Paul Argenti identifies three main objectives of Investor Relations (IR): to communicate actual and potential company results as understandably as possible to the investing public, to manage shareholder expectations appropriately, and to help reduce stock price volatility (147). The following case suggests an inherent interdependency among these objectives by demonstrating that a failure to met one objective can significantly compromise an organization’s ability to meet the other two objectives.
Specifically, the case explicitly illustrates how UBS AG’s failure to deliver messages about company results as understandably as possible to its investor constituency had a direct, negative effect on its abilities to also manage shareholder expectations and reduce stock price volatility.
In late 2007, as a result of the subprime mortgage crisis, Swiss banking giant UBS took dramatically increased asset value write-downs shortly after having disclosed smaller write-downs on the same assets. (For example, in December of 2007, UBS announced an increased $10 billion asset write-down, only three weeks after taking a $4.4 billion write-down in connection with the same assets.)
Shareholders and critics called such “piecemeal” asset valuation disclosures into question, and SEC Chairman Christopher Cox urged financial service firms like UBS to disclose “more information about their exposure to potentially problematic loans” (Taub). Underlying this disclosure issue faced by UBS was the fundamental difficulty many companies were experiencing in valuing the troubled mortgage-backed assets that served as the catalyst for the subprime crisis.
At an emergency shareholder meeting in February 2008, embattled then-UBS chairman Marcel Ospel defended the company’s communication policy, brandishing public criticism as “utter nonsense.” Two months later, Ospel stepped down as chairman and was replaced by a controversial “in-house” successor, Peter Kurer, compounding discontent among shareholders, who notched up the pressure on the new chairman to right the sinking UBS ship.
This case study explores UBS’s communication conflict with shareholders in the final months of Ospel’s chairmanship as well as Kurer’s initial communication options in attempting to quell the growing shareholder revolt. Going forward, how can UBS more faithfully disclose further asset value write-downs to the full understanding of its investor constituency without significantly destabilizing its stock price, especially in light of the difficulties involved in accurately valuing its most troubled assets?
Background of the UBS Crisis
UBS AG is one of the world’s leading wealth management and investment banking firms, employing more than 75,000 people in over 50 countries around the globe. Before it became an international financial powerhouse in the 1990s, Switzerland’s market leader in retail and commercial banking was a slow-growing, provincial model of Swiss prudence and careful discretion, with a rich and varied history dating all the way back to the mid-19th century.
Two Banks, One Pattern of Success
In 1854, six private bankers in Basel, Switzerland started the Bankverein (“Joint Bank”) in response to the growing credit needs of Switzerland’s railroad and manufacturing industries. In the following decades, the bank experienced ups and downs due to fluctuations in Swiss industry and trade. Nevertheless, the bank played an important role in the establishment of new industrial companies within Switzerland. In 1917, the bank’s name was changed to Swiss Bank Corporation.
The bank continued to grow through Switzerland’s industrial expansion and foreign trade, as well as through the acquisition of smaller, weaker financial institutions. During World War I, the bank supported neutral Switzerland’s wartime economy. Unlike other banks, Swiss Bank Corporation survived the war’s most daunting financial pressures and threats.
In 1924, the bank began to help rebuild the international economic system by extending loans to other countries. At the end of World War II, Swiss Bank turned to financing private rather than state industry and to rebuilding the devastated economies of Europe. By 1947, Swiss Bank was once again lending money abroad, contributing heavily to Switzerland’s efforts to help its neighboring countries rebuild in the late 1940s. By 1958, the bank’s assets had doubled, and they doubled again by 1964. Fueling this growth was an increasing number of domestic and international bank branches.
Union Bank of Switzerland (UBS) was formed in 1912 when Bank of Winterthur (founded in 1862) and Toggenburger Bank (founded in 1863) merged. UBS prospered through the 1920s, but struggled along with most of the rest of the world during the Great Depression. It recovered after World War II, thanks to a strategy of developing its domestic business by opening additional branches and acquiring smaller institutions in Switzerland. By 1962, UBS was the biggest bank in Switzerland (FundingUniverse.com).
UBS AG was eventually formed in 1998 by the merger of Swiss Bank Corporation and Union Bank of Switzerland. It is something of a marvel that UBS still stands at all, however, as the position of prominence seized by the bank at the close of the 20th century came at a severe price just a few years later.
An Ambitious Leader Emerges
The explosive growth of UBS at the dawn of the 21st century was largely attributed, with considerable shareholder gratitude and extravagant monetary compensation, to chairman Marcel Ospel, who came to Switzerland’s flagship bank with his own personal history of ambitious vision. Ospel graduated from Basel, Switzerland’s School of Economics and Business Administration and cut his teeth in the planning division of Swiss Bank Corp. from 1977 to 1984. After three years in Merrill Lynch & Co.’s capital markets division, Ospel returned to SBC in 1987 and quickly climbed the corporate ladder, helping the organization achieve global prominence in investment banking and wealth management. By 1997, he had become SBC’s Chief Executive Officer.
In 1998, the $19.7 billion combination of SBC and UBS created the world’s largest wealth manager. Just prior to the merger, Union Bank had made a $1 billion investment in Long-Term Capital Management LP, a troubled hedge fund firm that eventually required a massive bailout from major banks and investment firms to prevent it from total ruin (Cowen). As a result of this poor judgment, a shake-up at the new UBS forced the resignation of the top executives. Ospel and his SBC colleagues assumed the vacant positions of authority.
With his exciting new opportunity, Ospel set about making his mark in investment banking and wealth management in the U.S. After merger negotiations with Merrill Lynch failed, Ospel turned his attention to Paine Webber Group Inc., the fourth-biggest U.S. retail brokerage at the time. In 2000, UBS bought the New York-based firm for $11.5 billion. UBS Paine Webber instantly became a powerful force in American investment banking, becoming simply UBS after eventually dropping the Paine Webber from its name in 2003 (Baker-Said and Logutenkova 46).
With UBS roaring as Switzerland’s banking giant and as the top global wealth management firm in the world, investor relations soared. UBS’s annual shareholder meetings were opportunities for the constituency to praise Ospel, as the UBS stock price surged 115 percent from January 1999 to January 2007 (38).
A Bold Plan
Riding the wave of momentum he was so instrumental in generating, Ospel pushed what he would call a “smart expansion strategy” into asset-backed securities in the U.S. markets (38). In late 2002, the bank began investing money in U.S. securities backed by car leasing loans, credit cards, and commercial and residential mortgages (46). Under Ospel’s authority, the bank invested more than $100 billion into these securities (39). The investment bank’s biggest bets came from its CDO (Collateralized Debt Obligations) desk, which bundled together over 100 debt-backed securities into each CDO package. Credit rating companies then helped divide the CDOs into sections called ‘tranches’, each of which received a separate rating (Tomlinson and Evans, 52). UBS held residential-mortgage-backed securities for several months before securitizing them into CDOs and selling them to investors.
By early 2006, UBS had gone even further. Instead of merely securitizing and selling the CDOs, it began retaining the highest-rated tranches on UBS’s books and buying more on the open market so that the bank could profit from high yields. To buy the CDOs, the bank borrowed tens of billions of dollars. From February 2006 to September 2007, the CDO desk amassed a $50 billion inventory of these top CDO tranches. UBS’s risk management team never capped the size of their CDO positions (Baker-Said and Logutenkova 48).
The Plan Collapses
UBS’s gamble on these asset-backed securities began falling apart in March of 2007, when UBS had to mark down its book of securities backed by U.S. subprime mortgages by $50 million. The losses grew to 150 million francs in the first quarter (48). After the market for these instruments froze in mid-2007, the losses accounted for 10 percent of UBS’s write-downs that year, or almost $2 billion (47).
Ospel’s plan had backfired. So difficult to believe and so painful to admit, UBS had become fully ensnared in the U.S. subprime meltdown, with no escape in sight. “We were shocked when all this stuff came to light,” said Henry Herrmann, CEO of Waddell & Reed Financial Inc. “UBS was the one we perceived in a better light than the others” (39).
In October 2007, UBS reported that losses from sub-prime investments would wipe out third quarter earnings, but the bank remained confident that it would make a substantial full-year profit. Just over two months later, however, that annual profit had evaporated in the growing global financial catastrophe (Peston).
On December 10, 2007, the bank issued a press release titled “UBS Strengthens Capital Base and Adjusts Valuations,” which announced that UBS would write down its U.S. sub-prime holdings by approximately a further $10 billion. UBS also revised its outlook for the fourth quarter of 2007 from an overall profit (as anticipated in its October announcement) to a loss. The bank admitted that a net loss attributable to shareholders for the full year 2007 was possible. The document explained, “In light of continued deterioration in the sub-prime market, valuations of UBS’s remaining sub-prime positions reflect the extreme loss projections implied by the prices achieved in the very limited number of observable market transactions in U.S. sub-prime related securities and indices up to the end of November.”
Ospel was quoted in the release: “Our losses in the U.S. mortgage securities market are substantial but could have been absorbed by our earnings and capital base.” Marcel Rohner, who was the Group CEO of UBS’s wealth management unit at the time, added, “In the last several months, continued speculation about the ultimate value of our sub-prime holdings – which remains unknowable – has been distracting. In our judgment these write-downs will create maximum clarity on this issue.”
Not everyone was buying the message. Robert Peston, BBC News’ business editor, railed that UBS’s massive error in judgment was “a humiliation for the pride of the Swiss financial system. After all, this is a bank whose great claim has always been that it is more conservative than its rivals. So the sub-prime write-down represents more than a monetary loss for UBS. It’s a serious blow to a valuable brand.”
A Disclosure Crisis Emerges
But there was more at stake than just monetary loss. Faithfulness in disclosure was under scrutiny as well. The Securities and Exchange Commission announced plans to urge financial service companies like UBS to disclose more information about their exposure to potentially problematic loans in light of the massive write-offs caused by the sub-prime crisis (Taub). Critics began to hold firms like UBS accountable. In his blog, The D&O Diary, executive attorney Kevin M. LaCroix wrote, “Among the more disconcerting aspects of the unfolding subprime crisis has been the unseemly spectacle of major financial institutions taking dramatically increased asset value write-downs shortly after having disclosed smaller write-downs on the same assets.” LaCroix went on to characterize such investor relations as “piecemeal asset valuation disclosures.”
But later in the same blog entry, LaCroix admitted that underlying this particular disclosure issue faced by UBS (and other financial firms) were fundamental difficulties in valuing many of the troubled assets that had been the catalyst for the subprime crisis. In fact, the Public Company Accounting Oversight Board (PCAOB) released an Audit Practice Alert, maintaining that circumstances made it “difficult to obtain relevant market information to estimate the fair value of many mortgage-backed securities.”
News continued to get worse after the New Year rang in, and shareholder rage reached a boiling point, forcing UBS to call an emergency shareholder meeting for February 27, 2008. UBS opened the doors to the meeting venue 90 minutes early in anticipation of a massive audience, which promised to be especially contentious. “Two-thirds of the excitement is emotional and one-third is rational,” said Dieter Buchholz, an asset manager at AIG Private Bank in Zurich. UBS shares had almost halved in value since the previous summer. They had plummeted 36 percent just since December. Although the bank had asked shareholders to re-elect Ospel, stories were swirling that several high-profile bankers had been approached as potential replacement for Ospel. Activists were demanding a special audit to examine how things could have gone so terribly wrong. And no less important, shareholders were up in arms over the disconcertingly covert way the whole affair had been managed (Harnischfeger).
In his opening speech, Ospel vigorously defended the bank’s embattled communication policy regarding disclosures:
I have been asked repeatedly why we did not inform the public right away about the full extent of the required provisions and write-downs. Our communication policy was even accused of being ‘piecemeal’ – a conscious withholding of information. I hope you will excuse me for being blunt, but that charge is utter nonsense. All the information we have provided to date was, at least in our view, relevant for the UBS share price…UBS was in many ways and on many occasions the first bank of its kind to provide information so quickly and completely. UBS is viewed by experts in the field as a model in terms of communication because we always communicate all the information we have at the earliest possible moment. We have been praised for the way in which we communicate by government agencies and regulatory authorities both at home and abroad – from the Swiss Federal Council to the relevant US government offices.
Ospel went on to explain that UBS was forced to continuously adjust the value of their toxic subprime securities to the changing market conditions, resulting in “impairments.” The disclosed asset values agreed with the market information available at the time. According to Ospel, UBS was subject to specific accounting regulations that prohibited the bank from recognizing excessive write-downs in advance. He concluded his remarks on the bank’s communication policy by insisting, “We have always provided information as soon as possible and as completely as possible, and we will continue to do so going forward.”
More than 6,000 investors attended the emergency meeting, with many rising to call for Ospel’s resignation (Baker-Said and Logutenkova 46). Many in the audience concluded that Ospel had been blinded by his ambition and blamed him for leading them into a financial nightmare. “Ospel is responsible for this malaise,” a 30-year shareholder told fellow investors at the meeting (38). The perceived inadequate disclosure of monetary loss and continued exposure only intensified the attacks. The financial media pounded the UBS brand through it all, publishing articles with names like “The UBS Horror Show” and “The Mess at UBS” (Peston, Baker-Said and Logutenkova).
In the nine-month period that ended on March 31, 2008, UBS had lost $24.1 billion, more than any other bank trapped in the global credit crunch. The investments had resulted in $38 billion in write-downs of UBS assets (Baker-Said and Logutenkova 38).
Casualties in the Aftermath
Two months later, at UBS’s annual meeting in April, Ospel announced his resignation. The job of fixing UBS and cooling shareholder ire fell to new Chairman Peter Kurer and new CEO Marcel Rohner. Investors at the April meeting attacked the board’s decision to promote Kurer, who had been the bank’s general counsel. Kurer received only 87 percent of the votes, with an unusual number of abstentions and “no” votes. After the vote, dozens of shareholders heckled Kurer and walked out of the building (41).
Investors expressed severe disappointment in the decision to put a legal insider without a substantial background in market strategy in charge of the biggest risk positions in the world. At the annual meeting, one prominent institutional investor called on his European peers to band together and sue UBS for failure to disclose that it was anticipating big losses on its mortgage portfolio. “Your claim that shareholders were not informed is polemic and not in accordance with the facts,” Kurer responded, claiming that UBS issued five profit warnings, more than any other bank (42-44). In Kurer’s favor was his detailed knowledge of all the mistakes UBS had made. Soon after taking over as chairman, Kurer led a team that drafted a 400-page report on the UBS meltdown for the Swiss Federal Banking Commission. A 50-page summary was released to the public in April 2008 (41).
It was clear that upon taking charge, Kurer and Rohner were facing a potential shareholder revolt. “They are under such pressure to avoid losses at any cost,” said Markus Granziol, who served as CEO and then chairman of UBS’s securities unit until 2002 (49). The entire crisis had driven UBS shares down more than 55 percent during the 12-month period that ended on May 9, 2008 (40). Making things worse, many shareholders were convinced they had been misled or even deliberately deceived about the worst of the news. One thing was certain – going forward, despite whatever difficulties UBS faced in accurately valuing its most troubled assets, shareholders were going to hold Kurer’s feet to the fire and demand clear and honest disclosure in all of the bank’s future communications with the investor constituency, before trust and loyalty could ever begin to be rebuilt.
UBS’s failure to faithfully disclose asset value write-downs to the full understanding of its investor constituency had an immediate negative effect on the stability of its stock price and increased the difficulty of managing realistic investor expectations.
In Corporate Communication, Argenti identifies three main objectives of Investor Relations (IR) on which all publicly owned companies must focus:
1. Communicate actual and potential company results as understandably as possible to the investing public.
2. Manage shareholder expectations appropriately.
3. Help reduce stock price volatility (147).
As seen in the case of UBS, the failure to faithfully and completely disclose negative company results to the investor constituency contributed to the volatility of UBS’s already falling stock price and amplified shareholders’ unrealistically high-pressure expectations for the new chairman and the new CEO. This seems to suggest an inherent interdependency of the three objectives, at least in the sense that a failure to meet the first objective significantly compromises an organization’s ability to effectively meet the second and third objectives.
Peer-reviewed studies have yielded evidence of such interdependency by focusing on information asymmetry in investor relations programs. Information asymmetry is a phenomenon that occurs when different investor groups have different information about a company – in other words, informed investors have private information, while uninformed investors only have publicly available information. Empirical evidence confirms that there is a negative relation between the quality of a company’s disclosure and information asymmetry, in that as disclosure quality increases, the probability of investors searching for and trading on private information decreases (Chang, et al 376). Analysis also reveals that bid-ask spread – the difference between the highest price a buyer will pay for a stock and the lowest price at which a seller will sell it – is negatively associated with disclosure quality. (Active trading relies on minimal bid-ask spreads.)
Additionally, research supports the intuitive notion that firms with less extensive investor relations programs have less analyst following, lower institutional holdings, lower stock price levels, lower trading volume, and smaller market capitalization. On the other hand, firms with more extensive investor relations have more analyst coverage, higher proportions of institutional investors, higher market capitalization, and higher trading volume (376-377).
A fundamental communication issue on which the UBS case relies is audience analysis. In the case of UBS’s IR communication, the audience is the investor constituency. What does this constituency need? What does it want? What action does UBS want the constituency to take, and how can it craft its communication messages to persuade the constituency to take such action? One action the constituency may very well take out of their own interests is to sell their UBS stock. But this is precisely what UBS does not want them to do. So UBS’s IR communications must persuade the shareholder population to hold their stock.
However, ethical considerations would (hopefully) prevent IR personnel at UBS from simply manipulating or withholding information deliberately, solely to bring about a desired audience response. A document such as “STC Ethical Principles for Technical Communicators” is a helpful resource to review when planning and preparing communication such as UBS’s valuation disclosures, especially in difficult and trying times, when the temptation to take moral shortcuts is most appealing. While IR professionals do not typically fall under the category of technical communication, the ethical principles directly address the competence, integrity, professional responsibility, respect for rights and dignity, concern for welfare, and social responsibility required of all practitioners of professional communication of any kind. The document urges adherence to established legal provisions, describes the fair, honest, and proper way to conduct business in the overall communication profession, and encourages a dedication to a professional image of excellence.
The most pressing goal of UBS’s improved IR efforts as it begins to rebuild investor confidence may well be to ethically guide the current shareholder constituency toward maintaining their positions in UBS equity.
It will take considerable time for UBS to restore shareholder confidence, but a critical part of those efforts is the improvement of disclosure communication. If valuation practices are difficult, the bank must clearly explain the difficulties to the investor community along with the reasons for any potentially confusing series of write-downs. UBS executives and managers who are involved in UBS’s Investor Relations efforts must work to get leading financial analysts as well as the financial media on the bank’s side, so that circumstances are not further complicated by more bad press and unfavorable forecasts. Positive press and optimistic commentary from analysts could go a long way toward cooling shareholder tempers and restoring confidence in the investment community at large.
Another approach toward an ultimate resolution of the problem is to integrate the mission and efforts of investor relations with media relations and even public relations within UBS, as Argenti suggests (155-156). These various teams within the organization should not be completely separate or competitive internal rivals, but should work together for the good of the firm – especially in a time of crisis.
Whatever approach is taken, the road will not be easy. Organizations whose legitimacy has been compromised before their stakeholder constituencies due to a perceived transgression will likely experience diminished stakeholder support, lose access to some valued investor resources, and face a higher probability of failure than organizations that are perceived as legitimate. One proposed model for the reintegration process of a “fallen” company like UBS follows a four-phase prescription:
1. Discover the transgression.
2. Explain the company’s wrongdoing.
3. Serve penance by accepting punishment.
4. Rehabilitate and rebuild the organization’s processes and legitimacy (Pfarrer, et al 731).
Recovery from a transgression like UBS’s requires an unavoidable sequence of complex and delicate actions designed to address the changing questions, concerns, and expectations of an angry and severely disappointed shareholder constituency.
Questions for Reflection
1. Was Ospel’s chairmanship doomed regardless of the disclosure issues, or could more faithful disclosure have possibly saved him from the shareholder ire that forced his resignation?
2. Did UBS use asset valuation difficulties as a convenient excuse for manipulating their disclosures, or were these difficulties real and unavoidable?
3. What are Kurer’s highest priorities in changing the way UBS communicates with its investor constituency? If you were advising Kurer, what would you recommend?
4. Assuming interdependency within Argenti’s model, is it also true that the successful attainment of one objective significantly facilitates an organization’s ability to meet the other two objectives?
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