Going into the new decade, Swiss corporate boards are facing new territory, with a series of corporate crises and mounting shareholder activism throwing up new challenges. Homburger's Daniel Daeniker surveys the landscape

As the first decade of the 21st century draws to a close, the time has come to take stock: a lot has changed in the Swiss corporate governance landscape over the past 10 years.

First, the takeover regulation which came into force in 1998 has provided the basis for a number of takeovers of listed companies, many of them unsolicited. Second, the rise in shareholder activism outside of takeover situations has had a profound impact on the governance of Swiss-listed companies. Third, the recent corporate crises in Switzerland have had their effects on the perception of the role of a Swiss corporate board, especially with regards to board composition and the agenda a Swiss board should pursue.

At the start of the millennium, no one anticipated the developments which would unfold over the next 10 years. From a regulatory perspective, the decade started shortly after the new rules for takeovers of Swiss-listed companies came into effect. These rules had a profound impact on the market for corporate control in Switzerland.

From a macroeconomic perspective, the decade started with the peak of the technology bubble in the first quarter of 2000, followed by a series of corporate crises that shattered the financial world and humbled markets, a swift recovery enabling the rise of private equity firms and hedge funds until mid-2007 and, finally, the severe and unprecedented market dislocations and large-scale government interventions in the wake of the sub-prime financial crisis.

At the end of the decade, the faith of many Swiss observers in the laissez-faire capitalist system has been shattered for good. Calls for new, more interventionist regulations abound. Whether regulation will guarantee a better corporate governance is unclear; directors should, however, be aware that the developments described have an impact on the role and agenda of a Swiss corporate board.

Swiss takeovers: taking stock after a decade

On 1 February 1998 the rules of the Swiss Stock Exchange Act on public takeover offers took effect. The statute provided a set of rules on the information and filing requirements to be observed in connection with the takeover of a Swiss-listed company.

The statute also imposed a mandatory bid obligation on any shareholder or shareholder group acquiring more than a third of the voting rights of a Swiss-listed company. Finally, the new Stock Exchange Act provided a near total prohibition for Swiss corporate boards to implement defence measures in connection with public takeover offers. Takeover defences would, following announcement or launch of a takeover offer, only be permitted if approved by the shareholders.

While the new regulation allowed Swiss companies to opt out of the mandatory bid requirement, both the procedural rules and the restrictions on defence measures applied to all Swiss-listed companies. In addition, contrary to the expectations of many market observers, the number of Swiss companies that opted out of the mandatory bid regime were few and far between.

Since the new takeover rules took effect, there has been a genuine market for corporate control in Switzerland. Solicited and unsolicited takeover offers have been executed on a large scale. In fact, there is no precedent on record where a reasonably-priced tender offer was ultimately unsuccessful. The role of a corporate board in an unsolicited takeover bid was, after 1998, broadly limited to 'talking up' the offer price or finding a white knight who would be willing to outbid the initial bidder.

The rise and rise of activist shareholders

While the market for corporate control has been fairly well regulated, a new phenomenon has come to haunt Swiss-listed companies: activist shareholders who take a company hostage by buying a sizeable shareholding – large enough to influence decision-making, but still below the one-third threshold for mandatory bids.

Thus, the acquirer often had de facto control over shareholders meetings without being forced to buy all public shareholders out of the Swiss-listed company. This type of situation led to a stalemate where corporate boards were forced to change strategy without the minority shareholders being given an exit right.

Also, on the coattails of individual activist shareholders, institutional shareholder representatives have come to play an increasingly important role in corporate decision-making in Switzerland. Ethos, a foundation originally established for the promotion of sustainable development, is Switzerland's homegrown activist shareholder group which pushes an agenda of what they consider improvements to corporate governance in Switzerland, including consultative votes on executive compensation and the separation of chairman and CEO functions.

Increasingly, Swiss institutional shareholders are following the lead of Ethos and other shareholder interest groups and thereby exerting significant pressure on Swiss corporate boards. For example, while there is currently a protracted (and unhelpful) legislative debate relating to shareholder approval of executive compensation, Ethos has quietly convinced four of the five largest Swiss companies to hold non-binding consultative votes on the respective companies' compensation reports.

The company which refused to do so in 2009 won the vote only narrowly, and had to face the bad press that resulted from its resistance. It is therefore fair to say that shareholder interest groups are here to stay, and increasingly dominate the agenda of Swiss-listed companies.

Lessons from corporate crises for Swiss corporate boards

Since 2000, Switzerland has seen a series of spectacular corporate crises. The first was the grounding of Swissair, the national flag carrier, followed by the insolvent liquidation of the company. Following the bursting of the internet bubble, several technology companies lost value rapidly, and one even went bankrupt a year after listing.

Another technology company was liquidated after a large-scale accounting scandal was uncovered by a whistleblower. Finally, in the wake of the sub-prime financial crisis, UBS, Switzerland's largest bank and the world's largest wealth management institution, had to be recapitalised in several steps, the funds for the final step coming from the Swiss Government and the Swiss National Bank.

The legal consequences of all the corporate crises are not sorted out entirely. Already today, though, there is a healthy tendency in the Swiss courts and of Swiss criminal authorities to accept the fact that entrepreneurial decisions are risky and that entrepreneurs cannot be held personally accountable for risky decisions only because a loss has incurred.

To take an example, in the wake of the Swissair liquidation, no less than 19 executives and advisers of the company were indicted for unfaithful business conduct and other charges; each indicted person was acquitted, though, by the courts of first instance. The courts made it clear that taking a risk is not a criminal offence. Similarly, following the UBS recapitalisation, the prosecuting authorities decided not to press any charges against the individuals at the helm of the bank at the time.

The good news from the authorities is not a blank cheque for Swiss corporate boards, though. Looking back, the corporate breakdowns of the last 10 years carry a number of important lessons for the directors of Swiss-listed companies:

• When selecting the composition of a corporate board, focus should be given to competence first and on independence only if it is coupled with competence. Otherwise, a corporate board will not be able to effectively exercise its oversight responsibility.
• Once a board has been established – in particular following an initial public offering – it is important to build a robust team culture, which includes a culture that fosters dissent and challenges to current management, as quickly as possible. A divided board cannot stand.
• When setting its agenda, the board should not rely too heavily on processes and procedures that produce a vast amount of information that is difficult to digest. Rather, the board should regularly pause to search for the elephant in the room: are there any macro-risks inherent in the business of the company which have been overlooked by management? Are the control processes robust enough to detect any irregularities or is management given incentive to take excessive risks or to disregard warning signs?

All in all, a Swiss corporate board faces larger challenges today than 15 years ago. Yet this is only a reflection of a rapidly changing economy in Switzerland and throughout the world.

Daniel Daeniker is head of corporate at Homburger.