Author: | Published: 9 Oct 2003
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The primary source of Swiss corporate governance rules is its Company Law. In 1991, Switzerland enacted a thorough revision of its Law on Companies Limited by Shares as a result of a 24-year legislative process. The law adopted a number of fundamental principles relating to the direction and control of companies limited by shares contained in the original governmental draft (1983). Although the principles that eventually became law were not labelled 'corporate governance', they clearly belong under this term as it is generally used today.

The board of directors

The provisions dealing with the powers and duties of the board of directors form the cornerstone of Swiss corporate governance, and their enactment anticipated a great many of the principles advocated by the English forerunners of the corporate governance debate. The board must assume supreme strategic responsibility for the conduct of the affairs of the company. Related powers are neither capable of being delegated nor of being withdrawn by the shareholders. No particular qualifications are required to fill the position of a board member, except that the majority of the board must be of EU or Swiss nationality and reside in Switzerland.

The board is responsible for the organization, the financial planning and the delimitation of powers between the governing bodies of the company, the distribution of tasks, checks and balances, and the enactment of internal regulations dealing with these issues which may provide for the establishment of special board committees to deal with matters capable of being delegated under its ultimate responsibility. The most common are the audit committee and the remuneration committee.

The Swiss system rests traditionally on the unitary system which contrasts with the German two-tier system. The functions of the chairman of the board and CEO acting as delegate of the board are therefore often vested in the same person, although the majority of the directors of Swiss public companies are non-executive. Banking is the exception to the unitary system, as mandatory banking law commands a strict separation of executive management and the board as supervisory body.


Non-transferable powers of the shareholders' general meeting

From a corporate governance perspective, the most significant rules are the right to adopt and amend the statutes, to appoint (and dismiss) members of the board and the statutory auditors, to approve the annual and consolidated accounts and to fix a dividend. Shareholders' rights to information, to participation in the preparation and decisions of the general meeting, their controlling rights and their right to take action for liability against the corporate bodies of the corporation - that is board and statutory auditors - further serve their protection. The 1991 revision of the Company Law significantly improved shareholder's protection.

Shareholders' general meeting

The general meeting of the shareholders must be called by the board, subject to a notice period of 20 days, unless the statutes provide for a longer period. Shareholders representing at least 10% of the share-capital can request a shareholders' meeting to be convened. The calling remains the board's responsibility, but it must follow the request. Shareholders holding shares of a nominal value of at least SFr1 million ($724,466) have the right to request that specific items be included in the agenda. A resolution of the shareholders' meeting is only permissible on items that have been included in the agenda, except for motions of shareholders to convene an extraordinary meeting or to order a special investigation into the conduct of the affairs by the board.

Right to vote

Possession confers the right to vote on holders of bearer shares. Public companies request evidence of possession by investors to be provided by a deposit confirmation of a financial institution that will also issue the admission cards and statutory documentation to the depositor. The entry in the shareholders' registry determines the right to vote of holders of registered shares. Problems related to corporate governance may arise where the exercise of shareholders' rights is linked to proxy votes and the absence of registration of shares. These aspects deserve a more detailed analysis.


The exercise of shareholders' rights in the general meeting is, in principle, meant to be carried out in person. In practice, this is rarely the case. Subject to limitations contained in the statutes of public companies (which are frequent in practice), each shareholder may choose to be represented by a proxy who must not be a shareholder. A very significant majority of votes are cast by way of proxy. Mostly, the representatives are banks. This poses no problems where instructions have been issued relating to the exercise of shareholder's rights. Corporate governance issues arise where these are absent, but the bank holds a blanket power of attorney or where the shareholder is not registered and the shares are held by the bank as nominee.

Banks cause their clients to execute, together with the account opening documentation, blanket powers of attorney in their favour permitting them to vote on their behalf in shareholders' meetings. The according forms contain provisions allowing, but not obliging the bank, to exercise the powers granted under the proxy. They further incorporate minimal standards of shareholder protection required by law, in particular providing that the bank request detailed instructions to be given on the exercise of voting rights, but also, that in the absence of instructions, the bank will vote in favour of the motions tabled by the board. Predominantly, a bank's clients do not issue instructions. Shareholders' rights of depositors are therefore mostly dormant.

The impact on corporate governance in practice is obvious. The bank's right, but lack of obligation, to exercise shareholders' rights opens the way to mass abstentionism that may be decisive. Conversely, the board's tabled proposals are almost certainly accepted. Latent conflicts of interest may materialize where the bank's own interests are at stake and may conflict with the client's interests as a shareholder. This is relevant in view of the function of the banks as regulated securities dealers within the meaning of the Federal Law on Stock Exchanges and Securities Trading whose article 11 imposes special fiduciary duties on the bank towards its clients.

A second category of dormant shareholder's rights results from the non-registration of shares bought by a bank's client. The former registered owner loses his or her shareholder's rights on notification of the sale to the relevant listed company. The new owner is only registered if he or she so requests. Failure to do this results in the respective shareholder's rights becoming unexercisable. More than 50% of investors do not bother to register as shareholders. The present state of the law offers no solution to the problem. To the extent that the statutes allow the exercise of shareholder's rights through the bank as nominees, the issues relating to proxy votes arise.


Voting rights may have differing weights, as the principle one-share-one-vote is by no means mandatory under Swiss law. Each share carries one vote, irrespective of the nominal capital amount it represents. Over 75% of Swiss public companies are controlled by one interest which need not represent a majority of the share capital. Frequently, dynastic influence plays its part and this is increased by share transfer restrictions which are permissible if the statutes so provide and limit by percentage the number of registered shares for which one single shareholder will be entered in the shareholders' registry. Registration may also be refused if the applicant does not confirm that he or she acquired the shares for their own name and account, thus barring nominees from exercising shareholder's rights.


The Accounting Rules contained in the company law have remained singularly summary even after the revision of the law in 1991. Listed companies must disclose participations controlled by one interest exceeding 5% of the voting rights in an appendix to the statutory accounts. Companies controlling centrally a group of companies must prepare consolidated accounts in addition to the statutory accounts provided that two of the three following figures are exceeded: balance sheet in excess of SFr10 million, turnover in excess of SFr20 million, works staff in excess of 200 employees. This applies to listed and non-listed companies alike. The statutory accounts remain the set of accounts to be approved by the ordinary general meeting of the shareholders.


Banking and other financial services

The Federal Banking Act and its ordinances impose generally recognized standards of good corporate governance on banks. Members of the board cannot exercise any executive function.

A financial institution's board must enact internal regulations the contents of which is subject to approval by the Federal Banking Commission as banking regulator. These regulations provide for the bank's internal organization, division of responsibilities and internal supervisory mechanisms. They normally provide for an executive committee to which certain supervisory functions and decisions of the board may be delegated, an audit committee of the board, an internal audit unit on management level, a credit committee and an investment committee. Most of a bank's corporate governance rules are under the regulator's orders whose avowed aim it is to safeguard the reputation of the Swiss banking industry and of the financial services' sector. The entire industry, which includes lawyers insofar as they are acting as financial intermediaries, that is engaging in fiduciary work, is subject to stringent federal anti-money laundering legislation which, in the banking sector, has been further expanded by a new ordinance of the Federal Banking Commission on the Prevention of Money Laundering of December 18 2002, put in force on July 1 2003.


The Federal Stock Exchange and Securities Trading Act (SESTA) can have a material impact on matters normally governed by company law. Apart from imposing transparency rules in respect of substantial holdings on listed companies, it provides for mandatory takeover offers to be issued once the threshold of 33.3% of the voting rights has been exceeded by one interest. In practice, however, these rules are ineffective if an issuer makes use of the possibility offered by the SESTA to increase the threshold to 49% or to opt out of it in the Statutes (caveat emptor).

With a view to conforming with internationally recognized standards in its listing requirements, the Swiss Exchange (SWX) imposes far-reaching obligations of ad hoc publicity on the board of a listed company whereby the issuer must inform the market about any fact liable to influence the price of its shares. In practice, enforcement of these rules has proven to be slack, as was particularly the case with the collapse of the Swissair Group. The according breaches of ad hoc publicity rules are now being officially sanctioned, some two years after the Swissair Group went into bankruptcy.

The Listing Rules of the SWX contain accounting provisions and require financial statements to conform with the true and fair view principle, which here means being in line with the principles and recommendations issued by the Commission for Swiss Accounting and Reporting Recommendations (also referred to as Swiss GAAP). They do not conform with IFRS (formerly IAS) or US-GAAP. Meeting the requirements of IFRS or US-GAAP is a condition to be listed on the SWX New Market. These requirements will be extended to the main board by the SWX from 2005.


Swiss Code of Best Practice

On July 1 2003, new guidelines came into effect based on the final report of a panel of experts on corporate governance under the auspices of the Swiss Business Federation. These deal with all aspects of corporate governance in Swiss Company Law, in particular the law on companies limited by shares. They are primarily addressed to Swiss public companies, but suggest that non-listed companies of sufficient economic weight should be able to derive proper guidelines from the code and incorporate them into their internal organizational regulations. The release of the guidelines was combined with the enactment by the SWX of a directive on Information relating to Corporate Government (CGD).

Directive on Information relating to Corporate Governance of the SWX

The CGD applies to all Swiss issuers listed on the SWX and to foreign issuers that are not also listed in their country of origin. It is applicable to all annual reports for the financial years beginning January 1 2002 or later. The details on the information to be disclosed are contained in an annex to the CGD and relate to group structures, shareholders, capital structure, limitations of transferability and nominee registrations. The most prominent part deals with compensation and shareholdings of the members of the board of directors and of senior management. They include a description of the contents of the method for determining compensation and shareholding programmes. The total compensation for acting members of governing bodies must be disclosed, but not broken down by individuals. Without naming the beneficiary, the highest single compensation paid out must be shown separately. The CDG is non-binding, except for the section dealing with compensations, shareholdings and loans to an issuer's member of the board or its senior management. It is expected to be governed by the principle of comply or explain. Non-compliance entails disciplinary action by the SWX which ranges from a written reprimand to the publication of the fact that an issuer has been summoned in vain to publish information required to be disclosed and de-listing.

Self regulatory rules in the banking sector

In addition to the regulatory framework, banks adhere to the self-regulatory set of rules enacted by the Swiss Bankers Association and known as the Swiss Banks' Code of Conduct with regard to the Exercise of Due Diligence which complements the legislation on money laundering and directives of the Federal Banking Commission in respect of client identification procedures. Its origins go back to 1978. The latest version was put into force on July 1 2003.


Significant impulses for the adoption of new principles of corporate governance in regulatory legislation resulted from the rejection of Switzerland's adherence to the European Economic Area in a popular vote in December 1992. Integration into European legal and regulatory standards made it necessary to adopt euro-compatible legal frameworks for companies wishing to remain able to access the European capital markets. The enactment of the Sarbanes-Oxley Act and its extra-territorial application may pave the way for a new wave of regulatory provisions bearing on issues of corporate governance. To conform to domestic regulations avoids the appearance of conflict, but some fear this may be at the cost of self-regulatory flexibility.

Haymann & Baldi
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Zurich CH - 8032
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