No More Gnomes in Zurich

For more than two thousand years, corporations have gained life by being chartered by the bodies that rule a society.

Clyde Prestowitz

(WASHINGTON DC) - For most of my life it has generally been accepted that Switzerland is about money -- hot, quiet, frightened, sweaty money in large amounts. It has also been understood that a particular class of people called the gnomes of Zurich run everything in Switzerland and cause most of the world's economic and financial problems by doing whatever is best for the money without regard for the people.

When Lyndon Johnson had to impose an interest equalization tax to prevent outflow of U.S. capital it was because of the actions and policies of the gnomes. When Richard Nixon had to cut the dollar loose from gold, it was again because of the machinations of the gnomes. I mean, I so badly wanted to be a gnome when I grew up. They were so powerful and it seemed like what they did was so much fun.

Well, that was then. As of last week, there are no more gnomes in Zurich or even in Europe for that matter.

In a national referendum, the Swiss electorate voted to give shareholders the right to veto the salaries, bonuses, and overall pay packages of senior corporate executives and board directors. Indeed, there are to be no signing bonuses, golden parachutes, or special compensation payouts to executives when their companies are taken over in corporate buyouts. Violation of these rules can result in fines of up to six years of salary and prison terms of three years. These strictures will become part of the Swiss constitution.

This vote followed an incident in which Daniel Vassella, the long time builder and CEO of Novartis had attempted to obtain a contract upon retirement that would have paid him $75 million for consulting and for not working in any way to compete with Novartis. Not normally known as revolutionaries, Swiss voters reacted to this and other practices of Swiss banks and corporations with a vote of 68 percent in favor of the new rules and limits.

Perhaps even more significant is the recent ruling of the EU Commission that all bankers and banks doing business in the EU as well as all employees of EU banks in countries outside the EU must have their bonuses limited to no more than their annual salaries. Now, I know that to you, gentle reader, this may seem quite generous. But you have to realize that for gnomes it is tantamount to penury.

Of course, these actions are only those of a small country and of an EU Commission ruling dealing only with one industry sector. But they have a much larger significance by dint of the fact that they represent a widespread popular demand for a new approach to the standards of corporate behavior and governance. Or perhaps it is a demand for a return to older standards. I mean, can you imagine Henry Ford even suggesting or even thinking that he'd need a consulting contract to prevent him from going to work for a competitor once he stepped down from being Founder and CEO of Ford?

The Swiss vote and the EU Commission ruling remind us of an old verity of business life. For more than two thousand years, corporations have gained life by being chartered by the bodies that rule a society. The point of incorporating is to gain special privileges within the society. These may include limited liability, access to special financial offerings or to special taxation. The reason a society and its state charter corporations is because the society thinks the corporations may do things to benefit the society that will not be possible in the absence of the corporations. In other words, the purpose of the corporation is to serve the society that charters it.

The presently ruling (at least in the Anglo/American world) doctrine of stockholder sovereignty holds that the corporation has a fiduciary duty to maximize the return to shareholders of its efforts. But the interests of shareholders are often at odds with the interests of investors and other stakeholders. And the very fact of the necessity to have a charter in order to operate as a corporation strongly reinforces the notion that the public grants special privileges to the corporation because it (the public) believes the corporation will deliver benefits to the entire society. If it is not doing so, but rather, delivering benefits only to a small privileged group, it has no justification.

As the Swiss are showing us, it is not the public that should serve the gnomes but rather they who should be serving the public. This goes for the gnomes of Wall Street as well as of Zurich.

To read more of Clyde Prestowitz in Foreign Policy, please click here.