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Executive Outlook

Under the surface of the Minder Ordinance.

Implications for board dynamics in Switzerland.

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A new era for Swiss boards. The focus on compliance masks the implications of the Minder Ordinance on board dynamics.

With the approval of the Minder Initiative in early 2013, Switzerland entered a new era of say-on-pay. While much public attention was awarded to its consequences for executive compensation, another aspect has gone largely without comment: the annual reelection of the entire board—including the chairman and all members of the compensation committee. This secondary facet of the Minder Ordinance will unavoidably alter board dynamics—the way board members interact and work with one another—with important consequences for board effectiveness and recruitment in the future. There are several interrelated reasons board dynamics will change. First, the ordinance engenders a stronger focus on director (re)election instead of appointment. In the pre-Minder era of staggered election of directors, the election was mostly about whether the directors collectively could obtain the majority of votes, and how the nomination committee might best promote a new director. That focus is now shifting toward explaining the merits of retaining each director based on the individual value (and capabilities) he or she adds to the board. The vote ultimately will be one of (dis)trust from the point of view of shareholders, triggering a “beauty contest” among directors. The same holds true for the chairman who now also stands for yearly reelection both as a board member and as a chairman. At the same time, the chairman cannot be voted out by the board itself, which strengthens his or her role significantly. Finally, because directors must be reelected to the compensation committee each year, that group will receive additional scrutiny; each member will need to be justified beyond his or her mere independence. Indeed, the ordinance foresees boards outlining specific principles, duties, and competencies for these directors, and urges boards to rethink the functioning of their compensation committee. This likely will increase the professionalization of the committee and translate into specific demands for expertise, authority, and reputation for its members.


UNDER THE SURFACE OF THE MINDER ORDINANCE

The Minder Ordinance thus means that the board is no longer built from within, and thus the board not only has less say in who joins but virtually no say in who leaves. As a result, individual directors may feel inclined to act individually to influence their reelection rather than to act as a collective body.

About the Minder Ordinance.

On March 3, 2013, Swiss voters approved the constitutional initiative against excessive compensation, the so-called Minder Initiative, and its implementing ordinance (VegüV) went into force on January 1, 2014. Minder introduces rules pertinent to corporate governance. The most notable is executive compensation, e.g., requiring a binding shareholder vote on the compensation report and prohibiting certain forms of executive compensation. The punitive sanctions imposed should the board implement forbidden forms of pay—e.g., compensation on departure, signing bonuses in advance, premium for acquisitions or sales of companies—means that Switzerland now has one of the world’s most restrictive regulations concerning say-on-pay (Institut Français des Administrateurs 2013). But Minder also invokes a number of other regulations touching upon the board of directors such as: 1) all members of the board of directors including the chairman and all members of the compensation committee be annually reelected; 2) that pension funds disclose how they voted on these issues; 3) that companies include the specification of principles, duties, and competencies of the compensation committee in their articles of association; and 4) that they introduce a cap on the number of mandates a director may have.

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Dynamic repercussions. These altered dynamics will drastically influence board effectiveness. For example, the need for more transparent communication about performance and compensation benchmarks seems likely to trigger mutual comparison if not outright competition among directors. Indeed, annual reelection may bring to light how well or poorly aligned are individual directors’ performance, reputation, and the number of votes obtained. The contribution of individual directors as perceived by shareholders and the Annual General Meeting may become the subject of more intense discussions—and to the extent that such conversations prove dysfunctional, this may have negative consequences for firm performance. Research confirms that boards that function as highly dynamic teams generate more economic value for their organization than those that do not. Moreover, the impact of the board as a collective is greater than that of any individual director on financial performance (Charas 2014).

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Implications of the Minder Ordinance

Shifting boardroom dynamics.

Pressure for board effectiveness.

Potential scarcity in the talent pool.

Changing role of the chairman


UNDER THE SURFACE OF THE MINDER ORDINANCE

A byproduct of conferring more power to shareholders is that the Minder Ordinance reduces the power of directors; at the same time, it increases directors’ responsibilities. That raises the question as to whether directors will demand more access to management, or less readily delegate decision making authority in important organizational matters. The shifts in this delicate power balance may change the relationship between executives and non-executive directors, as well as how board members interact with top management. Minder introduces a degree of uncertainty to the boardroom too; a stable board composition no longer can be taken for granted. Minder confers an easy exit option for directors unwilling to face upcoming strategic issues, performancerelated review, or other consequences. Against this background, important questions arise as to whether steep boardroom turnover will result in shallower knowledge of the company or a lack of nerve when it comes to challenging top management. The changes in board dynamics bear important consequences for director recruitment and succession planning too. Increases in director accountability and a growing list of responsibilities require a greater commitment in terms of time and effort for each board seat a person holds. Moreover, the criminal sanctions attached to noncompliance with Minder, compounded by the reputational risk of association with poor governance, reduce the attractiveness of board appointments—not only for sitting C-level executives but also for independent directors and particularly for foreigners who have had only a limited exposure to the discussion around the Minder issues. A likely outcome is scarcity in the talent pool of directors, as fewer will be willing to put their reputation on the line for modest financial compensation. Boards, for their part, will need to pay closer attention to their director succession planning process and achieve clarity on the caliber of directors they need and any limits on additional executive and non-executive mandates.

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Higher time and effort demands, increased professionalization, and greater risk will create a scarcity in the talent pool.


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New boardroom competencies. As a result of all of the above, we expect a change in the qualifications directors will need to fulfill their tasks. In addition to raising the bar on all sorts of functional skills and expertise, director recruitment will also need to take into account new competencies for directors. Among the competencies deemed particularly crucial: tolerance for ambiguity; high levels of self-awareness, integrity, and trust; and a focus on collaboration over competition. These competencies and others that are specifically relevant for a company at a given point in time will have to be assessed when hiring board members and during the regular board reviews as a whole.

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Last but not least, boards need a more comprehensive and standardized method for communicating and analyzing members’ skills and capabilities. Putting the whole board up for annual reelection ultimately means that there is a greater need to adequately assess board members’ capabilities and competencies, and demonstrate to shareholders that there is a good match between those and whatever challenges the company is facing. Chairmen especially will have a bigger role to play in the boardroom but also vis-à -vis the shareholder community. He or she will need to hone the competencies necessary to lead a more professional and active board. Interaction with management will likely get more intense and involved. There will probably be more diversity and healthy debate in the boardroom. Throughout, the chairman will have to effectively choreograph the actions of the board and provide visible leadership given that his or her reelection is determined by shareholders.

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Conclusion. Boards are well advised to equip themselves with an adequate toolbox for the post-Minder era.

Once the immediate process and procedural challenges of the Minder Ordinance are dealt with, the chairman and the board should steer their attention to its subtler long-term implications. A well-equipped toolbox for board improvement and effectiveness may help to give boards a strong start in this new era of governance in Switzerland. Among the steps to consider:

• An (independent) diagnosis of the now-required vs. available skills and competencies on the current board.

• Staying continually on the lookout for potential future board candidates who meet the required criteria.

• A conscious refinement of the interface between chairman and CEO to ensure a (continued) seamless collaboration between executive and non-executive leadership of the company.

• A board capability analysis that gauges the current director capabilities against the company strategy and environmental challenges in order to evaluate to what extent the board is collectively equipped to lead the company into the next phase of life cycle.

• A board efficiency review that consists of assessing board communication and how this translates into the board’s quality of decision making.

• A succession planning process to identify, develop, and—if need be—appoint the best talent for the company’s key leadership positions including board members themselves. Such initiatives will equip Swiss boards to readily deal with the changes just starting to surface in the post-Minder era, thereby increasing their company’s performance and shareholder value creation.


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References. Charas, Solange. 2014. “Improving Corporate Performance by Enhancing Team Dynamics at the Board Level.” International Journal of Disclosure and Governance. http://dx.doi.org/10.1057/ jdg.2013.35. Institut Français des Administrateurs. 2013. “Say on Pay: Comparisons Internationales & Bonnes Pratiques.” http://www. ifa-asso.com/_files/documents/fichiers/document-594.pdf.

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About the authors. Yannick Binvel Yannick is the regional leader for Korn Ferry’s Industrial executive search market in Europe, the Middle East and Africa. He is also a member of the Board and CEO Services practice. He is based in Zurich. +33 1 45 61 86 36 yannick.binvel@kornferry.com

Wolfgang Schmidt-Soelch Wolfgang is a senior client partner specializing in executive search for financial services companies. He is a member of the firm’s Financial Officers Center of Expertise and Board and CEO Services practice. He is based in Zurich. +41 43 366 77 63 wolfgang.schmidt-soelch@kornferry.com

Katarina Sikavica Katarina is a senior associate and the knowledge manager for Korn Ferry’s Board and CEO Services practice, based in Zurich. +41 43 366 77 11 katarina.sikavica@kornferry.com

Stefan Steger Stefan is managing director, Switzerland, for Korn Ferry. He is also a member of the firm’s Board and CEO Services practice. His consulting practice spans organizational and leadership development, executive recruitment, benchmarking and assessment. + 41 43 366 77 88 stefan.steger@kornferry.com


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