Dealing with the credit crunch

Our regular feature sees three experts face up, square off, and deliver complex answers about the state of the economy. They know what they're talking about and offer invaluable advice

Stephan Pfenninger, Partner, Tax Partner AG

1) Should shareholders have a say in how much a CEO or company head is paid?
To a certain extent they already have a say in the shareholders meeting today. The management has the overall responsibility for all expenses of the company, including the salaries paid to the CEO. The shareholders may question the expenses and charges made when approving the accounts of the company in the shareholders meeting. They also have the possibility of refusing the accounts. Hence, in my opinion, there are enough legal rules which assure the correctness of the salaries paid to the CEO. Any further instrument increasing the power of the shareholders with regard to the salaries, in my opinion, is neither needed nor appropriate.

2) Do you think central banks should be left to their own devices or should politicians be given more of an active role in issues such as inflation?
Central banks should employ professionals and seek advice from professionals in order to handle the issues properly. They should listen to the positions presented by politicians to a reasonable extent and interpret their statements with care. However, in my opinion, politicians should not have any further active role. The checks and balances as currently developed should be maintained.

3) World hunger: tough love or unending handouts?
Unending handouts do not solve the problem, except obviously in cases of catastrophes etc. As far as hunger is the result of structural issues, the suffering nations should be supported with the aim of developing their own sources. In addition I believe that addressing the imbalances in free trade would very probably solve part of the issue more efficiently than anything else. The world urgently needs some movement on this front.

4) How do you see energy markets progressing long term?
I am convinced that energy markets will have an exciting but also erratic development in the future. In this connection there is no doubt that the demand for alternative energy sources at consistent prices will be of growing importance. In the long term therefore, I assume that operations in the area of wind and other alternative energy will be very successful. In the short and medium term we will, however, see a lot of turmoil with big opportunities but also large risks.

5) Here’s €10,000. Put it in your pension fund, or spend it now?
Thank you. Money should be spent – we should enjoy our lives within reason. If on the other hand I wanted to invest the money, I would only pay it into my pension fund if I was looking for an immediate tax deduction or was obliged to improve my future annuity. In addition there are legal limitations in Switzerland which might preclude me from making the contribution. The performance of the fund would be less important for me. There is no doubt, however, that in today’s falling markets the combination of security and immediate tax benefits make it more attractive to consider the pension plan option.

Charles Davis, Economist, Centre for Economics and Business Research

1) Should shareholders have a say in how much a CEO or company head is paid?
In the post credit crunch environment, questions are being raised about the extent to which the incentives have been right for those at the top of some of the world’s biggest companies, particularly as executives walk away with multi million dollar payoffs in spite of leaving company finances in far from healthy states (Citigroup a case in point). A clear way of ensuring good corporate practice is to set up incentives for the CEO correctly.  Encouraging accountability is one way of achieving this, but making sure pay is well-aligned to medium term company performance is probably the most sensible way of designing incentives.
 
2) Do you think central banks should be left to their own devices or should politicians be given more of an active role in issues such as inflation?
As an economist I am skeptical of the role politicians would play in managing economic issues such as inflation. Historically, when politicians have presided over economic management, the results have been a tendency to focus more on short term outcomes than medium term economic stability. One thinks of the Lawson boom of the late 1980s which resulted in spiralling inflation, an unsustainable boom and ultimately contributed to the extent of the early 1990s recession.

3) World hunger: tough love or unending handouts?
As the world economy has grown at breakneck speed over the last 10 years, the scarcity of resources such as food has emerged as a key issue. Indeed, we have seen annual increases in global food commodity prices in excess of 40 per cent. Clearly this makes life difficult for those on low incomes. My view is that food markets are an area in clear need of reform; by any reckoning they are far from efficient at the moment – and it is unfortunate that the Doha round seems to have broken down – inhibiting the elimination of hugely inefficient subsidies in the US, Japan, Europe and India alike.

4) How do you see energy markets progressing long term?
In the long term it seems clear that the emergence of rapidly developing markets such as China, India, Russia, South America and the Middle East will pose an ever greater strain on energy resources. Thus, in the longer term I see upward shifts in the relative price of traditional energy sources such as oil and gas. At the same time, ever greater opportunities for innovation and expansion through more sustainable and efficient energy sources will emerge for those lucky enough to make the technological breakthroughs.

5) Here’s €10,000. Put it in your pension fund, or spend it now?
For a start I’m glad you’ve given me euros not sterling, although both currencies are set to suffer in the year ahead as stagnation takes hold in some of Western Europe’s largest economies. I’m no pension expert – but I suspect we have yet to see a trough in the markets. However, with the increasingly pervasive negative sentiment surrounding the coming recession, opportunities to take advantage of undervalued stock are likely to emerge soon – so I’ll take a punt, invest and hold out for the recovery in late 2009 and beyond to deliver the returns.

Dan Lewis, Research Director, Economic Research Council

1) Should shareholders have a say in how much a CEO or company head is paid?
In principle, if shareholders want that say, then yes. But by and large, they have much bigger issues to worry about; profitability, competition and the return on their capital. CEO pay only ever really becomes an issue when firms are underperforming, just like at any other level of management.  

2) Do you think central banks should be left to their own devices or should politicians be given more of an active role in issues such as inflation?
Historically, politicians have shown themselves to be much less trustworthy with combating inflation - usually because of their own short-term election-induced borrowing and spending - than Central Banks. However, Central Banks are only as good as the policy they enact. Today, in a global economy, those policies are being questioned again because inflation can no longer be contained in any given country with tighter monetary policy. High interest rates in one nation have virtually no affect on the external impact of globally-traded energy and food commodities. So politicians must act themselves by creating a more favourable investment framework in energy and food production.

3) World hunger: tough love or unending handouts?
More stick and less carrot for poorly performing and corrupt governments that can't feed their own people. The carrots could take the form of lower trade barriers - between and among rich and poor countries - and the abolition of the European Union's Common Agricultural Policy which depresses world food prices. The stick could be setting up an international agency to track down the stolen assets and foreign aid of kleptocratic government leaders.

4) How do you see energy markets progressing long term?
There will be no hold up to growing energy demand - the world is going to get richer and a lot of newly middle class consumers will want cars, air conditioning and computers. China alone, still plans to have 140 million vehicles on its road by 2020 - a three or fourfold increase from today. The big story in the years to come will be the arrival of peak oil production, possibly at the back end of the next decade, which will herald even higher oil prices. Expect by 2050 energy demand to be met by as much renewable and nuclear energy technologies as there are fossil fuels today, roughly 80 percent.

5) Here’s €10,000. Put it in your pension fund, or spend it now?
Neither. We won't know until at least early next year how bad the losses are from the sub-prime debacle when the banks release full year results. This is a time for cash.  But if you're feeling brave, look at Chinese smaller companies and keep an eye on financials with limited exposure to the US and real estate mortgages. Make no mistake; the financial markets will be back.