Regulation

Abstract

Chapter 2 elucidates the Swiss Code of Obligations (CO), the SIX Corporate Governance Directive (DCG), the Financial Market Supervisory Authority Circulars (FINMA Circulars), the Swiss Code of Best Practice (SCBP), and background on the election as chairperson to the board of directors.

Chapter 2 provides a background on the mandatory and voluntary legal requirements that organisations in general must/can comply with. Moreover, it highlights the specifics that are relevant for the election of the chairperson. These insights into the regulatory framework help to narrow the scope of the thesis and provide a framework for chair election practices.

2.1 Swiss Code of Obligations (CO)

Swiss company law (hard law) is an integral part of the Swiss Code of Obligations (CO). The CO is available in German, French, Italian, and English.¹ The versions exist side by side as equals.² The CO has been in force since January 1912 and was recently revised with effect from 1 January 2023 (revCO). Articles 552–964 l CO apply to all forms of commercial enterprises, while Articles 620–763 CO govern public limited companies: Aktiengesellschaft (German), société anonyme (French), and società anonima (Italian). They are comparable, but not identical to the corporation USA and the public company UK. For practical reasons, however, the terms will be treated equivalently (see also Section 1.4.2).

Election to the board of directors is subject to the standards established by the CO. Prerequisite for election to the board is the acceptance by the AGM. In consideration of the dissertation’s research topic, the (non-transferable) duties of the AGM, the board, and the nomination committee are outlined in more detail in the following sections.

2.1.1 Annual General Meeting of Shareholders (AGM)

The AGM is the supreme body of the organisation (Article 698 para. 1 CO). It takes place within six months of the end of the respective business year (Article 699 para. 2 CO). According to Article 698 para. 2 revCO, the AGM is assigned non-transferable powers (summarised in the following): determination and amendment of the articles of association (cipher 1); election of the board of directors, the chairperson, and the auditors (cipher 2); approval of the annual management report and consolidated accounts (cipher 3); approval of the annual accounts and resolutions on profit and dividend allocation (cipher 4); determination of interim dividend and approval of interim financial statements (cipher 5); resolution on repayment of statutory capital reserves (cipher 6); discharge of the board and the chairperson (cipher 7); delisting of the organisation’s equity securities (cipher 8); and passing on resolutions retained to the AGM by law or the articles of associations (cipher 9).

In particular, shareholders at the AGM hold pecuniary (Article 660 CO) and membership and participation rights (Articles 689–691 CO), the latter comprising voting rights (Articles 692–695 CO) and information and inspection rights (Articles 696–697 CO). With the introduction of the Ordinance Against Excessive Remuneration (Ordinance), a shift of composition and remuneration rights from the board to the shareholders took place (Forstmoser, 2020, p. 9).³ Subsequently, the AGM for listed organisations is obliged to vote annually on the appointment of the chairperson (Article 712 para. 1 revCO), the members of the board (Article 710 para. 1 revCO), the members of the remuneration committee (Article 698 para. 3 cipher 2 revCO), and the proposed compensation to the board (Article 735 para. 3 cipher 1 revCO). In this context, the members must be elected individually − an election in globo, i.e. a simultaneous election of several members, is inadmissible (Müller et al., 2021, p. 572).⁴

As previously stated, shareholders have the power to appoint, re-elect, and dismiss the chairperson and the board members (Article 698 para. 2 CO). In doing so, shareholders either follow the board of directors’ request or submit their own election proposal to the AGM (Article 709 CO).⁵ In the majority of elections, the AGM takes note of the candidate(s) proposed by the board of directors (Krneta, 2005, p. 75). Consequently, the AGM is left with the passive role of accepting/rejecting the candidates.

2.1.2 Board of Directors

The board of directors is the statutory organ at the top of the organisation.⁶ It is characterised as a group of decision-makers “that face complex tasks pertaining to strategic-issue processing” (Forbes & Milliken, 1999, p. 492). According to Article 716a para. 1 revCO, the board also has non-transferable and inalienable duties (summarised in the following): overall management of the organisation (cipher 1); determination of the corporate structure (cipher 2); organisation of the accounting system and financial controlling/planning (cipher 3); appointment and dismissal of the members of the senior management (cipher 4); supervision of the persons entrusted with managing and representing the organisation (cipher 5); compilation of the annual report and preparation of the AGM (cipher 6); notification of the court in case of over-indebtedness (cipher 7); and preparation of the remuneration report (cipher 8).⁷

Board activities are complex and comprehensive (van Ees & Postma, 2004, p. 93). To accomplish the tasks, each board member has individual obligations (Article 398 para. 3 CO; Article 717 para. 1 CO; Bauen & Venturi, 2009, pp. 60–63): (1) every member is obliged to exercise his or her mandate in person; (2) the duty of care and diligence prescribes to act with reasonable care in the overall supervision and management of the organisation; (3) the duty of good faith imposes an obligation to refrain from any actions that may harm the organisation and lead to the board member being held liable; and (4) the duty of loyalty requires members to safeguard the interests of the organisation and includes, for example, insider trading and confidentiality.⁸

In terms of its composition, the board consists of one or more members (Article 707 para. 1 CO).⁹ Thereby, only persons eligible for election as ordinary members may take the chair (Hungerbühler, 2003, p. 37). According to Article 713 para. 1 CO, the resolutions of the board of directors require a majority of the votes cast, with each member having one vote (Böckli, 2009, p. 1590).

The board of directors may delegate tasks to committees or members (Article 716a para. 2 CO). The purpose of delegation is to free up more resources for supervisory and control functions (Vafeas, 1999, p. 200). Thereby, the board has no obligation (must), but the possibility (may) to form subcommittees and/or allocate tasks (Müller et al., 2021, p. 73).¹⁰ However, if the board decides to delegate, its legal powers and personal liability are at its discretion (Article 754 CO; Hofstetter, 2002, p. 44).

2.1.3 Nomination Committee

The nomination committee (also remuneration and nomination committee or human resource committe) is responsible for board succession planning and leads the search process (Higgs, 2003, p. 6). Initially, due to diffuse patterns of ownership and management dominance, the committee was a response to stricter regulatory succession obligations in the US in 1971 (Murphy, 2008, p. 145).¹¹ To date, the majority of exchange-listed organisations have a nomination committee in place (>70%) (Walther, Morner, & Calabrò, 2017, p. 353).¹²

Compared to other committees (Table 2.1), the purpose of the nomination committee is to act as a crucial gatekeeper, providing human and economic expertise between internal (board) and external bodies (candidates) (Cheng & Rayton, 2012, p. 85). According to Kaczmarek et al. (2012, p. 476) and Müller et al. (2021, p. 74), key responsibilities of the nomination committee include (summarised in the following): (1) overseeing succession planning; (2) defining, identifying, and recommending candidates for the board; (3) onboarding new board members; (4) annual board assessments and board training; and (5) proposing necessary corporate principles.

Table 2.1 Comparison of Board Committees

There are three arguments for and two against forming a nomination committee. In favour, and first, succession planning is time-consuming. The nomination committee, in comparison to the board, has the time capacity and human resources expertise (Müller et al., 2021, p. 78). Second, succession planning is not yet state-of-the-art in many organisations. It needs to remain at the top of the agenda. The nomination committee ensures that a clear and transparent selection process is in place (Clune et al., 2014, p. 761). Third, defining and identifying a pool of suitable candidates is tedious and requires tact and sensitivity. The small group of committee members allows for the candidate to be approached with the necessary diligence and confidentiality (Pirzada et al., 2017, p. 104). However, and fourth, there is a tendency towards silo thinking. By introducing committees, the board can fragment “into various camps or silos based on individual director characteristics or service” (Olson & Adams, 2004, p. 423). Last, committees only have the right to table motions, but not to make decisions, which limits their scope of action (Forstmoser & Benz, 2011, pp. 62–63).

2.2 SIX Corporate Governance Directive (DCG)

The SIX Corporate Governance Directive (DCG) (hard law) is formed by Article 3 of the Listing Rules (LR), which is based on the Financial Market Infrastructure Act (FinMIA). The directive applies to all public organisations primarily or mainly listed in Switzerland. The DCG is published by the Regulatory Board of SIX and has been in force since 2002.

The principles of the Directive aim to provide a framework to ensure that corporate governance information is reported in a structured and coherent manner (Watter & Roth Pellanda, 2015, p. 382). The disclosure of key information must be published in a separate section of the annual report (e.g. corporate governance section). The DCG follows a comply-or-explain approach, which means that it allows organisations to refrain from publishing certain information if this better suits their purpose (Article 7 DCG; Müller et al., 2021, p. 883). In this case, however, organisations must essentially explain why and what solution they have chosen instead.

In principle, the DCG requires the ensuing information to be reported (summarised in the following): group and shareholder structure (Article 1); capital structure (Article 2); board of directors (Article 3); senior management (Article 4); compensation, shareholdings, and loans (Article 5); shareholder participation rights (Article 6); change of control and defence measures (Article 7); auditors (Article 8); and information policy (Article 9). Specifically for the chairperson and the board of directors (Article 3), the DCG requires disclosure of information on the members at the personal level by providing personal details, any changes in the board during the reporting year, educational level and key career aspects, current or previous operational management tasks, activities in other business or non-business organisations and/or political functions, and the allocation of tasks and responsibilities (e.g. committee memberships).

Under the SIX Directive on Ad hoc Publicity (DAH), exchange-listed organisations are required to release ad hoc announcements in the event of decisions that are relevant to the share price. In that context, a price-sensitive fact is information that is likely to trigger a significant change in the market price (Article 53 para. 1 LR). If a board resolution falls under the relevant rubric, an ad hoc announcement must be published as soon as the issuer is aware of the fundamental issues to be assessed (Article 3 DAH; Article 53 para. 1 LR). Few limited circumstances exist that give the organisation the right to postpone such an ad hoc announcement. If this is the case, the organisation must ensure through internal rules and procedures that the price-sensitive information remains confidential (Article 54 para. 1 and 3 LR). With regard to the subject of the dissertation under study, it is assumed that the appointment of the chairperson is price-sensitive information.

2.3 Financial Market Supervisory Authority Circulars (FINMA Circulars)

The circulars (soft law) issued by the Swiss Financial Market Supervisory Authority FINMA are based on Article 7 para. 1 lit. b of the Swiss Financial Market Supervisory Authority Act (FINMASA).¹³ The circulars apply to all financial services supervised by FINMA.

The objective of the FINMA circulars is to meet the increased market requirements in the financial industry. For the financial services sector, the provided information defines legal norms that guide the supervisory authority in its assessment procedures. With regard to board composition and succession planning, Circular 2017/1 for banks prescribes that the board of directors be staffed with appropriate personnel resources (cipher 13) and management expertise (cipher 16), that one-third of the directors be non-executive (cipher 17), and that requirement profiles be drawn up for the succession process (cipher 27). In addition, the chairperson of the board is assigned a key role in shaping the strategy, communication, and culture of the company (cipher 30). Circular 2017/1 for insurers is structured similarly to the one for banks, albeit with a stronger emphasis on the functions of risk management and the internal control system (ciphers 28–56).

2.4 Swiss Code of Best Practice (SCBP)

The Swiss Code of Best Practice (SCBP) (soft law) is a standard recommendation on corporate governance published by economiesuisse, the national federation of Swiss business. For organisations, the SCBP extends the scope of hard law requirements, but only insofar as “it also ensures that companies retain their organisational flexibility” (economiesuisse, 2016, p. 3). In that sense, the SCBP guidelines leave room to tighten certain aspects to strengthen best practice governance with a sustainable, long-term orientation (Hofstetter, 2014, p. 9).

Articles 12–14 SCBP emphasise practices of board composition and succession. According to the principles, the board of directors is neither too small nor too large to perform its management and control functions (Article 12 para. 1 SCBP) and is diversified (Article 12 para. 2–4 SCBP). In the same vein, the standards also ensure that a (chair) succession process with adequate selection criteria is in place. Recommended is the establishment of principles by the nomination committee (Article 26 SCBP).¹⁴ In all the recommendations, the SCBP leaves it up to the organisations to involve consulting/expert advice (Article 15 para. 3 SCBP).

The requirements of the SCBP for the chairperson are more precise than those of the CO (Section 1.4.3). The SCBP, for example, strengthens the leadership function of the chairperson over the ordinary members of the board: “The Chairman […] is entrusted with running the Board of Directors […], [and] ensure[s] that procedures relating to preparatory work, deliberation, passing resolutions and implementations of decisions are carried out properly” (Article 16 para. 1 SCBP). Furthermore, if the chairperson also holds the CEO position (dual function), an experienced and independent member shall be appointed as lead director to perform the chairperson’s duties (Article 19 para. 2 SCBP). With that move, the board can ensure the control and supervisory functions.

2.5 Election as Chairperson to the Board of Directors

Regarding the election of the chairperson of the board of directors, it should first be noted that the law makes this office mandatory (Article 712 para. 1 revCO). For the further course of this study, it is essential to examine the motives for the election or re-election and to have background information on the sequence of events upon entry, employment, and termination of the position. Such an examination allows for anticipating the legal and economic dynamics involved.

2.5.1 Reason for Election

Pressure from insiders (board member, company secretary, senior management) and/or outsiders (shareholder, proxy advisor) is usually the reason for “bringing about a change at the top” (Cadbury, 1990, p. 172). Such stakeholder pressure is a consequence of economic- and person-related trigger factors (catalysts) that drive the need for change. The two are thus explained in more depth below.

Starting with economic motives, the first aspect relates to performance. In principle, the chairperson is expected to meet financial cost/return targets, which are measured in terms of share price (Cannella & Lubatkin, 1993, p. 764). If the organisation has failed to deliver the expected results, the chairperson may come under pressure and, in the worst case, be forced to resign from his or her position (Maitlis, 2004, p. 1280). Performance, however, can also be tailored to the specific person (Gibson, 2001, p. 126). After the annual board assessments, board members may conclude that they are dissatisfied with the performance of the chairperson. As a consequence, they may communicate to the chair that they have lost confidence and prevent re-election (Cadbury, 1990, p. 172).

A second economic factor concerns benchmarking. Benchmarking is a sensitive but important issue and enables an early grasp of what is becoming the norm in the industry (Rothwell, 2005, p. 113). The goal is to jump on the bandwagon early before it is too late. “Just as companies benchmark their products, manufacturing operations and financial management processes against the best in class, they can also benefit from seeing how their [non-]executive leadership stacks up against that of other companies in their industry” (Spencer Stuart, 2010, chapter 5). Exchanges with industry peers may therefore have implications for the organisation’s strategy and consequently raise the question whether the chair is still the right person (Cadbury, 1990, p. 170).

In terms of person-related motives, the first aspect refers to compatibility. In that field, regulations/regulatory changes arguably have the greatest impact on board composition, as organisations are eager to comply with laws and policies (Aperte, 2016, p. 43). Here, aspects relate to hard law, soft law, and (additional) voluntary standards and norms (summarised in the following): For hard law, especially full capacity of judgement (Article 718 para. 1 CO; Müller et al., 2021, pp. 14–15) and the 30% gender diversity for listed organisations (Article 734 f revCO) are expected to influence the election.¹⁵ With the newly introduced board gender quota in particular (comply-or-explain approach), the regulator is trying to promote the currently small number of women in board (chair) positions. In soft law, besides diversity (Article 12 para. 2 and 3 SCBP), it is above all independence criteria that are decisive for the election. The FINMA Circulars (cipher 19–22 Circular 2017/1 for banks and cipher 20–23 Circular 2017/2 for insurers) and the SCBP (Article 14 para. 1 and 2 SCBP) consider a board member as independent when the person has not been active in other boards (case-by-case assessment), a member of the senior management (for more than three years), an employee of the organisation (for more than two years), an employee of the audit firm as lead auditor (for more than two years), does not have any/minor business relationships/commercial links with the organisation (conflict of interest), and is not a qualified participant/shareholder (of the respective organisation).¹⁶ On a voluntary basis, listed organisations have incorporated further norms and standards. For instance, age, size, term of office, and mandate restrictions apply to the board of directors, which are incorporated in the articles of association, by-laws, or related regulations (Article 698 para. 2 cipher 1 CO; von der Crone, 2020, p. 575).

The second personal dimension relates to capabilities. The chair has a more stringent requirement profile, in particular in terms of higher demands on time availability (Hungerbühler, 2003, p. 39). Especially in large listed organisations, presiding the board of directors is a full-time role due to the expectations of having the right people, addressing the right issues, and maintaining the right strategic course (Cadbury, 1990, p. 93). Adequate time resources enable the control, supervisory, and reputational duties to be taken seriously (Krneta, 2005, pp. 20–21).¹⁷ Equal requirements apply to the decision-making ability, which requires perseverance and efficiency. Swiss law hereby indirectly points out that members shall have financial expertise and knowledge of legal and economic contexts to follow the standards of the business judgement rule (Müller et al., 2021, p. 25). In the area of financial services, there are also reputational requirements that demand impeccable business conduct on the part of the board of directors, appropriate management skills, expertise, and experience in the banking and financial sector (Article 3 para. 2 lit. c BankG; cipher 16 Circular 2017/1 for banks; cipher 16 Circular 2017/2 for insurers).

2.5.2 Entry, Relationship, and Termination

In principle, it is the board’s responsibility to propose a candidate for election to the AGM (Article 716a para. 1 cipher 1 CO).¹⁸ With a majority of votes (Article 703 revCO), the AGM elects/refuses the chairperson (Article 712 para. 1 revCO). The elected person then formally confirms/rejects acceptance to the board. Acceptance comes without any formal requirements, except that the approval is unconditional and not linked to any terms and conditions (Böckli, 2009, p. 1557; Hungerbühler, 2003, p. 43). The elected board member will be registered accordingly in the Swiss Commercial Register (Article 643 para. 1 lit. e HRegV).

Despite mostly working full-time, the relationship of the chair to the organisation does not differ from that of an ordinary board member. In this respect, according to Meier-Hayoz et al. (2018, pp. 600–601) and Müller et al. (2021, pp. 47–48), it is an independent basic relationship between the two organs (in German: eigenständiges organschaftliches Grundverhältnis), which may include components of an employment and/or agency contract. For exercising the function, the chair has a right to compensation.¹⁹ The remuneration shall thereby take into consideration fixed and variable, short- and long-term, and adequate performance measures (Article 35 SCBP). It also should adequately include the form of payment (cash, stocks, stock options), personal performance (time spent, availability, input), position on the board of directors (chair, vice-chair, deputy chair, delegate), bearing of risk (unlimited and joint liability), and opportunity costs (Böckli, 2009, p. 1629).

There are five reasons leading to mandate termination (the latter two are rare and therefore not described in more detail): expiry of statutory limitation period (Article 626 para. 2 revCO); resignation (Article 710 para. 1 revCO); dismissal (Article 705 para. 1 revCO); death or incapacity of judgement (Article 35 para. 1 CO; Wernli & Rizzi, 2016, p. 1105); and liquidation (Articles 739 ff. CO). In the case of expiry and resignation, the term of office ends on the day of the AGM or on the day of resignation. Resignation is possible at any time without any specific form of notification (Bauen & Venturi, 2009, p. 16; von der Crone, 2020, p. 590).²⁰ The dismissal of members, unless the articles of association provide otherwise, requires the majority of the votes cast at the AGM (50% plus one vote) (Article 703 para. 1 revCO and Article 705 para. 1 revCO).²¹ Dismissal is valid immediately, possible at any time, and executable without statement of reasons (BGE 80 II 118; Krneta, 2005, p. 81).

2.6 Review

The regulatory background in Chapter 2 provides a legal framework for the study. Hard and soft laws specify a range of rules to be respected. However, apart from the election and working duties of the chairperson, there are few and less specified articles addressing succession planning. To summarise:

• The CO (hard law) stipulates that the AGM elects the members and specifies who chairs the board. The chairperson, together with the entire board, is obliged to define the organisation’s strategy and supervise the senior management; in the best interest of the organisation. They have the discretion to delegate tasks (e.g. forming committees), but remain ultimately responsible for their actions. The chairperson must be (re-)elected annually, and his or her term usually ends on the day of the AGM.

• The DCG (hard law) aims to provide SIX-listed organisations with a framework for disclosing corporate governance information in a structured and coherent manner. It allows shareholders and stakeholders to obtain and compare financial and non-financial information across organisations and industries.

• The FINMA Circulars (soft law) are governance codices for financial services with the objective to provide organisations with adequate and necessary financial, human, and structural resources.

• The SCBP (soft law) strives to enhance best governance standards for organisations, without loosing too much flexibility. In this respect, its application is voluntary, but expected by stakeholders and shareholders.