At the annual general meeting of Novartis, to be held on February 27 in Basel, the shareholders are called to approve important amendments to the articles of association linked to the implementation of the Minder Initiative. In this context, Novartis proposes that the maximum total remuneration of the executive management (fixed and variable) be voted in a prospective manner. Ethos opposes this practice which gives the board a blank check. In fact, the variable remuneration should be voted retrospectively, when the financial results are known.
Like all Swiss listed companies, Novartis must implement the Minder Initiative. In particular, the articles of association must be adapted as a consequence. One of the essential points is to specify the modalities of voting for the remuneration of the executive committee. Common sense would have it that the fixed salary be voted prospectively at the beginning of the concerned period. In contrast, the variable remuneration should be voted retrospectively at the end of the financial year, when the financial results are known. This allows shareholders to assess the connection between the variable remuneration and the performance achieved.
The articles of association go against the will of the Federal Council
Unfortunately, in article 29 of the amended articles of association, Novartis foresees that shareholders vote on the total amount of remuneration for the 9 members of the executive committee in advance, including the variable part. This leads to the troubling situation wherein the maximum amount of the 2016 remuneration must be already voted, including:
- The fixed salary 2016
- The bonus 2016, while the targets to achieve have not yet been defined and which will be paid out only at the beginning of 2017
- The incentive plan for 2016 to 2018, of which the final grants will only be released at the beginning of 2019
Regarding the CHF 23 million bonus for 2016 and the CHF 46 million long-term incentive plan (2016-2018), they constitute a blank check given to the board. Such a practice is clearly in contradiction to the spirit of the Minder Initiative which wanted shareholders to approve the actual remuneration amounts paid out. The preliminary draft of the revision of Swiss company law presented by the Federal Council last November comes to the same conclusions. On this subject, the Federal Council specifies that «prospective votes on the variable remunerations are unlawful».
Several other points of the revision of Novartis' articles of association are also inappropriate. In particular, the fact that it is possible to foresee a non-compete clause with a total annual remuneration (fixed salary and bonus) in addition to the 12 months of the standard notice period. It is thus possible to pay out up to two years of fixed salary and bonus to a person who is leaving the company. This constitutes a hidden severance pay, which is strictly forbidden by the Minder Initiative.
In light of the above, Ethos recommends to vote against these amendments of the articles of association.
Transparency and structure of the remuneration system have greatly improved
Nonetheless, Ethos recognizes with great interest that Novartis in the course of the last two years has made important progress in rendering the remuneration system more reasonable than in the past. In particular, the variable remuneration was revised to ensure a stronger connection between pay and performance. The transparency of the remuneration report has become one of the best in Switzerland. Ethos commends this development.
