Need for action in the wake of the approval of the popular initiative “against rip-off salaries”

1. Implementation of popular initiative

The new provisions of the Constitution entered into force immediately with the approval of the popular initiative on 3 March 2013, but are not yet directly applicable. Parliament must therefore draw up a draft bill for the implementation of the initiative. As this can be expected to take more than a year, the new provisions of the Constitution require the Federal Council to put into effect implementation regulations in the form of an ordinance on 3 March 2014 at the latest.

The Federal Council intends to put the ordinance into effect at the beginning of 2014 already so that the full 2014 financial year will be subject to the new legislation. However, to give companies some time to implement the required adjustments, the Federal Office of Justice will also propose transition periods. Although the first draft for an ordinance is expected to be ready by the end of May 2013, the annual general meetings scheduled for the first half of 2013 do not yet have to take any action.

2. Individual demands of popular initiative and their effects

The text of the initiative contains some far-reaching demands affecting listed companies, but these are mostly not formulated exactly enough to allow any statements about their implementation. Companies therefore have to wait for the Federal Council’s ordinance, which will have to regulate in particular the following demands of the initiative:

• The annual general meeting votes on the total amount of all compensation payments to the board of directors and the executive board and must individually elect the members of the board of directors, the chairman of the board of directors, the members of the compensation committee and the independent proxies every year. The wording of these provisions, however, does not indicate whether the voting on compensation must be binding or only consultative, or if it must be prospective or retrospective. It is also not yet clear how the compensation provisions will affect current and pre-existing contracts. The term “all compensation payments” must, however, be interpreted comprehensively and is likely to include all payments by the company and other group companies.

• Members of governing and executive bodies may no longer enter into any additional employment and advisor contracts with other group companies. If this provision is implemented literally, a CEO, for example, may no longer receive compensation from the group’s holding company as well as from one or more subsidiaries.

• Shareholders must be able to engage in long-distance electronic voting. The requirements that must be met by such an electronic long-distance voting system are not yet foreseeable, but the technical implementation of such systems will likely cause more problems than the legal aspects. With the systems that are currently available, powers of attorney with instructions are granted electronically to a proxy, sometimes until shortly before the actual vote is taken. However, the solutions applied to date in Switzerland in particular do not allow location-independent real-time participation in an annual general meeting without involving a proxy.

• The terms of the employment contracts of executive board members, the number of group-external mandates held by members of the governing and executive bodies, profit participation plans and the amount of loans and pensions for members of the governing and executive bodies must all be regulated by the articles of incorporation in future. It cannot be excluded, however, that Parliament in its draft bill will for practical reasons allow the regulation of these issues in separate regulations subject to approval. What still needs to be clarified, for example, is whether the inclusion of a maximum term for employment contracts of executive board members will be sufficient, or whether a specific agreement for every executive board member will be needed. It is also not yet clear whether basic rules on profit participation plans will be enough, or whether detailed regulations will be required.

• Members of governing and executive bodies may not be given severance pay or any other compensation nor any advance or transaction payments. The term “other compensation” presumably does not refer to all types of salary payment, but only to payments similar to severance pay. It is still unclear, for example, whether a bonus for signing a contract (signing bonus) will be deemed to be an inadmissible advance payment.

Generally, every breach of the new provisions is punishable by imprisonment of up to three years and a fine of up to six annual salaries of the member of the governing or executive body in question. It can be expected, however, that these rather draconian measures will be implemented by way of a differentiated scale of penalties.

3. Recommendations for action

In spite of the large number of questions it is a good idea to take the first preparatory steps for introducing the changes this year still.

• The compensation policy should be reviewed and adjusted so that it can be credibly and convincingly presented to the shareholders at the annual general meeting on the one hand and disclosed in full in the annual report on the other hand. This policy should in particular take account of the new prohibitions on certain forms of compensation.

• The employment and advisor contracts as well as the number of group-external mandates of members of the governing and executive bodies should be reviewed to ensure their compatibility with the new provisions.

• The introduction of electronic long-distance voting at annual general meetings should be investigated, in particular with regard to technical implementation.

It is already clear that several amendments to the articles of incorporation will be required and that the invitation process and execution of annual general meetings of listed companies will have to be adjusted once the exact implementation provisions have been issued. But what these will look like specifically will remain open until the Federal Council’s ordinance is published.