The actions and commentary surrounding the recent shareholder revolt over the proposed $78 million payment to departing Novartis Chairman Daniel Vasella offer a range of ethics and governance lessons. These are critical across all sectors from corporate to non-profit to governmental. My purpose is never to attack an individual leader, an organization, or commentators. My intent here is learning, especially as it seems inconceivable that this kind of situation could continue to occur following the relentless say on pay and other ethics events of 2012.First, proposals by the recipient of a bonus or other exceptional compensation to allocate part of the sum toward philanthropic activities in order to assuage shareholder uproar do nothing to mitigate any inappropriateness of a payment. It misses the point. If a corporation wants to engage in corporate social responsibility or charitable giving programs, it should do so directly, thoughtfully, and strategically. This version of philanthropy does not help shareholders either.

Second, respectfully, whilst shareholder approval of bonuses, non-compete payments, severance packages and the like may be appropriate – or even appropriate for regulation – shareholder approval does not alone indicate that the directors have fulfilled their fiduciary and ethical obligations. Nor does it indicate that the approved action is ethical. Shareholders are an important voice. But shareholders are not the only voice and not necessarily a neutral and/or comprehensively analytical or legally conclusive voice.

Third, maintaining secrecy of payments to a departing organizational leader is unacceptable. Likely it is also illegal in many jurisdictions. Legal or not, as a baseline ethical consideration there is simply no excuse for lack of transparency. This is particularly the case when significant sums are involved and when the sums have no apparent relationship to the market value of services rendered. (This is indeed perhaps the explanation.) Why is transparency so critical? It is, as the US Securities and Exchange Commission “reasonable investor” standard indicates, the basis on which reasonable people decide to trade in securities (or make donations) or even more broadly to engage in business with an entity and its leaders. It might also provide added incentive to keep the business dealing appropriate, in this case compensation aligned with fair market value.

Fourth, the solution is not to panic or to rectify one mistake with another. Heeding shareholder cries and cancelling or reducing a payment makes sense. Dropping an important strategic tool such as a non-compete does not. Boards must address such challenges comprehensively, not as one-issue defences. Even if an organization needs to backtrack on a particular decision, it is critical not to be so narrowly focused that another worse decision is left standing. I am not in a position to judge the value of the non-compete in the Novartis case, but the Vice-Chair is widely quoted as confirming the value. Therefore, we can assume that likely dropping the non-compete was not in the company’s or shareholders’ interests. Myriad examples relate to this. Dismissing an organizational leader in a media panic prior to assessing the most ethical course of action can lead to a decision that is not in the best interest of the organization. Another example is rapidly cutting a non-profit program providing services essential to human life following a relatively minor monetary fraud.

Fifth, leaders need to stand up and act ethically, even if there is no payment involved. It seems fairly standard that when a leader of a major organization leaves, a reasonable non-compete period at a reasonable salary should protect everyone. Perhaps this should be negotiated at hiring. The terms should take into account reasonable compensation at the time it kicks in, perhaps with shareholder approval in the case of a corporation. Whether or not golden handshakes are illegal as they may soon become in Switzerland, they are not ethically wise in today’s environment. Failing that, ethical negotiations at the end seem at the very least the fiduciary and ethical responsibility of all.

Finally, as with many recent news stories, the real lesson of the Novartis case is the flawed organizational ethics not one compensation point. Organizational leaders must focus on the need for a more proactive and forthright ethics oversight of organizational decisions, processes, the results, and the impacts on shareholders and other stakeholders.

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