Ethos’ six-month campaign: a new tactic in European say-on-pay

Swiss investors adopt US-style publicity strategy to shame companies into action.

The announcement by eight Swiss pension funds and Ethos, the Geneva-based foundation which looks after CHF2.3bn (€1.4bn) in assets run on a socially responsible basis on behalf of 80 Swiss pension funds, that they are going international with the creation of an institutional support group for their say-on-pay campaign at five of Switzerland’s largest companies, ABB, Credit Suisse Group, Nestlé, Novartis and UBS, heralds the start of an aggressive movement by European investors. That movement has, in part, been galvanised into action by the credit crisis following worldwide condemnation by politicians of excessive, short-term driven executive pay as being at the heart of the financial markets meltdown. Dominique Biedermann, executive director at Geneva-based Ethos, explains that it is part of a six-month campaign, which he likens to the more overt tactics on say-on-pay by US investors where a maximum amount of public and media pressure is used to prod companies into action. Biedermann says: “We think this is a small revolution and quite a unique approach in continental Europe. The law in Switzerland gives us no rights to a say-on-pay, so we have to stand up as shareholders and make a noise.”In September, Ethos set out its five resolutions in one dramatic announcement, backed with a report that found that pay amongst certain Swiss executives was “inappropriate” and “excessive” in light of company performance. Ethos said: “Remuneration policies often do not follow international best practice guidelines. In most cases, variable pay is not determined by adequate performance criteria and recent events have demonstrated that a bad remuneration structure can have very negative consequences on the company’s strategy.” Biedermann says: “The fact that we announced this six months in advance of the AGMs is very important. Firstly, it means we can block a certain amount of shares between us to get the minimum requirement to table a resolution, which can vary from company to company. It allows us to mobilise and each block just a part of our shares. Secondly, the six-month lead gives the companies time to convene their various committees and, ideally, come up with an appropriate response that would mean the resolution could be pulled. If we come with a resolution just 45 days in advance of the AGM, as required by law, it can make it very difficult for the company to respond.”

Ethos earlier this year led an attack on financial transparency at UBS after the bank revealed huge sub-prime related losses. Responding to investor and government pressure, UBS, recently sought to allay the controversy by laying down a new 2009 executive remuneration system including a “bonus-malus” test and a stipulation that bonuses would be conditional on achievement of risk-adjusted performance targets tested over three years. Ethos welcomed the new framework, including the shareholder vote clause it had lobbied for: “The incentive plan is also good because in the event of poor performance it could go to zero.”
However, Ethos said it regretted that the new system sets no overall bonus limits and could also still allow so-called ‘golden hello’ payments. The coalition is currently studying the UBS proposal to see if it will drop its resolution as a result. Says Biedermann: “UBS still has no bonus maximum or comparison to base salary. Theoretically, we could just get back to the old, opaque system of remuneration by a slightly more performance driven system, which is not good enough. Given that golden parachutes are being outlawed in Europe, we don’t see why these should be replaced with golden hellos that would amount to the same thing, just because someone has given up a golden parachute elsewhere.” Biedermann said the coalition was now also waiting on the reaction of Credit Suisse: “They can’t really say that they can’t do the same thing because UBS has done it.”Significantly, Credit Suisse accompanied a statement last week on heavy quarterly losses and huge reductions in headcount with an announcement that the chairman, group CEO and CEO of the investment bank would not be taking bonuses for 2008. “The bonus issue is at least on the table. We also believe Novartis must do something similar,” says Biedermann. A notable facet of the Ethos-led campaign is that it focuses on three clear core issues: transparency, structure and competency. Transparency has improved in Switzerland recently according to Biedermann because of necessary legal disclosures, but there are still problems with the reluctance of Swiss companies to publish both target and maximum bonus figures: “These should be calculated as a percentage of base salary, which is rarely the case,” he says.
Structure, he says, concerns the make-up of the bonus. “This tends to be a combination of past performance and incentive plans for future performance. The second part, we believe, should not represent more than 50% of bonus, yet it can reach more than 80% in some companies.” Biedermann says performance criteria for shareholder plans and options also needs clarifying: “In many companies, executives merely have to sit out their three-year vesting period on options to a point where they rise above the strike price. We believe these should also be tied to performance so that the company must be in the top quartile of its sector performance before options can be exercised.”