Daniel L. Vasella
A large number of interdependent financial instruments that were developed were not well understood by investors or even by the rating agencies. So there was a financial system at the surface. and underneath there was a shadow financial system that was not really regulated because it was not transparent.
The interesting question is why the regulators only reacted after the accident instead of when they saw the bubble and that consumers are taking on too much debt. The banks have created innovative instruments to earn better returns, but as a percentage of GDP the financial service industry has quadrupled, becoming as much as 40% of GDP. So no one [regulators] wanted to touch it because it seemed to work well and it contributed so much to GDP.
But now it is unavoidable and the President has the unpleasant job of cleaning up the mess. It will have to happen. The question is to what degree can the government clean up without having the economy go into a deep recession and triggering a sharp rise in unemployment
Tighter regulation is unavoidable. We [Big Business] don't like when the government gets directly involved in business, but the government has intervened and in many countries it has taken an ownership stake effectively nationalizing the industry .
So if you have a sanitation of the financial industry, then the banks will have to be much tighter and tougher on their lending practices. Credit card companies will have to impose limits on credit, and all this will impact the real economy.
Self regulation is wonderful, but when the incentives to entice consumers to spend beyond their means leads to a disaster then I don't think the government should just watch. There needs to be more transparency, especially with these new financial instruments.
The big challenge, though, is making sure regulators keep up with the innovation of the finance industry so they understand the consequences of any new instruments. Enforcing greater transparency is a no-lose regulation.
The other issue is that people speak a lot about executive compensation in the banks and the excess. This is true but people give executives incentives to be very aggressive because shareholders always want more money back. Investors have very short holding periods for stock, so they exert a lot of pressure. And when money was cheap, shareholders pressured companies to buy back shares and increase leverage, and those that took it to the limit are now in trouble.
So to what degree are boards and executives independent of short term shareholders? The power shift from management to boards and boards to shareholder activists has not been positive—you have to give the responsibility back to the boards. They have the duty of ensuring a company's long term sustainability as opposed to focusing purely on its short-term performance
If you look at medical profession as an analogy we have the Hippocratic oath—this is something that guides our actions and values. Boards and execs need something similar a kind of code of ethics.
I think the next President can encourage and promote the positive examples and single out the negative ones. This doesn't require regulation but it needs to be said and identified [by the President] in order to foster a certain behavior. This is something that you can not regulate.
I think health care is one of the primary responsibilities of any government in the same way that education is. The U.S. has been at the forefront of biomedical innovation and the National Institudes of Health plays a crucuial role in that. But funding for the NIH has been cut back as defense spending has increased. This needs to change.
The question of access to health care is a topic that will have to be addressed, and the uninsured are a population that we have heard a lot about. The question is what kind of health-care system needs to be instituted?
In the Swiss system, the only obligation the government makes is that everyone needs to buy health insurance—not companies, but individuals. In Switzerland, there are different levels and types of coverage you can choose from. The advice I would give is not to be hasty in designing the health-care system. Look at different ones around the world, and ask all the different stakeholders what they believe what the best system is. I'm not saying the Swiss system is the answer. There are many different ways of addressing the lack of access to healthcare but it needs to be addressed.
There is huge waste in the health-care industry because of lack of transparency. There are questions about the exchange of data and there is a huge amount wasted—billions of dollars—on litigation.
Waste in the System
If you look at what insurance physicians have to take and the lack of coordination in patient care—people see many doctors who don't work together, so medical tests are often unnecessary or duplicated. This waste increases the fee for medical services and the price of the drugs. These are things which critical review
The big cost drivers for the health-care system are the aging of the population and diseases such as Alzheimer's, diabetes, cancer, and cardiovcascular problems. We need better prevention and intervention [in the U.S.]. This is a must.
The U.S. needs to find a better system for people to control their weight. Dealing with consequences of obesity such as diabetes and heart disease will cost $1 trillion over the next 10 to 15 years. The U.S. needs to develop a national program to address this emphasizing healthy eating and weight control beginning in schools. The government could incentivize companies to develop weight-control educational programs for employees.
My view is you cannot raise prices significantly for a long time above the consumer price index and think people will be happy about it. But at same time we have to see the cost of developing new drugs is skyrocketing. Requirements for clinical trials—the size of the patient studies and the amount of data requested by regulators are rising as are development costs. The FDA needs to identify earlier in the process if they believe a drug won't fly. They need to say in advance what the exact criteria is for approval.
The next FDA commissioner will be an important person. In order to make good judgments, he or she needs to be left alone to work and get on with it as opposed to be attacked by politicians [as has happened in recent years].
The President should look at litigation and how to limit the exposure. If I was making the decision, I would say to eliminate the percentage the lawyer can get as a fee from the patient as they are making way too much money. The lawyer should not be able to get a percentage of settlement; they should get paid by the hour
Right now, you can sue irrespective of whether or not you have a case because lawyers will work for free, just claiming a percentage of the settlement. Too often, companies and doctors settle simply to avoid a long drawn-out litigation and the financial and personal damage that can cause.
I have had my legal team telling me that we know we are not at fault but we recommend settling because it is cheaper and to me that is the wrong system.
Intellectual property rights also have to be protected. The next President needs not only to strengthen IP but foster innovation. To do that, you need to have strong science and companies.
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