Fred Hu, a wealthy entrepreneur with a net worth of $870 million, recently purchased a luxury apartment in Hong Kong for $55 million, reflecting a trend among affluent mainland Chinese investors. He has faced scrutiny over his business dealings, including allegations involving Ant Group and concerns about his company’s ownership of private schools in Florida. Amid ongoing debates about executive compensation, UBS is considering adjustments to its salary framework, especially in light of potential regulatory changes affecting its capital requirements.
The grandiose mansion, adorned with impressive columns and turrets, boasts sumptuous window displays and even gilded toilet paper holders. Nestled in a prestigious area of southeastern Hong Kong Island, this luxury residence features a rooftop infinity pool that offers breathtaking views of the South China Sea.
Welcome to the opulent lifestyle of Fred Hu. Following a year filled with significant business transactions, the entrepreneur acquired an extravagant apartment in Hong Kong for approximately $55 million, as reported by the “South China Morning Post” in late May 2021. This purchase reflects a trend among affluent mainland Chinese individuals who are increasingly investing in high-end real estate in Hong Kong.
Under the Watchful Eye of Florida’s Governor
With a Harvard education in engineering and economics, Fred Hu previously directed the China operations for Goldman Sachs, a leading US investment bank. After becoming an independent entrepreneur in 2010, he established Primavera Capital Group, now recognized as one of Hong Kong’s largest investment firms. Hu’s net worth, estimated at $870 million, places him among the elite ranks of China’s wealthiest individuals.
Hu has attracted attention not only for his luxurious apartment purchase but also for controversies surrounding his business dealings. In late 2020, he faced allegations of offering discounted shares of Ant Group to his siblings shortly before the company’s highly anticipated IPO, which was ultimately canceled. In the fall of 2023, Florida’s Governor Ron DeSantis scrutinized Hu due to his company’s ownership of several private schools in the state, suggesting potential influence from the Chinese Communist Party over American youth. Primavera Capital refuted claims that Hu was a party member during his tenure at Goldman Sachs or afterward, raising questions about his prior affiliations.
It is widely acknowledged that Hu has provided counsel to the Chinese government on significant matters. He holds positions on influential advisory boards at prestigious American universities and the Hong Kong Stock Exchange. Additionally, since 2018, he has served on UBS’s board of directors.
As part of the compensation committee at UBS, Hu collaborates with American Julie G. Richardson and Singaporean Jeanette Wong. Richardson has chaired the committee for six years, while Wong has been a member for four years. Together with board chairman Colm Kelleher, they hold the critical responsibility of determining salaries and bonuses, including the remuneration package for UBS CEO Sergio Ermotti.
This issue has gained national attention following UBS’s salary adjustments prompted by the acquisition of Credit Suisse. In just nine months of 2023, Ermotti earned 14.4 million Swiss francs, with potential earnings reaching up to 28 million. This has been perceived by many as indicative of the banking sector’s disconnect from public sentiment.
Do the members of the UBS compensation committee possess the necessary understanding of local sensitivities? Are they attuned to the political and social climate of Switzerland, where UBS is based and regulated?
The backgrounds of Richardson, Hu, and Wong seem limited to their experiences at the airport and the UBS headquarters. The desired diversity criterion appears unmet, as all three are in their sixties and began their careers at American investment banks, later transitioning into private equity or major banking roles.
These industries are notorious for offering substantial salaries, often lacking accountability to the general public.
Thierry Burkart, the president of the FDP, has been one of the most vocal critics of Ermotti’s pay increase from a year ago. He now states, “Multinational corporations must demonstrate greater sensitivity to Switzerland. Their leadership must understand the political and social landscape of the country in which they operate.”
Ethos, a Swiss shareholder representative, has also voiced concerns regarding UBS’s salary structure. Ethos director Vincent Kaufmann argues that the performance criteria incentivize compensation increases through share buybacks, potentially undermining the bank’s core capital, which is detrimental to long-term shareholders.
Potential for Bonuses to Disappear
UBS asserts that its Compensation Committee members possess extensive financial industry experience. The bank maintains that an individual’s origin is less significant than their specific expertise in finance. It emphasizes that management compensation decisions are made collectively by the entire board of directors.
UBS defends its salary structure, stating that 80% of the variable compensation for the CEO is deferred for up to five years, only payable if the bank achieves sustainable performance; otherwise, it could amount to zero.
The notion that the bank seeks to minimize equity is unfounded, as UBS emphasizes its strategy prioritizes capital strength, stating that it meets the highest regulatory capital requirements among globally systemically important banks.
However, public perception has already been affected. UBS is facing backlash for its executives’ perceived excessive compensation. Recently, the Council of States approved a motion from Thurgau SVP politician Jakob Stark, proposing a cap on bank salaries at 5 million francs. In contrast, major European banks offer even higher compensation packages.
“This motion has a chance in the National Council,” Burkart remarks, “depending on whether the economically liberal faction of the SVP prevails or if the party aligns with leftist viewpoints.” SVP National Council member Thomas Matter views the acceptance of Stark’s motion as a miscalculation, asserting that he believes it will be rejected in the National Council.
UBS Considers Adjusting Its Compensation Framework
The ongoing salary debate serves as a precursor to a more pressing issue: How much capital should UBS maintain moving forward? The financial market regulator has requested that UBS bolster its foreign subsidiaries with significantly more equity than it currently holds. If Parliament agrees, UBS may need to raise an additional 25 billion francs.
This requirement could impose a 50% surcharge compared to foreign banks, leading UBS to consider relocating its operations outside of Switzerland, as warned by Roman Studer, the director of the Bankers Association.
Banking expert and SVP National Council member Thomas Matter believes that UBS would struggle to remain competitive under such stringent measures. As a compromise, he suggests limiting the bank’s riskiest endeavors, such as investment banking, to 30% of its total balance sheet.
The outcome of the Parliament’s decision may hinge on UBS’s actions. On March 17, the bank will announce Ermotti’s 2024 salary package, a pivotal factor in determining its political goodwill. UBS indicates that it is actively engaging with its shareholders regarding these issues.