. Sometimes it is even seen as an organic entity with an interest of its own (e.g. in the German theory of the Unternehmen an sich). This multiple interests give a large leeway to the mangers (and other insiders) in deciding what interests should be privileged: should the companies exceeding cash flow be reinvested in the production, used in order to increase salaries or be distributed to shareholders? In European corporate governance systems, this decision is often not made by shareholders during the Annual general meeting, but by the management or the board who has enough power to retain earnings for instance through the creation of hidden reserves.

The fight between Saurer and Laxey Partners illustrates in an impressive manner the clash between these two conceptions of the stock company and shows that the shareholder value idea does not yet prevail in certain parts of the Continent. Industrialists – despite political discourse that indicate the contrary (cf. Franz Müntefering’s last year’s speech on the plague of locusts in Germany and the ensuing debate on capitalism) – still seem to have the means to defend themselves against the evil force of globalised capital (and especially its spearhead the hedge-funds)!

The story begins on July 15 2005. That day, Laxey Partners Ltd. announces that it holds 7.61 % of the capital (which corresponds to 7.61% of votes since Saurer introduced in 1994 a single share). One month later, Laxey had increased its participation to 15.02%. Already at that point Laxey made clear that it considered the company – and more precisely its transmission system branch – as being fundamentally undervalued (NZZ August 12 2005).

From this date on, Laxey started to exert pressure on the Saurer management. The main contentious issue is very revealing of what I called the clash of two different economic mindsets. Thus, the chairman of Laxey, Preston Rabl, argued that, even though the Saurer management did a good job, the company was undervalued on the stock exchange, which was – according to Rabl, due to the fact that the management retained to much cash for its investment projects (NZZ March 18, 2006). The remedy was hence to distribute this money to shareholders, to increase transparency concerning its acquisition policy, and possibly to review the structure of the company. Concretely, Laxey attacked the fact that Saurer was built around two pillars, which did not generate any synergies, i.e. a textile machinery and a transmission systems division.

Also, Rabl reproached the Saurer management with being inclined to engage into ‘empire building’, i.e. to acquire new companies in order to increase the company’s size without consideration for its value or profitability. This is of course a real danger in any company that works well and generates good money (as was impressively illustrated by Swissair’s McKinsey-made ‘hunter strategy’ during the 1990s). However convincing Laxey’s argumentation may appear from a shareholder’s perspective, the management of Saurer has compelling arguments as well. In fact, the management put forward that the two divisions – textile machinery and transmission systems – constitute a very good combination for the company’s stability. In fact, the textile machinery branch generates a lot of cash with only little investment. In the transmission technology branch, on the other hand, profit margins are higher, but more investment is needed (NZZ March 5, 2006). The combination of the two branches constitutes, therefore, a good complementarity, allowing the company to operate successfully in both branches.

This argumentation, in turn, is compelling from an industrialist’s point of view. However, shareholder value textbooks clearly state that diversification is not the role of the company, but of investors. Or in other words, by diversifying its activities in order to achieve a more stable course of business, Saurer reduces the profitability of the investors stake, who themselves have already diversified their portfolio.

Before the Annual general meeting of May 2006, Laxey increased the pressure by putting several points on the agenda for the AGM. Firstly, Rabl demanded a seat on the board of Saurer. Secondly, CHF 140m should be paid back to shareholders (through a capital repayment), and, thirdly, the company’s strategy concerning its internal and external growth strategy should be reviewed by external experts. The Saurer management rejected especially the second point of this agenda. In fact, according to them, the spare cash was needed for investments (i.e. acquisitions) in different parts of the world in order to consolidate Saurer’s position in these markets. Also the amount of CHF 140m was, according to the management, more than the company had in surplus, implying that the level of debt would have to be increased if this proposition was accepted by the AGM.

Who was right? Does the company’s management have the right to use profits in order to pursue growth strategies or does the undervaluation of the company constitute an expropriation of its owners? Hard to tell of course. Especially because this question is very much steeped with ideological considerations.

Be that as it may, on May 11 2006, Laxey – who had meanwhile increased its stake to 20% – got in part what it wanted: Preston Rabl is elected (with 50.7% of the votes) on the Saurer board despite the opposition by the Saurer management. (This was in fact not the first time that a hostile investor acceded to the board of Saurer. In 1988, Tito Tettamanti bought an important participation in Saurer and acceded to the board where he staid until 1994). This move of Laxey was condemned even by pro-shareholder actors such as the company Institutional shareholder services (ISS), which considered that Rabl’s presence on the board of Saurer could constitute a source of conflict of interests (NZZ, May 5 2006). Also, it was in principle agreed upon the mandating of an external expert with a strategic review concerning Saurer’s acquisition strategy. The repayment of capital, however, was not voted during the AGM because Laxey finally renounced putting this point on the agenda.

However, despite Rabl’s election, the tensions between Saurer and Laxey did not decrease during the following months. In fact, it seems that the communication among the board members was very difficult. Thus, Rabl stated later that several important decisions were taken without even being discussed during board meetings (NZZ, August 30, 2006). Consequently, Laxey started a new attack during the summer 2006: on July 5, 2006 it announced that it had now a stake of 25%, which increased further to attain 25.94% on August 25, 2006. The following day, a new charge was undertaken: Laxey demands the holding of an extraordinary AGM during which four out of eight board members of Saurer should be replaced by representatives of Laxey. Together with Rabl’s seat, this would have meant a majority for Laxey. The justification of this move was that, despite the AGM’s decision of May 11, no strategic review had been order by the company’s management.

In the beginning of September, Laxey finally informs the public of its plans for Saurer. The most likely option that was considered was splitting Saurer into two, and selling one of the divisions (probably the transmission system business), and concentrating all the efforts on the other (NZZ, September 4, 2006). A second option would have been to raise more capital and develop both branches. However, this latter strategy was clearly not Laxey’s first choice.

However, on September 6, 2006, many there was somewhat of a commotion when, Laxey announced that it had sold its 25% stake and that Rabl resigned immediately from the board. The buyer of this stake was Unaxis (which has recently renamed into Oerlikon) – a formerly Swiss company now controlled by the Austrian Investors Georg Stumpf and Ronny Pecik through their company Victory. Unaxis/Oerlikon held an additional 20.94% in Saurer in the form of stock options, and Oerlikon announced the same day that it intention was to launch a public takeover bid in order to acquire a majority stake.

Several observations can be made: Firstly, it is interesting to see that a supposedly so powerful hedge-fund did not achieve its goals despite the fact that Saurer constitutes – for Swiss standards – a rather open company respecting important corporate governance principles. Thus, Saurer applies since the early 1990s international accounting standards, it has a single share without restrictions to the exercise of voting rights or their transferability and it was not controlled by any large historical blockholder. Yet, the Saurer management still managed to repel the attacks. It is difficult to say what was decisive in this battle. In fact, the reasons for Laxey’s decision to stop the tug-of-war with the Saurer management and to sell its stake at a moment where it was about to obtain an extraordinary shareholder meeting are not completely clear yet.

A second observation is that Unaxis/Oerlikon – which made the headlines when it was taken over by the Austrian investors and when an additional considerable stake was acquired by a Russian investor – is welcomed by the Saurer management as “white knight”. Contrary to what usually happens in situations when Swiss companies are acquired by foreigners (cf. my previous post on this blog from August 1, 2006), this time, the nationality of the owners does not seem to play a role. In fact, more important than the nationality seems to be the strategy of the investor: Stumpf and Pecik are – despite what one could read in newspapers before their takeover of Unaxis – considered to be investors that pursue industrial goals, i.e. that aim at the company’s development in the long run and not short-term financial benefits to shareholders. Thus, a formerly dreaded foreign institutional investor became the saviour of a Swiss company that was threatened by an even eviler foreign investor. Globalisation sometimes really seems to blur national frontiers…

Sunday, September 03, 2006


The Power of Institutional Investors: What the Swissfirst – Bellevue Scandal Tells us about Corporate Governance in Switzerland

A new full-scale corporate scandal has emerged in Switzerland a couple of weeks ago. This scandal around the merger between the Swissfirst Bank and the Bank am Bellevue touches some of the most central questions in the debate about good corporate governance: equal treatment of shareholders, insider trading, and the role of pension funds and their managers.

In fact, just before the merger of the two investment companies in September 2005, five large pension funds and two insurance companies sold their stakes in Swissfirst to this bank (NZZ, no 175, July 31, 2006). This allowed the Swissfirst to conclude the deal with Bellevue without capital increase, which led to a 50% increase in the Swissfirst share price after the announcement of the deal. At the same time, this implied that the future pensioners that were affiliated to the pension funds in question faced a loss of profits of about 20m CHF (the NZZ am Sonntag, July 30, 2006, estimates the loss of profits even at 33m CHF). This raises of course an important question: why were the managers of the pension funds ready to abstain from realising these considerable profits? The answer that the press gives is that the management of Swissfirst created incentives in order to convince the pension fund managers to sell their shares. In other words, some newspapers hold the view that the fund managers were bribed. Most likely, however, the incentives took simply the form of in-advance information about the merger (which is as illegal as bribing). Thus, several fund managers, while selling the stake of the pension funds they managed, bought privately Swissfirst shares and options just before the deal was concluded.

The suspicion of insider trading is supported by the fact that during the month preceding the announcement of the merger the price of stock-options of Swissfirst evolved independently from the price of the underlying share. In fact, from the beginning of August 2005 through September 9, 2005, the price of the option raised from CHF .21 to CHF .65 even though the share price remained fairly stable (NZZ am Sonntag, August 27, 2006). This hints of course at insider trading, since people who new about the imminent merger were ready to pay more for the stock options than what they were worth at the time. It is proved that mangers of Swissfirst – but also pension fund mangers – were among the buyers of stock options before September 9, 2005, the last trading day before the announcement of the merger.

One of the fund mangers appears to have increased hundredfold his personal fortune between 2001 and 2002. Following these revelations, the largest Swiss newspaper – the tabloid Blick – started a campaign against this fund manager. Front-page pictures showing the villa of the manager with headlines reading “That’s how the perkiest Swiss pension-fund manger lives” were published the following days and the integrity of the Swiss business elite as a whole was once more put into question.

But what does this episode tell us about corporate governance in Switzerland independently from the polemic it triggered? As any corporate scandal, this episode allows us to better understand the functioning of the Swiss economy. A very interesting question in this respect is the question of the role of institutional investors – and more precisely pension funds – in corporate governance.

In the US pension funds are mainly seen as powerful and active shareholders with considerable monitoring power over the management. This does not seem to be the case in Switzerland. In the US, CalPERS and other pension funds make headlines with their very active policy in proxy fights and during annual shareholder meetings. In Switzerland, on the other hand, there is not much ‘shareholder activism’ by pension funds, not even by public ones (one of the pension funds, which was involved in the scandal was Publica, the pension fund of federal civil servants). Except for the Ethos foundation, which explicitly pursues an active investment strategy and tries to exercise a certain influence on the management, most Swiss pension funds are very complaisant, follow buy-and-hold strategies and do not actively monitor companies’ management. A recent study by the Federal Office of Social Insurances shows that most Swiss pension funds do not exercise their voting rights during the AGM. Thus, during the period 1998 and 2000, only 5% of the interviewed pension funds said that they exercised their voting rights systematically. 50% answered that they exercised them never (Bulletin de la prévoyance professionnelle No 59, OFAS, 10.12.2001).

Two reasons explain this complaisance of Swiss pension funds towards companies’ management. Firstly, there is a built-in lack of independence of private pension funds from companies’ management. In fact, the foundation board of a private fund is composed of representatives of the employees and of managers of the company it belongs to, which makes a critical stance towards the management of course unlikely. Yet there is a second reason why critical voices are rare in Switzerland, i.e. the country’s small size. The small size of the country implies that the business elite is also small, which entails a situation where everybody knows everybody. Hence, ties between members of the business elite are very narrow. These close social ties render control by pension funds and other institutional investors difficult. This can be illustrated by the close personal ties that existed between the main actors of the Swissfirst – Bellevue scandal: the father of the CEO of Swissfirst was during long time manager of one of the pension funds, which sold its stake before the merger (NZZ am Sonntag July 30, 2006). A manager of another pension fund that was involved in the scandal was himself member of the Swissfirst board of directors until approximately one year before the merger. The chief investment officers of two of the pension funds sat together on the board of Cat Group, an investment company in which one of them held privately a considerable stake. The Cat Group, in turn, managed the savings of the pension fund in which its director was chief officer. Finally, one of the external investment advisors of another pension fund that sold its stake in Swissfirst, – a Member of Parliament from the Swiss People’s Party – was until May 2006 board member of Swissfirst and, at the same time, member of the investment board of another investment foundation that was involved in the scandal.

These multiple personal ties between the actors in the Swissfirst scandal are typical for the very coherent Swiss business elite. It reminds also the Swissair debacle, where the board of directors was composed of the most illustrious personalities from business and politics, which met in different places of sociability. Such ties are one of the reasons why critical voices are very rare and why it is difficult for individual members of the elite to denounce wrong-doings. In fact, due to this coherence social control is strong, imposing a set of common values – such as loyalty – on the members of the business elite. This is of course not new in Switzerland. The ‘sleaze’ composed of people close to the Swiss Radical Democratic Party was often held responsible for malfunctions in the Swiss economy. Notably the People’s party accused the radical democrats of nepotism and cronyism. What is new, however, is that this time it seems rather to be the People’s party, which is at the centre of the scandal.

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