Thursday, 24th April 2014

World Economic Forum chairman Klaus Schwab’s opinion on City bonuses

money-2.jpgCommercial feature - The recovery of the economy has been less than stellar, and the average UK citizen still feels the stress associated with financial disrepair. In this context, it is hardly surprising that controversy once again surrounds the idea of corporate and banker bonuses. The life of excess that they publicly display was a major contributor toward the financial crisis in the first place, and the last thing anybody wants is a repeat of 2008.

All of this controversy avoids the central issue, however. More important is the effect that banks have on society, and the way that executive’s decisions affect those institutions. All of this talk about bonuses is symbolic of a more fundamental change that has taken place in the banking world, and the business world as a whole.

Roughly forty years ago, Klaus Schwab, of the World Economic Forum, developed what is called the stakeholder theory of business. This theory was based on the idea that a business is a community, and several groups are either directly or indirectly dependent on that community. Shareholders and lenders are the most obviously affected, but those who work for the company, buy things from the company, sell products to the company, and even society as a whole are in some sense dependent on the business.

The reason for the creation of the World Economic Forum was to create a meeting place where executives and their stakeholders could discuss how they depended on one another, and what their responsibilities were. The executive is a trustee to all of the stakeholders.

But as Klaus Schwab stated in a recent article with the Guardian, “We have witnessed a gradual erosion of this communitarian spirit over recent years.” He went on to say that, in modern society, business “becomes a functional ‘profit-generating machine’.”

Today, a business is no longer viewed as an entity that serves a purpose. It is instead thought of as a purely mechanical organization, its only purpose being the maximization of profits in the shortest period of time. To continue the machine analogy, all of the parts that make the machine run are thought of as being replaceable. These parts include people as well as property.

This change is most obvious in the banking and financial industry, which at its very best has only an indirect relationship with the idea that businesses exist to provide goods.

Banker bonuses are a symptom of this problem. When an organization has only one functional need, to earn a profit, how can we expect the individuals working for the company to behave any differently? The only possible solution to this problem is to revisit the idea that business exists to provide a good to society, and to take it seriously.