The following opinion piece by Klaus Schwab, Executive Chairman of the World Economic Forum was published in The Guardian. A German version appeared in Süddeutsche Zeitung and French versions in Le Monde and in Le Temps.
Bonuses are a symbol of business’s bigger problem – an eroded sense of duty to the wider community
Given the uncertainty of the recovery and fears about the social impact of the economic crisis, it is little wonder that debate about corporate bonuses has crept back on to the agenda. You wonder whether managers have learned from the excesses that have to a large extent caused the crisis.
Nevertheless, this discussion is superficial, as it doesn’t consider the essential point: the role that companies, including banks, play in society, and the role of executives within those companies. The bonus discussion is actually just a symbol of a much deeper transformation that has taken place in the business world. Let me outline this transformation, as it has severe social implications.
Almost 40 years ago, I developed the “stakeholder” theory for businesses. This considers the enterprise as a community, with a number of social groups connected directly or indirectly to the enterprise which are dependent on its success and prosperity. These of course include shareholders and creditors; but employees, customers, suppliers, the state and the society in which the enterprise is active are stakeholders.
The idea at the core of the Davos meetings was to create a platform where managers could meet their stakeholders and discuss their mutual responsibility. According to the stakeholder approach, the management of the enterprise acts as a trustee for all stakeholders – not just for share owners. It is based on the principle that each individual is embedded in societal communities in which the common good can only be promoted through the interaction of all participants – and business success is also embedded in this interaction.
We have witnessed a gradual erosion of this communitarian spirit over recent years. This erosion of societal values has progressed particularly in the business world, and is also one of the primary reasons of the current economic crisis.
The enterprise has transformed from a purposeful unit to a functional unit: the purpose of an enterprise – to create goods and services for the common good – in society has been replaced by a purely functional enterprise philosophy, aimed at maximising profits in the shortest time possible with the aim of maximising shareholder value. But if management decision-making processes are decoupled from the responsibility of managers for their own risk-taking, the entrepreneurial system becomes perverted.
In this context, the enterprise is no longer an organic community; it becomes a functional “profit-generating machine”. All parts that do not fulfil their purpose are replaceable: managers, employees, products, locations. This development was particularly visible in the financial sector, where there is at best only an indirect connection with the original purpose of an enterprise, meaning the creation of substantive, real value.
This has consequences for individual behaviour: one cannot expect anything but selfish thought and action from somebody who knows that he or she is replaceable at any time. Instead of a communitarian sense of duty, there is a rise of individualistic profit-seeking behaviour in which society plays only a secondary role.
The current crisis should actually sound the alarm for us to fundamentally rethink the development of our morals, our ethical norms and the regulatory mechanisms that underpin our economy, politics and global interconnectedness. It would be a wasted opportunity for all of us if we pretended that the crisis was simply a bad dream, especially now that we are beginning to see the first signs of improvement in rising share prices or quarterly profits returning to banks – with corresponding bonuses – which are admittedly only financial indicators.
Unfortunately the reality we are hiding from looks different: the financial crisis has led not only to an increasing level of unemployment that will remain with us for years to come. It also puts an enormous pressure on public goods and services, as governments are forced to pay off ballooning debts. The billions that are needed to pay off the debts will lead to higher taxes, reductions of social and public health systems, and reduced investments in education and infrastructure. In the end, it is the taxpayer, the average citizen, who pays for the costs of the crisis.
There is a real danger that the financial and economic crisis will develop into a social crisis. Difficult times lie ahead. If we want to keep society together, a sense of community and solidarity are more important now than ever before. This communitarian spirit is the basis of the stakeholder principle. We need to embrace that stakeholder principle, not just within the narrow confines of companies, but at a national and global level as well.
From this context, the bonus debate is just a symbol of a more fundamental question: whether we can adopt a more communitarian spirit or whether we will fall back into old habits and excesses, thereby further undermining social peace.
Klaus Schwab, Executive Chairman of the World Economic Forum
@geeceesteiner62