The Swiss Federal Council recently published their “Proposal for an Ordinance against abusive remuneration practices” in response to the successful popular referendum on what has been dubbed the “Minder Initiative”. It is the first formal consultation stage ahead of the tabling of a formal legislative proposal, timetabled for November, in time for a January 1st 2014 implementation date.
The central thrust of the initiative is well documented: it’s a very Swiss response to the general public outcry against ‘fat cat pay’. Its aim is to ensure that companies are better held to account (for which read ‘reigned in’) by their shareholders to prevent egregious pay practices, especially (though not exclusively) in the banking sector.
In a society which makes such extensive use of popular referenda, we should perhaps not be surprised to see one or two aspects to the proposals which are both simple in principle but draconian in practice.
Many will sympathise with the idea that termination payments, payment advances and premiums for acquisitions or disposals should be banned, along with pension payments, credits and loans, and bonus and participation plans if not provided for in company Articles of Association. Issuers will almost certainly bemoan the lack of flexibility these rules offer them in the global market for executive talent, and shareholders may feel some sympathy too.
Far more important for informed, engaged investors is the proposal that it should be mandatory for Swiss pension funds to vote all their Swiss shares, because it introduces the very real possibility of serious unintented consequences. Anyone familiar with the history of regulations on ‘mandatory’ investor voting in the US will immediately recognise this as having the potential to disenfranchise Swiss (and other) institutional investors unless they think carefully through the implications and avoid the same mistakes.
By making voting seem ‘mandatory’ (in fact the proposal allows for pension funds to choose not to vote if they can explain how that is in the best interests of their members, but will pension fund compliance bods really take that view?), voting becomes a compliance issue, detached from the notion of informed stewardship. A bit like trying to run an engine without oil to lubricate it, this potentially removes the very thing that makes voting work – considered decision-making.
As happened in the US with ERISA, the proposals as they stand run the risk of creating a situation where pension funds simply pay someone else (e.g. proxy providers) to make sure their proxy voting is done for them, without overseeing the decisions being made in their name. ESMA and the SEC, to name but two, are currently wrestling with the thorny consequences of proxy providers being perceived to be the de facto unelected arbiters of corporate governance (irrespective of whether you deem that to be a fair assertion – see our blog piece earlier in the year “ESMA & Proxy – chasing molehills, missing mountains“). The Swiss currently have an opportunity to learn from those mistakes, and avoid replicating them. Swiss pension funds can do their bit to avoid the pitfall by thinking pragmatically about whether it is cost effective to vote all of their Swiss shares, and how they maintain proper oversioght of the voting of their shares.
You might find it odd to find the previous paragraph on the blog page of a proxy provider. Well, that’s because we’re different in that our sole purpose as a proxy provider is to put investors in the driving seat, rather than seeking to dictate governance ourselves through our own house recommendations. We hope to see the Swiss pension funds trade association, ASIP, take a role in ensuring that their members do not inadvertently put proxy providers front and centre of corporate engagement in Swizerland at the expense of the investors who bear the economic interest.
The Minder Initiative has the potential to make Swiss pension funds very powerful but, in the words of Spiderman, “with great power comes great responsibility”. The pitfall: You can give the power away, but not the responsibility.
Last Updated: 26 June 2013