The idea of
referendums setting the agenda for institutional investors may be a
frightening pipe dream in much of the world, but Switzerland’s unique
brand of direct democracy is set to revolutionise its funds’ priorities.
Swiss funds are due to be anointed as no
less than the country’s official guardians against “rip-off” executive
salaries. That is according to a referendum that received the
overwhelming backing of the Swiss electorate in March.
Funds do not appear to be hugely thrilled
at their boosted future responsibility, however – enhanced by binding
annual votes on executive pay and appointments at all publicly listed
companies in Switzerland. Some grumbles about cost implications have
made their way from investors into the local media.
The Swiss pension fund association, ASIP,
says it does support greater shareholder rights “but not at the expense
of members”. Director of ASIP, Hanspeter Konrad, says funds felt a less
stringent government counter-proposal would have been more effective in
advancing the underlying principals behind the referendum.
Sabine Doebeli, Zurich-based vice chair
of the Sustainable Investment Forum of Germany, Austria and Switzerland
(FNG), believes the referendum result is likely to prove a shot in the
arm as “the culture of being an active investor is not well anchored in
That challenge centres on the
introduction of mandatory voting for pension funds at annual general
meetings. It is an obligation funds would definitely not be advised to
ignore though as the text of the referendum – championed by the head of
a family cosmetics company – envisages jail terms and hefty fines for
Doebeli, pictured right, says that “with
existing legislative challenges in Switzerland and low funding ratios at
many funds, the commitments add an additional complex aspect to the
strategy of time-pressured investors”.
Stephan Skaanes of investment
consultancy, PPC Metrics, says the reactions of funds to the results
have been more mixed. Nonetheless, he explains that the first shock to
the country’s unengaged investors may come as temporary regulation is
introduced within a year to pave the way for full implementation of the
referendum’s terms within around five years.
Doebeli believes that pension funds will
likely wait for votes on executive pay to become mandatory before they
assume all their new voting rights.
Naturally, the largest investors should
find the task of becoming permanently active shareholders easiest. A
spokesperson for the CHF21-billion ($23-billion) BVK fund for civil
servants in Zurich, says that given “the scale and scope” of the fund’s
organisation, it is “very well positioned” for the new legislation.
Within days of the referendum gaining the
approval of the electorate, BVK began publishing the results of the
shareholder votes it casts, thereby revealing that it had rejected a
controversial remuneration scheme at pharmaceutical giant Novartis in
Disclosing the votes they make is another
responsibility that the referendum is to hand pension funds, although
Skaanes explains there is plenty still to debate as to how and to what
audience disclosure is made.
Other Swiss funds to demonstrate
engagement include the 90 pension funds, such as the $10.25-billion
Basel Stadt pension fund, that are party to the Ethos Engagement Pool –
an initiative that seeks shareholder dialogue with the largest companies
in Switzerland. That grouping, however, is a small minority of all Swiss
Doebeli says that a likely scenario as
the initiative is implemented is that stretched funds will increasingly
look to turn an ear to proxy shareholder voting advisers like Swiss firm
Ethos or ISS. There has been a wave of activity in that space in recent
months, with a new voting advisory firm Swipra launched just days after
the referendum, Inrate announcing a new product range ‘for active
shareholders’ in January and Ethos reportedly due to go on a
post-referendum hiring drive.
Another requirement of the measures
approved by referendum is, however, that pension funds vote in the
interest of their members. Skaanes says that could place a block on
fund’s controversial reliance on proxy advisors while the Swiss
parliament interprets the referendum result into legislation. Doebeli
says this could instigate some interesting broad-based dialogue with
members on investment priorities – “a new element in the Swiss pensions
landscape”. Konrad says that as funds are already structured to fully
heed the interests of their members, this won’t need to go as far as
polling members on their opinions prior to shareholder votes.
Will it work?
The radical new rules will surely boost
the workload associated with domestic equity holdings, which averaged 11
per cent across the country’s pension funds in 2012, according to
Skaanes says he would be “very surprised”
if a drive out of Swiss equity holdings results, even though the tough
regulations are not set to apply to overseas equities.
“There might be a switch from direct
investing into domestic equity funds if the government decides that
collective investment schemes are exempt from the mandatory voting
requirements”, he adds.
In the ideal world of the sustainable
investment business, perhaps Swiss equities will also gain added outside
appeal for the stringent shareholder checks imposed on executive pay?
Leaving aside the obvious objections from
the business community to that reasoning (they fear such strict rules
will drive investment out of the country), the initiative must first
prove it can perform in its chief task of checking pay. Critics point
out that with domestic pension funds making up a tiny fraction of
domestic share ownership (6.5 per cent according to ASIP), their
potential to transform the country’s boardroom culture is limited.
Beda Dueggelin, a spokesperson for Thomas
Minder, the businessman who proposed the referendum, agrees that Swiss
institutional investors can only do so much on their own. “Foreign
pension funds and investors are in the position to have a say on pay due
to their voting power,” he says. “If they exercise their increased
rights, something will change.”
The current regime was, after all,
sufficient to persuade Novartis to recently drop a planned $78-million
payment to its outgoing chairman. Credit Suisse and UBS have both also
faced shareholder rebellions on their executive compensation plans in
the past two years.
While determining “correct” rates of pay
is something for newly empowered shareholders and boards to wrangle
about in the years ahead, the new rules might not have such an obvious
limiting impact on pay. Doebeli says that the experience in the UK shows
that increased transparency on executive pay does not necessarily curb
it as the keenest observers of salary reports could be rival executives
hoping for a raise, although the clout of binding shareholder votes
mandatory for pension funds “should definitely make it easier to prevent
Skaanes adds that funds might be able to
simply have a default position of voting in favor of the board under the
new rules – perhaps in cases where they currently decide not to vote on
a company, as they have no desire to closely monitor it. Should this
indeed be a common pattern, the referendum’s impact would seemingly be
Doebeli says that “the strong
international reaction” to the referendum has been noted with interest
in Switzerland. Being home to several giant multinationals, particularly
in finance and pharmaceuticals, makes the radical changes globally
Dueggelin says the proponents of the
referendum “are sure that you will see more similar actions like the one
in Switzerland in the foreseeable future”.
The European Commission is known to
favour legislating for EU-wide binding shareholder votes on executive
pay later this year. Days after the Swiss referendum result, the German
government also announced that it will look to empower shareholders
before then – most likely with binding votes. That is despite Germany’s
Industrial Federation warning against “rash conclusions from the Swiss
debate” and arguing that Germany’s tradition of employee and shareholder
representation on supervisory boards makes new legislation unnecessary.
Gary Lutin, head of the Shareholder Forum
in the United States – a group that moderates between boards and
shareholders – says “that whether it works well or not, the Swiss
adoption of binding compensation votes will certainly encourage others
to try it”.
The US enforced the holding of advisory
votes on executive pay at large public companies as part of the 2010
Dodd Frank Act.
Speaking on whether there would be demand
for binding votes in the US, Lutin says: “You can expect the views of US
fund managers on binding votes to be as mixed as they are on everything
else. Some will see it as an opportunity to increase their influence,
and others will see it as an imposition of increased burden that adds
nothing to their portfolio’s performance or to their ability to compete
In any case, there might not be a
straight path to increased shareholder power.
Before the radical new corporate
governance framework takes shape in Switzerland, militant funds might
have to confront a growing academic backlash against increased
shareholder power emanating from the US. Critics such as Lynn Stout,
author of The Shareholder Value Myth, contend that shareholder
pressure is actually a major driver of the short-termism in corporations
that has spawned the kind of result-linked compensation schemes the
Increased rights should also logically
bring increased responsibilities. Lutin poses one of the questions that
he feels would result from a Swiss-style radical shake-up of
corporate-shareholder relations. “If shareholders now have the kind of
real authority to approve compensation that had traditionally been
assigned to corporate directors, do they also have the same kind of
fiduciary duty as directors to make informed decisions?”