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Novartis

Governance reforms

We have been engaging with the company on governance issues for several years, especially on remuneration disclosure and advisory votes. In early 2013, it emerged that the board of directors had agreed to grant the former chair and CEO, under whose leadership the Novartis group was created, a non-compete payment worth nearly CHF72 million (€66.7 million). This payment and the board’s repeated failure to follow best practice and disclose full and meaningful information to shareholders – although there was no legal obligation to reveal more than the board had disclosed – raised concerns about the board’s stewardship of shareholder interests and its judgment on this matter.

What we did
Since 2013, we have had numerous interactions with senior executives of Novartis, wrote a letter to the chair, provided our remuneration policy and best practice documents and had meetings with the chair as well as the chair of the compensation committee.

Results
Over the last two years, Novartis has made significant changes to the composition, structure and operations of its board. A new chair, who began transforming the board, was appointed in 2013. The refreshment of the company’s committees, particularly the compensation committee, was a vital step to rebuilding shareholder confidence. In a meeting with the chair and compensation committee chair in 2014, we obtained considerable reassurance that the changes have resulted in the substantial strengthening of the board and improvements in how it operates. Structural changes made at the board level, such as the introduction of a dedicated committee for research and development (R&D), are equally important. This dedicated committee, for example, now provides the board with more visibility on R&D, strengthens its ability to monitor key metrics and thus increases the accountability of the executives. We are also pleased that Novartis decided to bring in an advisory vote on its remuneration report, which we had long encouraged. Additionally, it introduced a binding vote on the quantum of pay at its 2015 AGM in response to Switzerland’s new say-on-pay law.

Novartis has clearly listened to the concerns of its investors and, building on the governance changes introduced by its new chair, has been working on winning back their trust. While we need to engage further with Novartis to reach a firm conclusion, leadership and culture as well as processes at the top of the company have significantly improved since the former chair/CEO’s departure. In 2015, we will continue to question the length of relevant performance periods in relation to executive remuneration, given the pharmaceutical industry’s long product lifecycle.

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Hans-Christoph Hirt Dr Hans-Christoph Hirt is an executive director and board member at Hermes EOS and as Co-Head of the organisation responsible for the sustainable success of the business. He leads and oversees the global engagement programme and the quality of the services Hermes EOS provides to its clients around the world. Hans also leads some high-profile stewardship activities, including priority engagements with major companies in Asia and Germany, as well as interactions with key regulators and organisations. rnrnPrior to joining Hermes EOS, Hans worked with international law firm Ashurst. He is the author of numerous publications on corporate governance and law, responsible investment and stewardship. Currently, he is a member of the Steering Committee of the UN PRI Investor Engagement Clearinghouse and the Shareholder Responsibilities Committee of the International Corporate Governance Network. In 2015, he joined the Institutional Investor Council in Malaysia. Hans is a UK-qualified lawyer, holds degrees in Business Administration from universities in Germany and the UK, the ACCA qualification and a PhD from the London School of Economics (LSE). He continues to be involved in academia as a Corporate Governance Fellow at the LSE’s Financial Markets Group and a Teaching Fellow at University College London. Hans speaks French, German and Mandarin.
Read all articles by Hans-Christoph Hirt
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