Family business and pay

Thomas Minder runs a third-generation Swiss family business that makes herbal toothpaste. Although Minder’s achievements in nurturing the family business are admirable, to the wider public he’s likely to be known for something a bit more important.

Minder has started a revolt against the excesses of executive pay in Switzerland that might be one of the biggest revolutions to happen in the area in the past few decades.

Specifically, Minder and a number of activist shareholders led an initiative to force a recent referendum, which saw 68% of Swiss voters approve new rules on executive remuneration.

The new rules give shareholders much more say on executive pay and bonuses, ban golden hellos and goodbyes, require annual re-elections for directors and threaten criminal sanctions for non-compliance.

The Swiss government is now obliged to convert the initiative’s proposals into law within a year. Opponents say laws on top pay will force many corporations to relocate elsewhere. This will be bad for the Swiss economy and undermine employment prospects for its citizens, so the argument goes.

Maybe, but would Swiss family businesses like Victorinox, Firmenich and the Swatch Group leave the alpine nation because of a ban on golden hellos and goodbyes? I’m guessing here, but I’d expect not. Nor would I expect non-family Swiss corporate powerhouses like Nestlé and ABB to look at relocating anytime soon just because of shareholders having more say on pay.

Let’s be clear on one thing – these restrictions don’t stop executives being paid a lot of money, nor should they. Nick Hayek – the chief executive and second-generation owner of Swatch – is paid handsomely for his role in the €6 billion-plus business. Minder isn’t attacking highly paid executives – he and a majority of the Swiss public just want more accountability.

I’m also pretty sure that Carl Elsener, chief executive of Victorinox, wouldn’t be too perturbed about Minder’s initiative. His business is firmly rooted in the community it was founded in – the Canton of Schwyz, 60 kilometres south of Zurich. I might be wrong, but I don’t think Victorinox sees any reasons to leave Schwyz because of controls on excessive pay.

Minder’s initiative proves that family businesses can play a role in curtailing rent-seeking behaviour by a small minority of business elites. Of course, not all family businesses are as principled on issues like pay as Minder. Put simply, just because you’re a family business doesn’t mean you don’t follow rent-seeking agendas. Some family businesses attempt to create monopolies and oligopolies to gain unfair advantages just like their non-family counterparts.

Nevertheless, I would think the financial services sector and the non-family corporate sector have a worse record than family businesses when it comes to what the public sees as excessive pay. There is a reason banker bashing has, on occasion, reached excessive levels, especially in Europe. It’s because the public largely perceives bankers as destroying wealth rather than creating it – paying themselves substantial awards in the process.

I haven’t seen a similar level of odium directed at family businesses. Some of this, of course, is because the corporate sector has done a better job of hiding excessive pay than bankers, but it’s also because many businesses don’t pay excessive (rent-seeking) amounts to their top people.

Now the challenge is for family business leaders in other countries to start or support a debate on excessive pay as well. Of course, pay will always be unequal, but a debate about pay at the top led by the private sector/family businesses is a worthwhile exercise. It could even help to reconfirm the public’s faith in capitalism.