As the result of the referendum on 3rd March was published, reactions to it followed a predictable pattern with the supporters of the new initiative being jubilant and those that had fought the initiative expressing consternation. Switzerland is not the first country to introduce legislation interfering with the rights of publicly listed companies to determine the compensation of CEOs. It is, however, the first country to have a referendum on the issue. This adds significant weight to the future law as the solid majority in favour of the initiative begs the question: Which is more important - the will of the people or the rights of a board of directors?
That the initiative was decided by a lengthy democratic process here in Switzerland presents an excellent example of the challenges facing corporate social responsibility (CSR) operatives.
One of the biggest barriers for an organisation (company, NGO, government) to overcome in acquiring a good reputation is to be in touch with the public perception of the organisation and thus continuously navigate accordingly. Often, organisations discover the difference between how they perceive themselves and how they are perceived by the public only when an incident forces the organisations to interact with the (greater) public. Being the umbrella organisation for Swiss businesses, Economiesuisse fought a campaign against the 'Minder-Initiative' arguing that if adopted, it would result in future job losses as Switzerland would become less attractive to locate in. Economiesuisse would, of course, have to take this position and in an attempt to dilute its potency, produced a counter proposal which went some of the way to meeting the intentions of the proposed bill. The counterproposal found some support in Parliament and thus might have had a future but it was thrown out as the 'Minder-Initiative' won.
However, the case of the Novartis CEO, MR Vasella, being offered Chf 72 million in severance pay affronted people and served to remind everybody why Thomas Minder gave birth to the bill in the first place. Initially, Novartis kept the actual amount a secret which was another strategic mistake compounding the CSR challenges, as it did nothing to make people trust the campaign against the bill. As the intention of the bill was to increase transparency and control, the actions of Novartis fed the distrust inherent in the bill since if the company believed the settlement was justifiable and fair, why did it keep it a secret? Being a publicly listed company, Novartis would have had to divulge this information sooner or later, increasing the suspicion that it was painfully aware of how it would influence the outcome if the deal was published ahead of the 3rd of March referendum date. The reason why this is important, is that it serves to underline a very important CSR and communication guideline which states that if you cannot defend it, you cannot explain it. A good CSR strategy leaves an organisation less exposed to risk by actively creating trust among its stakeholders through explaining its actions and activities to them, for example. One has to conclude that the decision to award Mr Vasella chf 72 million was strategically counterproductive.
Economiesuisse was quoted in The Economist as saying that “such complex and emotionally-charged changes should be implemented with great care”. The same article also noted that it could take up to as long as ten years before the new law enters into force. Sticking to its guns, the organisation seems adamant on delaying the legal process and even though one can sympathise with the sentiment that all laws should be drawn up with great care, you have to ask yourself again if it is a good CSR strategy. The largest stakeholder in any publicly listed Swiss company has just made it abundantly clear that remuneration for CEOs and top management must be within some sort of reason. Obviously, organisations do not necessarily need to listen to all of their stakeholders, and a company like the American retail giant Walmart has ignored numerous stakeholders for long periods of time without it impeding its profitability. But by helping to ignore and dilute the will of 68% of the Swiss people, Economiesuisse could lose credibility and legitimacy by becoming an advocate for greed. Are Swiss businesses really best served by such a perception or would the interests of Swiss business be better served by changing a bonus culture which the public has deemed inappropriate?
Revisiting Adam Smith
If the Swiss eventually arrive at a bill that effectively caps abusive salaries, they would not have invented a new way of conducting business, rather they would have put the economy back on track. As unique as the Swiss democratic culture is there was little new in the sentiment revealed by the support for the 'Minder-Initiative' in so far as that the free market was conceived in a context of strong social control. Publishing his famous work 'The Wealth of Nations' in 1776, Adam Smith outlined a new way of conducting business abandoning the mercantilism of previous centuries. In his view, people should be free to produce and sell what they want as well as being free to buy whatever they want. Prices would be determined by supply and demand, and by introducing the division of labour, production would increase many times over. However, Adam Smith worked under the precondition that the social norms that kept the populations of small communities together and people in their place would also ensure that even if guilds were disbanded and the King no longer decided prices and production, the things that were needed would be produced and cheats and people with low morals would be weeded out. In other words, the market would clean itself up continuously. Concepts that are correctly ascribed to Adam Smith such as the invisible hand of God, equilibrium and self-interest are concepts that can be understood in their true sense only if this context is taken into account. This means that the pursuit of the self-interest would never turn into excess because the pursuit always would be curbed by the surrounding society and the people living in it. Consistent with this line of thinking, Adam Smith also advocated the need for a power that would allocate resources in society as well as stating, that "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable".
Being a moral philosopher, Adam Smith's writings in the 18th century may seem outdated but his thoughts reverberate across the literature published since the breakdown of the financial sector in 2008. Laureates like Paul Krugman and Joseph Stiglitz may be some of the most well-known proponents of a more socially just way of doing business and they also point out the dangers of creating societies where the resources are extremely unequally distributed.
The increasingly global economy of the last 30 years has been created by and changed the way we do business. In all aspects of life, what goes on over the horizon is closer to us and thus more important to us than ever before, but the power of previously strong social norms has deteriorated leaving us without much in the way of guidance in this new global economy. Profits are being made from a variety of sources beyond the neighbours’ view.
By adopting the 'Minder-Initiative' the Swiss may have caused consternation among business elites and free market ideologists but in fact, they are being more true to the original idea of the free market than the board members that awarded Chf 72 million to just one man.
Photo credit: CHRISTOPHER DOMBRES via photopin cc
