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UBP in the press 01.05.2018

Meritocracy and European regulation

Meritocracy and European regulation

Le Temps (30.04.2018) - Is the Swiss tradition of meritocracy being challenged by European regulation?


As Swiss companies compete globally, it only makes sense that the talent pool of executives leading Swiss companies should be chosen on meritocracy as opposed to national identity. Furthermore, it makes sense that Swiss companies, and the investors that support them, seek out the best talent to run them.

Looking at the top twenty companies in Switzerland, fewer than half have Swiss citizens as CEOs. Similarly, Swiss boards tend to be quite international, bringing together specialists from different fields and different locations in order to support the strategic orientation of a company. This is a real asset and has no doubt been a contributing factor to the global leadership that a number of Swiss companies command within their business areas. In turn, this leadership explains in part the outstanding performance of the Swiss Performance Index in comparison with the MSCI World over the last 30 years, with it coming from the ability and drive of Swiss companies to improve and maintain their cash flow returns on investment (CFROI) at higher levels than many of their international peers.

Based on past experience, investors can be confident that meritocracy and company needs have driven the decision-making process. There has been little regulatory pressure to hinder the composition of boards and executive committees. One can envisage some improvements in terms of gender diversity, and high-calibre candidates are available to serve the interests of Swiss companies.

Following the Minder Initiative, an improved level of corporate governance does appear to have been adopted by institutional investors and companies in Switzerland. Shareholders’ general meetings are drawing more interest than they have in the past. Indeed, despite considerable focus on remuneration so far, there is no evidence that superior candidates have had to be overlooked. Similarly, political initiatives have not dissuaded foreign talent from joining management teams in Switzerland.

Remuneration discussions should not be to the detriment of talking about company strategy and the composition of boards and executive committees. Indeed, the fact that there are more opportunities for discussion should gradually encourage a higher level of meritocracy being promoted in companies.

In this context, the Minder Initiative can be welcomed and is leading the way internationally in terms of corporate governance. It is a useful step to encourage shareholders to take their duties seriously as regards their influence on appointments to boards. High-profile cases of unduly large remuneration packages seem to have been consigned to the past.

Investors and companies should maintain their own desire to further meritocracy and not fall foul of occasionally slapdash work, or politically and economically motivated proposals offered by proxy voting services. Staying in close contact with companies, understanding their motivations for the composition of their boards and executive committees is essential. It may not be widely known, but it appears that proxy voting services may not contact companies prior to issuing their voting recommendations. Similarly, these voting recommendations appear in some cases to be linked to the acceptance or not of fee-carrying consultancy services provided by the proxy voting agency. Simply accepting the recommendations of a proxy voting agency could have seriously detrimental effects on a tradition of meritocracy in the composition of boards. There should not be quantitative rules about board composition (number of years served, for example), rather the most appropriate individuals for the needs of the company should sit on the board.

There are, nevertheless, justifiable concerns that this tradition of meritocracy, which has been so successful for Swiss companies and the Swiss market in general, could be damaged by external regulation in the shape of MiFID II. Harsh economic decisions will be made both by brokerage firms and investment managers in order to comply with the demands of MiFID II. It is highly likely that this will lead to less scrutiny of smaller listed companies and there will be less drive from investors and companies to maintain the high levels of meritocracy established over the last 30 years.

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Eleanor Taylor Jolidon
Co-Head Swiss & Global Equity

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