On March 3, 2013, Swiss voters approved a referendum (the Minder “Fat Cat” Initiative) that implements some of the world’s strictest controls on executive compensation. The story has received far less attention in the United States than I would have hoped because it represents an important cautionary tale about business ethics and, if not heeded, I believe it is a harbinger of more drastic things to come. No matter what your feelings about Minder’s Fat Cat referendum, I strongly encourage all business leaders to take note and to consider the broader ethical implications for decision making in today’s business environment.
A referendum on “Fat Cat” compensation
The Minder Initiative, which was approved by nearly 68% of Swiss voters, gives shareholders of companies listed in Switzerland a binding say on the overall pay packages for executives and directors. Pension funds holding shares in a company will be obligated to take part in votes on compensation packages. Companies will no longer be allowed to give bonuses to executives joining or leaving the business, or to executives when their company is taken over. Violations could result in fines equal to up to six years of salary and a prison sentence of up to three years.
The over two-thirds majority vote was particularly surprising, given Switzerland’s pro-business culture, as well as the fierce campaigning by corporate lobby group Economiesuisse, which warned the referendum would damage the country’s competitiveness and scare away international talent. However, that argument was offset by the abuses in executive compensation (and, I would say, lapses in business ethics) that have come to light recently. For example, the referendum was bolstered this past February when Novartis proposed a $78 million severance package for outgoing chairman Daniel Vasella, provoking further outrage from the Swiss public.
In fact, the Minder initiative (authored by Thomas Minder) was born of a similar lapse in business ethics over a decade ago. In 2001, Swissair came close to bankruptcy due to a risky acquisition strategy that left the company strapped for cash. Swissair then reneged on outstanding contracts with vendors, including a $537,000 contract with Minder’s family business, Trybol. Trybol manufactured toiletries for the airline, and Swissair’s move almost bankrupted Trybol. However, although Swissair was running out of money, it still managed to pay an advance of $9.6 million earlier that year to a chief executive, Mario Corti, who was a major decision maker in the acquisition strategy and then left shortly after the airline’s collapse.
The experience inspired Thomas Minder’s 10-year campaign to address what he sees as ethical issues with senior executive behavior and compensation, and to seek legal controls. In fact, the meaning of the actual German name of the initiative (the “Abzocker” initiative) is much harsher than the “fat cat” translation, and it has clear business ethics implications. An Abzocker is someone who fleeces someone else—i.e., a con man—and implies financial theft.
The business ethics lesson being ignored
The Swiss lobbying organization Economiesuisse spent millions in PR and advertising to battle the referendum, and continues to beat the drums against the legislation. There is also now discussion in the business press criticizing the legislation because of difficulties with enforcement and citing the likelihood that some companies will simply search for ways to avoid the controls. Sadly, these reactions miss the critical underlying ethical lesson and run the risk of exacerbating the situation.
We all live in communities, and businesses are members of the communities within which they function. These communities may be local (such as towns or cities), vendor networks with which the companies do business, communities of workers, or perhaps nations. Each of us has responsibilities to the communities we live in, and business are the same. Communities frown upon individuals who take actions for personal gain that are harmful to the overall community; we label those actions as antisocial or unethical, even if those actions may be technically legal. If an individual continually causes harm to others, the community will ultimately take action to stop the harmful behavior, and the community will take increasingly stronger action until the harmful behavior is controlled. As such, unethical behavior isn’t in an individual’s long-term best interest because the larger community will ultimately do whatever is necessary to stop the harmful actions.
The same rules apply to business. Business decisions made purely for personal gain and that unduly harm the larger community (i.e., employees, vendors, or national economies) are fundamentally unethical, even if the decisions are (currently) legal. If business leaders persist in this kind of decision making, communities will respond, and they may ultimately respond in ways that severely limit the business environment.
In the Swiss example, let’s assume for the sake of analysis that the Minder Initiative is indeed harmful to the country’s business environment. However, these new laws have resulted from decades of executive behavior that has been harmful to the community. If the business community had heeded the early warning signs and modified behaviors, it’s very possible that public outrage would never have gotten to the point where such a referendum would have passed, let alone by such a strong majority. Now, business leaders continuing to ignore the message will only lead to more restrictive actions by the community. Thus, continued poor ethics are not in the business community’s long-term best interests.
The brewing perfect storm & a history of failure in teaching business ethics
Discussions about business ethics have certainly take center stage over the last several years with the recent scandals involving Barclays, JPMorgan Chase & Co., Goldman Sachs Group Inc., and many other finance firms. Combine the awareness these high-profile examples generate with the worldwide financial unrest and lightning-fast exposure brought by our Internet-driven culture, and you have what I believe is a perfect storm brewing.
For decades, top MBA programs have attempted to teach ethics, yet unethical behavior persists—a fact that was examined in a recent Bloomberg article “Do Business Schools Incubate Criminals?” Among other things, the article referenced research data suggesting that studying economic theory may foster a “greed is good” perspective and actually decrease ethics. This author, like many others, has suggested changes in the teaching approach. However, I think a simpler and more direct approach is needed, and it starts with each of us.
How to behave ethically, starting with (enlightened) self-interest
I believe the key to driving more ethical business behavior starts with a focus on self-interest—something the business community is generally good at—but this needs to be enlightened self-interest. Continued unethical business behavior, in today’s business environment, with our ongoing worldwide economic unrest, a growing trend of high-profile criminal activity by corporate leaders, and the exposure of our Internet culture, will undoubtedly bring a storm of public outcry and ultimately highly restrictive legislation.
If you as a business leader believe that a restricted business environment will dampen business results, then it is more critical than ever for you to adhere to the highest ethical standards and to drive ethics through your organization.
That is what enlightened self-interest looks like and here’s what it take:
- Start with values. Establish what your values are—both business values and personal values. Here’s a hint: values aren’t about making revenue; they are about how you make revenue and the standards to which you hold yourself accountable.
- Being legal isn’t enough. Many leaders fall prey to the assumption that legality is an accurate test for ethics. In truth, ethical behavior requires not only asking whether it’s legal, but also whether it’s really the “right” thing to do.
- It’s not about your level in the organization. The cases I’ve outlined examine ethical violations at a very senior level, but every person in an organization needs to take responsibility for the ethics of his or her own actions. For leaders, this means that in addition to looking at their own behavior, they also need to instill ethics throughout their organizations.
- Ethics require courage. Sometimes pursing ethics will mean taking an unpopular stance, or seeing the long-term picture beyond short-term profits. All business leaders need the courage to make these decisions.
- Behave as if the whole world were watching, because it is. In today’s world, more than at any other time in human history, we are constantly in the public spotlight. Even the smallest lapse in ethics has the potential of “going viral” in the public eye, so it’s critical to be vigilant at all times.
Ethics – It’s a process, not a destination
Perhaps the most dangerous approach to stop asking the important questions because you believe you’ve already achieved the goal. In truth, we live in a highly dynamic world where shifting circumstances require constant ethical evaluation. The truly ethical leader will reevaluate ethics for each significant decision or action.
Clearly this is an issue that the business community struggles with, and I invite you to share your thoughts and experiences with business ethics.