The Advisors' Blog

– Matthew Roberts, ISS Germanic Markets Research, and Subodh Mishra, ISS Governance Exchange

Regulators released June 14 a draft ordinance meant to address demands raised earlier this year by Swiss voters for the government to clampdown on executive remuneration. On March 3, roughly two-thirds of Swiss voters supported a referendum, spearheaded by businessman-turned-politician Thomas Minder, which radically empowered shareholders on matters of pay. Minder’s initiative gave shareholders a binding annual vote on pay, barred severance awards and other types of “golden” pay, gave investors a greater say in board elections, and required greater disclosure of voting records and policies by institutional investors.

Under the proposed rules released last week, shareholders would annually approve, on a binding basis, the total remuneration of the board, executive management, and the advisory board each year on an aggregate basis for each governing body. Fixed pay would be approved for each governing body on a forward-looking basis while variable pay would be approved on a retrospective basis. Effectively, the approvals would equate to six separate resolutions.

The proposed ordinance states that company articles of association may establish a different modus of vote (e.g., approval of a “budget” reflecting a lump sum of fixed and variable for the upcoming year), while respecting the annual meeting assembly’s authority to approve total remuneration annually.

If a vote is rejected, the board may make a second proposal at the annual meeting. If shareholders do not pass the second resolution, a special meeting must be convened within three months seeking approval.

On matters related to special, one-off, or bonus payments, the draft rules bar “remuneration in advance,” while allowing for sign-on payments . Severance payments–a rallying cry for those supporting the Minder referendum–are banned but non-compete agreements are permitted. Remuneration specifically for mergers, acquisitions, or other similar events is not allowed, but such events may be taken into consideration in the setting of variable compensation, the proposal stipulates.

More Say on Directors

The draft rules would allow shareholders to directly elect individual board members annually, as well as board chairman and members of the remuneration committee, as called for under the Minder referendum. The draft proposal also includes a provision that the annual meeting assembly can elect a vice chairman in order to prevent the possibility that a special meeting would have to be held if the chairman were to leave or otherwise be incapacitated.

With respect to overboarding, the draft regulations leave to the company’s articles of association a cap on the number of other board positions, while it remains unclear if the company set caps would apply only to Swiss companies and/or to privately held firms. Multiple directorships with a holding company group would be counted as one. The length of employment contracts, meanwhile, would also be regulated by company articles.

Investor Impact

Swiss-based pension funds will not be required to vote in all cases, under provisions of the draft rules. A number of funds had worried following the referendum that they would be penalized for doing so, even when the economic benefit of casting a vote was questionable.

Provisions allow for funds to abstain or not take part in votes at all if it is “in the interest of the pension fund members,” Investment & Pensions Europe reported. Provisions within the draft ordinance state that a pension fund’s board must draw up rules spelling out exactly how it will make decisions regarding members’ interests. In a televised press conference, a Justice Ministry spokesman said the government had set the fines for the violation of these regulations “milder” than other penalties within the legal framework “on purpose,” IPE reported. Funds must also report their shareholder voting activity to members at least once a year and will be given one year to comply with the rules that take effect Jan. 1.

Next Steps

Regulators intend to consult on the draft through July 28 with the aim of releasing final rules in late November. The rules would then take effect Jan. 1, though company articles of association must be amended within two years of that date.

The release of final rules is expected to occur within days of another referendum on pay, this one capping the ratio of highest paid employee to that of average rank-and-file at 12:1. In advance of the vote, the two heads of the main Swiss business lobby, Economiesuisse, announced on Wednesday they were both stepping down after the organization came under heavy fire over its failed campaign to oppose strict controls on executive pay, Reuters reported.

Economiesuisse, which represents 100,000 companies from all sectors employing 2 million people, lobbied hard against the Minder initiative, argued companies would leave Switzerland for more corporate-friendly locations and that businesses would suffer without flexibility to attract top talent. The group is likely girding itself for another fight over the pay ratio referendum, which most observers wrote off until voters made known their views in March.