Analysis: fixing the loophole in Switzerland’s Minder executive pay initiative

One can hardly fault Claudio Kuster, coordinator of the so-called Minder initiative to stop excessive executive pay, for being so angry.

In late June, or almost four months after the Swiss electorate approved the measure in a historic referendum, the government unveiled a draft law that undermines one of its key elements – namely that Swiss occupational pension funds must vote on pay at the annual general meetings (AGMs) of the country’s listed companies.

The schemes were singled out because of their role as guardians of social capital and hence in a position to take a stand on the issue.

However, the draft law transcribing Minder exempts the schemes from the voting requirement if it’s deemed not “in the interest of their beneficiaries.”

The text also lets the schemes’ managers decide what those interests are. The upshot of this is that a huge loophole for the schemes has been created. If it’s upheld when the draft is ratified on November 22, it would mean no change to the current situation where many funds don’t vote at AGMs.

This, in turn, could greatly undermine the effectiveness of the whole Minder project, as a major shareholder bloc would continue to be absent. To recall: The overall goal of the initiative is that the shareholders present at AGMs of Swiss firms will vote on executive pay, and that this result will be binding.

The threat to the initiative was not lost on Minder’s lieutenant, Kuster. In a recent commentary, he blasted the government for striking a behind-the-scenes deal with Swiss pension fund association ASIP to include the exemption. “The Swiss justice ministry didn’t even try to hide such undemocratic lobbying. A close examination of the draft law reveals that the passage concerning the voting requirement exemption was just copied from a position paper by ASIP and [industry group] economiesuisse,” he said. Kuster also dismissed claims made by ASIP before the draft law’s release that Swiss pension funds were not influential shareholders.While both parties firmly deny any backroom deal, ASIP and the justice ministry do acknowledge that there were talks about how Minder would be transcribed into law following the March 3 vote. Ingrid Ryser, a ministry spokeswoman, said ASIP’s input was important to help ensure that Minder did not overburden Swiss pension funds and thereby weaken the economy.

She told RI: “With the draft law, we are trying to balance the benefits of the schemes’ voting at AGMs against the administrative expense it causes. Should the latter outweigh the former, this would hardly be in the interest of beneficiaries.” The ministry, however, stopped short of quantifying what that expense was.

In the run-up to the referendum, ASIP made no bones about its opposition to Minder, saying it would significantly increase the workload and costs on its members. In early January, it calculated that the voting requirement would, depending on the stock holdings of a scheme, lead to between 150 and 300 of additional work hours. To deal with this, ASIP said many funds would be forced to hire new staff or rely on proxy voting firms. In either case, the result would be higher costs which could squeeze benefits.

Like the justice ministry, ASIP did not specify those costs. Then a few weeks before the Minder referendum, Dieter Stohler, chief executive of Publica, Switzerland’s largest pension scheme with CHF32bn in assets, downplayed ASIP’s fears about the voting requirement.

He said that while it certainly meant more work for Swiss schemes, the costs related to it were manageable and that benefits wouldn’t be affected.
Dominique Biedermann, chief executive of Swiss proxy adviser Ethos, agrees with this view. Speaking to RI, he said it simply wasn’t true that the voting requirement means much higher costs.
“If, for example, a small pension fund decides to outsource voting to us at the AGMs of the 100 largest listed firms, we charge just CHF8,000 (€6,475).
“Bigger funds will pay a bit more, around CHF15,000. Given those sums, one can hardly say that the costs are not bearable,” said Biedermann, who represents around 130 pension funds and associations.

Amid the justice ministry’s call for comment on its draft law, Ethos has just publicised its view, which is that the voting requirement has been effectively removed and must be put back.

Specifically, Ethos suggests that the relevant passage be rewritten as follows: “They (pension schemes) must vote in the interests of their insured [beneficiaries], which are defined as the long-term financial and non-financial interests of all company shareholders.” Where there’s no compelling reason to vote no or yes, funds should abstain, Ethos suggests.

Ethos also urges the government to ensure that the foundations used by some Swiss pension funds for investing are subject to the voting requirement and that voting disclosures are detailed enough.Now that Ethos, an influential player in the Swiss pension industry, has essentially demanded that the spirit of Minder be restored, it’s unclear whether the voting requirement exemption preferred by ASIP – the lobby calls it a “workable solution” – will be included in the final draft law. Ryser said that the point of the current comment period was for the ministry to get all the relevant parties’ view on the draft, adding that changes were possible.

Justice Minister Simonetta Sommaruga herself is a member of the Swiss Social Democratic Party, which avidly supported the Minder initiative in its purest form. Minder watchers say that whatever the government unveils on November 22 will likely go through the Swiss parliament with little or no change before becoming law on January 1, 2014.