Recent amendments to Swiss corporate governance laws may have some big business leaders feeling nostalgic for days passed. Switzerland’s notoriously lax say-on-pay procedures will start to see some massive changes starting January 1, as will some other aspects of the country’s historically laissez-faire corporate culture. Among the most sweeping changes, the law stipulates that shareholder votes on executive compensation will be both annual and binding from 2015 and onward.
Companies headquartered or traded in Switzerland will have two years to fully adjust their practices to the extensive legal changes, though the first of these additions to national law will be effective in less than two weeks.
The new regulations result from the March 2013 passage of what is often called the Minder Initiative and is alternately known as the referendum “against rip-off salaries”. In Switzerland, federal popular initiatives are submitted by individual citizens for a national vote after a sufficient number of citizens’ signatures endorse a measure. Thomas Minder – the eponymous penman of this initiative – began campaigning for these changes back in 2008. The referendum passed earlier this year with 67.9% approval (nearly half of Minder’s countrymen turned out to vote). According to the text of the new law, as it appears in the Swiss Constitution, the provisions are intended to protect the Swiss economy, private property, the shareholders of Swiss companies and sustainable corporate governance practices.
Aside from the addition of annual and binding say-on-pay votes, shareholders should be aware of the Minder Initiative’s other broad implications. Starting in 2014, executives of Swiss companies may no longer receive severance packages, advance payments, or bonuses for the takeover or transfer of business units. In addition any loans, payments, and performance- or equity-based compensation will be forbidden without shareholder approval. Election procedure in Switzerland will change drastically as well. Board chairmen and all directors must be elected individually by shareholders for terms not exceeding one year going forward. Companies with compensation committees must also elect members to this committee on an annual, individual basis. Directors and executives that knowingly breech the country’s new regulations will face large fines or jail time.
Following the passage of the Minder Initiative, the laws regarding executive compensation in Switzerland are now among the most proscriptive worldwide, which may be surprising for investors more familiar with stereotypes of the country’s permissive business ethos. Although no further legislative changes are slated for the near future, the possibility of newer and more prohibitive initiatives in Switzerland are not out of the question. Just last month, Swiss citizens rejected a referendum known as the 1:12 initiative, which intended to peg the salaries of a company’s lowest and highest paid employees to a fixed ratio. Supporters of the failed referendum believe no employee should earn more in a month than another makes in a year. Could similar proposals receive sufficient support in years to come? They certainly may, especially if Swiss citizens’ frustrations with a widening wealth gap between an executive class and the populace continue to grow.