Switzerland

Overview of recent corporate governance reforms

Corporate governance framework: hard and soft law

A major reform of Swiss company law took place in 1992, when the partially revised Corporation Law (part of the Swiss Federal Code of Obligations) was enacted. While not influenced by the British Cadbury Report issued in the same year, the revised law substantially overhauled the corporate governance triad of board-management-shareholders. The revised law establishes the inalienable core powers of the board of directors and specifies its non-transferable duties. It also clarifies the role and function of management, the shareholders’ meeting and the auditors. More recent statutes in the field of securities regulation have an additional impact on the development of corporate governance standards for public companies.

The introduction of two new sets of corporate governance rules in 2002 marked a milestone in the development of corporate governance principles in Switzerland.

The Directive on Information relating to Corporate Governance, issued by the SWX Swiss Exchange, came into force on July 1 2002 and aims to enhance corporate transparency. To this end, the directive requires Swiss listed issuers to disclose in their annual reports important information on the management and control mechanisms at the highest corporate level. While information on remuneration is compulsory, other broad categories of information – such as group and capital structure, board of directors, auditors, shareholder participation rights, change of control or defence measures, and information policy – may be dealt with in accordance with the ‘comply or explain’ principle: if the issuer decides not to disclose certain information, it must explain why. The SWX directive is thus an efficient tool which increases the transparency of the corporate governance mechanisms of Swiss issuers and the Swiss corporate governance system in general.

The Swiss Code of Best Practice for Corporate Governance was issued by economiesuisse, the federation of Swiss businesses from all sectors of the economy, on March 25 2002. It sets corporate governance standards which have the character of non-binding recommendations. The code primarily addresses Swiss public companies, but also serves as a guideline for non-listed Swiss companies and organisations of economic significance. It integrates and reflects various provisions of Swiss legislation which deal with corporate governance aspects. It also seeks to embody the high standards of corporate practice already observed by many companies in Switzerland. The code is of particular assistance to foreign investors who wish to have a better understanding of corporate governance in the Swiss context. In developing the new code, the expert panel which drafted its provisions drew on current international models, particularly those in use in the United Kingdom and other countries.

Forces for reform

The new corporate governance rules were adopted following several prominent cases of managerial misconduct and mismanagement which caused a public outcry. These included the excessive remuneration of board members and management at collapsed Swissair, excessive pension benefits at ABB and alleged misuse of corporate funds at Rentenanstalt/Swiss Life. An extensive public debate on board accountability and liability, excessive management compensation and shareholder control began as a result and remains ongoing.

Shareholders’ rights

The Corporation Law affords several fundamental, non-transferable powers to the shareholders’ meeting. In particular, shareholders may vote on:

• the appointment and removal of directors and statutory auditors;

• the approval or rejection of the annual business report;

• the setting of dividends; and

• any amendment to the articles of association, including changes in the share capital.

In addition, shareholders may bring actions against the company in order to protect their rights, or against liable directors or officers in case of non-compliance with their statutory duties.

Right to call meetings and propose resolutions

A shareholders’ meeting is called by the board of directors or, in extraordinary situations, by the auditors. However, one or more shareholders whose holding or combined holdings represent at least 10 per cent of the share capital may request that a shareholders’ meeting be called. Shareholders whose combined holdings represent at least 10 per cent of the share capital or an aggregate par value of at least CHF1 million (whichever is lower) may propose resolutions for adoption at the meeting.

Institutional investors as shareholders

Traditionally, shareholder democracy, supported by rules on proxy voting, has not been pursued vigorously. However, judging from the many hotly debated shareholders’ meetings in recent years, shareholder activism appears to be on the rise as, for various reasons, an increasing number of institutional investors and some minority shareholders’ groups have started shareholder motions. While some Swiss pension funds have mandated active corporate governance players, such as the ethosfund, to represent their votes and question management at shareholders’ meetings, the majority still do not seek an active role in the exercise of their shareholder rights.

Management structure and the role of directors

Nomination, removal and election

The shareholders’ meeting elects each member of the board of directors, mostly upon nomination and motion by the incumbent board, but sometimes upon counter-motion of the shareholders. The shareholders’ meeting may also remove directors and auditors, provided the matter has been timely included on the agenda.

Qualifications and term of office

Directors must be individuals and either shareholders or representatives of shareholding entities. Under current law the majority of the board members must be of Swiss nationality and must reside in Switzerland, although the nationality requirement is expected to be abolished in the near future. Exemptions from the nationality requirement already exist for citizens of EU and European Free Trade Agreement countries. In the absence of other provisions in the articles of association, the board members are elected for a term of office of three years and re-election is permitted.

Directors’ duties

The board of directors is responsible for managing and representing the company, and can be described as the ultimate executive body of the company. In general, the board is authorised to decide all matters that are not reserved to the general shareholders’ meeting or to the auditors. The directors, and any officers to whom the company’s day-to-day management has been delegated, must carry out their duties with due care and maintain the company’s interests in good faith.

Two provisions of the Federal Code of Obligations form the backbone of a system which can be read as a short manual for the board on good governance. Article 715a acknowledges that timely and appropriate information from management is crucial to the effective discharge of the board’s duties, and thus grants individual board members the right to comprehensive information and inspection of company documents. Article 716a provides the following checklist of fundamental matters which are specifically reserved to the board of directors:

• the duty to determine the overall corporate strategy and to allocate corporate resources accordingly (strategic governance);

• the duty to set up and structure a sound system of internal control;

• the duty to appoint and monitor management;

• the duty to define the fundamental organisational structure; and

• the duty to prepare for the shareholders’ meeting.

These board responsibilities are non-transferable and are firmly embedded within a statutory corporate framework which – while far from resembling a Delaware-type of legislative model – may be characterised as liberal and quite flexible relative to other European corporate laws.

Generally, the day-to-day management is delegated to the executive body of the management. The executive body may be structured in accordance with organisational models common in or legally required by other jurisdictions. Such models range from the German dual board system, with two strictly separate executive bodies, to the Anglo-American unitary board system, which integrates executive and non-executive board members, to the French ‘président-directeur général’ (PDG) system, which essentially centres around the almost omnipotent PDG.

Directors’ liability

Liability may arise out of statute, contract or tort. Statutory liability applies whenever a duty under corporate law has been violated. Directors may also be subject to criminal prosecution in case of misappropriation of corporate funds or exploitation of insider information.

Corporate liability actions may be brought by:

• the company;

• the shareholders (either directly or through a derivative action brought on behalf of the company if a shareholder has suffered indirect damage to the value of his shares as a result of the damage suffered by the company); or

• the company’s creditors in case of its bankruptcy.

Class actions as envisaged under US law do not exist under Swiss law.

The board members, de facto directors (ie, persons not formally appointed as directors who effectively behave as directors and significantly influence the decision-making process) and members of the top tier of management are jointly and severally liable for damages caused by any intentional or negligent breach of their duties.

An action by shareholders against the board or management may be combined with the special audit procedure (Sonderpruefung). A shareholder may request a special audit which will have access to inside information not disclosed to the public. Upon approval by the shareholders’ meeting or by a judge, the special audit is carried out by an independent auditor who acts as an intermediary between the shareholders and the company.

Directors’ and officers’ liability (D&O) insurance is purchased by virtually all public companies in Switzerland. D&O policies are generally claims-made policies with single-year policy periods.

Committees of the board

With regards to the structure of the board of directors, the Code of Best Practice for Corporate Governance proposes that an audit committee, a remuneration committee and a nomination committee be established. Depending on their tasks, these committees are subject to specific criteria with respect to independence and must be established accordingly. However, these are merely ‘soft’ law provisions, and due to the inalienable rights of the board, such committees merely have a decision-shaping, rather than decision-taking, role.

Remuneration

According to the SWX directive, it is mandatory to provide information on the total remuneration paid and shares and loans granted both to directors and to management. With regards to the board member with the largest total compensation package, the compensation, shareholdings and any loans must be disclosed individually, although the director’s identity need not be made known.

Disclosure

Increasing expectations of accountability and transparency have led to the introduction of new securities regulations in recent years.

In addition to the Swiss Corporation Law amendments, the Swiss Federal Stock Exchange Act contains provisions which aim to establish an efficient and more transparent market for corporate control. There is a duty to disclose immediately direct or indirect shareholdings in Swiss public companies when the shareholder passes certain voting right thresholds (5, 10, 20, 33.3, 50 and 66.6 per cent). In addition, the Corporation Law requires listed companies to include in the attachment to the annual balance sheet a list of significant shareholders (ie, those whose participations exceed 5 per cent of the voting rights).

Where a shareholding exceeds 33.3 per cent of the voting rights of the target company, unless the articles of association provide otherwise, the shareholder has a far-reaching obligation to make a public offer to all shareholders. In a takeover situation, both the bidder and the board of the target company must abide by certain rules, including the continuing disclosure of shareholdings, to ensure a fair and transparent takeover process and to protect the interests of the non-bidding minority shareholders.

Furthermore, ad hoc publicity rules of the SWX require that listed companies inform all investors immediately and simultaneously of share price-sensitive information. The moment of publication should be such as to allow market participants sufficient time to process the notification.

Accounts and audits

Accounts

While the Corporation Law only provides for annual reporting in compliance with the broad principles of the statutory Swiss generally accepted accounting principles, the reporting duties included in the SWX Listing Rules require publication of an annual report and a semi-annual interim report based on much more sophisticated accounting standards.

As of 2005, all companies listed in the main segment of the SWX will be required to comply with international financial reporting standards or US generally accepted accounting principles.

Auditors

The shareholders’ meeting elects and re-elects the auditors, usually for a term of one year. The Corporation Law states that auditors must have the “necessary” qualifications to perform their duties in auditing the company’s financial statements, but must meet higher professional standards in certain cases – for example if the company has bonds outstanding or if its shares are listed on a stock exchange.

The auditors are liable to the company itself, to any shareholder and to any creditor for damages caused by wilful or negligent breach of their duties.

Enforcement

Case law shows that the number of liability claims against directors and officers is on the increase. Liability claims have become almost routine in bankruptcies, but are still rare where the company is not over-indebted. However, judging by the number of reported court decisions, relatively few actions for liability are successful. Many proceedings are settled at some point prior to judgment, especially with D&O liability insurers. Nevertheless, the right to bring an action against the directors and officers is still a threatening weapon in the hands of shareholders with substantial means.

Corporate social responsibility

The principle of corporate responsibility and sustainability has begun to form an integral part of the long-term business strategies of many Swiss multinational players. Such companies acknowledge the importance of sustainable value for shareholders, clients and employees, and at the same time the importance of preserving the environment and contributing to the development of the communities in which their business is located. In general, such endeavours are set out in the annual business report.

Sarbanes-Oxley

The Sarbanes-Oxley Act applies to any Swiss company whose securities are registered with the US Securities and Exchange Commission and are listed on a US stock exchange (also where listed as a dual listing or in the form of American depositary receipts). In particular, Sarbanes-Oxley imposes duties on the board and management such as the appointment of an independent audit committee, which deals with the appointment, remuneration and supervision of the auditors. Sarbanes-Oxley further encompasses, among other things, the duty of the chief executive officer and the chief financial officer to issue periodic reports to the SEC, and introduces certain duties for in-house and outside counsel.

Sarbanes-Oxley has also influenced the draft Swiss Federal Law on Admission and Oversight of Auditors. The draft sets out new and more stringent requirements on the professional qualifications and independence of auditors. Importantly, it establishes a public oversight board which will implement a system for the admission of auditors, and requires that listed companies be constantly supervised.

Recent developments

A partial revision of the Federal Code of Obligations aims to improve transparency in relation to the remuneration of directors and officers of public companies. It provides that the aggregate and individual remuneration of directors, as well as their shares in the company, must be published. For officers, the aggregate amount of remuneration and the highest individual remuneration are also subject to publication. Further issues addressed are the review by external auditors and sanctions for non-compliance with these requirements.

In addition, following a number of parliamentary motions, the Federal Department of Justice appointed a Corporate Governance Working Group, tasked with evaluating whether Swiss law is in conformity with accepted corporate governance rules. In September 2003 the working group produced its final report. Its recommendations will be submitted to interested groups before being discussed by Parliament. The report encompasses a variety of proposals on corporate governance matters for listed and non-listed companies.

Finally, in October 2003 the Admissions Board of the SWX adopted rules on the disclosure of management transactions, subject to approval by the Swiss Federal Banking Commission expected in 2004. Directors and officers must disclose their transactions in financial instruments of the company in which they serve, and must indicate their position, but not their name. Transactions carried out directly or indirectly which exceed CHF100,000 must be reported within four exchange days.