Barbarians at Gate for Swiss Boards as Activist Investors Rule
Swiss directors beware: that role now comes with an ejector seat.
As part of the “fat-cats” referendum last year that gave investors a greater say in executive salaries, shareholders can fire all the board members of Swiss companies in one fell swoop. At recent annual meetings, companies such as Nestle SA (NESN) and Syngenta AG (SYNN) implemented new rules they say tip the balance of power toward foreign activist shareholders who may place their own interests ahead of the long-term good of the company.
“We have given away a lot of decision power to people outside of the country,” Syngenta Chairman Michel Demare said at a May 26 conference in Bern. “They have many more tools now in the toolbox to try to influence how a company is managed. There’s much more risk of deadlocks.”
Foreign agitators now have a weapon to provoke change at some of Europe’s largest companies, including Novartis AG and UBS (UBSN) AG. Although directors of Swiss benchmark companies receive $100,000 more per year than U.S. peers on average, Switzerland has been largely untouched by shareholder revolts. In contrast, hundreds of U.S. companies were targets of activist-investor campaigns last year, among them Apple Inc. and PepsiCo Inc.
“There are so many people just sitting on their chairs, earning money for nothing,” said Bernhard Signorell, head of 3V Asset Management AG, a Zurich-based fund. “These times are really coming to an end.”
At $381,000, the median pay for a board member of companies on Switzerland’s benchmark SMI index is more than double that of the Euro Stoxx 50 Index, data compiled by Bloomberg show. It’s $244,000 on the U.S. Standard & Poor’s 500.
The new rules cut the term of all board members to one year, after which they need to be re-elected to keep their post. Many Swiss companies previously staggered the positions and made them last three years to prevent sudden changes.
That means shareholders had to vote 13 times at Nestle’s annual meeting in April, approving every director of the world’s largest food company.
Besides lengthening the meetings, the governance changes encourage short-term thinking, Nestle Chairman Peter Brabeck-Letmathe said.
An “unintended consequence” of the measures is a transfer of power from Switzerland’s largest companies to foreign investors, Brabeck said. Almost half of Nestle’s board members are Swiss, while only about a third of its shareholders hold that nationality.
Swiss boards now need to spend more time with their main shareholders and proxy voting services to thwart rebellion. While a mass firing of a board may be unlikely, just the possibility empowers activist investors.
For Nestle, making more investor contact is time-consuming as the maker of Nespresso coffee capsules has a fractured shareholding structure, said David Frick, its head of corporate governance. No investor owns more than a 3.7 percent stake.
“You have weakened the board, and you have empowered the activists,” Frick said.
Among Switzerland’s top five companies by market value, UBS and Novartis also lack controlling shareholders, making them more vulnerable than companies such as Roche Holding AG (ROG) and Cie. Financiere Richemont SA, which have a majority of voting rights in the hands of family shareholders.
Unlike countries such as Germany and France, where a board seat is reserved for labor representatives, Switzerland has few requirements on the composition of boards. Swiss boards on average have 9.4 members, compared to 10.7 for the U.S. and 12.1 for the rest of Europe, according to Deloitte. Previously there wasn’t any legal limit on how long board directors could serve.
Several of Nestle’s main competitors have faced off with Nelson Peltz, whose Trian Fund Management LP took stakes in Danone, PepsiCo and H.J. Heinz Co.
The last big shareholder spat Nestle had was in 2005 when some investors opposed Brabeck taking both the post of chairman and CEO. The activists lost.
To be sure, Switzerland is no stranger to shareholder activism. UBS owes its creation to gadfly investor Martin Ebner, who in the 1990s mounted a campaign to unite two Swiss banks.
Recent forays haven’t been as successful. Last year, billionaire U.S. investor Carl Icahn won one of three board seats he sought at Zug, Switzerland-based Transocean Ltd. (RIG), the world’s largest offshore rig contractor.
The company agreed on a compromise to his dividend proposal after shareholders rejected it.
Swiss drugmaker Actelion Ltd. (ATLN) in 2011 fended off an attempt by Elliott Advisors, part of a New York-based hedge fund founded by Paul Singer, to replace the board and seek a buyer. Investors rejected all of Elliott’s proposals, including an effort to replace the chief executive officer.
Some investors say the new shareholder powers are justified.
“If you really want to control your shareholders then don’t go public,” said Gregor Greber, chairman of zRating, a firm that advises shareholders how to vote.
Swiss voters approved the “fat-cat” rules in March 2013, with the main provision that investors get a binding vote on the pay packages of the board and top executives. Thomas Minder, a lawmaker and managing director of a herbal-toothpaste company, began a campaign pushing for the limits in 2006.
The salaries of CEOs became a sore point with the Swiss public after UBS, the country’s biggest bank, was bailed out in 2008 and after drugmaker Novartis proposed and later abandoned a plan to pay as much as $78 million to outgoing chairman Daniel Vasella in 2013.
Executives “don’t like that shareholders have more power, but their excessive compensation was why the Swiss voters wanted new rules,” said Brigitta Moser-Harder, an activist shareholder who owns shares of UBS and ABB Ltd., Switzerland’s largest engineering company.
“If the board is doing a good job, they don’t have to worry about getting fired,” she said.
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