Switzerland – famous for its mountains, its watches and its banks. Politically neutral, Swiss investors have long been as inactive as their country’s military. That was until the last couple of years. It was the very public fall from grace of the Swissair Group that sounded a wake-up call for Swiss investors. Until then there had been a blind trust on the part of shareholders in a company whose airline was a national symbol and boasted a star-studded boardroom including the head of Credit Suisse, Lukas Muehlemann, and billionaire industrialist Thomas Schmidheiny.
The reality, however, was a Sfr2.9 bn ($1.7 bn) loss in 2000, an empty treasury that means Swissair is now a company dependent on the banks for support, a failed strategy of building alliances with smaller carriers and a share price that plummeted by around 50 percent in the first half of this year alone.
The company’s failure to communicate its problems has led to considerable discontent amongst investors. This failure, along with communication problems at other Swiss companies this year, could be the catalyst for increased emphasis on investor relations in Switzerland. It could also hasten major structural changes that will open up Swiss corporate culture to the scrutiny of international investors.
Swiss IR specialists and shareholder activists have long been calling for companies to engage in more open dialogue with shareholders, encouraging the establishment of one-share-one vote, better disclosure of management remuneration, separation of the roles of CEO and chairman, and publication of a good corporate governance code. Switzerland is the only country in Europe that lacks such a code.
Investors were ill-prepared for Swissair’s financial disaster, believing until the dismissal of chief executive officer Philippe Bruggisser on January 23 this year that the company was financially afloat. Indeed, a Credit Suisse analyst was dismissed last year after he issued a warning claiming that Swissair was on course to report a substantial loss in 2001. The analyst later claimed unfair dismissal against the bank and won the case in court.
Soon afterwards, the Association for the Protection of Swissair Group Shareholders was set up. ‘This is the first time a large public enterprise in Switzerland has got itself into such a mess,’ says the association’s founder, Hans-Jacob Heitz. ‘There is a lot of emotion around.’ Heitz brought a motion at Swissair’s April annual meeting that forced a special investigation into Swissair’s troubles. First results are expected at a special shareholders meeting next month. If directors are found to be at fault, legal action could be forthcoming.
Heitz’s motion won the support of the federal and cantonal governments, who are also major shareholders – a highly unusual move in a country where historically the state does not interfere in private sector activities.
Governance deficit
Charged with returning Swissair to financial health, the new chairman and CEO Mario Corti, a former Nestle chief financial officer, is promising better and more timely disclosure. But to many observers, the Swissair debacle pinpoints the need for significant change if Switzerland Inc is to improve its shoddy corporate governance. Indeed, the Brussels-based governance agency Deminor Rating placed Switzerland last among major European countries in its annual benchmark survey of European governance standards.
Other corporate shocks this year include a 35 percent drop in the share price of Zurich Financial Services after performance failed to match the repeated optimism of the company’s chairman, Rolf Hueppi. In addition, drugs group Sulzer Medica unsettled investors by revising upward the number of costly cases of failed hip implants in the US to 1,700 from an optimistic 886. Earlier this year, former chair Elisabeth Salina Amorini was voted off the board at verification and certification group SGS Societe Generale de Surveillance, after taking legal action against the current chairman, accusing him of not supplying her with sufficient information. Salina, who is also a major shareholder, has said she will continue to pursue the legal action.
And at pharmaceuticals group Roche there is growing disapproval of the fact that the founding family controls more than 50 percent of the votes despite holding only 10 percent of the capital.
In the wake of these events, specialists say investor relations must gain in importance. Traditionally, says Martin Meier-Pfister, who heads Wirz Investor Relations, the chief financial officer or CEO has controlled investor relations, deciding what and when to communicate. Now, there is pressure for the board of directors to take final responsibility for investor relations, even though day-to-day management remains the responsibility of the CEO and CFO.
‘The board of directors is held responsible in the end, so investor relations strategy must be set at the highest level,’ he suggests. He also notes that Swiss small and medium-sized companies have put too little emphasis on IR in the past. ‘They must catch up,’ he suggests. This may not prove easy, however, owing to a shortage of competent Swiss IR professionals, as Jean-Marc Hensch of Farner PR and Consulting points out. ‘It’s difficult to get people and they often ask for horrendously high salaries that industrial companies are not willing to pay,’ he adds. His hope is that this situation will improve as the global economy becomes less buoyant.
What is agreed is that financial communications at Swiss companies are not up to scratch. Unwilling to face reality, they often break bad news to investors too late. ‘A company loses credibility if it informs too late. Those who inform quickly have credibility,’ notes Meier-Pfister.
Hensch sees an inevitable trend towards greater disclosure as it has become too dangerous for companies not to adopt a policy of full and frank disclosure. For example, investors now want to be informed about salaries and options, as is the practice in Anglo-Saxon countries. In the past, such information usually has only been provided if a company lists in the UK or US where disclosure regulations are tougher. ‘I believe recent debacles will speed up change,’ says Hensch. He also points out that with the increasing reach and influence of the global investment community, Swiss companies cannot afford not to follow US disclosure best practice.
Klaus Stoehlker, director of the Zurich-based communications consultancy that bears his name, suggests that many of corporate Switzerland’s problems have been caused by old habits that will pass away as a new generation takes over. Swiss companies have traditionally been dominated by a small old boys network. The result is that often the same faces are present in different boardrooms across the country, leading to the ‘wrong people’ being chosen as board members – a fact demonstrated by Swissair, which appointed a politician as its chairman.
Stoehlker suggests that a new generation of business managers will be more aware of the importance of Anglo-Saxon capital, leading to increased IR activity in New York and London, global centers of capital where giant Swiss companies such as Nestle, UBS and Credit Suisse are comfortable, but many others are not.
Required reforms
Greater emphasis on IR also should be backed by structural reforms, many observers agree. Andre Baladi of the International Corporate Governance Network, which represents $10 trillion in international investment funds, ticks off a number of required reforms, including one-share-one vote. He points out that at least ten major Swiss companies have caps on voting rights or allow shares that give greater voting weight to one category of stock. ‘This is inadmissible in a democratic country,’ he concludes.
Sulzer, for example, has a 5 percent cap on the number of voting shares a person or group can exercise. Incentive Capital, an investment company, blamed Sulzer’s old-fashioned restrictions for the failure of its bid this year to take over the engineering group. But, said Incentive in a release, it ‘keeps all options for future action open.’ And, adds spokesman Thomas Wyler, ‘We are Sulzer’s biggest shareholder with more than 10 percent of capital and we remain interested in the company.’
Martin Ebner, Switzerland’s best-known investor, pressured for reforms at Roche that would have reduced the influence of the controlling family. When his efforts met with little success, Ebner sold his stake to Novartis, giving the rival health services company around 20 percent of Roche’s stock. This only served to increase the pressure on Roche to change its share structure.
There is also growing pressure for the structure of boards to be changed. ‘There are too many bankers on Swiss boards, and that means a conflict of interest,’ notes Baladi. This point was starkly illustrated by the bankruptcy of paper producer Biber in the mid-1990s. Banks represented on the Biber board sold shares to small investors when, unknown to the investing public, the company was already in deep financial trouble. The Society for the Protection of Swiss Investors is fighting for compensation for Biber investors. Director Johann-Christoph Rudin believes recent events will only help increase Swiss shareholder activism. ‘They are no longer going to automatically believe what the board of directors says,’ Rudin suggests. The society is also involved in organizing compensation for shareholders who suffered through the collapse last year of Miracle, a new economy company that allegedly failed to adequately inform shareholders of its financial troubles.
Self controls
Perhaps the hottest topic at the moment for shareholder activists is the fact that at many companies one individual fills the positions of both CEO and board chairman. Ethos, an organization representing around 90 Swiss pension funds, is leading a drive to stop what it sees as an undesirable situation where the top executive oversees himself. This is the case at both Credit Suisse and Zurich Financial Services.
At Credit Suisse’s annual general meeting on June 1, CEO and chairman Lucas Muehlemann faced sharp criticism not only for his role as a director of Swissair but also for his double mandate at Credit Suisse. In an effort to appease his critics, Muehlemann announced the appointment of a lead independent director, Peter Brabeck, CEO at Nestle. However, this failed to satisfy Ethos. ‘Credit Suisse and Nestle traditionally have very close ties so that Brabeck is an associate, not independent,’ says Ethos director Dominique Biedermann. An Ethos-backed motion to separate Muehlemann’s roles was voted down at Credit Suisse’s annual meeting. Nevertheless, the proposal marked a new level in Swiss pension fund activism.
According to Baladi, Switzerland needs a governance code. But, despite the talk, Baladi points out that change comes slowly in multi-cultural Switzerland, and he is skeptical that such a code will emerge. Nevertheless, there is little doubt that this year’s events have put both investor relations and corporate governance at center stage.
