Dismantling of a Swiss Holy Cow

In my last blog article, I took a look at the deterioration of the brand “Swiss” and noted that this was in part due to the negative publicity that Switzerland has been getting abroad concerning its banking secrecy and opportunistic taxation schemes. While Swiss banking secrecy may now soon be something for the history books, it is still interesting to note that the Swiss banks and taxation regimes originally had their roots in virtues, and not vices. Whereas most of Europe featured unstable governments and legal frameworks, engaged in endless wars and built their “social contract” on the premise of mistrusting its citizens, Switzerland provided stability in both governance and law, was largely peaceful and had a basic “social contract” that espoused trust before mistrust (this being in part a consequence of its direct democratic tradition and a source of the extensive privacy rights as pertaining to financial matters). This resulted in the flourishing of the Swiss banking sector as it attracted wave after wave of foreign depositors, fleeing instability, insecurity, and states more interested in the gleaning of the wealth of its citizens than in the provision of needed services. While Switzerland – again, beginning with a virtue - for centuries already practiced a strongly decentralized (federalized) “good governance” regime which paired up freedom with accountability by allowing every commune and canton to freely levy their own taxes and invest these resources as best they saw fit, thus also creating a healthy competition to keep a sound budget and make wise investments, much of Europe experienced just the opposite: top-down directives with little to no citizen participation and consequently freedom and accountability.

With time, however, bit by tiny bit, these virtues became corrupted. Banking secrecy became no longer so much a reflection of privacy and trust between citizens and their state, but rather was a convenient pretense for the easy garnering of money from abroad. On the haughty altar of “discretion”, Swiss bankers would willingly bunker the millions and billions of dictators, tyrants or simply the clever evaders of taxation in their home countries. Much the same happened with the taxation regimes in Switzerland. Cantons and communes realized that much money could be made by adroitly positioning themselves in a zero-sum race to the bottom and attracting wealthy individuals – for whom special taxation schemes would be negotiated – and global companies in search for a more profitable tax haven from which to conduct their business. This led to the proliferation of countless “mail-box” companies which had little or no real connection to Switzerland.

Since the recent financial crisis and its accompanying scandals, however, the EU and the USA have increasingly started to put pressure on Switzerland (as also on other similar finance and tax havens, although often conveniently omitting some of their own) to change its “bad habits”. While a minority of Swiss citizens has always openly criticized its banking and taxation practices, and probably a healthy majority in private moments admitted to the status quo being ethically questionable, the matter was nevertheless nothing less than a “holy cow” amongst the Swiss economic and political establishment. So strongly was this self-righteousness engrained, that when a professor at the renowned Swiss Business School of St. Gallen was openly critical of this situation in an interview with a German magazine a couple of years ago, some voices (granted isolated, but nevertheless remarkable for a country with a rightfully proud democratic tradition with guaranteed free-speech) branded him as a national traitor and demanded his immediate demission!

It is a well known and studied phenomenon that countries that are blessed with ample natural resources such as oil, are often cursed with having their economies develop asymmetrically with an over-dependence on just these natural resources. As with abundant natural resources, the incentives that the Swiss legal system and historic precedents provided also resulted in relatively “easy money” to be made in the finance sector. Some of the nefarious side-effects of this in turn resulted in what may well be deemed an internal resource and brain-drain, as investors invested in the areas of greatest returns for the least risk (and for a long time, the Swiss private banking sector was a very low-risk investment, as success was not so much based on any unique, rapidly changing know-how but a legal framework which virtually ensured its competitive advantage) and many of the brightest labor market entrants turned their back to work in other sectors such as for example the risky high-tech area or lower-margin machine industry, in favor of the far more stable and lucrative financial industry.

While Switzerland still has a highly sophisticated, diversified and competitive economy, always jousting for the top spot in global assessments, there is a real risk and an increasingly high price that Switzerland has to pay for its extensive financial center. Apart from public bailouts (such as the UBS in 2008) and the internal resource and brain drain, the very fact that salaries paid in the financial sector are so high drives up concomitant costs such real-estate, making it increasingly difficult for, say, high-tech companies to get started in the country. Starting an export oriented business from scratch in Switzerland is simply prohibitively expensive, especially if the returns, as in many high-tech sectors, take years to materialize. Add to that the finance sector’s negative impact on the overall reputation on Switzerland, and you can well comprehend that the Swiss financial industry is increasingly unpopular also in Switzerland.

The tragedy of this entire matter is however that the age old Swiss social contract of trust between the state and its citizens may now have to be sacrificed in view of the financial center and taxation policies of decades past. The United States, long also a bastion of individual freedom and with a delicate awareness of privacy rights, has already sacrificed much of this on the altar of national security. The question thus remains one of just how much freedom are we willing to sacrifice for security, and how much privacy for fairness.

Manuel Dawson

 Capitalism in Question

The Academy of Management (AOM) is a professional organization that strives to further the scholarship of management. It comprises twenty-five professional divisions and interest groups focussing on management problems. Examples of these divisions are „Business Policy and Strategy“, “Entrepreneurship“, “Human Resources“, or „Social Issues in Management“. Every year, the AOM carries out an Annual Meeting. Last year, more than 10,000 participants – primarily university professors – took part from all over the world. In numerous events, such as the Professional Development Workshops, Paper-Sessions, Panels and All Academy Symposia, the newest research and teaching methods were discussed. Also Switzerland was well represented, coming in at 10^th place with respect to the number of participants.

For each of the AOM annual meetings a theme is selected. For this year’s meeting that takes place between the 9^th and 13^th August in Orlando, Florida, the theme will be “Capitalism in Question”.  Indeed, following the financial crisis of 2008, the business schools are challenged to review the foundations and assumptions upon which their research and teaching are based on. Currently, this is the neo-liberal economic theory and the corresponding theory of the firm. Questions and problems that the organizers have put in the center are for example:

·        While it is recognized that the market competition during the last decades brought great benefits, material prosperity and much innovation, it has also become clear that there are serious down sides: economic, social and ecological “costs”.

 

·        Research questions are called for that deal with the question if and how the capitalistic economic system can and should be further developed.

·        In need are also contributions that elucidate what alternatives there are to the current system and what would subsequently change in a social, economic and ecological context.

·        Connected with the above is also the question of by what social and ecological components the objective of shareholder value maximization by firms need be complemented and what this means for the role and self-conception of managers and leaders.

·        Also the question how true innovation can be upheld in firms – as for example via a shift of focus from rivalry to cooperation with stakeholders – has been included in the call for papers.

It will be interesting to see what an event of this size and scientific reputation will bring forth in terms of insights and impulses for the academic research and teaching in the area of management. I hope to be able to report some of these interesting news in a later blog post.

Edwin Rühli

From materialism to non-materialism

At the end of 2011, many people may question the deeper causes of the financial crisis and the possible ways out. Damianos I, Abbott of the Greek-Orthodox St. Catherine’s Monastery and Archbishop of Sinai, (NZZ am Sonntag, p. 73, 25. Dec. 2011) made in my opinion a very convincing statement in this regard: "For me it is clearly not so much about a financial crisis but a spiritual crisis. There has always been materialism. Money has always been important. But today materialism is no longer merely tolerated as a human weakness. Having many things, being wealthy, are ideals today. The human need and desire for meaning is as big as it always was. But most people are seeking in the wrong places. However as in every crises this one also offers the opportunity of finding the right path."  

Therefore if we want to embark on a new path in 2012, then according to these wise words nonmaterial values need to be given special attention. We need to consider that we do not only “possess” material goods but that we also have knowledge and experience at our disposal, which in today’s knowledge based society are as relevant as material goods. The essential innovations of our society did not come only  about on the basis of financial ownership but through knowledge, ideas and the engagement of human beings in human enterprises. These contributions create property rights of all kinds (e.g. intellectual, organizational, financial etc.) for the firm. Therefore stakeholders (e.g. employees, customers, suppliers) with their broad range of skills become key actors in value creation. Due to their contribution in the value creation process, they create and enhance property rights for the firm as well as for themselves. In reality a broad range of stakeholders are normally indispensable for corporate operations aside from the investors. This has in fact important implications not only for value creation, but also for value distribution. Both are not exclusively of a financial nature but consist of different kinds of values (see chapter 4, Sachs, Rühli, 2011).

Property rights have to therefore be understood in an extended way: materially and non-materially. This broad understanding of property also motivates people to engage themselves in society instead of only concentrating on enriching themselves financially. The resolution for 2012 for the “right path”, also in the spirit of Damianos I, is to engage ourselves more with and for nonmaterial values.

Sybille Sachs

The human factor

Last week I was invited to a networking meeting of top-management to present our book to leaders of different industries. The focus of the event was the success factors of strategic management, in the time after the financial crisis and in Europe’s critical economic situation. The participants agreed on one dominant factor for success: human beings. After a long period of narrowing down corporate value creation to a purely financial dimension, which can be measured and negotiated in impersonal markets, the longing for a human dimension has become dramatically noticeable.

The success stories the participants presented are examples of actively motivated individuals, who are inspired to contribute in a meaningful way to value creation. The successful management strategy in these examples depends on the way human beings are willing to contribute. And they emphasize that human beings are motivated, when they are respected and appreciated in their engagement. Confronted with challenging times, and the growing lack of trust in leadership, the relief is seen to be in the hands of human beings.

The participants of the meeting then asked how this crisis of confidence could be overcome. One leader emphasized that successful mangers are also courageous individuals. Leaders have to stand up and advocate sustainable value creation that contributes to the quality of human life, and not to quick short-term profits. They have to support their own people, and respect the experience and knowledge of the people with whom they do business. These kinds of human narratives contrast greatly with the greedy behavior that brought us to the deep crisis of trust in which we find ourselves. Or to quote one manager: “Every company has the employees it deserves. If a company is interested in short-term profitability and it sets the corresponding incentives, it will automatically have selfish and extrinsically motivated people. Companies are what they do (not what they say!).”

Successful business is moving away from the idea of the controlled and defensive management of relations toward a constructive and partnership exchange between leaders of firms and stakeholders. In the late seventies, Chandler was already calling for the visible hands of the leaders (Chandler, A. D. (1977). The Visible Hand: The Managerial Revolution in American Business. Cambridge, MA: The Belknap Press of Harvard University Press). We recall Chandler’s notion of the "visible hand," because value today is not being primarily created by the invisible hand of the market, but by the active shaping of leaders (see chapter 9 of our book). Not the invisible hand of the market leads to an overall increase in the welfare of society, but the visible hands of the leaders of the firm and its stakeholders. The human factor, not the inhuman factory, matters in rebuilding trust and achieving sustainable value creation.

Sybille Sachs

The Limits of Regulation - A Claim for Good Management

A new study from Syracuse University recently revealed the shrinking numbers of fraud prosecutions since the financial crisis in 2008 (http://articles.businessinsider.com/2011-11-16/wall_street/30404680_1_prosecutions-transactional-records-access-clearinghouse-financial-crisis#ixzz1ehpr2kd9, see also  http://tagesanzeiger.ch/wirtschaft/geld/Finanzbetrueger-haben-Justiz-im-Griff/story/28152529).  And the New York Times already in the spring of this year raised the question: “Why, in the aftermath of a financial mess that generated hundreds of billions in losses, have no high-profile participants in the disaster been prosecuted?” (http://www.nytimes.com/2011/04/14/business/14prosecute.html?pagewanted=all). It seems that a serious regulation failure exists based on wrong assumptions of what should guide the actors’ behavior.

In our book we argue that today the underlying basic assumption of the dominant business model, which promotes self-interest as rational behavior, is at risk of having to be revised (see chapter 5). And we mention that already the Nobel Prize Winner Amaryta Sen reflected on the basic assumption of the self-interest of actors in his book "On Ethics and Economics” in 1987. He concludes that the idea that only self-interested values are rational is even harder to defend.

If all human beings are modeled as self-interested actors, and efficient market functioning fails to occur, additional control mechanisms of firms and their actors must exist. These are normally in the form of state laws and regulations, or in some cases voluntary self-regulation (e.g. Global Compact). A continuous need for control is all the more important as some of the actors are not interested in efficient market functioning. And it is the same actors that are also trying to annul all kind of regulations. In as much as state sovereignty is by definition limited to geographical borders, this leaves serious gaps in governmental control of this self-interest. But even a mixture of compulsory and voluntary adherence to regulation will always lag behind a constantly and swiftly changing environment.  It is consequently often up to the discretion of the diverse actors of firms whether or not they exploit such regulatory gaps. Meanwhile, regulators and prosecutors are frequently not able to fulfill their functions in an adequate way, resulting in the lack of prosecutions mentioned above.

To overcome this unsatisfactory situation, new mindsets are necessary: After the first waves of corporate scandals, Ghoshal claimed in his seminal paper that we have to change the basic assumption of strategic management, and that amoral business with its negative impact should not serve as a role model (Ghoshal, S. (2005). Bad Management Theories Are Destroying Good Management Practices. Academy of Management Learning & Education, 4(1), 75-91). In this context, we ask why it is necessary for firms to commit themselves to the worst forms of self-interest and to fight against an endless series of constraints, when they can focus and draw upon the stimulating cooperation of a broad cast of stakeholders for value creation? We propose as a positive approach that the potential of value creation will be unleashed through creating a sense of mutuality in networks of stakeholders, rather than through the self-interest of single parties sometimes violating regulations. Therefore new narratives about leadership are required for good management (http://www.fh-hwz.ch/g3.cfm/s_page/63500/s_name/leadershipprojekt11).

Sybille Sachs