More Cause for Hope - After Novartis Chairman's Rescinded Golden Parachute, Swiss Voters Give Control of Hired Executives' Salaries Back to Owners

Recently, we discussed the latest stupefyingly big golden parachute given to a departing pharmaceutical executive.  Former Novartis CEO and outgoing chairman Daniel Vasella was to be given more than $75 million, after making multiple millions previously, ostensibly so he would not go to work for a competitor.  After a public outcry, the company cancelled the plan, and Vasella admitted a "mistake."  This was the only instance in recent memory in which a big health care organization pulled back some huge executive pay package due to public protest.

Swiss Voters Give Control of Pay of Hired Executives Back to Company Owners

Now Swiss voters have approved a referendum which would actually let the owners of public companies, the stockholders, decide how much to pay hired executives.  As summarized by the New York Times,

Swiss citizens voted Sunday to impose some of the world’s most severe restrictions on executive compensation, ignoring a warning from the business lobby that such curbs would undermine the country’s investor-friendly image.

 The vote 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 would be obligated to take part in votes on compensation packages.

In addition, companies would no longer be allowed to give bonuses to executives joining or leaving the business, or to executives when their company was 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 new rules in Switzerland would be unprecedented in the current era.  

Those who are Ostensibly Pro-Business Defend Hired Executives, not Owners

Despite the fact that the new rules would give control over one type of hired employees, hired executives, back to the shareholders, the owners of companies, spokespeople for big companies, but presumably really for their top executives, claimed that the rule would be bad for shareholders.

 

Ahead of the vote, [the Swiss business federation] EconomieSuisse and Mr. Minder’s other opponents warned of dire consequences if the referendum passed, notably in terms of keeping Switzerland attractive to foreign companies and investors. 

But [chief proponent of the new rules] Mr. Minder argued that Switzerland would benefit if it gave shareholders control over the companies in which they invested.

Furthermore, the Guardian reported, 

Minder says the massive sums demonstrate that company boards have lost control of pay and prefer to fork out 'astronomical' salaries rather than pay dividends to shareholders.

Minder told the Swiss daily Le Temps that the only solution was to give shareholders the power to set pay.

 A Bloomberg article suggested that driving the vote were how the Swiss are

 worried about how long they can fend off the crisis that has engulfed the rest of Europe, and dissatisfied with a feeling of being ripped off by their elites.

'It is scandalous. No one deserves to be paid such monstrously high salaries, especially when their employees get paid not much in comparison,' Marianne Lecoultre, a pensioner who lives in a modest flat on the outskirts of Geneva, told me. 

The Germans are Thinking of Making Hired Executives More Accountable

The German media outlet Deutsche Welle reported that there is now more interest in returning control of hired executive pay to company owners there as well.

 After Swiss citizens voted Sunday to impose controls on executive pay, a similar debate has started in Germany. 

Furthermore,

Joachim Poß, the parliamentary leader of the opposition Social Democratic Party, told the daily Neue Osnabrücker Zeitung that the outcome of the referendum was an important step towards restricting the money-grabbing prevalent in corporate management,

He noted that the referendum was encouragement for an initiative at the EU level, and added that 'people do no longer accept perverted bonus systems, neither in banks nor in the real economy.'

Summary: Ripped Off by Health Care Elites

I can start to imagine how supposedly pro-business people in the US will dismiss actions taken by European countries as anti-business and probably "job killing," even though these actions actually gave more control of publicly held business to their owners, not to government, which would seem to be fully in support of capitalism.  Again, maybe some people making the loudest pro-business noises are really sympathetic to, if not paid by, the hired managers of businesses who have put their enrichment ahead of the interests of other employees, customers, clients or patients, the business owners (stockholders, that is), and the public at large. 

Enormous compensation of hired health care executives, out of all proportion, if related at all to whether their work had any positive effect on patients' or the public's health, has long been a concern on Health Care Renewal.  For example, back in 2006, we posted repeatedly (look here for links) about the billion dollar plus fortune amassed by the then CEO of UnitedHealthcare which vividly contrasted with the company's avowal to "make health care more affordable."  That seemed to be an example back then of a rip off by a member of the health care elite.  Now the notion that our top elites have been generally ripping us off is becoming more widespread.

In my humble opinion, the perverse incentives generated by a system that allows top executives to make almost unlimited amounts, regardless of all other considerations, has been a major reason for US and global health care dysfunction.  Making executive compensation less perverse, and ultimately making health care leaders accountable for the effects of what they do on patients' and the public's health may be an absolutely necessary step to make our health care system more functional.  Now at least there is some precedent, admittedly from Europe, for making top hired managers more accountable. 


As Pierre Briancon wrote in Reuters,

 Corporate boards had better take notice: public outrage at what looks like persistent and unapologetic greed in the most severe economic slump in decades is forcing governments to step in. Throughout Europe, indignation at private excess has become a policy problem for administrations trying to explain the need to cut public spending.

In addition,

Self-moderation doesn’t work and self-interest continues to prevail. Throughout the Western world, corporate boards have paid lip service to the need to take into account public opinion, and nothing much has changed either in the banking industry – the symbol of immoderation – or in the wider corporate world. In desperation, governments are taking more forceful action – sometimes reluctantly: the Swiss referendum followed a failure by the country’s parliament to heed to public indignation.

Government intervention can often be clumsy, and it is fraught with the risk of unintended consequences. But it is the right of governments to legislate on social ills – and excessive and provocative private-sector pay has become one. Meanwhile the lobbies promising economic apocalypse have failed to make their case – and to scare anyone with warnings that 'talent' – as they call it – may relocate to friendlier countries. It would be in the interest of all if they stopped turning a deaf ear to calls for decency emanating even from countries like Switzerland, which is hardly a hotbed of Soviet-style command economics.

Even though the final impetus for the overwhelming majority vote on the Swiss referendum came from a ridiculous golden parachute from a pharmaceutical company, the discussion so far has not centered on health care.  So I get to close with something I have repeated on and on, now with a little hope that it may not be considered so extreme....

 Health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior.

If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.