BOARD OF DIRECTORS STUDY
Switzerland 2009
The Consequences of the Crisis Zurich/Geneva
TABLE OF CONTENTS EXECUTIVE SUMMARY........................................................................ 1 THE BOARD How well do boards operate?............................................................... 2 What it takes to be a board member.................................................... 3 Finding the right mix in the boardroom............................................... 4 Why directors agree to serve on boards.............................................. 6 What concerns directors most?............................................................ 7 THE CEO Board discussion of the CEO’s performance........................................ 8 Evaluating the CEO.............................................................................. 9 Changes in CEO compensation........................................................... 9 THE AUDIT COMMITTEE Its role in risk management................................................................ 11 REGULATION The impact of the present crisis......................................................... 12 Evaluating the board’s performance.................................................. 13 The shape of future regulation............................................................ 14 CONCLUSION.................................................................................... 16 COMMENTS Comments on Board and CEO Compensation.................................... 17 Comments from Management Science............................................... 18 APPENDIX Profile of respondents........................................................................ 19 About Korn/Ferry............................................................................... 20
EXECUTIVE SUMMARY The world is experiencing what is probably the deepest economic crisis within living memory. Its causes are complex. But not least among them is a significant failure of corporate governance. Financial firms which only recently had impeccable reputations are now in disgrace; their senior executives and boards of directors failed abysmally to identify the risks their firms were taking and the actions necessary to control those risks. The behaviour of these firms has resulted not only in distressing losses for shareholders, but also in many cases for employees and for customers too. New attitudes and new rules are emerging as efforts are made to ensure that a similar disaster does not occur again. Here in Switzerland Korn/Ferry has attempted to find out what company directors think are the most essential changes to be made if confidence in corporate governance is to be strengthened. In November 2008, we sent out a questionnaire to the board members of companies listed on the Swiss Stock Exchange. In it, we asked a series of questions about the changes that they see emerging. Our analysis of their answers can be found in the subsequent pages of this report. In brief, the survey’s main findings are fivefold: 1) Switzerland’s corporate governance regulations are good, but they are not being implemented; 2) Executive bonuses in the past have often been excessive, with no direct connection to the creation of economic value. In the future, CEO compensation should be related to long-term results; 3) More attention should be paid to risk management. It is not enough to leave it to the board’s audit committee. Members of that committee are not always qualified for such a task; 4) Boards need more directors with real understanding of the markets in which their firms operate. One big Swiss bank, recently in trouble, had not a single independent banker on its full board; 5) The current economic crisis is pushing environmental and social issues down the corporate agenda. For 34 years Korn/Ferry has been conducting annual studies of boards of directors all over the world. This has given us an incomparable basis for analysing emerging trends and for identifying changes early on. The firm’s partners also spend a lot of time with experienced directors in their own day-to-day practice.
Rainer Faistauer Country Managing Partner Switzerland
Thierry de Preux Senior Partner (retired) Switzerland
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THE BOARD How well do boards operate? Respondents were asked a number of questions about the functioning of those boards on which they serve. They were asked to rate various aspects as to whether they were “excellent”, “satisfactory” or “in need of improvement” (see Table One). Of the thirteen aspects of board operations listed, the three which respondents felt were most in need of improvement were: • The frequency and adequacy of the board’s auditing of itself; the regularity and the quality of its process of self-evaluation; • The responsibility of the audit committee for assessing strategic risks; • The role of the compensation and nomination committee in designing compensation schemes and in deciding on “golden handshakes” and “golden parachutes.”
Table One How do you judge the following?
Needs Improvement
Satisfactory
Excellent
The Audit Committee is led by a competent chairperson and has qualified members
8
35
61
The Chair is capable of influencing the CEO and top management
11
37
57
The relationship with the CEO and top management is open and trusting
14
33
59
The Chair is leading the board and the company in the right direction
13
49
44
The information provided to board members is adequate and answers the board’s specific needs
16
45
45
The board reviews the CEO’s performance, focusing on mid-term to long-term performance
18
46
41
The board reviews the CEO’s performance, focusing on value creation for shareholders
16
57
31
The composition of the board is diverse, with the right balance of competencies, genders, backgrounds and ages
25
41
40
The Audit Committee has responsibility for assessing strategic risks
24
51
26 Continued on next page
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Needs Improvement
Satisfactory
Excellent
The Compensation and Nomination Committee is responsible for decisions on “golden handshakes” and “golden parachutes”
21
33
40
The Compensation and Nomination Committee does a good job of designing reasonable and balanced compensation schemes
23
51
27
The Audit Committee understands and analyses the strategic content of the numbers
9
53
42
The board undertakes regular self-evaluation
36
41
28
Based on our findings, there appears to be some ambiguity surrounding the role of the audit committee. On the one hand, directors say they feel that such committees are led and manned by competent people; yet, on the other hand, they say they are less than totally happy with the committees’ ability to understand and assess strategic risks. But auditing and strategic risk management are very different things. Some companies are resolving the issue by creating special strategic risk committees.
Companies should be searching more widely for new directors, in particular for directors with competencies that are more closely related to the markets in which their companies operate. There was a fourth feature of boards – their diversity in terms of their members’ gender, competencies and age – that many respondents clearly felt could also be improved.
What it takes to be a board member Next, we asked respondents what qualifications they thought made a director most valuable to a company board. By far the largest number said “Industry and market knowledge” (see Table Two) – which makes it all the more surprising that there is so little of it to be found in Swiss boardrooms. Part of the reason lies in conflicts of interest. It is obviously difficult to find someone with deep and relevant market experience who is not already linked in some way with a rival firm. How else could they gain that experience? “Entrepreneurial experience” and “Moral authority” were the qualifications that followed in second and third place. “Moral authority” may have risen up the list somewhat in the past 18 months, as more and more instances of unethical behavior have come to light. People are increasingly looking to boards for some sort of moral authority.
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There may also have been a switch in recent years in the emphasis placed respectively on “leadership skills” and “team spirit.” The dominant individual who leads from the front (and rarely looks back) is less in favour these days than the man or woman who leads with the involvement of teams and teamwork. But a team composed entirely of leaders does not work. Particularly in times of crisis, teams need team players as well as leaders. It is surprising to find “Political experience” so far down the list of desirable qualifications. In many countries, not least the United States, retiring senior politicians expect to be invited onto the boards of significant corporations almost as a matter of course. Boards should consider carefully what value such individuals add to their company in a liberal, open democracy.
Table Two In general, how much value do directors with the following qualifications add to the board?
Least value (1) (2) (3)
Most value (4)
Industry and market knowledge
1
1
25
78
Entrepreneurial experience/successful management of good companies
0
7
33
65
Moral authority
3
5
45
53
International background/ experience
3
8
47
47
Team spirit
1
18
59
28
Auditing expertise
6
24
60
16
Leadership skills
2
17
51
36
Political experience
38
42
19
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Finding the right mix in the board room Assembling a board is a difficult task. It is more of an art than a science, a matter of finding the right balance between different skills and traits. Too much difference and communication becomes difficult; too little difference and there is a risk of “group think,” where no one individual is prepared to stand out and offer constructive criticism. Moreover, directors with the right competencies and characteristics are not easy to find. Not only are would-be directors increasingly wary of the potential liability of becoming a director, but those with the most valuable skills are in great demand. We asked respondents how difficult it has been for their board to find directors with particular skills. The most difficult skills to find, they reported, were “Creativity and strategic skills,” closely followed by “Expertise in emerging markets.” The easiest to find were directors with previous experience as board members. Almost equally easy (and perhaps surprisingly so) are candidates with financial and auditing expertise.
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Table Three How difficult has it been for your board to add members with the following skills?
Least difficult (1) (2) (3) (4)
Most difficult (5)
Creativity and strategic skills
4
16
31
39
11
Emerging-markets expertise
5
17
27
28
16
Market knowledge
10
21
21
32
17
Risk-management expertise
8
22
31
28
11
Technological expertise
10
18
33
29
10
Knowledge and experience of carbon-footprint management and sustainability
7
21
33
22
11
Successful company leadership experience
13
21
35
17
14
Developed-markets expertise
11
30
33
19
7
Financial/auditing expertise
18
40
28
9
6
Experience as a board member elsewhere
23
35
26
13
4
When talent is scarce, organizations turn to professional recruitment firms to help them. We asked respondents how likely it is that their board will use an executive search firm to help them find suitably qualified outside directors. Fortunately for us as an organization, a high percentage said that they are likely to seek such help; nearly half indicated that they are either likely or very likely to use a search firm to help them find qualified external directors.
Table Four How likely is your board to use an executive search firm to find highly qualified external directors?
Response
Very unlikely/unlikely
25.5%
Neither unlikely nor likely
25.5%
Likely/ very likely
49.1%
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Why directors agree to serve on boards We asked respondents what had made them decide to sit on the most important board where they are currently a director. The most popular reason cited was “Interest in the business” followed by “In order to make a difference.” Not one of them said that pay was the most important reason for joining a board, and very few laid much store in the value of networking with other directors. This is despite the common perception of boardrooms as a sort of elderly gentlemen’s club, a perception that is long out-of-date given the demands imposed on directors today. By contrast, in the 34th annual Korn/Ferry study of boards worldwide 14 percent of respondents in America and 11 percent in Europe said that they had turned down offers of a directorship because the compensation was inadequate. In general, there is still too little acknowledgement that directors are, in fact, the legal representatives of a company’s shareholders.
Table Five What is most important reason you chose to sit on a board?
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Least important Most important (1) (2) (3) (4) (5)
Interest in the business
0
1
11
42
51
In order to make a difference
3
9
13
24
53
To share knowledge and experience
1
8
14
47
34
Networking opportunities
24
25
35
13
4
Staying active in business after retirement
44
12
15
20
4
Pay/compensation
38
31
30
4
0
What concerns directors most? We presented directors with a wide range of issues and asked them which gives them the most cause for concern in their role as a board member (see Table Six). With one or two exceptions there was not much difference in the importance that respondents gave to these various issues. There was, however, one issue clearly at the top of the list and one equally clearly at the bottom.
In the current economic climate environmental and social issues may well move further down the corporate agenda. Respondents say their biggest concern is that board members have a strategic vision and a long-term view. At the other extreme, they are least concerned about the quality of non-financial information, such as data on environmental and social issues. In the current economic climate, this suggests that environmental and social issues may well move further down the corporate agenda.
Table Six Which of the following issues are causing you the most concern as a board member?
Least important (1) (2) (3) (4)
Most important (5)
Strategic vision/long-term view
6
21
19
25
33
The range and level of competencies represented on the board
13
17
29
25
18
The Chairman and the board do not sufficiently challenge top management on essential issues
16
19
28
27
13
The quality and depth of non-financial information, such as soft factors, environmental and social issues
6
28
37
25
6
Risks of conflicts of interest
20
23
20
24
16
The competencies in certain committees of the board
13
29
26
22
12
The balance of communication and the relationship between CEO & board
16
27
32
18
11
Lack of information focused on the board’s specific needs
14
30
34
19
6
Regular evaluation of the CEO
16
26
37
16
7
Regular board evaluation
12
34
32
21
3
Moral authority/integrity
30
25
17
12
19
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THE CEO Board discussion of the CEO’s performance and compensation Boards not only have to choose their CEO, they also have to review his performance and agree on his compensation. These are sensitive subjects and not easily broached when the CEO is also a member of the board. One out of every five respondents said that their board was not able to discuss openly their CEO’s performance and compensation.
One out of every five directors of Swiss listed companies said that their board was not able to discuss openly their CEO’s performance and compensation. We asked them why not, and some of the reasons they gave were more satisfactory than others. The most common response was that the responsibility has been designated to a sub-committee, normally the Nomination and Compensation Committee. One respondent said that the job was carried out by the chairman alone. But several said that their board was “reluctant” to address the issue, that the subject was still “too hot” or “taboo.” In our experience, problems tend to arise when a CEO has been in office for more than three to five years. After that length of time, a degree of deafness to criticism sets in. At three companies where CEO compensation and “excessive bonuses” have been widely discussed in the media, the CEO was until recently also chairman of the board. In such cases, it is clearly difficult for the full board, or any subcommittee of it, to discuss the performance and compensation of the chairman/CEO. Members of the board may owe their own nomination as directors to that person. If Thomas Minder’s initiative to hold a national referendum in Switzerland is successful, there will be changes in the way that top management’s pay packages are determined. Golden handshakes will be banned, bonuses will be performance related, and the general shareholders’ meeting will discuss the packages and decide what is appropriate. This will take responsibility for the CEO’s compensation away from the board.
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Evaluating the CEO What parameters should a board use when evaluating their CEO’s performance? We asked the respondents to rank a list of nine parameters in order of importance and “company leadership” was at the top of the list.
Table Seven Rank the following parameters in terms of their importance in evaluating a CEO:
1
2
3
4
5
6
7
8
9
Company leadership
38
16
6
2
0
1
0
5
1
Financial performance
14
15
16
6
5
7
4
1
2
Ethical behavior
3
10
12
9
14
7
4
8
2
Strategic risk assessment
2
5
9
18
11
12
11
2
0
Thought leadership
2
11
11
3
10
8
15
6
4
Employee satisfaction
0
2
6
12
13
13
7
16
1
Relationship to the board
3
3
4
7
12
10
12
10
9
Stock price performance
5
6
4
8
2
7
10
11
17
Carbon footprint/ sustainability
3
1
2
5
3
5
6
11
34
In second place came “financial performance,” with “ethical behavior” and “strategic risk assessment” virtually in a tie for third place. Right at the bottom of the list was “Carbon footprint/sustainability.” Directors clearly give the most weight to parameters linked to personal characteristics. “Company leadership,” “ethical behavior” and “thought leadership,” for example, are all high on the list. Expertise in specific functions or techniques is considered less important. When evaluating their CEO, boards judge the character of the individual more than his/her specific skills.
Changes in CEO compensation CEO compensation has been a controversial subject throughout the recent economic downturn. We asked respondents what, if any, changes have been made to their CEO’s pay plan over the past 12 months. The question elicited a wide range of responses. In view of the circumstances, some were not surprising – “bonuses were reduced because of reduced results,” said one respondent.
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But three trends in particular seem to be emerging:
• A larger part of compensation is now based on long-term results (from three to five years).
For instance, one respondent said that the balance of the package between salary, bonus (a short-term incentive) and equity (a longer-term incentive) has shifted. Another said that compensation is now “clearly aligned to the long-term ambitions of the strategic business plan.”
• The package is increasingly combined with shares or a share option plan. Several
respondents said that their company had introduced a stock options plan for their senior managers within the past 12 months. One said that his firm’s options plan had been replaced with a reward scheme based on direct ownership of shares. One should remember that stock options are heavily taxed in Switzerland.
• More and more, a portion of the CEO’s reward is in the form of a bonus related to increases
in long-term shareholder value. The bonus accrues over a period of three to five years so that in bad years sums can be deducted from the overall amount. One respondent said that his firm had introduced a compensation scheme based on Economic Value Added (EVA), a technical measure considered by many to be a better gauge of the real contribution of executives to a firm’s profit.
We asked directors if they approved (in principle) of the idea that bonuses should be used to reward sustainable performance over a longer period and nearly 95 percent of them said yes, an overwhelmingly favorable response.
More and more, a portion of the CEO’s reward is in the form of a bonus related to increases in long-term shareholder value. CEO compensation and bonuses have been a major corporate-governance issue during the recent crisis, and many company chairmen can expect to be questioned intensely on the subject at general shareholders’ meetings scheduled for this spring.
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THE AUDIT COMMITTEE Its role in risk management In view of the apparent mismanagement of risk in recent years, we asked respondents if their audit committee was in charge of strategic risk management. The answers were split 60 percent indicating that their audit committees are responsible for strategic risk management while 40 percent responding that their audit committee do not hold this responsibility. Many of those who stated that the audit committee was not in charge of risk management said that it was the responsibility of the entire board. “It is the full board’s core competence,” said one, “the audit committee may contribute.” Other directors said that in their company it was the responsibility of a separate committee – a finance and risk committee, for example, or a strategic committee. This shift marks a significant change from the recent past, when audit committees were almost invariably responsible for strategic risk management and assessment. It shows the growing awareness within boards of the importance of risk management. This awareness is leading more or more companies to shift the responsibility to a special committee, or to the full board itself. Respondent Quote:
“Risk management...is the board’s core competence...the audit committee may contribute.” However, when we asked if the role of the audit committee has been modified in the light of recent economic turmoil and the large number of high-profile fraud cases, over 85 percent of respondents said that there has been no change. This must be examined, however, in relation to the radical changes to the role of audit committees everywhere that followed the passage of the Sarbanes-Oxley legislation in the United States in 2002. Where change has occurred, respondents mentioned a number of different areas of transformation. Most common was the amount of time that the committee (and the full board itself) spends in analyzing risks and corporate results. This was sharply higher than in previous years. One respondent said that his firm’s committee was holding “more meetings, and coming up with more plans in case of problems.” Another said that his was now “producing more reports,” while a third said that there was “more focus on risk management.” This significant development has also been observed in other countries. In the United States, for instance, directors in 2007 reported spending twice as much time on board matters as they had done 20 years earlier. While main boards in the US hold fewer meetings than in the past, the number of sub committees and the time that they require have increased sharply.
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REGULATION The impact of the present crisis Has the financial crisis changed any of the board’s responsibilities or behavior? Less than 20 percent of our respondents believed that the crisis has had a significant impact. But our questionnaire was completed in November 2008, which was still quite early in the recession. Since then, boards have had more time and cause to consider and implement change within their organizations. We asked those who said they had made changes to tell us what they were. There was a wide variety of answers, from the very dramatic, “We fired the CEO and the chairman,” to the rather vague, “more awareness of strategic risks.” Others said they had become more focused on particular aspects of the businesses, such as operating cash flow, interbank credit, moral and strategic long term values and survival factors. Some were becoming more involved in operations like securing credit lines, scenario planning, regulatory and auditing issues and risk analysis. In one case, where a respondent said that he had noted no changes, he did admit that the board had, because of the crisis, become “more conscious of its actual responsibility.” Respondent Quote:
“Boards are behaving during the crisis like a rock in a sea storm.” From these responses we can identify two important trends emerging from the crisis:
• Boards are playing a more active role during their organizations’ current difficulties. They
have become more aware of their responsibilities, and of their need to be kept informed and to be involved. Directors are following operations more closely than ever, and in the process they are becoming closer to top management. They are, in the words of one respondent, “behaving during the crisis like “a rock in a sea storm.”
• Boards are delegating less than they used to, and they are taking a more careful look at essential aspects of their business – such as credit lines, operating cash flow, risk analysis, treasury practices, scenario planning, compliance and auditing, all of them crucial for survival.
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Evaluating the board’s performance We also asked respondents if the performance of their board and of its various committees has been re-evaluated in the light of lessons learned from the present crisis. And if so, in what way? Respondents’ answers to this question reflect the fact that it was asked at a fairly early stage in the crisis. Many directors said they were scheduling special meetings for this purpose, several of them “before the end of this year (2008)” or “early in 2009.” Others pointed out that the process is ongoing, a system of “permanent learning, leading to adaptation.” Another said it was too early to undertake re-evaluation because “the crisis is still under way and will have a deep impact.” In general, if boards are considering changes, the process will take time. We also asked directors how they rate their board in various aspects of its performance (see Table Eight).
Table Eight Judge the main board that you serve on for the following:
Poor
Fair
Good
Very good
Excellent
Active involvement in discussing the company’s business model and strategy
1
5
26
40
33
Really representing shareholders’ interests
0
2
31
45
26
Ensuring legal and ethical integrity
1
7
26
40
30
Providing direction and vision
1
8
35
39
22
Having both a short-term and a long-term vision 0
13
28
40
22
Caring for environmental and social issues raised by the company’s activities
37
33
20
11
4
In general, respondents consider that their boards are doing a good job. In one area, though, they seem to agree that their contribution could be significantly improved, and that is in the area of “caring for environmental and social issues that are raised by the company’s activities.” This suggests that where this responsibility has not been high on a corporation’s agenda, it might become an early victim of the economic crisis, giving it an even lower priority and less investment.
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The shape of future regulation “It is in a crisis, be it of a company, an industry or of an entire economy, when good governance becomes clearly visible and beneficial to those who have created and fostered it in good times,” says HansUeli Maerki, a leading Swiss board member. Likewise, bad governance also becomes clearly visible, and the current crisis is almost certain to lead to new regulations aimed at improving the system. We asked directors if they expect an increase in board members’ responsibilities to ensue from such regulations. Perhaps not surprisingly, a clear majority, nearly 60 percent, responded positively. Those who believed that more board responsibility is imminent were then asked in which areas they thought the extra responsibilities would lie. The two responsibilities most cited were:
• Financial and risk management, closely followed by • Compensation and bonuses. Boards should take more responsibility for “compensation schemes and long-term strategy,” said one director. “Board members should be accountable for defending the interests of shareholders,” said another. The need for greater accountability was mentioned by several respondents. Others suggested that there should be “a strict split of the roles of chairman and CEO” – in that the posts should never be held by the same individual. (That is a rule that already applies to quoted companies in the UK, with only rare exceptions.) Communication with investors business ethics, board member competencies, transparency, compliance and independence were other issues mentioned. Finally, we asked respondents what changes to Switzerland’s corporate governance principles are necessary in response to the sub-prime credit crisis. We left the question open-ended, but found that the answers fell into seven broad categories:
1) Swiss governance rules are good, but they need to be better applied. As one respondent put it, “We do not need more regulations, but we do need to take existing regulations more seriously.” Other respondents warned that we should be careful not to overreact and impose regulations that are stifling. In other words, more regulation will not mean better regulation.” There is, said one respondent, “a danger of hysteria over regulations.” Another mentioned the experience of the United States with Sarbanes-Oxley and GAAP. One extreme pessimist suggested that any new regulations “will probably be useless as the next crisis is sure to be different.”
2) Better compensation schemes are needed. The most popular suggestion here was that a significant part of any bonus should be based on cumulative results over a longer period of time; “up to five years,” said one director. “Bonuses should be capped,” said another, “they should never be outrageous.” And they should be transparent. “There should be full disclosure of top executives’ compensation,” said one respondent. Others supported the idea that bonuses should be positive in years when the company makes profits and negative when it doesn’t, the sort of bonus-malus system introduced by UBS in November last year. Such a system does not usually involve executives in paying back money that they have never received. Rather, their bonuses are held in an escrow account from which sums are deducted as, and when, losses occur.
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3) More focus on risk management. This is currently a top priority for company boards eager to foster greater risk management awareness. There were several suggestions as to how this might take place. One idea was that all company boards should have a risk management committee. This committee should be quite separate from the audit committee. One respondent went so far as to suggest that there should be specific rules “to prevent risk exposure.” Professor Dr. Leo Brecht of Ulm University’s Institute for Technology and Process Management suggests that boards should be “linking strategic insights to the company’s potential risks and opportunities.”
4) Better board members. Some felt that the composition of boards needs improving; while others said that boards need “more market and product knowledge.” There was also strong support for softer, less tangible features. Directors need to be “more independent,” “free to express opinions,” and there needs to be “more fairness; less arrogance.” They must be “more conscious of excesses – excessive bonuses and excessive risks.”
5) Better boards. Others felt that boards need to improve their “moral/ethical behavior,” and to make sure that they “adhere to proven values of prudence, hard work and modesty.” In the cut and thrust of competitive business, it is possible for executives to lose sight of the overall need for the business to retain its moral values. Ethical behavior is not just necessary for its own sake. In this day and age, ethical companies attract top talent and faithful customers. It is a key responsibility of a board to retain high moral standards, to make sure that the “right” decisions are made at the highest and final level.
6) More power to shareholders. Respondents say that shareholders should be more involved in key corporate decision making. Their “influence must be strengthened,” said one. At the annual general meeting they should have a “vote on executive compensation,” said another. And board members should be made more aware that “they represent the interests of the shareholders.” Stephan Hostettler of the University of St. Gallen believes there should be a “well-defined separation of power between strategy and incentive compensation, for instance, by means of an independent compensation board directly elected by the general assembly. This would strengthen the position of shareholders.”
7) More transparency. As the legal representative of the company’s shareholders, the board is responsible for ensuring that those shareholders are fully informed of all facts material to the business. Such facts must include details of senior executives’ compensation packages. It is now better understood how closely related transparency is to the management of risk. Other specific areas mentioned by respondents include, “information on financial products” and “transparency regarding asset quality.”
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CONCLUSION The Swiss Code of Conduct is the main reference point for corporate governance in Switzerland. Drawn up in 2002 by the Swiss Business Federation (économiesuisse), it was revised and extended in 2007. While being generally regarded as good in principle, the code is widely ignored in practice. For instance, some 20 percent of the boards of listed companies do not discuss the performance and compensation of their CEO, as they would if they were to follow the code’s principles strictly. A significant number of respondents to our survey felt that boards should be more rigorous in applying the principles of good corporate governance, even if that means reinforcing and extending existing regulations. Specific areas where respondents felt that regulation could be applied more rigorously include:
• Reinforcement that the board represents the interests of shareholders; • Checking the competencies of board members, in particular their understanding of the
company’s products and markets;
• Overseeing the balance of board members – in terms both of their competencies and
their diversity;
• Clearly defining the board’s ethical responsibility; • Producing numbers that are transparent and complete. Firms need to be more precise
about what information is provided to shareholders, and how often.
More rigor, however, does not need to be forced upon boards by outside groups, be they political parties or shareholder activists. As our survey shows, board members are beginning to take the initiative themselves. Many of the proposals they are making are eminently sensible and, if put into practice, would result in a substantial improvement in the corporate governance of Swiss companies.
Many of the [directors’] proposals are eminently sensible and, if put into practice, would result in a substantial improvement in the corporate governance of Swiss companies. But they need to go still further. For example, they need to negotiate with authorities such as the Swiss Stock Exchange. In both the U.K. and the U.S., stock exchanges are powerful allies and enforcers of voluntary codes of practice.
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Korn/Ferry asked two eminent professors to read and comment on this study. Please find their comments on the following pages.
Comments on Board and CEO Compensation Most results of the Korn/Ferry International Swiss Board of Directors Study correspond with my professional and academic experience. The majority of boards consider the CEO’s compensation as an issue of high priority, since every incentive system creates its own organizational culture. Long-term incentives, for example based on bonus/malus-principles and performance shares/units, serve as an important mechanism to anchor business strategies as well as to align the manager’s and shareholder’s interests. Furthermore, “compensation at risk,” instead of competitive pay and yearly based surveys, enables the development of a distinct performance and risk culture. According to the study, the Board’s responsibility and accountability are insufficient, particularly in a crisis situation. An increased ‘wealth leverage’ for board members would be one practicable approach to raise their risk-sensitivity. A well-defined separation of power between strategy and incentive compensation, such as by means of an independent “compensation board,” directly elected by the general assembly, could strengthen the position of the shareholders. Irrespective of the outcome of the current political debates and other regulatory guidelines (e.g., of FINMA), Board members and top executives are challenged to design and implement incentive schemes that are closely aligned with shareholder’s interests and are flexible enough to help navigate through the rough business environment we observe today.
Stephan Hostettler Founder of Hostettler & Partner AG
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Comments from Management Science This is an excellent study from a scientific and very practical point of view. The study provides a representative profile on changes, behaviors and new emerging regulations that can be expected from major Swiss Boards. However, in my role as a “scientific corporate advisor,” I feel encouraged to comment on a few, but important statements published in this study. The respondents clearly state that their contributions to the board are generally good in discussing the strategy and business model, in providing direction and having both a short term and a long vision. On the other hand, they predict changes in the Board’s responsibilities like “need to be more informed,” “more scenario planning,” “more formalized risk analysis” and even suggest the need for more strategic skills in the boardroom. Is this a discrepancy or is it an outcome of the current crisis? Risk management – and hopefully also opportunity management – should be an obvious top priority for board members. However, in my eyes, board members should move one step further, and link strategic insights to the company’s potential risks and opportunities. These insights can have a major effect on a company’s KPI’s, such as “cash flow at risk” for a given period of time. Board members should have a clear understanding about the implications of potential future scenarios and their decisions.
Professor Dr. Leo Brecht Professor at the University of Ulm and St. Gallen Chairman of Capitum Suisse
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APPENDIX Profile of Respondents (101 Responses) Primary professional background Private investor
7.7%
Retired executive
31.7%
Sitting CEO
24.0%
Sitting C-level (COO, CFO, etc.) executive
16.3%
Former government official
4.8%
Other
15.4%
Chairman
27.9%
President
4.8%
CEO
20.2%
Vice-chairman
12.5%
Chief financial officer
3.8%
Retired CEO
1.9%
Other
28.8%
Job title
Length of tenure on primary board Less than 5 years
36%
5-10 years
39%
10-15 years
14%
15-20 years
6%
20-25 years
1%
More than 25 years
3%
Main sector of participants’ business Consumer
15.8%
Financial services
27.7%
Industrial
23.8%
Life sciences
11.9%
Professional services and technology
20.8%
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About Korn/Ferry Switzerland Korn/Ferry Switzerland is part of Korn/Ferry International, a premier global provider of executive talent and leadership development solutions. Korn/Ferry has been serving clients in Switzerland for 25 years with offices in Zurich and Geneva. Its 30 professionals provide state-of-the-art, tailor-made recruitment, succession planning and leadership development solutions, including CEO and Board services. They support clients, large and small, domestic and multinational companies to attract, develop and retain the most qualified executives required for a successful performance. The Korn/Ferry partners offer a unique blend of market knowledge and professional expertise with local and global reach. They are active in Consumer, Financial Services, Industry, Life Sciences, Not-for-Profit and Technology.
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