Between 2008 and 2013, Switzerland had a fiercely fought public debate led by Thomas Minder, a leading Swiss businessman and a member of the Swiss parliament concerning the excessive payouts made to company executives. At least five of Europe’s 20 highest-paid chief executive officers worked for Swiss companies.
Just a month before the Minder vote, the initiative was boosted by news that the Novartis Board had planned to secretly pay outgoing chairman Daniel Vasella CHF 72 million as a golden handshake. In response to the public ire, Novartis said they would cancel the payout.
On March 3, 2013 the Swiss voting public approved, by a large majority (roughly 68%), the “rip-off initiative”. Given this clear message the Swiss Federal Council followed through on its promise to rapidly implement the Minder Initiative and its key corporate governance requirements.
The proposal gives shareholders an annual vote on managers’ pay. It eliminates sign-on bonuses, as well as severance packages and extra incentives for completing merger transactions. The initiative also includes rules punishing executives who violate the terms with as long as three years in jail.
Being the regulator of corporate governance, the State is called upon to balance the entrepreneurial freedom required for businesses to thrive against the legitimate interests of shareholders and other stakeholders. The State may not interfere in the decision-making process of executive bodies but must ensure that an appropriate balance is struck between direction and control in a company.
The government has serious interest in the economic success of companies, and thus must provide them the freedom to develop the structures for success. However, it must ensure that supervision and accountability are guaranteed. Consequently, a challenge between the right degree of regulation and corporate freedom.
This new law is now set forth in article 95 paragraph 3 of the Swiss Federal Constitution (Art. 95.3) which entered into force on January 1, 2014 with immediate effect, subject only to some transitional provisions.
Art 95.3 fundamentally changes the legal framework on executive compensation for Swiss public companies and reflects an on-going shift in the current global corporate governance landscape towards increased shareholders’ rights. It also implements some serious criminal sanctions.
The intention to strengthen shareholders’ rights in a Swiss listed company lies at the center of the Minder Initiative. Art 95.3 requires that each Swiss public company must establish its say-on-pay framework which, must comply with three requirements:
(i) the shareholders’ vote on compensation must be held annually;
(ii) the shareholders’ vote on compensation must be final and binding rather than merely advisory; and
(iii) the shareholders’ vote on compensation must be held separately for the Board, the executive management and the advisory board, if any.
Within these limits, a company is free to flexibly establish its own say-on-pay framework. However, any such framework established must be reflected in the articles of association and set forth the details and nature of a say-on-pay vote including, particularly, timing aspects and the consequences of a negative outcome.
The law is vague regarding the nature of the vote. A company is free with the choice to either;
- submit to its shareholders the compensation proposed by the Board without offering the shareholders an opportunity to submit their own counter-proposals,
- allow counter-proposals by the shareholders.
If counter-proposals are tolerated, companies may find themselves in a voting quandary, thus we are seeing the more restrictive mode of only having the shareholders’ vote on the Board’s proposal without accepting counter-proposals by the shareholders.
The vote on compensation may be held prospectively (e.g. until the next AGM for the upcoming business year) or retrospectively (e.g. covering the preceding business year). The trend seems to lean towards a prospective vote on fixed compensation and variable long-term incentives while short-term incentives are generally likely to be addressed retrospectively which allows shareholders to pass a vote knowing whether or not the management has indeed reached its targets.
What is still unclear is that if Shareholders reject the compensation proposals, what would be the outcome? Would the Board have to call for an Extraordinary AGM? It is not permissible to implement a mechanism which would deprive the shareholders of their right to ultimately resolve the compensation element concerned.
Severance payments are not permissible unless required by law (Swiss or foreign) or owed to a leaving executive as a consequence of a judgment or order. Payments during a notice period of up to 12 months or fixed-term employment agreements not exceeding 12 months (i.e. payments owed until the end of the contractual relationship) do not constitute prohibited severance payments and are thus still permissible. Non- compete covenants and consultancy agreements for a post-employment period are still permissible unless they serve to circumvent the prohibition of severance payments.
At the start of employment, sign-on bonuses as compensation for forfeited benefits granted by the former employer will remain permissible. However upfront payments are considered prohibited advance payments.
In summary, a company’s freedom to over-compensate its directors and officers should be substantively diminished by the Art 95.3.
Furthermore, the Art 95.3 clarifies that the shareholders must have the possibility to give general voting instructions in case of new (ad hoc) proposals (Anträge). In addition, the Art 95.3 determines that proxies sent back without any instructions (which, in practice, is actually surprisingly often the case), are to be calculated as abstentions. Yet, whenever the absolute majority rule applies (which is the default rule under Swiss corporate law for shareholders’ resolutions), such abstentions are effectively “no” votes. Against that background, it remains to be seen whether proxies may be specifically drafted to address this issue, i.e. by stating on the proxy that it would be deemed exercised in the manner described in such proxy (e.g. supporting the Board proposal) if duly executed but sent back without any box being ticked. Further, the Art 95.3 provides that proxies and instructions are valid for the upcoming AGM only.
The Minder initiative requires pension funds to make use of their voting rights in the best interest of the policyholders regarding elections and when voting on compensation-related matters. Furthermore, the pension funds have to disclose their voting behavior.
Unfortunately the concrete implementation of Minder’s initiative will take years
The Minder initiative risks being a toothless tiger particularly if shareholders remain ignorant of their rights and of the understanding of company workings, and that the government is implementing a somewhat watered down version of the initiative.
Additionally oversight is required so that companies cannot cover up material issues that should be taken into consideration in determining compensation and rewards. SUISHARE with its initiatives for better oversight will support this law reaching its intended results. To this end SUISHARE will offer training, explanations, and sturdy oversight.
Please do participate in discussions on these themes in the SUISHARE forums.