Switzerland could open a new chapter in corporate governance history by becoming the first nation to change its constitution to tackle excessive executive pay at listed firms. On March 3, a referendum will be held on a grass-roots initiative that not only makes shareholder votes mandatory and binding, but prohibits special payments to executives for recruitment or severance (i.e. “golden parachutes”).
Conceived by Thomas Minder, a small businessman turned politician, the “Initiative Against Rip-Off Artists,” or simply the “Minder initiative,” is unprecedented. While governments outside Switzerland recognise that executive pay has reached absurd dimensions at some firms or that bonuses are unjustified when losses are made, they have yet to empower shareholders to the same extent. Votes on executive pay are still typically consultative, and many shareholders don’t bother to take part.
With just under a week until the results are known, opinion polls are showing strong public support for the initiative. So Responsible Investor caught up with Brigitta Moser-Harder, the shareholder activist known for her work on UBS and a key Minder collaborator.
Why is Minder so popular among the Swiss?
I can answer that question best by pointing to UBS. In 2012, the bank lost CHF2.5bn (€2bn), yet the exact same amount was paid in bonuses to management and employees! The bank has learned nothing from the financial crisis of 2008, when, due to gross mismanagement, it had to be bailed out by the Swiss central bank and taxpayers at a cost of CHF46bn. When the managers responsible resigned, the public was outraged to learn that they received millions in severance pay. UBS has only fed the fire since then.If Minder fails, the government’s counter-proposal takes effect. Proxy advisor Ethos argues it goes farther in strengthening shareholder rights and permits shareholders to vote on how pay is structured, not just on the total amount.
I don’t agree. Under Minder, shareholders must also vote on corporate statutes that specify what management and board executives may get in terms of loans, pensions and bonuses. Moreover, our initiative goes farther than the counter-proposal by banning dubious payments for recruitment, severance or acquisitions of other firms. Between the binding votes on pay and the ban, I think the initiative goes farther in strengthening shareholder rights.
A key criticism of Minder is that it will prevent companies from recruiting the most talented managers.
The initiative in no way prevents companies from recruiting the best. That’s because shareholders vote on total compensation for all executives and not just for one. A CEO can, therefore, earn a lot more than other managers if the company feels this is warranted or necessary to compete for talent. When a new executive is recruited, total compensation for management could increase. If total compensation is rejected by shareholders, the board can make a counter offer. But naturally it would be better settle this in the corporate statutes to prevent deadlock.
Swiss pension fund association ASIP says Minder will increase workload and hence costs.
ASIP’s claim that the initiative dramatically increases costs on schemes is nothing more than a scare tactic. Dieter Stohler, CEO of Publica, the pension fund for Swiss government employees, has already stated
publicly that benefits are not threatened in the least. As far as the workload goes, I wouldn’t overestimate it. With today’s technology, voting and informing beneficiaries on how you voted is as easy as a click of the mouse.
Some Swiss schemes may opt to use one of the few proxy advisors around. ASIP warns that this is not ideal, as too much power may be concentrated in the hands of a few advisors.
ASIP is not wrong to point this out. But proxy advisors like Ethos are known for their best practice, so the point seems theoretical. My view is that pension fund managers should not outsource voting but do it themselves. This is what their beneficiaries are paying them for, and that pay is more than adequate.You have faced a lot of resistance, what is the secret to your staying power?
Simple: We’ve had the support of the Swiss people from the beginning. When we first said we would do something about the rip-offs, many fellow citizens volunteered. We then quickly got the necessary amount of signatures to put our proposals to a referendum. Since then, the continued rip-offs at companies like UBS and Novartis remind the Swiss that something must be done.