Tuesday, October 31, 2006

 

Manager Compensations: A Populist Fight with Windmills?

Yesterday’s Swiss newspapers reported the launching of a popular initiative against corporate “rip-off”. A popular initiative is an instrument that allows Swiss citizens to submit a proposal for a constitutional amendment to a popular vote if they manage to collect 100’000 signatures. This “anti-rip-off initiative” proposes, in a nutshell, that the “shareholder democracy” should be strengthened by granting the annual general shareholder meeting (AGM) the right do decide about the total wage bill, bonuses, and other forms of remuneration for mangers and board members. Moreover, executives that occupy a full-time position in the company, but hold other mandates (such as board seats on the boards of other companies) should be obliged to pay a part of this additional income to their principal employer. (NZZ online, October 30, 2006).

What were the reasons for the launching of this initiative? The originator of the initiative Thomas Minder, owner of a small-sized company called Trybol AG, states in an article published in NZZ online october 30, 2006 that he has always been annoyed with the fact that managers pocketed millions in indemnities and compensations, wheras their company announced losses. The immediate reason for the launching, however, Minder says, was the Swissair debacle.

These arguments may seem somewhat bizarre. In fact, excessive executive remunerations are a real problem of corporate governance. However, they concern mainly the shareholders (whose money is paid in excessive salaries) and the other employees of the company (who can consider that it is not justified that they should earn as much as 500 times less than their boss). Hence, the corporate governance problem with excessive remuneration is one of expropriation and agency costs and of distribution of value added. In other words, if a manager of a company is paid too much, this is the problem of the shareholders of that company and of other employees.

So, what has the Swiss citizen to do in this? What is her interest in granting shareholders more control over executive remuneration? Of course, one could argue that most Swiss citizens are now shareholders since a part of their pension fund assets are invested in shares, but the real reason is arguably another. In fact, the whole problem boils down to a question of “social justice” or, to put it in a slightly more polemic way, to envy. In fact, people who have troubles to make ends meet (1m persons in Switzerland have a net income of less than 2450.- CHF a month, whereof approximately 200’000 are “working poor”) can just not understand why some people should earn as much whereas the same economic system seems not to be able to pay them a decent salary.

Also, since the 1980s, like in many industrialized countries, the citizens have become used to hear the litany of the importance of saving costs. Not only in the corporate world, but especially in the public sector: social benefits are continuingly reduced in all sectors with the arguments of budgetary discipline and reducing of public debt. The same is true in corporate life: real salaries of “normal” workers have stagnated or even decreased during the largest part of the 1990s. In such a situation, it is hard to understand for John Doe why management salaries should increase by 18% a year and where this money comes from. Since the end of the postwar boom, the sentiment that economics is a zero sum game has been reinforced: if someone gets a larger part of the cake, someone else has to lose. Hence, an increasing ressentiment against excessive salaries.

As understandable as such feelings may be two questions suggest themselves: firstly, how problematic are the current levels of executive remunerations really? Are they really excessive or do they reflect extraordinary achievements? Or in other words: what are “objective” criteria to assess if managers earn too much? The answer the initiative suggests is that the only ones that can tell are the shareholders, which seems a fairly reasonable approach.

Secondly, is a popular initiative the right means to tackle the problem – if there is one – of executive remunerations? In fact, it is of course not very difficult to find support for such an initiative among the voters, since most of them do not earn salaries of several millions a year. Notoriously populist actors such as the tabloid newspaper Blick – which is worldwide one of the only left-wing tabloid newspapers – are of course very eager to support this initiative. So is such a populist strategy the right answer to a real problem of corporate governance?

Concerning this latter point, one argument of Minder for his initiative is that the new reform proposal of the Stock Corporation Law, which will be debated by the Parliament sometime next year, does not contain any proposal concerning management remuneration. According to Minder, this is due to the fact that the majority of MPs are themselves part of the Wirtschaftsfilz (literally: the “economic sleaze”) and do not wish to curtail their own power and material benefits (NZZ online, October 30, 2006). And he’s probably not completely wrong. In that sense, the popular initiative may be a good means to put on the agenda issues that the political elite – which are of course very close to the business elite notably because of the non-professional Parliament in Switzerland (Milizsystem) – would refuse to address.

What is very interesting, however, is that the initiative does not originate from left-wing parties or trade unions but from the milieu of the SME. In fact, many owners of a SME seem to be sympathetic with Minder’s initiative (see the article in today's Blick) despite the fact that they are on the same side of the class divide as the managers that are aimed. According to the comments one could read in the press, their aim seems to be to fight the greed of the execs of the top firms in the name of economic integrity and of a now bygone way of doing business, where the boss and owner of a company (the “patron”) was preoccupied with the well-being of his employees and not just with his personal benefits. This reflects very well the divide between two parts of the Swiss economy, i.e. the large multinational companies oriented towards international markets and the vast majority of SME who produce mainly for the domestic market, which have different needs and interests and different views on corporate culture and values in general. In a way, the ‘anti-rip-off initiative’ is but a new episode in a conflict that has opposed the two parts of the Swiss economy for a long time.


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