Corporate governance in Switzerland

Author: | Published: 10 Oct 2002
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The introduction of two new sets of corporate governance rules in 2002 marked a major milestone in the development of corporate governance principles in Switzerland.

The Directive on Information relating to Corporate Governance (the 'Directive'), issued by the SWX Swiss Exchange (SWX), came into force on July 1 2002. Its purpose being the creation of better corporate transparency, the Directive requires primarily Swiss issuers to disclose in their annual report important information on the management and control mechanisms at the highest corporate level, starting from the business year 2002.

The Code of Best Practice for Corporate Governance (the 'Code') was issued by economiesuisse, the federation of Swiss businesses from all sectors of the economy, on March 25 2002. It sets corporate governance standards that have, however, the character of non-binding recommendations. The Code addresses primarily Swiss public companies but also serves as a guideline for non-listed Swiss companies and organisations of economic significance.

The new rules were adopted following several prominent cases of managerial misconduct and mismanagement in recent years that had prompted a public outcry. An extensive public discussion on the board's accountability and liability, excessive management compensation and shareholders' control followed, and is still ongoing.

Code of Best Practice and Corporation law

The Code's purpose is to set out guidelines and recommendations, "but not to force Swiss companies into a straightjacket". It integrates and reflects Swiss legislation's various provisions dealing with corporate governance aspects and also seeks to embody the high standard of corporate practice already being observed by many corporations in Switzerland. The Code, which contains an English version, is of particular assistance to foreign investors for a better understanding of corporate governance in a Swiss context.

A panel of experts engaged by economiesuisse prepared the Code. In developing the new Code, the panel drew on the current international models, foremost from the UK and some other European countries. The commission was in fact the first of its kind in Switzerland to comprehensively analyze and report on the mechanics of corporate governance in Swiss corporations. This may come as a surprise, given the international exposure of many Swiss multinational players such as Nestlé, Novartis, Roche, Ciba SC, UBS, Credit Suisse, Zurich Financial Services and Swiss Re, to name a few, all incorporated under Swiss law.

A main reason for the absence of a genuinely Swiss soft law i.e. an official Code of Best Practice until now is that a major reform of the Swiss Corporation law was introduced shortly before the Anglo-American concept of corporate governance had reached the European continental shores. In 1992, the same year the Cadbury Report was issued, the partially revised Corporation law (Aktienrecht) as part of the Swiss Federal Code of Obligations (CO) was enacted. Although not influenced by the Cadbury Report, the new Corporation law did substantially reform the corporate governance triangle "board - management - shareholders". The revised law anchors the inalienable core competencies of the board of directors and defines its core non-transferable duties. It also sharpens the profile and function of the operative management, the shareholders' meeting and the auditors. Swiss statutes in the field of securities regulation adopted in more recent years have an additional impact on the development of corporate governance standards, namely for public corporations.

Board of directors / management

Two provisions of the CO form the backbone of a system which can be read as a short manual for the board on good governance: Article 715a CO acknowledges that timely and appropriate information from the management is the key element for the effective discharge of the board's duties; it grants to the individual board member the right to comprehensive information and inspection. Article 716a CO provides a checklist of fundamental matters that are specifically reserved for decision by the board of directors:

  • the duty of the board to determine the corporate strategy and allocate corporate resources (strategic governance);
  • the duty to set up and structure a sound system of internal control (interestingly, established years before the Hampel report emphasized its importance as one of the core duties of the board);
  • the duty to appoint and monitor management;
  • the duty to define the fundamental organizational structure; and, last but not least
  • the duty to prepare the shareholders' meeting.

These responsibilities of the board are non-transferable and inalienable and stand firmly in a statutory corporate framework which can - although far from resembling a Delaware-type of legislative model - be characterized as liberal and quite flexible relative to other European corporation laws. As a consequence, through the delegation of the transferable duties and powers from the board to the operative management, the executive body of Swiss corporations may be structured to cater for specific business needs. In particular, the executive body may be tailor-made to implement the executive organization models common in or legally required by other jurisdictions. In a nutshell, the range stretches from the German dual board system with two strictly separated executive bodies, the Anglo-American unitary board system integrating executive and non-executive board members to the French Président-Directeur Général (PDG)-system, which essentially centers around the almost omnipotent PDG.

From a corporate governance perspective, the rather flexible wording of the statute may also be a disadvantage. Swiss law does not oblige the board of a Swiss corporation to implement generally accepted corporate governance standards other than the core duties indicated above. The new Code of Best Practice, despite not having binding effect, undertakes to fill this gap. It sets corporate governance standards by recommending the structuring of the board into audit, compensation and nomination committees, the appointment of a lead director in a situation where the roles of chairman and CEO are combined, the nomination of independent non-executive directors, or the development of a clear remuneration policy.


How do the shareholders as the suppliers of finance ensure that board and managers do not invest it in bad projects? This central question first posed by Adolf Berle and Gardiner Means is addressed by Swiss Corporation law basically through the provision of several fundamental non-transferable competencies to the shareholders' meeting. In particular, the shareholders may vote on the appointment and removal of directors and of the statutory auditors, on the approval or rejection of the annual business report, including the declaration of dividends, as well as on any amendment to the articles of association. Shareholders may also sanction non-compliance with statutory duties of the board or the management by bringing actions against liable directors or officers to recover damages.

In relation to the Shareholders, the Code particularly aims to facilitate the exercise of shareholders' statutory rights in all possible respects, be it, for instance, in the calling or organization of the Shareholders' Meeting or in receiving comprehensive information prior to or at the shareholders' meeting.

Shareholder activism on the rise

Shareholder democracy, supported by rules on proxy voting, has traditionally not been pursued vigorously. Judging from the many hotly debated shareholders' meetings in recent months, shareholder activism appears to be on the rise. An increasing number of institutional investors and some minority shareholders' groups have started shareholder motions in order to reach various objectives. Excessive remuneration to the board and the management was a subject at some of this year's shareholders' meetings including ABB's. The independence of the board, particularly as regards the demand for a separation of the function of the CEO and the chairman of the board, was intensely debated. With respect to the top executives of Zurich Financial Services and Credit Suisse, it resulted in a separation of the two functions.

Despite being still rather occasional, hostile takeovers of and among Swiss corporations appear to be increasing in number over the past two years. In its ongoing attempt for a hostile takeover, Multipapiers continues besieging Baumgartner Papiers despite an unsuccessful public tender offer. Litigation to tear down a 3-percent threshold-clause in the target-Articles which confines the voting power of Multipapiers to three percent as well as public proxy fights to gain control of the target corporation through the removal of the incumbent board of directors is ongoing.

Shareholders' actions against directors and officers

On behalf of the corporation, the shareholders' meeting may also discharge the members of the board and the management from liability with respect to their business activities performed on behalf of the corporation. However, any non-consenting shareholder may still bring a derivative or an individual action against any director or manager for a breach of the duties of loyalty or of care, in particular a breach of the non-transferable core duties of the board as outlined above. Although rarely enforced in court due to certain inherent impediments and risks and the frequent settlements with D&O-liability insurers, the right to bring an action against the directors and officers may still remain a threatening weapon in the hands of shareholders with substantial means.

An action by shareholders against the board or management may be combined with the so-called special audit in favor of shareholders (Sonderprüfung). A shareholder may require in the Shareholders' Meeting the institution of a special audit in order to have access to inside information not disclosed to the public. Upon the 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 corporation. The information collected by the independent auditor may help clarify whether there is a breach of duty in the first instance, and if so, whether there is sufficient evidence for an action against members of the board or the management.

Accountability through transparency: securities regulation

Rising expectations of accountability and transparency have led to new regulation, mainly in the field of securities regulation in recent years.

In addition to the amendments to the Swiss Corporation law, the Swiss Federal Stock Exchange Act contains provisions that work towards an efficient and more transparent market for corporate control, which, as a consequence, is putting underperforming management under pressure. There is a duty to disclose directly or indirectly held shareholdings in Swiss public corporations when its holder passes the thresholds of 5, 10, 20, 33 1/3, 50 and 66 2/3 percent of the voting rights. Far reaching is the obligation of a shareholder to make a public offer to all shareholders if his shareholding exceeds the threshold of 33 1/3 percent of the voting rights of the target company, unless the Articles of Association of the target company provide otherwise. In a takeover situation, both the bidder and the board of the target company are required to abide by certain rules, including disclosure of shareholdings, to ensure a fair and transparent takeover process and to protect the interests of the non-bidding minority shareholders.

Among the various statutes which collectively bring about the picture of Swiss corporate governance, the listing rules of the SWX constitute an important piece. Thanks to these rules, the reporting and accounting practices of Swiss public corporations have been significantly improved over the past years, making management better accountable to shareholders. Furthermore, ad-hoc publicity rules require that all investors are informed immediately and simultaneously by the board and management of share price-sensitive information regarding listed corporations. For the first time in 2001 blue chip corporations listed at the SWX started being traded at the Paneuropean trading platform virt-x. However, the SWX listing rules generally continue to apply to these originally SWX-listed corporations.

SWX Corporate Governance Directive

In accordance with the Listing Rules of the SWX, the new Corporate Governance Directive requires listed corporations to make essential information on their respective corporate governance concept available to the market. This information shall be included as a separate chapter in the annual report starting from the business year 2002. The Directive applies to all Swiss issuers having their securities listed on the SWX. It also applies to issuers not incorporated in Switzerland but having their securities listed only on the SWX.

According to the Directive, it is mandatory to provide information on the compensations, shareholdings and loans in an aggregate amount (for each, the board and the management). As regards the board member with the largest total compensation package, the compensation, shareholdings and loans must be disclosed separately, with his or her identity withheld. Other broad categories of information such as group and capital structure, board of directors, auditors, shareholder participation rights, change of control or defence measures, or information policy may be dealt with in accordance with the principle of comply or explain: If the issuer decides not to disclose certain information, it must explain so.

The Directive is, thus, an efficient tool to make the corporate governance mechanics of Swiss issuers and the Swiss corporate governance system in general more transparent. In a post-Enron-world this is of even greater importance: transparency creates trust.

Schellenberg Wittmer
Löwenstrasse 19
CH – 8023 Zurich
Tel: +41 1 215 5252
Fax: +41 1 215 5200




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