Notes on Wealth Management

H.B. Falkena

Notes on Wealth Management

by H.B. Falkena

Copyright © 2007 by H.B. Falkena All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written permission from the author. The information and opinions contained in this book have been compiled or arrived at from sources believed to be reliable, but neither the author nor the publisher accept responsibility for any loss arising from decisions based on them. ISBN 978-0-620-38461-2 Fifth edition, first impression 2007 Previous editions were entitled Entrepreneurs Only Published by Roy Bamber c/o The Financial Sector Forum http://www.finforum.co.za P O Box 12028, Hatfield 0028 Set in Times New Roman/Arial 10/12 point by Roy Bamber

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Generally speaking. Leaving aside celebrities. what is the typical amount of wealth entrepreneurs can accumulate over their working lives. how should wealth be invested and fund managers be managed. fashion models and the executive management of large corporations. key and tempo of every chapter had to change materially. For instance. of course. an ever increasing percentage is self-made. why are entrepreneurs always striving for more wealth even if greed. in all their admired variations. sportsmen. no offence is intended. as the topic under discussion is international in nature. To do so. the vaster the scope of the topic at hand. This essay views some of the wealth problems of millionaires (in US dollars). the more lighthearted the approach to the specific subject.PREFACE Every level of wealth creates its own specific problems. In essence this essay covers the life cycle of an entrepreneur in a few pages. artists. how does the total accumulated wealth of entrepreneurs in medium-sized companies compare with that of chief executives employed in large corporations. The Author iii . envy and obsession may scare off their friends and therefore adversely affect the quality of their lives. This last category consists mainly of entrepreneurs. fund managers. Quantitative analysis will be done foremost in US dollars. it required some effort to remain serious at times. this essay concentrates on the wealth management issues of entrepreneurs and executive management. where should the line be drawn if it comes to unethical business practices or activities. Where failures occur. Although some 20% of millionaires simply inherited their wealth. the tune. and who ultimately inherits an entrepreneur’s riches. Considering the issues at stake. the required equivalents in rands will be given as well. Where local taxes and local costs of living are discussed.

11.CONTENTS 1. 6. 12. Wealth distribution: Internationally and in South Africa Executive remuneration Entrepreneurial remuneration The opportunity costs of wealth Growing your business Selling your business Retirement and financial restructuring Managing your fund managers Trusting your trustees The realm of Regina Pecunia Ruling from your boardroom in the sky Reflections on wealth and happiness 1 4 9 14 22 25 28 33 40 44 47 49 iv . 4. 7. 8. 2. 3. 9. 10. 5.

This means that 1999 7.3 trillion) millionaires millionaires Year 2 millionaires (as (in US$ trillions) (in millions)1 (in US$ millions)1 % of world GDP) is about 75% of world GDP 1996 4.5% 2 wealth .7 28. it makes 2004 8.2 million).3 74. Nonetheless only 0. ultimately the price of money is always paid in terms of time.2 30. World Economic Outlook.9% of the total number of millionaires – the so-called ultra-HNWIs).6% close to a half. 3 4 1 .7 million individuals or 0.1: Number of worldwide millionaires and their financial wealth we al t h o f m i l li o n a i re s Number of $ Total wealth of Total wealth of World GDP (estimated at US$ 33. you have to use other people’s money and other people’s time. To emphasise the order difference between a million and a billion: a million seconds is 12 days. 2006. Accordingly.9% bankers to concentrate on their 1 Source: Capegemini and Merrill Lynch. Obviously this is only a ballpark figure and therefore somewhat arbitrary. 2 HNWI’s. their total wealth should be at least R1 500 billion. while the bottom 80% of households holds 17%. an aspect that becomes clearer with age. particularly as entrepreneurs have a great skill to fly below the radar screen.67) .2% of the total population or 1% of the working population of 7.7 32.1 29. on average. if you aim for an annual income of more than.7 81. In South Africa the number of wealthy people is estimated at about 72 000 (i.4 74. you either 1 2 Capgemini and Merrill Lynch.5 30.2 27.9 63. and possibly even 2002 7.9 21.7 41. the total worldwide Table 1. New York. The earnings pyramid remains relatively steep even passing the $1 million threshold.5 million). South African millionaires have financial assets of about R20 million each (which is probably an underestimation considering the importance of inherited wealth in South Africa). 1% of the population owns some 50% of all assets and 20% owns close to 90%.5 16. while in South 1997 5.e. According to the SA Reserve Bank total household wealth amounted to some R3 308 billion (excluding unaccounted foreign assets) and GDP was R1 523 billion in 2005 (SARB Quarterly Bulletin.3% least a third. In an economy based on the political philosophy of property rights and individual autonomy.5 36. Such amounts of wealth cannot be obtained by hard work alone.3 44.2% of the South 2000 7. $5 million. a billion seconds is 32 years.0 31. wealth distribution is typically a steep rising curve.2 19. even if these clients IMF.1% of the world population (or an estimated 8. If. The largest number of wealthy people is found in North America and West Europe (namely 5. i.9% around 0.5 83.4% commercial sense for private 2005 8.6 30. For instance.2 31.4% African population owns at 2001 7. or what is called in banking terminology “high-net-worth individuals (HNWIs)”.7 million millionaires worldwide there are today an estimated 85 000 people with net financial assets in excess in $30 million (or 0. say.CHAPTER 1 WEALTH DISTRIBUTION: INTERNATIONALLY AND IN SOUTH AFRICA Wealthy people.e. in the US the wealthiest 1% of all households controls 38% of the national wealth. But. Although small in absolute numbers.8 82.3% (see Table 1. some 0. 2006.8% of their total populations). By comparison.0 55.6 29. p. An accurate estimate at these extreme levels is difficult. World Wealth Report 1997-2006. account for only a fraction of the population. To rise above the average millionaire. please note. among the 8.7 million people) qualifies for this exclusive club1. 20% of the people own around 80% of all assets.3 26.7 72.1 26.6 85. Although the income distribution in South Africa is among the world’s most skewed.9% Africa this figure may be about 1998 5. From conception everyone is living on borrowed time.8% 100% of GDP. Only through progressive tax policies can wealth be more evenly distributed (as is done for instance in Sweden). as you can only sell some 3 000 hours of labour per annum4. Accordingly.1).e. June 2006. your gross annual income is limited to some $6 million a year. while there are probably only a thousand billionaires in the world3. even in the majority of industrial countries the Pareto principle applies: i.8 77. of all household 2003 7.7 33. are usually defined as those with net financial assets (excluding their primary residence) of US$1 million (or some R7. Should you be able to charge $2 000 per hour (which is about the maximum for professional services in the US).0 25.

130% 4. and of the ultra8% 50. your own health. particularly during the initial growth phase.0 Table 1. as they possess two uncommon traits: common sense and courage.millionaires roughly 1% of the population year period) qualifies as HNWIs. but they are usually multi-talented as well.001% 512. who noted “the best view from the mountain is neither in the valley nor at the top. Of course.125% 271 875 0.001% 256. However. But “losers” 2 Number of HNWIs worldwide: 8 700 000 (Source: Capegemini). To determine the relationship between talent and income is of course a pet research project for many politicians.000% 0.4 ultra-HNWIs.have to become the CEO of a large listed company (in South Africa about 0. The new business elites – an aristocracy of talent.0 the air becomes thinner and 21% 1.026% Total your family. The political consequences are bound to be far-reaching for any national state. it often remains a poor proxy in practice.0 this climb to the top you usually have to forget about 98. may lose all his accumulated wealth. In essence entrepreneurs are a rare species.0 approach Olympian heights. In the OECD countries millionaires millionaires potential (over a 30.0 any chance of succeeding.0 Only those that really.a.000% 4 350 000 0. the climb to the Table 1.p. casual observation indicates an impressive range of different talents in society – a range that is not dissimilar to the skewed income distribution.a. Around 20% of millionaires simply inherited their wealth5. really 30% 0. the mentality of a true entrepreneur (according to Paul Getty.000% 2 175 000 0. 3 Total population of OECD countries: 838 288 000 (Source OECD). but the entrepreneur.0 becomes billionaires (see 13% 12. 5 Capgemini and Merrill Lynch. 2 .01% of the labour force succeeds in doing so) or you have to start your own private enterprise (according to Paul Getty the door to the millionaires club is always open!). who knew how to make a “few bucks” quickly). while exceptional investment skills produced around 10% of millionaires. can console themselves from 4 The estimated wealth per person is simply doubled for each interval. you are effectively only selling your own time (instead of selling other people’s time) and therefore your wealth can hardly exceed $5 million p. as % of total1 numbers2 population3 p. 18% 3. which is probably far too conservative. the words of Nietzsche. And although the prime aim of an executive share incentive scheme is to align the interests of the owners with that of executive management.063% 5 438 0.259% 2.0 want to reach this summit have 33% 0. i.010% 87 000 32. Ibid.500% 1 087 500 0. of No. if you are a highly qualified professional.250% 543 750 0. rather than of blood – are often uncommonly cosmopolitan in nature. But then professionals run a far lower business risk and pursue a far more balanced lifestyle in general.125% 10 875 0. of Total wealth wealth path. Of these Real IRR % Distribution In absolute % of OECD US$ millions HNWIs only 1% becomes p.0 24% 0.e. and in terms of remuneration the CEOs of such companies easily outperform the entrepreneurs that started their own small businesses.0 HNWIs again roughly 1% 11% 25. so on a risk/return basis their remuneration is not out of line.010% 0. but in reality the differences in mentality and risk appetite are still impressive. friends and even Notes: 1 The percentage distribution of HNWIs is estimated (very roughly) by halving the previous value.2: Worldwide number of millionaires and billionaires in 2005 absolute earnings peak is a Annual growth in very steep upward sloping % of No. In 36% 0.2).032% 16.0001% 870 1 024. However. Most wealthy people have not only excelled in making money. Income generated (mainly by senior executives and professionals) account for some 25% of millionaires. The importance of your own enterprise in the accumulation of wealth is clearly reflected in hard statistics.005% 64.500% 43 500 0.823% 8 597 558 1. 27% 0. To grow a business in a meaningful way requires foremost a “millionaire’s mentality”.0 mountain sickness awaits you.003% 128. who typically invested heavily in his own business. but half way up”. Today’s millionaires have obtained their wealth mostly from the sale of a private business (some 40% of the total).250% 21 750 0. running a large company profitably is a rare skill. In short.519% 1. Clearly as you 16% 6.065% 8. In the case of bankruptcy the CEO is propelled back into the job market. At first glance the differences between a CEO and a true entrepreneur may not seem significant.

but strives for the exceptional. e. and invested your savings in a professionally managed fund. it is usually considered somewhat impolite to ask a successful entrepreneur where or how he made his first million. are based on the 2005 price level. Alternatively those born with a silver spoon in their mouths should multiply their inherited assets in real terms7 at least a hundredfold during the last three decades of their careers to qualify for entrepreneurial status.g. He faces business issues different from those confronting ordinary businesspeople. a sharp eye for future developments and a sensitive ear to pick up the sound of bulls’ hooves on a bear market. In such a case you could just as well have remained a senior executive. The US dollar was chosen as a reference currency. Such people usually have exceptional senses6. even if you have your own shop. This implies a real growth rate in equity capital in excess of 15% p. All real values. irrespective of the currency.a. An entrepreneur is not interested in the ordinary. They are also better at anticipating potential problems than management in general.These characteristics are profitably combined to challenge old and trusted habits. 7 3 . 6 Such as a fine nose for business deals. Such issues may well be legally difficult. Indeed. how to invest his wealth and diversify his company’s assets on a global scale. even if his home country imposes exchange controls. Real values are equal to nominal values adjusted for inflation. It is in these grey areas where most of his problems (and also profits) are found. but he has to “manoeuvre around them” in one way or another. Unless you are worth some $4 million at age 60. you should not really consider yourself an entrepreneur.

the median income of senior CEOs of the 350 largest listed companies in the US was around $7 million p. and DC Hambrick.82 seconds can mean millions of dollars in advertising money. which can be a big hit. senior executives of large listed companies earn significantly more than young upcoming entrepreneurs. 2. your end-salary in a typical mediumsized company should be around $500 000 just before retirement (see Table 2. which emphasises the steep growth curve in earnings and talents). Senior CEOs in the US earn anything between $20m and $50m p. in larger companies. has prominence in the company’s press releases.5 million. but completing the same distance in 9. The so-called “entrepreneur executive” is in this context a misnomer and simply a form of title inflation. CEO remuneration rockets to tens of millions of dollars. In this top-salary league the senior CEOs have to compete with demigods such as fashion models. State University of Pennsylvania. and ensures a big gap between his pay and that of the second-highest paid in the company. has a high frequency of use of the first person singular in interviews.1).1). Ultimately CEOs’ pay hinges on corporate earnings growth. today. provided that sensible savings occurred. “It’s All about Me: Narcissistic CEOs and Their Effects on Company Strategy and Performance”. has an extensive entry in “Who’s Who”. fund managers. how much wealth could you typically accumulate during your career? Since the equities markets in the industrial countries had an average earnings yield of some 6% p.a. Note that this is a challenging financial goal for the average CEO.e. and which justifies a relatively high earnings/remuneration ratio for the CEOs of such companies. By that time your financial assets should have grown to roughly $3. as their remuneration packages. p.a. Huge egos usually imply large risk-taking strategies. which compares with annual salaries of some $50 million for investment bankers and in excess of $100m for top hedge-fund managers. By contrast. amounts to some 10% of company earnings (i. and without any personal risk exposure to speak of. Expressed as a percentage of earnings CEO pay is typically between 5% and 7%. If the accumulated net 1 The Economist. The typical income of a CEO of a medium-sized company in the US – i. If your salary grows in real terms at the same rate as the earnings yield of an average listed company. For companies whose profits are measured in billions rather than millions of dollars “the winner takes all” principle usually applies. 2006.g.4. Executives do not. At the end of their careers the accumulated net worth of executives of medium-sized companies varies between 6 and 9 times their last earned gross salary (see Table 2. as it requires dedicated savings and a market-related return on financial investments. would be delegated. Generally the top five executives of large corporations are very well paid by their shareholders. Nonetheless. an earnings/remuneration ratio of some 2% on average for each top executive). 20 January 2007. mainly depending on the type of industry. a. It has to be emphasised however that these levels of remuneration are truly exceptional. but also a big miss.83 seconds amounts to an absolutely worthless effort. The key difference between an executive and an entrepreneur is whether you put a significant slice of your own capital at risk in the firm. tennis players and tenors2. Here compensation is partly media-driven: e. while entrepreneurs do. as even the CEO’s own shareholding in the firm is usually only a fraction of the total outstanding shares. as very few companies measure their earnings in billions of dollars (see Chapter 1. if you succeed in attaining one of the leading positions in this race. See Chatterjee. In all likelihood the CEO then fulfils a number of key executive functions that.CHAPTER 2 EXECUTIVE REMUNERATION The question posed here is a simple one. since 1960. In South Africa senior CEOs’ earnings are lower than in the United States and hardly exceed 1% of earnings.a. in 2005 (or some 2% of earnings)1. If these are measured in billions. 2 4 . a firm with profits in the order of some $5 to $10 million p. which is about the maximum such medium-sized companies can pay. Supplement on executive remuneration: “In the Money”. – ranges between $250 000 and $500 000 p. A.a. A “celebrity” or “narcissistic” CEO can be identified by six criteria: Has a large picture of himself in the company’s Annual Report. It clearly requires active participation in the socalled rat race and. you will soon be classified by your private banker as a “high-net-worth individual” (HNWI). always involves a major effort.1 Current executive remuneration in the US Currently the highest paid executives are found in the United States.e. To experience such a steep rise in salary. running the 100 metres in 9. inclusive of pension provisions.

1 6.0% 5.8% 60. a significant part of your savings is locked up in contractual investments where you have little or no direct influence on investment strategy and therefore potential returns.1 shows the typical pattern of income and expenditure of corporate executives in the US. Firstly. while even your investment in your own residential property is far from flexible.5% Gross annual income at age 60 750 000 650 000 500 000 350 000 250 000 Gross pension after age 61 193 692 172 368 133 102 95 324 67 751 Consumption at age 60 133 647 122 381 94 502 69 586 50 813 Consumption after age 61 133 647 122 381 94 502 69 586 50 813 Total net worth at age 60 4 608 005 4 207 669 3 449 289 2 736 724 2 146 822 Financial assets 3 108 005 2 957 669 2 449 289 1 886 724 1 446 822 Consumption/Gross income ratio 17.6% Financial assets/ 16. your end salary is likely to vary between $250 000 and 750 000 depending on the size of the company. The game of 3 Consumption is defined here as gross income (including all forms of remuneration) less tax. If your starting salary was some $50 000 at age 20.4): 2. i.6 ratio at age 60 Assumptions: Income tax rate is 25% at $50 000 and peaks at 43% at $500 000 Portfolio expenses (TER) and taxes (as per Table 8. as tax and savings are income dependent. 4 5 .2% Savings ratio (% of 62.5% 4.1). Income is of course the prime driving force.0% 31.9% 20. your contributions to the corporate pension fund are clearly at arm’s length. may indeed lurk around the corner if you try to maximise your returns on your housing asset by an overly active buying and selling strategy. This implies in practical terms.5% 5.0% 6.8% 6.5 6.8 8. Likewise. When you start your professional life as a salary earner with no private capital in any form.0% 61.0% 7.1% 4. while your motor cars have to reflect your social status.4 19. Note though that for the very rich.8% 58.2 18. Table 2.0% Rental/After-tax income 76.1: Relationship income.4 Pension income ratio Net worth/Gross income 6. savings.0% disposal income) Residential property 1 500 000 1 250 000 1 000 000 850 000 700 000 Real mortgage rate 6.0 17. Even if your salary rockets to ever higher levels.1 emphasises a few important points.2% 58. school fees have to be coughed up.9 7. excluding his residential property. that there will hardly be any discretionary savings left over until you are well into your forties.0% 6. Table 2.2% 6. Moreover.2 Determinants of wealth accumulation As a salary earner your wealth accumulation is an active interplay between income. Unforeseen events. the average CEO of a medium-sized company would typically strive for financial assets in excess of $3 million at retirement.6% 29. the accumulation of discretionary assets is initially very slow.8 21. To succeed in this financial goal consumption expenditure has to be limited to about 20% of gross income on average 3 . a mortgage has to be repaid. Financial wealth.7% 29.7% 62.0% 6.0% 6.8% 59. savings and investment returns. less interest payments (on the mortgage loan) and less savings (both contractual and discretionary).5% ratio Real investment yield 9.0% 8.0% 6. but these investments are bound to be meagre until your children have left their well-feathered nest. such as divorce.1% 5.0% 3. while the residential property is likely to be worth some 30% of net wealth (see Table 2.e.8% 18. a spouse has to be kept happy. investments and pensions (in 2005 US$ prices) (Excluding net worth in own business) Starting salary 50 000 Real annual income growth 7. as the trustees determine overall investment strategy.worth of a CEO at retirement would be significantly lower than say six times last earned salary.1% 32.8% 63.0% (pre-income tax) Real annuity yield 5. it is not possible to maintain his standard of living during retirement. Accordingly.4% 68.9% 19.5% of total financial assets Annuity yield is net of TER Life expectancy of 40 years at age 60 2. total net worth less residential property.8% 18. The required multiplier is crucially dependent on life expectation and the net real return on annuity income. your participation in the executive share incentive scheme is passive. Discretionary savings will only accumulate meaningfully during the last fifteen years of your professional life. residential property is usually well below 20% of their total assets.0% 4. at least for a salaried person. Indeed. Only your discretionary investments are fully under your own command. should be roughly 20 times desired income at retirement4. Table 2. timing is of the essence.3% Property/Net worth 32.

Try to avoid the predicament of those unfortunate executives who are informed in middle age that “the game is over”. So far as your expenses are concerned. the family dog). as taxes. J. your total worth is also likely to be nearly half that of the king rat. while the demands of the extended family on your purse cannot always be ignored either. if your salary rises on average by some 6 per cent per annum in real terms during your career.5% p. over a period of forty years.a. London: Constable & Robinson. it is too impressive. In fact. Clearly the CEO position has become “Darwinian”. In the United States at present. real increase on average. tax becomes one of the largest expenditure items.a.7% 1 000 35 435 3 000 000 late in your life with serious savings (see Table 2. For instance if your real salary rose by 4% p. if the real net investment yield is 3. And at a 4% p.5% 1 000 255 604 3 000 000 investment yields to make the 40 3.5% 1 000 35 435 3 000 000 target of $3 million at 20 13. It is quite normal that taxes on income and investments alone absorb more than half of your total gross income towards the end of your professional life. However. even a moderate reduction in this real salary increase has a powerful impact on your wealth accumulation. for many others. The power of compounding interest should not be underestimated in this context. he needs to save on average $35 435 per annum over 40 years (see Table 2.a. to maintain a high growth rate in your salary. there is more to life than work only (see Chapter 12). 2005. For instance. 6 . Although a surprising statement to make in executive surroundings. are unavoidable. the global trend over the past few years has been for the tenure in the top job to reduce significantly.wealth accumulation lasts only some forty years or so and during this limited time you should neither be too relaxed nor neglect to live life to the full. your end salary will be only half that of an executive who received a 6% p. Accordingly many companies slow down their executives’ real salary increases during the last five years of so. you have to run faster in the rat race than 99% of your fellow workers.) (PMT in US$) totally impossible strategy for 40 3.5% 1 000 106 013 3 000 000 requires unrealistically high 10 3. as familiarity has a creeping tendency to create contempt.a. Likewise it 20 3. fate may cruelly intervene as major setbacks occur all too frequently. and the investor wants total investments of $3 million at retirement age. But because of the power of compounding. For those who doubt. as by that time your job mobility has decreased significantly. a savings plan doomed to fail). it requires some careful thought. Moreover. tax and consumption expenditures are the largest items. the impact of compounding is impressive.3% 1 000 35 435 3 000 000 retirement age if you start too 10 43.2 again). corporate executives do not really work out of loyalty for their companies. At high marginal tax rates.5% 1 000 35 435 3 000 000 the average CEO). and generally it loves money much more than it loves you. particularly towards the end. Anyhow. but nearly always for prestige and remuneration5. They can easily do so. and particularly towards your friends (which includes of course man’s best friend. see: Bakan. Being such a large expenditure item. Secondly. But for a company it is not so much loyalty that counts as creativity.. Clearly. In contrast to popular belief. Taxation is compulsory (for top earners usually well in excess of 60% of gross income – at least if all direct and indirect taxes are considered). But even if there is the desire to save. Taxes are generally considered unavoidable for salaried people. to obtain this level of investments over a 20-year period requires three times this amount of annual savings (i. with this final message flashing on the heart monitor. like death. In fact the biggest increases in salary and position typically occur after a “regime change”. For most executives a proper savings plan from an early age plays a key role in their wealth strategy. while annual savings have to be seven times higher for the investor who aims for a short Table 2. but for employees this is usually not a very productive field of investigation. Your only hope rests with the skill of your tax advisers as they design your corporate remuneration 5 Loyalty is very important.a.e. not. you probably have to change your employment regularly. while personal savings are a very individual affair. The Corporation: the pathological pursuit of profit and power. if you want to be part of the millionaires’ club. Obviously very few (and most likely only CEOs) can maintain a real growth rate in their salaries equal to the earnings yield of the company they work for. For some incumbents this has happened willingly.2).2: The power of compounded interest 10-year savings sprint towards Investment Net real Annual Present value Future value the end of his working life (a period investment savings (PV in US$) (FV in US$) (in years) yield (% p. real salary increase. the average CEO is in the job for less than four years. often influenced more by character than ability to save.

a. This alone may cost you over $25 000 per annum. and ! taxes and social security payments: usually the richer the country. salaries around $10 million p. Nonetheless. By contrast the self-employed are generally in a better position to limit their tax obligations and particularly so if there is a large gap between the corporate and the top personal income tax rates. while true entrepreneurs who started their own businesses from scratch will most likely “only” qualify as a HNWI before retirement.a. the same basket of essential goods and services costs nearly double as much in Frankfurt as in Johannesburg. All-in-all the opportunity costs of children will be anything between $1 million and $3 million per child before they become truly independent – all depending of course on the degree of pampering you apply. The average pay of a CEO of a middle-sized company in South Africa is currently estimated at some R2 million p. the end is a philosophy translated into action”. The higher a CEO’s pay package. you are lucky if you make a 6% p. As already noted. ! cost of residential property: e. the major expense items in any household are living beings – you and your spouse. The gross real return on your discretionary savings may be higher. your real returns may even fall below 4% p. In this context nothing more needs to be said about the costs of polo horses and spouses. Senior CEOs make their real killings in this field and earn tens of millions dollars per year in the process. and that “you only live once”. These type of earnings are virtually impossible to be matched by an entrepreneur who started his own small business (the exception proves the rule here!). For instance. a similar type of residential apartment costs at least five times more in London than in Johannesburg. only a small percentage of millionaires make their money by superior investment strategies7.a.e. These top CEOs are all ultra-HNWIs. while you may consider it a longterm investment. (or some R75 million). in the long run. while their total financial assets may well exceed R100 million towards the end of their careers. the higher the costs of the social security net. Obviously. Individual exceptions are all around of course. Even Soros’s appetite for risk fell sharply after his biggest gamble. the fear of losing what you have risked – sooner or later becomes too much. the buy-sell spread fees. Generally after tax payments. the pain of investing – i. Equalising factors that are at work here include the following: ! costs of living: e. you could expect a real net return on your pension fund investments of some 4% p. a. Of course the proviso is that the company’s growth is in line with the average performance of the stock market. the CEOs of large listed companies do significantly better than their colleagues in smaller companies. with total assets well in excess of $30 million.e.a. To make serious amounts of money as an employee. Moreover. Clearly if timing becomes so finely tuned. Here salaries are fully harmonised with executive pay in the US. For instance. 2. The earnings package of senior CEOs is typically in excess of R10 million p. the share-incentive scheme is crucial as its financial gearing is so attractive. He summarised his philosophy in respect of money as follows: “Money is a means to an end. the “future unknown”. your return on investments is an important form of income. Not surprisingly. Only the senior CEOs of large listed companies are ultra-HNWIs. George Soros made his famous $1 billion profit in “one day” by betting successfully against the Bank of England (on 16 September 1992).e. The expenses on housing and motor cars are not really that material in comparison. Many executives use the proceeds of their share incentive schemes for consumption. and that Soros routinely risked his entire wealth in a single day.g. but. as your children have to do with an absolute minimum of your “quality time”. dually listed and mainly on the London Stock Exchange).g. Usually shares in such a scheme may be sold after about five years.3 Comparison between international and South Africa executive remuneration Although gross salaries of executives may differ materially between various countries. From the company’s viewpoint the share-incentive scheme is just another expense item. the children and their pets (particularly the polo horses). in South Africa. i. Most CEOs of medium-sized companies in the US are HNWIs and have total assets ranging between $3 and $5 million (see Table 2. In a league apart are the CEOs of South African companies whose shares are listed abroad (i. Note though that his currency exposure on Black Wednesday was $10 billion. 7 . But to repeat: only about 1% of millionaires make it to ultra-HNWIs.1). transaction fees. they have to go to a boarding school to master the elementary rules of good behaviour in polite society6. and management fees). more than only luck is required. The executive management in large corporations earn roughly the same. but unfortunately largely outside your sphere of control. perhaps some 9% p. the more internationally comparable it usually becomes.package. After tax. citing the standard excuses that “life is short”. if the trustees in their various positions do a good job.a. so that national 6 7 Executives routinely neglect the family and their own health.a. real return on a net basis but before taxes. after allowing for all types of portfolio fees (such as safekeeping fees. the amount of net wealth that can be accumulated by these executives differs significantly less.

10). Anyhow to directly compare CEOs’ income levels in the United States with those in South Africa is bound to be rather subjective. as use has to be made of the purchasing power parity (PPP) exchange rate. implying that future trends in executive pay ultimately depend on American shareholders getting tough on CEO pay. 2006. 9 8 . compared with an actual exchange rate of around R7. the differences in wealth between the average CEOs (but not the senior CEOs) in these various cities are probably around a million dollars.1 in Johannesburg (see UBS. a CEO in Johannesburg9. say. Zurich. while housing at the higher income levels is usually below 10% of total assets which in turn benefits discretionary investments. A large house with a big garden. two or three motor cars in the garage. p. Prices and Earnings. Ultimately. and overseas holidays are luxuries every South African CEO considers the norm. Tokyo or Zurich lives more affluently than. The major differences between CEOs in South Africa and their US colleagues are the higher savings propensity in South Africa and the lower expenses on residential property. but would be considered an exorbitantly elaborate lifestyle for a CEO in a similar position in New York. which currently is estimated at around R5 to the dollar8.executive pay disparities are slowly disappearing at the very top. servants. Because of lower local living costs. a swimming pool. many retiring CEOs have total assets in excess of 10 times last earned salary in South Africa. 8 The domestic purchasing power on an index basis is 100 in New York and 61. Therefore the absolute income differences between executives in different countries do not imply that a CEO in New York. London.50 to the dollar. All top bosses nowadays look at the “going rate” in the USA.

In the long run there will then be a trend towards a “normal” profit level in all sectors of the economy. A generally used yardstick for measuring a firm’s profitability is the return on equity after interest and tax (or net ROE). This net ROE in turn equals the internal rate of return (IRR) on own (or equity) capital. Moreover. However. tames even tigers. ! debt/equity ratio (gearing).5 depending inter alia on stock market size and liquidity. The key variables are gross ROE (i.e. exploiting these market failures is no easy task and requires intelligence. the higher the business risk. and ! other income received.g.5 and 2. For instance.e. This implies that for these firms the maximum gearing should be about one. So. which in turn is only possible if there are some inherent market shortcomings. This does not mean that all sectors will have the same level of profitability. this often means that the entrepreneur has to rely on his “edge” in the market. the higher the profit level as well as the equity capital of a firm to remain “normal”. In practice. “excess” corporate profits should be a temporary phenomenon. Banks’ equity capital usually amounts to about 10% of total assets. For larger companies the gearing ratio usually fluctuates between 1. as “normal” profits are directly related to the degree of business risk in the sectors. as these variables are determined by the authorities2. hard work and ambition – clearly very few qualify! 3. the tax rate and the rate of interest are outside a firm’s control. ! retention rate. If the market is indeed efficient. As will be highlighted in this chapter a net asset target in excess of $10 million requires an exceptionally high profitability level for your company. Entrepreneurship is then reflected in for instance extensive skills in networking or the ability to benefit from regulatory capture1 and/or monopolistic positioning in markets. and therefore the higher the nominal rate of interest. There are a few exceptions though. i. ! tax rate. the motor car industry).g. 1 A phenomenon in which a government regulatory agency becomes dominated by the interests of the existing incumbents in the industry that it oversees. what should the profitability level of your company be? As the average wealth of a CEO of a medium-sized company peaks at some $4 million. ! credit costs (rate of interest). In the case of smaller companies creditors are generally unwilling to prop up the working capital of such companies to a greater extent than shareholders are. as the saying goes. your target as an entrepreneur should probably be at least double that amount. Usually the lower fiscal discipline. The make-up of the IRR ultimately depends on the following variables: ! gross return on equity employed (before interest and tax). for every dollar they borrow.1 Real return on equity investments Entrepreneurs are generally at the mercy of “the market” which. The higher this risk. before interest and tax) and gearing. The greater the fluctuations in corporate profits. is more risky than in businesses where profit margins remain relatively stable (e. ROE and gearing are related concepts. those industrial sectors that are particularly exposed to swings in the business cycle need higher profit margins during good years to compensate for smaller or no margins during bad years (e. In these types of businesses financial gearing. the use of debt to increase a company’s working capital. food retailers). If you started an enterprise of your own and you want to earn at least double that of the average CEO of a medium-sized company worldwide.CHAPTER 3 ENTREPRENEURIAL REMUNERATION The question posed here is only slightly different from that of the previous chapter. they usually like to see at least one dollar of equity capital. and it may concentrate fully on its main business (“other income” received as a percentage of the pre-tax profit is then zero). as a company does not have to pay dividends at all (its retention rate is then 100%). 2 9 . the higher the tax rate and the higher the inflation rate.

Such firms will be very dependent on a relatively high gross ROE to achieve the desired real IRR.5% 5 roughly what outside investors 6.5% 9. 33% and that the company Inflation Real credit Desired Assumed Required pays no dividends. provided the return on equity (ROE) is relatively stable over the business cycle and inflation relatively low. In practice the difference is immaterial though.2).5% 9.0% 9.0% 1.0% 8 fundamental fact that the real 6. few new companies celebrate more than a few birthdays.00 54. companies operating in high-inflation countries will be subjected to major fluctuations in the real rate of interest and accordingly their degree of gearing will be severely limited. is a bit of a “stretched target”). By comparison. Table 3. If your company operates in a low-profit environment.0% 9.which implies a gearing ratio of 9 if depositors’ money is seen as funding3.0% 1 shows a number of ROE and 3. Therefore. not surprisingly.e. Indeed. with central banks keeping Argus eyes on their operations.50 17. Accordingly unless a firm can recoup the inflation expense from its clients..00 43.00 27. For many Note: Corporate tax rate is one third of gross profits newly established firms operating in a highly inflationary environment the implied profit targets may become so daunting. If it is assumed that the Table 3. The difference between the gross ROE and net IRR is in essence: (i) the corporate tax rate.00 32.g.1: Relationship between corporate returns.0% 2 gearing scenarios that will all 6. as IRR and total return are closely related concepts.a.6% 9 profit level has to rise the 1. In the long run the total real return on equities was typically between 6% and 9% in the US and the UK (see Table 3. in true entrepreneurial spirit. food retailers are often in a position to increase their debt/equity ratio well in excess of unity. it is burdened with a major expense that may vitally undermine its competitiveness.a.0% 3 produce a real internal rate of 1.0% 7 these scenarios emphasise the 3. All 1. gearing and corporate tax rate on profits is inflation based on a desired real IRR of 9% p.00 22.a.0% 9.0% 4.5% 9. even if on-balance-sheet gearing is not allowed or difficult to achieve.50 20.0% 0. by making use of suppliers’ credit on an extensive scale.0% 1. Ultimately.a.a. dividend payments plus share price appreciation.0% 4 return of 9% p.5% 9.) (% p.4% 12 financial gearing6. This is achieved by paying producers only when their goods are sold.0% 1. both in real terms).00 18.5% 9.5% 9. But.0% 4.a. Using historical benchmarks and ignoring the short-term impact of business cycles. the higher the gross ROE needs to be in relation to the real IRR. and (iii) the inflation rate.) ratio ROE (%) line of business. These off-balance-sheet instruments are not only ideal to achieve gearing. All derivative exposures can be transformed into on-balance-sheet equivalents by means of financial engineering.a. 4 5 6 10 .0% 9. Of course. These derivative exposures are of course better brought on-balance-sheet for your own analysis. who typically evaluate the profitability of their firms in terms of real growth in own capital – i.50 28. e.0% 2. a firm’s real IRR – investors usually value their equity holdings in terms of total real return (i. In contrast to entrepreneurs.00 33. the entrepreneur should aim at achieving a total real return on his equity investment of at least 9% p. inflation is a type of indirect tax on society by central government. (ii) the real rate of interest.0% 3.0% 1.5% 0.0% 0.00 23. it can succeed in doing so by increasing its gearing.5% 0.0% 1.7% 11 unless the firm decreases its 6.0% 2.5% 9. (which. (which is 3.0% 1. and particularly so if the competition operates in a lower inflationary environment abroad.0% 3. there is always the possibility of using derivative instruments.1 1. this 9% 3 Because of this large gearing ratio banks belong to the most regulated of industries. entrepreneurs have to produce a minimum IRR at least equal to that of the market average to keep their shareholders happy.0% 2.0% 3.0% 4.00 20. while the corresponding figure for South Africa was slightly higher.5% 9. but may also obscure the true gearing picture of a company to competitors4 – in fact they are useful instruments in accounting camouflage.5% 0. Likewise.) (% p. Anyhow this high gearing ratio is only commercially possible because banks are unique among corporates in that their interest earnings exceed interest payments. but has to produce a minimum real IRR of 9% p.0% 1. The higher these three rates. that gearing can only be very moderately used. while rate costs real IRR debt/equity nominal gross Scenario concentrating fully on its main (% p.e.8% 6 expect of a company)5.0% 0.5% 0.0% 10 higher the inflation rate goes. 3.0% 4.

g. Firstly. it will become increasingly difficult to 0% 10% 20% 30% 40% 50% 60% Real ROE maintain the initial rapid growth rates in equity capital. the concentration of economic powers differs materially between various industries. but only during the end game do the grandmasters prove their true worth. Consistently outperforming the industry average Graph 3. for tax purposes. Revolutionary periods of this kind are. you have to learn the ropes in your selected field of business. 15% is difficult in the long run. real return is an average for all listed equities in the long run. and the demise of communism in Russia (creating the plutocrats there). In fact. over the long term is a challenge that can be met by only a few very talented entrepreneurs. often requiring billions of dollars for a new development. but today environmental laws dictate that the “polluter pays”. but as the firm 0% matures. Secondly.p. a few lucky deals may well result in 5% a doubling of the capital base. Greek oil tankers were on the spot at the right time when the Arabs decided to switch to non-American transport ships. ! Entry barriers: e. As with chess. at $260 million in 1977 (or some $825 million in today’s prices). but often not easily exploitable. to maintain an IRR in excess of 9% p. 20% Accordingly. the development of the New World. the IT revolution towards the end of the 20th century (creating the computer and internet billionaires). and that billionaires are able to make their commercial killings9. Nowadays mining is a highly capital-intensive industry. the opening game is relatively easy. the discovery of diamonds and gold in South Africa (creating the rand lords). as your choice of activity will be severely limited by various factors such as: ! Creative skills: e.g. while others depend on high operating profit margins (e. 11 . ! Running costs: e. Inflation is extremely difficult. and is usually possible only if it goes hand-in-hand with a technological breakthrough. In fact. Usually not only exceptional entrepreneurial skills are required but. His estate was grossly undervalued. This would require entrepreneurial flair of the first order. different technology or different culture. often a certain edge over the market is also necessary7. the banking sector). Rhodes could obtain control of his first diamond mine at very little cost. the more successful a specific company is. It is important to keep in mind that every sector has its own peculiar financial characteristics.a. you have to complete your basic training – either in the street and/or at school. Moreover. to 7 8 9 True competition always comes from the outside: different country.g. Some industries are highly geared (e.g. the quicker the industry’s inefficiencies will be eliminated. 25% Required ROE for IRR of 9% the higher you climb the profit performance ladder. and particularly so between various industries. for instance. Every entrepreneur wants to be and ROE (Assuming a gearing ratio of 1) Inflation rate (%) in the best growth sectors and wants to operate in the 30% country with the best economic prospects. as noted above. For the entrepreneur a lifetime is too short to master all the peculiarities of each sector.2 Wealth accumulated by entrepreneurs It often takes some time before you can start your own business. In the middle game the masters show their class. ! Time and place: e.1: Relationship between IRR. Required ROE for IRR 12% the tougher the global competition becomes. In the shorter term equity prices fluctuate sharply. To maintain a real IRR in excess of 20% p. implying additional running costs and capital resources. you cannot really switch from one industry to another at the drop of a hat to exploit perceived profit opportunities. However.a. If the company’s capital base is still relatively small.g. 3. For instance. And it is exactly in such a revolutionary period of economic change that the gap between rich and poor increases significantly.g. particularly as a company 10% increases in size. the 19th century industrial revolution (creating the land lords in the UK). Onassis made his fortune because international oil politics changed abruptly in the early 1950s. From an entrepreneurial point of view these differences in sectoral profitability may be tempting. Rockefeller could still dump surplus oil and dirt into rivers. It is unlikely that he would have been similarly successful in other spheres of economic activity. Usually the entrepreneur has to accept these sectoral characteristics – unless of course he is able to revolutionise an industry as a whole. and the innovation of the internal combustion engine and corresponding demand for oil early in 20th century (creating the robber barons in the US). and the more difficult it will be to compete with other suppliers. Picasso was a highly successful entrepreneur8 with a very specific skill.a. the mining and oil sectors).

make it as a new entrant in any industry you will have to perform above average. Thirdly, you will need working capital. Suppose you are ready to take the plunge at age 30. To start up your own business requires sufficient working capital to avoid financial anaemia10. Suppose you need $1 million to fund your own specific company. If you are lucky, perhaps a quarter of that amount can be funded with bank credit. So the firm’s equity capital has to be at least some $750 000. Should your firm perform more or less in line with the average listed firm, your initial equity of $750 000 may grow at 9% p.a. to some $10 million at constant prices over a 30-year period. The “joy of compounding” is obviously crucial here. However, if you had started your working life with Table 3.2: Total real returns on cash, bonds and equities (% p.a.) no capital of your own, it is Period 1926-2006 1946-2006 1961-2006 1971-2006 1981-2006 1991-2006 unlikely that you would be Money market funds able to lay your hands on SA 0,8% 1,1% 2,1% 2,2% 4,2% 5,7% more than $100 000 at age UK 0,8% 0,9% 1,4% 1,5% 2,3% 1,3% 3011, in which case you have to USA 1,0% 1,0% 1,6% 1,8% 3,7% 2,9% engage the so-called “three Government bonds Fs” – family, friends and fools. SA 1,7% 1,3% 2,4% 3,1% 6,4% 11,0% For financial needs up to $3 UK 2,0% 1,4% 2,1% 2,7% 6,0% 3,8% million you have to rely on a USA 2,5% 1,2% 3,4% 4,0% 7,2% 5,6% business angel12, as a venture Equities capital firm13 will consider SA 8,2% 7,0% 9,4% 10,0% 9,3% 10,4% deals only if it can invest at UK 8,5% 8,2% 5,7% 5,9% 9,8% 8,6% USA 7,0% 6,9% 6,2% 5,6% 9,3% 7,1% least $6 million. If you succeed Inflation in obtaining the required SA 5,9% 7,5% 8,8% 10,4% 9,8% 6,7% external funding for the UK 3,0% 3,8% 4,3% 4,7% 3,1% 2,6% $750 000 and if your company USA 4,3% 5,6% 6,2% 6,6% 3,8% 2,6% performs in line with the Sources: average listed firm, your initial Barclays Capital, Equity-Gilt Study, 2007 SA Reserve Bank capital investment of $100 000 may then generate wealth of some $1,5 million in real terms over a 30-year period. Although attractive, this amount of wealth could also have been accumulated had you invested your savings in an equity fund and operated as an executive of a large public company. However, should your business partners elect you as the CEO of your company, you will earn a salary in addition. Your starting salary in this small firm may be about $100 000 p.a. at age 30, but this may grow to some $500 000 p.a. by age 50 – at least if your company is successful. As a CEO/owner your propensity to spend will be roughly in line with that of your colleagues in other companies. Even if you want to save more, for instance by living in a stoic manner, this may prove difficult in practice. The prestige of an entrepreneur requires that his appearance should convey prosperity – because since time immemorial, money attracts money. Because your firm is still relatively small, your gross income will be only slightly more than that of an executive of an average-sized company. On balance, your total real net wealth could grow from some $100 000 at age 30 to about $6,5 million at age 60 (see Table 3.3). Of this $6,5 million, about $3,5 million will be derived from savings on your salary income, while about $3 million will be derived from the investment made in your company (see Table 3.3 again). Of course, if your company does really well, your net wealth will be higher. For instance, suppose that you and your partners succeed in pushing the firm’s real IRR to some 15% p.a. Your initial capital investment of $100 000 will then grow, in real terms, to some $6,6 million over a 30-year period (assuming a 100% retention

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In this context also remember that cash is the life blood of the enterprise or as the business saying goes: “turnover is vanity, profit is sanity, cash flow is reality”. The traditional methods include: owner’s credit cards; a second mortgage; or a loan from a friendly, rich uncle. Business angels work roughly on the following rule of the thumb: “If it’s just an idea, it’s worth $10 000; if it has a credible management team in place, it might be worth $100 000; but if it has sold something for real money to real customers, it could be worth $500 000”. See The Economist, “Giving Ideas Wings”, 16 September 2006, p.83. The managers of venture-capital funds take an almost universal fee of “two and 20”: i.e. a 2% annual management fee and up to 20% of any profits made by their funds. Business angel investors set their own terms. Ibid. p.82.

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rate). But, the other extreme is also possible: had you invested in the South African clothing industry, you might have lost your shirt. Obviously, considering the financial risks at stake, an entrepreneur wants to do significantly better than an employed CEO. As the total wealth of CEOs in the US now typically grows to some $4 million at age 60, an entrepreneur probably aims for at least $10 million in net wealth after a 30-year working life, which in turn implies an average real return on invested capital of some 15% p.a. (see Table 3.3). Therefore to go it alone requires more than just attaining the minimum level of performance that your customers and investors expect. In fact, the above analysis implies that you, as a new entrepreneur, have to perform above average. Rather than merely staggering across the industry threshold, you should strive to be at the leading edge in your industry, which is the level of performance attained by market leaders only. Unless Table 3.3: Real net wealth accumulated by entrepreneurs (in US$ 2005 prices over a 30-year period) you can do this, your savings might as well go into a Likely Average Total real Total real success managed investment portfolio, real wealth wealth Annual Performance of Total real rate growth in derived derived growth in as an “industry threshold” entrepreneur wealth (as % of equity from from total real relative to listed accumulated the total performance is bound to give capital equity1 salary as wealth1 companies ($ million) population (IRR) investment CEO (% p.a.) “normal” returns (say, some in the (% p.a.) ($ million) ($ million) West) 7% p.a. in real terms). If you Well below want more, you will have to 3,0% 0,2 1,0 1,2 8,8% 1,000% average be in the forefront of the battle 6,0% 0,6 1,4 1,9 10,4% 0,750% Below average for intellectual leadership, Average 9,0% 1,3 2,4 3,7 12,8% 0,500% which will typically redefine Above average 12,0% 3,0 3,5 6,5 14,9% 0,250% the rules of the game for your 15,0% 6,6 4,5 11,1 17,0% 0,050% Good chosen industry. Ultimately, 18,0% 14,3 6,0 20,3 19,4% 0,025% Excellent your ability to learn faster 21,0% 30,4 9,0 39,4 22,0% 0,010% Outstanding than your competition may be 1 Assuming initial equity investment of $100 000 at age 30 the only sustainable competitive advantage. In conclusion, if you regard yourself as the king rat, you should rather enter the corporate rat race and aim to become a CEO. Depending on how well you run, your net wealth – as an employee – may then grow by some 5% to 9% p.a. in real terms on average. However, if you are a “dreamer that does”, it makes sense to start on your own and in time qualify as a true entrepreneur, but then only if your net wealth is going to increase at least a hundredfold in real terms during your working life. Accordingly, an entrepreneur is neither a small businessman nor the CEO of a large corporation per se, but somebody who continuously seeks new business opportunities and maintains an average real growth rate of his net wealth of at least 15% p.a. This growth rate may seem high for an outsider, but should be considered reasonable compensation for the risks involved. It is the reward the entrepreneur deserves for being alert, realising opportunities that others have missed, and propelling his staff forward with an “inspired shared vision”. Indeed, for anything less it would hardly be worth the risk.

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CHAPTER 4

THE OPPORTUNITY COSTS OF WEALTH

Few things in life are really free, as even the most enjoyable activity has its opportunity costs. Likewise, the pursuit of wealth may be enjoyable for some, but it is never without its implicit costs. This chapter will highlight some of these costs. 4.1 The emotional costs of running a business Running a business is like running on a treadmill. On the one hand there are all the desires to make the business a roaring success, but on the other hand there are all the unavoidable disappointments and frustrations. Once on this treadmill, it is difficult to get off again – at least in one piece. Moreover, life as an entrepreneur can be a lonely affair. Before too long your marriage may be on the rocks, your colleagues may secretly be looking for new jobs, and your bank manager may contemplate repossessing your house. In short, on this treadmill you have to enjoy your own company very much indeed. A new business needs some time to bed down. Losses during the initial phase are not always avoidable (i.e. expected losses – but painful nonetheless), but you have to be careful that the enterprise does not continue along a negative growth path for too long (unexpected losses – which are even more painful). To avoid bankruptcy the standard mistakes have to be avoided. These mostly involve the following: ! Poor management. More than half of all business failures are due to management not being up to its tasks. Either planning is insufficient or execution is wanting because of a lack of managerial skills. The balancing of conflicting demands can be particularly difficult: e.g. what strategies are in place to balance short- and long-term results, or what is the balance between the corporate constituencies of customers, staff, suppliers and shareholders? ! Staffing problems. To attract the right person for the job is one of the biggest challenges for any entrepreneur. And even where you succeed for your own company, there still may be trade union trouble in the industry at large. Then there are the familiar problems of how to motivate your staff to do things they do not like doing. The skill of communication, a knack for developing talent and the taking of unpleasant decisions all require character traits you may lack. ! Poor accounting and record keeping. Poor accounting methods go hand in hand with poor planning, as you cannot plan properly without reliable figures. Moreover, all the outside participants in your business, i.e. mainly the taxman, other shareholders, and creditors require proper financial records to ensure that they are not being short-changed. Once these outsiders lose their patience, your chances of success will have fallen so dramatically that failure is virtually guaranteed. ! Adverse economic conditions. A sudden deterioration in the economic climate can be catastrophic if the enterprise is too heavily geared. To spot changing economic conditions ahead of time and implement the required changes in the overall corporate strategy are massive and ongoing tasks for every businessperson. When business conditions suddenly and unexpectedly deteriorate, adaptability becomes crucial. ! Sales and marketing problems. Without sales there will be no business. And there will be no sales unless your marketing strategy is up to scratch. Probably you have to operate as the company’s prime salesperson as well. Painfully, your sound ethical compass, so crucial to the business, may suddenly work less perfectly. ! Charm. Private business is very different from business in the public sector, and without some charm and selfconfidence you may never succeed in your networking goals. Although you may have started your own business with the idea that you have now become your own boss, you will quickly notice that every client is in effect your king. Soon you will also become aware that, as the owner of the business, you are the Corporate Trouble Shooter Number One. No serious problem is ever too dirty or too time consuming. In the end you will feel that the running of any business is a drudgery, which may drain you mentally in some unexpected ways1. Not surprisingly, the classics always considered business the ideal task for talented slaves.
1

As McCaw, a US communication’s billionaire, rightly noted: “In business you have to be driven by competitiveness, which is usually driven by adversity”, The Economist, London, 15 July 2006, p.60.

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But. But even if you succeed in business. Within three years half of these would have ceased to exist. profits cannot be made and personal honour maintained in all fields of business. as the fundamental requirements of command also stipulate that you remain on top of the massive information flow that finds its way across your desk.So what are the survival chances for your new firm in the end? Some evidence suggests a 1% survival chance after ten years on average.2 The costs of business success in terms of personal honour It is a well established fact in business that the bad do not always do badly. businesspeople have first to deceive themselves and then only say what they believe. you may well make pots of money. On the stock exchange. the costs of your victories are forever present. He takes what he cannot leave4. in the US nine out of ten entrepreneurs fail in the first five years. conditions are somewhat better. In this type of business the counterparty may even consider cheating and corruption to be refined business techniques. Source: Enterprise Support SA and Moneyweb. considered too uncivilised and too crude. All this is true. The fairest flowers often grow at the edge of the (moral) abyss. Such motivated fantasy may well be viewed by others as a reflection of a weak reality principle. today’s multinational oil companies have to conclude deals with sovereign states in which the difference between public and private property is ill-defined (oil and ethics mix just as nicely as oil and water). Most successful CEOs pass the fox test. Marketing. as you cannot truly emphasise. he may be inclined to reflect on the specific way his profits were made over the years. the delegation of tasks to executive management is possible only up to a point. brutal and short. 3 4 15 . Particularly when an entrepreneur becomes older.” Usually entrepreneurs strive for the highest level of personal integrity possible. to a lesser or larger extent. time is always in short supply and particularly so if you are running a multinational business. For instance. while the good do not always do well. 15 July 2006. leadership. A. such as: “The man who has most. but has the advantage that it can be announced to the world at large in all sincerity. respectively riches and sins. In a ten year period 99% of firms newly established in year one will be gone2. deceit to succeed. Accordingly. but whether you succeed or fail. Most top dogs in society have the ability to deceive themselves thoroughly. Not surprisingly in the Middle Ages the practice developed among entrepreneurs to leave part of their wealth to wronged business partners. 1997. and management in general all contain. If you are one of the handful who succeed. though: the average listed company has a survival age of roughly 12 years. obviously. Geus. Longview Publishers. but only a few the hedgehog one as well. But as a hedgehog. such as the knowledge required to run the day-to-day operations. of the 10% that succeed 90% fail within the second five years. and nearly always some profits have been made in a way regretted later in life. Moreover. The Living Company. Such deals easily become an ethical mess. For many CEOs the job ultimately becomes too large to handle: corporate life becomes nasty. For instance. Those with religious feelings may even reflect on teachings of the mediaeval church. To avoid failure could become a permanent mental strain on young entrepreneurs. For most entrepreneurs the overlap between personal honour and corporate responsibility is no easy matter. even in business. 2 In South Africa some 10 000 small businesses register each month. I. leaves most behind. In the competitive jungle a truth teller is often at a disadvantage compared with a manipulator and liar. for instance. Archilochus’ fable remains true: the CEO as a fox has to know many things. for some 45 years3. This money was then distributed anonymously by the liquidator of the will. you are likely to age like a dog in the process and obviously die far earlier than your less stressed friends. while large multinationals survive. “telling the truth makes one very unpopular at the club”. What constitutes a fair trade or what is a fair price anyhow? These old questions have never been properly answered. de. and his passage is the most painful. growing in intensity the greater your commercial successes become. As emphasised by Oscar Wilde. 4.e. the shortcomings of your firm’s products. on average. But then again. On a personal level you could now suddenly be subjected to extreme scrutiny and even humiliation by the press. he also needs to know the one big thing which could empower him with the insight and wisdom required to make a few major strategic decisions. and money loses some of its lustre. As the global economy is in a permanent flux. telling outright lies is. He leaves what he cannot take. To preserve your privacy may turn out to be an ongoing battle.

If all constraints on common decency are removed. To stand on the commanding heights of commercial power is no virtue as such. Corruption in business is particularly a problem for developing countries.g. governments may be major business partners in their own right – either as providers of production inputs or buyers of a firm’s outputs. For staff the ethical issues are rather straightforward: to be trustworthy and honest servants of the company at all times. and therefore the minimum standard of common decency prevailing in society. Like the corps diplomatique. and ultimately the entrepreneur has to weigh the moral issues at stake against his own personal conscience. gentleness. largeness of design and purpose. In the camp of moral purity there are virtues such as absolute integrity.Business now has to distinguish between good and bad corruption and illegal and legal commissions. power on any considerable scale is incompatible with moral innocence and purity. extensive use was made of Stuart Hampshire. Companies cannot avoid involvement for a number of reasons. and a disposition to gratitude. No company can work effectively and efficiently if staff relationships. The issue at stake is no longer integrity as such. To what extent this law can operate fully in a technologically advanced society remains a mystery though. Over the years every sort of atrocity imaginable has been perpetrated by governments. As Lord Acton remarked: “Power tends to corrupt. De Beers has to deal with countries such as Angola.g. generosity. there are no hard and fast rules. corporate directors can hardly afford to lose sight of the “commercial interests” of a company. intelligence. which will have to deal even with the devil himself if this is considered in the “national interest”. But corruption is only one facet of the ethical problems facing business. This is a dualism that cannot easily be untangled. both internally and externally. as most firms have no choice in the matter whatsoever. human life becomes nasty and brutish – less than human. 1989. For instance. you move quickly towards a system where only the law of the jungle6 applies. Accordingly. This is the world of Realpolitik. The degree of personal integrity expected from corporate staff is always quite different from that expected from entrepreneurs. courage in the face of risk. the jurisdiction in which companies operate. London: Penguin Books. a company can routinely take such matters to the courts of law. Obviously all these “fines and fees” are unavoidable in doing business and are therefore tax-deductible. 16 . and may be forced to rely on the loyalty of traitors. has to be consulted for sound business advice. Indeed both the virtue of innocence and the virtue of experience can inspire strong emotions and great admiration5. Firstly. facilitation fees. But for those who elect to ride in triumph through the corridors of commercial power. better known to some as Old Nick. a disposition towards sympathy. on these ethical issues Niccolò Machiavelli. to deal only with clients of your own choice should be considered a luxury in business. Under no circumstances should there be any conflict of interest between work and personal affairs. Hampshire sets three mutually interdependent moral principles: ! Moral principle 1: Ensure a minimum standard of basic common decency Without the virtues of common decency. a fastidious sense of humour. an auto-da-fé). even if this would be against a company’s likings. However. The ultimate choice for these multinationals is then either to withdraw fully from such corrupt countries (which may amount to commercial suicide) or lower their principles of integrity. expediting fees. inter alia.g. but the Machiavellian conflict between justice and expediency.g. Like it or not. for at least some. Equally serious is the commercial exploitation of the innocent and outsiders – e. If staff engage in criminal activities such as hands in the till. are not based on high standards of integrity and fair dealing. Congo and Russia to ensure an “orderly” diamond market. consultancy fees. and absolute power corrupts absolutely. thirdly. secondly. The virtues of experience are tenacity and resolution. those who are not party to a “social contract”. exceptional energy. and habits of leadership. governments may use private corporations as pawns in their power plays. Here. governments are “sleeping” business partners. and lobbyist fees. genocide) or fulfilling “the wishes of God” (requiring e. is set by governments. Although many people maintain that there is nothing morally wrong with the laws of nature as 5 6 In drafting this section. Their excuse was usually “the national interest” (justifying e. Most business leaders are accustomed – out of necessity – to operate along an adjustable spectrum of personal business principles. and last but not least. using corporate taxes to finance part of their (unethical) expenditures. Great men are almost always bad men”. Innocence and experience. Shareholders of De Beers do not ask their directors for a moral evaluation of their partners before trading: wherever diamonds are found en masse – irrespective of the political regime and its moral standards – the commercial interests of De Beers demand involvement. Corruption is often reflected in the accounts with ambiguous entries: e. not everybody wants to carry the moral weight of power as.

will be unacceptable because of the risk to humanity (or a company) as a whole if a serious miscalculation occurs. On these moral grounds. today’s Popes may have some doubts about the moral rulings of their predecessors (on issues such as the Inquisition or slave trade). For instance. Obviously such a type of civil society (or company) may constitute an unstable organisation. is incorrect at least for those societies in which procedural justice is firmly 17 . even if such actions may induce a sense of horror or disgust. Clearly the interests of society (or shareholders) have to be reasonable and should not conflict with Moral Principle 1. It is through these institutions that procedural justice can be enforced. as implicit in procedural justice. an extreme and irresponsible reliance on Machiavellian principles. This again amounts to the reality of the Machiavellian thesis that those in power should be clear-headed. theft and murder alone. an entrepreneur easily becomes involved in situations that seem to exclude the possibility of a decent outcome. owing to the very nature of power. kindness. and that some basic standard of common decency. and therefore some basic form of “law and order”. as in politics. However. and the procedure is not terminated before all the arguments are in. injustice to a minority may be justifiable if the risk to national (or company) security is very large. embarrassing alliances. Secondly. But. but they have to make the best of a bad situation. Even the mafia accepts that no one has ever become really rich through betrayal. as those subjected to its authoritarian rules will sooner or later rebel against the injustices inflicted upon them. over-invoicing. purity. and not divided in their own minds about their obligations. The lower the civil standards in society. For instance. Machiavelli’s view that power is foremost an instrument of conquest. Parliament. in the political arena the desires of the majority should not be so extreme as to endanger the minimum standard of common decency in society. fictitious transactions. Executives certainly should not view a company’s problems as presenting an occasion for vindicating some ideal of personal integrity. his arguments should not be taken too far. a multinational corporation is entitled to transfer its capital resources from a corrupt regime (which always applies exchange controls. unwanted compromises. The virtues that bring great political achievement and civic glory (which is one possible route to happiness – also for entrepreneurs) take their toll through the loss of integrity and the loss of virtue. procedural justice becomes impossible in such an environment. gentleness. this may prove difficult in practice. the more justifiable it becomes for a minority to use immoral means to limit the powers of the majority. Accordingly. Machiavelli even saw this development as unavoidable. it will always be expected of executives to understand a company’s predicaments in the light of its history. and the injury done to the minority is not correspondingly great. He emphasised that “innocent virtues” such as friendship. as bad morals drives out good money) by way of “transfer pricing” – i. integrity and personal honour take their toll through political (and commercial) disempowerment. a moral decision is a just and fair one only if it satisfies the minimum conditions of procedural justice. asset stripping or plain currency (gold) smuggling. this process of weighing up conflicting moral claims and competing concepts of the good. For those in power the weighing up of the abovementioned three moral principles is an ongoing process. the state (or company) should preferably use power as an instrument of persuasion rather than an instrument of conquest.such. ingratitude. has to be maintained. at some time. First of all. is always to some extent subjective. ! Moral principle 3: Be prepared at all times to make a choice between the lesser of two or more evils In business. With experience comes the ability to choose between the lesser of two or more evils. the courts of law and civil society should play an important role in this respect. Time and place often dictate a trade-off between these three moral principles. Most state organisations and large commercial firms have been built on a history that included. and should therefore be used for violent conquests wherever opportunities occur. testing and cultivating the skills of bargaining and debate. dividend stripping. and in which all lines of action seem dishonourable or blameworthy. in terms of which the pros and cons are both heard and evaluated. For instance. Shareholders expect creative accounting from their directors under these circumstances.e. as there is no completeness or perfection in morals. whether in the state or a company. To enhance power and profits there is always the temptation to lower the standard of common decency. Reason is replaced by brute force and accordingly the state (or a company) can slide inexorably towards a totalitarian system under which sheer ruthlessness becomes both a natural and an acceptable practice. ! Moral principle 2: Protect the reasonable interests of society (or a company) Those who accept the trappings of power have to ensure that they promote the interests of society (or shareholders) above their own personal interests. Here the weight of history usually overwhelms those currently in power. distressing manoeuvres and secret betrayals. In essence. Although Machiavelli’s basic line of argument is difficult to fault.

these three objectives are interrelated. A history of Rome. with wealth comes responsibility. the change from the classical to the modern view has been gradual. Therefore strong legs are required to carry riches. You were either nobility. power and wealth were directly linked to rank. as a rich person has power and can afford a life of leisure. Ultimately moderation is vital: without any wealth individual freedom and happiness may not be within reach. In a nutshell. works of art and yachts. pp. and is probably one of the greatest sources of evil.1875 Troy ounce) but. Obviously. but was never considered his property. “a sense of being in control of their lives”. In the end this issue is rather personal as. in his will Caesar left 100 million sesterces (about $300 million in today’s prices8) and Czar Nicolas II slightly less than one million roubles (or some $3 million 7 According to expert opinion. to be an entrepreneur requires some hours of philosophical study as well. wealth and leisure. 8 18 . 412–413. The Olympians were of course known for their “inextinguishable laughter” and their capacity for “living easily” – an obvious requirement for those living forever. Strictly speaking. private fortune included those assets that the sovereign could bequeath at will on whomsoever he chooses. wealth is paid for in terms of time: a painful trade-off – at least for the greedy – as the desires for more power. (ii) crown property (i. Lastly. Indeed. In fact. a distinction should be made between: (i) public property (which at times was referred to as belonging to Caesar). more wealth and more leisure are impossible to achieve simultaneously. as a first hesitant step. after which the “man of leisure” was free to engage himself in. Often striving for one is detrimental to attaining the others. Those with weak knees would be happier if they could pass part of the load to those who are more capable of carrying it. It requires wisdom to ensure happiness if the striving is for both wealth and power. ideally. However. The private fortune of imperators was usually modest. But if “too much is still too little” problems emerge.e. for instance. and as such spills over into politics. politics and culture. Happiness is foremost a state of the mind that may be influenced by material possessions. optimism. inter alia. because the purchasing power of gold was then more than triple of what it is today. Accordingly the block of stone taken from the public quarries and marked C(aesaris) n(ostri) belonged as much to Caesar as the British warships bearing the letters H(is/er) M(ajesty’s) S(hip) belong to the King/Queen of England. And even today many subscribe to the classical view that happiness ultimately depends on wisdom. crown jewels. and (iii) private fortune. Power and wealth For millennia. Public property was paid for by the Treasury. an unrestrained drive towards domination violates basic justice.established. Traditionally the nobility aimed for three objectives in life: power. by ignoring minimum standards of basic common decency. 1962. wealth can be better enjoyed if you have less of it. Crown property was considered the property of the ruling sovereign. or not. as Machiavelli implied. M. at times. since the Industrial Revolution financial independence has become more or less a by-product of entrepreneurial activity and is no longer pursued in its own right as a critical condition for freedom and happiness. For more than two millennia the classical (Greek) view has been predominant: wealth had to ensure financial independence. It could be managed by Caesar. the state (or company) becomes an inherently unstable organisation. and an extroverted nature. not the person. usually riches. Moreover.3 The costs of business success in terms of personal happiness The blessing “May you have health. the socalled imperial patrimony). power and happiness do not sit comfortably together. for Socrates nothing could match the satisfaction of understanding. In fact. Obviously. the equivalent is some $3. Ultimately. Great wealth results in financial power. One sesterce was equal to 0. and could be passed on only to the successive wearers of the crown. love and wealth – and time to enjoy them”. Thirdly. freedom and culture. by forcing basically decent people into immoral actions to position themselves favourably in such an unjustified system. 4. A rich man’s lot is not an easy one and to know exactly how much wealth to aim for in life is therefore worth some thought. See Cary.00 per coin in today’s prices. These assets usually included palaces. while striving for great wealth (requiring a fair dose of greed and envy) implies that you have become a slave to money with corresponding worries. happiness stems more from internal psychology than external circumstances and is therefore largely genetically based. to ensure happiness? At what level of wealth do your family and your friends or hobbies become more important than a further increase in wealth? This is an old and favourite philosophical question. but is not necessarily dominated by them7. Happy people seem to have four characteristics in common: self-esteem.. For instance. In business the trade-off between honour and expediency is not easy and often painful. and therefore powerful. How much wealth is then required.05832 grams of gold (1 Aureus = 100 sesterces = 0. emphasises that wealth alone is not enough to ensure your happiness. For imperators (which include all the variations of strongmen such as autocrats and dictators) the difference between private and public wealth was mostly of academic importance. London: Macmillan.

the man of leisure had no socially recognised profession. He was free to engage in any kind of activity.53 grams of gold or some $50 per coin in 2005 prices. annual expenses of the Royal Household of the Romanoffs. Nonetheless no opportunity was missed by the nobility to air its disgust for the trading class. 259. W. 23–24. pp 42–54. pp. The annual income of a notable was virtually exclusively derived from land ownership. 1992. not how hard you worked. the merchants in those days whose financial “essence” was their economic activity. The Czar. (ii) the political life. to make his home in an old barrel and had. I. According to the principle that what cannot be conquered has to be absorbed. besides his famous desire for some sunlight. Financial independence involved a fine balancing act between desired annual income and required financial resources to generate that income. The essence of a notable was that he was a person of leisure. one of the richest monarchies of the immediate past. This capital was always tied up in land and.e. the ancients considered the vain pursuit of money above all else as one of man’s main follies. Ibid. on an investment portfolio containing both equity and fixed-interest securities. with an economic activity. 1994. Financial independence: the Classical view Before the Industrial Revolution financial independence implied that current annual expenditure had to be equal to about 2% of capital invested. This capital amply guaranteed financial independence. amounted to about 20 million roubles a year (some $68 million in today’s prices10).40 in 2005 prices. P. During the Renaissance the net wealth of successful merchants could total some 100 000 florins12 (or some $150 million in today’s money13).. Notables. no great material demands. It must have been more than a mild irritation for Philip II – with dominions on which the sun did not set – to be dependent for his military campaigns on the credit ratings of his Italian bankers. Wealth and leisure The notables of a nation typically include its leaders. The Medici for example. Origo. creative and material wealth bestowed on them).in today’s prices9). under no circumstances should anyone strive for extravagant wealth. and creators. could top up his private fortune by channelling funds from the Treasury. free and able to organise his life as he wished – because he preferred to beg. as was richly illustrated by the mythological figure of King Midas. p. for instance. According to the classics. London: Orion. In contrast to. Translating the classical concept of financial independence into today’s money terms would roughly imply the following: 9 One rouble equalled 1/10 of a pound sterling up to the First World War. This level of current expenditure requires underlying investments in excess of $1 billion in today’s prices. wealth depended on fate. but by 1917 it had depreciated to some 15 roubles per pound and would be worth some $3. those notables who did not immediately see that the absence of desire was the height of wealth.. Obviously. and a natural consequence of autocratic rule. Bread and circuses. 10 11 12 13 19 . became sovereigns. and a good mule 100 florins. Veyne. The only profession that could overshadow the glory of the notables was that of the merchants. as wealth based on robbery has always been considered highly dignified. which is a career of dignity in which socially recognised titles can be acquired. an adult female slave 60 florins. like any other autocrat. and hence wealth became pure political power. pp. For example. Wealth was supposed to be obtained through inheritance. were expected to be financially independent in the past. provided it was not regarded as work. required more capital. “thanks to their fortunes” (i. the nobility and the “princes of finance” started to intermarry during the Renaissance. Indeed. 1990. One florin (of Florence) represented 3.a. but merely a specialised occupation. Usually such a need emerged in the public domain. symbolising what happened to a ruler who became a slave to money. for imperators private fortune had little meaning: money was simply taken for granted and channelled from the public purse when needed.. and (iii) the life of the philosopher in which a notable becomes a person of culture. considering that. a political dignity and perhaps a cultural profession11. as family property. only people of leisure are truly citizens. thinkers..g. professionals were earning some 80 florins a year and that a rich man’s dwelling cost about 1 000 florins. at the time. The merchant of Prato. which was funded by the Treasury. originally bankers. However. For millennia this threat was no more than a social irritation.e. In a nutshell. 342. was not for sale. See e. But most of the money spent by the imperators was expended on crown property. The return was similar to that on a perpetual bond. marriage or conquest. The lost fortune of the Tsars. After the Industrial Revolution the net real return on capital rose gradually to some 3% p. As Aristotle emphasised. 333–339. So Diogenes of Sinope could be financially independent – i. the purchasing power of a florin is probably closer to $1 500 in today’s prices. These transactions were considered legal. but by the Middle Ages even the crowned heads had become financially dependent on their bankers. if need be. the intellectual. London: Penguin. London: Penguin. The classics distinguished three modes of existence for the notable: (i) the life of enjoyment in which no ideal purpose is ascribed to existence. In the end. See Clarke.

They had to wander dead among the living – as money constituted the blood and soul of a free man.e. perpetual real return on such an investment. Like entrepreneurs. Bachmann.g. as it requires skills. but was not really required.a. At senior management level the choice between these three alternatives is not really determined by wealth considerations alone. in principle. The hoi polloi became the driving force in constitutional democracies. invested capital of some $30 million would be required in today’s terms (again based on a real perpetual return of 2% p.a. Of course wealth in excess of $30 million could come in handy.). slaves.R. he still has freedom of professional choice and can select an employer to his liking. while the family income of the “middle middle class” (with both man and wife working) is probably closer to $75 000 p. Individual happiness has to be found in freedom (but now granted by the rule of law rather than by financial independence).a. Although an executive may not be financially independent. The “natural” income distribution in a free economy is very skewed indeed (see Chapter 1). the sovereign powers of the imperators were constrained by the rule of law. A Roman procurator earned anything between 60 000 and 300 000 sesterces p. perpetual real return). all those who had to work to make ends meet) were considered hoi polloi in classical times. Der kleine Machiavelli. For instance.a.a. Glory no longer rests in men of leisure. a navy admiral does not see himself in competition with the owner of a small coaster. provided a person has these skills.a. They are the rats who lead the race. which by its nature involves extensive human relations work. This choice is again dependent on individual talents.e. but in men of talent. until the 18th century financial independence implied invested capital of between $1 million and $30 million in today’s prices. For a satire on this topic. knowledge has become the hardest and most precious international currency. Work has to be done to make ends meet. Freedom was more important than excessive wealth. or (iii) to start an own business the moment sufficient capital has been saved. Assuming a 2% p. and financial independence would then require some $750 000 in invested capital (assuming a 2% p. the man of leisure was sidelined by homo economicus.. The choice between being either a well-fed domestic dog or a sometimes hungry but free-roaming wolf presented no conundrum to the Hellenic race: it would always choose to be a wolf! Financial independence: the modern view ! The Industrial Revolution turned the whole previously known world on its head: the Olympians gave way to political ideology. To an important extent happiness has to be found in a chosen occupation.a.2 million in today’s prices). all men of leisure in those days were HNWIs or even ultra-HNWIs)15. even if the last-mentioned person 14 The peasants. today the average income is about $50 000 p. in industrial countries. Accordingly. and H. Assuming that executive pay was about 200 000 sesterces p. in today’s prices) in those pre-industrial days. depending on responsibilities and experience. in today’s prices). annual income for the middle class amounted to some 8 000 sesterces (or $24 000 p.75 million). This working majority had to be content with its lot. leadership). culture (often financed out of a nation’s general wealth) and wisdom (with education. This was also the required capital sum for admission to the Equestrian Order (a typical middle class organisation). now open to all). but often lacked the funds to start their own business16. To earn this income from land requires assets of at least $3. Probably also in the pre-industrial era the men of leisure represented only some 1% of the population and owned about half of all households’ assets. whether this is manifested in the fields of leadership or knowledge. an economist) who indulges himself in his chosen field of knowledge.Minimum-wage class. 1988.e.g. but the kind of work is no longer predetermined by class. The foundation of wealth has shifted from fate (as reflected in inheritance and successful conquest – whether on the battlefield and/or in bed) to productive output. Forty years of hard labour is nevertheless required for the average skilled worker to accumulate this amount of capital.a. P. ! Middle-income class. three broad alternatives are available in today’s corporate world: (i) to engage in true management (i. see: Noll. In short. is seen as a bourgeoisie problem nowadays. rounded off in millions and ignoring those who deliberately adopted a life of poverty (e. But. Zürich: Pendo. Juvenal remarked that he and a few slaves could live easily on capital of 400 000 sesterces (or some $1.a. and financial independence became a by-product of entrepreneurial activity rather than a critical requirement for the good life. (ii) to become a professional (e. science and the arts. in industrial countries. Worrying about financial independence per se. ! Executive-income class. The executives of modern companies are mostly non-conformist people. the Cynics or mendicant friars of the Middle Ages14). (or some $600 000 p. Today’s minimum living wage is about $15 000 p. shopkeepers and other untouchables (i. However. depending on lifestyle (i. 15 16 20 . Diogenes living like a squatter claimed to be totally content with a subsistence income. Obviously this professional freedom is not available to all.a. The key issues for leadership today are commerce. they enjoy high levels of innovation and entertain little respect for authority. or wealth in general.

does not want his company to be “disciplined” by 30-year old hedge fund managers and notes: “Yes. Power is preferred to wealth in this instance.a. – has to be set to avoid getting eaten alive by the competition. The commercial issue underlying this view is a very fundamental one. This is a high. suppliers and dealers and then shareholders”. to start your own enterprise makes economic sense only if: (i) you already have some material wealth at age 30 (which is usually obtained from inheritance or through marriage – even today). For them private enterprise is a kind of game – you win some. we have heard of shareholder value.may become financially independent sooner. Usually people want to work on their own because of the challenge. business partners. such as client satisfaction18. an average real growth rate in equity capital of 10% p. Clearly some minimum performance – say. But that does not change the fact that we put customers first. In terms of the shareholder value model (as found in the UK and US) a firm exists primarily to maximise (short-term) profits.a. but corporate analysis has shown that those firms that do not try to maximise profits at all costs usually do better in the long run than those who try to. 17 Striving for both perfection and power may qualify you for bedlam: power dreams of indefinite expansion and is accordingly never fully satisfied. then workers. 18 21 . Accordingly. and (ii) your business performance – as reflected in the average real growth rate in equity capital – is in excess of some 15% p. you lose some – but profit maximisation is not the be-all and end-all. while the stakeholder value model (as found in Continental Europe) emphasises the importance of the firm for all stakeholders in the long term. of course. He enjoys the work as such. but not impossible. while true perfection requires a touch of the gods and can consequently be accommodated only by genius. in real terms (assuming a 100% retention rate). Likewise. Mr Ferdinand Piech. and perfection is preferred to power17. rate of return to achieve – at least if you have the right skills and spot the opportunities in the market early. Profit as such simply becomes a by-product of more important corporate objectives. For instance the chairman of VW and Porsche. a true professional does not regard himself as running in the corporate rat race.

2 3 22 . 5. even more extremely. ! Market saturation may force you to “fish in other waters”. For instance. not mergers. Takeovers always occur between unequal business partners. Therefore. Only those who seek the ultimate – a corporate marriage based on complementary talents – should go for alliances or. and there are always some companies that pick over the carcasses of those who fall behind. mergers. but ultimately the gap between an acquisition and a merger cannot be successfully bridged. Obviously making a living out of consuming the dead and dying is a specialist activity. A similar sentiment was expressed by Demosthenes (4th century BC): “We have mistresses for our enjoyment. reverse. your poison pills have to be ready for the taking during any lunch – even that rare free lunch. from an entrepreneurial point of view. No room for mistakes here3. Besides scavenging. deteriorates into you being the main course (ask Mr Praying Mantis for further details). Obviously any weak company wants to present a takeover to the outside world as if it was a merger. One way to grow your already successful business even faster is to look for a takeover. there is also the conquest of the fit and healthy. To avoid being eaten alive from the inside out by your faithful business partner. and wives for bearing of legitimate offspring”. Either way. ! Industry consolidation may be forced on you. A merger easily starts as a happy affair. it is always the stronger consuming the weaker. for instance if research and development costs are rising to ever greater heights. mergers and anti-takeover defences. make sense only if they cast a long shadow and therefore run to succession2. like a marriage again. Aphrodite’s happy marriage to Hephaestus was possible only because it committed nobody and was soon overshadowed by her strategic alliance with her soul mate Ares. An inherent danger in the acquisition game is the reverse takeover. Mergers are formalised alliances and. It is the nature of those who specialise in takeovers – whether direct. but may end in a valley of tears soon afterwards. the issues of takeovers. such as: ! Technological changes in your industry may require the acquisition of new technology that would be easier to purchase than to develop. even if you favour standing on your own two legs. As a predator your roving eye may fall on another firm for a number of reasons. friendly or hostile – to evade binding mergers and in extreme cases merely tolerate strategic alliances. No industry can flourish without scavengers.CHAPTER 5 GROWING YOUR BUSINESS A successful business cannot depend on organic growth only. it will be a takeover target in its own right for your stronger competitors. Once you have decided to go for a hostile takeover. Such meals require careful digestion of the good bits – usually an odd mixture of customers and technology – and spitting out of the rest – often many of the staff. inverse. go directly for the jugular. the strategic alliance between Aphrodite and Ares was so notorious and satisfying because it was based on complementary divine skills: the one broke hearts. All of the above criteria constitute reasons for takeovers. as any bondage based on weakness is doomed to fail. if your company has become very successful. an alliance is a bond between equals1. In contrast. What starts out as a feast. 1 Nothing new here. For instance. new markets and products. Again to use some classic reference. you may be dragged into this game of takeovers and acquisitions against your will. steep corporate growth in a domestic market of limited size can occur only if competitors merge or are taken over. This chapter will briefly discuss. ! Globalisation may require a repositioning of your firm to meet aggressive international competitors. For technical refinements please consult your friendly merchant bankers.1 Takeovers Acquisitions usually come in two guises: either by a scavenger or a predator. concubines to serve our person. Alternatively. Ultimately your business is driven by competitiveness and accordingly inefficient competitors have to be conquered (either by elimination or takeover) or you have to fend off a predatory takeover yourself. the other arms and legs.

Therefore takeovers financed by way of additional share issues are a second best solution. you may lose your honour before you know what hit you. There needs to be a substantial percentage increase in market share. mergers are far more difficult to bed down than acquisitions.g. but also set your own requirements. next the kill and last of all the meal. An acquisition is simply a conquest. the takeover target should have business activities that support your own corporate driving force. and resorted to only if your share price is relatively high.2 Mergers Generally. For powerful acquisitions you need piles of cash. such as increasing your competitive position and adding value to shareholders’ wealth. enabling technologies are best controlled (rather than owned). involves a bit more. To avoid “becoming lunch” you should not only be fit. Always have a backup plan in case anything goes awry. but then happiness flowers so often in an environment of utter uselessness. because most people lack the moral fibre and courage for bonds of this nature. 23 . capabilities and/or technologies. a delight in your skills and powers4. In contrast. where often only the paranoid survive. as a war should not be conducted on two or more fronts simultaneously. ! Never go over to the attack with a one-step plan. In a merger both parties should be of equal status. Accordingly. you have to consider your defences carefully. Enemies serve practical purposes. limit yourself to acquisitions. if you want to play it safe. pure and simple. M. then the catch. it will become increasingly difficult to combine size with speed. and often fail badly. Accordingly. but also look fit. Such a proposal would for instance stipulate whether are you going to merge “in community of property” or with an “ante-nuptial agreement”. In other words unique strengths inherent in one partner that cannot be copied by the other partner. to make it as a successful entrepreneur today you not only have to fulfil a number of minimum business requirements (such as a satisfied clientele. most mergers are doomed to fail. ! 5. Even the few that do succeed. and the more you can influence the conditions of a possible merger proposal. 4 5 Any cat’s preference (like the corporate predator) is as follows: foremost the chase. your new CEO may even swap you out of your controlling interest. It is built on complementary skills. This may be one reason why friendship with predators – true killing machines such as tigers and orcas – is so often more satisfying than fellowship with a hare or a chicken. In any corporate predator. but a merger. As your company grows. You have to be extremely careful when issuing additional shares for the purchase of another company. These killings may lack purpose at times. you cannot succeed in business without the help of your enemies – only slaves like to surround themselves with slaves. ! Never start without weapons (e. In short. However. those based on strengths. The better your visible corporate assets are developed. but rather to realise your strategic objectives. See Robert. In addition. In a hostile market.3 Anti-takeover defences Any attempt to avoid being taken over should also avoid relying on a white knight to save your honour. Takeovers financed by way of share swaps at relatively low price-to-earnings multiples make sense only for CEOs with aspirations to build empires. the quicker you will catch the eye of a corporate Don Juan. the less you will be inclined to go for friendly ones. are often no more than friendly takeovers. you are an absolute nobody until at least somebody thoroughly hates you. Similarly. such as focusing your mind on business. Generally you want to take over only those enterprises which businesses have a strategic fit with your own business5. which entrepreneur does not like to be a fox in a chicken run? Super killings – even those in business – result from Funktionslust. as in essence you will be exchanging part of your company for the ownership of another firm. cruelty and affection coexist by nature (is revenge not merely the converse of gratitude?). Anyway. 5. business systems). flexibility and cunning: indeed you cannot expect a whale to frolic like a dolphin. Unbundling is often the only way to address a conglomerate’s inefficiencies and bureaucracies. presented as a “mergers” to the outside world. ! Never start a meaningless war. i. Therefore takeovers should not be done for the sake of growth. taken to the extreme. Therefore your shareholding will be diluted and.e.: Strategy. The more you develop your skills and tastes for hostile takeovers. New York: McGraw-Hill. like a marriage. 1993. a price-competitive product in the market and mastery of your industry’s core competencies). promoting corporate solidarity among your own ranks and reinforcing bonds of friendship in the face of common opponents. Accordingly. while differentiation facilities require unlimited access only.In this context remember the golden rules of war: Never target more than one competitor at a time.

rent increases or loss of distribution profits). In terms of this arrangement disclosure of shareholders’ identities can be stipulated to address “concerted action”.To avoid a hostile takeover the following structures should be considered: Control structures. Alternative arrangements in this area are holding companies. although it may be painful for a few firms. Successful shareholder resolutions are often “precatory” for directors. the bylaws can delay the process of replacing the board of directors (e. Your key staff can be given golden parachutes or pension parachutes.g. Alternatively. For instance. in the US directors may still be elected by shareholders under the method of “plurality” which in practice means that only votes cast in favour are counted. non-voting shares in a company are not forced down the throat of any buyer. one vote” does not apply6. through staggered tenure) or they may require large majorities for changes in specified company policies. one vote” principle in Europe (with Germany close to 100% and the Netherlands at below 20%). ! Extending a company’s bylaws or articles of association. but not least. 7 24 . shareholder power is not always what it seems. ! Increasing takeover expenses. Yet another option would be to engage in pre-emptive or preference agreements in terms of which the majority shareholders agree a priori to sell their securities to third parties7. It has been observed over the years that stock markets with liberal takeover codes have outperformed those with more conservative codes. can be granted to “long-term” shareholders or the company can issue bonds with share warrants in favour of friendly investors. A good example is a pyramid company structure where you (and your friendly partners) own all the voting (A-class) shares and outside investors the non-voting (B-class) shares. ! Buyback of shares by your company. that all the above defence mechanisms take their toll in lowering the competitive position of firms. one vote” results from the involuntary nature of citizenship. These agreements seriously affect “fair play” and are usually enforceable in court only if they were in place prior to a bidder’s offer. Such warrants can be exercised at any time and will increase the company’s equity capital. Last. which will make retrenchments and restructuring of the company extremely expensive after a takeover. On average only some 60% of companies apply the “one share. Note. Usually a favourable climate for hostile takeovers is to the advantage of the economy as a whole. loyalty bonuses. but it is not allowed in all countries (since it will reduce a company’s equity capital. This will increase your power over your company. ! Management agreements. This can be achieved by for instance material contracts with penal conditions if there is any change in control (e. however. Anyhow.g. Alternatively poison pills can be activated by registering proprietary technology or intellectual property rights in your own rather than the company’s name. meaning that they are only advisory and not enforceable. Obviously this structure can be implemented only in those countries where the principle of “one share. Any disregard of such rules obviously leads to a loss of voting rights. which is not always appreciated by creditors). together with increased voting rights. voting trusts or formal voting agreements between shareholders. ! 6 In contrast to a democracy in which “one man. Ultimately a high price-to-earnings multiple presents one of the best defences against “being lunched”.

annual and monthly compounded interest can no longer be ignored. a five-year loan at a real interest rate of 10% p. Once an economy is inflated at double digit figures. 6. say. the less real value will be embodied in successive interest payments on a long-term loan. with equal annual principal repayments implies that during the first year the 2 25 . Therefore. say.2 Inflation and cash flow The impact of inflation on your company’s cash flow can be frightful. The higher the inflation rate goes – and the more the economy moves towards a type of barter economy – the greater the adjustments that have to be made to the financial structure of your firm as well as your long-term business strategy. cash flow. To compare the ROEs of similar industries in different countries. as the interest repayment 1 In a price-stable environment the nominal rate of return is equal to the real return. And small fry is always on the menu as an aperitif. with no appreciation whatsoever of others. In this environment. ! Return on equity (ROE): Even if a company’s assets and liabilities are being re-priced continuously in line with inflation.1. in a high-inflation country the rate of interest should no longer be expressed as a nominal rate. making them unsuitable for financing long-term investments2. you should consider the following adjustments for high-inflation countries: ! Real interest rate: If the investment rate is. For instance. The lender of $100 therefore needs to receive $200 just to retain the purchasing power of the principal. the differences between. The higher the inflation rate goes. 6. Accordingly. ! Compounding period: At a low nominal interest rate the effect of the period over which interest is compounded is relatively small. And. as you know only too well: “Art is I – science is we”. the fluctuations in the inflation rate become large and therefore the real interest rate unstable. but instead as an effective (compounded) rate of interest. In essence.1 Real rates of return Inflation does its destructive work so thoroughly that the full consequences are difficult to gauge for the average entrepreneur. For instance. gearing and the price/earnings ratio. equity capital is still wholly exposed to the adverse impact of inflation.a.a. The skills of an artist are required here. i n = nominal rate of interest and P = rate of inflation. Because of this uncertainty lenders secure a real return on their investments by charging even higher nominal rates. Instead make time to think about the unthinkable. how would you adjust your business if its tentacles start to spread around the globe? What if you have to operate in both low-inflation and high-inflation countries or at what price is your business for sale? In a high-inflation country you find yourself in a sea of sharks. At the beginning of the year 7 per cent interest amounted to $7. Therefore you have to raise the real ROE in an inflationary environment. 100 per cent. but to buy goods worth $7 a year later you would have to have $14. simply forget about long-term finance in a high-inflation economy. if the nominal interest rate goes to double-digit figures. at least if you want to protect the real asset value of your firm. Should the inflation rate accelerate to. Accordingly. Here feeding time is always a frenzy. without adjusting for inflation differentials.5%. and need to be calculated as ir = [(1 + in)/(1 + P)] – 1. suppose you want a 7 per cent real return on your lending.a. Therefore. To obtain a taste of what is expected of you – the potential seller of your own business – consider the following delicate bites: the impact of inflation on corporate returns. high rates of inflation transform all long-term nominal interest loans into short-term loans. any fat cat will smell a rat if he is told that the real rate of return is 7% p. What is more. where i r = real rate of interest. can easily result in strategic blunders. at 100 percent inflation the lender of $100 requiring 7 per cent real interest would demand $214 at the end of one year or 100 per cent of the principal plus 114 percent nominal interest. and the prevailing inflation rate is 100%.CHAPTER 6 SELLING YOUR BUSINESS Many entrepreneurs are so busy running their enterprises that they simply lack the time to think of profits in the long run. real interest rates tend to rise in high-inflation countries (with serious consequences for your investment strategies). However. this means that prices double each year so that each unit of currency can buy only half of what it could buy a year earlier. say. But it may be profitable if your competition does so out of ignorance. 107% p. This compounded rate should be compared with the inflation rate (itself a compounded concept) to compute the real rate. the real rate of interest is only 3. For instance. You should leave this mental cul-de-sac to your loyal staff.

it usually does not hesitate to tax the poor with inflation. 6. which in turn implies a low PE ratio. In contrast. as both these evils demand more or less the same recipe: public sector reform. operating simultaneously in different inflationary environments. Ultimately. and the poor get more children.g. but also squeeze small enterprises out of business4. procurement officials) and costs (e. in a few countries bribery expenses are still tax-deductible. the higher the company’s ROE needs to be. high-inflation countries do not only tax the poor with inflation3. Usually the higher the rate of inflation (i. Such firms do not have the financial muscle to pay serious bribes to overcome the various entry barriers (e. Endemic corruption. 3 In contrast to the rich. Rose-Ackerman. 6.4 Inflation and corruption Many ladies abhor the idea of selling their bodies to strangers. the payments during the first year would amount to 60% of the total payment in constant prices. 6. All other things being equal multinationals prefer to do their capital funding in low-inflation (hard currency) countries. pp. Germany lost this major commercial advantage over its EC partners when it switched from the D-mark to the Euro). In short.g. you may discover that you no longer have a pussycat by its tail. which in turn emphasises the importance of securing the real ROE of your business (see also Chapter 3). and the greater the temptation to employ corruption to stay in power. and are too small to serve the power interests of current rulers. for instance. If the government struggles to balance its own budget. more privatisation of state-owned enterprises. improved whistleblower status. imposes a disproportionately high burden on small firms. they most probably cannot eradicate corruption either. property. This occurs in addition to the familiar “crowding-out” effect of large government budget deficits. For local firms this presents a lethal threat. the more unstable the political elite.g. less state intervention. For politicians the art of bribery is always second nature. greater competition. competition and privatization”. Till 2002 German firms were still allowed to bribe foreign-company employees.a. Instead. and then operate with relatively low capital costs in high-inflation countries (e. “Redesigning the state to fight corruption – transparency.. which usually also go hand-in-hand with high inflation. Therefore. This payment of principal and interest will amount to 23% of the total payments. and a better balance of power (e. If the government attacks small business with inflationary forces. more than one police force)6. For instance. or even the merest risk of a higher inflation rate. the appropriate gearing for a multinational firm. the more it pays to be honest and trustworthy.5 Selling the business The higher the inflation rate. the higher the nominal rate of interest (owing to inflation). you may abhor paying bribes. Indeed. in Public policy for the private sector. Washington.schedule is usually far above your company’s cash flow capacity.. but in corrupt countries these may not always be avoidable5 (see also Chapter 4). becomes an optimisation exercise. the lower the potential for financial gearing. and the real interest rate remain at 10% p. before you can go over to the attack again. if governments cannot manage inflation. Should the inflation rate rise to 100% p. March 1996. Switzerland stopped this fiscal generosity only in 1998 to avoid further international political pressure.e. like inflation. S. though not foreign officials. Here bribers have to make a careful calculation of the potential benefits. and the relative bargaining powers of the bribee. You simply will have to wait for the return of sanity. in those countries where the inflation rate suddenly accelerates. but instead are offered a free ride on a tiger’s back. the riskiness of corrupt deals. There is then a high probability that its “civil servants” will be grossly underpaid and therefore have to operate as your “uncivilised masters” in daily life. 4 5 6 26 . Similarly. monopoly benefits and regulatory laxness for selected bribers). but also from higher gearing. defence seems the only sensible business strategy.a.g. Investors will now also demand a relatively high real earnings yield. The World Bank Group. as even in respected democracies the trick is to bribe the majority at the cost of the opposition (parliament has known for long that creditors are always in a minority). In high-inflation countries the rich get richer. the higher the return required by investors. Likewise. tax collectors). increased transparency. large companies can flex their muscles by bribing state officials who do have power over the distribution of public benefits (e. firms in low-inflation countries with low real interest rates not only benefit from relatively low credit costs. 49–52.g. fall back on retained earnings. but quite a few of them would not give a second thought to marrying for money. the poor cannot hedge themselves against inflation by buying.3 Inflation and gearing The more risky a business (measured in terms of its ROE volatility). For this very reason. In contrast. Generally speaking the lower the rate of inflation. the greater government’s incompetence).

27 . the economic climate should be favourable. In essence there is no great difference between selling your house or your enterprise: in both cases the asset for sale has to look attractive and. enabling potential buyers to relieve you relatively cheaply of your investment. most importantly. since the selling price ultimately depends on specific assumptions made about an unknown future and speculations about the number of skeletons to be found in your company’s cupboards. you primarily want cash for the business. implying that the real cost of credit will be relatively low. potential buyers may be wondering to what extent last year’s earnings yield was a flash in the pan or a sustainable rate applicable to long-run valuations. If you want to sell your company to reap the fruits in the harvest period of your life (say before your 60th birthday). as most enterprises are sold on a “fair” price/earnings basis. Usually your merchant banker will be able to calculate a full spectrum of “fair” prices for your business. For instance.obviously adversely affects the selling price of a company. The right time to sell is then of course when your enterprise performs better than the competition and the inflation rate is relatively low.

Moreover. the importance of the contractual investment pool decreases proportionately. Nowadays life expectancy is on average some 25 years at age 60. Only a fraction of millionaires ever become true rentiers – most are just pensioners. and the sound of whirring wings at sunset that gives examples of what joy and beauty are …” It has to be emphasised from the outset that the financial plan of business executives at retirement is fundamentally different from that of ordinary mortals. elegance and simplicity. you now want to pay for not having. the winter of your life may last far longer. But for the pensioner. Graph 7. dividends. Clearly. most executives have a contractual investment pool of about a third of their total financial investments and a discretionary investment pool making up the remaining two thirds. there is suddenly scope to simplify your lifestyle and finances. but quite a few people celebrate their centenary. Usually the executive’s Years 1 Family property was the main source of income for the rentier in the past. In any case.CHAPTER 7 RETIREMENT AND FINANCIAL RESTRUCTURING Retirement does not have to herald the beginning of the end.g. In winter you increasingly appreciate harmony. the real value of land increased gradually as it became an ever-scarcer resource in a world with an ever-increasing population. with modern medical support. but quite a few retire a lot earlier. interest. The rentier is someone who lives solely on the return of his investments (e. With money in the bank and the children out of the house. while a pensioner consumes all underlying investments during his lifetime. If it should be significantly less than a third (because of job hopping) it should ideally be increased to this level by purchasing an additional pension from a life assurer. as the rentier per definition never digs into his capital1. the mud of a marsh beneath one’s feet. For a rentier the risk of living too long (and therefore outliving his capital) is irrelevant. Indeed.1 gives an overview of the typical US$ 2005 prices 4 000 000 accumulation and consumption of assets of a CEO of Residential property 3 500 000 a medium-sized firm since entering the job market. Most executives retire in the late autumn of their life cycle. 28 . if you are well-off there is no need to break your head about an issue such as how to maintain your standard of living during retirement. At this stage of your life you may even start to appreciate the words of Van Dyke: “It is wind and rain in the face on a treeless hill. However. if total financial investments start to exceed the $5 million mark. life expectation is a crucial consideration in his financial plan. a sharp distinction was made between the rentier and the pensioner. But it does imply some major financial restructuring.5 1 500 000 million and will decrease again to nearly nothing towards the end of his life.1: Accumulation and consumption of assets Graph 7. Of course some 1 000 000 executives stay in more expensive houses. The proceeds of your sold business or your share incentive scheme simply imply an addition to your already impressive pile of discretionary investments. Traditionally. Retirement fund assets Financial assets 3 000 000 In a forty-year business career the executive’s total 2 500 000 financial assets (excluding the house worth some $1 2 000 000 million) will rise from virtually nothing to some $2. but a high 500 000 level of “life-style assets” will always be at the cost 0 1 7 13 19 25 31 37 43 49 55 61 67 73 79 of discretionary savings. say between 55 and 65. For the average executive the company’s pension fund constitutes about a third of his financial investments at retirement (based on 40 years’ accumulated pension fund contributions). Accordingly. and rental income).

particularly if the inflation rate is high. Secondly.e. Accordingly. Obviously. The risk of you outliving your accumulated capital can be eliminated only through insurance (by sharing the risk of living too long with others). although its annual pension payout will be for life.primary residential property accounts for some 30% of his total assets. The contractual investment pool could be seen as a kind of “financial sanctuary”. As you cannot manage your accumulated pension fund investments yourself. employers’ defined-benefit pensions are usually not fully inflation-linked in South Africa – the annual adjustments average only some 80% of the ruling inflation rate. This potential fall in real income from your employer’s pension fund has to be compensated for by your other savings. Profits made on the investment portfolio underlying a pension may display significant fluctuations in the short term. A crucial decision at retirement is how much of your total investments should be invested in a contractual pension 2 Unfortunately. and ! the risk of living too long. although. This is costly in the longer term. So the pension period of this fund is around 25 years. surprisingly. of course. your real pension payout will have fallen by 22% by the time you die. Most of the large life assurance companies sell pensions that fulfil the above requirements. your investment decisions in effect centre mainly on the type of pensions purchased and the amount of funds invested in your contractual investment pool. as the assurer has very strict payment liabilities to its retirees. ! Smoothed-bonus policy. The returns on these investments are market-related and actually quite competitive. many variations on this theme to suit individual needs. The major disadvantage of a purchased life annuity is not so much its lower yield (as the risk is also lower). A purchased pension has to fulfil the following minimum criteria: ! Mortality-linked. this is only a memorandum item (i. Accordingly. In terms of Graph 7. but that your heirs are inheriting a smaller estate (which they. assurers have to eliminate individual mortality risk by spreading it over as many policyholders as possible. giving the retiree not only financial. Firstly. you still need to save or have other sources of income to draw on. the underlying assets have to be invested in low-risk financial instruments. A smoothed-bonus policy (rather than a market-linked policy) is therefore advised. the pension should be structured to provide the surviving spouse with at least 75% of the joint benefit. and is normally left to the heirs. This in turn implies a lower return than on more risky investments such as equities. 7. Firstly. strictly speaking. Expenditure is a matter of personal choice and is directly related to accumulated capital.or four-year moving average. ! Joint benefits. and wants to leave something behind for the children or a charity. a notional asset). As the investment portfolio is expected to grow in line with the real growth rate of the economy. Purchasing power is protected by linking a pension payout to the return on the underlying investment portfolio. This chapter gives attention to these two pools in somewhat greater detail. and secondly a discretionary investment pool (which consists of any additional assets). pension payouts should be smoothed on a three. even if the employer’s defined-benefit pension fund scheme pays 100% of your final salary. It is also advisable not to place all your golden eggs in one basket (although splitting up your purchased pension implies higher management costs).1 it is assumed that the retiree does not want to consume all his discretionary capital. 29 . such as inflation-linked bonds. On the death of the first partner. retirement annuities (if any). There are. The pension should be based on your and your spouse’s life. a contractual investment pool (which contains the corporate pension fund. should you retire at 60 and live for another 17 years. So at retirement the retiree has to establish two distinctly different investment pools. generally dislike). To ensure a relatively stable income flow. with inflation running at 6% per year. and any purchased pensions). They normally also outstrip the inflation rate. the pension should do the same in the longer run2. For instance. the planned retirement period is set at a conservative 40 years. This spreading of risks comes at a price for those who have (in retrospect) a relatively short lifespan. a pension should be selected with great circumspection and in full knowledge of the ultimate benefits you will be receiving many years later. The relative low return on a life annuity is directly related to the implicit costs of such a financial product. but also psychological security. The risk of living too long should be eliminated by a pension that is paid until death. ! inflation. The inflation risk can be hedged only by investing in a broadly diversified asset portfolio. This corporate pension is typically linked to a life insurance and dependent on the average life expectation. Investment in the corporate pension fund is part of the financial assets in this graph.1 Your contractual investment pool In essence. ! Inflation-linked. the contractual investment pool has to address the following three inter-related issues: ! annual expenditure. Assurers pool the savings of retirees and invest these assets in the various lowrisk securities and property markets.

See Barclays Capital. but not least.7% 1. these pension fund investments are always shown as positive notional amounts on your balance sheet. Clearly the richer one is. running a too small 3 After you have purchased an inflation-linked pension. plus a yearly (variable) bonus. Op. Unless you have discretionary investments in excess of $3 million. and any purchased pensions). All money in the contractual investment pool should be considered “notional” as. the South African capital gains tax regime is quite onerous. actuarial risk considerations underlie all cost calculations.5% 0. strictly speaking. a life assurer will pay you a guaranteed monthly pension. 90 years. Generally the funds in your company’s retirement fund as well as your retirement annuities were accumulated in a tax friendly way over the years. Clearly. because basic consumption expenditure then becomes an ever smaller percentage of total income. these funds are no longer yours.75% 0.7% 4.8% obsessive about optimising Equities 30% 6.0% 1 not to your stress levels. Be careful. you nevertheless stand to benefit if you live significantly longer than. there will be no free lunch – you get what you pay for. To minimise your tax obligations at retirement quickly becomes a very technical affair and it is money well spent to consult a good tax adviser. 2006.8% may result.2 Your discretionary investment pool Whereas the contractual investment pool is basically there to keep the wolf from the door. the sole purpose of the discretionary investment pool is to augment your basic living expenses and/or to leave something to your chosen heirs. The United States has one of the most complex tax systems in the world. The flip side of this coin is of course that.0% 1.8% 1. whatever the variations. This large difference may tempt you to reduce your contractual investment pool by too much. based on your life expectancy. though.50% 4. If you become Fixed income 21% 2. and will be paid until your death. as all basic consumption expenditure should be financed ideally from your contractual investment pool. Now any pension received from this source will be considered taxable income. based on the initial income percentage. As a rule of the thumb most executives with financial assets of between $2m and $5m invest about a third of their total wealth in a contractual investment pool (which includes the company’s retirement fund.0% bound to ruin your life. Even if the annual real return on a life annuity is less than what you could earn yourself by investing these funds in your discretionary investment pool. Your purchased pension will now increase roughly in line with the ruling inflation rate. A contractual investment means that you have purchased an annual income (preferably inflation-linked) until your death in exchange for a lump sum payment to the assurer3. In Weights are based on the asset composition of HNWI. This choice largely depends on your life style. In this area do not be pennywise and pound foolish! 7. Moreover. the less the need for a life annuity. As noted above.(basically a life annuity) and how much in your discretionary investment pool. A pure life annuity will lose all value the day you die (which may well be on the same day that you signed the contract). Currently life assurers work on a life expectancy of 23 years for males and 26 for females at age 60.00% 6.1: Assets by investment class and their returns not be sufficient to compensate Gross real Net real Weights1 Total fees returns2 return for the financial worries that Money market funds 13% 1.5% every cent. there are more friendly alternatives but.cit. Last. Your state of health is obviously an important consideration if you buy an additional pension. 2 Gross real returns are based on the period 1961-2006. 2007. cit.0% 2. because the life assurer has to make provision for future payouts. short. It is for this reason that contractual investments appear on the balance sheet as notional investments or memorandum items (as these assets.00% 1. say.0% your retirement money should contribute to your happiness. based on the performance of the underlying investment portfolio. See Capgemini. Of course taxation is a very countryspecific issue and generalisations are difficult in this respect. in effect.00% 6. Particularly. the additional profits you may garner by scaling d o wn s i g n i fi c a n t l y o n contractual investments will Table 7. Op.0% 3. Whereas you typically expect a 3% net real annual return on your contractual investment pool. 30 . During Property 16% 8. a pension is always a good purchase to cover at least your minimum living expenses. should you die earlier than expected. no longer belong to you). But South Africa is on the way to catch up with the US in this respect. the net real annual return on your discretionary investment pool before tax could well be of the order of some 4% to 6% in the long run (see Table 7.1). there are some specific tax aspects related to retirement. owing mainly to political lobbying of all kinds. the life assurer will make a “profit” on your pension policy. Total 100% 5. If the chances are good that you will outlive the average mortal.. retirement annuities. your money is Alternative investments 20% 9. As assets in the discretionary investment pool are somewhat of a luxury – in the sense that they are used to finance non-essential expenditure or even expenditure beyond the grave – they can be of a more risky nature.

e. Besides the fact that your total taxable earnings will be lower. suppose the inflation rate suddenly accelerates dramatically. bond holders). (ii) a net real return on your investment portfolio of 3. your discretionary investments (as a percentage of total assets) will increase sharply.. Working on the same basic assumptions mentioned in Chapter 2. Inflation is in essence a tax on the government’s creditors (i. However. Graph 7. provided these bonds are kept until 60 000 maturity).3 Expenditure level and available resources Working on the “20 times rule” and with total financial investments of $2. particularly as most investors express their losses in cents and their profits in percentages! The day you sell your business or retire from your executive position in the company.5 million. lower withdrawal rates become really crucial to protect the underlying value of your bond 0 -10% -8% -6% -4% -2% 0% 2% 4% 6% investments. and secondly. the balance from discretionary income. in many developing countries 50 000 the central bank is not truly independent. Some executives prefer the more conservative “25 times rule” in which case real income would be limited to $100 000 p.) (of course. Graph 7. Graph 7. no longer constrained to reside close to your place of work. after all these adjustments. you can even sell your house and move to greener and cheaper pastures. $2.2: Annual real income and so will the total return on your bond investments obtainable from $1m bond investment Income ($ p. Small decreases in the real rate of 30 000 interest can be coped with by increasing your savings 20 000 rate. However. Clearly.3 depicts your expenditure (and income) after retirement in somewhat greater detail.5% p. the accumulated total assets of an average executive should be roughly $3.2 depicts this relationship Real discount rate (return) between the real rate of interest and real income on your discretionary bond investments. Whatever your choice here. however. In this instance consumption expenditure plus taxes were assumed to equal desired income.a. Clearly. and particularly your investments in fixed-interest securities. 7. if you assume (i) a life expectancy of 40 years at age sixty (which is conservative indeed.a. Graph 7. after retirement a few fundamental changes in your finances take place. and secondly the increased level of socio-economic uncertainty implies 31 . Therefore. not all available income from the discretionary pool has to be consumed – part of it could be saved for the unknown or specifically for your heirs. this rise in inflation will result in a rise in the real rate of interest. This “informal” tax distorts your finely tuned financial plans very easily.5 million at retirement and his financial investments some $2. As emphasised repeatedly. The trick is to ensure that. your desired income is financed from two main sources: firstly your contractual income that should account for roughly a third of total income. For instance. no need to contribute to the company’s pension fund any more (you now draw a company pension). Now there is the possibility of reinvesting the proceeds from your business and/or the share-incentive scheme in more liquid alternative investments (such as listed equities and property).5 million divided by 20). and on your lower gross earnings after retirement your tax obligations also fall meaningfully.e.1 depicts the typical pattern of your financial assets during your retirement phase. your desired income remains unaffected. your financial plan during retirement crucially depends on the inherent characteristics of an annuity.5 million. if the inflation rate moves to ever10 000 higher levels. your real income should not exceed $125 000 per annum (i. and (iii) total financial assets of $2. as corporate income has already been fully taxed in the past). If there is central bank independence. Note. Your reinvestment rate on coupon income now also rises.a. No longer is there a need to save for retirement funding (as you are now retired). This is ensured if you stick to at least the “20 times rule”. In fact.5 million. in a high-inflation environment your discretionary expenditure is reduced for two important reasons: firstly you have to save to pay for the inflation tax. However. that in a high-inflationary environment savings become essential. as the working life styles of most executives ensures an early death). a large component of your income is now also investment income (which is usually taxed at a lower rate than profits. and a rise 40 000 in inflation may easily result in a decrease in the real rate of interest.contractual investment pool may easily result in stress. Of this $100 000 gross income roughly a third should come from the contractual investment pool and the balance from the discretionary investment pool. your annual withdrawals should be around $100 000 per annum in real terms.

should there be a major risk of the currency being severely eroded. and this will be at Years the cost of discretionary expenditure. 32 . To cope with all 0 these uncertainties implies in practice. that you have 1 7 13 19 25 31 37 43 49 55 61 67 73 79 to save more than initially planned. investing in foreign currencies has to be done during the good times when this is still legally allowed. To switch into hard currencies as hyper-inflation emerges. as such an event will almost certainly go hand-in-hand with very strict exchange control measures. will be difficult to achieve. Graph 7.3: Application of income Indeed in a hyper-inflationary environment all prices US$ 2005 prices are unreliable and subject to massive changes as 600 000 Savings socio-economic conditions change. you have to invest a major part of your capital in hard currencies.that discretionary savings become more desirable. Therefore. Even inflationRental or Mortgage interest repayments Portfolio expenses and tax payments 500 000 linked bonds are suspect in such an economy as it is Consumption expenditure unlikely that the government will honour such 400 000 commitments if it is already undermining the 300 000 economy with its inflationary taxation policies (Zimbabwe comes to mind in this context). Ultimately. Hyper200 000 inflation means that you can never be certain about 100 000 the real value of your investments.

Firstly. July. Of course. the rich only want to delegate. which will give them some global asset exposure at a reasonable price. a firm has to declare dividends. Considering a trust’s running costs. unless its shares are so marketable that shareholders can easily sell them in the stock market1. their 1 2 3 Alternatively. The other 95% of your investment capital should go to professional fund managers. inter alia. some 5% of your investment capital yourself in the investment currency you know best. Although such securities3 can be purchased privately. May.CHAPTER 8 MANAGING YOUR FUND MANAGERS “June is one of the most dangerous months for speculating in stocks. equities. emerging markets or gold). not only control the asset allocation process. the opportunity costs of managing your own funds are often too high. Thirdly. Fourthly. Firstly. The investment horizon is determined by the future date on which you intend to liquidate your investments. to a third party. Alternatively.g. you can decide to purchase specialised mutual funds (e. This strategy requires little capital. August and February”. and (iii) a higher-risk portfolio for investors with a time horizon of more than five years. Secondly. most mini-entrepreneurs have to be satisfied with the purchase of a few foreign mutual funds (rather than local ones). This chapter deals with the issue of how to delegate the investment task and how to control your fund managers. but also involves more administration and therefore entails opportunity costs. Firstly. The average entrepreneur has neither the time nor the inclination to adjust his portfolio on a continuous basis. it is also possible to create your own investment company offshore – provided you have at least $20 million to invest. the best advice is to manage. this avenue is essentially open only to those with investable assets in excess of $500 000 abroad. you can buy units in a managed global asset portfolio. This approach is not only riskier. as these units cater specifically for retail clients. Whether entrepreneurs like it or not. To attempt to manage all of your funds yourself is usually a bad idea. bonds and equities. as a hobby. each aiming at a specific investment horizon2: (i) a low-risk portfolio for investors with an investment horizon of less than one year. an ultra-HNWI). it is still good investment policy not to keep all those eggs in the same basket. For larger investors managed portfolios are unattractive. but in addition place operational constraints on your fund managers. To accumulate this amount of investment capital is a tough task for a start-up entrepreneur and one that can be successfully accomplished only later in life. This sharp observation by Mark Twain presents a fair summary of the challenges facing fund managers. consisting of a mix of cash. September. to ensure that your specified risk level stays in place. sooner or later they will be drawn into this risky business as well. Even if your own firm is laying golden eggs. dividends should be paid out if a company cannot invest at a better return than the cost of its capital. If you really are fond of managing a fund yourself. 33 . January. Accordingly. rather than specialised mutual funds. as they usually lack the technological expertise and network of information. 8. if you have mastered the skill “of running with the bulls and dancing with the bears”. you can also buy equities and bonds directly. in which case you will handle the asset allocation yourself. the others are October. Usually three different types of managed portfolios are offered. (ii) a medium-risk portfolio for investors with an investment horizon of about three years. private investors compete with professional traders on a very uneven playing field. consisting predominantly of equities. it is more efficient to do so through an offshore discretionary trust (see Chapter 9). fund management should be carried out on a global scale and it is unlikely that you possess the skills and business contacts to do so in all the major investment currencies. You can even appoint your own fund managers. Accordingly. consisting mainly of fixed-interest securities with a short duration. Because the future is unknown – note that Fortuna moves her rudder with near-divine skills – your assets have to be well-diversified. A major advantage of fully managed portfolios is that you can abrogate your investment responsibilities and related worries.e. November.1 Managed global asset portfolios For the global investor there is more than one way to skin a fat cat. investment portfolios have to be kept under constant review. and more correctly. March. December. funds investing only in bonds. April. If you are really rich (i. not rescind. in which case you completely hand over the investment task to professionals.

each market is a dog. It needs to be kept on a short leash or it will drag the pack off course. you should be realistic. J. as the appropriate asset mix crucially depends on your preferred investment horizon and your appetite for risk. At times losses. will occur and these temporary setbacks will be bigger the larger you allow the tracking error to be. or at least underperformance. if the market moves against him. The shorter your investment horizon and the lower your mental ability to absorb losses in your portfolio (owing. you can assume larger risk exposures. In a few crucial areas they want to keep a definite finger on the pulse. it will be difficult for a fund manager to outsmart other fund managers on a continuous basis. You then want to look your fund managers in the eyes from time to time. If markets are efficient. As a portfolio owner you should give your individual fund managers sufficient freedom to demonstrate their investment skills. the downswing will last. If you have decided to invest a major part of your financial assets in the global rather than the local market. because of local financial commitments. UBS Global Research: Emerging markets strategy.2 The riskiness of funds A frequently cited rule of thumb employed by fund managers is that an optimally diversified portfolio can be approximated by using country weights that correspond to countries’ market capitalisations. for instance. 8. In terms of this rule some 80% of your equity investments should be invested in the industrial countries. to a stock market crash). The relative riskiness of a fund is measured by its so-called tracking error. South Africa (large and low-volatility) is a well-trained St. However. restocking. are the dog handler.investment responsibilities. In contrast. You can ask for professional advice in this respect. the standard deviation of the fund’s return from that of a benchmark. a heart of ice. As a rule of the thumb few portfolio owners (or trustees) would allow their fund managers tracking errors in excess of 5% (the exact percentage will depend on your investment horizon and risk appetite). 2nd quarter 1996. the fund manager. the less risky should be the composition of your global asset portfolio. It can have a relatively long leash. a fixed-investment boom or even a 4 5 Union Bank of Switzerland. you find horses for courses: if you have a relatively small part of your capital invested abroad.. i. Pocket guide to economics for the global investor. For a summary of economic factors influencing investments see Calverly. First of all.g. London: Probus. managed portfolios are in essence retail products for people with little knowledge of investments and relatively little money.e. as it will not stray too far from the chosen path. In practice this implies that the risk-averse entrepreneur will invest any surplus capital only in a global asset portfolio. Assume that a fund manager is running a fund with a tracking error of 10%. This is the notorious “take it all or lose it all” strategy. for that matter. he will outperform the benchmark – which will no doubt be reported as “clever trading”. At the same time you do not want to give them carte blanche. and a long-term investment horizon (e. Today there are literally thousands of professional fund managers in the global investment field. you will have to manage these assets more actively. p. if you have nerves of steel. no business cycle upswing is similar to any previous one and nobody knows how long the upswing or. 1995. As this competition is after all a zero-sum game. he may have some difficulty selling his underperformance as “bad luck” (fund managers running tracking errors in excess of 10% therefore update their CVs continuously). all trying to outperform one another with superior timing and stock selection strategies. 34 . and reap the rewards in the form of higher than average returns. There are a number of reasons for fund managers finding it difficult to execute a profitable timing and stock selection strategy over the medium to longer term5. But for most entrepreneurs it is difficult to place such a large slice of their investment capital abroad. An economic upswing may be caused by increased exports. Therefore a tracking error of 5 implies that there is a two-thirds chance that the fund’s return will fall within a range of plus 5 to minus 5 percentage points around that of the benchmark. bonds or equities. Another way to think of this concept is through the analogy of taking a pack of dogs (markets) of different temperaments (volatility) for a walk along a path (benchmark return)4. the managed global asset portfolios are hard to beat in terms of convenience and costs. but ultimately this decision has to be taken by yourself. If the market moves in his favour. if you are an aged tycoon managing assets in essence for your heirs). This dilemma is solved by stipulating appropriate benchmarks and maximum tracking errors for each of them. fiscal and/or monetary stimulus. Brazil (a medium-sized volatile market) is a red setter with a scatty personality. if you are seriously rich and your foreign assets run into millions of dollars. the next hurdle is to decide how much of your portfolio’s capital should be invested in cash. 68. London. Bernard. Secondly. For large amounts such retail products are relatively expensive. You. Therefore even in the investment field. However. while the allowed tracking error can be thought of as the length of the leash on which each dog is kept. Turkey is a terrier.

Your fund managers should run specialised funds against appropriate benchmarks. even if there is general agreement about the exact position of the business cycle and its interaction with the global liquidity cycle. while the larger the non-core proportion of the portfolio. e. pp. funds switching between investment styles. ! stock selection. ! currency allocation. While global liquidity conditions may drive equity prices in the short run.g. they should have the operational systems to report to you their tracking errors and the attribution of their excess returns on at least a monthly basis. but not so much that they can strangle you as well. the less aggressively it should be managed. Thirdly. Accordingly. to what extent was the excess return a result of asset selection within selected markets (i.g. the “We know it all and do it all” variety) should be avoided like the plague. In conclusion. You should not constrain your fund managers with too many operational limitations (then you may as well do their jobs yourself). you can sit back and watch the results.g. and allowed only to those who have a track record of really superior returns. its return will nevertheless move towards the expected average return over longer holding periods. the various funds in your portfolio may run the danger of becoming carbon copies of each other with inefficient overlaps. As fund managers ultimately market their specific tracking errors. bond. currency derivatives or hedge funds. e. because the expected price movements have already been discounted in the market. European. 60% equities and 40% bonds). fund managers should be able to explain the composition of their tracking errors and the attribution of their returns (i. give your fund managers sufficient rope to hang themselves. For instance. Asian.e. to determine the exact state of the business cycle – and therefore the global liquidity cycle. inter alia. the more aggressive the additional fund managers should become. Lastly. involving primarily country and currency selection and timing strategies). e. ! style funds.e. the smaller the proportion that needs to be actively managed in a portfolio. impacting differently on different stock exchanges. Generally. which is a predominant factor in asset price movements6 – is usually possible only after the event. and (iii) the tracking error for each of your fund managers (say. the more skilful a fund manager.g. the state of the business cycle may differ from country to country. the Global Asset Market Index as your benchmark for equities). and ! market timing. if they have no such specific skills.g.g. a top-down approach. 35 . Always remember that markets are generally too sophisticated to be consistently outsmarted by some clever fund managers. e. An acceptable spread in terms of risk is ensured by stipulating a maximum tracking error. North American or emerging markets funds. Moreover. e. 8. Fund managers who sell all of the above in one package (i.g. Usually a portfolio is split among at least three specialised fund managers: (i) bonds. Fourthly. funds searching for mispriced securities. A tracking error in excess of 5% should be exceptional. a bottom-up approach with emphasis on industry and stock selection) or of asset allocation between markets (i. London. Indeed.3 Selection of global fund managers The first question that should come to mind when considering the appointment of an additional fund manager is what value he can add to the existing portfolio and what the impact of his appointment will be on existing fund managers. Fund managers usually specialise in one of the following fields: ! asset type. they have to specialise to make a living. 85–87. and a portfolio’s composition is best amended by allocating new cash flows. e.consumer buying spree.g. “Of bulls. e.g. ! style rotation. Before being considered seriously.e. After you have decided on: (i) the broad asset allocation (e. the more fund managers are employed. in the longer term corporate profits have a bigger influence. a “buy and hold” strategy is often preferred.e. (ii) the appropriate benchmark (e. The demand is rather for specialist fund managers with proven track records. ! country allocation. the excess return above the benchmark return). bears and financial clock watchers”. timing analysis does not help to predict the size of asset price movements. even if a specific asset is bought at the wrong time. At the same time you should avoid the situation of your employees running excessive risk exposures. In each of these cases the impact on the various sectors of the economy will be different. 19 November 1994. because of reinvested cash flows such as dividend and coupon payments. ! industry positioning. (ii) equities (asset 6 See for instance The Economist. gold or mineral funds. Secondly.g. 3% against the benchmark). Accordingly. Fifthly. e. funds of which the cash components are dynamically altered. large capitalisation versus small capitalisation stocks or value versus growth stocks. equity or derivative funds. asset prices may not react as anticipated.

Once a benchmark and a maximum tracking error are prescribed for each fund manager. It is probably too optimistic to assume that such good times will roll on for ever. Therefore your investment choice is virtually limited to your discretionary investment portfolio. of assets under management plus a 10% or even a 25% haircut. not necessarily a change in the maximum tracking error as well. and (iii) equities (asset selection). with real returns of 8% p. In terms of this school of thought “tomorrow may be quite different from yesterday”. while you have virtually no say in the asset composition of these funds.e. ! Even if all active portfolio managers are doing a great investment job (as reflected in the market index). while for a conservative income portfolio the weights are likely to be around 90% local and 10% foreign. P. Compared with a passive portfolio.4 Expected long-term portfolio returns The return on your portfolio obviously depends on your asset weightings: i.a.e. i. Poor portfolio returns for too long require a “changing of the guard”. Most portfolio managers find it nearly impossible to consistently outperform the market index by some 2 percentage points per annum in the long run. while local fund managers will have to invest in foreign denominated funds (but using rand investments). your net returns after these management fees will be significantly less attractive. In a bull market.e. your discretionary investment pool ought to be fully invested in the foreign market. your foreign fund managers can handle only around $500 000 (i. their share of the trading profit if they outperform a certain benchmark). using the foreign-exchange equivalent of R4 million). but still with the strict proviso that each additional fund manager should add value to the total portfolio. The optimal local/ foreign mix for a growth portfolio is then something like 70% local and 30% foreign for South African investors. More fund managers can be added as a portfolio grows in size. pure speculation) will clearly show up in the tracking error. will outperform passive portfolio management in the long run are briefly as follows7: ! Active trading does not come cheaply. which in turn implies new fields of specialisation.5 percentage points per annum.allocation).12.1 (which assumes that a third of the portfolio is local investments. “The long view”. asset selection by a chimpanzee may be better than that of a 7 Coggan. then historical data mining will determine the weighting of your local and foreign investments. 8. The Financial Times. You have to be realistic about the real returns such a portfolio can produce. this active buying and selling will raise your portfolio costs by at least some 1. p. while the international fund allocation is based on the average asset portfolio of HNWIs in 2005 – see Table 8. ! Although hedge fund managers may make superior profits for themselves (with management fees as high as 3% p. The reasons for it being unlikely that active portfolio management. The second school of thought views South Africa very much from an international perspective. and they cannot all be above-average! ! Active trading strategies that focus on short-term results often do so by implicitly harming the strategy’s long-term survival chances. Your contractual investment pool is bound to consist nearly fully of local funds. The first school relies on the great philosophy that “tomorrow will be like yesterday”. According to this school the total weight of emerging markets – which includes South Africa – in your portfolio should never exceed 20%. Indeed the market index is the average of all fund managers’ performances. per definition a large part of those will have to under-perform the index.1 again). excessive gearing by way of derivatives or over-hedged currency positions (i. it would be dangerous to base profit projections on financial data of the past two or three decades.e. bonds versus equity investments. and so on.a. If you do indeed believe this. the period 1984 to 2000 was a golden era for the equities markets. local versus foreign investments. Ultimately long-term economic growth is determined by the size of the workforce and productivity increases and these may well have peaked in the recent past. 12/13 August 2006.2). There are two broad schools of thought. Accordingly. but there are obviously other possible combinations – all depending on your insights and time horizon. Seen from a historical perspective. London. 36 . such as hedge funds. As your contractual investments are already a third of your total portfolio. Nowadays active fund managers typically turn over your entire portfolio during one year. Because South African exchange control regulations currently stipulate a maximum direct investment of R2 million per adult (or some R4 million per household).. The first question to be answered is how much to invest abroad. there is little purpose in interfering with his day-to-day operations and speculative bets. compared with about a 20% turnover some 50 years ago. on average (see Table 8. Indeed. One possible investment portfolio is depicted in Table 8.

2% 4.7% 7.8% 9.0% 1.3% 2.6% 1.8% 10.5% 1. But you will also have to keep an eye on costs.9% 9. Asset class 2002 2003 2004 2005 And don’t forget that on this 25% 10% 13% 13% Cash amount taxes have to be 30% 25% 24% 21% Fixed income coughed up as well: income 20% 35% 28% 30% Equities 10% 13% 19% 20% tax and capital gains tax being Alternative investments 15% 17% 16% 16% Real estate the most important ones.a.2% 7.8% 1.6% 10.1991between a lucky and a Period weights 2006 2006 2006 2006 2006 2006 good portfolio I South African contractual investment pool manager? Statisticians Cash or T/B's 3.5% 0. 2006 Assumptions: required – ultimately all Alternative investments returns = real equities return plus: 3.5% 7.5% extensive and expensive IV Total net real return 100.9% 8.1981.2: Asset allocation of HNWIs real return will be of the order of 4. Lots of time Sources: Barclays Capital.1% 3.2% 3. your net Table 8. active stock fund managers need to assess the probity of a company’s management.6% 7.7% 8.8% 5. and the economic conditions before even attempting to calculate the fair value of its shares.4% 10.0% 1.1% 7. and quite USA 5.6% 9.0% 7.4% 1.4% 11.0% 7. using a host of different measures. 2007 and deep pockets are Capgemini.6% 10.0% 2.0% 2.5% 2.9% keeping it secret for Alternative investments long. If even the professionals fail so spectacularly.9% 5.0% 7.1% 2.9% 1.0% 9.4% 3. Total 9.9% 8.9% 6.2% 7.1% Total 20.6% 8.3% 5.5% p.3% 1.3% 10.3% 5.5% of the value of assets under management on average.7% 9. How difficult this all is.6% 5.8% 9.2% 5. the appeal of its products.1% 2.2% 7.0% 3.6% 4.7% 1.0% 3.0% 8. but how do (Before expenses and taxation) you differentiate Portfolio 1926.5% 2. Accordingly. a gross real return of some 6% p.0% at your cost.9% 4.1% 2.2% 5.8% 11.4% 4.8% 8. which should not exceed 1.0% Expenses and taxes (as per Table 8.0% 7. he is UK 10.0% 10.9% 12.3% 5. 2005 and 2006 37 .1961.8% 0.6% sacrificed in one such USA 34. what is your claim to fame? After all is said and done.3% 7.8% USA 7.1% 5.1% 3.6% 6.5% instance.0% 7. the threat from competitors in the sector.3% 2.0% suggest that it takes a Equities 16.1% possibly against him.0% 1.6% manager has discovered Total 14. is a good performance for an investment portfolio in the long run (see Table 8.9% 9.0% 1.2% spectacular blow up.0% 6.0% 1.5% 10.1971.4% ! Active fund manageIII Total gross real return 100.5% 2.7% 3. is clearly evident from statistics: very few fund managers consistently beat the market index.7% 6.3% me n t d e p e n d s o n Expenses and taxes 2. Equity-Gilt Study.1: Gross and net total real returns on cash.6% 5.1% 6.0% 2.6% 9.9% 11.0% 4.6% very fast in the financial USA 7.5% 11.5% 2.7% 5.0% 9.5% 2.3% 1.0% 8.6% 8.0% 0. From your gross return you still have to pay management and safekeeping fees.6% 12.8% 3.2% 8.2% 5.0% 7.9% done to your portfolio.2% 8. and soon his Total 14.3% 9.0% 8.0% 9.6% 11.0% 6.1% ! If yo u r c a r e fu l l y Bonds selected active fund UK 7.9% Years of profits may be Real portfolio return (growth) UK 34.6% by everybody.1% 6. bonds and equities (% p.4% 6.7% Bonds 13. For Property fund investments returns = real equities return plus: 2. Total 11.0% 9. in the long term.5% 3.1).0% 11.1946.5% 1. II Global discretionary investment pool By that time irreparable Cash or T/B's UK 4.7% 9.8% 11.5% 1.8% 12. After this sacrifice you are probably 100% 100% 100% 100% Total Source: Capgemini.0% 8.2% between luck and skill.6% 9.4): 2.0% 6. Sub Total 68.7% 5.1% markets. Success travels UK 7.2% 5.5% 8.2% 5.6% data mining.0% 10.7% 2.1% 5.8% 3.4% 2.5% 9.0% 5. Ibid.6% unlikely to succeed in USA 10.9% 1.0% 6.8% 7.9% 6.5% 2.0% 5.8% 10.9% 6.4% decade to distinguish Total 32.a.professional fund Table 8.0% 7.9% Property strategy could be used UK 5.7% 6.6% 9.a.7% a uniquely successful Equities trading strategy.3% damage may have been USA 4.) manager.5% 10.0% 0.3% 10.0% 2.

5% largely based on index funds). Trust fees 0. dividend and interest income are nearly all taxed at the same rate (with a maximum rate of about 43% of gross income depending on the specific state). Depending on the financial service provider chosen the TER fluctuates usually between 1% and 2% of the nominal value of the assets under management.3: Net real returns after expenses and taxes (% p. dividend and interest income are all taxed quite differently8.7% spectrum.) important differences between gross nominal returns and net Returns Portfolio A Portfolio B real returns on your Gross nominal portfolio return 8. As the fixed fee for a trust ranges between $5 000 and $10 000 per annum. the Net nominal portfolio return 6.0% 0.0% 73.1% investment portfolio. taxes such as uncertified securities tax. In the US wage. In the Netherlands your financial assets are taxed at a flat rate of 1. 38 . in France 45%. only a few made their money out of superior investment strategies.3% aspects can be highlighted: ! In many industrial countries financial service providers have to disclose their total expense ratio (or TER).5% p.5% 3. brokerage. custody. should your total portfolio be invested in equities and/or alternative investments the TER can be a high as 3%. indirect tax on society that flows directly from the state monopoly on the issuance of 8 In South Africa.7% 13. On a portfolio of $5 million the trust fees typically account for some 0.5% hedge fund).0% incurred in Portfolio A are at Net real portfolio return 3.2% of the nominal value of the assets under management.5% of the nominal value of the financial assets. Even if you would do all investment business yourselves it is unlikely that your expenses will be less than 1% of your nominal investments. Fiscal competition between nations imply that tax havens avoid any tax on capital gains.e. At the other extreme.6% total expenses and taxes Inflation 3. Table 8.5% the bottom of the cost spectrum in the market. while it is around 25% in the US.0% A is a low-cost fund (e. For those countries that impose CGT. irrespective of the actual income generated by these assets).3% while Portfolio B is an Effective income tax on financial assets 1. interest and foreign dividends is taxed at individual tax rates with a maximum of 40%.25% and 0.0% 0. particularly because brokerage for smaller trades can be very high.a.2% of the current market value (i. And for those that did succeed the chances are good that some form of insider trading formed an integral part of their successful trading strategies.5% 49.e. performance fees.0% 6. whilst interest and foreign dividend income enjoy certain tax exemptions. ! Capital gains taxes (or CGT) are in essence a tax on top of the informal inflation tax.6% 6. local dividends are tax free. this legal structure is economically viable only if total investments are counted in millions of dollars.7% 9. income in the form of wages. but will be compulsory in the near future. And.a. the tax rate usually ranges between 0. ! Total taxes and social security revenues as a percentage of GDP vary greatly between countries. a Capital gains tax 0. – i. in Germany and the UK around 35%.0% reflects the top part of this Expenses & taxes (as % of gross return) 24.g. stamp duty.0% 2. as well as any other fees incurred in the buying and selling of the assets in the portfolio. In South Africa the taxation of financial assets depends on whether these assets are local or foreign holdings. The following Total deductions (as % of gross return) 60. while wage.0% actively managed fund (e. ! Inflation is an informal.left with a net after-tax real return of some 3. Pre-tax nominal return 7.g. bank charges. not significantly more than the net returns on contractual investments. Portfolio Total expense ratio 1.3 summarises the Table 8. trustee and audit fees. In South Africa this is still voluntary.0% 3. but countries with overstretched fiscal budgets can mostly not withstand the temptation to levy this tax as well.0% 3. Expressed as a percentage of the market value of your financial assets the effective tax on investments in the OECD countries ranges roughly between 1% and 2% (but in tax havens this percentage may be zero). while Portfolio B Expenses & taxes (as % of portfolio value) 2. TERs include all expenses incurred by the service provider such as: annual management fees. as in the long run most of the nominal share price increases are inflationary in nature. ! Trust fees will be incurred if your portfolio is located in a discretionary trust. not surprisingly. Furthermore. Japan and South Africa. In Sweden it is about 55%. administrative costs.

4: Net real returns after expenses and taxes (% p.2% policy.8% 74.2% 5.6% 5.4% independent.1% (as % of gross return) in consideration. As evident from Table 8.3% 5.e.g.6% 11.6% 12.e. though.2% 0. the soTable 8. index funds).5% 9.6% 2.4% 2.6% inflation targets below Net real portfolio return 3.6% 6.2% 1. 39 . accumulating sufficient funds for retirement is going to be difficult for most people.2% 6.9% 3.3% 0.3% 12.9% 5.0% 1. and have Inflation 4.1% 5.0% 1.2% 0.6% 2. Only very few talented portfolio managers succeed in doing so consistently. Clearly with contractual and statutory deductions on such a large scale.2% 0.1946.0% 1. Fortunately. as talent does not come cheap). But there is a silver lining around this dark cloud: hopefully high management fees go hand in hand with high portfolio yields (i.1971.8% 2. which complicates the Maximum income tax rate: 40.0% 10.6% 8.2% 6.4% 10. and particularly so in the long run.8% 2. and therefore it is generally better to stick to a low-cost fund (e. based on the assumptions underlying this estimate). your net real return will be similar to that of a low-cost portfolio.2% 1. Pre-tax nominal return 9. If 1926.2% (as % of gross return) and 6% p.7% 11.8% 24. total portfolio Memorandum items: expenses and taxes range Real portfolio returns 6.9% 8.9% 24.8% most central banks in Effective income tax on the Western world 1.5% (as % of portfolio value) still ranges between 3% Expenses & taxes 25.2% 0.2% 0.2% 1.0% 1.2% returns. the state Gross nominal portfolio return 10.3% 11.5% 21.2% 0.4 the difference between gross nominal return and net real return was on average some 70% during the last 80 years (i.1) total nominal value of your Inflation rate (US) 4.2% financial assets (including South Capital gain tax 0.a. If your fund managers do indeed succeed in outperforming the market yield by some 4 percentage points.4% 22.1961.2% 0. in a Assumptions: high inflationary country very Portfolio value in US$: 5 000 000 little may remain over from Total expense ratio: 1.1% Africa) are now Net nominal portfolio return 7.0% 1.9% 8.a.5% 2.4% 10. a superior performance implies a relatively high cost.7% 3% per annum.2% 0. Total deductions Taking all the above factors 67.7% 5.1% is in effect involved in a Total expense ratio 1. The South African Reserve Expenses & taxes Bank’s inflation target 2.3% between 2% and 6% of the (as per Table 8.e.7% 9.3% 5.0% massive confiscation Trust fees 0.2% 0.6% 6.1991inflation becomes Period 2006 2006 2006 2006 2006 2006 hyperinflation.5% 23.money (i.7% 49.0% major way.5% 75.6% financial assets.6% 75.9% 12. Indeed.0% funding for retirement in a Capital gains tax: 10.7% 11.0% 8.2% 1.6% 3.6% 3.3% 53.1981.0% Trust fees in US$: 8 000 your gross nominal portfolio Effective income tax on financial assets: 1.0% 11.) called “legal tender”). But to outsmart the market by such a large margin will be no easy task.2% 1.0% 3.6% 2.5% 2.

The trust itself can be established in any country you desire. Switzerland. the time has come to consider the creation of a discretionary trust. Tax havens and their uses. The trustee and management fees of an offshore trust today amount to anything between $5 000 and $10 000 per annum. while the Swiss global banks are reputed to be the most expensive. So. Firms of attorneys are probably the cheapest. London: The Economist Intelligence Unit.e. which advertised itself as the ideal place to “checkmate the taxman in one beautiful move”. For those who have slightly less and who are already accustomed to being treated like a number in daily life. For example. Depending on the degree of your offshore involvement you may either need an offshore discretionary trust (which is sufficient for your global fund management and inheritance planning) or an offshore company (which may engage in a wide range of activities such as investment portfolio management. which need not always be a safe haven). Usually this is done in a country where taxes are low or where the taxman is understanding (i. So your trust assets have to amount to at least $500 000 to make it worth your while. Because of their complexities offshore trusts do not come cheaply.e. trading.g. If required. the South African tax authorities at the time were rather relaxed about playing chess with their counterparts in the Ciskei. prior to its reincorporation into the Republic of South Africa. The powers of the trustees in dealing with the trust assets are defined in the trust deed and these may be as limited or as encompassing as preferred by the settlor (i. For instance. property holding. ownership of yachts. which at times may become extremely complex. while your trust assets are protected against possible claims from creditors. and you are well-advised to consider appropriate professional advice before making any final decisions. Such accounts are also helpful in maintaining privacy. or the country of incorporation for your offshore company. 1 2 An excellent overview is given by Doggart. and running offshore holding companies). the Swiss themselves prefer Liechtenstein as their tax haven. The choice of jurisdiction for your offshore trust.CHAPTER 9 TRUSTING YOUR TRUSTEES When your total net wealth starts to run into millions of dollars. 40 . while the Vatican City has even obtained divine approval. The tax advantages offered by the Ciskei qualified it for immediate inclusion in the tax haven blacklist of the industrialised countries. Politics often dominate tax morality. 9.1 Local trusts A discretionary trust is a legal entity that enables you to set aside part of your estate to be managed by trustees for the benefit of the beneficiaries of your choice. depending on the level of activity and institution used2. although Switzerland is still a much preferred safe haven for the global rich (rendering about a third of all (non-domestic) private banking services in the world). ships and mineral rights. is highly respected. only a broad overview can be presented here. Ultimately a high cost is attached to the benefits of a low tax regime. because a trust has its own legal identity. administration and taxation of a trust are legal matters. The trust relieves the individual of title to the assets as the trustees assume independent legal ownership. a so-called tax haven. There are many possibilities here. a point which entrepreneurs should never lose sight of. the power to make a capital payment from the trust fund to a beneficiary) may be exercised only with the prior written consent of the settlor or of a person nominated by the settlor (“the protector”). The establishment. It is exactly the sheer complexity of taxation that opens the opportunities to pay less tax. 2002. C. Accordingly. and the relative attractiveness of various safe havens is mainly dependent on personal needs. Inheritance planning can now be done more elegantly. Obviously not all tax havens are as notorious as the Ciskei. In contrast. certain important powers (e. A trust will enable you to manage your private assets similarly to your company assets. is totally dependent on your personal needs and no generalisation is possible in this context1. the Ciskei was such a tax haven.. This may come in handy in case of (heaven forbid) bankruptcy. captive insurance. the numbered accounts of Swiss banks may present a cheaper option. The beneficiaries may include yourself (“the settlor”). In this regard it may be noted that the Swiss banks are experts in imparting such advice. your family or charities. the individual transferring the assets to the trust). Safe havens come in many forms and disguises and offer a wide range of services. one of the oldest safe havens in the world. but are not as flexible as a trust.

! Legal security. ! Simplified estate and succession planning. 3 Banks of Switzerland. The success of an offshore financial centre ultimately rests on six criteria3: ! Reliability. In addition. the days of exchange control seem to be numbered. of the capital value of the trust. unauthorised bodies (such as foreign governments) should be barred from investigating an individual’s financial circumstances. but the moral argument seems to have been settled out of court by improved technology. cit. ! Privacy. As the assets in the trust are no longer your assets (they now belong to the trustees).As the trust is a separate legal entity. An offshore trust may assist individuals in their tax planning if their unit trusts. the trustees can manage the inheritances of minors or provide for the needs of the surviving spouse (all in terms of the letter of wishes). and well-capitalised financial institutions. The jury is still out on this issue. Basle. for a variety of reasons. ! Fund management. Furthermore. and available in sufficient numbers. Moreover. 9. and there should be no requirement to register the trust in the offshore centre itself. And any law that cannot be enforced is a bad law. as the trustees manage these assets in terms of your letter of wishes. as they are not subject to the prudential requirements of local governments (which often classify their own debt as a prescribed investment). ! Efficiency. it continues after the death of the settlor and is therefore ideally suited to handle complex wills. Bermuda. 41 . Offshore trusts are. as a rule. ! Fiscal and political risk management. located in tax havens (Isle of Man. In the South African legal context offshore trusts are particularly interesting for those residents who have multiple nationalities and tax domiciles or who stay abroad uninterruptedly for longer than 183 days a year (the so-called “taxpats”). There should be social and political stability. Moreover. Staff should be technically competent. Local and foreign citizens should be equal before the law. 1992 and Doggart. A trust (usually either a family or a charity trust) has a number of advantages such as: ! Continuity. op. and exchange control regulations are seen by them as no more than a bureaucratic hurdle. more specifically the interest costs on public debt. etc. ! International fund management.2 Offshore trusts Ultimately. Although a trust seems ideal for people who are financially well-off. the trustees may give you (the settlor) power of attorney so that you can still manage these assets directly. The courts and law firms should be competent. a marginal tax rate of 98% on investment income. ! Tax efficiency. which makes the enforceability of exchange control virtually impossible. Offshore trusts hold even greater advantages than local trusts in that they can address the following aspects as well: ! International tax efficiency.a. any distributions of the trust to individuals may be taxed at the (lower) incomes of the beneficiaries and thus at their (lower) individual rates. In terms of the so-called power of distribution.g. Switzerland – Excellence in Banking. Your death will not affect the assets in the trust.). An offshore trust can deal more effectively with confiscatory government policies (e. would prefer not to hold them himself. Running expenses amount to about 1% p. ! Protection against creditors. As assets allocated to the trust do not have to be transferred after your death. An offshore trust can look after your global investments without any difficulty. Your business partners or other interested parties will welcome the continuity of a business concern should you die unexpectedly. Channel Islands. Financial institutions should be backed by the most modern means of information technology. A main feature of a trust is that it enables assets of many kinds to be accommodated effectively – the assets having been selected by a person who. Bank secrecy should be legally enforced on all bank staff. proper business conduct. no creditor can claim these assets in the case of your bankruptcy. The laws of a country should protect individual freedom and property. it obviously entails some costs. they are not subject to estate duty. Liechtenstein. without the trustees’ involvement. The trust can take over all your discretionary investments. as prevailed in the UK in the seventies) than a local trust by investing the trust assets abroad. yachts or aircraft are held abroad. taxpayers vote with their feet. Accordingly. offshore fund managers have greater freedom to invest in what they consider attractive. while entrepreneurs in these countries are increasingly attacking exchange control by claiming that a state has no moral right to limit the free movement of capital. Governments in developing countries often argue that exchange control is required to lower the domestic rate of interest.

g. Liechtenstein.e. while Switzerland emphasises its size and long-term status in this market. Op. ! Accessibility. Moreover.. is particularly suited to deal with inheritance needs. The moment tax cheating becomes both endemic and respectable – a near hopeless combination. p. help and a safe haven for their capital. According to the above criteria offshore financial centres such as the Channel Islands score very high. many offshore financial centres would face ruin. Costa Rica or the Seychelles. insider trading and other organised crime. if they do not harmonise their tax rulings with international (liberal) standards. For instance.. the Channel Islands consider themselves among the best safe havens for the ordinary rich. A capital-gains tax violates the basic fairness principle of income tax – i. Moreover. to many taxpayers. morality seems out of place in a matter that concerns only what is rendered to profligate Caesar. and (iv) “refugees” from non-liberal states should be offered sympathy. Great and long-term harm can be done to a country’s tax morality if the appetite of the taxman becomes insatiable. Svalbard Island touts its nice and icy approach to tax matters. (ii) a capital-gains tax is fundamentally unfair6. See Doggart. Between these extremes there are many shades of grey. the size of the various countries is today as follows4: Switzerland 35%. for instance. The choice of jurisdiction depends mainly on your specific needs and whether you want to be subjected to common law (i. in the UK the so-called “non-domiciled resident” is only taxed on his foreign income remitted to the UK. as found in Italy today – the government faces major fiscal problems. It should be noted though that the large industrial countries themselves are also tax havens to some extent. Caribbean Islands 10%. two similar individuals with the same income should pay the same tax – because the primary sources of capital gains are inflation and retained earnings. 7 8 42 . the Isle of Man or Liechtenstein. US 12%. Op. usually with the jurisdiction of the trust either in the Channel Islands. As long as there are major differences of opinion among national states on how to address these “human rights”. An offshore financial centre should be physically and legally accessible. But unity among taxmen seems difficult to achieve.Professionalism. because government action is anchored in political ideology.e. Channel Islands and Luxembourg 6% each. Staff training should be of the highest quality to ensure the best advice to clients. Confiscatory taxes imposed by 51% of the electorate on the other 49% may be legal. while you are bound to raise an eyebrow when evaluating. business in offshore centres will boom. and the rest 11%. Nominal income gains should be adjusted for inflation. many people have elected Switzerland as their offshore centre. the British concept) or civil law (as reflected in the Stiftung and Anstalt structures in Liechtenstein). 7.e. In making your final choice you will have to depend largely on your trust advisers. On this score the Maldive Islands are too remote and the Vatican City is too exclusive (reserved for the pope and papal staff only). non-criminal tax evaders and capital hoarders. UK 15%. with its Stiftung (“foundation”) structure.cit. In terms of the amount of offshore foreign wealth managed. even the US and UK! 9. Monaco claims its elegance as an advantage. the effective marginal tax rate should not exceed 49%). the Netherlands Antilles see as their strong point their extensive doubletaxation treaty network (operating via the Netherlands – which is indeed very attractive for multinationals). In all these safe havens there usually is complete freedom to choose a trust’s beneficiaries. Hong Kong 5%.e. At the heart of the matter lies the value put on individual freedom. According to volumes. cit. Moreover. 4-5. to avoid a tax revolt government should have its own interests at heart by keeping tax burdens bearable7. but still illegitimate if the consent of the people to be taxed is not obtained. national states have become aware that. To keep off the blacklist of the industrialised countries it is in the best interests of offshore centres to avoid becoming involved in the laundering of “dirty” money made from drug trafficking. I. (iii) private property and individual freedom can be truly effective only if an individual’s financial circumstances are shielded from the gaze and intrusion of unauthorised bodies. pp. each claiming specific advantages: e. Increasingly. their air may soon become thick with the flapping wings of flying capital. Many liberal states are of the opinion that: (i) the individual should always remain the major shareholder in his own endeavours5 (i. while retained earnings have already been taxed at company level. there is a fine balance between a taxpayer’s morality and the appetite of the taxman.3 Avoiding the blacklisted spots If the taxmen of the world were as united as the workers. So fiscal competition as a tool of economic development is attractive to many countries. Anyhow. Offshore centres are in keen competition with one another. while its Anstalt (“establishment”) structure is very flexible for corporate tax planning. Financial institutions should exhibit professionalism in their daily (global) activities. those with “clean” capital8 are becoming increasingly sensitive to the company they may have to 4 5 6 ! Doggart.

where it was owned by a few chosen trustees and thus kept firmly within their control. when wealthy monks entering the Franciscan Order.keep in their chosen offshore centres. Swiss law grants no protection to money made by criminal means (note: tax evasion is not a crime in Switzerland. it is an administrative offence only). harmonised the order’s vows of poverty with their vast personal fortunes by transferring their assets into a trust. The last thing these people would like to experience is being caught in the crossfire between the authorities and organised crime. In summary. Accordingly. little has changed since the 13th century. 43 .

London: Collins. As such it forms the backbone of the social class in any country. 1508. flair. Snobs have the pretensions but no money. namely that. and the larger the change in income. the difference lying only in the holding period of their fortune.. because it usually lacks the skills to make a new fortune for itself. South African Journal of Economics. Indeed snobs are never famous: they are far too busy keeping up to the mark ever to make a mark2. following financial independence.CHAPTER 10 THE REALM OF REGINA PECUNIA Virtually all dog fights are caused by disagreements over status. D. on which interest has to be paid. divorce.G. 459–472. particularly in terms of time – the most expensive item for any entrepreneur. i. as it had already arrived in the land of Queen Money some generations ago.. Without fellow-travellers social elevation may become a very lonely experience indeed. Old money is in a continuous battle against decay. 327–328. and often plain imitation is the only way out. pp. one major problem is how to move your expenditure mix in line with that of the income class you have joined.. the old and new rich are wealthy and famous. and accordingly cultural pursuits have become – mostly against the likings of old money – much more déclassé and commercial in modern times. The rich are very much like man’s best friend in this respect. “Changes in income. race. The old rich have to preserve all they have at all costs. philosophical and political spheres (see Chapter 4). but obtaining social capital. In a sense the old classical ideals are still very much alive among old money. Usury and Theft3 – may even have to be called in to make their lives more bearable. 2 3 4 44 . p. The target is now no longer wealth as such. as it deals with the interaction of money. You cannot make too many mistakes or you risk becoming the laughing stock of your friends1. 1. For instance. Indeed. Although new money often has entrepreneurial spirit. 3. At times this may be even more difficult to acquire than material wealth. which results in major tax payments such as estate duties. 10. Midas’ ears are always evident from under the headdress. York. questions about rank. pp. the topic is essentially of a social nature. When you have struck it rich in life.1 Old versus new money Old and new money should not be confused with snobs and Sloanes. and debt. Old money – in contrast to new money – does not need to change its expenditure mix during its lifetime. which may cost you half your fortune. the greater the need for the consumption mix to change4. new consumption items have to be tried and tested. behaviour and tastes”. The social gap between old and new money often seems virtually unbridgeable. These pretensions increase – almost as a law of human nature – in inverse proportion to actual achievement. Old money is always based on inherited wealth and associated with a distinct lifestyle from birth (and therefore imprinted). Once your wealth has ensured your financial independence. and that work should be regarded merely as an occupation and not as a profession. Moriae Encomium. A. Interpersonal comparisons will have to be made. The lifestyle of new money is not easy either. But its existence is often ravaged by what is called the “dreaded three D’s”: death. power and prestige. 63. 1987. few things concerning man are more significant than the way in which he chooses to spend his money.e. London: Ebury Press. 1 According to expert opinion. S. age. Deceit. nationality or rank. Shock. The official Sloane Ranger diary. bewilderment and even envy are possible negative outcomes. S. you should distinguish yourself in the cultural. And not surprisingly scent marking now becomes a crucial occupation for the retired “celebrity CEO”. its main function becomes securing an appropriate ranking among your circle of friends and acquaintances. Barr. The tastes of a person usually vary with his level of income. To determine the new optimum expenditure mix can be costly. optimism. Triantis. and P. In essence. the new rich have to adapt their needs continuously as they grow richer. irrespective of sex. See Erasmus. a love of risk-taking and the like. selfesteem. 1983. Schama. In contrast. Unfortunately the “three D’s” make this philosophical outlook increasingly difficult to apply in practice. The embarrassment of riches. 1995. This chapter looks more specifically into the problems that come with major changes in your income. The faithful attendants of Queen Money – viz.

3 Social capital Even for the rich the law of diminishing returns comes into play pretty quickly after reaching a certain level of income. Often in such cases you could quickly be dealing with mentally crippled offspring. boredom and exclusion. To catch up quickly later in life is no easy task for new money. because you are too afraid of the birds of prey. growing up in wealth. while the old rich have all the time in the world. maybe tertiary. as they try to master the art of intoxication. especially in work ethics. in these circumstances. money as such becomes secondary. With success comes celebrity status. and are soon a bore to others as well. exaggerated novelty or variety. 1987.New money acquired its slightly derogatory epithets (e. Small oaks grow with great difficulty under the branches of a massive parent tree. Ultimately you may start to hate all the social pleasantries that usually come with always being in the public spotlight. The price for this status is being targeted relentlessly by the press. Like the famous dog that caught the bus.2 The burden of a rich man With wealth come a few specific problems that the less wealthy often oversee. They become bored. Of course endless problems may ensue as a result. ! The relationship with money. After you have obtained financial security. where do you draw the line between greed and wealth? Perhaps you have to look for a couch. Loneliness is the burden to carry thereafter. The biggest problem is usually the impact of wealth on their children and grandchildren. They usually work too much and are continuously running out of time. have tasted many more of the fruits of life before they reached maturity than the new rich. like living in a “gated ghetto community”. The Complete Essays. in importance. Any mistakes here can cost a fortune. ! Avoid that your offspring start killing each other for your inheritance? This type of in-fighting may well occur while you are still alive. Indeed. Like a little bird you may prefer your “golden cage” above the open sky. In essence the underlying issue is here that your children inherit only half your genes and that they grow-up in a palace with servants all around.g. In short. M. Boredom and idleness may also become particularly big problems. And soon the isolation makes contact with the rest of society much more difficult and often plain impossible. not a coach. p. To protect your family against armed robbery and kidnapping requires careful thinking and a vastly different lifestyle. if you define “rich” as more than what you have. What now counts in life are the things that 5 Montaigne. Drug addiction may be lurking around the corner. For instance. ! Prevent your son from marrying a gold-digger? The children often see only romance and innocence. How do you distinguish between the courtier and a friend if you are the top dog? For Michel de Montaigne5 the greatest disadvantage of high rank was the lack of true friends. 10. but no meaningful occupation. extraordinary jewellery. the seriously rich see little incremental benefit in incremental capital. parvenu and nouveau riche) from an often unbalanced consumption mix as well as the envy of old money. and even the bizarre in unthinkable guises). crooks and lunatics. de. London: Penguin. ! Loss of friendship. such as: ! Security. 10. there will always be chronic discontent irrespective of the size of your bank balance. ! Loss of privacy. while you would like to see them streetwise. when they know that all job effort is essentially artificial? “Normal” staff treatment of the corporate “crown prince” is of course impossible. 45 . what are you supposed to do thereafter? Unless you have strong outside interests. Of course kidnap insurance is now a must.g. Or alternatively. The rich often develop a complex psycho-relationship with their wealth. The danger then is always that the new expenditure patterns will be somewhat unbalanced for the experienced eye (e. Formal education may be a nightmare. Interference is difficult and delicate. the new rich are often harassed consumers with little time for leisure. For instance how do you: ! Motivate your children. ! Ensure that your children are given a fair chance to do their own thing? Be fair.1041. many self-made millionaires find it nearly impossible to relax. The pressure on children may become virtually unbearable if they are expected to match the achievement of the creators of wealth. In the end you fear the Chinese observation: “Wealth does not last for more than three generations!” Apart from the children there are a few other problems that come specifically with money. to save time. the new rich – in contrast to old money – can afford to make a few small and quick mistakes in their expenditure pattern or to taste only superficially. ! Ensure that your children are not being spoilt rotten? To avoid this is all far easier said than done. ! Idleness. Moreover. The old rich.

and taste is cultivated only over time. those that can scuttle up the social ladder with you. the following attributes: ! Friendship. And remember: shared pleasures are double the fun! ! Skills. A true feeling for art and culture cannot be learnt8. The desire of giving rather than taking (besides the classic virtues such as honesty. you should not give. Indeed. if you have money and the abovementioned attributes. All of the above attributes are difficult to master and extremely expensive in terms of time. for instance. But was there a future labour waiting for Heracles after he had been elevated to the ranks of the immortals? How much time and effort would be required to adjust his consumption mix to that of the gods? “Ambrosia and nectar only please!” 6 7 At the end of his life Croesus could offer only his chains out of true generosity to his beloved Delphi. but of course in your circle of friends a bit more is required. p. gardening. and courage) is perhaps the most fundamental characteristic of friendship. like Croesus6. Op. 8 46 . though he possessed all other goods”. Instead try to force yourself to give from what you really like yourself and have in short supply. Production skills are now no longer required. For Aristotle at least: “No one would choose to live if he lacked friends. more wit than waste! ! Taste. But. few things can really go wrong. but it may be even more challenging to master the “half halt” in riding or to steer your yacht with full sails into a gale. fencing. you cannot enjoy the pleasures of friendship. music. See De Montaigne. You are born with this. it does not really matter how long you train a donkey – it will never become a horse. besides wealth. sailing. It is often defined as friendship with wings! Odysseus summed it up nicely in his darkest hour beneath the walls of Troy: “One more time. is not really for sale. Good spouses. than with whom you eat” (Seneca). loyalty. For instance. And indeed what would Heracles. from your surplus pile. the entrepreneur has completed many energy-sapping labours before he arrived. riding. you will notice that there always is room at the top. This highly valued asset will come within your reach if you can display. This often misused concept requires a little more than just camaraderie and enjoyment.cit. inter alia. after having seen the world. have been without his friend Theseus and vice versa? ! Love. are worth their weight in gold and more. Wit at the table is highly valued. “You should be less concerned with what you eat. You prefer an elegant.1252. Indeed with Pallas at your side. Athena. Skills and knowledge absorb massive amounts of time. Accordingly Chilo’s refusal to promise to come to a banquet at Periander’s before finding out who the other guests were. not a copious feast7. Like Heracles. In this context.. generosity. What are your skills in languages. Social capital. Without this it is extremely difficult to enjoy the best fruits of life. love me as much as you can”. but has to be earned over the years – many years in fact. but what about your consumption skills? The classics already considered those who could “neither swim nor read” beyond repair. and culture in general? Ordering your caddy around elegantly is no doubt difficult. unless you are willing to make enemies. ! Intelligence and wit.cannot be bought or stolen. despite all his prowess. Like Heracles he looks rather tired towards the end of his journey. Your friends and loved ones need your time more than your money.

or those about to grab. You can slacken the sails. are often more difficult to please. Scene 2. and other famous men of antiquity.’ As they stroll off. Niccolò hears himself 1 2 3 4 5 6 Alighieri. With luck you may even spot the rare Cape vulture. This requires careful consideration. To get hold of your legacy the captaturi. Der Ring des Nibelungen. But fear of hell. he is told that they are the blessed of paradise whom one reads about in scripture: ‘Blessed are the poor for theirs is the kingdom of heaven. 1876. 1606. For further details see Wagner. S.CHAPTER 11 RULING FROM YOUR BOARDROOM IN THE SKY Your final years should herald a particularly happy period of your life. that in the northern celestial sphere. R.. Modern technology has made it possible that they can even offer you – what Juvenal could only speculate about – the ultimate sacrifice. In fact. Satires. and should be done long before you hear the rivers bubbling underground. he sees a long file of people. for instance. The divine comedy. ragged.g. These. Juvenal. Op. Legacy hunting is a favourite pastime of any rentier and should be accepted as such. the Trojan Horse). Indeed. is a bad motivation for action.. where the fair and goodly company gathered. Plutarch. profits of a different feather can still be made. but with money. cit. because it is written: ‘The wisdom of this world is the enemy of God. B. p. But a few minor tasks still have to be performed. Dante. Are the Elysian Fields open to those who are fearless or to those who have done no wrong? If you think that there is little purpose in agonising over the few things you did morally wrong in life. after years of studying all the known maps to Elysium and paradise. 11.’ As they fade from sight he sees gathering a group of impressive persons in courtly attire. Grazia. Tacitus. and head for the harbour.. 81. you will notice a rather unusual concentration of crows and ravens in the air. These lovely scavengers are scouting for their carrion. are the damned of hell. Among them he recognises Plato. sick. de. In ancient times fat quails were a delicacy reserved virtually exclusively for the aged without children. An alternative route is quite possible in this context. Rationality and fear do not sit comfortably together at the same table. As long as you recognise the true nature of these birds. though. Like Volpone4 you could turn the tables on your new friends by accepting all their presents and best wishes and then returning their kindness by solemnly emphasising your bad health and promising them pride of place as the inheritors of all your earthly goods.. Inferno. Strangers to this part of the garden were kept at bay by fear. 1321. as nothing can be taken along on your last trip. Niccolò had a vision just before he died6: “. namely an elephant. Remember. you are grossly mistaken according to the pardoners. 341 47 . For a start you have to hand over all your earthly possessions. he is told. Act III. gather the ropes1. ruling – in this sense – constitutes looking forward. Asking who they are. Siegfried. Those friends of yours who promise you a nice spot in hell. the “Lord of the Ravens” also used fear to protect what was closest to his heart5. Besides the pleasure of giving – including a few poisoned gifts to show your true talents as a respected entrepreneur2 – there is the enjoyment of planning how to influence events on earth long after you have departed. Volpone. with tusks. Jonson. all mishaps have to be cleared before departure. weary.. Livy.1 The legacy hunters As you approach the harbour. will either promise you anything under the sun or threaten you with hell. that hell was located within paradise. Indulgences have to be bought en masse. the smoother your passage to paradise. Machiavelli. figured out. XII. Inspired by the motto “to make money you have to spend money” they may offer valuable presents. By their lights. Since ancient times the poisoned gift has played a major role in strategy: “Beware of Greeks bearing gifts” (e. and the more property given into the Dreaded Dead Hand. and that these are currently all water under the bridge. unless you pay up. or the garden on God’s right hand. And their feeding frenzy is approaching. walking and gravely discussing matters of state. XXVII. where Wotan’s will rules. It is a game in which the hunted and the hunter swap roles continuously. so profitable for the Princes of the Church. he discovered it to be the special retreat. on your chosen altar3.

even of those of sound mind. Like the builders of the great Gothic cathedrals. Horace already observed: “A worthier heir shall consume your Caecuban / preserved with a hundred keys and drench / the pavement with a fine wine / too good for priestly banquets”. Likewise at corporate level you have to ensure that able people take over the rudder. In fact. Often the largest portion of the inheritance goes to the lawyers as the children fight for their respective shares. rather than pampered at the micro-level. A charitable foundation has the further advantage of being a good training school. London: Penguin. should the gates to your family business be thrown open to them. Usually it is impossible to think about any worthy replacement for yourself and therefore it is best to grant maximum freedom to the board of directors in choosing the executive management of the day. you have to plan well beyond your own lifetime. as a fool and his money are easily parted. See Horace. To preserve certain key positions in advance for your family members usually does not work because. The wrongs need to be corrected at the political level. Eros seduces the intellect. Should your children marry. Tax also takes its ample slice of the cake. This type of damage could have been avoided entirely had you given some timeous thought to ruling from your boardroom in the sky. 385. Rather look for your ideal rainforest – you may even do so at the cost of the proposed charity. Experience has taught that the greater part of an estate is frittered away by the inheritors10.being asked: ‘With whom would you rather go?’ ‘Me?’ he said. one generation is too short for building a really great commercial empire. In this way they will learn hands-on money management.’” Fear seems to ensure the select membership of hell: “The place jokingly called hell by those who know it is a corner of paradise. 48 . there is a lot you can do with your largesse: you can even give to the less fortunate in life. All these niceties can be thought through carefully while you coolly await the arrival of death. only half your genes land up in your children. a garden for God’s elect. modestly located in – no surprise here – the Paul Getty Museum. Alfred Nobel showed a fine sense of humour when the money he made from dynamite for the war machine was used to fund his “peace” prizes. Certain grants can be made over and above the yearly emoluments. 119. The complete odes and epodes. you can put them in command of such a charitable foundation. ‘I am not tagging along with those ragbags to go to paradise. if you are really motivated to stop the suffering inflicted on animals or to improve the life of the blind and crippled. for instance if an exam is passed.3 Largesse Philanthropy is a luxury. For example.7 But before your final departure at least two other issues will have to be settled: your succession planning and your largesse. p. hiring and firing techniques. p. In your letter of wishes you can dictate under what conditions your trustees could make your money available. Satires. a place for the society and conversation of liberal spirits”. For instance. the Giver of Wealth. Rather than letting them loose in your family business. If you have serious money. It should be noted. to the environment. 11. to culture or the arts. and benign spirit of an academy. well presided over not by a fallen angel but by Pluto the Rich One. of course. In doing so your discretionary trust (or Stiftung if you preferred civil law to common law procedures) will now come in very handy. I. I am staying with that other company. But in your will you can be generous. through improved legislation. possessor of a beautiful wife – ‘woman beautiful above any woman in the world’ – traveller to earth and back. how to be amicable with a board of trustees and how to stop quarrelling among themselves. though. 1983. Juvenal. 11. as already noted. it is better to support a political pressure group with your money. the brother of Zeus and Poseidon. and should not be engaged in too early in life. a garden of delights. To handle wealth does not come easy for those who grew up with it. Over time such effigies have too often been used as public latrines – or worse9. 7 8 9 10 Ibid. particularly for your children if they are still relatively young and inexperienced. to talk about the state and go to hell. Usually it is not such a good idea to offer the city of your birth a statue of yourself. and Paul Getty created a foundation to fund one of the best art collections in the USA. minors or your spouse can obtain a specified stipend. Another big chunk disappears when the family business is mismanaged by the second and third generations. Only when they have successfully negotiated this hurdle.2 Succession planning The assets you have accumulated over so many years will have to go on without you.. that largesse or charity as such has little impact at the macro-level. For instance. In time to come this may even increase the esteem in which you are held. no wealth should overflow to the bride (a last line of defence against gold-diggers8).

Ovid).. no sight. accumulated like the venom in a serpent’s tooth. increased loneliness and boredom. Beauty was simply moderation and proportion5. as they hold the highest rank in human intercourse: carrying off your finest judgments and biases with their great authority and their wondrous impact”. Nonetheless. For people such as Schopenhauer. Falkena. He felt man needed to be tamed and restrained by civilisation. The moment your body resembles a bag of bones. Firstly. but also not too little. Since all these components of happiness are interdependent. philosophers had their doubts about the quality of man’s character and therefore his chance in becoming content. this highest stage of richness. It is no good to be alone in a grand villa and not being able to share these pleasures with friends and loved ones (note again: shared pleasure is double pleasure.g. i. Op. of storming and raging”. Remember. See Michel de Montaigne.cit. not too much. Dr Faust).CHAPTER 12 REFLECTIONS ON WEALTH AND HAPPINESS Even with piles of money. Old age can be cruel (e. and/or no memory1). like a demon unchained. the striving for more material wellbeing implicitly occurs at the cost of your striving for intellectual satisfaction and the pleasures of the soul. the mind needs ongoing occupation. contentment remains terra incognita. too much success on one score inherently comes at the expense of another. and not too much lust and love (study e.g.g. Op.. as there are only 24 hours in a day. your soul also needs ongoing attention. for in “the boundless egotism of our nature there is joined more or less in every human breast a fund of hatred. happiness consists of various layers or building blocks3. it simply changes them”. e. you cannot forget things you want to forget. contentment. while grief is halved by sharing). Traditionally. rancour. to enjoy your meal you have to be a bit hungry. later in life. money cannot always buy what is most required. bad health. there are the basic bodily needs for food. You may suddenly notice that you are left with more rations than road2. H. London: Athena Press. and shelter. horrible beast”. For such characters. And not surprisingly he concludes: “Almost all of our sorrows spring from our relationships with other people”. clothing. evidently the vast majority of mankind. the pursuit of happiness remains problematic. but health requirements have to be respected as well. or even a totally unexpected financial calamity. and waiting only for an opportunity of venting itself and then. Broadly speaking. These are largely material requirements. This closing chapter will sketch a few issues concerning the relationship between wealth and happiness. from King Midas). work satisfaction and the pleasures of the soul all have their implicit opportunity costs. while Schopenhauer noted in one of his more friendly moods: “Man is at bottom a savage.g. Old Age should enjoy them” (Seneca). Happiness so easily slips through your fingers the moment you think you have it firmly in hand. Anyhow. the only choice is between loneliness and vulgarity. mental satisfaction. de. you are not dying because you are ill: you are dying because you are alive. According to Homer (Iliad) “Zeus found nothing so miserable on earth as man”. Despite being well-off and therefore having no need to work at all. See Montaigne. mind and soul. who feel surrounded by all those who can “neither read nor swim”. M. Lastly you have to appreciate that material wellbeing. Discomfort precedes enjoyment as a rule. For example. Banking on Happiness.e. Happiness is foremost a striving for the golden mean – i. Therefore in the winter of your life you might find it difficult to hunt down this elusive prey.551.g.B. 2002. “The youth should make provisions. 1 2 3 4 5 Even more painfully. p. Secondly.1 Wellbeing Of course you can easily finance six square meals a day. Therefore not too much material wellbeing (learn e. envy. you still need to invest in intellectual pursuits to ensure dividends. “The power of the Graces is not to be underestimated (“a privilege of Nature” according to Plato). 1199 49 . anger. is obtainable only by ensuring a balance between the various conflicting demands of the body.e. not too much intellectual pursuit (lessons from e. Thirdly. Accordingly. and that Epicurus was right: “being rich does not alleviate your worries. p. which any entrepreneur can easily fulfil. Ultimately the opportunity cost of all human striving is expressed in the loss of time and freedom. no taste.4 you should know that you have passed your due date and that money has lost its glitter completely. no teeth.cit. and malice. 12. For the classics.

the stricter my principles become”.. as it is used up (like food) in the act of its enjoyment. J. But there are other views as well. All this involves time and only a little money. For instance. the weekend in the country cannot be properly enjoyed. Money can buy only a certain amount of wellbeing (e. Clearly. wolves and ravens. while a falcon is fully 6 7 8 Burckhardt. All these “positional” goods (i. Marquise de Merteuil was of the opinion: “The more I see of the world. “The joyless economy: An inquiry into human satisfaction and consumer dissatisfaction”.g. but etiquette tends to create distance and therefore loneliness (note Louis XIV ruled France with etiquette)8. Scitovsky. p. with too many trimmings that you do not require. These “mini-morals” are of course an absolute necessity in polite society. Often your pets become the best fitness trainers and companions. 1998. a high level of comfort and luxury usually goes hand in hand with more formality and etiquette. Before you know it you are packed like a donkey. de. This is also the reason for experienced travellers. Moreover. Soon the motor car is just another asset and a bore. too much comfort quickly results in loneliness. For the ancient Greeks. Proper riding requires many years of intensive training and discomfort. for instance. Vanity depends on jealousy and is accordingly dependent on others: it is therefore ultimately self-defeating. take the purchase of a motor car versus a riding horse. 1961. comfort has only a limited initial positive stimulus for happiness. However. T.As age progresses you have to eat more like a pauper than a prince. good health was the prerequisite for all other kinds of good fortune6. regardless of how rich they are. but it is often a lonely affair. The Greeks and Greek Civilization. the striving for great wealth requires a corresponding lifestyle. But then enjoyment and struggle form a natural combination bringing unexpected benefits: you may even develop a close friendship with your new horse (plenty of examples here: e. In contrast to motoring. Mrs Gucci. London: Oxford University Press. So why should you? Your canine friends generally release stress and give you prolonged friendship. The basic problem with comfort is that it requires no skill and therefore quickly becomes boring. For example. unless you have made the appropriate investments. preferring to travel light. which in turn is the born enemy of happiness. The first week in your new motor car may indeed give you some enjoyment of novelty. namely that of a slave.e. Even with a 4x4 vehicle in the field.g. London: Fontana Press. they all agreed that health was number one. the second best is a noble character. Novelties can be purchased. It is in the nature of the golden mean that the most pleasant experience borders on the unpleasant and that there is even usefulness in a useless activity. fatigue and boredom. food. For those without proper consumption skills the danger of boredom and fatigue is always lurking. the third is wealth obtained without dishonour. but not their ongoing positive stimuli. and housing). Caligula made his horse Incitatius a leading senator of the Roman Empire. 1976. Indeed. If you really had the choice. Tibor Scitovsky famously referred in this context to the trade-offs between novelty. p. whether wealth should supersede a noble character. but too much novelty soon becomes painful. while tiresome bodily exercise also becomes crucial. However. 50 . you would perhaps rather choose to spend the night with your lover in a haystack. money can buy you the best suite in the most expensive hotel. in which case you have become dependent on the opinion of others for your own happiness. this novelty wears of quickly. According to Cicero all you need is a garden and a library. Newness initially has an enjoyable positive stimulus. horse-riding is skilled consumption and has been regarded throughout the millennia as both a science and an art. but more worrying is that all these assets absorb far too much of your precious time. London: Penguin. while Napoleon adored his stallion Marengo). See Laclos. Although ancient philosophers argued about some sequences. and soon becomes negative – particularly if you get overburdened with it. unless you are able to lead or follow your friends in the chase. Les Liaisons Dangereuses. In nature the wellbeing of an elephant requires some 18 hours of continuous grazing a day. Hadrian honoured his charger Borysthenes in verse. rather preferred to be unhappy in her Rolls Royce than happy on a bicycle. clothing. Likewise. Simonides has noted: “To be healthy is the best of all things for mortals. a bit of comfort may be pleasant. Like novelty. ever so loyal to her class. the novelty of your new horse will not quickly wear off. Accordingly. the benefits of riding cannot be reaped.77. comfort and pleasure7.83. you can sleep only in one bed at the time. C. those goods and positions that are limited in supply and that you can enjoy only if others cannot) depend on vanity. unless of course it is treated as a status good. Usually your possessions quickly become a bore. provided of course that you reciprocate their kindness. the fourth to spend one’s youth with dear friends”. But where do you ultimately draw the line between greed and wealth? This again is a question of character rather than money. For example. Odin would not easily travel without his favourite horse. Status anxiety always results if people become uncertain about their proper place in society. For instance.

i. “Plutarch predictably lays stress on the conditional and unreliable nature of all earthly possessions in order to support his doctrine of culture and education as the infallible means to attain virtue and happiness. is a fine thing. courtesy and of course longevity. which involves cultural activities such as writing. if it is already clear form birth that you never have to work for a living.226. playing this specific game has its limits in terms of honour. London. exposed to wicked enemies and often in the hands of the basest men. If you succeed in becoming a true friend of the Muses. Skilled consumption requires the generalist’s skills of judgement and wisdom. Scitovsky. boredom and exclusion. playing music. and therefore have to forgo many pleasures11. leading to increased fatigue and probably a premature death. languages13 are not studied to make a living abroad. he says. And indeed in the end no man is poor by nature’s own standards. even if you see trade as a game with its own rules. Therefore keep your memoirs short! Scitovsky. fame is sublime but not immutable. elephants and lions. 33-72. Ibid. Burckhardt. is likewise skilled consumption and therefore a form of culture. the importance of culture and education – and therefore time management – becomes absolutely crucial. A bit more is required than citing your memoirs9 or playing skilfully your favourite percussion instrument. while production skills are not. of all these men. without which they quickly equate to idleness.. but as keys to open doors to other cultures. only culture is immortal and godlike. and puny compared to that of bulls. Consumption skills are therefore part of culture. as you have. wealth is respected. I took no vacations of any kind and I wouldn’t even read many things that didn’t have anything to do with software. ultimately you are faced with the trade-off: comfort gained. of all we have.2 Satisfaction No amount of money can compensate you for a life spent on a job you hate doing. the money marimba – or cash register – for your guests. But fortunately the talents and likes of people are greatly different.. You reluctantly continue to run your business. that part of knowledge that provides the redundancy needed to render stimulation enjoyable. They clearly understand that those who want much. you have made it as a very fortunate person. Xerxes wept at the sight of his enormous army to think that. For ascetics simplicity is the most pleasant way of life and they accordingly fully subscribe to the old dictum “the more the trappings. the less the freedom”. But suddenly to transform a retired CEO into a Renaissance prince is impossible.”14 An obsession with commercial success clearly rules out the enjoyment of culture and a life in the shade (the classical ideal of vita umbratilis). as private business knows only one pace: full speed ahead! Anyhow.85. 10 11 12 13 14 51 . Indeed. To master the language of nature. The enjoyment of culture is skilled consumption that presupposes learning and discomfort: i. not one would be alive in a hundred years’ time. Firstly. 12. Accordingly. Op.cit.cit. beauty envied but of brief duration. working members of society!10 In contrast to production skills that demand specialisation. 9 Schopenhauer remarked: “According to Herodotus. Therefore choosing this option implies in practice that you will continue to run on your treadmill. To occupy your mind pleasantly there are a number of basic options open to you at your retirement. but at a slower rate than you used to. you can join the Muses.e. the opportunity cost of making all that money in the past). but credit for it only due to past generations. Op. Even leisure activities require major investments.fed after only an hour of hunting. Since only the enjoyment of stimulation is skilled consumption.228. only production and no consumption skills (i. Work satisfaction is in essence a dividend payment.. gardening.” 12. I was pretty monomaniacal. but a matter of chance and precarious too. The above also explains why money cannot be used as the measure of a person’s worth. lack much. health precious but uncertain. while the study of sciences is seen foremost as a pleasant discovery game.e. pp. unfortunately. p. Similarly. Op. physical strength valuable but vulnerable to age and illness. mathematics. p. Noble birth. Secondly. Financial Times. A few skilful assistants may do the trick. but no consumption skills) usually aim for too much comfort. while the enjoyment of comfort requires no skill.cit.e. others prefer the lifestyle of a falcon – always watching. So who cannot but weep at the sight of the thick fair catalogue to think that. only stimulus enjoyment is a cultural activity. of all these books. you can decide not to retire fully. Mr Bill Gates emphasised the implied costs of his commercial success when he announced his “retirement” from business: “If you go back all the way to the early days of the company. consumption efficiency requires the very opposite. which they developed and needed to enhance their efficiency in enjoying leisure. pleasure lost! The nouveaux riches (with production skills. this approach usually fails. Enjoyable leisure in the company of friends does not come for free. however. However. Culture is knowledge.. not one will be alive in ten years’ time”. 17 June 2006. Scitovsky emphasised that culture was the learning of the leisure class. p. some people prefer to go through life like an elephant – always chewing. No wonder it is suspect in the eyes of productive.

understaffed and bleeding talent17. annual and strategic reports. capital budgets. For instance.e. Most entrepreneurs soon notice that material support for The Truth. “Harmless” philanthropy in the Machiavellian sense. as De Montaigne already noted: “O wretched ship of State. concert halls. p. often lack experience. According to Homer (Iliad) and Euripides (Orestes) Zeus organized the Theban and Trojan Wars to relieve the earth goddess of her burden of too many people: “… to liberate the earth from the impudence of countless throngs of mortals”. hauled in different directions by the waves. Philanthropy is in essence no more than a prioritisation of capital allocation. This option is accordingly available only to a selected talented few. hospitals. et cetera. et al. deceit. For instance.88. imperial philanthropy may aim at defusing the looming population time bomb or ensuring maximum biodiversity – this type of charity work always involves “dirty hands”. Do-gooders. you can decide to throw yourself into politics proper. No doubt applying insight and imagination in charity work is a true challenge and predictably many entrepreneurs wreck their ships right here. that you did not pay even more taxes or attend even more board meetings. tax planning. Unless you have invested in your chosen field of expertise in a meaningful way well before retirement (again with all the huge opportunity costs in the form of forgone profits!). the bank will do the reinvesting. also called “imperial philanthropy”. while the ancient Greek oligarchs targeted the masses. riding or perhaps doing some scientific research. For instance. Los Angeles: The J. all large scale philanthropy falls in the political domain. rather than generally supporting the less well-off19. A lifetime spent in private enterprise is not going to be immediately helpful in solving these problems – even if you throw lots of money at them. pp. Ultimately.. If experienced business leaders are helpful after all. In a way all this “do-good philanthropy” is a bit bizarre. Imperial philanthropists often seem misanthropic. The survival of the fittest. Op. which is familiar territory for any CEO. life. they swore an oath: “I will be an enemy of the people and will devise all the harm against them I can”.e. See Hampshire. Imperial philanthropists therefore typically support the elimination of hindrances to inequality of access and opportunity. knew this only too well: FAUST: “…who are you”? MEPHISTOPHELES: “A part of that force which. the wind and the man at the wheel”. the arrogated sovereign importance of man in nature (and therefore the farming of the natural order for humankind’s comfort and pleasure) or the sovereign rights of states in a mutually dependent world. one way or another after your death. it remains a problem what to do with your cargo. anyhow. which. S. museums. 2003. Finally. Nonetheless. Singapore has a child-tax. and a most popular option as well. the drug trade in all its variations. foresaw a new world where the State is forced to issue “breeding certificates” to only approved couples. as their summum bonum is one where mankind lives in harmony with the rest of nature. The production skill of giving then becomes an enterprise again similar to the money-making business: i. The defining difference is “excepting the necessity of getting dirty hands in politics”18. always produces good”. Cambridge University Press. In this context China has “dirty hands” by prescribing mandatory abortion for any woman who falls pregnant with a second child without official sanction. for instance. Thirdly. Most philanthropists prefer “politics” and only a few dare to select “Politics”.sailing. The difference between “harmless” and “expedient” philanthropy is in essence similar to the difference between politics written with a small or capital “p”. while Paul Getty. p. Probably you will then regret. and where the least fit are not artificially prevented from dying out”. is always encouraged and enjoyed by politicians.23-53. 1978. For example. The Good. particularly the letting of (human) blood. on your death bed. pollution and global warming). particularly now that the harbour is so quickly coming into sight. which in turn brings them all the unexpected pleasures of the wild chase: for them no need to harmonise their moral standards with the Law of Nature. and The Beautiful (the famous trinity that always justified yet another war) is 15 Wolfgang Goethe. universities or even supporting the local fire brigade. and try to address in an “expedient” (rather than “harmless”) way the true problems of the world: overpopulation (and the resulting problems of nature’s massive exploitation by “homo rapiens”. as your fortune will be allocated. The easiest way out. involves the familiar goals of building libraries. not private. Paul Getty Museum. 16 17 18 19 52 . if your heirs decide simply to leave all your wealth in a bank account (rather than donating it to charity). is to spend it all on salaries for the do-gooders in all their fine feathers and variations15. staff issues. only hardened philanthropists will try to implement Herbert Spencer’s philosophy of “the survival of the fittest” (whether in business. with his vast experience as a senior civil servant in Weimar. From a morality viewpoint civil war is particularly complex. it is too late to do so later in life. always willing evil. The imperial philanthropist expects the opposite to be true as well. London. similar to taxation without representation. it is mainly because the public sector is so often not up to its task – it is. These “harmless” philanthropists usually underwrite Andrew Carnegie’s dictum: “The man who dies rich dies disgraced”. For more detail see Burckhardt. A far more extreme population policy was followed by the citizens of Sparta who declared war on their own slaves annually to control their numbers. eugenic breeding (see his “As I see it”.e. i. implies a public policy where “the fittest members are allowed to assert their fitness with the least hindrance.). under-funded. “Public and private morality”. society or nature at large).172. you can apply your mind to philanthropy. as the running of a charity trust is very similar to the running of a business enterprise. virtually as a rule. social Darwinism. An old experience though.cit. i. as the supply of these public goods (equivalent to a voluntary tax payment) usually implies much political and economic wastage. like the youth generally. violence and war are moral issues of public. or the conflicting requirements between private and public life16 as well as between the current and future generations.

politicians have ideological passions which so easily become destructive obsessions. It may even bankrupt you (e. Many types of pleasures come to mind. and concentrates all his desires exclusively on sex. Therefore they can operate in those sensitive areas where politicians fear to tread. and they spend their own money. and therefore centre on erotic lusts and blood lusts21. is only the passage of time. An old philosophical question is the psychological relationship between sexual lust and blood lust. procreation is the ultimate “blood sport”. and ultimately they frequently hesitate even to shoot at all.cit. or the joys of delights offered by Aphrodite? Although a difficult call. requires foremost the skill and knowledge of how to ride a tiger20. but we do not know how to be re-elected thereafter” noted Jean-Claude Juncker. Or stated mathematically: “happiness is wealth divided by desire”. such as giving. changes in 2 Procreation. p. 12. 20 “We all know what has to be done. by contrast. They are in essence two sides of this same coin. imperators have a traditional passion for land. killing and a life in the shade. the heartbeat of imperial philanthropy..3 Pleasure “Pleasure is the beginning and end of living happily” noted Epicurus. Although character has always been judged to be innate Table 12. may come relatively cheap while. all those aspirations. imperial philanthropists do not need to be elected. field research seems to indicate a slight preference for the chase. obsessions and ecstasies). That spring and autumn are the most essential pleasures in nature is easily checked by asking any tiger. or sex and hunting. Some pleasures. Nonetheless. which was stated as follows: Are predators (including man) generally more attracted by the goddess of love or the goddess of the hunt? Or alternatively stated. much time is involved in doing so properly (e.7. For 5 Commercial sex 5 Commercial slaughtering instance. are predators more attracted by Artemis’ thrills of the chase. Politics. But again. not the intellect.1: Desires and the circle of life and therefore a reliable Sexual lust (to start life) Blood lust (to end life) compass (captured already in Desire Desire Heraclitus’ dictum “Fate is 1 No sex 1 No hunting man’s character”). The driven force in each of those categories requires a certain character trait. which only tries to emphasise that your character determines similar pleasures of spring and autumn. to constrain its destructive desires (i. the taking of life. No doubt then that your passions need to be satisfied. as death haunts life from its conception and succeeds without failure. a Greek gift or a white elephant). while reflecting on his own specific tiger ride in a democracy. then to necessity (the culling of surplus game and the killing of poachers). lusts. Jim Corbett confirmed this at the end of his hunting career: “The tiger is a gentleman!” 21 22 23 53 . Similarly. and property rights. For instance.1 is a simplification. According to Plato only philosophers should apply for this joy ride. happiness can be only ensured by constraining your desires. But ultimately all passions in nature can be reduced to the forces of spring or autumn. The hunt for money often has a similar pattern. Of course. for Don Giovanni it was a fulltime involvement). Obviously Table 12.g. But then you have to add immediately that without Aphrodite. the pleasures of receiving can so easily become mentally draining. which 3 Procreation. This gentleman23 considers summer and winter as simply extensions of respectively spring and autumn. From a wealth management viewpoint it has to be emphasised that all pleasures come at an implicit cost.g. the core issues in the debate about private and public morality centre on sexual relations. with sexual pleasure 3 Hunting for the pot.inefficient in itself. passions. Table 12. with pleasure is also important in the context 4 Sports sex 4 Sports hunting of wealth management. Accordingly Xerxes’ offer of “a bag of gold for him who discovers a new pleasure” never really endangered the Persian Treasury.e. the prime minister of Luxembourg. Life is a process of dying at different rates. Op. Ultimately desires have nothing to do with reasoning or as Pascal famously noted: “The heart has its reasons that the reason does not know”. Therefore the soul relies foremost on ethics. while businessmen often have the more innocent passions for accumulating material possessions (often no more than toys). Usually the heart completely dominates the brain. Does not love conquer all? Truly new pleasures are rare and not easily created. In contrast to professional politicians. then gradually move to quality and rarity (what has been shot). without pleasure style do occur over time. without sexual pleasure 2 Culling.1 depicts various categories of desires in both having sex and killing (as the extremes of the life cycle22). hunters often start in 6 Rape of the fair sex 6 Rape of nature their youth with quantity goals 7 Sadism 7 Vivisection (how much has been shot). duties of friendship. In the end the difference between procreation and death. and for David Hume this was preferable: “Reason ought to be a slave of passion”. See Stuart Hampshire. family duties. there would be no procreation and therefore no role for the virgin goddess of the hunt.

lose his edge and become. heaven forbid. fortitude. lust – a fear of lacking the full scale of sexual experiences. not only in monetary terms but particularly emotionally24.It is of course useless and self-defeating to try to harmonise the conduct of people who are driven by different psychological (and moral) values. Op. which so nicely complements his more famous poem The Tiger). envy. requires an Aristotelian balance between private and public life – for example. 12. “Little Fly Thy summers play. most traders look at forty as they deserve to look (George Orwell was right here). against the fear of being caught by tax inspectors. 25 26 54 . envy – a fear of losing out to others. In any case the secrets of his success have now to be concealed carefully (jealousy). pride – a fear of being given insufficient respect. the average financial trader.4 Contentment Life is a fragile bargain. particularly the fear of remaining unsatisfied (want): gluttony – a fear of missing out on some nice titbits. anger and greed) were seen as costly. while he is increasingly disappointed by the lack of respect shown by his colleagues – respect that had to be in line with profits made (pride). Hampshire. Contentment.. for instance. a sloth. And in the long run. sloth – a fear of insufficient rest. In fact these fears (in moderation though) ensure your survival in business. More profits can be made for instance by fraud and tax evasion. as loyalty always implies partiality.45. My thoughtless hand Has brush’d away Am not I A fly like thee? Or art not thou A man like me? 24 For instance the Marquis de Sade nearly bankrupted himself through his obsessive research project about sexuality. and after many fat profits26. In essence all the classical vices refer to fears. Indeed. where character and Lady Luck. yet another fear may appear: the trader may start to lose his hunger for more money. Usually greed does not even stop here. To survive on this treadmill he needs to kick the bottle and a few dolls around to regain his sanity (respectively gluttony and lust). Of course keen competition in the financial markets demands continuous use of the above power tools (i. if later this position moves into profit. the classical vices) to secure ongoing trading successes. Fearing all. Note that virtues are mutually supportive. A code of honour underlies the manners (and accordingly the morality) of society. As the Spanish saying goes: “Money and honour should not be kept in the same purse”. But leaving aside for a moment the moral aspects (indeed what is a lustful delicacy for the one may be disgusting for another). greed – a fear of losing control in the face of the unforeseen. he immediately fears even greater losses and gets annoyed or even infuriated with himself for being so stupid (anger). a balance between the moral claims of friendship and the duties of public life. All these phobias keep you well-focused on whatever you might decide to do. Not surprisingly. Remember at Trimalchio’s estate (in The Satyricon) the following three gods were specifically honoured: Fat Profit. costs do differ materially between these categories. p. which contribute powerfully to both individual happiness and (business) success. rather than money. are the determining driving forces.e. but one that leaves its marks. Now two fears are being opposed: the fear of not being fully satisfied (greed). honour and fortitude cannot easily be harmonised with commercial striving. not to mention the lack of freedom he had to endure for many years while documenting his research findings in the Bastille. Good Luck and Much Income. and so are vices. This balance also entails a trade-off between virtues and vices as well as between conflicting loyalties. he will be unhappy because he did not take a larger position at the bottom of the market (greed).cit. In the end it all becomes a farce. Traditionally virtues (such as prudence. he now strikes out at all. and justice) were considered within everybody’s reach. and particularly so if some other traders did exactly that (envy). and ultimately an “ideal way of life”25. If he takes a trading position in the market and consequently starts to lose money. while vices (such as pride. and anger – fear itself. Take. Contrast the above life style with that of a happy fly (citing here William Blake’s The Fly. embodied in an ideal way of life.

Contentment can be reserved only for those lucky few who know how to strike a sensible balance between fortitude (honour) and fear (money). 2.For I dance And drink & sing: Till some blind hand Shall brush my wing If thought is life And strength & breath: And the want Of thought is death Then am I A happy fly. where the rich were torn by fear and wants. Choderlos de Laclos (Les Liaisons Dangereuses) refers to the Sultan with his favourite Sultana: “he is either her tyrant or her slave”. one race and one language. 3. This little fly may well dream of a mighty fly empire stocked with jolly good fellows who all believe in the classical ideals of one creed. In short. not beauty or contentment. Or if I die. Enterprises expect of their staff to put up with all their clients (“the client is king”). In essence all these slavish traits are driven by only six life principles: 1. What is in it for me Clearly business cannot operate without its (wage) slaves. 27 This in contrast to the free-man. 55 . Epictetus already referred to the “futile” slavery at court. it has all been said before: the price of (commercial) success is paid for in terms of freedom and fear. 4. But then the ultimate purpose of an enterprise is profit. And beauty itself does not even appear on the corporate radar screen. defined as a person free of guilt and of fear. If I live. while Nicolas Berdyaev (Slavery and Freedom) aired similar views on the psychological relationship between a tyrant and a slave. And like a fire. It is foremost this fear of losing out (in that never ending comedy of more money. 6. the more fuel you throw on. the more destructive your desires become. more power and more prestige) that defines a slave’s character27. Traditionally the tyrant (always overreaching and completely enslaved by his desires) was seen as the biggest slave in society. those same people you would normally not even want to greet in daily life. 5. but ultimately also flies yield to the philosophy that only beauty and friendship count.

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