Neosocialism versus Neoliberalism?

The speaker reserves the right to deviate – even considerably - from the manuscript!
St. Gallen, 18.5.2006: On the occasion of the 36th St. Gallen Symposium, Federal Councillor Christoph Blocher commemorated the liberal thinker Wilhelm Röpke and referred to the relevance of his teachings for solving the economic problems of today such as the debate on managers’ salaries. Mr. Blocher emphasised that the remuneration employees should reflect their performance and market value, and that it is the responsibility of the owners of a company to determine the level of salary. The Federal Councillor, however, sees difficulties with regard to large enterprises listed on the stock market and, therefore, supports state regulation of corporate governance and the current reform of Swiss company law in order to offer better ownership protection.

1. Fortieth anniversary of the death of Wilhelm Röpke

There is good deal of celebrating going on at present:

  • This year we celebrate the two-hundred-and-fiftieth anniversary of the birth of Mozart. 
  • And we commemorate the one-hundred-and-fiftieth anniversary of the death of Heinrich Heine. 
  • Eighteen-fifty-six – the year of Heine’s death – saw the birth of Sigmund Freud, the founder of psycho-analysis.

But among this whirl of festivities, one man who died in exile in Switzerland forty years ago has been virtually forgotten: Wilhelm Röpke, one of the great liberal thinkers of the twentieth century. I consider the teachings of Wilhelm Röpke to be an important guide in helping to solve the national economic problems of our time.

Like Mozart, Heinrich Heine and Sigmund Freund before him, Wilhelm Röpke was also ostracized and forced to leave Nazi-Germany in nineteen-thirty-three. The Nazi regime considered him a danger on account of his – I quote – ″liberal mind″.

2. Warning against socialism

Röpke was one of the strongest advocates of the free market economy, which he considered to be of central importance in a free and democratic society. He was, what people these days contemptuously call, a ″neoliberal″.

Indeed it has become fashionable to see in ″neoliberalism″ – as it was expounded by great liberals such as Ludwig von Mises, August Friedrich von Hayek, Wîlhelm Röpke and, later, Milton Friedman – a basic ill, what is more, evil per se. Those who criticise them obviously have not yet understood that liberalism is the inevitable, be it perhaps unpleasant, foundation for solving our problems. The western industrial nations are suffering from an overregulated welfare system and the alienation of its citizens from the state. They are characterised by weak economic growth and in general from excessive demands on the state. And yet, in fact, it is the neoliberals who are the true socialists, for no other school of thought has made a greater contribution to full employment, welfare and against poverty than that of neoliberalism.

What is more, neoliberals would also have many important things to say on today’s problems such as the debate that is currently going on in all significant industrialised nations – that of managers’ salaries.

3. Managers’ salaries

The current debate on managers’ salaries is characterised by lack of insight and envy. There is little point in comparing a labourer’s salary with that of a manager, and envy should not be allowed to dictate the political agenda. The question of the ″correct″ manager’s salary is much more complex than the bold statements of critics or advocates of manager’s remuneration would have you think.
What is there to say or do about the question of managers’ salaries? Here are a few basic truths that have fallen into oblivion but should be brought out again and accentuated:

4. Basic truths

  • Basic truth number one:
    Based on the experiences of the last two-hundred years, it is indisputable that private enterprises that flourish generate the best jobs, high income, welfare, affluence and tax revenue, and thus the best pre-conditions for a social state.
    As an entrepreneur it was obvious to me that my greatest social duty was to manage my company successfully, because profitable enterprises create employment and are the source of general prosperity.
    As a federal councillor I believe that the greatest social task is to ensure that as many entrepreneurs as possible can run their enterprises in Switzerland successfully.
    Whoever still believes in socialism or neo-socialism has slept through world history!
  • Basic truth number two:
    The success of an enterprise depends on the leadership of the company. The decisive factor is the leading figure of the company or its top management: ″There is no such thing as bad workers, only bad bosses!” This is a universal truth and applies to companies, organisations, associations and political parties. It also applies to schools, universities and – if you allow me this collegial remark – even to the Federal Council! That is why the main task of an enterprise is to make sure it has a good management.
    This also means that a top-level failure must be removed from office immediately, because the head of a company is responsible for the result, be it good or bad.
  • Basic truth number three:
    Good top-level managers are difficult to find. They are not many in number. That is why they are usually expensive. However, there is a market for all types of employees – including managers! For this reason it is imperative to be able to choose from applicants on the market in free competition.
  • Basic truth number four:
    How, then, do we define an entrepreneur?
    A classical entrepreneur is someone who owns a company and manages it himself. He is manager and owner in one. His existence – one could also call it, somewhat emotionally, his destiny – is linked closely to the company because the entrepreneur invests his capital in the enterprise. That distinguishes him from the manager who only runs the company as an employee.

    This principle, however, does not apply to companies listed on the stock exchange. In these companies, there is no such thing as the classical entrepreneur – the manager and owner in one: Leadership and ownership do not overlap. What is more, ownership is not vested in a single individual but in numerous shareholders. Thus it becomes more difficult to safeguard the interests of the owners to the full.
  • Basic truth number five:
    It is important for the success of a company that the owners appoint managers at a salary that reflects performance and market value. Neither the state nor any outsider is in a position to determine the correct remuneration or set a maximum limit, not even the managers themselves, for the company does not belong to them. Determining the earnings of the management is the responsibility of the owner – in the case of a public limited companies the shareholders.
  • Basic truth number six:
    How high should remuneration be?
    Generally speaking, it should correspond to the performance and market value of the person. This principle applies to all employees, even to those on the highest level. The terms of employment should generate excellent performance at a price that is as reasonable as possible. In contrast to the market for office workers, labourers, sales people, teachers and professors, the market for managers is smaller and there is no clear indication what the ″right″ salary – the market rate – should be.
  • Basic truth number seven:
    Having good top-level management is so important to the success of a company that it would be wrong to determine salary according to general public acceptance or pressure by the media. Social conscience means ensuring that a company is run by successful managers in such a way that it generates profits and creates prosperity. The only criteria for determining a manager’s salary are performance and market value.

5. Protection of civil rights and liberties

As I already mentioned, it is up to the entrepreneur, the owner, the shareholder or the board member – as fiduciary to the owner – to take these seven basic truths to heart. That is why the question arises as to whether the call for state intervention is justified. Does the issue of managers’ salaries have anything to do with the state at all?

In my opinion; yes, it does. As an advocate of the liberal constitutional state, I am convinced of this.

One of the most important tasks of the liberal constitutional state is the protection of civil rights and liberties, and especially the protection of private ownership.

The owners of large publicly held corporations with thousands of shareholders have difficulty in safeguarding and asserting their claim to ownership. The function of the owner is often demolished to the point that the individual can barely guard his interests.

It is similar to communism: under communism property was supposed to be publicly owned, but nobody could assert his or her right to ownership so that finally the nomenclature had to take on this role. The nomenclature allegedly took care of private interests – but for its own benefit.

Because the protection of private ownership is one of the state’s main tasks and essential for economic prosperity, the state must then take action if private ownership is not being sufficiently protected. Large shareholder companies listed on the stock exchange need state regulation on corporate governance in order to offer better ownership protection. Otherwise, there is a danger that governing board members and management enrich themselves at the expense of the owners and in violation of private ownership.

6. Measures in company law

In order to offer better ownership protection, the state must act. This issue is currently the subject of the reform of Swiss company law. The draft is at present in the consultation procedure. What is the purpose of this reform?

  1. The reform provides that board members’ earnings must be published individually and in detail. This also applies to the highest salary within the management, and the total sum of earnings of the whole management. The auditors must examine and confirm the figures. This regulation has already been decided and will come into force on 1 January 2007. The purpose of publishing salaries is so that shareholders can judge whether earnings are in relation to performance and market value. 
  2. Each individual board member is to be elected or confirmed in office on an annual basis. Thus, the owners or shareholders have the chance each year to pass judgement on the earnings and performance of top managers. 
  3. So that the will of the owners can be asserted, acts that distort voting results – such as proxy voting by banks or by borrowing shares and thus being temporarily eligible to vote – must be abolished. 
  4. The board must apply the selection procedure not only to employees, but also to the selection of top-level managers. The board must ensure the free procedure of salary negotiation and not subject this process to the coordination of a few consultant firms. The board is the trustee of the owners and not the consultant firms. It is the duty of the board to fulfil this role. A board that does not look after the honest management of the company must be called to account; the legal regulations on this already exist.
  5. With regard to companies not listed on the stock exchange, the reform provides that board members’ earnings must be made public if requested by the shareholders. This ensures that shareholders in small companies – as entrepreneurs – can determine performance and salary by means of the ballot.

Such regulations as these do not qualify as state intervention. For those who are convinced of the benefits of the free market economy, it goes without saying that performance, market-value remuneration and the protection of private ownership must be safeguarded.

Other proposals such as maximum salaries for managers, determining salaries by outsiders, or even the battle cry of the socialists “same wages for everyone” are nonsense and would have disastrous long-term consequences for the national economy.

The reform of company law as proposed here will put an end to the wretched discussions on managers’ salaries.

7. Röpke in Geneva

Let us turn our attention, once again, to Röpke:
After emigrating to Switzerland, Wilhelm Röpke found a new place of activity in Geneva, at the Institute of International Studies. His extremely positive evaluation of Switzerland was not just a result of his special biography as an immigrant: In Switzerland he recognised, quote; ″an exception, like all things in history, that succeeded.″ (taken from ″The Social Crisis of our Time″). May this also apply to the reform of company law.

Let us allow the state to do what it really has to do. The rest is down to democracy, the free market and freedom.

Last modification 18.05.2006

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