On March 3, 2013, Swiss citizens voted overwhelmingly to approve the Minder Initiative, giving shareholders far-reaching influence over the executive compensation and corporate governance matters of publicly traded Swiss companies. Though the first corporate elections under the new Swiss say on pay law will not occur until 2015, institutional investors are beginning to worry potential unintended consequences. For instance, the Minder rules require Swiss shareholders to vote on the aggregate compensation of directors and senior management for each of the equities in their portfolios. This requirement could cause problems for Swiss pension funds and other Swiss institutional investors who wish to engage in securities lending. Typically, when a security is lent out, the right to vote the share passes to the borrower. Will the new law requiring pension funds to vote at the annual general meetings of companies either headquartered or listed in the country effectively prevent them from lending their Swiss securities?
What Is The Minder Initiative?
Named after its sponsor – Thomas Minder – the Initiative applies to publicly listed Swiss companies that trade on the Swiss or other exchanges. Approved by 68% of Swiss voters, the Initiative is designed to give Swiss shareholders greater say on the compensation of directors and officers of Swiss companies and add some teeth to enforcement of say on pay rules. The main requirements of the Minder Initiative are:
- Shareholders are mandatorily required to vote on aggregate compensation of the board of directors and of senior management;
- Payments of golden parachutes and signing-on bonuses for members of the corporate governing bodies are prohibited;
- Requirement for a mandatory annual shareholders’ vote for the election of the chairman of the board and of the members of the board;
- Disclosure of pension funds’ vote;
- Shareholders cannot be represented at shareholders’ meetings by corporate bodies or by proxies for deposited shares;
- Mandatory provisions in the articles of association on credits, loans or pensions granted to members of corporate bodies, as well as bonus and participation plans;
- Criminal sanctions, including prison sentence, in case of violations against the above provisions.
A Rock and a Hard Place
The overall goal of the Minder Initiative is to improve corporate governance by increasing shareholder disclosure and participation in corporate elections. Though this is a laudable goal, the requirement that institutional investors vote their shares could leave them in a very difficult position indeed. The goal of any pension plan is to manage safely the fund's investments maximizing return to meet the future obligations to make pension payments to the fund's beneficial owners. Presumably, the best interest of plan beneficiaries is to maximize the earnings of the plan's portfolio, and in this low return market, one of the methods for augmenting returns is securities lending. Not all pension funds engage in securities lending, but many, if not most, do.
Prior to the Minder Initiative, each Swiss pension fund was free to develop its own policies regarding when and whether to recall and vote the proxies of shares out on loan, or instead forego the vote in favor of maximizing the lending revenue. Recently, Florian Zihler, a lawyer working at the Swiss Ministry of Justice has said that lending could not be used as a excuse by Swiss pension funds to fail to vote the shares. Consequently, where prior to the Minder rules a pension fund could weigh the pros and cons of lending versus voting shares, and make that decision in the best interest of the fund and its beneficiaries, now they are required to vote the shares regardless, and may be forced to leave large sums of lending revenue on the table.
The Minder rule leaves pension plans in the position of potentially violating their first duty to their beneficiaries -- to maximize the value of the portfolio -- in exchange for exercising rights to vote that most pension beneficiaries care little about. Is this a fair result for pension beneficiaries? Granted greater shareholder participation in corporate governance may be a a public good, but surely Swiss lawmakers did not intend to pay for this public good from the pockets of retirees and pensioners.
Beyond Switzerland
The effect of the Minder Initiative is not limited to just Swiss companies. Nearly a dozen multinational companies with roots in the United States have relocated to Switzerland in recent years and would be subject to the the new proxy voting rules. Also, the ideals of the Minder Initiative are not unique to Switzerland. The Netherlands, Sweden, Norway, Denmark, Belgium and the United Kingdom have taken up similar initiatives. In addition, a number of other countries, including the USA and Australia, have instituted advisory voting. As Swiss regulators implement the Minder Initiative over the remainder of this year, perhaps there is still time to address the unintended consequences of forcing pension plans to be good shareholders, but at the expense of their duties to be good stewards of their beneficiaries' assets.