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The Swiss vote against corporate rip-off – 218

On 2-3 March the Swiss voted on a “constitutional initiative” introducing changes in corporate governance. The voters obligate the legislative to create laws or rules within a substantive framework.

Here, the “constructive” mandate aims to put an end to “corporate rip-off” – instances where management is either over-rewarded for good performance or receives a “golden handshake” despite poor performance. The measure does not include “claw-back”: getting at past management for decisions that have subsequently ruined the firm

Some details of the intended legislation: The general assembly of a publicly traded corporation approves the global amount to be paid out in salaries and emoluments to management and board. Management and board are chosen yearly. Proxy-voting is restricted; electronic voting is allowed. Institutional shareholders (pension funds etc.) exercise their vote in the framework of their fiduciary responsibility and announce their intention publicly. Severance pay for management and board may no longer be agreed to in advance. Guidelines in the statutes set out incentive plans for management. All these measures intend to limit excessive salaries for top management and “sweet deals” among fat cats.


The vote was straightforward. 46% of the electorate participated. Two thirds of actual voters – and all the Swiss cantons – approved. The initiative is now part of the Swiss Constitution. The government creates the regulatory framework within eighteen months.

The measure addresses three core concerns of a market economy:

  • Economic theory forbids monopolies (and oligopolies where collusion limits competition) because they cause asymmetries. If the product is good, the monopolist can overcharge. If the product is defective, the client has no alternative. Head I win, tail you lose. Current culture sees managers as “unique”. This allows them to extract monopoly rents.
  • Economic theory forbids “asymmetries of information”. Sweet-heart deals and back-room pacts between management and institutional investors are no longer allowed.
  • Share ownership is diffuse nowadays. Rights are exercised by proxy – the bank holding the shares, or the investment fund, or the pension fund. The “default” position has been so far: vote with the management. This form of “nudging” grossly favors management: currently a shareholder may only propose change in person; but he is powerless against the “default block”.

Opponents of the measure argued: it is too constrictive. Parliament did not propose an alternative, however, though it could have done so and shown commitment. It gave a bland and generic promise to act in the spirit of the mandate. Voters showed their fear that Parliament (which has heavy representation of corporate interests within the Membership) might only make cosmetic changes in the law. A referendum may disallow a gutless law, but not improve it. In this instance, voters wanted to impose a framework for positive action.

Beyond the specifics of the vote, I’d like to say a couple of words about the use of referendums. For historical reasons, the voting rules in Switzerland favor minorities. Constitutional initiatives must garner a majority both nationwide and in the 26 cantons. Success depends on “over-majorities” of close to 60%. The rules protect small (and rural) mountain cantons from the power of the large and urban cantons in the plains. Things have changed, however. The small cantons are no longer rural – they have become suburban. Fat cats commute to the large towns from their homes in the mountains. The small cantons can become a fief of an oligarchy. This is gerrymandering of sorts.

The working of the Swiss system rests on a strong political culture. Four times à year voters go to the urns on federal, cantonal, and local matters. Some decisions are complex. Involvement in the vote reminds voters of their responsibility as they feel “empowered” by the act. It is a subtle educational process that yields long-term stability to a country which has linguistic, cultural, and religious diversity.

Direct democracy rests on the systematic use of the referendum. The occasional referendum, on the other hand, holds the substance hostage to the momentary popularity of the government.

There seems no compromise between direct and representative democracy. Does not the adage say: a woman cannot be “a bit” pregnant?

06 March 2013
4 replies
  1. Tereza
    Tereza says:

    Thanks for this insight into
    Thanks for this insight into the Swiss referendum culture. My biggest problem with direct democracy is the proxy voting, which is much more likely to happen when using the direct democracy instrument. Some issues that are subject of the Swiss referenda, like this one, call for popullistic campaigns.

    I have been following direct democracy mainly in the EU context. For instance, the case of the EU Constitutional treaty – voting on a document of 800 pages. In Denmark, one advice I have heard spoken out: if you want to win the referendum, never send out the full treaty (every Danish citizen got a full-text of the Maastricht treaty in their postbox…).

    • Aldo Matteucci
      Aldo Matteucci says:

      Tereza, I’m not sure what you
      Tereza, I’m not sure what you mean by proxy-voting. The legal concept is “handing to a third party the right to exercise the vote as he sees fit”. No problem this way with direct democracy, that I know of. All ballots in Switzerland must be signed personally.

      You may mean “using the vote as proxy to signal something different than consent to the specific measure”. I’ve hinted at this at the end of the blog. If there is one referendum every two years, it is likely one uses his vote to pi… off the government. If one votes 10 times per year, this effect gets diluted.

      Direct democracy is inherently incremental. The more issues you have in the same ballot, the more coalitions to destroy the project are easy to form. One subject at a time, not a whole Maastricht Treaty. When done properly, incremental reforms turn out to be better than “big” plans, incidentally. Trimming sails is better than tacking.

      Heuristics is the fancy term for populism. Rather than analyzing a difficult problem, by analogy we find an easy one, and then argue that the easy solution also fits the difficult problem. Our brain is AWASH in heuristics (see Kahneman – Thinking fast and slow) so the problem is central. Here, alas, I’d argue for inherent weaknesses of our System 2 brain. Look at the populist vote in Italy, or the proxy-fights in the USA.

      “Wisdom of the crowd” (SUROWIECKI) is the path forward. If you take a crowd, and ask each one in it the weight of a cow – ON AVERAGE (i.e. over many votes)the crowd is closer to the correct weight than a bunch of experts. So, if you go for direct democracy, you have to think in terms of a population of votes, not just one. Direct democracy is a damn good “nudger” (see my blogs on this).

  2. Aldo Matteucci
    Aldo Matteucci says:

    Jovan: direct democracy is
    Jovan: direct democracy is preventive medicine, like vaccination. If the vaccine does not work, for whatever reason, it might not be the best medical choice to get back to health. Aldo

  3. Jovan Kurbalija
    Jovan Kurbalija says:

    Aldo, Is Swiss system of
    Aldo, Is Swiss system of careful balance between representative and direct democracy a solution for the political systems in crisis? I like “educational” aspect of the participation in politics. It takes time but it pays off. It creates “organic political stability”.

    Jovan: direct democracy is preventive medicine, like vaccination. If the vaccine does not work, for whatever reason, it might not be the best medical choice to get back to health. Aldo

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