Shareholders: Executive Pay Reform Too Limited

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Shareholders: Executive Pay Reform Too Limited by Matthew Allen,

Small shareholders still face a raw deal despite new laws giving them a greater say in the running of Swiss firms, according to pension fund advisor Ethos Foundation. Foreign shareholders also have a hard time understanding the evolving Swiss system.

On Thursday, Ethos presented the results of a survey of corporate annual general meetings, two years after Swiss voters approved the Minder “anti-fat cat pay” initiative – named after its author Thomas Minder. The resulting reforms were rolled out in full in time for this year’s AGM season.

They included binding shareholder votes on remuneration packages and the election of board members.

Ethos acknowledged that the worst excesses of inflated executive pay have been largely eliminated. But it also noted that the average chairman’s pay of Switzerland’s largest 20 firms last year was CHF2.5 million ($2.6 million) – down 11% on 2013 – whilst chief executives took home an average CHF8.2 million (+6% on 2013).

“This observation casts doubts on the effectiveness of the Minder Initiative,” Ethos concluded. Furthermore, Ethos claims that the reforms are being patchily applied by Swiss firms, some of whom deliberately violate the “spirit” of the changes.

Foreigners perplexed

Several companies invited shareholders to vote on forward-looking performance related bonus schemes for 2016. “It is impossible to form a proper opinion on variable pay when we don’t yet know how the company will perform,” said Ethos chairman Dominique Biedermann. Shareholders are in effect voting to give firms a “blank cheque”, he added.

In the worst cases, companies would present projected bonus levels and hide in the small print that amounts could rise if targets are exceeded.

The Swiss AGM voting system now operates so differently from other countries that foreign shareholders, which make up the vast majority in Switzerland’s largest firms, are struggling to know how to vote.

“Many find the binding vote on managers’ salaries too aggressive,” Biedermann told “This means they vote in favour of the company’s proposed remuneration package because they fear managers will simply walk away if the vote ‘no’.”

Independence test

The solution, according to Ethos, lies with parliament that will soon debate a raft of proposed corporate reforms that include enhanced shareholder rights. Biedermann is hopeful that the new laws will outlaw votes on forward-looking bonus plans and instead give shareholders the right to vote on the previous year’s variable pay package.

Biedermann predicts that the proposed reforms will be fought hard by companies and business lobby groups that expound self-regulation rather than imposed rules.

But Ethos, in its study, also questions whether companies can be trusted to self-regulate given the composition of its boards. Only 20% of board members in Switzerland’s top 20 companies could be properly described as independent, according to Ethos, and 44% in all listed firms.

Too many board members are either significant shareholders in the company, or double up as executives. This could lead to conflicts of interest that could damage small shareholders, Ethos concluded.

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