The draft revised Swiss Code of Best Practice published for public consultation on 5 June 2014, does not bring a change of scene. The changes are mainly related to the new Minder rules against excessive pay. Not unexpectedly, the draft retroactively implements the new realities instead of setting own standards.

By Matthias Rey (Reference: CapLaw-2014-24)

Corporate governance in Switzerland is only marginally regulated in Swiss corporate and stock exchange laws. Apart from the new Ordinance against excessive compensation in listed companies of 2014 (ExCompO) that implemented the provisions of the Minder initiative into Swiss law, the topic of corporate governance in Switzerland is rather governed by selfregulatory rules, such as the Directive On Information Relating To Corporate Governance by the SIX Swiss Exchange of 2008 (the Corporate Governance Directive), which obliges issuers to comply with certain rules regarding top management or substantially explain and publish.

Apart from that, one of the most observed set of rules of selfregulation is the Swiss Code Of Best Practice for Corporate Governance (the Swiss Code) by economiesuisse, the Swiss business umbrella association. It was initially issued in 2002 and last revised in 2007, and is based on the specific situation in Switzerland. The recommendations of the Swiss Code are targeted on publicly listed companies and also provide guidelines for nonlisted companies of economic significance, but in each case apply on a voluntary basis only. On 5 June 2014, economiesuisse published a revised draft of its Swiss Code for public consultation which is, however, only available in German language. Any interested parties could provide input on the draft revised Swiss Code by the end of June. Publication of the final revised version of the Swiss Code is scheduled for September 2014.

1) ExCompO Rules against Excessive Pay

Most material changes proposed by the draft Swiss Code are driven by the ExCompO against excessive pay which have been enacted on 1 January 2014. Firstly, this includes the implementation of the hard rule topics such as approval of the compensation for board members and management, direct election of the chairman and the members of the compensation committee as well as the independent proxy representative, and one year terms for the board members. Secondly, appendix 1 of the Swiss Code was fully amended to refl ect the new ExCompO. In certain aspects it even goes beyond and mentions payback obligations and breakup clauses in case of major non-compliance (claw backs). Also, the draft Swiss Code provides for explanations why compensations have declined or been increased (pay-for-performance relation).

2) Comply or Explain

Another change relates to the introduction of the “comply or explain” principle. According to this principle, companies have to either comply with the rules of the Swiss Code or substantially explain why they do not adhere to it. This principle was initially introduced in Switzerland with the Corporate Governance Directive by the SIX Swiss Exchange in 2002, last revised in 2008, and is therefore an old story. However, since the Swiss Code contains many recommendations and broad guidelines, the “comply or explain” concept seems a bit odd in certain contexts, e.g. if a company should explain why it does not follow the company’s sustainable interests or why the board does not influence the corporate governance of company. The Swiss Code was never intended to follow this principle, and its introduction does challenge the distinction of scope between the Corporate Governance Directive to provide transparency and the Swiss Code to provide content.

3) Board composition

Other changes include that the board of directors should consist of male and female members and ensure an adequate diversity. Also, it should work towards having different persons as chairman and as CEO, which principle was not contained in this strict form in the existing version of the Swiss Code. Further, the draft Swiss Code now provides for a majority of the board members being independent directors.

4) Corporate Social Responsibility and other changes

The revised draft Swiss Code starts with an amended definition of corporate governance: “Corporate governance encompasses the full range of principles directed towards companies’ sustainable interest seeking a good balance between direction and control and transparency at the top company level while maintaining decision-making capacity and effi ciency”. The small difference to the current version is that “shareholders’ interest” was replaced by “companies’ sustainable interest”. This change should reflect the new principle of corporate social responsibility which is stressed in the corresponding press release. However, content wise this principle does not seem to have much influence on the draft Swiss Code.

Further changes relate to the reference to a risk management for financial, operational and reputational risks, and the cross reference to other economiesuisse frameworks such as the Guidelines For Institutional Investors of 2013, and the Basic Principles Of An Effective ComplianceManagement of 2010 (for which another amendment seems to be planned for 2014 as well). The draft Swiss Code also mentions the usage of electronic means in different context (partly due to the Minder Rules), e.g. in connection with the general meeting of shareholders or that the outline of the organizational regulations should be publicly electronically available.

5) Conclusion

The adoption of the Minder initiative seems to have caught economiesuisse on the wrong foot. Instead of leading the discussion on corporate governance topics and setting own standards, it has to follow the developments and refl ect the status quo in its new draft Swiss Code. Innovative or controversial topics are carefully avoided if not already provided for by the Minder Rules or other mandatory law. It would be surprising if the public consultation can create lots of feedback or earn compliments.

Matthias Rey (matthias.rey@metallzug.ch)