Swiss voters change constitution to curb excesses of the ‘fat cats’

During the financial and economic crisis in Europe, European chairmen and top-level executives of listed companies were increasingly set up with what were perceived as astronomic compensation packages and spectacular golden parachutes or handshakes, paid even when their companies operated at a loss, laid off employees and offered shareholders nothing but falling share prices and no dividends.

In Switzerland, Mr Minder, a small-to- medium enterprise (SME) entrepreneur manufacturing mouthwash products, was upset seven years ago when his company lost 500,000 Swiss francs (US$540,000) in the Swissair bankruptcy, while the last Swissair CEO had feathered his own nest by a 12.5 million franc prepayment of his five-year salary.

Mr Minder successfully launched a constitutional “fat cat” initiative designed to improve shareholders’ say on pay of listed Swiss companies. On 3 March 2013 Swiss voters adopted his initiative by a clear margin of 67% affirmative votes. Consequently, the Swiss constitution was amended accordingly.

Nevertheless, the new constitutional law is not directly applicable and needs implementation at the legislative level. As the federal parliament is rather unlikely to adopt an implementing statute prior to 2017, the federal government must enact an intermediary implementing ordinance on or before 3 March 2014, which is likely to fully enter into force as of 1 January 2015. Nevertheless, the government’s implementing ordinance will only apply until being replaced by the Swiss parliament’s implementing statute.

This column discusses the main features of the new constitutional law.

Who will be affected?

The new law will only apply to companies registered in Switzerland that are listed on a Swiss or non-Swiss stock exchange. It will not apply to non-Swiss companies or to privately held Swiss companies.

How will they be affected?

a) General purpose. The new constitutional law aims to give shareholders of listed Swiss corporations a (limited) direct say on pay with respect to board members, advisory board members and top-level executives, and bans compensation for board members, advisory board members and top-level executives if granted for no services in return.

b) Shareholders’ direct say on pay. Under current corporate law – still continuing, pending the implementation of the new law – shareholders of listed Swiss corporations unhappy with the take of their board members or top-level executives may oust the board in the hope that a new board might change the relevant compensation policies. The shareholders do not, however, have a direct say on pay. Although the board may on a voluntary basis submit its compensation policy to the shareholders’ annual general meeting (AGM), it may only do so for consultation purposes. Consequently, the relevant AGM vote has no binding force.

The new law subjects the overall total compensation for the board, the advisory board (if any) and the top-level executives to the AGM’s yearly approval. The AGM will, once a year, have an opportunity to veto the overall total compensation requested by the board for itself, the advisory board and the top-level executives.

The new law will not, however, limit the amount of any salaries and bonuses, and with respect to the legal impact of AGM vetoes, the legal community expects the implementing law to provide reasonable fallback provisions that prevent the affected individual employment agreements from becoming void.

Incentives regulated

The new law also requires that the amount of loans and pensions payable to top-level executives, their bonus and incentive plans, the number of their mandates outside of the group, as well as the duration of their employment contracts, must be regulated in the articles of incorporation.

This requirement was introduced in an attempt to ensure that shareholders of listed Swiss corporations will also have a say on compensation policies relating to these issues.

The new law also shifts the competence to designate the members of the board’s compensation committee and chairman from the board to the shareholders’ meeting, and limits the term of the board members to one year (renewable). These provisions attempt to ease the ousting of board members.

In an attempt to ensure independent voting at shareholders’ meetings, shareholders may also no longer be represented by banks holding their shares in custody or by board-appointed proxy holders.

In an attempt to reduce the weight of board-friendly votes, usually well represented at shareholders’ meetings, the new law requires Swiss pension funds – traditionally abstaining from voting or routinely approving the board’s motions – to vote in the interest of their beneficiaries.

Finally, in an attempt to ease participation in shareholders’ meetings, the new law requires listed Swiss corporations to provide for electronic voting. Nevertheless, the legal community expects the implementing law to request no electronic voting other than indirect electronic voting, that is voting by electronically mandating and instructing the independent proxy holder.

c) Ban on compensation for no services in return. Listed Swiss corporations will be prohibited from granting any compensation for no service in return to their board or advisory board members and top-level executives. Therefore, the legal community expects the implementing law to ban golden parachutes, golden handshakes and transaction incentives.

d) Criminal sanctions. Offences against the new law will be punishable with imprisonment of up to three years and fines of up to six years’ remuneration, which is a rather drastic criminal sanction (the Swiss maximum penalty for coercion and fraudulent mismanagement is up to three years imprisonment or – not and – a fine).