On 3 March 2013, the Swiss people approved the initiative ‘against excessive compensation’, also known as the Minder initiative (the initiative), after the name of its instigator, Thomas Minder, a member of the Council of States. The main purpose of the initiative is to increase shareholders’ rights in connection with the compensation of directors and management.
The initiative provided for a one-year period for the enactment of an implementation ordinance by the Federal Council, which would be valid until formal legislation were enacted by the Federal Assembly. Hence, on 20 November 2013, the Federal Council adopted the Ordinance Against Excessive Compensation (the Ordinance), which entered into force on 1 January 2014. The Ordinance only applies to Swiss stock corporations whose shares are listed on a stock exchange in Switzerland or abroad.
The Ordinance
One of the main novelties of the Ordinance is to provide for a binding vote of the shareholders on compensation. The shareholders’ meeting will see an annual vote on the aggregate amount of compensation for the members of the board of directors, the executive management and the advisory board (separately for each body). The Ordinance does not, however, impose any cap.
The modalities of this vote will be set forth in the articles of association. This leaves companies some room for manoeuvre, as they can choose among various models, such as:
- the budget solution: voting on a compensation budget that includes fixed and performance-based compensation for the upcoming year; or
- the combined solution: voting on fixed compensation at the beginning of the period (prospective vote) and on performance-based compensation at the end of the period based on financial results (retrospective vote).
The budget solution has been criticised, notably by the Ethos fund, which represents pension funds and other institutional investors,1 for its lack of correlation between the results of the company and the performance-based compensation. According to Ethos, performance-based compensation should be voted on retrospectively, once the results are known. This indeed seems more consistent with the spirit of the initiative.
The Ordinance further sets forth that the following types of benefits for the governing bodies are prohibited:
- severance payments;
- anticipated compensation; and
- incentive payments in relation to intragroup transactions.
However, payments that are due until the end of the notice period are not considered prohibited severance payments. Moreover, employment incentives that aim to compensate for a loss of entitlements under previous employment are not to be considered prohibited anticipated compensation.
Loans, credits, pension benefits (outside the ordinary pension system) and profit-sharing or equity-based reward plans are only authorised if the general principles of such benefits are set forth in the articles of association. The same applies to the granting of participation, conversion and option rights.
Furthermore, the articles of association must provide for the maximum duration of the agreements setting forth the compensation of the governing bodies. The duration of fixed-term contracts must not exceed one year, nor must the termination notice period for unlimited contracts exceed one year.
Corporate governance rules
The Ordinance also introduces further corporate governance rules, such as a term of office of one year for the directors, who will thus stand annually for re-election, as well as the election of the chairman of the board by the shareholders. Until now, the directors’ term of office could range from one to three years, and the chairman was elected by the board, unless the articles of association provided for election by the shareholders. From now on, listed companies must also establish a compensation committee, to be elected by the shareholders, among the board members. The tasks and competences of the compensation committee will be set forth in the articles of association.
It is worth mentioning that wilful violation of certain provisions of the Ordinance by members of the board of directors, executive management and advisory board, as applicable, may lead to criminal charges of up to three years’ imprisonment and the equivalent of six years’ annual compensation.
The new provisions of the Ordinance apply as of 1 January 2014. However, adaptation of the articles of association and other internal regulations may be deferred until the 2015 ordinary shareholders’ meeting.
Several major players, such as Roche, Givaudan, UBS and Credit Suisse, have already adapted – or will shortly adapt at their upcoming shareholders’ meeting – their articles of association to the new regulation. Among these entities, one can observe a tendency to provide for a combined solution (a retrospective vote on performance-based remuneration) as regards the vote on compensation.2
- 1‘Ethos 2014 proxy voting guidelines: Stricter remuneration and governance requirements’, 27 January 2014, www.ethosfund.ch
- 2Roche’s 2014 AGM, www.roche.com ; Givaudan’s 2014 AGM, www.givaudan.com ; Credit Suisse AGM 2014, Letter to Shareholders, www.credit-suisse.com ; UBS general meetings of shareholders, www.ubs.com