Switzerland: Land of Corporate Governance Guinea Pigs

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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Switzerland, a bastion of moderation and discretion, doesn't often go for radical change, especially where corporations are concerned. Yet Swiss voters on Sunday overwhelmingly approved a referendum that will shackle boards and executives and, above all, limit CEO pay.

The Swiss government, lawmakers and chief executive officers say the changes are so severe that companies may be forced to decamp beyond Swiss borders. Jobs will be lost and economic growth will falter, they warn.

For corporate-governance activists, however, the Swiss referendum is a dream come true. It enshrines in law practices that shareholder advocates have advocated for years.

We shall see which side is right. Switzerland is about to become a laboratory of corporate governance. Will limits on executive pay push the smartest CEOs to look elsewhere for work, depriving the country of top talent? Will stingier pay, or the lack of big bonuses, mean CEOs won't have incentives to take risks, consigning Swiss companies to the bin of mediocracy? Or will stronger shareholder participation mean the end of excessive compensation, more focus on long-term results and more-predictable profits?

Other questions loom: Will shareholders educate themselves enough to make the right decisions on whom to reward and how much? Perhaps the biggest unknown is whether companies really can be profitably managed with so much shareholder second-guessing.

Inelegantly, if not accurately, called the "Rip-Off Initiative," the referendum gives shareholders a binding vote on executive and board compensation. In the U.S., shareholders have a so-called say-on-pay, but it's nonbinding and rarely do they garner 50 percent of shareholder support.

The Swiss initiative also bans one-time payouts in the form of signing bonuses or golden parachutes. It closes potential loopholes, for example by forbidding side contracts to boost executive pay, or special compensation for "change of ownership," which usually means fat bonuses when a company or a division is sold. And it requires more transparency over all forms of pay, including making public any loans to executives.

The referendum, which won 68 percent of votes and applies to Swiss companies listed domestically and abroad, doesn't end there. It increases shareholder rights over board appointments. It requires pension funds to be more transparent by revealing how they voted their corporate shares.

The penalties for violating any of these clauses are as radical as the initiative itself: up to three years in prison, or forfeiting as many as six years' salary.

Swiss voters obviously remain resentful after the country's biggest bank, UBS AG, had to take state aid during the financial crisis. The initiative's brainchild is Thomas Minder, manager of a cosmetics company that had supplied toothpaste to Swissair Group. The troubled airline, which had stopped paying Minder's invoices, went bankrupt in 2001 yet somehow found $7.5 million to pay the outgoing CEO.

The referendum gained strength last month when public outrage forced pharmaceutical-maker Novartis AG to withdraw a plan to pay outgoing chairman Daniel Vasella $78 million to keep him from working for a rival.

Bloomberg News reports that at least five of Europe's 20 highest-paid CEOs work for Swiss companies, including Roche Holding AG's Severin Schwan, an Austrian, and Nestle SA's Paul Bulcke, a Belgian. The list also includes three Americans: Credit Suisse head Brady Dougan, ABB Ltd.'s Joe Hogan and Joe Jimenez of Novartis.

The Swiss government still must figure out how to translate the new law into workable rules. Meanwhile, CEOs' worries aren't over: A group called the Young Socialists is campaigning for another referendum that would stop executives from being paid more than 12 times their lowest-paid employee.

In Germany, Chancellor Angela Merkel's opposition is praising the Swiss vote, raising pressure on her to consider similar rules. The European Parliament has tentatively agreed to ban bonuses that are more than twice bankers' fixed pay, a deal that the full European parliament and national governments must also endorse.

Clearly, Europe's voters are angry and signaling they aren't taking it anymore. The question is whether they're taking it too far.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Paula Dwyer at pdwyer11@bloomberg.net