Switzerland: Trouble in Paradise

A series of catastrophes has the Swiss wondering where things went awry

What's the matter with Switzerland? That's the question Blick, a mass circulation tabloid, has been asking the country's business leaders in recent days.

Like most of its readers, the gaudy Zurich newspaper is reacting to the corporate, political, and managerial disasters that have shattered the complacency of Europe's most prosperous nation. The grounding of Swissair last fall, corporate-governance battles at Zurich Financial Services Group and Credit Suisse Group this spring, the July 11 arrest of the ambassador to Luxembourg on charges of money-laundering, and, most tragically, the air-traffic failures that contributed to the July 1 Überlingen crash in which 52 Russian children and 19 adults died, have forced the Swiss to acknowledge that their landlocked country of just over 7 million people is no longer the bastion of order and efficiency it once was. "Swissair and [those other calamities] have triggered a massive debate," says Bernd Schips, the head of the Swiss Institute for Business Cycle Research. "People were astonished that such things could happen here." Now, the soul-searching has started, and with it a serious quest to change the system.

First, though, comes the task of figuring out why things went awry. The Swiss are coming to grips with the idea that many business executives, politicians, and investors had wrongly convinced themselves that their way of doing things was superior. It's easy to see why. Switzerland is Europe's most successful economy, with gross domestic product of more than $31,000 per capita, an unemployment rate of just 2.1%, and a massive balance-of-payments surplus equal to almost 10% of GDP. Switzerland has five companies in the world's top 100--food processor Nestlé (NSRGY ), financial-services giants UBS (UBS ) and Credit Suisse Group (CSR ), and pharmaceutical companies Novartis (NVS ) and Roche Holding (ROHHY )--compared with just six from Germany, which has a population 10 times as big.

Yet that success encouraged management at Swissair, Zurich Financial Services, and Credit Suisse to embark on ill-considered expansion programs and to press ahead with them even when it became clear that they weren't in shareholders' interests. And it bred the complacency that allowed air-traffic control to run a third-rate operation. The malaise cuts across public and private sectors. "No one exerted discipline on management. No one asked uncomfortable questions," says Hans Geiger, head of the University of Zurich's Swiss Banking Institute and a former Credit Suisse executive board member.

The boards of most Swiss companies are often little more than rubber stamps, made up of members of the country's small, conservative, smug Establishment. Everyone knows everyone else and sits on each other's boards. So Nestlé CEO Peter Brabeck-Letmathe is vice-chairman of Credit Suisse's board, while Credit Suisse honorary Chairman Rainer E. Gut is chairman of Nestlé. If these players aren't members of the same political party or Zurich guild, they often know each other from army days: Many captains of industry were also officers.

Meanwhile, Switzerland's passion for direct democracy doesn't extend to the corporate sphere. Institutional investors have been far too passive. For example, they didn't challenge former Zurich Financial Chairman and CEO Rolf Hüppi even after his rapid expansion program ran into difficulties and the company's stock price plummeted. "This is a country where most political decisions are made by the people through referendums," says Geiger. "Yet big shareholders never made any effort to exercise control over the companies they own."

The string of recent catastrophes has unnerved ordinary Swiss. "I always thought we had the world's best system, but now, I see I was mistaken," says Anne-Marie Mudry, a retired banker from Bern, the federal capital. The anti-Establishment Swiss People's Party is exploiting that dismay. It's now the country's most popular political grouping, with more than 20% of the vote, according to pollsters. "The political class and some people in Big Business are as inefficient as they are self-important," says the party's best campaigner, Christoph Blocher, a poor pastor's son who built up a huge chemicals empire before turning to politics.

Voters are in vengeful mood, increasingly distrustful of big companies and free markets. Last month, the people of Thurgau, a canton northeast of Zurich, threw out plans to turn the cantonal bank, currently a public institution, into a joint stock company. The cantonal government can't even think of privatizing the bank. And in September, voters look set to veto plans to open the electricity market to competition. Individual investors are restive, too. Thousands supported activist Hans-Jacob Heitz's bid to oust Credit Suisse Chairman and CEO Lukas Mühlemann at the annual meeting on May 31. "Public and shareholders' trust in large companies has begun to erode dangerously," Justice Minister Ruth Metzler-Arnold told business leaders in a speech last month. "Further erosion in that trust would undermine our economy."

Shocked out of their complacency, the leading lights of Swiss industry have hammered out a new corporate-governance code. Companies will be required to publish the salary of their highest-paid executive and disclose the total amount of money and perks given to board members. "This is the first time Switzerland has had this sort of regulation," says Dominique Biedermann, the director of Foundation Ethos, a shareholder group that represents pension funds.

Meanwhile, overconfident managers are increasingly being brought to heel. At Credit Suisse, Mühlemann is being forced to give up the chairmanship after next year's annual meeting. Hüppi has stepped down after major shareholders at Zurich Financial finally turned against him. And politicians are no longer as keen to sit on company boards, fearing they may be caught up in a corporate disaster. That will put some much-needed distance between politics and business. "Switzerland is becoming a normal country," says Rudolf Ramsauer, chairman of Economiesuisse, the Swiss Business Federation.

Plenty more needs to be done, though. Despite Switzerland's wealth, its economic growth is flat. One way to boost productivity is to open the protected areas of the Swiss economy--including agriculture, construction, and tourism--to foreign competition, though that would be hard to sell to voters at this point.

Up to now, the Swiss model has proved remarkably resilient. The watch industry successfully restructured after being almost crushed by Japanese competition in the 1970s. And other manufacturing sectors did likewise in the 1990s when their competitiveness was eroded by the soaring Swiss franc. But can the country as a whole renew itself? "Whether Switzerland becomes Europe's cow patty or its jewel is still an open question," says David Bosshart, director of Gottlieb Duttweiler Institut in Zurich, which analyzes the retail sector. Well, before change comes the jolt. The Swiss have definitely been jolted.

By David Fairlamb in Zurich

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