Droit des Sociétés
La version française sera achevée prochainement!
Company Law Framework of Corporate Governance in Switzerland
The Company Law in effect since 1992
The law regulating companies was defined by the Swiss legislature in 1992. The law regulated principles pertaining to corporate governance and described the organisational structure of listed companies according to the so called parity principle of corporate bodies. The law accorded the board of directors and the AGM of shareholders specific non-transferable and inalienable core powers.
Art. 716a of the Swiss Code of Obligations (CO) forms the backbone of Switzerland’s « mixed system » combining a classical one tier system, and a two-tier board model. The law lays down four corporate governance rules:
(i) The overall responsibility for establishing strategy – the « ultimate decision making power » – does not lie with management but with the board of directors. The board decides what objectives are to be pursued and the financial and other resources to be employed to this end.
(ii) The board of directors possesses overall organisational and financial responsibility.
(iii) The board is responsible for the supervision of management and compliance.
(iv) The board may appoint committees from among its members to which it may delegate specific supportive tasks, but not ultimate or final decision-making powers.
Art. 716b CO enables the board to delegate the actual executive management of business to a management board, similar to the two tier board system as in German law. Delegation is the usual case in practice; it is subject to the provision of the non-transferable and inalienable core powers reserved to the board of directors, as mentioned above, and set out in so-called « organisational rules ». These rules are similar to bylaws under American corporate law.
Thus, combined with its supervisory tasks, a Swiss board of directors retains the powers of an executive body and, as such, is positioned between a German supervisory board and a German management board in terms of its function. These statutory cornerstones of corporate governance are supplemented by general guiding principles that are not entirely precise:
- the duty of care.
- the duty of loyalty to shareholders of the board of directors.
- of management board as per Art. 717 para. 1 CO.
- duty to implement principles of corporate governance.
In this discretionary and policy-making framework that the corporate law sets out, companies are left with a relatively large measure of freedom to develop their own corporate governance frameworks, aligned with their own individual requirements.
The law also contains various highly determinant specific stipulations with regard to transparency requirements in particular that leave the board of directors virtually no margin of discretion in their implementation. Art. 663bbis CO. Particularly requiring listed companies to:
- provide a detailed disclosure of the compensation,
- conversion and option rights of the board of directors and executive management,
- individual disclosure for each board of directors member,
- the total for executive management,
- highest compensation accorded an executive management member.
Reform of Company Law
Following financial scandals involving major corporations such as Swissair and ABB in 2001, a draft bill was passed in 2005 recommending a transparency law that compelled listed companies to provide detailed disclosures of the holdings and compensation of board of directors and executive management members.
In 2007 the Swiss government launched a « major » company law reform. This left the statutory cornerstones of corporate governance intact, but rather focused on the options for shareholders to influence their company and the regulation of top salaries in listed companies. The slow birth of this law was superceeded by an initiative launched by a leading Swiss businessman and member of Parliament, Thomas Minder. In February of 2008 the initiative “against fat-cat pay deals » was launched. This triggered a much needed political debate on the compensation of the top executives of listed companies, and in general a discussion about transparency and governance. The Minder initiative demanded a mandatory formal approval on the total compensation of board of directors and executive management at each annual general meeting. By contrast, the counterproposal passed by the Swiss Parliament proposed to leave it up to the individual company to establish by way of the articles of association as resolved by shareholders whether the resolution of the general meeting pertaining to the compensation of executive management should possess a binding or merely a consultative effect. In contrast to the initiative, the counterproposal did not provide for any criminal prosecution where compensation rules are violated.
On March 3, 2013 Swiss voters overwhelmingly backed the initiative giving shareholders sweeping authority over executive pay. The voting for the initiative was helped by the disclosure of the Novartis Board’s unethical behavior in trying to secretly embezzle CHF 72 million from its shareholders to give to its parting CEO Daniel Vasella. (Some people responsible have still not been held to account!)
Unfortunately, the outcome of the « Minder » initiative with regard to various items continues to be uncertain, and its implementation is being watered down by the parliament.
Regulated Self-Regulation by the SIX Swiss Exchange
Outside the bounds of company law, Art. 8 para. 1 of the Swiss Stock Exchange Act obligates stock exchanges to regulate the admission of securities for trading. Following from this authorisation, in its Listing Rules the SIX Swiss Exchange has established, among other things, what information must be disclosed by issuers. As is the case in most European countries, however in contrast to Germany, Swiss securities exchanges are not public-law entities but rather are constituted as companies under private law. As such, their rules must be qualified as regulated self-regulation measures.
Though self-regulation is no prevention of criminal / unethical behavior, the SIX Listing Rules Directive compels issuers to make specific key corporate governance information, available to investors:
(i) Details pertaining to the group structure and significant shareholders or groups of shareholders.
(ii) Specific details relating to the capital structure, such as authorised and conditional capital.
(iii) Specific particulars on the members of the board of directors and executive management, such as their professional career, their business relations with the company, other functions and their position within the group.
(iv) Articles of association provisions by virtue of which issuers depart from discretionary statutory provisions pertaining to the participation rights of shareholders (e.g. voting-rights restrictions, qualified quorums etc.).
(v) Departures in the articles of association from the statutory triggering threshold concerning the duty to make an offer under the Stock Exchange Act (opting-out or opting-up) and the content of contractual clauses on changes of control.
(vi) The duration of audit engagements including the term of office of the lead auditor, the amount of auditing fees and all other consultancy service fees.
Essentially what the SIX demand is a “comply or explain” principle covering all disclosures, added in the notes of an annual report. Concretely, where an issuer departs from the Directive in a disclosure item, a justification must be included in the annual report. The self-regulation of stock exchanges does not interfere in the internal checks and balances within a company in terms of corporate governance and does not impose any conditions pertaining to a company’s individual governance mechanisms, but rather its focus is on enhancing transparency in a listed company’s operations.
At the same time as the Corporate Governance Directive was issued, economiesuisse, the federation of Swiss businesses, issued its « Swiss Code of Best Practice for Corporate Governance » in 2002.
The preamble of the Swiss Code outlines its purpose and legal significance; reference is made to the following explanation: « The purpose of the Swiss Code is to set out guidelines and recommendations, but not force Swiss companies into a straightjacket. Each company should retain the possibility of putting its own ideas on structuring and organization into practice. » Hence, the Swiss Code emphasises the discretionary freedom of companies and is restricted to legally non-binding recommendations of best management practice and supervision.
The problem is that companies can retain top lawyers to “interpret” the law, and the positive effect of the Minder initiative has been diluted by strong political lobbying.
Self regulation sometimes appears to be a smoke and mirror exercise in deception where company executives say one thing but do another. SUISHARE will lobby to see the law amended to ensure that Directors (who have no limitation on their liability) and company executives are taken to task and held accountable for any unethical behavior that leads to fines incurred by the company through the mismanagement and unethical conduct of executives. It is unacceptable that shareholders are first in line to be punished for the misbehavior of executives and the lack of diligence by the Board.