Implementation of the ‘Initiative against rip-off salaries’: New Corporate Governance Rules for Swiss Public Companies
By Urs P. Gnos & Simon Kehl
Posted: 17th April 2014 08:47
On 3 March 2013, the Swiss voting public – after a long and fiercely fought public debate – approved the so-called ”rip-off initiative“ by a large majority. Given the clear message sent by the Swiss voters, the Swiss Federal Council has rapidly implemented the initiative and its key corporate governance requirements and published the ordinance on excessive compensation in listed corporations (the ”CompO“) which entered into force on 1 January 2014.
The following aims to outline the most prominent features of the revised Swiss corporate governance framework and highlight some practical implications for Swiss public companies, most notably the say-on-pay regime and the provisions which, in substance, limit a corporation’s freedom to compensate its top executives.
The scope of the CompO is broad. Its provisions are mandatorily applicable to Swiss corporations whose shares are listed on a stock exchange in Switzerland or abroad.
Primarily, as fallout from the various corporate scandals leading up to the recent global financial crisis, the intention of the initiative was to strengthen shareholders’ rights in Swiss listed companies. This spirit is visible throughout the provisions of the CompO and with this aim in mind, a comprehensive say-on-pay regime is the most far reaching novelty introduced. Swiss public companies are now required to establish a say-on-pay framework which, in any event, needs to comply with the following three requirements: (i) a shareholders’ vote on compensation must be held annually, (ii) such vote must be final and binding, and (iii) the shareholders must vote separately on the compensation of the board of directors, the executive management and the advisory board (if any). While a company is generally free to flexibly establish its own say-on-pay framework meeting these requirements, such framework must be reflected in the articles of association of the company concerned and set forth the details and nature of a say-on-pay vote including, particularly, timing aspects (prospectively or retrospectively and specifying the reference period) and the consequences of a negative outcome. First industry trends, particularly for compensation of the members of the top executive management, seem to go towards a prospective vote on fixed compensation and variable long-term incentives while short term incentives are generally likely to be addressed retrospectively. This approach allows shareholders to pass a vote on the variable short term incentives knowing whether or not the management has indeed reached its targets. Board compensation (for both, fixed and, if applicable, variable remuneration components) is likely to be addressed for a period from one GM to the next, aligning the term of office of the members of the board with their compensation scheme.
Further to introducing a comprehensive say-on-pay regime, a company’s freedom to compensate its directors and officers has been substantively diminished by the CompO now in effect. Severance payments are only still permissible if they meet certain tight requirements, the maximum duration of fixed-term employment agreements (not exceeding 12 months) and notice periods (maximum of 12 months) needs to be set forth in the articles of association and non-compete covenants and consultancy agreements for a post-employment period need to comply with strict parameters. Golden hellos are generally prohibited and only compensation for forfeited benefits originally granted by a former employer remains permissible. Furthermore, a basis in the articles of association is required for all other benefits (other than post retirement-benefits), loans and credit facilities extended to top executives.
In addition to the say-on-pay regime and the substantive provisions on executive compensation, the CompO has introduced various other elements. In an effort to create additional transparency on remuneration, a separate compensation report, which does not need to be approved by shareholders but is to be submitted to the statutory auditors for review must now be prepared. Additionally, the CompO requires that the shareholders may vote electronically and strengthens the position of the independent proxy representative. Finally, the CompO contains some fierce criminal sanctions. Non-compliance against better judgment with the cornerstones of the ordinance may now be sanctioned with imprisonment of up to three years and a fine of up to six times the annual compensation.
The transition periods prescribed by the CompO are short. The articles of association need to be brought in compliance with the requirements of the CompO at the second general meeting of shareholders following 1 January 2014, i.e., in most cases, the AGM for the business year 2015. Similarly, a binding say-on-pay vote must be held at the same shareholders’ meeting at the latest. Existing employment agreements must be amended by 31 December 2015. The transition periods are short and the sanctions for non-compliance are strict. In light of the brief transitional periods and the stiff sanctions, corporations subject to the CompO are well-advised to rapidly comply with the CompO, revise their articles and, thereby, aim to provide for legal certainty and predictability for their shareholders.
In summary, the CompO fundamentally changes the legal framework on executive compensation for Swiss public companies and reflects an on-going shift in the current global corporate governance landscape towards increased shareholders’ rights. Due to its rapid implementation combined with a rather brief transitional period and some fierce criminally sanctioning provisions, the CompO requires Swiss public companies to act promptly and decidedly in amending their governance structure on the one hand and to redefine their approach to the annual general meeting of shareholders on the other hand.
Urs P. Gnos heads the Corporate & Commercial team at Walder Wyss. His practice focuses on international and domestic M&A, private equity and capital market transactions as well as public tender offers and buy-outs. Urs P. Gnos also advises companies with respect to corporate governance matters, stock exchange regulations, corporate reorganisations and restructurings. He lectures and publishes regularly on his areas of practice. Urs P. Gnos was educated at Zurich University (lic. iur. 1993, Dr. iur. 1997), at Columbia University / Leyden University and at University of the Pacific, McGeorge School of Law (LL.M. 2000).
Simon Kehl is an associate in Walder Wyss’ Corporate & Commercial team. He focuses his practice on domestic and international M&A, private equity and venture capital transactions as well as on corporate reorganisations and restructurings. Simon Kehl also supports corporate clients with respect to their corporate governance and his experience further includes capital market law and stock exchange regulations. Simon Kehl studied at the University of St. Gallen (HSG) (M.A. HSG in Law 2006) and at the University of California, Berkeley (LL.M. 2013). In addition to his practice, Simon Kehl is a lecturer at the University of St. Gallen (HSG).