Over the last few years, developments in corporate governance and stewardship in Switzerland have gathered momentum. One example for this is pharmaceutical company Novartis, whose AGM takes place on 27 February. The company has made significant changes to the composition and the work of its board as well as to its remuneration practices. We have engaged with the company on these issues for some time.
All eyes on Minder
As the Swiss voting season approaches, all eyes are on the final and most important step in the implementation of the Ordinance Against Excessive Remuneration at Listed Companies (the Ordinance). The Ordinance is a direct result of the Minder initiative, a high profile national referendum aimed at improving corporate remuneration practices at Swiss companies, which was approved by 68% of voters in Switzerland in March 2013. The Ordinance has transferred some decision-making powers from the board of directors to shareholders, such as the approval of pay packages for the board and executive management. It also seeks to make board members more accountable to shareholders by introducing new mandatory voting items for shareholder meetings, such as annual director elections, as well as direct elections of the board chair and compensation committee. The Ordinance further requires companies to set limits on certain practices, such as the number of external board mandates that board members or executive management can hold and the length of contracts for executive managers.
Although the Ordinance came into effect on 1 January 2014, binding votes on remuneration will only become mandatory this voting season. By giving shareholders the power and responsibility to approve the amount of remuneration that may be paid to the board of directors and executive management, the voting on remuneration introduced by the Ordinance focuses on the quantum. It may be proposed either on a forward-looking or backward-looking basis or a combination thereof, provided the company’s articles of association have been amended accordingly. This is in contrast to other countries whose advisory – or in the case of the UK binding – say-on-pay votes focus on the shareholder approval of remuneration policies or reports instead of quantum.
Varied voting resolutions
According to the Voting Season Review by our proxy partner ISS, Swiss companies proposed a variety of different approaches on how shareholders were able to vote on board and executive management remuneration in 2014. So-called “budget” voting resolutions, where shareholders were asked to approve total pay for the following year dominated. However, a number of companies chose to make one or more pay components subject to a shareholder approval on a retrospective basis. This approach makes it difficult to assess pay packages among Swiss companies, let alone compare them with their international peers. The flexibility regarding the quantum used in budget votes granted by the Ordinance adds further complexity. For example, in a three-year long-term incentive plan, a company could justifiably use either fair value or the maximum amount that could theoretically vest in a budget vote on total 2016 compensation. We prefer companies to use the maximum amount that could vest, however they are understandably weighing up their options. As a result, the ability of investors to make informed decisions will be compromised.
Increasing investor-company dialogue
In February 2015, we held an event for Swiss companies, local and international investors to discuss the implementation of the Ordinance. It was positive to hear that the implementation of this fairly radical legal change seems to have gone more smoothly than many had predicted. Most participants believe that the law has not only enhanced the scrutiny of remuneration systems and the quantum paid at board level but also encouraged more intensive dialogue between issuers and investors beyond pay issues, particularly at small and mid-cap companies. While this is correct, in our experience too much time has been spent talking about hypothetical amounts and voting technicalities instead of how remuneration systems support the effective implementation of strategy and ultimately the creation of long-term value. Encouragingly, issuers and institutional investors were aligned in wanting to hold more dialogue on the systems, appropriate metrics and performance periods that are relevant to a company’s specific circumstances and supporting strategy.
Lessons for the EU Shareholder Rights Directive
We are looking forward to the 2015 voting season in Switzerland which no doubt will see some unexpected twists and turns in the final stages of the implementation of the Ordinance. However, the introduction of binding remuneration votes in Switzerland, on top of the binding shareholder approval of compensation policies in the UK, will help the finalisation of the EU Shareholder Rights Directive, which is likely to introduce mandatory voting on pay across the EU. We significantly contributed to the development of the draft of the Directive and look forward to seeing it finalised.