Motherhood and apple pie
Perhaps it should not be a too much of a surprise that 68% of Swiss people voted in a national referendum in March in favour of a motion against ‘rip-off’ executive salaries.
Perhaps more surprising is that almost a third of voters disagreed or at least were sceptical enough not to join this popular movement at the ballot box – although the vote enjoyed one of the highest levels of popular support in any Swiss federal referendum.
Corporate governance and wider issues of corporate behaviour are rightly subject to greater scrutiny from institutional investors and the wider public, whether the issue is JP Morgan and the separation of its chairman and chief executive roles or Apple’s tax affairs.
These issues have gained a new edge since the onset of the global financial crisis – and for two reasons. First, is the level of popular outrage at the cost to voters of banking bailouts, as manifested in the Occupy movement. For voters, high executive pay and high banking bonuses are a single manifestation of wider problem.
Second, and closely related, is the response of politicians, which has been guided by the globally co-ordinated response to financial services regulation that has taken place since the 2009 G7 meeting in Pittsburgh.
The US has distinguished itself in the sheer volume of financial services legislation in the form of Dodd-Frank. There has also been quite a blunt lack of differentiation between institutions of systemic relevance to the financial system, like investment banks, and others, like pension funds, that are not. This is particularly apparent in OTC derivatives legislation.
In Europe, this lack of finesse and understanding of the financial sector has been compounded by the European Commission’s preference for harmonisation, both between EU member states as well as between sectors, such as insurance and pensions. Much of this is for legislative and organisational convenience.
The voting public has been shocked by the level of remuneration at a small number of large international companies, including the banks, and clearly associates these levels of pay with a wider malaise. To ape the populist terminology of the initiative, who wouldn’t vote against being ‘ripped off’ if it were put to a referendum?
The initiators of the referendum motion have used pension funds as a key vehicle for the achievement of their aim to reduce excessive executive pay. Indeed, Switzerland has a compulsory workplace pension system so it has been easy to argue that every voter, as a pension fund member, is simultaneously an indirect shareholder and thereby a victim of corporate excess.
But while many Swiss pension funds have already been actively engaged with the companies in which they invest, there is little evidence that compulsory shareholder voting promotes better corporate governance overall. As they are not activist investors, they will necessarily have to delegate their voting decisions, which could lend too much power to an unaccountable group of advisory companies.
Lastly, watch out for European action on shareholder voting. This issue has gone quiet for several years but the success of the vote in Switzerland could inspire Michel Barnier’s internal market DG to resurrect the idea.
Like the proverbial motherhood and apple pie, compulsory shareholder voting is the kind of idea that attracts both popular support and the support of politicians when something needs to be done, or be seen to be done about corporate excess. But it is far from clear that it will solve the real underlying problems of shareholder influence over companies and their boards.