Of fat cats and a barking public

Tobias Haeusermann
April 3, 2013

Precisely one month ago, on March 3rd, Swiss voters backed a proposal to enforce some of the world’s strictest regulations on executive pay,  giving shareholders binding say on curbing compensation and colossal  payouts for both new and departing executives. Pension funds—frequently  the largest category of shareholders—will also be obligated to vote on compensation packages. Violations could lead to prison sentences  of up to three years or strict fines up to 6 times the boss’s annual  salary. The referendum “gegen die Abzockerei,” literally “Against  Rip-off,” was one of the most successful popular initiatives of recent  times. Despite being opposed by Switzerland’s main political parties and  business associations, it passed with a majority of nearly 68 percent.  In a society where obesity  is the most common result of malnutrition, citizens seem to have  realised that the fat cats sitting on the boards of Swiss companies  embraced gluttony in a deregulated market—and a diet is in order.

What is striking about the outcome is that Switzerland had been  weathering the present economic crisis much better than its European  peers. A small country historically less affected by global events and  long seen as merely a transit country, it presents a textbook example of  economic prosperity due to its openness to both foreign trade and  investment. Known for its political neutrality and firm banking secrecy  regulations, Switzerland has the highest average wealth per adult, the highest European rating according to the Index of Economic Freedom, is home to numerous large multinational and transnational corporations and ranks first on the Global Innovation Index. Moreover, the country’s unemployment rate has remained lower  than in any other recession-hit country. Yet, the public decided that,  notwithstanding the country’s healthy state, there was something  fundamentally wrong with how top executives of publicly traded companies  had been setting their own exorbitant salaries. As the crisis had  shown, many of the highest paid CEOs could simply game the system, most  recently demonstrated by Konrad Hummler, managing partner of  Switzerland’s oldest private bank, Wegelin, which was forced to fire-sell its operations after pleading guilty to tax evasion charges in the US.

The CEO as the indispensable saviour of a company? A myth.

And there are other myths in desperate need of shattering: While the  public has been gulled for years with the notion that high pay brings  high performance, studies have shown that in numerous large firms, higher CEO salary is negatively related  to performance outcomes. Another myth revolves around the argument that  CEOs will jump ship if offered better pay. But a recent report found  that less than one percent of Fortune Global 500 CEOs were poached while employed by a company in another country.

Although Switzerland emerged from the global economic meltdown  comparatively unscathed, this result came at a price, with the Swiss  government having to take steps to fortify its leading bank UBS  in 2008. These events showed the crucial and systemically important  role the two largest Swiss banks hold within the Swiss economy: Before  the crisis, they accounted for nearly 60 percent of the financial  system’s total assets. It turned out their combined balance sheet total  was a staggering 4.5 times larger  than the Swiss GDP and 40 times larger than the government’s proceeds.  UBS ended up raising $6bn (£3.7bn) from the administration while it was  also allowed to transfer roughly $60bn of toxic assets to a fund  sustained by the country’s central bank. The government essentially  became a major shareholder and partial owner of the institution. This  was the Swiss case of the “too big to fail” problem.

Meanwhile, the ratios for executive pay quickly recovered during 2009 back to pre-crisis levels, which were often more than 250 times the average worker salary.  The recent financial crisis unearthed the vulnerability and fallibility  of the current global capitalist system, yet it seemed as though the  crisis turned the villains into heroes. Adding insult to injury, the  wage share of income—the share of labour compensation in the total  income generated by the business sector—has steadily decreased in  Switzerland and other OECD countries. Whereas from the 1970s to the  mid-1980s wage share of income peaked at roughly 80 percent, it has progressively dropped to an average of 71 percent in 1990 and 63 percent in 2005.

Undoubtedly, governments—alongside regulatory agencies—had a hand in  shaping these outcomes. In response to declining profits and rising  inflation in the 1970s, governments in the 1980s and 90s curtailed  labour movements, deregulated the banking sector and liberalised finance  so as to expand the size and reach of capital, all with the intention  of raising competitive pressures to foster productivity and boost  profitability. The resulting financialisation of the economy offered  various opportunities for firms to reallocate wages upward for the  benefit of the few. As a case in point, the Swiss pharmaceutical company  Novartis unleashed a political storm when it recently decided to reward  its departing chairman Daniel Vasella with a package worth $78 million.  The package was “intended to protect the company” and it “required that  […] Vasella refrain from making his knowledge and know-how available to  competitors” while granting him “an annual payout of up to CHF 12 million for six years.”  Eventually, Vasella was pressed to announce to shareholders that the  arrangement had been a mistake. Such incidents cast doubt on claims that  the reforms initiated before the referendum had led to a sensible  compromise between equality and efficiency. Equally doubtful is the  supposition that market deregulations produce sustainable economic  growth and enduring employment.

The financial meltdown was in part a result of governments’ constant  concessions to the financial industry, which they nourished with cheap  capital while bestowing it extraordinary tax advantages. In the case of  Swiss politics, these concessions were made possible in part by a core institutional problem,  namely that there is no formal campaign finance structure or regulation  in Switzerland, nor are there any donation limits or disclosure  requirements. With the help of political money, connections and the  popularization of free market dogmas, both commercial and investment  banking were transformed into financial mega-players.

As German sociologist Ulrich Beck suggested,  did the state miss its chance to render the economy social and  democratic again? Suppose we believe that a business, a system or a  government can be “too big to fail”: should we not implement incentives  to impede systems from attaining those mammoth proportions? Is it really  sensible to sustain flawed systems because of their sheer size? These  concerns aside, the Swiss referendum to curb profligate executive pay  seems to be a first step in the right direction.

Swiss businesses and banks now hope that the new laws will mitigate  further outrage. But critics of the referendum, calling the bill a  “bluff package” and a “populism trap,” argue that it ultimately  reinforces knavish capitalist values; at worst, the implementation of  the law would facilitate the plundering of companies and, at best,  shareholders would trim executive pay, merely shuffling the wealth back into their own pockets. Most likely though, the status quo will be maintained, since shareholders are commonly prone to follow management too often in their voting and tend to wave through remuneration packages.

It is questionable whether a binding vote will truly reduce the  excesses in executive pay. Switzerland’s Young Socialists are thus  already demanding that executive pay be restricted to 12 times  that of the lowest-paid worker. While core systemic problems persist,  it remains to be seen whether the fat cats will be frightened by the  chorus of a barking public.


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Tobias Haeusermann