Showdown on Executive Compensation in Switzerland

GENEVA — For Thomas Minder, a decade-long crusade against “fat cats” is about to come to a head.

The Swiss are set to vote Sunday on whether to adopt his proposal to impose some of the world’s most severe restrictions on executive compensation. The prospect is opposed by the banks and other multinational corporations that have long spearheaded the Swiss economy, who say the rules will damage the country’s business-friendly climate.

Mr. Minder, an entrepreneur and member of the Swiss Parliament, has taken the opposite view.

“If this gets voted, it will be the best export advertisement possible, because investors put their money where they have the most to say, and that will clearly then be Switzerland,” he said. The changes, he added, would guarantee that “investors will no longer have to worry about ridiculous backdoor deals.”

If Mr. Minder’s proposal is adopted, shareholders of companies listed in Switzerland would have a binding say on compensation for executives and board members, and the plan would obligate pension funds to participate in all such votes.

Mr. Minder’s proposal would also ban departure packages like the $78 million payout Novartis, the pharmaceutical company, agreed to give its departing chairman, Daniel Vasella. The payout set off a political storm and brought intense criticism from some investors, forcing Mr. Vasella to tell shareholders last week that his plan had been a mistake.

Those who violate the new rules would be subject to fines worth as much as their salaries for six years and prison sentences as long as three years.

The vote on Mr. Minder’s proposal comes after the United States and Germany, among other countries, authorized shareholders to cast nonbinding votes on executive pay. Such actions have been taken in response to Occupy Wall Street and other movements that have attacked corporate abuses that fueled the world financial crisis. On Wednesday, the European Parliament also agreed to limit bankers’ bonuses to twice their salaries.

The latest opinion polls suggest that voters will endorse his project, and Mr. Minder said the Novartis controversy had illustrated exactly why tougher rules were needed.

“There is something completely sick in a board like that of Novartis, where everybody is just friends with everybody,” he said. As to Mr. Vasella’s U-turn, Mr. Minder said, “It’s easy to renounce something which should in any case never have belonged to you.”

Still, Switzerland’s business lobby is warning of dire consequences if voters approve the proposals. While Switzerland is home to 7.5 million people, it punches far above its weight in economic terms, thanks largely to multinationals in sectors including banking, watches, food, pharmaceuticals and engineering. Many of these companies have most of their shareholding outside Switzerland.

“Switzerland risks becoming one of the most restrictive places for management in the world,” said Meinrad Vetter, an official from EconomieSuisse, the Swiss business federation. For foreign companies, he added, Mr. Minder’s proposal would “clearly be a very bad signal in terms of choosing Switzerland as a location to do business, because Switzerland has in fact always been a country that had been seen as very business friendly.”

Neither have many institutional investors endorsed the plan. The Ethos Foundation, based in Geneva, which is owned by 141 pension and other funds, recognized that Mr. Minder had pinpointed a genuine problem in Switzerland in terms of weak shareholders’ rights. But Mr. Minder’s proposal would push Switzerland “from one extreme to the other,” said Christophe Hans, head of communications at Ethos.

Mr. Hans also warned that Mr. Minder’s proposal could create a new set of managerial problems.

“You cannot give the board the right to choose the C.E.O. but then not make it able to finalize the hiring contract,” Mr. Hans said. “Which employee, let alone a C.E.O., would accept a job offer without first having the salary guaranteed?”

Article source: http://www.nytimes.com/2013/03/02/business/global/showdown-on-executive-compensation-in-switzerland.html?partner=rss&emc=rss